Papua New Guinea - Agricultural Development Project

RESTRICTED Report No. PA 2 5a 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 The report may not be published nor may it be quoted as representing their views.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 AGRICULTURAL DEVELOPMENT PROJECT PAPUA AND NEW GUINEA December 23, 1969 Agriculture Projects Department  CURRENCY EQUIVALENTS VS$1.00 - Australian $AO.89 $Al.O0 - 100 cents = US$1.12 $Al million = US$1,120,000 WEIGHTS AND MEASURES (English System) 1 acre = 0.45 hectares 1 ton = 2,240 pounds = 1,020 kilograms 1 cwt = 112 pounds = 51 kilograms 1 inch (in) = 2.45 centimetres 1 foot (ft) = 12 inches = 0.305 metres 1 mile = 5,280 feet = 1,610 metres 1 cubic yard = 0.765 cubic metres INITIALS AND ACRONYMS DASF Department of Agriculture Stocks and Fisheries ffb fresh fruit bunches H&C Harrison and Crosfield IDA International Development Association NBPOD New Britain Oil Palm Development Ltd. PNGDB Papua New Guinea Development Bank  PAPUA AND NEW GUINEA AGRICULTURAL DEVELOPMENT PROJECT Table of Contents Page SUNMARY AND CONCLUSIONS .................... . ........ ......i- I. INTRODUCTION ....................... ********** 1 II. BACKGROUND ................................ . 2 III. THE PROJECT . 5 A. General Description............ . .. 5 B. Detailed Features ...... . ........ 5 C. Cost Estimates ......................... .. . . .*.-. D. Project Financing ............................. 13 IV. ORGANIZATION AND MANAGEMENT . ............................ . 15 Department of Agriculture, Stock and Fisheries ........ 15 Papua New Guinea Development Bank ................... .. 15 Appraisal Procedures ..... ............ ........ . ...... . 17 Security of Loans ... ................... ................ 17 Procurement ................................................ 18 Disbursement .......... ... ...... 18 Accounts and /Audit ................. .............. 18 V. YIELDS, PRODUCTION, MARKETING AND PRODUCER BENEFITS ...... 19 VI. BENEFITS AND JUSTIFICATION ................. . .............. 22 VII. RECOMMENDATIONS.. . ..... 23 ANNEXES 1. The Coconut Sub-Project 2. The Beef Cattle Sub-Project 3. The Smaliholder Oil Palm Sub-Project 4. The Kimbe Wharf Sub-Project 5. Agricultural Credit and the Papua New Guinea Development Bank 6. Market Prospects for Palm Oil and Palm Kernels 7. Oil Palm Smallholder FFB Purchase Price Formula This report is based on the findings of a Bank Appraisal MisSion to Papua and New Guinea in May/June 1969 composed of Messr,.-A. Storrar and P. Grosjean.   PAPUA AND NEW GUINEA AGRICULTURAL DEVELOPMENT PROJECT SUMMARY AND CONCLUSIONS i. This report contains the appraisal of an Agricultural Develop- ment project, made up of four sub-projects, for which an IDA credit of US$ 5.0 million equivalent is proposed. ii. The economy of Papua and New Guinea is almost completely agri- cultural with its indigenous population mainly involved in subsistence agriculture, and expatriates dominating commercial production. Although the project allows for a small investment in coconut produetion, the Territory's chief export crop, it is aimed mainly at diversification in- to oil palms and livestock, enterprises well suited to the country and which the Government is now actively encouraging. There is an abundance of undeveloped and underdeveloped fertile agricultural land which can and should be economically exploited. Aii. In 1967 a development bank, the Papua and New Guinea Develop- ment Bank (PNGDB), was established to provide lending facilities for all farmers in the country. A small number of farmers have already availed themselves of these facilities but lack of finance restricts the acti- vities of this organization. Since both PNGDB and the government depart- ments have adequate numbers of technical and administrative staff to organize and supervise agricultural investments, assisting PNGDB to make timely investments will further strengthen the roots of agricultural de- velopment in the Territory. iv. The project, comprising four sub-projects, involves the follow- ing: the planting and replanting of 10,000 acres on existing coconut estates; the development and stocking of 150,000 acres of private beef cattle ranches and the improvement of government services to the beef cattle industry; the construction of a wharf at Kimbe in New Britain to serve an area being developed for oil palm production; and the second stage of a project recently financed by the Association (PEG-137) which would provide for 980 smallholders to grow 7,840 acres of oil palmd. V. The total cost of the project is US$ 8.8 million, and the im- port component of US$ 5.0 million would be covered by the proposed IDA credit of US$ 5.0 million. The borrower would be the Administration of the Territory of Papua and New Guinea. Lending to farmers through the PNGDB would be at interest rates of not less than 6% to oil palm small- holders and 6-3/4% to coconut producers and beef cattle ranchers; after July 1st, 1970 interest rates to cattle ranchers would be not less than 7%. vi. The first IDA Credit (US$ 1.5 million equivalent) to Papua and New Guinea was made in January 1969 (PNG-137) for the development of smallholder oil palms, a new enterprise for the Territory. The  - ii - smallholder project represents the combined efforts of the Government, PNGDB and a joint estate/factory company, the New Britain Oil Palm De- velopment Ltd. (NBPOD), formed between Government and Harrisons and Crosfield (H & C). The latter company is -one of the world's leading organizations in the oil palm industry and they are the body responsi- ble for managing NBPOD. To date, the development of the initial oil palm project has been very satisfactory and the proposed Phase II sub- project would .function under the same oper-ational and managerial 8syB- tems. vii. The livestock and coconut subprojects would be the joint responsibility of Government, in -particular the Department of Agri- culture, Stock and Fisheries (DASF) and PNGDB. Present operations in both these sectors are being well handled. 'The Australian.Depart- ment of Public Works, which has adequate and competent staff, would have fall responsibility for supervising the construction of the proposed wharf. viii. Both Government and PNGDB would be required to keep separate accounts for the project so that items eligible for IDA reimbursement vould be readily ascertainable. Government accounts are audited by the Commonwealth Auditor-General's Office-and a special sector -of the office, devoted to accounts and records of banking institutions,,:au- dits PNGDB accounts. ix. The economic-rates of return from investment in the sAb- project are: the coconut subproject - 9%; the livestock subproject - 11%; the oil palm subproject - .15%; and-the Kimbe wharf - a$mini- mum of 15%. x. The Project is suitable for an.IDA credit of US$ 5.0D-million. The balance of project costs vould be provided by the Territ.ory-of Papua and New Guinea, and local participating farmers.  PAPUA AND NEW GUINEA AGRICULTURAL DEVELOPMENT PROJECT I. INTRODUCTION 1.01 The Administration of the Territory Of Papua and New Guinea (Government), through the Government of the Commonwealth of Australia, has requested the Association's help in financing the following: (a) planting and replanting about 10,000 acres of existing coconut estates; (b) developing and stocking some 150,000 acres of private beef ranches and the improving of Government services to the beef cattle industry; (c) implementing the second stage of a smaTllholder oil palm development project which would provide for 980 smallholders to grow 7,840 acres of oil palms. A first stage of the project (4,600 acres) is being fi- nanced by the Association under credit PNG-137; and (d) constructing a vharf at Kimbe, Nev Britain, mainly to support nearby oil palm development. 1.02 Sub-projects (a), (b), and (d) together with the first stage of the allholder oil palm project were examined originally in January/ February 1968 by an Association mission U/. A credit of US$ 6 million for these four sub-projects was negotiated in early September 1968 but with the reservation that it would not be considered by IDA until suf- ficient funds became available. 1.03 In January 1969, the Association approved a credit for US$ 1.5 million to cover the highest priority item, the New Britain Smallholder Development Project, vhich consisted of the development of 4,600 acres of smallholder oil palms. 1.04 In May/June 1969 a mission comprised of Messrs. Storrar and Grosjean visited Papua and New Guinea to re-appraise the coconut, live- stock, and Kimbe wharf elements of the initial request and to appraise a second stage of the New Britain Smallholder Development Project. This report is based on the mission's findings. U/ Mission members were Messrs. C. P. McMeekan (Consultant), S.D. Eccles, P. G. Nelson, M. Palein (IDA) and T.A. Philips (Consultant).  -2- II. BACKGROUND 2.01 The Territory of Papua and New Guinea (Territory) comprises the eastern half of the island of New Guinea (mainland); nine major islands including New Britain in the Bismarok 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 mountain- ous, with ridges on the mainland rising to 15,000 ft and on the islands to 8,500 ft. Total population is about 2.2 million including about 30,000 ex- patriates. 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 which is actively preparing the Territory for Independence continues to spend large sums on its administra- tion and development. In 1967/68, vhen total Government expenditure was $A 131.1 million, Australian grants-in-aid totalled $A 77.6 million. 2.03 The Territory's economy is predominantly agricultural. Agricul- ture earns nearly all export income, engages more than half the people in paid employment and most of the self-employed. The economy includes an exceptionally large non-monetized sector in which a majority of the popu- lation engages almost exclusively in various agricultural activities for obtaining the basic necessities of life. The real Gross National Product (GNP) of the monetized sector was unofficially estimated at .6% .of the total GNP and to be rising rapidly at an annual rate of over 10%. For the economy as a whole, the total real GNP, including that of the non- monetized sector, has been rising at 6% per annum in the last five years. Total GNP amounted to about $A 400 million (approximately US$ 450 million) in 1966/67 and per capita average for the indigenous population, about US$ 100. In the monetized sector, agriculture (including livestock for- estry and fisheries) accounts for one-third of the GNP, most of the rest comes from Government services. Exports have risen steadily in volume and their annual value bas increased from about $A 28 million in 1960/61 to $A 59 million in 1967/68. Copra and coconut product exports are worth about 36% of the total, coffee, 24% and cocoa. 20%. 2.0o4 A 1967 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 Govern- ment efforts to develop oil palms, pyrethrum and tea, crops which had not previously been grown in the Territory on a comercial 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 will be in a better position to pay for the imports neces- sary for continued economic development. 2.05 Increased coffee production is limited by the International Cof- fee Agreement; cocoa has suffered a disease setback; and fluctuating prices  -3- have tended to discourage further rubber development. Government bas, how- ever, succeeded in interesting private enterprise in oil palms, ten, pyre- thr-um_and livestock. ' __ C/ - - 2.06 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, coco- nuts take seven to eight years to come into production and costs are rising so that in the absence of a specific program of assistance the smaller es- tates have little incentive to develop. 2.07 By the end of World War II the Territory's cattle herds had been decimated. Since then meat has had to be imported and demand has I grown steadily, reaching some 40,000 carcass equivalents costing near- ly $A 5 million in 1968. The large natural resource of 8 to 909mi2 on acres of grassland has been little used so far, although capable of ef- ficient exploitation by livestock. 2.08 Prewar experience with Government farms, private estates, and mission stations established the feasibility of cattle raising in the Territory. Government has used two approaches to re-establish the indus- try postwar; first, it has developed four ranches under its own control, in the lowland plains of the Markham Valley, in the Highlands and in the Sepik area; and second, it has leased land to Australian cattlemen for the development of 12 ranches in both highland and lowland zones. At the beginning of these developments, there were virtually no breeding cattle available in the Territory and breeding cattle had to be imported at land- ed costs 60% to 80% higher than in Australia. In view of the technical and political risks involved, Government subsidized 2/ the cost of freight and disease control on all approved imported breeding stock. This subsidy will be discontinued in about 1973 if the status of the industry then war- rants this. Government has provided still further encouragement to the new industry by building abattoirs at the two main producing centers, in order to foster efficient marketing. Despite these features, development of the industry has been slow and the total cattle population_is_still only about 50,000 head though rising steadeily-o accelerate development, Gov- -6iFi-e h n deided to make long-term credit available to the private sector through PNGDB, as recommended by the 1963 Bank Economic Survey Mission. 2.09 Government followed up the 1963 mission's suggestion that a fi- nancial institution suited to the specific conditions of the Territory be organized to provide long-term development credit, and the Papua and New Guinea Development Bank opened for business in July 1967. Its credit services would be made use of in the project which this report describes. 1/ The Freight and Disease Control Subsidy.  -4- 2.10 In January 1969, under Credit 13T-PNG, IDA made U5$ 1,500,000 available for a first stage of smallholder oil palm development on the island of New Britain. Under the project 580 smallholders are establish- ing 4,600 acres of oil palms together with food and other cash crops. Provision is also made for related infrastructure. Progress to date in carrying out this project has been excellent. This is the only agricul- tural project financed by the Bank Group in the Territory.  -5- III. TEE PROJECT A. General Description 3.01 The project consists of four subprojects: coconut estate new planting and replanting; beef cattle production; the planting of 7,840 acres of oil palm by 980 smallholders; and the construction of Kimbe wharf. Important features of each subproject are summarized in the fol- lowing paragraphs. Fuller details of the subprojects are given in An- nexes 1, 2, 3 and 4 respectively. PNGDB would provide credits to parti- cipants in the coconut estate, beef cattle production, and oil palm projects. PNGDB Lending Program 3.02 The total on-farm development program is estimated to cost $A 4.8 million (us$ 5.4 million) and the PNGDB would lend approximately 80% of this total or $A 3.8 million (U.S.$4.25 million). The lending program would be as follows: PNGDB Lending Program Loan as Subproject Percentage Acreage Amount Average of Total New to be Number of of Size On-Farm Developed Participants Lending of Loan Investment ( --- A$'000 ----) Coconut (10,000 acres) 25 725 18 80 Beef cattle (150,000 acres) 15 960 64 56 Oil palm (7,840 acres) 980 2,108 2.15 100 B. Detailed Features The Coconut Subproject 3.03 The coconut subproject comprises a five-year tranch of a ten- year program of lending by PNGDB to existing estates for the planting and replanting of about 10,000 acres of coconuts.  -6- 3.04 New planting involves clearing, nursery and cover crop estab- lishment,, planting, fertilizer and pesticide application, and construc- tion of access roads. Replanting would involve similar activity except that instead of clearing unplanted land, unproductive coconuts would be cut out, and there would be no need for additional access roads. 3.05 Participants. The coconut planters vho would participate in this program are mainly expatriate and Australian with wide expe- rience in managing coconut estates of about 1,000 acres. -With Sub- stantial long-term finance available from 'PNGDB it is estimated that at least 10,000 acres would be developed under the subproj ect. A survey conducted in late 1967 indicated that about 25 grover.s-would be definitely interested in borroving for the purposes of :replanting 2,000 acres and new planting 8,000 acres. Enquiries made .in May 1969 by the reappraisal mission.indicated that grower interestt re- mains strong and applications for credits had already been-:mad- to PB;GD.B.in May 1969 to the amount of US,146,000. The Beef Cattle Subpro,1ect -3.06 The subproject is an integral part of Government -plan= for the development of the beef cattle industry and comprises: (a) in the private sector: -provision of credit to .quali- fied ranchers to purchase.additional imported breeding _tock and pay for associated on-farm development on about 100,000 acres of partly developed existing-ranch- es, and about 50,000 acres of additional grazing land for new.ranches. (b) in the -ublic sector: completion of development.of two Government cattle breeding ranches, and the-,pro- vision of training in cattle management for -indi-ge- nous farmers. 3.07T The objectives of the subproject are fivefold: (a) to initiate the development of large unused'.land re- lb) to help replace high-cost Imports; c) to provide a source of.locally adapted cattle at eco- nomic prices to permit widespread participation by in- digenous farmers in a nev system of land use; (d) -to train indigenous -farmers in livestock husbandry; and (e) to ensure a continuing and adequate supply of:animal protein to the population.  -7- 3.08 Participants. Existing ranches and new ranches included in the project would be developed by cattlemen already in the Territory, or by qualified cattlemen who have experience elsewhere in a tropical environ- ment. Government has already arranged for the purchase of land needed for the new ranches and leasing arrangements for 30,000 acres out of the pro- posed 50,000 acres to be developed as new ranches are now being made, and the remaining 20,000 acres will be purchased as soon as practicable. It is estimated that the owners of existing ranches will be interested in further development of some 100,000 acres. 3.09 Field Development. For estimate purposes, two 10,000 acre ranch models have been used; one for existing ranches (Annex 2, Tables 3 and 4) and one for new ranches (Annex 2, Tables 5 and 6). It is forecast that in the case of existing ranches, 50,000, 30,000 and 20,000 acres would be dev- eloped successively in the first three years; and in the case of new ranches, 20,000 and 30,000 acres in the second and third years of the subproject. This would require the import of about 5,500 head of breeding stock over a three-year period, associated on-farm development and a limited amount of pasture improvement. 3.10 Beef production by indigenous farmers is in its early stages and cannot progress satisfactorily until more locally adapted stock are available, and interested farmers are trained in cattle management. By providing additional classrooms and equipment on Government ranches, training in cattle management for these indigenous farmers would be ex- panded; these ranches would also supply livestock to the newly trained ffamers. 3.11 Government Services. The subproject involves further develop- ment of two Government cattle ranches at Baiyer River and Urimo (see Map 1), including the importation of TOO breeding cattle and associated on-farm improvements. Both ranches would produce yearling cattle for sale to in- digenous farmers and Baiyer River would provide cattle management training. The Freight and Disease Control subsidy would continue to be paid tempora- rily on all imports of suitable breeding stock (see para. 2.08). During negotiations, Government agreed that it would consult with the Association before December 31st, 1972, with a view to terminating the Freight and Disease control subsidy by December 31st, 1973 or as soon thereafter as the development of the cattle industry in the Territory shall permit. The Smallholder Oil Palm Subproject 3.12 Oil palm cultivation in the Territory started at Hoskins in New Britain in 1967 with the implementation of Phase I of an oil palm development prograi7- Phase I consists of: (a) a nucleus estate of 3,000 acres of oil palms,  (b) a palm oil mill with a capacity for processing 15 tons of ffb/hour 1/; ,(c) a settlement scheme under which about 580 families are being provided with holdings of 15 acres, on which, within a three-year settlement period, eight acres of oil palms are being established. The settlement scheme will result in about 4,640 acres of oil palms being es- tablished; and (d) necessary physical and social infrastructure for the project area. 3.13 In January 1969, the Association made a credit of US$.1..5 mil- .lion equivalent (PNG-137) to finance part of the cost of items (c) and (d) of Phase I of the development program. The development of this phase vas well advanced by the time the IDA Credit was approved andl the main plantings will be completed in 1970t/71. The Government has already sur- veyed the area for Phase II and development of this sector commenced in July 1969. 3.14 Progress of Phase I has been excellent and the Government now proposes to embark on Phase II which would involve: (a) the planting of a further 5,000 acres of oil palms on the nucleus estate; (b) the extension of the oil mill processing capacity from 15 tons ffb/hour to 45 tons/ffb/hour; (c) the settlement of an additional 980 smallholders-on 15 acre holdings over a three-year period; (d) the planting of 8 acres of oil palms on each holding over the first three years of settlement, resulting in a total of 7,840 acres of oil palms by 1974/75; and (e) the expansion of the present supervisory and credit facil- ities provid ! . tihe nec': ^7 t:h- -,b - project. 3.15 The nucleus estate and the oil mill are owned by Ne Britain Oil Palm Development Ltd. (NBPOD). NBPOD is owned in equal shares by the Government and an experienced plantation company, Harrisons and Crosfield (Australia and New Zealand) Ltd.. The nucleus estate is being 1/ Fresh Fruit Bunches. The saleable product of the oil palm: one cluster of individual fruits. Each fruit consists of a unit con- taiing the palm kernel surrounded by a flesh containing palm oil.  -9- developed by NBPOD's vholly-owned subsidiary, Mosa Plantations Pty Ltd., and the oil mill by another wholly-owned subsidiary Mosa Oil Mill Pty Ltd. Planting of the nucleus estate started in 1968 and construction of the mill began in September 1969. NBPOD is under contract to Government to supply planting material to the smallholders, and to collect and process the harvest of their oil palms. 3.16 The sub-project, which is the subject of this report, consists of items (c), (d), and (e) in para. 3.14 above. Full details of the sub- project appear in Annex 3. 3.17 Land Tenure. A Land Ordinance governs land tenure in Papua and Nev Guinea and it specifically allows Government to acquire land by negotia- tion or compulsory purchase. The land required for the sub-project has already been purchased by Government from the local tribe, and it can now be leased to individuals on a 99-year basis according to criteria explained in para 3.23. Leases have already been issued to over 300 smallholders in the Phase I development. Lessees are normally given six months' grace in which to confirm or reject the offer of a lease; if rejected, the lease is reallocated. Such a practice has led to delays in the plan- ned planting program and Government is now reducing the grace period to three months. 3.18 Land Clearing. On each holding, eight acres of forest would be cleared for the planting of oil palms within a three-year period. Merchan- table timber would first be removed, and the Government, through the project authority, would then fell six acres of forest on each holding. The set- tler would stack and burn the felled material to complete the clearing operation himself, and subsequently fell, stack and burn both the area required for his food crops, and a further two acres for oil palms. Forest clearing is traditional work in the Territory and no problems are anticipated in meeting the projected targets. 3.19 The overall clearing program of the project would be as fol- lows:  - 10 - Clearing Prograwfor Oil Palms 1969/70 1970/71 12971/2 1972/73 1973/74 197T4/75 Total ........ . .* . acres ............. . Pre-clearing by Government 2,280 1,800 1,800. - - - 5-,880 Completion of clearing by settlers - 1,140 2:,o40 1,800 900 - 5,880 New clearing for remaining 2 acres of oil palms on each holding - - - 760 600 600 1,960 Total land cleared: for oil p&lms-. 7,840 3.20 Planting Program. High yield potential oil palm see.& will be obtained from Malaysia. by NBPOD which would be. under contract: to Government to supply suitable planting material to smallholders, as is th.e case with Phase I. 3.21 Each mallLholder would plant three acres of oil palm- ix his first year of occupation, three more in the second and two in.thee third year, giving a total of eight acres. Should substantial areas of the smallholder's plot not be properly planted by the smallhol&er, project staff would arrange to complete planting. 3.22 The planting program for the project would be as follows: 19T0/Tl 1971/72. 1972/73 1973/74 1974/75 Total t - ------ acres