Papua New Guinea - New Britain Smallholder Development Project

Report No. 3070 Impact Evaluation Report Papua New Guinea: New Britain Smallholder Development Projects FILE COPY july 7, 1980 Operations Evaluation Department FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. ABBREVIATIONS AR - Appraisal Report DASF - Department of Agriculture, Stock and Fisheries DPI - Department of Primary Industries ffb - fresh fruit bunches HCG - Harrisons & Crosfields Group NBPOD - New Britain Palm Oil Development, Ltd. PNG - Papua New Guinea PNGDB - Papua New Guinea Development Bank PPAR - Project Performance Audit Report Rates of Exchange US$1 = Kina 0.834 1972 0.700 1973 0.694 1974 0.763 1975 0.792 1976 0.791 1977 0.708 1978 0.711 1979 0.680 1980 (February) 1 Kina = US$1.198 1972 1.423 1973 1.441 1974 1.310 1975 1.262 1976 1.264 1977 1.412 1978 1.406 1979 1.471 1980 FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C 20433 U.S.A. Office of Director-General Operations Evaluation July 7, 1980 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Impact Evaluation Report - Papua New Guinea: New Britain Smallholder Development Projects (Credits 137/175-PNG) Attached, for information, is a copy of a report entitled "Impact Evaluation Report - Papua New Guinea: New Britain Smallholder Development Projects (Credits 137/175-PNG)" prepared by the Operations Evaluation Department. Attachment This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. FOR OFFICIAL USE ONLY Impact Evaluation Report PAPUA NEW GUINEA - NEW BRITAIN SMALLHOLDER DEVELOPMENT PROJECTS (Credits 137/175-PNG) TABLE OF CONTENTS Page No. PREFACE ............................................................ i Subom Y ..................................V... ....................... ii I. INTRODUCTION ............................................. 1 A. Historical Background ... .......................... 1 B. The Projects .................................. 2 II. PROJECT IMPACT ........................................... 5 A. The Settlers ....................................... 5 B. Employment ......................................... 15 C. Production .......... .......... .................... 17 D. Institution ........................................ 19 III. CONCLUSIONS ........................,,.................... 21 Table 1 - Yields, Estimated and Actual ............................. 24 Table 2 - Fresh Fruit Bunch Prices - Annual Averages from 1971/72 to 1979/80 .............................. 25 Table 3 - Average Gross Income from 4 ha Oil Palm Blocks ........... 26 Attachment - Comments received from the Government of Papua New Guinea .................................... 27 Map This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Impact Evaluation Report PAPUA NEW GUINEA - NEW BRITAIN SMALLHOLDER DEVELOPMENT PROJECTS (Credits 137/175-PNG) Preface This is an Impact Evaluation of the New Britain Smallholder Develop- ment Projects in Papua New Guinea for which Credit 137-PNG was approved in January 1969 in the sum of US$1.5 million, followed in January 1970 by Credit 175-PNG amounting to US$5.0 million. Credit 137-PNG was closed, fully dis- bursed on March 31, 1974 and Credit 175-PNG on June 16, 1976. The Impact Evaluation Report is based on a review of the Appraisal Reports (Nos. PA-la and PA-25a) dated December 27, 1968 and December 23, 1969, respectively; the President's Reports (Nos. P-661 of December 31, 1968 and P-766 of December 29, 1969); the Credit Agreements dated January 21, 1969 and January 30, 1970 and the Project Performance Audit Report (PPAR, OED Report No. 1400) of December 28, 1976; relevant Bank files have also been consulted and Bank staff associated with the projects have been interviewed. An OED mission visited Papua New Guinea in February-March 1980. The mission held discussions with officials of the Ministries of Finance, Agricul- ture and Planning, the Papua New Guinea Development Bank (PNGDB), as well as the University and the Harrisons & Crosfield Group (HCG). A field trip to interview some participating farmers was undertaken. The information obtained during that mission was used to test the validity of some conclusions of the 1976 audit report and permitted discussions of the projects' impact on the lives of the smallholders, on employment and production, as well as institu- tion building. A copy of the draft report was sent to the Borrower on May 21, 1980. The comments received have been taken into account and required corrections have been incorporated and differing views and/or more recent developments footnoted. The valuable assistance provided by the Government of Papua New Guinea, PNGDB, the University, HCG and their staff met, as well as the small- holders interviewed, during the preparation of this report is gratefully acknowledged. - ii - Impact Evaluation Summary PAPUA NEW GUINEA - NEW BRITAIN SMALLHOLDER DEVELOPMENT PROJECTS (Credits 137/175-PNG) 1. Following the recommendations of a 1963 Bank Economic Mission, the Papua New Guinea Department of Agriculture, Stock and Fisheries in collabora- tion with the Harrisons & Crosfield Group (HCG) started field surveys and oil palm trials in 1965/66. Proposals for oil palm development in West New Britain near the town of Hoskins were submitted to the PNG administration and the Bank in 1966. 2. Despite the Bank's reservation at this stage about the adequacy of project preparation, PNG signed a formal agreement with HCG for the establish- ment of a nucleus oil palm estate in 1967, under which PNG took up a 50% share in a newly founded company, the New Britain Palm Oil Development, Ltd. (NBPOD) and HCG, in addition to its 50% share, accepted management responsibilities. 3. The Bank, at the same time, was requested to consider assistance for the smallholder oil palm development, together with rubber, cocoa, coconut and livestock investments. Total costs of all these investments were estimated to reach US$8.4 million. 4. Following appraisal in 1968, the smallholder coconut and rubber components were eliminated because of marginal estimated economic returns. Due to delays in IDA replenishments, the oil palm component was made a sepa- rate project, approved by the Board in January 1969. Credit 137-PNG, amount- ing to US$1.5 million, became effective in July 1969. It supported the settlement of 580 families on holdings of 6.1 ha (15 acres), of which 3.2 ha (8 acres) would be planted with oil palms over a three-year period. 5. At the same time preparatory work on a larger project continued and Credit 175-PNG was approved by the Board in January 1970. Out of the US$5 million credit approved, US$3.4 million was for oil palm development and associated infrastructure. In particular, the credit provided for the addi- tional settlement of 980 families on 6.1 ha plots (3.2 ha oil palm for each holding) and the construction of a wharf at the local coastal town of Kimbe to facilitate export of palm oil/kernels and other goods. 6. Settlement was undertaken on six blocks adjacent to the 3,200 ha nucleus estate and an additional seventh block about 15 miles west of the estate/oil mill. Forest land from which saleable timber had been extracted was allocated to smallholders, who cleared it from the remaining trees shortly after their arrival. Settlers were housed in pre-fabricated individual houses on their blocks. Following the establishment of food gardens, each family planted 4 ha oil palms (slightly larger area due to a wider spacing of trees than originally anticipated) within a two-year period. The Government pro- vided settlers with social services at each of the seven blocks (schools, dispensaries, community centers), as well as with extension services and - iii - access roads. Smallholders received planting materials, tools, housing on credit, together with a small food cost and cash allowance to tide them over the early years before the first harvest. 7. The projects reached their combined target of 1,560 settlers without major delays. Due to extremely fertile soils and favorable climatic condi- tions, palm trees started fruiting after 2-1/2 years, about six months earlier than expected at appraisal, reaching peak production levels almost immedi- ately. However, the same factors also contributed to much faster growth of the palms, resulting in pollination problems and a shortened economic life, down from 25 to 15 years. 8. The PPAR found the projects a success, in part also due to pre- vailing high international prices of fats and oils. Because of favorable developments and performance, the projects' recalculated rate of return was established at 19%, compared with 15% at appraisal. Some concern was ex- pressed about the lack of providing supplementary employment opportunities in the project area, thought especially important in the light of existing underemployment on the relatively small holdings. 9. The projects' principal objectives were to diversify and increase the production of crops for export and develop an underpopulated area of high agricultural potential. In addition the projects were expected to provide the additional labor force - outside the nucleus estate. The establishment of port facilities was expected to encourage further development in an area which had then restricted access to the remainder of the country. 10. Pre-project incomes of the settlers, who originated from different ethnic backgrounds, were low and consisted mainly of food produced for subsis- tence. Based on various studies it can be assumed that the value of subsis- tence, plus minor sales of surplus production, was of the order of US$600 (1979 prices) per family per year (K222 at 1969 prices). 11. The appraisal estimated annual settler incomes to increase to US$900 (1969 prices) for Phase I (Credit 137-PNG) and more conservatively to US$830 for Phase II (Credit 175-PNG) families. Due to earlier bearing and higher than anticipated yields of the palms, more favorable palm oil prices and reduced costs - it was found that high soil fertility did not require ferti- lization - settler incomes were substantially above estimates. Settlers succeeded in repaying their debts much faster. In 1978/79 average family incomes from oil palm plus receipts from surplus food sales amounted to US$4000 for Phase I and US$4500 for Phase II families (K1,490 and K1,660 at 1969 prices). The high incomes contributed also to the popularity of other oil palm settlement schemes in different parts of the country. 12. Increased incomes are too recent to have a conspicuous permanent effect on settlers' living standards. However, improved nutritional standards are quite evident and many have started to improve their houses. Income allocation follows traditional patterns with about 60% of settler incomes being devoted to social and other non-agricultural pursuits. About US$1.5 - iv - million is remitted annually to the settler's place of origin, which is also visited by the average settler about every two years despite relatively high airfares. Another US$1.5 million has been deposited as savings in commercial banks. Non-agricultural investments have gone largely to the establishment of retail stores and transport business. 13. The projects had considerable success in improving education of the settlers' children. Many smallholders brought children of their relatives to the settlements so they could benefit from the projects' schooling facilities. Establishment of a secondary school at the settlements is under discussion. 14. Settler incomes are far superior to those of most other farmers in the country. Taxation would be a fair instrument for coming closer to equity principals; however, taxation is not handled as vigorously as possible under existing laws, depriving the country of about US$300,000 revenue annually. 15. There is also some inequity among settlers. But since they all started out with the same acreage, on rather homogeneous, fertile soils, differences in income are largely attributable to individual skills and energies. In 1978/79 incomes from oil palm ranged from zero to US$7500 per settler. 16. Regional development received a boost from the projects. The area's main town, Kimbe, has now a continuously expanding business center with super- markets, banking facilities, a hospital, workshops, etc. 17. The projects also contributed to nation building. Tribal tensions gave reason for concern during the early years of settlement. Relations between different tribal groups have improved, especially through the settler children who live, learn and play together. 18. The appraisal underestimated the labor units an average settler family could mobilize. Especially the women's labor input was underestimated. No allowance was made for the assistance the farmers' children would provide. As a consequence, problems of underemployment are evident and there is an emigration from the settlements of young family members and school leavers. Full employment for a family could have been provided by palm plantings of about 6.4 ha (instead of the 4 ha now available). The projects' impact on hired labor is of relatively minor significance. All together about 300 persons have been employed by the processing/transport sector to accommodate settler production; additional employment was also created during the develop- ment phase in road construction and other infrastructure works and, now, in the service sector, but no exact quantification is possible due to the lack of proper information. 19. Average yields during the first years of tree bearing were substan- tially above appraisal estimates. However, due to the faster growth of the palms, making hand pollination, pruning and harvesting more difficult, yields are now in line or even slightly below appraisal assumptions. Average yields of fresh fruit bunches (ffb) are about 16.5 tons/ha in Phase I and 18.6 tons/ha on Phase II blocks. The highest yield obtained on a block in 1978/79 was 34 tons/ha, giving a good impression of the area's potential. - v - 20. While a highly motivated extension service, supervised by experi- enced expatriates, succeeded in conveying good standards of technology during the project-s first years, a weakening of these standards is now apparent. Especially replanting techniques leave a lot to be desired. The weakening of the extension impact is to a large extent due to qualified personnel being transferred to new settlement schemes and being replaced by inexperienced junior staff. The situation is further aggravated by declining settler interests in oil palms, now giving preference to non-agricultural activities. 21. The favorable yield developments combined with higher prices and reduced operating costs, i.e. no need to apply fertilizers, has led to an increased economic rate of return. Despite the need to replant palms already after 15 years the positive aspects, i.e. higher returns at an early stage by far outweigh the reduced economic life of the palms. The ERR has been recal- culated at 25%. 22. The projects had a positive impact on the two institutions respon- sible for their implementation. The Department of Primary Industries (DPI, formerly Department of Agriculture, Stock and Fisheries) has gained valuable experience from the project and is successfully implementing similar settle- ment schemes in other parts of the country. The Papua New Guinea Development Bank (PNGDB) has grown into an important development financing institute. Since 1976 it has been able to operate without any Government grants. The bank office at Kimbe has grown into an active branch, financing private oil palm development, as well as other important development activities. 23. Farmers associations, which would lead to more settler involvement in administrative activities, are now evolving more strongly after initial difficulties. 24. With replantings not proceeding as well as it was hoped for, small- holder oil palm development seems to have come to a crossroadsl. If appro- priate incentives can be provided, smallholders will continue to play an important part in the sector. 1/ The Government in its comments mentioned that replantings have proceeded at a more rapid pace lately. Impact Evaluation Report PAPUA NEW GUINEA - NEW BRITAIN SMALLHOLDER DEVELOPMENT PROJECTS (Credits 137/175-PNG) I. INTRODUCTION 1/ A. Historical Background 1.01 Papua and New Guinea comprises the eastern half of the island of New Guinea; nine major islands, including New Britain in the Bismarck Archipelago, and a large number of smaller islands. Total land area is about 184,000 square miles, much of it mountainous with ridges rising to 15,000 ft. Total population is about 3 million. Papua, formerly a British Protectorate, and New Guinea, formerly German and then a UN Trust Territory were administered jointly by Australia until independence. 1.02 The country's economy is predominantly agricultural. Agriculture earns nearly all export income and accounts for more than half of employment. The economy also includes a large non-monetized sector in which the population produces only for their subsistence needs. Exports have increased steadily in volume, and value on an annual basis grew from A$28 million in 1960/61 to A$59 million in 1967/68 and K518.9 million (A$690) in 1978. Copra and other coconut products accounted for about 7% of total exports in the same year, coffee for 20.6%, cocoa for 12% and palm oil for 2%. 1.03 A 1963 Bank Economic Mission recommended expansion of coconut, cocoa, rubber and cattle production through strengthening of extension ser- vices and provision of farmer credit. The mission endorsed Government efforts to develop oil palm, pyrethrum and tea; crops which had not previously been grown in the country on a commercial scale. In particular the mission recom- mended the establishment of two or three oil palm plantations in sparsely populated areas of New Britain, preferably in the form of nucleus estates associated with smallholder farms. It advised that trials precede settlement investments. 1.04 The first development of Hoskins-/ in New Britain took place during the 1965/67 period without any Bank involvement. The Harrisons & Crosfield Group (HCG), which manages oil palm estates in Malaysia and Indonesia and is one of the most experienced and best known private companies in the world in oil palm development and palm oil production, was involved in the planning exercise from the earliest stage. HCG collaborated with the then territorial Department of Agriculture, Stock and Fisheries (DASF) in field surveys in 1/ Adapted from the PPAR, op. cit. 2/ Small town with airstrip near oil palm development. - 2 - 1965, started plant trials in 1966 and submitted to the administration in the same year a proposal for the overall development program, including settlement of smallholders. The proposal (West Nakanail Agricultural Development Project) was forwarded to the Bank in October 1966, but the Bank thought the project not yet ready for appraisal and requested an updated assessment by early 1967. 1.05 Despite the Bank's reservations, the project authorities were already moving ahead of the Bank. In February 1967 they signed a formal agreement with HCG for the establishment of the nucleus estate, with the administration and HCG sharing ownership on a 50-50 basis of a new company, the New Britain Palm Oil Development, Ltd. (NBPOD), for which HCG would serve as manager. The estate area was leased to NBPOD for 99 years: ground was broken at the Mosa-/ site in May 1967 and the first seeds planted in July of the same year. 1.06 The oil palm proposal before the Bank was considered together with other agricultural investment possibilities (rubber, cocoa, coconut, live- stock), which led to delays. The Bank at this stage was especially interested in the strengthening of the country's new credit agency, the Papua New Guinea Development Bank (PNGDB). Further, combination with other investments in agriculture would have contributed to a more sizeable project, estimated to cost US$8.4 million. 1.07 Appraisal took place in January 1968. The smallholder coconut component was eliminated during the appraisal and the smallholder rubber component shortly afterwards, due to likely unsatisfactory economic returns. Negotiations had to be suspended in September because of delays in IDA re- plenishment. Due to this difficulty the oil palm proposal was rewritten as a separate project, approved by the Board in January 1969 and signed the same month. 1.08 At the same time preparation of the larger project continued and Credit 175-PNG in the amount of US$5 million was approved by the Board on January 13, 1970, was signed the same month and became effective on June 3, 1970. B. The Projects 1.09 Credit 137-PNG supported the settlement of 580 families on holdings of about 6.1 ha (15 acres) of land suitable for oil palm cultivation. Set- tlers were expected to establish 3.2 ha (8 acres) of oil palm on each farm 1/ Census division for the Hoskins/Kimbe area in West New Britain. 2/ Village next to oil mill. - 3 - within three years. Total oil palm acreage would thus be 1,860 ha. Credit 175-PNG was to assist among others,1/ the settlement of an additional 980 smallholder families with 3.2 ha of oil palm on each holding, adding another 3,140 ha of oil palm to the smallholder scheme, and the construction of a wharf for palm oil/kernel and other exports at Kimbe.!/ 1.10 Settlement under the first project was undertaken on three blocks of forest land from which saleable timber had been removed and which was adjacent to the nucleus estate. Under the second project three more blocks were developed adjacent to the existing blocks and one about 15 miles west of the estate. Each settler was expected to clear eight acres of forest within a three-year period and plant oil palms. Additional clearing of land would permit the cultivation of food crops required for the settlers' subsistence needs. Prefabricated houses were to be erected by the settlers shortly after their arrivals in the project area, while the Government took on responsibili- ties to provide social services (schools, dispensaries, community centers), extension and access roads. 1.11 The nucleus estate was to supply under contract to the Government the settlement's oil palm seedling requirements in addition to seedlings required by the company for its own planting expansion program. Planting material was to be a high yielding dura x pisifera hybrid. At the start of the project insufficient information was available on fertilizer requirements. Later during project implementation it was found that no fertiliz-rs were required due to extremely high soil fertility. However, provisions had been made for fertilizer as well as pesticide applications, should the need have arisen. 1.12 Cash savings of most settlers selected for the scheme were thought to be insignificant. Consequently, the PNGDB was to provide loans up to 100% of the costs incurred by each settler and his family during a four-year development period. These loans would cover moving to the project site, establishing 3.2 ha of oil palm, building a house and purchasing household utensils. Pending the establishment of subsistence crops (a four-month period), the PNGDB loans were also to cover food purchases. The loans were to be in kind except for the food costs of the first four months and a cash "living allowance" of A$8 per month and family. 1.13 To permit the shipping of palm oil/kernels and other goods produced in the Hoskins/Kimbe area the project provided funds for the construction of a jetty extending some 400 feet from the coast and terminating in a wharf of about 200 foot width and 40 foot depth. A transit shed, necessary roads and 1/ The Credit provided also funds for estate coconut development and ranch- ing. Government together with HCG financed the planting of 2,024 ha (5,000 acres) of oil palm on the estate and the additional processing capacity required. 2/ Coastal town; now site of a port. utilities (water, electricity and sewerage) were also provided to permit the estimated export of about 55,000 tons of oil and approximately 5000 tons of kernels a year at full development. 1.14 The total cost of the first project was estimated at US$3.35 million of which the Government was to meet US$1,588 million (47%', HCG, US$0.24 million (7%); IDA, US$1.5 million (45%) and the settlers, the remainder - less than 1%. Total cost of the second project (oil palm subcomponent, including the Kimbe wharf) was estimated to reach US$4,949 million including contin- gencies (4%). Government was expected to contribute US$2.03 million (41%) and IDA, US$2.92 million (59%). 1.15 The then Department of Agriculture, Stock and Fisheries (DASF), now the Department of Primary Industries (DPI), was to be responsible, together with PNGDB, for project implementation. Project coordinators at headquarters and at project site assisted by senior and junior staff were expected to deal effectively with complex administrative arrangements requiring the cooperation of the Public Works, Public Health, Education and other departments. Agricul- tural officers and subordinate staff were to be allocated to each of the settlement blocks to reach a ratio of one Agricultural Assistant for each 40 settlers. PNGDB, which had begun operations in 1967 was expected to provide loans to participating settlers. 1.16 The project reached its targets of 1600 settlers with only minor delays. During project implementation it was found advantageous to use a larger acreage (4 ha) for the same number of trees because of a much more rapid growth of the oil palms. Yields surpassed anticipated production levels and harvests began 2-1/2 years after planting, that is, 1/2 year earlier than expected, reaching peak levels almost immediately; evidence of the excellent soil fertility and climatic conditions. However, these factors also led to a much faster growth of the palms, resulting in pollination problems and the recognized need to fell and replant the trees after 15 years, instead of the 25 years expected at appraisal. Findings of the PPAR 1.17 The PPAR found the projects a success with respect to all major objectives -- production, export earnings, stable settlement and smallholder prosperity. It noted that there were start-up problems at the mill, but they were to a large extent the consequence of the unexpected, excellent early smallholder harvest. Project success was amplified by the high international prices of fats and oils received in the first year of production (1971/72) and by another increase in 1973/74. 1.18 The PPAR found that updated estimates of rates of return and annual incomes were higher than forecast at appraisal. Financial returns on average settler holdings were expected to be 30% above appraisal estimates. The eco- nomic rate of return was recalculated at 19% compared with 15% at appraisal. Concern was voiced about the limited possibilities of providing supplementary - 5 - employment opportunities in the project area, especially for underemployed adults and youths in the subdivisions, in light of the small size of the holdings. II. PROJECT IMPACT Objectives 2.01 The principal objective of the oil palm projects was to "diversify and increase the production of crops for export...so that, on Independence, the Territory would be in a better position to pay for the imports necessary for continued economic development". (Appraisal Report, Credit 137-PNG, para. 2.04). In so doing, the project would employ valuable but previously untapped resources: "there is an abundance of undeveloped and underdeveloped fertile agricultural land which can and should be economically exploited". (Appraisal Report, Credit 175-PNG, para. ii). 2.02 Further objectives were to provide part of the labor force, since HCG had refused to invest alone in a single large plantation without any back up from outgrowers and the Government involvement, guarantee and protection implied therewith. The projects were to provide an outlet for surplus labor in three small but densely populated parts of the country. Finally it was thought that the Kimbe wharf would provide general facilities for the local administrative center at Kimbe and would encourage further development in an area which has had restricted communications with the remainder of the country. A. The Settlers General 2.03 Settlers originated from different regions and ethnic backgrounds of a country comprising some 700 language groups. This linguistic complexity is compounded by diversity in the size of local groups, ranging from a few dozen to a few thousand, each politically independent from and often in conflict with the other. Thus, although Papua New Guinea's overall population is small, the linguistic, traditional and socio-political diversity of its population and the rugged natural terrain make the task of nation building one of the most challenging problems confronting the national state. 2.04 The settlement scheme under the project may be considered part of the overall national effort at unifying the country. Although this was never an explicit objective of the project, it has worked out that way. And, in a country characterized by conflicts drawn along tribal and linguistic lines, the experience of this settlement scheme is a considerable success in social engineering. The success has encouraged the national government to go ahead, sponsoring several other similar projects in other parts of the country, for example, at Biala, Popondetta, Cape Rodney and Sepik. -6- Pre-Project Incomes 2.05 Settler selection was based on several criteria focusing on the applicant's background, particularly in farming and plantation work; his physical fitness and willingness to move and the availability of family labor to help him (Appraisal Report, Credit 137-PNG). Based on a recent survey!' the annual value of subsistence production, i.e. pre-project income can be estimated at K120/family (US$180). This, however, seems to be on the low side. The IDA financed Rural Development Project (Credit 841-PNG of 1978) adopted shadow wage rates of about K190 (US$275) per year.?! By combining the value of subsistence production with average shadow wage rates the settlers' pre-project incomes can be estimated to have been around K400 (US$600 equivalent at 1979 prices) per family and year. 2.06 Settlers received A$140 (US$157) as subsistence allowance during the initial four months after arriving at the project site to tide them over until their gardens could produce enough food to sustain the family. In addition, A$8 (US$9) per month to cover general expenses were also paid out. These two allowances combined represented an annual income of A$376 (US$421) around 1970. Bearing in mind that food prices in this calculation are based on the higher buyers' price - allowing for middlemen's fees and transportation costs, the 1970 value of subsistence production is likely to have been around A$140/ year. Allowing for inflation (1970-78 about 100%) average annual family incomes following this calculation approach would have been around K472 (US$708) at 1979 prices. 2.07 During appraisal of the First Phase annual settler incomes were estimated to reach US$900 at full development. The appraisal of the Second Phase - anticipating higher fertilizer costs - lowered the figure slightly to US$830. 2.08 Several factors contributed to a much more favorable income develop- ment of the settlers: (i) oil palms yielded fruit about 6 months earlier than anticipated; (ii) yields during the early project years were above appraisal estimates (see Table 1); (iii) palm oil prices were far above appraisal estimates (see Table 2); and (iv) the high soil fertility made the envisaged fertilizer applications redundant, thus saving sizeable operating costs. 2.09 As a consequence of higher initial yields and prices, settlers succeeded in repaying their loans much faster than anticipated. The average settler repayments based on a 50% deduction of ffbl/ sold/delivered to the oil mill are shown below. I/ R. Shand, Department of Economics, University Pertanian Malaysia, Eco- nomic Evaluation of the Hoskins Oil Palm Scheme - not yet published. 2/ Based on minimum daily wage rates of K1.7, shadow wage rates were esti- mated to range from K0.4-1.0 for the various plantation crops. The year would consist of 275 working days. 3/ Fresh fruit bunches - the unit of produce. - 7 - Average Production, Loan Repayments and Incomes of Settlers (Kina) Year 1 Year 2 Year 3 Year 4 Year 5 Phase I Gross Income 720 2342 3888 1196 1554 Loan Repayments /a 360 1176 152 - - Income (Including 500 1310 3876 1336 1690 Subsistence) Phase II Gross Income 730 1564 2042 2840 2806 /c Loan Repayments /b 365 782 1021 322 - Income (Including 515 922 1161 2658 2946 Subsistence) /a Average Loan K1688/settler including capitalized interest. /b Average Loan K2490/settler including capitalized interest. /c Estimate based on deliveries of first 4 months and prices of first 9 months. Phase I settler incomes in 1979/80 are estimated to reach K2,628 compared to K2,946 for Phase II settlers. The lower incomes are due to a general decline in yields because of the older age of the palm trees and more difficulties with hand pollination. 2.10 A recent studyl shows that in 1977 settlers delivered about 800 tons of vegetables and other foodstuff from their gardens to four local markets. Produce marketed included sweet potato, taro, greens, bananas, peanuts and betel nuts. The total value of these deliveries is estimated at about K72,000 or about K45/settler. 2.11 Total family incomes from agricultural activities amounted on aver- age to about K2700 for Phase I and K 3000 for Phase II settlers in 1978/79. This compares very favorably with appraisal estimates of K900 for Phase I and K830 for Phase II families. At constant 1972 prices - the first year settlers would have received incomes from their plantations according to the appraisal report - the 1978/79 incomes would have been K1540 and K1710 respectively. 2.12 The high incomes on the settlement contributed to the popularity of other oil palm settlement schemes in the country. The main reason for people entering the oil palm project was undoubtedly financial. Here was an oppor- tunity for them to earn better incomes than they had before. For most, if not 1/ Benjamin, C. 1977 Food Market Survey Report 1977 for Kimbe, Mosa, Karugara and Talasea, New Britain. - 8- all of them, the secure exclusive entitlement to a block of land for 99 years was a unique opportunity to break away from the constraints of customary land tenure systems characterized by frequent ownership and boundary disputes, and from the traditional demands on resources by kin and community. Although most settlers were subsistence farmers before coming to Hoskins, a number of settlers were selected not directly from their villages of cligin but from the squatters' settlements in the urban centers of Lae, Rabaul and Madang. These people, who had left their rural communities, were either low income laborers or casual workers with little financial security for the future of their fami- lies. After residence in the towns or fringes thereof, becoming accustomed to a monetized economy and to freedom from the constraints of village life, they saw in the project an opportunity for increased cash income, security of tenure, and freedom from traditions. It is not surprising that the project had attracted about six applicants per block. Living Standards 2.13 The settlers' greatly increased income is too recent an event to have a conspicuously permanent effect on their living standards. It is true that settlers are now buying a wide range of goods including luxuries such as watches and radios but this is not yet markedly different from the capability of non-settlers in other parts of the country except in the most remote and relatively inaccessible areas. Most settlers live in small wooden shacks, cook in detached kitchens on fireplaces on the ground, dependent on foot and passenger-carrying vehicles to get to markets and are yet to assume a life style different from that of their co-nationals. There are several reasons for this. Most settlers have less education and are therefore unable to have the same kind of selectivity in planning their lives as their more sophisti- cated middle-class fellow citizens in the towns, although their incomes may be comparable or in some cases higher. A good deal of the settlers' income is expended on immediate consumption such as protein foods, fuels and beer,l travel to their places of origin, on traditional feasts in the settlements, obligations to co-resident or nearby kin, and remittance to relatives in places of origin, rather than on better housing, own transportation, better household facilities and other long term investments that would make a real qualitative difference in standards of living. The change so far in personal life styles is in the direction of consuming more of, and with greater fre- quency, the same kinds of things that simple and poor people in the country tend to buy. It must be remembered that the settlers had only recently risen from the low income level. In the long run, however, and provided that their present level of income (allowing for inflation) is maintained or bettered, a more qualitative difference will emerge, more likely in the coming generation rather than in the present one. 2.14 The same may be said of the settlers' attitudes toward increasing incomes. The increase in settlers' income following the repayment of their loans has not led to a spurt of income-generating activities within the oil 1/ Expenditures for food are of relatively minor importance, see para. 2.16. palm industry, but to a decline in productivity. This has to be expected from people with simple rural backgrounds in which target production, rather than sustained long term productive effort, is the dominant mode. A main problem of development in predominantly traditional, rural societies such as Papua New Guinea is the provision of incentives for people to reach and sustain the desired level of productivity necessary for qualitative changes in living standards. One way of dealing with this problem at Hoskins is to devise a series of specific targets for settlers to reach, committing for specified periods part of their incomes, as a way of providing incentive for sustained high level productivity. For example, the Papua New Guinea Development Bank (PNGDB) has agreed to make loans up to K5,000 for settlers' improved housing. Once this is paid off, and assuming the completion of the planned hydro- electric scheme for Kimbe, Hoskins and the oil palm settlements, settlers could then be encouraged to take out further loans for furnishing their new and improved homes with electricity. This will have the desired effect of really raising the standard of living and at the same time providing incen- tives for maintaining the required production levels. Income Allocation 2.15 The ways in which settlers allocate their incomes may be divided into the following categories: household expenses; luxuries; social obliga- tions; savings and finally income generating activities, either agricultural or non-agricultural. Experienced observers point to the fact that only a relatively small proportion of settlers' income is reinvested in oil palm. According to their estimates 60% of the settlers' activities and income is devoted to social and other non-agricultural pursuits. The root of the problem regarding the future of the industry therefore is not agricultural and economic but social and cultural, to be traced ultimately to the settlers' social and cultural backgrounds. This reasoning is commensurate with the assertions made by research scholars of traditional South Pacific societies and economies to the effect that production in the region is social rather than economic in nature. 2.16 The day-to-day household expenses such as purchases of protein foods, lighting fuel, clothing, etc., seem to take up only a minor proportion of settlers' income in view of the relative simplicity of their life style mentioned above, and of the settlers' other and more expensive financial commitments. 2.17 Likewise, income allocated to luxuries such as watches, radios, cassette decks and so on do not absorb much of the settlers' income since these are relatively durable goods bought in small quantities by each family. The proportion of income devoted to luxuries such as alcoholic beverages, especially beer, is another matter. This is part of a nationwide problem of much concern to authorities and to families of people concerned. The excessive consumption of alcohol in Papua New Guinea towns and heavy cash cropping rural areas has led to a nationwide partial ban on the sale of alcohol. No one may buy take-away alcoholic beverages from Thursday afternoon till the following Monday. This legal step was taken to counter excessive - 10 - weekend consumption of alcohol and to ensure that people cake at least a fair amount of their income to their families. Extension workers at Hoskins tell of the common problem of wives of settlers complaining about their errant husbands squandering their income on beer rather than spending it on their families. 2.18 A good proportion of settlers' income is allocated toward social obligations. At least KI million is remitted annually to the settlers' places of origin which also means a substantial spread of benefit from the industry. About every two years settlers and their families fly to their homes of origin. This is a major outlay since airfares in Papua New Guinea cost about eight times as much as for comparable distances in the U.S.A. Airfares are so high that commonly settlers take out loans from commercial banks at Kimbe to enable them to meet the costs, committing half their monthly income from the sale of oil palm fruits until they have paid the loans. Settlers also spend income on assisting their kinsmen in the project settle- ments, a hallowed tradition of mutual help among kinsmen. Finally, part of the settlers' income is allocated to traditional feastings in the settle- ments - necessary feasts in connection with the rites of passage ceremonies. 2.19 It must be borne in mind that, although income thus allocated is economically unproductive, it helps keep settlers in contact with their kinsmen in their home areas, spread the benefits from the oil palm industry, keep the bonds of kinship alive with relatives in the project settlements, and maintain continuity with crucial aspects of their cultures. Although part of the reason for entering the project is freedom from the constrictions of traditions and demands of small communities, the settlers cannot completely cut off their roots without being alienated. It is inevitable that they desire to maintain some continuity with their familiar cultural backgrounds while forging new lives for themselves and their families. 2.20 A proportion of their incomes is deposited in commercial banks in Kimbe. The average savings account is a modest K100; but one bank has 12,000 such accounts totalling K1.2 million. This amount had doubled within a three year period. About K1 million of the amount saved comes from the settlers. The common practice among the settlers is to open a savings account for each member of the family, an excellent way of investment for the future, given the local conditions, and a good education in saving. 2.21 It becomes obvious then, in view of the income allocated in ways enumerated above, that not much is left for investment in income-generating ventures. (It also explains in part why the settlers' living standard has not altered substantially.) Nevertheless, reinvestment of part of the income in oil palm production seems to focus largely on payment of extra labor on the blocks. Initially settlers used relatives living with or visiting them as free labor. But the situation has changed since many of the extra hands, including the settlers' own sons in some cases, have taken up wage employment in the estate, in the mill, with public works and even in Kimbe, or have themselves secured their own oil palm blocks at Biala and Popondetta. This has necessitated wage payment, even to family members, to keep them on the blocks. - 11 - 2.22 Income allocated to non-agricultural investmetL 1ave gone largely to the establishment of retail stores and vehicles such a- 'uses, passenger-- carrying trucks, and heavy trucks for road works. Since, as mentioned above, individual settlers have little left over after other financial commitments to invest in income-generating ventures, the common practice is for groups of settlers, organized on the basis of ethnic and kinship affiliation, to pool their resources and buy trucks and buses. But due to the poor state of the roads, and the low level technical knowledge, many such ventures have failed and groups disintegrated. There is need here for education in the maintenance of machines and in judicious investment practices. Social Activities 2.23 Social improvements are most noticeable in the field of education. All blocks have primary schools - and due to higher than expected attendance - more classrooms had to be added than originally anticipated. Settlers send their children to school pinning their hopes for a "better" life on them. Backed by education and property, the children will then, hopefully, carry their families over to the level of middle-class affluence. 2.24 The high rate of school attendance is also due to the fact that settlers tend to bring the children of relatives who have remained at the villages of origin, to the settlement blocks so that they too will benefit from the education facilities provided under the project. 2.25 Some of the children who graduated from the settlement schools now attend the secondary school at Kimbe (established in 1970) and at Hoskins (established in 1975). But settlers consider them too far for convenient commuting. There is already a mounting agitation for a secondary school located in the settlement area, but for financial and political reasons the Government declines to accede to settlers' wishes. 2.26 In addition to the schools each settlement block has a health clinic and a shopping center. The main traffic artery (Kimbe-Hoskins) has been paved and connecting roads are of adequate standard to permit all year passage. 2.27 Special attention has been paid to improving the nutrition of settlers. A special officer has been assigned to check and advise on nutri- tional standards. Equity 2.28 It is argued by critics of the project that the settlers form a privileged group of farmers relative to the surrounding villages and to other rural regions of the country. A project of this kind, if successful, necessarily entails some income inequality. However, as far as the surround- ing communities are concerned, the economic success of the project has been in itself an incentive for them to enter oil palm production either on their own customary lands or more recently on settlement blocks near Biala reserved specifically for them. - 12 - 2.29 The allegation of inequality and privilege also tends to ignore the fact that most economic development taking place throughout the country pro- motes income disparity, whether among cocoa, coffee and coconut growers in villages, workers in the copper mines or those in various occupational groups in urban ar-as. The Hoskins smallholder projects provide an opportunity for about 1,600 settler families to improve their lot substantially. Agricultural development in villages is much more open and amenable to the rise of really wealthy growers as witnessed by the rise of rich coffee planters in the Eastern Highlands. 2.30 Progressive taxation as a means of establishing greater equity between settlers and lower income groups has not been introduced to the extent permitted by existing laws. Export taxes on palm oil have been levied only in times of excessively high world market prices. Tax authorities indicated to the mission that present annual revenues from taxing settler incomes amount to about K30,000. Based on their average incomes, however, tax revenues should be in the region of K200,000 (US$300,000 equivalent). Establishment of the tax base would be fairly easy and cheap since the oil mill keeps records on payments to individual settlers. Some officials argued that taxation of settlers would be unfair, since coffee/cocoa growers go untaxed. It is, however, equally unfair not to tax settlers vis-a-vis workers at the mines or estates, craftsmen and small businessmen, who are already being taxed according to the law. Taxation should also be looked at as a potential incentive to further stimulate smallholder production: the project has demon- strated that settlers put maximum efforts into their plantations only when they are confronted with new financial obligations. 2.31 Some unavoidable inequities also developed within the settlement blocks. All settlers started out with equal-sized holdings on uniformly fertile soils with the same number of palm trees of high yielding varieties. However, due to differences in plantation maintenance, individual incomes show a wide range of differences. Average 1978/79 incomes from oil palm amounted to K2443/settler in Phase I and K2761 for Phase II settlers. Incomes ranged from K5,091 to nil (5 settlers) in the Phase I area and from K4,574 to nil (1 settler) in the Phase II area. A total of 75 settlers grossed less than Kl,000, but 54 settlers earned more than K3,300. Regional Development 2.32 The growth of the West Nakanai region is tied to the development of oil palm, its most important industry. Other investments made under the projects or associated with them have also contributed to furthering regional development but at a minor scale. The Kimbe wharf has had a considerable effect on the structure of prices in the area. Previously, imported goods (either from abroad or from other islands) were expensive because they had to be transshipped from Rabaul, the closest international seaport. Together with improved roads throughout the area, the wharf has also permitted expand- ing exports of copra, cocoa and timber. In turn, these have greatly increased returns and production from existing village stands in the area. Village oil palm development, which had been included in the project from the very begin- ning, is now expanding rapidly. The infrastructure built under the projects - 13 - has also allowed expanding both the estate and smallholder sectors without requiring additional investments in infrastructure. 2.33 The town of Kimbe has benefitted most by the project. Besides being the administrative headquarters of West New Britain Province, the construction of the project financed wharf made it an interitational seaport for imports as well as exports of local commodities. Improved roads, the upgrading of the airfield at Hoskins, the establishment of banking and tele- communications facilities, improvement in refrigeration and electrical repair facilities, steel fabrication, and a consequent construction boom have all helped commercial development in the town. Downtown Kimbe today boasts two supermarkets, four general merchants, two wholesalers, one delicatessen, two haberdasheries, a children's shop, two electric and electronic suppliers, a news agency, a take-away foods store, a brewery depot, three motor vehicle agencies, two oil companies' service stations, two airlines agencies, two commercial banks, a savings and loan society, and a hotel. The population of the town has doubled over the last decade, and the town itself is planned and zoned for further commercial, office and residential expansion. It is esti- mated that the retail turnover is at present K5 million (US$7.5 million) per annum, and that the larger of the two commercial banks has an annual turnover of 14 million. For a town in the South Pacific islands region that came from nothing only a decade ago, its growth record is quite remarkable. Ethnic Relations 2.34 A point of concern since the inception of the projects has been the relationships among the various tribal and linguistic groups in the settle- ment. In the early years and up to the late seventies a number of inter-ethnic disturbances occurred following homicides. It was not only the authorities but also, and more importantly, the settlers themselves who were concerned about amicable relations within the settlements. Settlers themselves ini- tiated a move that eventually led to the promulgation of the 1977 Prevention of Disruption Act which empowered the government to remove any settler who himself, or whose relative living with him, is responsible for disturbing the peace. Only three settlers have been punished under the law. In fact since 1977 violence among ethnic groups has declined sharply. The important point is that settlers themselves are acutely aware of the potential for fights and have gone out of their way to avoid them. Field officers assert that ethnic relationships among settlers are far better than in urban and many other rural areas of the country. 2.35 Most of the fifty or so settlers who sold their blocks and moved out have been people from Bali Witu Islands, who left because of some pressure from a cult. For others from West New Britain the precise reasons for leaving are not clear but seems in part due to a feeling of insecurity in number since they formed a small minority among settlers. Since the surrounding villages are now increasingly establishing oil palm blocks on customary lands, it is probable also that settlers from the region have decided that it is better for them to move back into the security of their own communities while still benefitting from the industry. - 14 - 2.36 Real integration is occurring among settlers' children who mix with each other through common educational upbringing in the community schools. These children identify themselves not so much as members of their parents' ethnic groups but as members of particular, named settlements to which they belong. Beyond this they identify themselves as members of the "tribe" of Wel Pam (Oil Palm). 2.37 Are the oil palm projects a kind of development that contributes toward nation building in terms of wiping out tribalism? Or are they contrib- uting toward breaking down traditional cultures? 2.38 It must be clearly understood that the planners' primary aim in implementing the project was and still is economic. Sociological considera- tions as such have been secondary to the economic goal of earning foreign exchange. Thus any contributions to nation building in social and cultural terms have been incidental. The projects and other similar schemes are enclave settlements, relatively isolated from the rest of the community, so that their social and cultural impact is at the moment circumscribed. Given that, within the settlements themselves, people from different tribal and language groups are thrown together so that inevitably they must adapt to their new heterogeneous environment. And, as mentioned above, settlers have gone out of their way to maintain amity in the midst of diversity. It has been an educational process which has helped to lower the barriers between them. Their children mix in peer groups at school and have behaved exactly in the same ways as children of different backgrounds mixing at schools in other parts of the world. Tribalism as such means little to them. When they grow up and leave the settlements, as many if not most of them will have to, their horizons will be wider than those of their parents. It is in this sense that the kind of development taking place at the oil palm settlements may be said to contribute toward breaking down tribalism. 2.39 Is it also breaking down traditional cultures? Taking people from one environment and placing them in a completely different one must inevitably entail fundamental social and cultural changes as well as alteration in economic mode of production. But it must also be said that the officials responsible for the implementation of the settlement schemes have done what they can to ease the transition by grouping settlers into small residential units consisting of those who come from the same area, and by providing them with services and facilities superior to those provided for the country's rural areas as a whole. The project and similar ones that have since been established or will be established will create a new kind of social and cultural entity. So far Papua New Guinea has had traditional communities, transient plantation townships and urban societies. The smallholder settle- ment scheme is a new social, economic and cultural creation distinctive from the others. History will tell whether this creation is for good or for ill. It will most probably be a mixture of both. - 15 - B. Employment General 2.40 Providing for additional employment was not a specific objective of the projects. Deliveries from smallholders to the oil mill require trans- port services and a small labor force at the mill to process the fruit. The total additional labor force employed as a consequence of the smallholder projects is about 300 persons. Also, considerable employment was created during development phase (e.g., road construction, bush felling, house build- ing, etc.) and now in the service sector (e.g., drivers, storemen, road maintenance, public service, etc.) Underemployment 2.41 During preparation and appraisal of the projects it was assumed that the palm trees plantedi/ would require a labor input of 1.5 man-units per year for plantation upkeep and harvesting. It was further assumed that the settler would account for supplying one full labor unit per year and his wife half a unit, leaving her half her time for work in the farm's garden and for household chores. 2.42 Labor requirements for oil palm establishment, upkeep and harvest vary from year to year. A recent study.V puts the actual labor require- ments for each holding as follows: Total Labor Requirei/a (man-days) Year 1 2 3 4 5 6 7 8 9 10 Required 294 313 334 242 278 314 335 311 256 336 Surplus /b 116 97 76 168 132 95 75 99 154 74 /a Including work for subsistence gardening. /b Under the assumption that 1.5 labor units represent rounded days/year 410 (1 Unit 275 days). 1/ While the tree number/farm has remained unchanged, the acreage has been increased from 8 to 10 acres due to a wider spacing of the palms. See para. 1.16 above. 2/ Shamsuddin, N. An Analysis of Labor Supply and Productivity in the Oil Palm Industry. A Case Study of the Cape Hoskins Settlement Scheme. - 16 - 2.43 Actual underemployment on the average settlement block is, as the study correctly points out, even more pronounced because of two factors. First, the wife's labor input has been underestimated, and, second, no allow- ance has ever been made for the help provided by the farmer's children. 2.44 It was found that women spent between 3.2 to 4.6 hours/day working in the vegetable gardens and in addition to this almost matched the labor input supplied by their husbands for the plantation work. While the males can provide 51% of total labor input, women can reach 44% and children 5% of the requirements. In other words women should have accounted for 0.86 labor units and children for 0.1 labor units in the appraisal assumptions. 2.45 While paid children's labor is definitely objectionable, it is questionable if the support provided by the farmers' own children should be excluded when calculating labor requirements and supply on average farms. Children growing up on farms always help their parents regardless whether in a developing or a developed country. In the particular case of oil palm farms, children help, for instance, in collecting loose fruit from the ground, removing pruned fronds from the ground, weeding, etc. 2.46 In assuming a more realistic labor availability of 2 units per farm/ year a larger oil palm acreage per holding would have been feasible. Going back to the table in para. 2.42 above it can be seen that the peak labor requirement occurred in year ten. However, about one-third more labor was actually available than calculated at appraisal, leading to a labor surplus of 210 man-days, or 60% more labor would have been available than actually required. In terms of plantation acreage that could have been worked with the settler's available family labor 6.5 instead of 4.0 ha (16 instead of 10 acres) would have been feasible.11 2.47 Since land was not the limiting factor larger average holdings would have meant more project benefits. First, settlers could obtain higher incomes; second, the settlement cost/benefit ratio would be better since the additional plantation establishment costs!/ would have represented only about 16% of total settlement cost; third, the administrative cost/project output ratio would be improved and, fourth, the higher output would mean larger exports and increased Government revenues. 1/ The Government in its comments thinks it doubtful that most settlers would have had the ability to organize their labor resources to attain maximum utilization. Also, settlers still require considerable time for social activities. On the other hand, large holdings would have resulted in fewer settlers, wasted land, and -- as experience when settlers have purchased a second block has shown -- lower yields. 2/ Based on appraisal estimates. - 17 - C. Production Yields and Production 2.48 When the project was prepared and also at the time of the apprai- sals, no experience on likely yields of oil palms in New Britain existed. Since available data suggested that soils and climatic conditions were about similar to those found in Malaysia, yields assumed for the estate were iden- tical with average Malaysian yields, and smallholders were expected to average about 25% below estate yields. 2.49 Within a relatively short time it was found that these assumptions had been too conservative in many respects. Soils of volcanic origin and ideal climate brought palm trees to earlier fertility (2-1/2 years instead of 3 assumed at appraisal), led to higher average yields during the early years and made fertilizer application unnecessary. However, the first years also demonstrated that palm trees grew much faster than anticipated - the economic life of a tree will be only 15 years against appraisal projections of 25 years - and that hand assisted pollination would be needed at all times - not only during the first four to six years of production as expected at appraisal. 2.50 Yield developments from project start-up until 1979/80 are shown in Table 1. They surpassed appraisal forecasts during the first four (Phase I) to five (Phase II) years of production - in addition to beginning to bear ahead of estimates (see para. 2.49 above) - but start to fall below projec- tions thereafter. Total production per hectare over the productive life of a palm tree was estimated at 2,780 tons of ffbi/ at appraisal. The reduced economic life of the trees is likely to yield only 2,230 tons of ffb - a shortfall of 550 tons or 24%. 2.51 As is evident from the variations in settler incomes, yields show wide differences. High yields are mainly dependent on hand assisted pollina- tion. The highest yield obtained by a settler (136 tons/ffb or 34 tons/ha) was in the Sarakolok Block-2, where oil palms are now 10-11 years old. Another settler in one of the older blocks (Tamba) harvested 106.8 tons (26.7 tons/ha) in 1978/79. All together about 80 settlers (13% of all Phase I settlers) had yields above appraisal estimates which seems to indicate that the shortfall in production is influenced more by human than natural factors. 2.52 Higher average yields are also contingent to a large degree on price incentives. Yields over the first four months of 1979/80 were better than during the corresponding period of the previous year. This has been attrib- uted to an improved producer price which encouraged more efforts on the part of the settlers in hand pollination and harvesting. 1/ Adjusted for lower tree density - increase from 3.4 to 4 ha/holding with number of planted oil palms unchanged. 2/ Another settler in the same block averaged 27.8 tons/ha. - 18 - Technology 2.53 The high calibre staff providing extension to the settlers at the time of planting resulted in successful tree establishment and was also a factor contributing to the early high yields of the smallholder plantations. In the ensuing years extension concentrated on proper plantation upkeep and more recently on replantings. 2.54 Proper plantation maintenance focuses primarily on hand pollination of flowering trees, pruning and, where necessary, pest and disease control. The mission found that maintenance was deteriorating. Pollination standards vary from block to block. While natural pollination improved in the three Phase I blocks, the visiting agents (Harrisons Fleming) found that inadequate standards were applied in the Phase II blocks ranging from 54% inadequate (Buvussi) to 26% (Kavugara).I! 2.55 Pruning standards have also fallen behind with bad or below average pruning practiced on 40% of the holdings in the worst blocks (Tamba, Buvussi) and 6% at the best (Kavui A). The report on the 1979 mission by the visting agents stated: "Possibly because of there being more fruit to harvest, pruning standards in the three older sub-divisions have slightly improved, but with much room for further improvement. Much pruning on Buvussi remains sub- standard, whilst standards on both Galai and Kavui have improved. Kavugara has shown a further lowering of standards at one end of the spectrum but an improve- ment at the other end. Overpruning was a feature of numerous plots on Galai." 2.56 Some other husbandry practices also need improvement. Burning of palm-crowns is, although less frequent than in previous years, still going on. Burning of frond piles which leads to a loss of valuable plant nutrients has not been halted. Some weed problem (Eupatorium) on four blocks (Kavui) has not been successfully tackled because of inadequate follow-up work after chemical treatments. 2.57 The projects' impact on technology transfer seems weakest in regard to the planting techniques. Standards of land preparation for new plantings are not good enough. Hardly any leguminous cover crops are established prior to the planting of seedlings. Weeding of young stands - which have to compete sometimes with vegetable crops - is insufficient. Fertilizer application to newly planted seedlings is hardly ever done. Planting technique is often poor. Planting palms too deep is a common occurrence, leading to retarded development. Sometimes seedlings are planted too shallow leading to root wash and palms being blown over. 1/ The Government expects experiments with insect pollination to prove successful in the near future. This would have a considerable impact on yields and the economic life of the palm trees. - 19 - Economic Benefits 2.58 Factors influencing project benefits changed considerably during the implementation of the projects having both positive and negative impacts on the projects' economic returns. The foremost positive factors were the yields of the palms, which were substantially higher during the first years than anticipated and which were obtained at an earlier stage than expected. The projects also benefitted from the high palm oil prices of the 1971 to 1975 period. Settlement costs could be kept low by relying on low cost pre- fabricated housing and relatively cheap chartered transport. Plantation upkeep is also less costly than projected due to high soil fertility which makes fertilizer application unnecessary. On the negative side are the reduced economic life of the palms, growing much faster on the fertile soils than thought, and requiring felling and replanting already after 15 years. However, the positive factors are by far dominant. The recalculated ERR is now 25%, up from 19% calculated by the PPAR, not to mention the 9% (Cr. 137) and 15% (Cr. 175) assumed at appraisal. D. Institutions The Department of Primary Industries 2.59 The Department of Primary Industries (DPI) had the main responsi- bility for implementing the project. PNG was still under colonial administra- tion when the projects started, and expatriate civil servants occupied all senior positions. However, on the job training of local staff has been successful, especially for senior personnel. The last expatriate officer left the Hoskins scheme in February 1980. His former deputy - a PNG na- tional - is now successfully managing the Biala-oil palm settlement in the eastern part of New Britain. 2.60 The Hoskins settlement has also become a kind of training ground for settlement officers - with all its positive and negative implications. While the scheme's success serves as a model from which lessons have been learned and continue to be learned, the lack of experience of newly recruited officers has a negative impact on the settlers' performance. The visiting agents remarked following their 1979 mission: "...there has been a gradual decline in staff knowledge of oil palm field practices and basic agronomy. The most obvious reasons for this seem to be: - Newly appointed officers do not appear to possess sufficient knowledge of oil palm cultivation. - There is a noticeable decline in enthusiasm and interest in agricultural aspects of the Project. - It is felt that knowledge gained by senior staff, through either experience or courses, is not being passed on to junior staff members. - 20 - DPI is aware of this problem, and corrective action, e.g. training courses, improved field supervision, etc. has been initiated. The Papua New Guinea Development Bank 2.61 The Papua New Guinea Development Bank (PNGDB), established by special ordinance in 1965, began operations in July 1967. At the time of credit negotiations the Government of Australia persuaded a reluctant IDA to accept low interest on-lending of funds to PNGDB to support its overall development. 2.62 During the early years of the projects PNGDB's field role was relatively small, since between 75% and 80% of settler loans were disbursed in kind or as services provided by the Project Authority. PNGDB did not assign a permanent representative to Kimbe until September 1972, a year after the first payments to settlers were made by the nucleus estate. 2.63 The Kimbe branch office has developed into a viable bank. Oil palm financing still accounts for 85% of its activities, but it has also branched out into assisting small business, other agricultural activities, fisheries and logging. 2.64 PNGDB has evolved as an important financier of national development priorities. In 1979 alone loans approved amounted to K16.41 million (US$24.6 million equivalent), of which K1.76 million (US$2.6 million) was for oil palm development. Income earnings and proper control of loans contributed to PNGDB's financial viability - no Government grants have been received since 1976. Staff benefitted to a large extent from its association with the oil palm projects and are now fully aware of the agronomic as well as financial issues of oil palm development. Farmers' Associations and Self-help 2.65 The project has had so far little impact on organizing settlers into associations which could take over more of the administrative and marketing/ supply functions of DPI. The notion of delegating more power to the settlers' associations to manage their own affairs is an attractive one but impractical for the moment. Project management feels that such power should be given only when settlers are fully behind the association. At present only about 25% of settlers subscribe to the association. As mentioned above, settlers are largely unsophisticated and vulnerable to exploitation. The present repre- sentatives in the association have little or no understanding of the mechanics of the world market pricing and have an undercurrent of unrealistic expecta- tions. The association was initially founded by somebody who promised his fellow settlers that, once they formed the association, he would raise the price of oil palm fruit to K80 a ton. Settlers joined the association and were defrauded of K13,000. The association inevitably declined but was later - 21 - resurrected on the condition (imposed by the settlers themselves) that it be headed by an expatriate.l/ 2.66 At present the association meets monthly to discuss common problems and to deal with other routine day-to-day matters. In fact the association is developing into a kind of a pressure group, as evidenced by its demands for a separate secondary school and the formation of a separate local government council for the settlers. Given the level of settlers' sophistication, the association will need careful and educative guidance from government offi- cials for the foreseeable future. And to make the association work and attract greater participation on the part of settlers, it must be guided into delivering real benefits to its members. Finally, and not the least importantly, the association's finances must be handled with scrupulous honesty and be allocated judiciously, effectively and profitably. The chronic problem of disintegration of so many developmental groupings in the country stems from misuse and mismanagement of groups' affairs, in particular the finances. 2.67 In the early stages of clearing and establishing oil palm blocks, and now with replanting on the back block, settlers commonly help each other by forming small groups which work on each other's block in turn. This practice of mutual assistance is a carry over from traditional subsistence activities, in which people help each other in clearing forests for new gardens, in constructing fences or new houses and in other tasks that require the labor of more than one man. Working together involves greater enjoyment in labor than working in isolation: people enjoy each other's company, tend to exert more effort in the presence of companions, and usually eat well, since the person assisted is obliged to present his or her helpers with the best foods he or she can provide. This practice may be profitably encouraged, especially now with the labor problem settlers face regarding the pollination of the increasingly tall palm trees. III. CONCLUSIONS 3.01 After more than 10 years of successful development the project has come to a crossroads - and at this stage it is nearly impossible to forecast which way it will take. Due to the faster than anticipated growth of the palms, replanting is of the highest importance but at the time of the mis- sion's visit had not gained momentum. Of the 288 blocks of the 1968/69 establishment scheduled for replacement plantings, only 163 (57%) had been planted by 1979. The present policy is to plant 2 ha of a block's reserve or 1/ The Government states that they know of no suggestion for the association to be headed by an expatriate. There was a suggestion that accounts be kept by an expatriate accountant, but the Chairman as well as committee members are all settlers (see Attachment). - 22 - garden area when the first planted palms are about 10 years old. Two and a half years later when the replants are in bearing, one half of the old palms will be poisoned. A second stage of replacement plantings would be carried out on these plots. Whether the replanting program will be successful is not certain. The Government has mentioned that since the visit of the OED mission planting of the 2 ha replacement plots has proceeded rapidly, with Kapore, Tamba and Sarakolok virtually complete and preparations well advanced on Buvussi. Also, life span of these "second generation" palms would be longer as they have been specifically bred locally at Dami for lower height increment (see Attachment). 3.02 There are several factors which may contribute to the diminishing settler interest in oil palm farming. First is the pricing of delivered fruit bunches: despite recent price recoveries, settlers still cherish the high price of K80/ton ffb, obtained for deliveries in November 1974. The estab- lishment of a price stabilization fund would have been beneficial in evening out price fluctuations within a crop year and possibly also over several years. However, the chance of establishing such a fund seems to have been missed, i.e. in the years of high prices!Y. 3.03 Second, some observers mentioned that loan repayment terms were inappropriate for the prevailing conditions. The introduction of a 50% deduction from gross earnings allowed early repayment of loans because settler incomes were much higher than appraisal estimates. Once debts had been repaid, usually within a period of 3 to 5 years, enthusiasm for hard work diminished. According to the observers' opinion and also from the national economy's point of view, loan repayment terms actively encouraged production during the early years of the project rather than creating conditions for sustained production over the life of the project. Higher income taxes (see para. 2.30) would also have a positive effect as an incentive to hard work. 3.04 Third, non-agricultural activities, mainly in the transport sector, are diverting time and resources away from project activities. 3.05 Fourth, some of the least productive settlers are handicapped by old age. They find it difficult to pollinate, prune and harvest the tall palms. Hired labor is scarce and some of the old settlers without children are now unable to even harvest the few bunches growing on their trees. Some com- mentators thought that the provision of improved education may affect the future of the scheme, since most school leavers are looking for improved employment elsewhere, turning their backs on the farms. The successful project may turn out to be a stepping stone for the families towards even higher incomes and better living and smallholder production may disappear. 1/ The Government comments that the scheme has gone through several price cycles, both within and between years. Therefore, settlers should be familiar with market trends. Also, the Government thinks no stabili- zation fund could be introduced until after all blocks were in production and loans were substantially repaid. - 23 - 3.06 On the other hand, the 6.1 ha blocks at the smallholder project have already been felt by some settlers to be too small for any real expansion, and since the onset of replanting on the 2 ha back blocks,l/ settlers have complained that they are being deprived of areas for their subsistence gar- dening. Concerning areas for further expansion, successful settlers feel too restricted with only a smallholder lot. They are concerned with the future of their children, for only one can inherit the block and make a fair living out of it. However, some of these successful settlers have bought out the blocks of those who have left the scheme, but instead of expanding on these they have given them to their kinsmen to settle on. 3.07 The project successfully assisted nation building. Tribal rival- ries, although still existing, have diminished, and the daily contacts of school children of various tribal origins is a major factor that contributed to that development. 3.08 The project infrastructure also contributed to a more rapid expan- sion of cocoa and copra production which will lead to an even higher overall economic rate of return - a quantification, however, is impossible due to inadequate data. Project production has provided valuable foreign exchange earnings and has led to export diversification. At this stage it can only be hoped that an undertaking that has had such a significant impact on the lives of 1,560 families directly involved, and many others outside the scheme but benefitting from its experience, will continue successfully2/ 1/ Up to now used for vegetable gardens or left fallow. 2/ In its comments, Government mentions that replantings are proceeding rapidly (see footnote to para. 3.01) since the departure of the Impact Evaluation Mission and believes the future of the smallholder scheme to be bright (see Attachment). - 24 - Table 1 Yields, Estimated and Actual (in tons of ffb/ha) Appraisal Estimate1 Actual Settler Settler Phase I Phase II Phase I Phase II 1971/72 - 8.5 - 1972/73 - - 12.4 - 1973/74 6.6 - 17.9 - 1974/75 11.2 - 24.1 - 1975/76 14.1 6.6 20.8 13.7 1976/77 16.0 11.2 17.9 17.6 1977/78 17.9 14.1 17.1 18.6 1978/79 17.9 16.0 16.9 19.1 1979/80-2/ 17.0 17.9 16.5 18.6 Source: Harrisons Fleming Advisory and Agronomic Report No. 7, January 1980. 1/ Adjusted to account for lower tree density. 2/ Estimate based on deliveries of first four months. - 25 - Table 2 Fresh Fruit Bunch Prices Annual Averages from 1971/72 to 79/80 1/ (Kina per ton) 21 1971/72 42.66- 21 1972/73 44.47- 21 1973/74 46.292/ 1974/75 48.10 1975/76 13.32 1976/77 22.20 1977/78 27.44 1978/79 37.19 1979/80!3 37.71 Source: Harrisons & Crosfield 1/ These figures are simple arithmetic averages and are not weighted against fluctuating seasonal production. 2/ The figures are those received from HCG for the years indicated and were averaged by the mission. The original breakdown is available on request from OED. In its comments Government questioned the figures shown and stated that no records were available for 1971/ 72 and that the 1972/73 average was only K19.52 and for 1973/74 K40.16/ton. 3/ Nine months only. - 26 - Table 3 Average Gross Income from 4 ha Oilpalm Blocks (Kina) Phase I Phase II 1971/72 1,442 1972/73 2,205 1973/74 3,314 1974/75 4,637 1975/76 1,108 730 1976/77 1,590 1,515 1977/78 1,877 2,042 1978/79 2,514 2,841 Source: Harrisons & Crosfield - 27 - ORLDSANK440099* ad 4S48:5 ,322145 Attachment GRICT NE22143 Page 1 CAN ItCAgo gDIStribution: INT XAFRAD Mr. Kordik WASHINGTON DC USA FOR KORJJIK PROJECT AUDIT UNIT HAVE FOLLOWING COMMENTS SUMMARY PARA 4 BLOCK SIZE 6.5 HECTARES IE 15 ACRES NOT 6 HA THIS ERROR REPEATS LATER PARAGRAPH 11 SHOULD READ OTHER OIL PALM SETTLEMENT SCHEMES PARAGRAPH 7 SHOULD READ 1560 SETTLERS REPORT PARA 1.12 SUBSISTENCE CROPS SHOULD BE FOUR MONTHS NOT SIX LIVING ALLOWANCE OF 68 TO PRODUCTION AND SUBSISTENCE ALLOWANCE FOR FOUR MONTHS WERE IN CASH 2.06 SUBSITANCE ALLOWANCE WAS IN CASH NQT KIND FOR FOUR MONTH$ ONLY MOST SETTLERS WERE SUBSISTENCE FARMERS BEFORE COMING TO HOSKINS 2.12 ONLY CONTRIBUTED TO POPULARITY OF OTHER OIL PALM SCHEMES 2.14 SHOULD BE K5000 NOT K6000 2.25 SETTLERS CHILDREN ATTEND HIGH SCHOOL AT KIMBE ESTABLISHED 1970 AND AT HOSKINS ESTABLISHED 1973 2.35 MOST WEST NEW BRITAIN SETTLERS WERE FROM RALI WTTU ISLAND AND RETURNED AS A RESULT OF CARGO CULT PRESSURE FROM HOME AREA FEW SETTLERS CAME FROM ACTUAL HOSKINS AREA - 28 - Attachment Page 2 2.4) EMPLOYMENT UNDERSTAT77D NUCLEUS ESTATE EMPLOYS 300 PEOPLE IN IN TRANSPORT AND MILL DIRECTLY ATTRIBUTABLE TO SMALLHOLDER SCHEME NO MENTION IS MADE OF CONSIDERABLE EMPLOYMENT IN DEVELOPMENT PHASE EG ROAD ONSTRUCTION BUSH FELLING HOUSE BUILDING ETC OR IN SERVICE SECTOR NOW EG P M V DRIVERS STOREMEN ROAD MAINTAINENCE AND PUBLIC SERVICE ALSO REPEATED PARA 1:l 2.46 ALTHOUGH ADDITIONAL LABOUR UNITS MAY THEORETICALLY BE AVAIL- -ABLE IT IS DOUBTFUL WHAT HER SETTLER WOULD HAVE ABILITY TO ORGANISE HIS LABOUR TO MAXIMUM UTILISATITION ONLY BEST SETTLERS COULD DO SO ALSO SETTLERS STILL REQUIRE CONSIDERABLE TIME FOR SOCIAL ACTIVITIES NOW THAT PROCESSING CAPACITY IS AVAILA- BLE IT WILL BE POSSIBLE TO CATER FOR MORE ENERGETIC SETTLER AS A GENERAL RULE LARGER HOLDINGS WOULD HAVE RESULTED IN WASTED LAND PLLEASE REFER TO VARIATION IN YIELD WITH STANDARD AREAS WHICH IS DUE SOLERY TO SETTLER INPUT LARGER BLOCKS WOULD HAVE MEANT LESS SqTTLERS LOWER OUTPUTS WHEN SETTLER HAS PURCHASED SECOND BLOCK GENERAL TENDENCTY HAS BEEN FOR YIELD TO DECLINE 2.65 WE KNOW OF NO SUGGESTION FOR ASSOCIATION TO BE HEADED BY EXPATRIATE THERE WAS SUGGESTION ACCOUNTS BE KEPT BY EXPAT ACCOUNTANT BUT CHAIRMAN AND COMMITTEE EMBERS ARE ALL SETTLERS S.I' SETTLERS DO NOT CLIM PALMS TO POLLINATE DONE BY PUFFER ON END OF LO:RG -TICK liT I, M Of: DIFFICULT THAN FOR SHORT PA LMS - 29 - Attachment Page 3 PAGE TWO WEST NAKANAI IS NOT LOCAL NAME FOR WEST NEW BRITAIN IT IS THE CENSUS DIVISION FOR HOSKINS KIMBE AREA BIALA IS EAST NAKANA I GENERAL SINCE YOUR VISIT PLANTING OF REPLACEMENT WTWO HECTARES HAS PROCEEDED RAPIDLY WITH KAPORE TAMBA SARAKOLOK VIRTUALLY COMPLETE AND PREPARATIONS WELL ADVANCED ON BUVUSSI NO MENTION IS MADE OF POTENTIAL MAJOR EFFECT ON YIELDS AND PALM LIFE OF INSECT POLLENATION DUE TO BE INTRODUCED HERE SHORTLY ALSO PALM LIFE OF SECOND GENERATION PALMS WILL BE LONGER AS SPECIFICALLY BRED LOCALLY AT DAMI FOR LOWER HEIGHT INCREMENT GENERALLY WE FEEL FUTURE OF SMALLHOLDER SCHEME IS BRIGHT ALTHOUGH MENTION IS MADE OF REDUCED COSTS OF IMPORTS NO MENTION OF EFFECT OF INFRASTRUCTURE QNCOCOA AND COPRA PRODUCTION WAS MADE DIRECT EXPORT OF COPRA AND COCOA HAS GREATLY INCREASED RETURNS AND INCREASED PRODUCTION FROM EXISTING VILLAGE STANDS IN AREA VILLAGE OIL PALM CEVELOPMENT WAS INCLUDED IN PROJECT FROM START BUT IS NOW EXPANDING RAPIDLY PROJECT IS ALSO EXPANDING BOTH ESTATE SECTOR AND SMALLHOLDER SECTOR WITH NO INCREASE IN INFRASTRUCTURE REQUIREMENT WITH RESULTANI IMPROVEMENT IN RATE OF RETURN FIGURES INTABLE TWO ARE INCORRECT HAVE CROSS CHECKD WITH H AND C THEY CONFIRM THIS CORRECT FIGURES AS FOLLOWS 71/72 RECORDS LOST BUT WOULD BE APPROX !1A25. 72/7 ' 0A19.j2 7V/74 BA40.16 - 30 - Attachment Page 4 REST AS STATED NOTE ALSO MOVEMENT OF KINA AWAY FROM PARITY WITH AUSTRALIAN DOLLARS THESE FIGURES ARE SIMPLE ARITHMETIC AVERAGE AND ARE NOT WEIGHTED AGAINST SEASONAL PRODUCTION THE SCHEME HAS BEEN THROUGH SEVERAL PRICE CYCLES BOTH WITHIN YEAR AND BETWEEN YEARS AND SETTLERS ARE FAMILIAR WITH MARKET TRENDS ANY STABILISATION FUND COULD NOT BE INTRODUCED UNTIL AFTER ALL BLOCKS WERE IN PRODUCTION AND DEV BANK LOANS WERE SUBSTANTIALLY RCPAID SO NO OPPORTUNITIES WERE LOST REGARDS CHRISTENSEN AGRIC KONEDOBU. AGRICT NE2?21'4Vs WORLDBANK440099 21 IBRD 12159R (PPA) 0 .. _iT1.11 7 T1 i f Hoskins 5- °30, 5030- 0 PAPUA NEVv GluINE- WEST NAKANAI (KIMBE) OIL PALM SCHEME Mrki- INCLUDING THE SMALLHOLDER DEVELOPMENT PROJECT CREDIT 137 SUBDIVISIONS CREDIT 175SUBDNVISIONS VILLAGE OIL PALM AREAS MOSA ESTATE PIAS1 l MOSA ESTATE PHASE I1 -6-4M i BUVUSSI DAGJ COCONJT/COCOA SETTLEMENT AREA j -- -- OIL MILL AND HOUSING AREA NAHAVIO PROJECT HEADLUARTERS . - - COMMUN TY CENTERS DAMI RESEARCH STATION O ASSOCIATED VILLAGES - MAIN TRUNKROADS. SEALLD_ MAIN FEEDER ROADS, GRAVEL 5 2 4 6 8 10 - SAWMILL KILOMETERS Mil,FS -5040' 1 MI-ES''0 12M-0, 1105TR2