Papua New Guinea - Agriculture and Rural Development Sector Memorandum

Document of The World Bank .II RETURN TO FOR OFFICIAL USE ONLY REPORTS DESK WITHIN ONE WGVkDE AL Report No. 1444-PNG PAPUA NEW GUINEA AGRICULTURE AND RURAL DEVELOPMENT SECTOR MEMORANDUM January 24, 1977 Regional Projects Department East Asia and Pacific Regional Office This document has a restricted distribution and may be used b'y recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. C1611/J2922/D646 A-2 CURRENCY EQUIVALENTS Currency Unit - Kina US$1 = K 0.813 K 1 = US$1.23 K 1 = US$1.05 (from July 25, 1976) US$1 = K 0.764 (at August 31, 1976) MEASURES (Metric system used in PNG) 1 m = 3.28 ft 1 sq m 10.76 sq ft 1 sq km 0.39 sq mi 1 hectare (ha) = 2.47 acres ABBREVIATIONS DASF - Department of Agriculture Stock and Fisheries DPI - Department of Primary Industry FFMP - Fresh Food Marketing Project NIDA - National Investment and Development Authority PNGDB - Papua New Guinea Development Bank RIP - Rural Improvement Program VEDF - Village Economic Development Fund THE GOVERNMENT OF PAPUA NEW GUINEA FISCAL YEAR July 1 - June 30 C1611/J3227/D646 A-3 PAPUA NEW GUINEA AGRICULTURE AND RURAL DEVELOPMENT SECTOR MEMORANDUM TABLE OF CONTENTS Page No. SUMMARY . . .. . .. . .. .. .. .. .. ...... i-viii 1. BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . 1 Agriculture in the Macro-Economy . . . . . . . . . . . . 1 2. THE AGRICULTURE SECTOR . . . . . . . . . . . . . . . . . . 2 3. ACHIEVEMENT IN AGRICULTURAL PRODUCTION . . . . . . . . . . 7 4. IMPORTS OF FOOD . . . . . . . . . . . . . . . . . . . . . 8 5. LAND RESOURCES . . . . . . . . . . . . . . . . . . . . . . 9 6. OBJECTIVES FOR AGRICULTURAL DEVELOPMENT . . . . . . . . . 17 Accelerating Smallholder Production . . . . . . . . . . 20 Accelerating the Production of Export Crops . . . . . . 24 7. THE RURAL IMPROVEMENT PROGRAM . . . . . . . . . . . . . . 30 8. THE NATIONAL INVESTMENT AND DEVELOPMENT AUTHORITY . . . . 32 9. THE ROLE OF THE WORLD BANK IN AGRICULTURAL DEVELOPMENT . . 34 10. PRIORITIES FOR COUNTRY SECTOR WORK . . . . . . . . . . . 40 11. CURRENT RESEARCH PROGRAMS . . . . . . . . . . 41 Institute for Applied Social and Economic Research . . . 41 Agricultural Production Research Services . . . . . . . 42 ANNEX 1 - Table 1:- Exports of Agricultural Commodities and the Balance of Payments Table 2: Major Export Crops - Participation of Papua New Guineans and Expatriates, 1972/73 C1611/J3227/D646 A-4 PAPUA NEW GUINEA AGRICULTURE AND RURAL DEVELOPMENT SECTOR MEM1ORANDUM SUMMARY 1. A United Nations Trust Territory administered for over half a century by Australia, Papua New Guinea gained its independence in September 1975. The nation is characterized by abundant resources in relation to a relatively low but maldistributed population. Of its 47.5 million ha of land area, about 15 million ha are suitable for cropping or livestock pro- duction, but only about half this area is currently in use. The main reasons for this are: (a) the traditional land tenure system based on family and tribal groupings, (b) isolation and remoteness, and (c) in the case of the lowlands, endemic malaria. Since some 55% of the population lives in the highlands there are densely settled areas of the Chimbu, East New Britain and East Sepik Provinces where pressures on land available for agriculture are being experienced with increasing intensity as the population grows. In contast there are sparsely populated areas of fertile land capable of being developed on Bougainville, in the Milne Bay, Medang and West Sepik Districts and on New Ireland and New Britain; however, the traditional attachment of people to their kinship group and clan land and the centralization of the population in the highlands limits the potential for large migration of people to agriculture settler schemes. 2. About 90% of the utilized land is still under subsistence agri- culture and 60-70% of the population are subsistence farmers, many of whom have only recently emerged from neolithic culture. Of the 2.7 million C1611/J3227/D646 A-4 - ii - population, 50% of all adults speak only their clan vernacular, 70% are illiterate, and about 55% of the population live below the estimated poverty income level of US$220. Per capita income is about US$450 for the entire population including the high income of the 37,000 expatriates and US$320 for the local population. Only about 25% of the population is wholly engaged in activities of the monetary sector. 3. The agriculture sector is the largest sector in the economy con- tributing about 30% of GDP. The remaining domestic output comes from one copper mine (20-25%), activities of the Government (20-25%), and from a miscellany of small sectors such as manufacturing, wholesale and retail trade, etc. In FY76 agricultural exports were 30% of total exports contri- buting to a trade surplus of US$10.4 million. Rapidly rising coffee prices, contrasting with low copper prices will probably result in agricultural commodities reaching 40% of exports in FY77 and a trade surplus of around US$85 million. 4. There are three subsectors in the agriculture sector: subsistence agriculture, smallholder cash crop agriculture and plantation-estate agriculture. C1611/J3227/D646 A-5 - iii - (a) Subsistence Agriculture. The share of subsistence agriculture in the economy in the 1960s declined from 65% to 40% of GDP and is now about 22% of GDP. Over the next five years, agricultural growth in real terms is expected to average 1% p.a. in the subsistence sector and about 5-6% in cash crop agriculture. As the rate of growth of population has increased steadily at 3% per year and the rate of migration to towns is already in excess of the rate of growth of wage employment, increasing effort will be required to maintain agricultural production per head of population, provide a source of livelihood for most of the rural population and improve inadequate rural living standards. The stimulus for this development will have to come almost entirely from the public sector. (b) Smallholder Cash Crop Production. Nearly all members of the rural work force are now engaged in some kind of money-raising activity ranging from transport and retail enterprise to the growing of cash crops for domestic or export markets. At present the production of export crops (cocoa, coffee, rubber, tea, coconuts and oil palm) is the major source of rural cash incomes. About 230,000 people grew export crops exclusively in 1975 and about an equivalent number grew mainly cash crops for domestic markets (vegetables and fruit) with minor involvement in traditional subsistence activities. About 30,000 people join the work force in rural areas each year, mainly as smallholder cash crop producers. Notwithstanding the fairly rapid increase in smallholder incomes, the average rural cash income still remains substantially lower than the minimum income in urban wage employment. C1611/J3227/D646 A-5 - iv - (c) Plantation Estate Agriculture. The dominant sector in agriculture has been the 600 expatriate-owned plantations which produce virtually all the rubber exported, 80% of tea exports and 60% of coconut and cocoa exports. Until 1970/71 when copper exports from Bougainville commenced, these rural exports accounted for up to 90% of Papua New Guinea's total value of exports; today they total about 30% of export earnings. Smallholder production has increased considerably faster than plantation output in recent years and the share of foreign ownership in plantation agriculture is being further reduced through the Government's plantation purchase program and subdivision of these estates into smallholdings. 5. Growth in output of the subsistence sector seems to have slowed down with the decline in the rate of population growth in this subsector. There has been negligible introduction of new crops apart from some vegetables for immediate consumption and the prospects for a marked increase in yields of existing crops using higher yielding varieties is not encouraging. The diversification of subsistence production for nutritional reasons is likely to be more important than improving yields of traditional crops. In the smallholder and plantation subsectors, the volume of copra production is expected to remain unchanged in 1980; cocoa production is expected to rise by 8%, coffee by over 40%, oil palm by 160% and tea production by 120%. Rubber production and export are expected to fall slightly. C1611/J2922/D646 A-6 -v - 6. A notable feature of the agricultural sector is the failure, so far, to produce cash crops in any quantity for domestic market, particularly in the small but rapidly growing urban centers. PNG continues to import substantial amounts of food at an increasing rate. In FY75 food imports amounted to K 58 million comprised as follows: 41% grain and cereal prepar- ations, 32% meat and meat preparations, 12% sugar and honey, 8% fruit and vegetables and 7% dairy products and eggs. 7. Presently there are no detailed plans for agricultural development in PNG, but it is proposed that a long-term National Agricultural Plan be finalized early in 1977. The most explicit statement of the Government's broad objectives is the "Eight Aims" announced by the first elected Government in December 1972. These can be broadly summarized under the headings: self-reliance, rural improvement and decentralization of economic activity, reduction of inequalities in the distribution of incomes and services and strengthening local government. The Government White Paper (National Develop- ment Strategy) published in October 1976 reaffirms these objectives and sets down as the priority for government expenditure the development of rural areas to provide income earning opportunities, particularly in those areas of high population density relative to available agricultural land, where incomes are lowest. This strategy is consistent with the recommendations of the last Bank Economic Report (July 1976). 8. The major constraints to achievements of these objectives are weak entrepreneurship, small local markets scattered over difficult terrain, high transport costs, the traditional land tenure system based on family and - vi - tribal groupings, which stifles the growth of individual initiative, and inadequate credit and agricultural extension organizations. Steps to correct these problems will require government policies and programs which are attuned to the specific needs of each of the agricultural subsectors. Most important of these policies and programs will be those which assist the transition of people in subsistence subsectors into the monetized economy as smallholder cash crop farmers. 9. Since it is not possible to move the large numbers of people in the subsistence sector into the monetized economy in the next 10 or even 20 years, the Government and the Bank will have to evolve a "holding operation" for this subsector until commercial smallholder agriculture can be suffi- ciently expanded to replace the subsistence sector. Such a program should include measures to improve the health, nutrition,.education and basic creative comforts of these people until such times as they can be absorbed in the main into the smallholder and estate subsectors. Developing commercial smallholdings must become the main plank of the development strategy for rural PNG in the foreseeable future. Further developments in plantation estates will also continue to be important, however, as a focus for nucleus- estate smallholder settlements to stimulate the development of new land in less densely populated areas with good agricultural potential and also occasionally as a vehicle for introducing new agricultural technology. 10. The Bank should -continue its support for nucleus estate/smallholder projects producing export or import substitution crops. Improved benefits will depend on nucleus estates providing adequate technical assistance and processing facilities for smallholders; on Government accepting the candid but difficult broker role in assuring agreement between smallholders and the Cl611/J2922/D646 A-7 - vii - estate on the terms of sale of raw materials and the unit price for the smallholder crop; and on action by Government to induce an appropriate degree of wage restraint. 11. Improvement of the facilities for rural people to become more productive will result from the first Bank assisted project within the education sector. This will help replace untrained rural development assis- tants with certificate level rural development technicians and improve the quality of rural education and health facilities. The proposed Second Highway Project will complete the improvement, including paving, of the Highlands Highway from the main port of Lae to Togoba, west of Mount Hagen. This will, for the first time, permit reliable, all-weather, low cost land transport for the area. 12. In March the Bank will appraise a rural development project in the Southern Highlands Province which is intended to: (a) develop cash crops such as tea, coffee and cattle to stimulate smallholder and village clan development; (b) diversify and intensify subsistence production; and (c) improve health, education, nutrition and other public facilities to raise the standard of living for as many of the subsistence population as possible. If the project is successful, this integrated approach to rural development concentrating on upgrading the subsistence subsector is likely to be repli- cated in other provinces in PNG. 13. Simultaneous with the appraisal and implementation of the proposed Southern Highlands Project, the Bank should persevere in assisting the PNG Government to find other suitable projects, particularly in the densely settled areas of the highlands and the lesser settled areas of the Gulf, C1611/J2922/D646 A-7 - viii - Western and Sepik Provinces. These projects should aim to assist as large a number of subsistence farmers as possible at a reasonable cost. The small range of crops suitable for development in these areas, the inadequacy of transport, marketing and extension facilities, and the limited amount of land available for intensification and extension of village gardens will complicate the design and implementation of projects and make financial economic justifi- cation difficult. The establishment of several small pilot projects aimed at demonstrating the viability of improved subsistence/cash crop farming systems would greatly enhance the prospects for village subsistence agriculture emerging into a cash economy. C1611/J2922/D646 A-8 PAPUA NEW GUINEA AGRICULTURE AND RURAL DEVELOPMENT SECTOR MEMORANDUM 1. BACKGROUND Agriculture in the Macro-Economy 1.01 Planning for agricultural development in Papua New Guinea needs to be considered in the context of a country in which the processes of moderni- zation commenced only in the past two or three generations among people who hitherto lived unto themselves as clans in conditions of primitive isolation. About 85% of the 2.7 million population is dispersed among 12,000 often isolated villages; some 50% of all adults speak only their clan vernacular; and 70% are illiterate. 1.02 The economy is characterized by a rapidly expanding monetized sector, comprising some 25% of the population, and a vast sluggish subsis- tence sector. There is a great and widening gap in per capita income between the two sectors. Per capita income is about US$450 for the entire popula- tion, including the high income of the 37,000 expatriates. Among the local population alone the per capita income is US$320 with 55% of the population living below the estimated poverty income level of US$220. /* Most of the /* Poverty level is based on the cost of providing the caloric needs of an adult. latter live in the subsistence economy. C1611/J2922/D646 A-8 -2- 1.03 The agricultural sector is the largest in the economy contributing about 30% of GDP, but encompassing 70% of the population. The remaining domestic output comes from one copper mine (20-25%), activities of the Central Government (20-25%), and from a miscellany of small sectors such as manufacturing, wholesale and retail trade, hotels and tourism, finance and insurance. In FY76 agricultural exports were 30% of total exports, contributing to a trade surplus of US$10.4 million. Rapidly rising coffee prices, contrasting with low copper prices will probably result in agricul- tural commodities reaching about 40% of exports in FY77 and a trade surplus of around US$85 million. Details of the contribution of agricultural exports to total exports, trade balance and balance of payments from 1973-77 are given in Annex 1, Table 1. 2. THE AGRICULTURE SECTOR 2.01 There are three subsectors in the agriculture sector: subsistence agriculture, smallholder cash crop agriculture and plantation-estate agri- culture. A profile of each of these subsectors is given below. C1611/J2922/D646 A-9 -3- PROFILE OF THE AGRICULTURAL SECTOR /a % % Total Total Land agricultural- Average % of population in use production income/head GDP Subsistence agriculture 70 90 70 200 22 Smallholder cash crop agriculture 10 5 10 500 4 Plantation-Estates agriculture 6 5 20 400 7 /a Broad estimates based on available 1972, 1974 and 1975 data. 2.02 Subsistence Agriculture. About 90% of the arable land in produc- tion and about 70% of PNG's population are engaged in subsistence cropping. Production amounted to about 70% of total agricultural production and 22% of GDP in 1974. The standard of living in the sector is usually one of "primi- tive affluence," where minimum food needs are met with inputs of labor and land well within supplies potentially available and the level of output is governed more by a ceiling on local demand than on food supply. In the last few years there has been a modest participation of the subgroup in marketed agriculture production, although ceremonial exchanges of substantial quanti- ties of agriculture and other produce continue to be important. The average income per capita in subsistence agriculture in 1973 was estimated to be US ZUU, about 20% of which came from market sources. C1611/J2922/D646 A-9 4- 2.03 Traditional subsistence activities while not yet declining in absolute terms may be expected to contribute a steadily declining share in total agricultural output. The share of the subsistence agriculture sector in the total economy has already declined from 65% at the beginning of the 1960s to 40% of GDP at the end of the decade and to 22% in 1974. Over the next five years, agricultural growth in real terms is expected to average 1% per annum in the subsistence sector. This contrasts with an expected agri- cultural growth in the monetized sector of some 5-6% in real terms over the next five years. 2.04 As the rate of growth of the population has increased steadily to 3% per year and the rate of migration to towns is already in excess of the rate of'growth of wage employment, increasing effort will be required to maintain production per head of population, provide a growing source of employment for the rural population and improve the inadequate living standards of the subsistence population. About 55,000 persons are being added -to the subsistence population each year with the result that the subsistence population of 1.9 million may be expected to double in less than C1611/J2922/D646 A-10 -5- 25 years. This growth together with the increased food requirement of the urban areas will place an increasing burden on the nation's subsistence subsector. The stimulus for development will have to come almost entirely from the public sector. 2.05 Smallholder Cash Crop Production. Of the 40,000 people who join the work force of 1.25 million each year, the overwhelming majority have remained in rural areas to participate in the cash economy. Nearly all members of the rural work force (totaling 1 million) are now engaged in some kind of money raising activity ranging from transport and retail enterprise to the growing of cash crops for domestic or export markets. At present the production of export crops (cocoa, coffee, rubber, tea, coconuts and oil palm) is the major source of rural cash incomes. About 230,000 people grew export crops exclu- sively in 1975 and about an equivalent number grew mainly cash crops for domestic markets (vegetables and fruit) with minor involvement in traditional subsistence activities. The area cropped by smallholders growing export crops, the average size of holdings, and total production are given in Annex 1, Table 2. At the present time approximately 50% of the production of copra and cocoa, about 70% of Papua New Guinea's coffee production and about 30% of tea exports come from the smallholder sector. 2.06 Rural cash incomes have increased gradually over recent years, but the average rural cash income per head is still considerably less than the minimum income in urban wage employment. The degree of involvement in C1611/J2922/D646 A-10 -6- money-raising activities varies considerably between different areas of the country. Regional differences in incomes per head are closely related to the quality of transport to major towns. Inequalities in cash earnings also exist within villages; there are signs that a distinct rural business "elite" is emerging. These business leaders are often closely associated with local and national political leaders and they tend to have the best access to government extension services and concessional finance through Development Bank loans and grants from the Village Economic Development Fund available to their areas. 2.07 Plantation Estate Agriculture. The dominant subsector in agricul- ture has been the 600 expatriate-owned plantations which produce export crops such as copra, cocoa, coffee and rubber. Until 1970/71 when copper exports from Bougainville commenced, these rural exports accounted for up to 90% of Papua New Guinea's total value of exports; today they total about 30% of export earnings. In the late 1960s, efforts were made to diversify the agri- cultural base through the development of the oil palm and coffee and tea industries. The oil palm industry was developed on a "nucleus estate" basis, whereby a government overseas joint venture company was established to process its own production together with that produced on smallholdings to which it gave technical assistance. This approach was in contrast to the development of the copra,.cocoa, coffee and rubber industries where the Australian administration encouraged both overseas controlled plantation development and smallholder/village development on the mainland and through the larger islands. Both these approaches seem to have been reasonably successful if judged from the fairly rapid increase in smallholder production. C1611/J2922/D646 A-11 -7- 3. ACHIEVEMENT IN AGRICULTURAL PRODUCTION 3.01 Growth in output in the subsistence sector seems to have slowed down with the decline in the rate of population growth in this sector. Yields vary widely depending on environmental conditions and agricultural practices. There has been negligible introduction of new crops to the subsistence sector apart from some vegetables for immediate consumption. Surpluses in the output of food crops cultivated in the subsistence sector are usually absorbed by the various feastings and other social activities, although increasingly surpluses are being brought to "local markets" for cash sales. Most of these local markets are located around administrative centers in the rural areas and operate on a direct producer-consumer basis. To date there has been little produce grown by commercial or larger scale producers to supply these local markets. 3.02 In 1974/75 the production of export plantation crops was valued at US$181 million (Annex 1, Table 1). Of these, copra and coconut oil accoun- ted for 34%, coffee 25%, cocoa 31%, rubber 2%, tea 3% and oil palm 5% of the total export value. By 1984/85 it is envisaged that the export earnings from the sector will be about K 347 million, of which copra/coconut oil will account for 20%, coffee 44%, cocoa 15%, rubber 2%, tea 5%, and oil palm products 14%. Trends in coffee real prices are expected to boost coffee earnings above the level to which output expansion alone would take them, while tea, cocoa and palm oil prices will tend to decline and will therefore adversely affect the expected growth in earnings from these three crops. C1611/J2922/D646 A-11 -8- 4. IMPORTS OF FOOD 4.01 Papua New Guinea continues to import substantial and growing amounts of food as indicated in the following table: Imports Average annual (million Kina) /a % increase FY75 1971-75 Cereal grains & cereal preparations 23.8 41 Meat and meat preparations 17.9 31 Sugar, sugar preparations & honey 7.2 44 Fruits and vegetables 4.9 27 Dairy products & eggs 4.2 38 /a Estimate based on 11 months' data. 4.02 The main reasons for the substantial growth in imports of these items are: C1611/J2922/D646 A-12 -9- (a) the absence of adequate meat and fish protein availability in the traditional subsistence farming system; /* /* About 90% of the value of products purchased for cash by villagers are supplied from urban production or from imports. (b) the difficulties of storing, transporting and processing the bulky, starchy food crops grown locally; (c) the growth in demand as locals adopt the tastes of the expatriates; (d) production problems in areas adjacent to high population centers, e.g. adjacent to Port Moresby where the technology (varieties, irrigation, etc.) was not available to meet specific climatic and biological conditions. 5. LAND RESOURCES 5.01 Papua New Guinea has considerable potential for agricultural devel- opment due to its natural resources. Of its 47.5 million hectares of land area, about 15 million hectares (31% of land area) is suitable for cropping C1611/J2922/D646 A-12 - 10 - or livestock production, but only about half this area is currently in use. The main reasons for this are: (a) the traditional land tenure system based on family and tribal groupings; (b) isolation and remoteness; and (c) in the case of much of the lowlands, endemic malaria. 5.02 Regarding land tenure, enterprising individuals are normally inhibited in the type of venture they can undertake on tribal lands unless they can get clan approval. Additionally, the financial incentive for individual initiative is impaired by customary sharing of personal income with the kinship group. An added handicap is that land plots owned by individual family units/tribal groups are generally small and scattered. About 96.7% of the land in PNG is held and operated by indigenes under such traditional land tenure systems. The remainder is either freehold land owned by nonindigenous persons (0.1% of the total land area) mainly in Papua, or crown land (4.0%) of which 20% is leased to private persons. 5.03 Since PNG is dissected by rugged mountains, jungles, major rivers and coastal swamps a lot of the usable agricultural land is too isolated for immediate agricultural development. In the more densely settled areas of the Chimbu, East New Britain and East Sepik Provinces, pressures on land available for agriculture are being experienced with increasing intensity as the population grows. Any significant increases in agricultural production in these areas will need to come through the introduction of higher yielding subsistence crops, diversification of crop production and greater incentives to entice farmers to produce a surplus beyond their subsistence requirements. The limited data available indicate that there are still areas of fairly C1611/J2922/D646 A-13 - 11 - fertile agricultural land capable of being developed on Bougainville, in the Milne Bay, Madang, and West Sepik Districts and on New Ireland and New Britain. However the traditional attachment of people to their kinship group and clan land and the centralization of the population in the highlands where some 55% of the population is concentrated, restricts the potential for large migration of people to agricultural settler schemes. The two Bank Group financed oil palm settler schemes, Credits 137-PNG and 175-PNG, settled some 1,600 families on New Britain for an estimated cost per settler of US$5,500. 5.04 Communications. The isolation and fragmentation of individual holdings of much of the agricultural land make transport and communication difficult. Although a good road exists between Lae and the Highlands, consi- derable problems have been experienced in obtaining reliable and timely freight services from the Highlands to urban centers. The problem is further complicated by the poor road network linking isolated villages to highland collection centers. Air services are well developed, but freight rates are high. Coastal shipping services appear completely inadequate for transport of perishable commodities. 5.05 Marketing Services. There are considerable institutional problems to the supply of agricultural inputs and internal marketing of agricultural consumer products. The demand for agricultural inputs from the subsistence sector is small and unpredictable. Consequently, local traders in many areas are reluctant to carry stocks until a regular clientele is established. The Government agricultural officers therefore often find themselves involved in arranging for the supply of agricultural inputs, particularly for smallholders C1611/J2922/D646 A-13 - 12 - by assisting them in placing orders and encouraging local traders and cooperatives to maintain stocks. Internal marketing of agricultural consumer products grown by smallholders is inadequate, particularly for meat, fruit and fresh vegetables. Government is taking steps to improve this situation and in 1973 established the Fresh Food Marketing Project to improve the internal marketing of fresh fruit and vegetables. In July 1976 the marketing functions of the Project were taken over by the wholly government-owned Food Marketing Corporation Pty., Ltd. It is hoped that the Corporation will define town-oriented market areas for smallholder production and find a suitable system for supplying smallholders with inputs and marketing facili- ties which would make the supply of inputs and markets for smallholder produce more predictable. 5.06 The marketing of agricultural export commodities is better organi- zed through: (a) rural cooperatives which in some cases provide processing facilities; (b) traders and exporters registered under export control boards as with cocoa and coffee; (c) commodity board/stabilization fund as for copra; and (d) direct negotiations between producers and overseas buyers as with the oil palm nucleus estate/factory companies. Government operates an export produce inspection service and through its representation on the various control boards and joint venture companies exercises supervision of export prices. 5.07 Agricultural Credit. The supply of credit for agricultural develop- ment is the responsibility of the Papua New Guinea Development Bank (PNGDB). Established in 1967, the Bank provides finance for primary production, the C1611/J2922/D646 A-14 - 13 - establishment and development of industry and commerce, and advice and assis- tance with a view to promoting the efficiency, organization and conduct of primary production and industrial undertakings. Over the last three years commercial and industrial loans, together with hire-purchase and equipment loans, amounted to 69% of loan balances at June 1975, while oil palm, rural and other small loans amounted to 31% of such balances. In terms of total loan numbers, however, approvals for agricultural loans in FY75 amounted to 58% of the total. The overall average value of agricultural loans was K 1,332, but in the case of 42% of these loans, the average was below K 1,000. This is understandable since one of the most important tasks of PNGDB in the agricultural and rural sector is to help the transition from traditional subsistence farming to the monetized economy. In practice reasonable requests for loans from Papua New Guineans are not refused, even if the amounts are small, and this results in high administrative costs. 5.08 An appraisal of the operational problems that have developed in the area of supervised credit was undertaken early in 1976 by an overseas consultant firm. They reported serious problems with present rural credit arrangements. The smallholder agricultural credit policy has yet to be adequately defined (except for IDA financed projects); a credit delivery strategy has not been prepared; a proper level of cooperation and adequate communication between DASF (now DPI) and PNGDB has not been achieved; and accounting and approval procedures are complex and slow causing borrowers to become discouraged by the procedures. C1611/J2922/D646 A-14 - 14 - 5.09 To help overcome these problems it was suggested that an agricul- tural credit policy committee be established comprising senior officials of PNGDB, DPI and the Department of Finance to determine basic agricultural credit policy, monitor and coordinate credit programs, and develop a suitable training program and operational manuals to instruct field staff in the needs, uses and administration of agricultural credit. A series of specific proposals are given in the consultant's report for strengthening DASF and PNGDB. Most center on the need for simplification of work procedures, employment of a few additional key professionals (e.g., an accountant and an organization and methods expert in DASF), and the introduction of special training courses. The report is now being studied by Government. 5.10 Agricultural Extension, Possibly the most vital element to agri- cultural development in PNG is the agricultural extension service since this resource more than any other is likely to provide the rural population with the opportunities, motivation and knowledge to become more productive. The agricultural extension service has, for two reasons, made relatively little impact on increasing the productivity or diversifying the range of crops grown in the subsistence sector, despite adequate quantitative staffing. First, most extension agents have been concentrated in districts with pre- dominately cash crop agriculture. Since 1972, however, they have been redistributed on a more equitable basis throughout the country. Secondly, the average professional standard of the extension agent is low, as the majority have received only primary education plus about 12 months vocational education. Furthermore, farmers have not been very interested in what the extension service has had to offer, and in many cases there has been a C1611/J2922/D646 A-15 - 15 cultural disaffinity between farmer and extension agent. At December 1975 there were 461 trained extension staff and 808 without formal training serving an estimated 370,000 farmers - a ratio of one trained man to about 800 farmers. 5.11 The introduction of agricultural credit through the Development Bank has forced the extension agent to devote an increasing amount of his time to servicing loans. By December 1974 extension staff were spending 45% of their time on various aspects of supervised credit, most of which was directed toward wealthier farmers. The remainder of the time spent was largely in administration or distribution of other material services, and only 5%, in a direct educational role with farmers. The effectiveness of the extension agent is further impaired by his isolation from other govern- ment departments which so far has prevented the creation of "district teams" effectively combining a number of rural services. 5.12 Department of Primary Industry. During 1975 and early 1976 substan- tial changes took place in the organization of the Department of Agriculture Stock and Fisheries (DASF). A reorganization of ministerial responsibilities has placed responsibility for DASF together with the Department of Forests under a new Department of Primary Industry (DPI). The extension service is presently being restructured and decentralized, hopefully to improve the efficiency of the service and to ensure that development programs are based C1611/J2922/D646 A-15 - 16 - on local needs. The first Bank Group assisted project within the education sector is designed to help replace untrained rural development assistants with certificate level rural development technicians. 5.13 Localization of the Public Service. Replacement of expatriates by Papua New Guineans is proceeding at a slow, but satisfactory rate. At the end of FY76 the public service was 87% localized, only a slightly higher proportion than the year before. However, the composition of the expatriate group has changed considerably. The Australian Staffing Assistance Group came to an end formally on June 30, 1976, when those Australians wishing to remain signed contracts directly with the PNG Government. Of the 2,400 invited to stay, almost 1,800 still remain in PNG. The loss of the rest of the Australians has not disrupted Government operations. To a large extent, they have been replaced by other expatriates, mainly from the UK and the Philippines. A summary of staff changes in DPI is given below. SUMMARY OF STAFF CHANGES September December June 1973 1974 1976 Total DPI staff 2,749 2,524 3,234 Local officers 534 491 1,290 Expatriate officers 537 326 324 Total DPI field staff 1,678 1,707 1,620 Local field staff 1,426 1,540 1,536 Expatriate field staff 252 167 84 C1611/J2922/D646 A-16 - 17 - 6. OBJECTIVES FOR AGRICULTURAL DEVELOPMENT 6.01 Government has not yet drawn up detailed plans for agricultural development in PNG, although it is proposed that a long-term National Agricul- tural Plan be finalized early in 1977. General guidelines for development objectives - termed the "Eight Aims" - were announced by the first elected Government in December 1972. These can be broadly summarized under the headings: self-reliance, rural improvement, reduction of inequalities in the distribution of incomes and services, and decentralization of economic and public service activities. 6.02 The Government White Paper National Development Strategy published in October 1976 sets out the priorities and key policies for government expenditure, rather than a more comprehensive, but less easily implemented, national strategy for development. The primary policy is to devote a higher proportion of the nation's resources to rural areas through the generation of income earning opportunities with special efforts in regions with greatest pressure on available agricultural land and consequently low income levels (e.g., Chimbu, Enga, East New Britain, and East Sepik Provinces). The aim is to reduce the inequalities, both regional and urban-rural, that have already caused a large and disruptive migration to urban areas. This strategy accords with the recommendations of the last Bank economic report (July 1976). C1611/J2922/D646 A-16 - 18 - 6.03 The key programs in the area of rural development deal with improvements in the regulation of land ownership; coordination of exten- sion services, which are now provided by specialists from a number of departments; diversification and improvement of agricultural production, with high priority given to food for domestic markets and improved nutrition; introduction of appropriate, usually labor-intensive, technology; promotion of small-scale industries that are located in rural areas or support rural industry; development of the means to mobilize local savings for local investment; redirection of the education system away from formal schooling towards informal and vocational training; redistribution of health services towards rural areas; introduction and improvement of marketing and storage facilities; and extension of rural electrification. In addition, recognizing that the high cost and slow speed of transport are major obstacles to rural improvement in many areas, the Government will give highest priority to extending the existing transport system in order to increase accessibility to markets, both through development of feeder road systems and improvement of coastal shipping. 6.04 Agriculture will therefore continue to play a leading role in economic development. It will have the major role in providing employment for the majority of people well into the foreseeable future. Mining, for- estry and hydro developments currenty being planned, which in themselves are substantial and likely to.generate significant foreign exchange earnings, are unlikely to provide many direct employment opportunities (an estimated 30,000 jobs in total by 1985 compared to an estimated 27,000 school leavers per year by 1985). Agriculture, however, will contribute a reduced percentage of total export earnings and GDP. This contribution will be further reduced as current plans for tourism and mining development are realized. C1611/J2922/D646 A-17 - 19 - 6.05 The implications of a decline in the percentage share of agricul- ture in the GDP are considerable. It is likely to lead to a continuing disparity between rural and urban wages and to a high wage/price/cost struc- ture. This will place considerable cost stress on the export agricultural sector which will need to compete with other tropical countries with a relatively lower rural cost structure. Because of the fixed resources in plantation tree crops and the difficulties of increasing productivity in the short term, a situation could arise where some parts of this sector may have to go out of business, transfer to other forms of production or receive assistance in one form or another. 6.06 Efforts are now being made to integrate rural land use planning (agriculture, forestry) with planning for marketing and processing needs, social (health, education) and recreational needs, and other infrastructure requirements (roads, transport/storage, communications). This is to provide an adequate infrastructure of goods and services to spread the income earning opportunities through self-employment to as many of the subsistence population as possible. The oil palm scheme developments (IDA Credits 137-PNG and 175-PNG) were first attempts at integrated area development where agriculture is the key development vehicle. Recent proposals for integrated area develop- ment are the Southern Highlands Area Development Project and the Sepik Area Project which are now under study by the World Bank and the Asian Development Bank, respectively. C1611/J2922/D646 A-17 - 20 - Accelerating Smallholder Production 6.07 There are a number of strategies open to the Government to stim- ulate decentralized, small-scale, self-reliant activity with participation and control by Papua New Guineans. Villages can be encouraged to cash crop under communal tenure. This requires no relocation of population, little social disturbance and a relatively small investment of public funds. Government can also initiate formal land settlement schemes involving relocation of population, disruption of normal social patterns and, normally, a major investment of public funds to organize output efficiently. There is considerable resistance by people in the densely settled areas of the high- lands to move to the lowlands and outer islands where most of the land avail- lable for settlement schemes is located. The average cost per settler has been about US$5,000 (based on IDA Credits 137-PNG and 175-PNG at Hoskins on New Britain and estimates by the Operations Evaluations Department in the Bank). These figures compare with US$16,000 per settler in the Jengka Triangle, the best known of the FELDA Malaysia operations. 6.08 In the past two decades the dominant approach has been the village garden strategy where villages are encouraged through extension efforts to establish an area of cash crops on lands located within traditional clan or tribal boundaries, in addition to their normal subsistence activities. If a cost/benefit analysis were made it would probably show a historically high rate of return. Further expansion of village garden output can take place in one or both of two ways: through an extension of such development to new areas and by increasing output in areas already in production. Experience to date suggests that beyond an initial enthusiastic response a sustained C1611/J3133/D646 A-18 - 21 - growth in the number of participants and the area cropped is quite small. It has also been found that, at least with existing extension techniques, it is difficult to generate interest among growers in obtaining increases in yields and resource productivity owing to a lack of sustained economic motivation. The evidence therefore suggests that barring exceptionally favorable changes in market conditions, the rate of new plantings in established areas will be slow. In such areas diversification of village garden production for nutri- tional reasons is likely to be a more important goal. Protein/energy malnu- trition caused by a deficiency in the quantity of food eaten and its protein quality and quantity is fairly widespread in PNG, particularly in the more isolated highland areas. Introduction of protein-rich vegetables and grains would help to ameliorate the situation. 6.09 Means have yet to be found to introduce cash crops to areas popu- lated but as yet undeveloped, and with poor market linkages. There appears, however, to be only restricted scope for such growth. The limited data available indicate considerable potential for development on Bougainville, the Milne Bay, Madang, East and West Sepik Provinces and on New Ireland and New Britain. Agricultural potential exists in parts of the highlands, but in the absence of adequate infrastructure (roads, markets, etc.) and a suitable cash crop with long-term prospects, the potential is uncertain. The breakdown of the economic conditions of the International Coffee Agreement is currently stimulating a substantial extension of coffee plantings in the highlands. C1611/J3133/D646 A-18 - 22 - Another possibility considered by Government is an extension of tea as a smallholder crop, but the limited growth in demand for tea on the inter- national market precludes any large increase in acreage. 6.10 Productive activities which offer prospects for smallholders in PNG are beef, pig and poultry production, coconuts, vegetable and grain crops. To help achieve the aim of self-sufficiency in meat supplies the Government is increasing its extension effort, building up breeding herds and flocks and providing the necessary infrastructure. Currently, Papua New Guinea is able to meet 60% of its consumption requirements of fresh and chilled beef from domestic production. Beef processing is limited to minor quantities of small goods such as sausages, boning out and prepacking. Pigs have traditionally been a way of life rather than a diet as they are largely slaughtered at special ceremonies and not regularly consumed. Increasingly, this resource is being channeled into the regular diet either through the cash economy or by upgrading village pig performance. Imports of fresh and chilled pig meats are currently 800 tons per annum. There are only two commercial poultry abattoirs in Papua New Guinea; total production in 1974/75 was 800 tons; imports of fresh poultry meat in the same year were 3,000 tons. However, domestic commercial broiler production is expected to increase to 1,700 tons in 1975/76 and the country may well be self-sufficient in poultry meats by 1976/77. Egg production is currently 875,000 dozen per annum. Imports during 1973/74 were 386,000 dozen; however, of this total 290,000 dozen were imported into Bougainville alone to meet abnormal demand created by the mining operations. Additional smallholder poultry projects will commence on Bougainville this year. C1611/J3133/D646 A-19 - 23 - 6.11 Total subsistence production of fruit and vegetables in 1974/75 was over 90% of total domestic production. Imported fruit and vegetables are mainly either European vegetables such as potatoes and onions or processed fruit and vegetables, particularly fruit juices, quick frozen vegetables, etc. Most of these goods are consumed by the expatriate community. There is no domestic processing industry, with consequent high wastage of unprocessed fruit and vegetables. The Food Marketing Corporation, however, has two factories where trial processing of vegetables is underway. 6.12 PNG is one of the few countries in Asia and the Pacific where rice has not formed part of the traditional diet. Nevertheless, imports have been growing at about 10% and are now about 60,000 tons per year against a domestic production of 2,000 tons. Unless domestic production is increased or imports restricted, rice imports are likely to increase to well over 100,000 tons per year in the early 1980s. Government intends to grow more rice locally and at the same time induce people to consume more of the traditional foods instead of rice. Local rice cultivation is on dry land and grown by traditional village farmers. There are differences of technical opinion in regard to the economic feasibility of rice production in PNG and the appropriate organiz- ation of production in suitable areas. Extension efforts to increase rice production have met with very little success-due to better financial returns from other cash crops, the prevalence of pests and disease problems, and the difficulty of training villagers in modern rice growing technology. Research and investigation into rice production, including mechanical irrigation, are continuing although the Government considers that the best method for increased C1611/J3133/D646 A-19 - 24 - smallholder rice production rests with the bush/fallow system. The areas with greatest potential for expansion of such a system are the Sepik and Mekeo Valleys. 6.13 Feasibility studies have begun for increased production of sugar and coarse grains (maize, sorghum and soybean). Consumption of imported refined sugar is at present about 18,000 tons per annum. Consumption is expected to increase to 30,000 tons by 1980. Feasibility studies by expert sugar technologists are needed to determine whether sufficient data on climate, soils, crop varieties and yields are available to accurately determine the prospects for a viable sugar industry. 6.14 Stock feed grain imports are currently running at 10,000 tons per annum and are expected to increase to 25,000 tons by 1980. About 20,000 tons of flour were imported in 1975, but PNG anticipates milling imported wheat at mills in Lae and Port Moresby to replace these flour imports. The area under mechanized cultivation for grains, peanuts and rice has stagnated at about 2,200 ha per annum. Of this total, 1,350 ha is in the Markham Valley, the balance being in Central Province and the Sepik River area (rice). Production in the Markham Valley in 1974 comprised 1,000 ha sorghum, 50 ha maize and 200 ha peanuts. Soybean is not at present commercially produced. Accelerating the Production of Export Crops 6.15 A significant policy issue facing the Government is the extent to which its import substitution program of food production should be expanded, possibly at the expense of export production. Fruit and vegetable production C1611/J3133/D646 A-20 - 25 - in particular appears to require a relatively heavier input of extension resources and marketing assistance than the traditional export crops. Government forecasts that the volume of copra production (including coconut oil) will remain unchanged at the 1971/72 level until 1980. Cocoa production is expected to rise by only 8%. The production of coffee, however, is expected to increase by over 40%, oil palm by 160% and tea production by over 120%. Rubber production and export are expected to fall slightly. 6.16 For a steady expansion of the major export crops beyond 1980 of the major export crops, it is essential that large-scale replanting and acreage expansion start immediately, since these crops require a lead time of three to six years before they can be harvested. Replanting is especially needed for coconut production since nearly 50% of coconut palms are over 50 years old, and since they have been poorly maintained, are now low yielding. Government intends to implement a program of hybrid coconut planting to increase yields; however, there has been little research on the suitability of imported hybrid material and there has been little progress in the estab- lishment of seed gardens to provide planting materials domestically. Yields of 100% to 200% above those currently being achieved (1 or 1.5 tons of copra per ha versus the present 0.5 tons) are easily attainable and would greatly improve the financial attractiveness of the crop; they might also make cocoa/ coconut and livestock/coconut settler schemes economically more attractive than oil palm as the latter requires greater capital investment. C1611/J3133/D646 A-20 - 26 - 6.17 A program for a considerable expansion of the area under Arabica coffee is being undertaken in the highlands, and less importantly, Robusta coffee in the lowlands. Both plantation and smallholder plantings under national ownership are being promoted by the Government. Since 1970 coffee production has increased by about 11% per year and is likely to increase in the 1980s as restrictions on acreage expansion are eased following the suspension of the economic provisions of the International Coffee Agreement in 1973. At present, coffee is PNG's top agricultural export and it is projected that it will contribute two thirds of the growth in the country's agricultural exports during the next decade. 6.18 Cocoa is PNG's second largest agricultural export, and is well suited to smallholder production. There has been a considerable amount of new planting of cocoa in East New Britain recently. Papua New Guinea is a member of the International Cocoa Agreement and is classified as a "fine and flavor" exporter for 75% of its produce. It therefore has no marketing con- straint until total annual exports exceed 40,000 tons leading to a possible quota restriction under the terms of the Agreement. Production, however, has been held down in recent years by the fungal disease "die-back" and pantorytes insect infestations in all areas except Bougainville. Research on the disease has begun to yield encouraging results. 6.19 Recent success in oil palm development through nucleus estates/ factory company combined with a large smallholder component indicate good prospects for this crop beyond 1980. The Bank-assisted operation in West New Britain at Hoskins (Credits 137-PNG and 175-PNG) was a pioneer project in this respect. A second Bank-assisted nucleus estate/smallholder project C1611/J3133/D646 A-21 - 27 - for Popondetta in the Northern District of the mainland has recently been approved. Experience has shown that the country has a competitive advantage for oil palm production over most other producing countries. Because of the favorable combination of climate and soils, oil palm trees consistently come into production a 1 to 1-1/2 years earlier and yield up to 20% more than the same varieties grown in other parts of.the world. Since there are consider- able areas of fertile, unused and underpopulated areas in the coastal main- land and the islands, Government proposes that for the time being at least, further development along the present lines will be an important component of its agricultural development strategy. Although some alternative commercial crops such as coconut and cocoa could be grown in most of these areas, they are more susceptible to pests and diseases and hence do not yield as high a return on investment as oil palm. 6.20 Prospects for expansion of tea exports beyond 1980 are not very clear. About 3,500 ha of plantations are currently producing 5,000 MT of made tea. The highlands have soils and an altitude (1,200-1,800 m above sea level) which are extremely favorable for tea production and not conducive to growing most other crops. A number of clonal selections have given high yields and semimanufactured leaf samples have shown better than average quality and flavor. The world market outlook for tea, however, precludes large-scale development since there is an annual increase in world import demand for tea of 14,000 MT of which 10,500 MT can be expected from yield increases of existing crops. This leaves only 3,500 tons to be generated worldwide by new plantings each year. C1611/J3133/D646 A-21 - 28 - 6.21 Commercial tobacco growing and manufacturing are receiving support from Government to provide viable crops for the diversification of smallholder cash cropping and largely replace imports of leaf and manufac- tured tobacco amounting to K 1.7 million in 1975/76. About 400 growers currently grow about 60 ha. Government aims to produce 100% of fire-cured and 50% of flue-cured consumption within a ten-year period. Given present yields up to 1,000 kg/ha there is potential for developing about 570 ha over the next five years which would provide employment for about 1,200 additional growers. 6.22 There are no current developments which give much promise that any major new crops will enter the stream of export production. PNG growing conditions for spices appear generally uncompetitive. PNG growing conditions for spices appear generally uncompetitive. No foreign investor has shown interest in tropical fruit production. There is talk of an Australian firm developing lime production, and mint being grown by the Japanese at Bialla, but so far nothing has materialized. 6.23 Wage Price/Cost Structure. The principal problem in the area of productivity of export crops is that of a high wage/price/cost structure. The current statutory rural minimum wage is about K 10 per week, and the urban minimum wage in large towns is approximately K 28 per week. This has placed considerable stress on the outlook for plantation crops since they have to compete on world markets against tropical countries with a relatively lower wage and cost structure. To try and counter this, PNG is increasingly C1611/J3133/D646 A-22 - 29 - paying attention to the use of higher-yielding planting material. Concur- rently, there is a growing awareness and acceptance of the need for wage restraint. The Minimum Wages Board which met during the first half of 1976 to rule on minimum urban wages for both the public and private sectors declared a freeze on wage increases through March 1977. Following that date, all salaries will rise at a rate equal to two thirds the rate of increase of the consumer price index (CPI) to a maximum of 12.5%. This decision replaces the old system of indexing only a specified base salary to the CPI, which has led to a relatively small differential between the highest and lowest salaries. 6.24 Another step taken by the Government to hold down both wages and its own budget was the rejection of the proposed salary increases for employees from Great Britain and New Zealand. This was the first time the Cabinet had used its power to reject the recommendation of an arbitration tribunal. Subsequently, a board of inquiry into salaries of all overseas public servants was opened, and the Government has declared to the board its opposition to the introduction of common conditions of employment for all overseas employees, a step which would increase government expenditures on salaries by raising all expatriate incomes to the level of the Australian employees. 6.25 Papua New Guinea has good to excellent growing conditions for all the export crops and often enjoys a comparative advantage in physical terms with competitors both in plantation and smallholder export cropping, with the C1611/J3133/D646 A-22 - 30 - latter showing yields that are often only about half the former in all crops except oil palm. Generally smallholders and village producers have been encouraged to use a low level of technology (i.e., no fertilizer and spray programs) to minimize cash costs and make substantial savings on foreign exchange. Nevertheless, there appears to be considerable room for increasing the output from the smallholder sector through increased yields using fertilizers and insecticides and increasing acreage. Increased output from the estate subsector will depend on the containment of increasing production costs, particularly arising from the high price of rural labor and the willingness of foreigners to continue their investment in the subsector. Since implementation of the Land Acquisition Act in January 1975, which authorizes government purchase of land for subsequent sale or lease to its original customary owners, fewer than thirty plantations have been acquired, and of these only six have been transferred to nationals. 7. THE RURAL IMPROVEMENT PROGRAM 7.01 Government attaches great importance to the Rural Improvement Program as an instrument for achieving PNG's overall aims for more equal distribution of economic benefits, movement towards equalization of services among different areas and decentralization of economic activity. The program is part of the National Work Program in the Ministry of Finance, and is designed to foster development using local initiative, local planning, and self-help. Projects include roads, bridges and other construction; social C1611/J3133/D646 A-23 - 31 - and welfare activities; health and education; water supply; pilot projects for village industries; assistance with sea transport to areas reliant on it; and recreation and sporting facilities. 7.02 In the 1975/76 budget, the allocation to the RIP was K 6 million, the second largest item (after national roads and bridges) in the total Works Program budget of K 42 million. An equivalent contribution in cash and kind from villagers has not come up to expectations in many areas, and in some provinces actual expenditure fell considerably short of that budgeted in 1973/74 and 1974/75. The main problems with regard to project implementation are shortages of materials, poor planning and lack of technical and super- visory staff. Overall, however, the program appears to be working fairly well and to be capable of further expansion. In addition to its importance as a source of stimulation for the construction of local infrastructure, it has important political and administrative benefits since it strengthens local government. 7.03 In addition to the RIP and the earlier mentioned agricultural development efforts primarily through the DASF (now DPI) and PNGDB, the Government in 1974/75 established the Village Economic Development Fund (VEDF) with a grant of K 1.5 million. This is intended to overcome shortages of risk capital available for commercial projects by villages. Many village groups which cannot raise the capital necessary to qualify for a PNGDB loan for commercial enterprises can obtain from the VEDF grants of up to 40% of the project cost. The remainder is supplied through a PNGDB loan and the group's own resources. Villagers' demand for such grant money is reportedly very high, but it is too early to judge the prospects of the Fund's operation. C1611/J3133/D646 A-23 - 32 - 8. THE NATIONAL INVESTMENT AND DEVELOPMENT AUTHORITY 8.01 The National Investment and Development Authority (NIDA) was established on December 6, 1974 to coordinate government policies towards foreign investors and to serve as the registration and licensing authority. Since its creation, NIDA has coordinated evaluations and negotiations for a wide variety of proposals including flour and stock feed milling, oil palm estate development, and timber projects, involving a total investment of over K 150 million. 8.02 NIDA is also responsible for recommending the areas in which foreign investment will be promoted, those where it will and will not be permitted, and those where it will be restricted to ventures with substantial Papua New Guinean equity. The resulting National Investment Priorities Schedule spells out clearly the Government's policies towards investment in particular areas. Integrated sector programs are being formulated, particularly larly for agro-based and forest related industries. 8.03 In the agricultural sector, the following list of activities shows the areas in which foreign investment will be promoted, permitted, restricted or prohibited. C1611/J3133/D646 A-24 - 33 - (a) Priority Activities (i) Cultivation and processing of tea, oil palm, and sugarcane; and cultivation of legume and grain crops and root crops for processing. (ii) Processing of agriculture and livestock products including coconut and other vegetable oils; coir products, except brooms and brushes; canning and preserving of fruits and vegetables; manufacture and processing of rubber and rubber products; manufacture of cocoa and tanned hides. (b) Permitted or Open Activities (i) Nucleus estate and/or agricultural activities integrated with further processing facilities. (ii) Manufacture of instant coffee and tobacco growing. (c) Restricted Activities New foreign investment will be restricted to enterprises with substantial (25% or more) Papua New Guinean equity or to joint venture partnerships between foreigners and Papua New Guineans: coffee and rubber plantations, sago cultivation and processing; C1611/J3133/D646 A-24 - 34 - spice growing, silkworm cultivation, processing of cocoa (collection through to dry bean), copra (collection through to dry copra) and coffee (collection through to green bean), tea packaging for the home market, coffee roasting, grinding and packaging. 9. THE ROLE OF THE WORLD BANK IN AGRICULTURAL DEVELOPMENT 9.01 To achieve the Government's goal of optimizing the welfare of the rural majority, development would best be initiated through a large number of relatively small-scale economic and social projects which will increase opportunities and improve the scope and quality of facilities available to rural people. Simultaneously such a strategy for rural development would provide for a policy of "selective decentralization" of major projects to establish growth centers for general rural development. 9.02 The three subsectors in agriculture, subsistence agriculture, smallholder cash crop agriculture and plantation estate agriculture, will require different government policies and programs if they are to be success- fully integrated into a development strategy for growth of the agriculture sector. Most important of these policies and programs will be those which assist the transition of the subsistence agriculturalists into the monetized economy as smallholder cash crop farmers. Since it is not possible to move the large numbers of people in the subsistence sector into the monetized C1611/J3133/D646 A-25 - 35 - economy in the next ten or even twenty years, the Government and the Bank should sustain plantation-estate agriculture as a holding operation until smallholder production can take over. Plantation-estates will also continue to be.important as a focus for nucleus estate/smallholder settlements to stimulate the development of new land in less densely populated areas with good agricultural potential. A program running concurrently with these developments will be needed to improve the welfare of those in the subsis- tence sector until such time as these people can be integrated into the smallholder and estate subsectors. 9.03 Bank Group agricultural lending to date has concentrated on nucleus estate/smallholder settlements such as the West New Britain oil palm scheme (Credits 137-PNG and 175-PNG) and in the Popondetta smallholder oil palm project. Generally, field performance and execution of Credits 137-PNG and 175-PNG have been good. There are now 1,750 smallholders with a total planted area of 6,050 ha. The secondary benefits generated by the projects have been substantial. Under the traditional "Wantok" system, the oil palm settlers support at least one other family on their farms and also remit a portion of their earnings to clan groups in their home district. The estab- lishment of the town of Kimbe is a direct result of the scheme and has had a notable impact on local employment opportunities and the development of ancillary enterprises. Education and health facilities and economic infra- structure (mainly feeder roads) have substantially improved. Largely reflecting the growth of Kimbe, the population of West New Britain has increased by 25% over the past few years (from 60,800 to 75,800 in 1975). Cargo passing through the deep water port at Kimbe has increased from C1611/J3133/D646 A-25 - 36 - 10,150 tons in FY72 to 32,980 tons in FY75. With the ability to accept overseas cargo vessels in addition to the very expensive coastal shipping, the Kimbe district has now the advantage of considerable freight savings. The effect of this has been an increase in smallholder coconut production from 300 to 3,000 tons of copra per annum by providing a ready outlet for direct export. 9.04 IDA lending for livestock development, mainly cattle, has been based on large ranch/smallholder development, smallholders utilizing the off-turn from the large ranches. Due to insufficient smallholder demand for cattle under Credit 348-PNG only half of the 7,000 heifers available each year from the large ranches will be placed on smallholder farms. The number of new smallholdings in 1975 was about 200 compared with 340 in 1974 and the average size of the loan has dropped to K 2,000 compared to K 4,470 anticipated at appraisal. The main problem has been the deteriorating terms of trade for cattle ranchers. There seems to be sufficient credit available under Credit 348-PNG to meet the likely demand for smallholder cattle loans until the project completion date. 9.05 Bank lending for the first education project will contribute significantly to the upgrading of the agricultural extension service and provide trained personnel to improve the quality of rural education and health services. Considerable emphasis will need to be given to practical training of extension agents to enable them to interact successfully with C1611/J3133/D646 A-26 - 37 - subsistence farmers and facilitate their entry into the monetized economy. At present too great an emphasis is placed on training in sophisticated technology for export crops. 9.06 Future Bank lending, keeping in mind the "Eight Aims" of the Govern- ment, should be directed primarily (but not exclusively) toward two sets of rural programs, the agricultural production programs of DPI and the extension of rural infrastructure brought about by an expanded Rural Improvement Program. The projects may well be modest in size because of the present and hopefully temporary limitations of the organizational and administrative structure and the ongoing budgetary commitments of Government. Of particular relevance is the budget crisis which emerged after November 1975 and forced the Government to freeze 1976 recurrent funds at the 1975 level. 9.07 Since Government is attempting to improve the planning and coor- dination of programs, especially at district or area level, to achieve decentralized, integrated development, formulation of projects will require involvement of people and implementers at the grass roots level. A country with large numbers of people in an unemployed or underemployed situation will obviously want to optimize employment opportunities. The capital/labor mix in any one investment context, while taking account of broad government employment objectives, will also need to relate to economic viability. There appear to be no government development programs with a purely socio-political rationale which would exempt projects from such an economic evaluation. C1611/J3133/D646 A-26 - 38 - 9.08 Projects which meet the Government's objectives for rural develop- ment are those which combine productive components with improvement of health, education, nutrition and other public facilities. To this end the Government has initiated studies which will culminate in plans for the development of the more densely settled, low per capita income provinces. The Bank has received a proposal for the development of the Southern Highlands Province. This project would provide the Province with an integrated development program which would increase the opportunities for those in the subsistence subsector to engage in money earning activities, improve the quality and quantity of subsistence production (coffee, tea, cattle), provide a basic infrastructure of minimum standard access roads to all its main centers, and improve health and nutrition services. Some difficulty has been encountered in the Bank with the project since Bank Group policy is against financing tea production unless it can be demonstrated that there are no investment alterna- tives with an acceptable rate of return. Three Bank missions have concluded that there are no viable cash crop alternatives to tea, coffee and livestock production in the Southern Highlands, and while an effort has been made to reduce the tea component it is believed that it has now been reduced to a minimum compatible with the provisions for exemption of the Bank restrictions on tea lending. Government attaches high priority to the project and hopes that the Bank will appraise the project as soon as possible. The Asian Development Bank has been asked for assistance to identify rural development projects and in 1975 allocated US$300,000 for a feasibility study for an integrated agricultural development project (buffalo, rice and fisheries) in the East Sepik Province. The UNDP is currently devoting a comprehensive study for an integrated development project in the Purari River Basin. C1611/J3133/D629/B-1 - 39 - 9.09 Based on their success, the Bank should continue its support for nucleus estate/smallholder projects. Efficient schemes producing export crops can continue to play an important role in relation to export income and employ- ment. They can, in addition, play a more positive part in assisting smallholder development than is currently the case in many areas. The possibilities for introduction of new crops such as coffee, tea, sugar and tobacco in schemes modified from the oil palm prototypes are encouraging and are presently receiving government consideration. Care needs to be taken, however, to ensure that such projects do not create a "rural elite" with family incomes far above those enjoyed by the majority of the population and that investment costs are as low as practicable. The success of these schemes will also depend on Government having a crucial and difficult broker role in assuring agreement between smallholders and the estate on the terms of sale of raw materials and the unit price for the smallholders' crop. 9.10 Concurrently with the above development strategy, the Bank should continue to explore suitable agricultural projects, particularly in the densely settled areas of the highlands to assist as large a number of subsistence farmers at as reasonable a cost and in as short a time as possible. The small range of crops suitable for development in these areas, the inadequacy of transport and marketing facilities, and the limited amount of land available for intensifica- tion and extension of village gardens will complicate the design and implementa- tion of projects and make financial and economic justification difficult. Experimentation with several small pilot projects to try and establish the viability of certain farming systems in the context of the PNG village economy deserves a trial. C1611/J3133/D629/B-1 - 40 - 10. PRIORITIES FOR COUNTRY SECTOR WORK 10.01 The principal aim of country agricultural sector work should be to determine the most efficient way to combine development of the subsistence sector and the nucleus estate/smallholder sector using scarce financial and managerial resources and to place development of each sector in an appropriate time frame. Specific areas of enquiry might include: (a) An examination of the strategies available for the improvement of subsistence farming. What are the trade-offs between agricultural development based on the village or clan as the basic unit of develop- ment or the individual subsistence farm family? What crops should Government promote for subsistence development? What are the credit transport, marketing, and extension/farmer training requirements? How best can long-fallow rotations to restore fertility be reduced? What goals can be realistically set for subsistence development within the next five or so years? (b) Skilled manpower and organizational requirements to identify, prepare and implement projects designed to improve village/subsistence agricul- ture. To what extent would these scarce resources compete for expan- sion of the smallholder sector? C1611/J3133/D629/B-2 - 41 - (c) The scope for rural development projects and an evaluation of an acceptable cost per beneficiary given the nature of the benefits expected. (d) A study of an appropriate taxation system to recover the costs of investment in smallholder schemes and village/subsistence agricul- ture. When should such a system be introduced? 11. CURRENT RESEARCH PROGRAMS Institute for Applied Social and Economic Research 11.01 The Institute, once part of the Australian National University (ANU), is in the process of defining a research program and hiring new staff. Five general areas have been chosen for research: population, the effec- tiveness of government services, participation in decision making at local levels, rural development and general macro-economic studies. These areas of research will be broken down into specific topics when the capabilities and interests of new staff are assessed. The Insitute requires additional revenue if it is to implement these studies and initiate new research pro- grams. Consideration should be given in the Bank to providing finance under a future Bank project to support this work or from DPS research funds. C1611/J3133/D629/B-2 - 42 - Agricultural Production Research Services 11.02 Most research is being conducted on 8 DPI agricultural experimental stations with about one third of the resources directed to off-station surveys, field trials and applied research. Adaptability trials are underway to select a suitable hybrid coconut seed for new plantings especially on the east coast of New Ireland, parts of the Gazelle Peninsula and Madang and to replace the older plantings in Papua. Experimental sugarcane plantings are being planned to obtain adequate information on the suitability of the Kemp- Welsh Valley and the Morobe Province for sugar production. An oil palm research station on New Britain established in 1967 continues to conduct excellent trials on suitable new hybrid planting materials, fertilizer requirements and the optimum spacing for oil palm plantings. Research also continues into suitable clonal tea varieties for introduction to the highlands, with promising results. However, greater efforts in rice research are needed to select improved varieties suitable for rainfed rice.production under a bush fallow system. 11.03 Research on fruit, and vegetables and subsistence crops has intensi- fied in the last two years. The research occurs in two phases with one small group of researchers working on experimental stations, screening new varieties and determining basic disease and pest control methods appropriate to farmers' needs. A second group of agronomists is trying to apply this work in direct association with extension staff in localized trials. In 1974 DPI started to release the first results of its program to develop "die-back" resistant strains of cocoa, and research is continuing on breeding and grafting tech- niques to increase utilization of "die-back" resistant planting material. C1611/J3133/D629/B-3 - 43 - 11.04 The main aims of livestock research are to promote smallholder production of cattle, pigs and poultry and to investigate the potential of buffalo and sheep. Pasture assessment trials are in progress on tropical legumes including Siratro, Glycines and Leucaena. 11.05 This wide range of research activity, however, has overtaxed the limited physical and manpower resources available for research to a point where the quality of results has been adversely affected. If PNG is to continue to research and introduce new technologies to improve its agricul- tural production it will clearly need external tunds and technical assistance. C1611/J3133/D629/B-5 ANNEX 1 Table 1 PAPUA NEW GUINEA AGRICULTURE AND RURAL DEVELOPMENT SECTOR MEMORANDUM Exports of Agricultural Commodities and the Balance of Payments (US$ million) FY73 FY74 FY75 FY76 FY77 Agricultural Commodities Coffee 30.2 42.4 45.9 53.7 132.6 Copra and copra products 18.1 57.2 61.4 26.0 33.8 Cocoa 14.4 34.3 55.3 36.3 53.8 Palm oil 1.4 4.0 .9.3 8.6 10.9 -Tea 2.6 3.8 5.3 5.1 7.4 Rubber 2.6 5.3 3.6 3.3. 5.3 Total Agricultural Exports 69.3 147.0 181.8 133.0 243.8 Total Exports 304.4 676.3 514.4 455.8 612.8 Trade Surplus +27.5 +345.9 +20.6 +10.4 +85.3 Current Account +54.8 +232.6 -35.1 -17.3 +82.5 Balance of Payments +37.7 +237.4 -70.1 -24.4 +160.0 Exchange Rate: FY73 I Kina = US$1.29 FY74 " - " 1.47 FY75 " " 1.37. FY76. "t " 1.27 FY77 = " 1.25 C1611/J3133/D629/B-6 ANNEX 1 Table 2 PAPUA NEW GUINEA AGRICULTURE AND RURAL DEVELOPMENT SECTOR MEMORANDUM Major Export Crops - Participation of Papua New Guineans and Expatriates, 1972/73 Average size of holdings Crop area Percentage Production Percentage in 1971/72 ('000 ha) composition ('000 MT) composition (ha) Coconuts Papua New Guineans 139.9 56.4 51.9 40.1 1.28 Expatriates 108.3 43.6 77.4 59.9 163.30 Total 248.2 100.0 129.3 100.0 Cocoa Papua New Guineans 22.9 28.9 6.8 30.5 0.63 Expatriates 56.7 71.1 15.5 59.5 129.50 Total 79.6 100.0 22.3 100.0 Coffee Papua New Guineans 22.9 76.6 25.0 71.8 0.13 Expatriates 7.0 23.4 9.8 28.2 28.00 Total 29.9 100.0 5.8 100.0 Rubber Papua New Guineans 3.6 21.8 0.2 3.5 1.43 Expatriates 12.9 78.2 5.6 96.5 185.61 Total 16.5 100.0 5.8 100.0 Tea Papua New Guineans 0.4 10.8 0.7 19.5 0.52 Expatriates 3.3 89.2 2.9 80.5 135.72 Total 3.7 100.0 3.6 100.0 Oil Palm Papua New Guineans 4.9 64.5 22.0 ja 60.8 3.19 Expatriates /b 2.7 35.5 14.8 a 39.2 132.84 Total 7.6 100.0 36.8 100.0 /a Estimate. /b Expatriate companies are involved in equal partnership with PNG in nucleus estate/factory operations. Sources: Acreage and production in 1972/73, DASF unpublished data, average size of holdings in 1971/72, PNG Bureau of Statistics and Rural Industries, 1971/72.