Papua New Guinea - New Britain Smallholder Development Project

C r -' 7 FiLE COPY RESTRICTED Report No. PA- I This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION PAPUA AND NEW GUINEA NEW BRITAIN SMALLHOLDER DEVELOPMENT PROJECT December 27, 1968 Agriculture Projects Department  CURRENCY EQUIVALENTS US$1. 00 = Australian A$0.89 A$1. 00 100 cents = US$1. 12 A$1 million = US$1, 120, 000 WEIGHTS AND MEASURES English System 1 acre (ac) = 0. 45 hectares 1 ton 2, 240 pounds = 1, 020 kilograms 1 inch (in) = 2. 24 centimetres 1 foot (ft) = 12 inches = 0. 305 metres 1 mile = 5, 280 feet = 1, 610 metres INITIALS AND ACRONYMS DASF: Department of Agriculture, Stock and Fisheries ffb: fresh fruit bunches PNGDB: Papua and New Guinea Development Bank  PAPUA AND NEW GUINEA NEW BRITAIN SMALLHOLDER DEVELOPMENT PROJECT TABLE OF CONTENTS Page No. SUMMARY i I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . .1 II. BACKGROUND .1 III. OIL PALM DEVELOPMENT IN PAPUA AND NEW GUINEA 3 IV. THE PROJECT AREA. 4 V. THE PROJECT. 5 A. Project Definition... 5 B. Pattern of Settlement . . . . . . . . . . . . . . 6 C. Develorment Schedule . . . . . . . . . . . . . . . 6 D. Oil Palm Establishment . . . . . . . . . . . . . .8 E. Palm Produce Processing . . . . . . . . . . . . .8 F. Cost Estimates ...9 G. Proposed Financing .. .10 H. Accounts and Audit .. .12 VI. SETTLEMENT PROCEDURES, ORGANIZATION AND MANAGEMENT . . 12 A. Settlement Policy .. .12 B. Settler Selection .. .13 C. Titles and Leases . . . . . . . . . . . . . . . . 13 D. Credit Arrangements . . . . . . . . . . . . . . . 14 E. Harvesting and Collection of Settlers FFR . . . . 16 F. Project Organization and Management. . . . . . . . 16 VII. YIELDS, MARKETING AND SMALLHOLDERS' INCOMES . . . . . 18 VIII. BENEFITS AND JUSTIFICATION .20 IX. CONCLUSIONS AND RECOMMENDATIONS. . . . . . . . . . . . 21 This report is based upon the findings of an appraisal mission comDosed of Messrs. McMeekan (consultant), Eccles, Nelson and Palein (of IDA) and Phi]]ins (consultant) which visited Papua and New Guinea in January/February 1968.  ANNEXES 1. Investment Costs. 2. Disbursement Schedule. 3. Agricultural Credit and the Papua and New Guinea Development Bank. 4. Organization Chart. 5. Smallholder FFB Purchase Price Formula. 6. Market Prospects for Palm Oil and Palm Kernels. 7. Smallholder FFB Price Calculation. 8. Oil Palm Smallholding (8 acres) - Financial Projections. 9. Economic Rate of Return. MAPS 1. Territory of Papua and New Guinea. 2. Project Site, New Britain Island.  PAPUA AND NEW GUINEA NEW BRITAIN SMALLHOLDER DEVELOPMENT PROJECT SUMMARY i. The Administration of the Territory of Papua and New Guinea, through the Government of the Commonwealth of Australia, has requested an IDA credit to help finance a settlement project on the island of New Britain. ii. The project would provide some 580 families with holdings of about 15 acres each, on which they would be assisted to: plant and bring to ma- turity eight acres of oil palms; construct a house; and develop a food garden. Settlers would receive loans, in cash and kind, for the above purposes, and would repay these with 6% interest over a period of eleven years, including five years of grace. These loans would be made by the Papua and New Guinea Development Bank. Settlers would sell their palm produce to an oil mill Jointly owned by Government and private interests. Under an agreement with Government, the mill would provide a guaranteed market for the output of the settlement for a period of 25 years at prices that would be determined by a formula mutually acceptable to Government and IDA. iii. The project, which would have an average annual net return to the economy of about 9%, would open up a new area of fertile soils, and would establish settlement techniques which would be annlicable throughout the Territory and with other crops. At maturity the annual foreign exchange value of palm produce from the settlement, all of which would be exported, would be about US$1.2 million. Participants would earn about US$900 annually from their oil palms, about double the average income for a laborer in the commercial agricultural sector. iv. Project costs total US$3.3 million, of which the import element is 57%, about US$1.9 million. v. The project is suitable for an IDA credit of US$1.5 million. The borrower would be the Administration of the Territory of Papua and New Guinea (Government). About US$660,000 of the credit would be on-lent by Government to the Papua and New Guinea Development Bank at 1-1/4 % per annum interest, and would be repaid within 25 years. These soft terms are justified because the Development Bank is a new Government-owned institution, in need of capital resources, whose profits can only be used for reserve or working capital pur- poses. The remaining part of the credit would be used directly by Government Departments for services to smallholders.   PAPUA AND NEW GUINEA NEW BRITAIN SMALLHOLDER DEVELOPMENT PROJECT I. INTRODUCTION 1.01 The Administration of the Territory of Papua and New Guinea (Gov- ernment), through the Government of the Commonwealth of Australia, has re- quested IDA assistance in the financing of oil palm, coconut and beef cattle development, comprising: - development of about 7,600 acres of smallholder and estate oil palms; - new planting and replanting on about 10,000 acres of existing coconut estates; - development and stocking of about 150,000 acres of private beef cattle ranches, and the improvement of Government services to the beef cattle industry. Assistance in the identification and preparation of the three sub-projects was given by Bank Economic Missions in 1963 and 1967. 1/ 1.02 Based on the findings of a mission composed of Messrs. McMeekan (Consultant), Eccles, Nelson, Palein (IDA), and Phillips (Consultant), which visited Papua and New Guinea in January/February 1968, an IDA credit of uS$6 million was negotiated in early September 1968, with the reservation that it would not be considered by the IDA Board until sufficient IDA funds became available. Subsequently, following representations from the Government, it was agreed that a smaller credit should be considered immediately for that part of the project to which the Government gave the highest priority - a settlement scheme on the island of New Britain for smallholders growing oil palms. This scheme, the New Britain Smallholder Development Project, is the subject of this report. II. BACKGROUND 2.01 The Territory of Papua and New Guinea (Territory) is in the tropics about 100 miles north of Australia. It comprises the eastern half of the island of New Guinea (mainland); nine major islands including New Britain 1/ The 1963 Mission's report was published: "The Economic Development of the Territory of Panua and New Guinea", Johns Hopkins University Press, Baltimore: 1964. The 1967 Mission's report, No. AS 129b, was issued by Asia Department on August 25, 1967.  - 2 - in the Bismarck Archipelago; and a large number of smaller islands (see Map 1). Total land area is about 184,000 square miles, of which about 85% is mainland. Much of the Territory is mountainous, with ridges on the main- land rising to 15,000 ft and on the islands to 8,500 ft. Total population is about 2.2 million including about 30,000 non-indigenes. 2.02 Papua, formerly a British Protectorate, and New Guinea, formerly German and now a UN Trust Territory, are administered jointly by Australia. The capital is Port Moresby. Australia, actively preparing the Territory for Independence, continues to spend large sums on its administration and de- velopment. In 1967/68, when total Government expenditure was A$131.1 million, Australian grants-in-aid totalled A$77.6 million. 2.03 The Territory's economy is almost completely agricultural. Agri- culture earns nearly all export income, engages more than half the people in naid employment, and most of the self-employed. The Gross National Prod- uct (GNP) was estimated by the Bank Economic Mission in 1967 to be rising rapidly at a real annual rate of about 12 to 13%. It was then about A$360 million (Us$400 million) per annum overall and about A$100 (US$110) per capita average for the indigenous population. About half the GNP is derived from the subsistence sector, mostly agricultural. About 40% of the remain- der, in the monetized sector, also comes from agriculture; most of the rest comes from Government services. Exports have risen fairly steadily in volume and their annual value has increased from about A$37 million in 1960 to around A$50 million at the present time. Copra and coconut product ex- ports are worth about 40% of the total, and coffee and cocoa about 20% each. Rubber is next with 6%. 2.04 The 1963 Bank Economic Mission recommended further encouragement of coconut, cocoa, rubber and cattle production through a strengthening of extension services and the provision of credit. It endorsed Government efforts to develop oil palms, pyrethrum and tea, crops which had not pre- viously been grown in the Territory on a commercial scale. Government was, and still is, anxious to diversify and increase the production of crops for export and for import substitution, so that, on Independence, the Territory would be in a better position to pay for the imports necessary for contin- ued economic development. 2.05 Coconut is the most important crop but many palms are old and overdue for replanting. Some estates have small parcels of unplanted land, and a few of the larger ones are planting and replanting. However coconuts take about 10 years to produce an economic crop and costs are rising, so the smaller estates have little incentive to plant or replant. Copra production in the indigenous sector has been expanding. 2.06 As to other crops mentioned in paras 2.03 and 2.04, further coffee production is limited by the International Coffee Agreement; cocoa has suf- fered a disease setback; and current low prices are discouraging to further rubber develoDment. Government has, however, succeeded in interesting  - 3 - private enterprise in oil palms, tea and pyrethrum. It continues to en- courage the cattle industry by paying most of the costs of freight and disease control for breeding cattle imports, and provides facilities to train the local people in cattle management. 2.07 Government followed up the 1963 Mission's suggestion that a financ- ing institution suited to the specific conditions of the Territory be or- ganized to provide long-term credit, and its Panua and New Guinea Develop- ment Bank opened for business in July 1967. Its credit services will be made use of in this project. III. OIL PALM DEVELOPMENT IN PAPUA AND NEW GUINEA 3.01 Oil palm develonment began in 1967 with the establishment of New Britain Oil Palm Development Ltd, a joint venture which is owned in equal shares by Government and a well-experienced plantation company, Harrisons and Crosfield (Australia and New Zealand) Ltd. The new comnany has been granted a 99-year lease on a 5,400 acre site between Talasea and Hoskins, on the north coast of New Britain (Map 2), in an area where soils and climate are very suitable for oil palms. A nlantation of high-yielding oil palms is now being developed by a wholly-owned subsidiary, Mosa Plantation Pty Ltd, and an oil mill will be built by another wholly-owned subsidiary, Mosa Oil Mill Pty Ltd. It is a condition of the lease that 80% of the site will be planted with oil palms and that the oil mill, which must be completed within five years, will have a minimum capacity sufficient for the output of 6,000 acres. The lease specifies that half of the mill capacity will be reserved for smallholders. 3.02 Planting of Mosa estate started in 1968 and 3,000 acres will be completed in 1971. Construction of the mill will start in 1969. Investment costs of the estate and mill program are estimated at A$3.6 million (us$4.o million). 3.03 The smallholder project described in this report would be adja- cent to Mosa estate. The estate, under contract to Government, would arrange certain services for the smallholders such as the supply of planting material, and the oil mill would collect and process "fresh fruit bunches" 1/. Financ- ing of New Britain Oil Palm Development Ltd is adequate and its two subsidi- aries will be able to play their role in the Droject. However, assurances have been obtained that Government would make alternative arrangements for processing if the companies were unable to fulfil their contractual obligations (see para 7.02 for further details). 1/ Fresh fruit bunches (ffb) - the saleable product of the oil palm - are clusters of individual fruits. Each fruit consists of a nut, which con- tains the palm kernel, surrounded by oily flesh from which palm oil is extracted.  - 4 - 3.04 Oil palm develoDment in the Mosa area will require improvements in the existing infrastructure. All palm oil and kernels produced will be ex- ported from New Britain, and thus require the construction of a small port and related facilities. Specifically, requirements are: - construction of a small port in San Remo Bay comprising a wharf, three dolphins for ocean-going freighters, sheds and palm oil storage tanks and numping facilities. - completion of 16 miles of road from the Mosa mill to the port site and construction of a bridge over the Dagi River. The roads, bridge, wharf, dolphins and sheds would be constructed and opera- ted by Government; the palm oil storage tanks and pumping facilities would be the responsibility of the klosa Oil Mill Pty. The total cost of this program is estimated at Atl.4 million (US$1.6 million), and minimum palm oil loading facilities would be required by mid-1971. Since the viability of the small- holder project is dependent upon these facilities (as is that of the Mosa estate) assurances have been obtained from the Government that they would be constructed, and that adequate port loading facilities would be operative by mid-1971. IV. THE PROJECT AREA 4.01 The project area lies close to Mosa village near the north coast of New Britain between the communities of Talasea and Hoskins (Mans 1 and 2). It has a very low resident population. Comunications 4.02 Mosa is about 20 miles by all-weather road from a grass airstrip, suitable for DC3s and similar aircraft, at Hoskins: Trans-Australian Air- lines schedule regular flights from Hoskins to Talasea and the ports of Rabaul and Lae. Until the completion of the new facilities at San Remo Bay (para 3.04) heavy supplies will be brought ashore by rafts from ships lying off-shore near Buluma, about half-way between Mosa and Hoskins. Radio- telephone facilities are available at Hoskins. Topography, Soils and Climate 4.03 Topography is level and well suited to tree crop and food crop pro- duction. Soils are volcanic and free draining. They generally have a light texture and a loamy surface but there are some areas which are stony or clayey. These soils provide a good rooting medium and their nutrient status is satis- factory, although it is anticipated that fertilizers will be necessary to achieve maximum crop yields. 4.o4 Rainfall records from stations in the general nroject area-- Hoskins, Talasea and Numundo-- indicate a rainfall in the settlement area of  - 5 - between 100 and 170 inches annually. Distribution is generally good, al- though a distinct dry season occurs May through August. Even in these months, however, rainfall averages 3-4 inches monthly. Water deficits might occur on occasions but would not seriously impede growth nor production of fruit. Temneratures, ranging between 700 and 800 F, and sunlight, totalling about 2,000 hours annually, are ideal for oil palms. 4.05 Topography, soil, and climatic conditions are thus very suitable for oil palm cultivation. In the opinion of Harrisons and Crosfield -- who have considerable experience of oil palms in Malaysia and Indonesia -- growing conditions are as good as, if not better than, the best conditions for oil palms in Malaysia. Vegetation 4.o6 The natural vegetation is tropical rain forest. Logging by con- tractors has already started and most of the marketable timber will be ex- tracted prior to clearing. Water supply and Health 4.07 Good supplies of water are available from the all-season Dagi, Ru, Lamegi and Ganok rivers which traverse the project area. Malaria, which in the past has been responsible for the low population, is no longer a serious constraint on development due to the general use of malaria suppressants. Land Tenure h.o8 The Land Ordinance (1Q62-1966) governs land tenure in Papua and New Guinea. Apart from some freehold titles issued during the German ad- ministration of New Guinea, land may be owned only by the indigenous popula- tion -- "native land" -- and by the Government. All land to which the Gov- ernment cannot show rightful title is considered as "native land". The Government can acquire "native land", either by negotiated purchase or by compulsory purchase, and may lease land acquired in either way to private individuals or companies. Usually such leases are for 99 years. Land needed for the project has been purchased by the Government from the local tribe -- the tribe owns large tracts of land which will be more than suf- ficient for its needs in the foreseeable future. V. THE PROJECT A. Project Definition 5.01 The project involves: - bringing about 580 families from other parts of the Territory and settling them at Mosa, each on a holding having about 15 acres of land suitable for oil palm cultivation;  - 6 - - establishing, within three years of settlement, eight acres of oil palms on each holding -- a total of 4,640 acres of oil palms; - erecting permanent settler houses and establishing food gardens on each holding; - providing long-term loans to settlers for the above purposes, through the Papua and New Guinea Development Bank; - providing a suitable infrastructure for the settlement area; and - providing necessary health, education and welfare service for the settlers. The project also includes the Drovision of adequate processing and export handling facilities, as already described in Chapter III. B. Pattern of Settlement 5.02 The settlement would be developed in three blocks totalling some 15,000 acres, which would border three sides of the 5,400 acre Nahavio block leased by New Britain Oil Palm Development Ltd (Map 2). The Kapore and Tamba blocks, totalling about 7,500 acres, have been subdivided already into about 310 holdings, each having about 15 acres of land suitable for oil palm cultivation, with provision made for roads and service areas. Settlers arrived on these holdings in the latter half of 1968. A further 270 hold- ings have been tentatively demarcated in the third block -- Sarakolok/ Lakiemata -- of about 7,500 acres, and these would be allocated to settlers in the second quarter of 1969. 5.03 Settlers would live on their holdings, and not in a central village. Initially they would be housed in temporary accommodation, subsequently con- structing and moving to their own houses. A full range of social services would be provided for settlers, importantly education and health. These services generally would be superior to those provided for established com- munities of a similar size in Papua and New Guinea. C. Development Schedule Land Clearing 5.04 Saleable timber will have been removed from the forest which covers most of the settlement area. Clearing of the remaining timber is relatively inexpensive -- felling, stacking and burning on the Mosa Plantation costs about A$35 (US$39) per acre, even though many of the workers have to be transported by air to the site. Government pre-clears -- felling only, at  - 7 - a cost of about At12.50 (Us$14) per acre -- six acres of each holding, leav- ing the settler to complete the clearing operation. These six acres will be planted with palms during the first two years. Subsequently, the settler would have to completely fell and clear the two acres for his third year's planting, the 1-2 acres needed for his food garden, and any additional area of his holding on which he wished to plant either more oil palms or other cross. Pre-clearing is being carried out by contract labor brought in from outside the settlement area; many of the settlers work in these contract gangs before they are allocated a holding. Forest clearing is traditional work in the Territory and no problems are envisaged in settlers falling behind on their clearing schedules. The overall clearing program for oil palm slanting is shown in the following table: 1967/68 1968/69 1969/70 1970/71 Total - - - - - - - - - acres - - - - - - - - - Pre-clearing by Government 1,860 1,620 - - 3,480 Completion of clearing by settlers - 2,670 810 - 3,480 New clearing for remaining 2 acres of oil palms on each holding - - 620 540 1,160 Total land cleared for oil palms: 4,640 5.05 At the time of the visit of the anpraisal mission in January/ February 1968, the above program was slightly in advance of schedule. Planting Program 5.06 Each settler would plant three acres of oil palms under supervision during his first year of occupation, three more during the second and two in the third, making eight in all. Consequently, the oil palm planting Program for the project is as follows: 1968/69 1969/70 1970/71 1971/72 Total -acres - 1968 settlers, 310 930 930 620 - 2,480 1969 settlers, 270 - 810 810 540 2j6o Total 930 1,74o 1,430 540 4,640  D. Oil Palm Establishment Planting Material 5.07 The Mosa Plantation Pty would supply, under contract to the Govern- ment, the settlement's oil palm seedling requirements. This would be of a dura x pisifera cross. The Mosa Plantation Pty obtains, and would continue to obtain, its seed supplies from Harrisons and Crosfield estates in Malaysia. At the time of the appraisal mission sufficient planting material was on site to complete the 1968/69 planting program. No Droblems are envisaged in ob- taining supplies to complete the planting program. Cover crop seed would also have to be imported, and Malaysia would be the most suitable source. Assurances have been obtained from the Government that suitable arrangements would be made for the provision of the required quantities of planting material and cover crop seed. Fertilizers and Pesticides 5.08 In the absence of experience with oil palms in the project area, detailed fertilizer requirements are not known. However, experience with oil palms elsewhere, and with coconuts in the project area, indicates that despite the high initial fertility of the soil, nitrogen, and possibly phos- phorus and magnesium, may be needed to obtain high yields. In project costs allowances are made for fertilizer use by settlers. It is anticipated further that some Dynastid beetle and possibly bag worm attacks will occur. Consequently, provision is made in project costs for suitable pesticides, and application equipment. Pollination 5.09 Pollination would be needed to obtain maximum yields in the first four to six years of production, and would be provided as a central settlement service. Suitable supplies of pollen can be obtained from Malaysia, and as- surances have been obtained from the Government that satisfactory arrangements would be made for the supply of nollen. E. Palm Produce Processing 5.10 Settlers' ffb would be processed, and the products marketed, by the Mosa Oil Mill Pty, which would be contracted by the Government to pro- vide this service throughout the 25 year economic life of the settlers' palms (para 7.02). Construction of the mill would start in 1969, and by mid-1971 it will be operative with a capacity of 10 tons of ffb per hour. By 1974 capacity would be increased to 15 tons per hour. This phasing of capacity is adequate to process production of both the settlers and currently planned plantings by the Mosa Plantation Pty. Without the settlers, a ca- pacity of 5 tons per hour would have been sufficient by mid-1971, increasing  - 9 - to 10 tons per hour by 1974. The basic design and foundations of the mill allow its further expansion to a capacity capable of processing the produc- tion from 16,000 acres of oil palms, equivalent to a capacity of 40 tons per hour. F. Cost Estimates 5.11 Total project costs, including capitalized interest on Pa-nua and New Guinea Development Bank (PNGDB) loans made to settlers during develop- ment, are estimated at A$3.0 million (US$3.3 million). The table below gives a summary of the cost estimates. Further details are in Annex 1. SUMMARY OF PROJECT COST ESTIMATES Local Import Local Import Imnort Currency Component Total Currency Component Total Component - A$'000 - - - - - - - - Us$