Papua New Guinea - Nucleus Estate and Smallholder (Milne Bay) Project

Dcument of The World Bank FOR OFFMCLAL USE ONLY Repet ho 12226 PROJECT COMPLEIION REPORT PAPUA NEWl GUINE NUCLEUS ESTATE AND S(ALLUBLDER (NILNE BAY) PROJECT (LOAN 2608-PNG) AUGUST 5, 1993 MICROGRAPHICS Report No: 12226 Type: PCR Agriculture Operations Division Country Department III East Asia and Pacific Regional Office This document has a restricted distribution and may be ased by recipients onlY in the performance of their official duties. Its contents may not otherwise be disclosed witho World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = Kina (PGK) US$1.00 = POK 0.891 (at appraisal) = PGK 0.953 (at completion) PGK 1.00 = US$1.122 (at appraisal) = US$1.0493 (at completion) FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES Metric System ABBREVIATIONS ABPNG Agriculture Bank of Papua New Guinea CDC Commonwealth Development Corporation DAL Department of Agriculture and Livestock (formerly Department of Primary Industries) FFB Fresh Fruit Bunches (oil palm) GOPNG Government of Papua New Guinea IBRD International Bank for Reconstruction and Develpoment (the Bank) ICB International Competitive Bidding MBEPL Milne Bay Estates Proprietary Limited (the Company) PCR Project Completion Report PNG Papua New Guinea  FOR OMCLAL USE ONLY THE WORLD BANK Wshington, D.C. 20433 USA. Offi" of DroUt.ssuedow Oprtew_ Evdaas August 5, 1993 MEMORANDUM TO THE EXECI DREG=IO AND THE P1SDN SUBJECT: Project Completion Note an Papua New Guiea Nucleus Estate and Smaliholder (Milne Ba) Project dlan 2608MP& G) Attached is a Project Completion Report on Papua New Guinh - Nucleus Estato and Smaliholder (Mine Bay) Project (Loan 2608-PNG) prepared by the East Asia and Pacific Regional Office, with Part It contrbuted by the Borrower. The report is comprehensive and of good quality. It highlights the extent to which the economic and financial benefits expected at apprasl from a weU conceived and competety maaged prject cn be compromised by a dramatic and unexpected fal in commodity prices oaring Implementati Ihe project aimed to establish 3200 ha of ol palm and 750 ha of cocoa on a nucleus estat, jointly owned by the Govemment and the Commonwealth Development Corporation (a cofinacier with the Eank), and 1,000 ha of smalholder oil palm, and to construct associated infrstructre including crop proceing, housing, access and social services. The nucleus estate oil palm planting was carried out ahead of schedule, and the area reaed 5,500 ha by the end of 1992, almost 50% higher dta the appraisal target. Ile nucleus estate cocoa, however, had to be abandoned because of diseae associated with higher rainfall than aumed at appraisa. The smailholter oi palm uptake was lower than forecast at appai and had reached 880 ha by ihe end of 1992 compared to an appraisal target of 1,000 ha which was to have been achieved two years earlier. Quality of established oil palm plantings is high, although yields, based on early production figur, are likely to be around eight percent below appraisl esimates in the case of estate plantigs, and as much as 17% below in the case of smaliholdings. Unfortmately, a dramatic decline in palm oil and kernel prices which commenced shordy after the project was declared effective has resulted in prics at completion being only about half of the earlier frecasts, and current projections are for a fAurther price decline. For this reason, the estate enteprise Is in financi difficulty; the economic rate of return is negative; and the project outcome must be viewed as unsisf. Nevertheless, the principal shareholders are continuing their support for the project and are considerng reducing the high debt: equity gearing, possibly through conversion of a substantia portion of the debt to equity. Given the probability of this continued support, sustnability can be considered likely. Institutionad development was substantial, due in large part to a heavy investment in staff training given by the expatriate management. A performance audit is not planned at this time. But an impact evaluation wl be considered in a year or two. Robert Picciotto by H. Eberhard Kopp Attachment This document has a restrieted ditibution and may be used by recionts ony in the perfomane-of their offlcia dutie. Its contents may not otherwse be disclosed wit 'out Wjald Bank autorization.  FOR OMCUAL USE ONLY PROJECT COMPLEI,ON REPORT PAPUA NEW GUINEA NUCLEUS ESTATE AND SMALLHOLDER (MILNE BAY) PROJECT (LOAN 2608-PNG) TABLE OF CONTENTS Preface . ................................................ i Evaluation Summary ........................................ i1i PART I: PROJECT REVIEW FROM BANK'S PERSPECTIVE Project Identity ....................................... I Background ............ ............................. 1 Project Objectives and Desciptan ......I..................... I Project Design and Organization ............................. 2 Project Implementation .................................. 3 Project Results ........................................ 4 Project Sustainability .................................... 6 Bank Performance ..................................... 7 Borrower Perfomance .................................... 7 Project Relationships .................................... 7 Management Services .......... ........................ 8 Conclusions and Lesons Learned ............................ 8 PART I: PROJECT REVIEW FROM BORROWER'S PERSPECTIVE Comments on Part I .................................... 10 Bank Performance ..................................... 10 Borrower Performance ................................... 10 Lessons Leamed ........... ........................... 11 PART Im: STATISTICAL ANNEX 1. Related Bank Loans and IDA Credits ....................... 12 2. Project Timetable ..................................... 13 3. Loan Disbursements .................................. 14 4. Project Implementation ................................ 15 5. Project Costs and Financing ............................. 16 6. Project Results ................................... 17 7. Status of Loan Covenants ............................... 18 8. Use of Bank Resources ................................ 19 This document has a restricted distribution and may be used by recipients only in the performance of their oMcial duties. Its contents may not otherwise be disclosed without World Bank authorization.  ANNEXES 1. Comments from Commonwealth Development Corporation .... ...... 21 2. Commodity Price Projections ............................ 23 3. CocoaDevelopment .................................. 24 4. Palm Oil Mill Procurement and Construction ................... 25 S. Financial Rate of Return Calculation ........................ 26 6. Planting Program Realization . ................... 27 7. Commodity Price Risk Management and Operational Lending .... .... 28 MAP: IBRD No. 18332  PROJECT COI1,2LETION REPORT PAPUA NEW GUINEA NUCLEUS ESTATE AND SMALLHOLDER (MMNE BAY) PROJECT (LOAN 2608.PNG) PREFACE This is the Project Completion ReporL (PCR) for the Nucleus Estate and Smallholder (Milne Bay) Project in Papua New Guinea for which Loan 2608-PNG in the amount of US$27.6 million was approved on July 23, 1985. The Loan was closed on September 30, 1992, in accordance with the original schedule. It was fully disbursed and the last disbursement was on January 29, 1993. The PCR was prepared by the Agriculture Operations Division of the East Asia and Pacific Regional office (Parts I and II). Part II was prepared by the Borrower. Preparation of this PCR was started during the Bank's final supervision mission of the project in October 1992 and is based, inter alia, on the Staff Appraisal Report; the Loan and Project Agreements; supervision reports; correspondence between the Bank and the Borrower; and internal Bank memoranda.  - iii - PROJECT COMPLETION REPORT PAPUA NEW GUINEA NUCLEUS ESTATE AND SMALLHOLDER MILNE BAY) PROJECT (LOAN 2608-PNG) EVALUATION SUMMARY 1. Objectives. The Nucleus Estate and Smallholder (Milne Bay) Project was the third Bank- financed project in Papua New Guinea to use oil palm, a crop extremely well-suited to the soils and climate, in support of the Government's policies to: (a) increase and diversify foreign exchange earnings; (b) accelerate economic development in the least-developed provinces; and (c) improve the quality of life of poorer people through provision of social infrastructure. The Project was to include: (a) development of 3,700 ha of oil palm and 750 ha of cocoa nucleus estate plantations, 1,000 ha of smallholder oil palm blocks, and associated processing facilities; (b) construction of 560 houses for laborers and staff; construction of three bridges and upgrading of provincial and access roads, bridges, and culverts; (c) construction of necessary health, education and police protection facilities within the project area; and (d) provision of administrative, technical and training support; and strengthening of governmental extension, research and project preparation services. 2. Implementation Experience. The Project was generally well executed, achieving or exceeding nearly all its physical targets. The planned 750 ha nucleus estate cocoa development was abandoned in view of disease associated with higher rainfall than anticipated at appraisal. The high quality nucleus estate oil palm plantings totaled 5,500 ha, almost 50 percent higher than the appraisal target. Smallholder oil palm reached 880 ha or 88 percent of target; further smallholder uptake is expected. Farmers' holdings are more scattered than planned at appraisal. Mill procurement and construction was difficult, the contract was terminated, and the factory completed in-house by the nucleus estate Company. The mill is now functioning at good efficiency. The village infrastructure items and roads were all completed, and the additional health facilities and schools are experiencing heavy demand. 3. Results. The projected prices for palm oil and palm kernels have fallen dramatically from the appraisal forecasts, overwhelming the generally sound implementation experience. At appraisal, the Bank's commodity price projections, in constant 1990 terms, indicated that the price of palm oil would be $7691ton in 1995, and of palm kernels $430/ton. The projections now indicate prices of $343 and $234 respectively, only half the earlier forecast. The position continues to worsen in later years, with the projected price of palm oil falling to $303 by 2000, and $266 by 2005, or 39 and then 35 percent of the appraisal forecast. The peak nucleus estate yields are now estimated at 24 tons/FFB/ha, which is high, but a little less than the appraisal estimate of 26 tons/FFB/ha. SmalHholder yields are now estimated to peak at 17 tons/ha, compared to the appraisal estimate of 19.5 tons/ha. Overall, the price outlook is the most important factor causing the economic outcome of the Project to be negative, rather than 14 percent as forecast at appraisal. 4. The nucleus estate Company invested heavily in human resources, particularly in training, setting the basis for the scale-back of expatriate staff, from 15 in 1991 to 7 in 1992. National management staff now number 16. Subsistence lev,. farmers have been trained in tree crop techniques, and the  - Iv - expanded health posts and schools are functioning well. To preserve the environment, tree and plant cover around water courses have been left untouched, and treated mill effluent and empty fruit bunches are used as an organic fertilizer supplement for the palms. In general, women hold land in the project area and they have been willing to give rights to men for oil palm, a non-traditional crop. There are no restrictions on women participating in the Project in their own names, and some have. It appears that decisions on new expenditures made possible by increased incomes are being taken at the family level, that is with participation of both spouses. 5. Project Sustainability. The nucleus estate Company's fuure cash flows show a higfly positive financial internal rate of return In constant terms, and the fturm economic IRR would also be highly positive. These future returns permit project sustainability, but given the depressed convmodity price projections, there appears little prospect for fully redressing the negative overall returns to the total project investments, including sunk costs. The Commonwealth Development Corporation in December '992 injected a further GBP