Papua New Guinea - Second Agricultural Credit Project

Document of The World Bank FU copy FOR OFFICIAL USE ONLY Report No. 3043-PNG PAPUA NEW GUINEA SECOND AGRICULTURAL CREDIT PROJECT STAFF APPRAISAL REPORT April 29, 1981 Agricultural Division II Projects Department East Asia and Pacific Regional Office 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.  CURRENCY EQUIVALENTS Currency Unit: Kina US$1 = K 0.67 Kl = US$1.50 GOVERNMENT-S FISCAL YEAR January 1 - December 31 ABBREVIATIONS DPI = Department of Primary Industry NPMA = National Plantation Management Agency PAS = Provincial Administrative Secretary PMTP = Plantation Management Training Program PNGDB = Papua New Guinea Development Bank PRDO = Provincial Rural Development Officer SC = Project Steering Committee  FOR OFFICIAL USE ONLY PAPUA NEW GUINEA SECOND AGRICULTURAL CREDIT PROJECT TABLE OF CONTENTS Page No. I. AGRICULTURAL BACKGROUND . . . . . . . . . . . . . . . . . . 1 General .1... . . . . . . . . . . . . . . . . . . . . . I Agricultural Sector . . . . . . . . . . . . . . . . . . . 1 Development Issues and Government Strategy . . . . . . . . 2 Bank Group Participation . . . . . . . . . . . . . . . . . 4 II. SOCIOLOGICAL AND INSTITUTIONAL FRAMEWORK . . . . . . . . . . 5 Traditional Setting . . . . . . . . . . . . . . . . . . . 5 Structure of Government .... . . . . . . . . . . . . . 6 The Papua New Guinea Development Bank (PNGDB) . . . . . . 7 Department of Primary Industry (DPI) . . . . . . . . . . 11 Plantation Management .12 Marketing Agencies ................. 13 III. THE PROJECT.. ............... 15 Origin . . . . . . . . . . . . . . . . . . . . . . . . . 15 Objectives. . . . . . . . . . . . . . . . . . . . . . . . 15 Brief Description ...... . ......... 15 Detailed Features ...... . ......... 16 Estimated Cost. . . . . . . . . . . . . . . . . . . . . . 17 Financing . . . . . . . . . . . . . . . . . . . . . . . . 17 Procurement . . . . . . . . . . . . . . . . . . . . . . . 20 Disbursement. . . . . . . . . . . . . . . . . . . . . . . 20 Accounts and Audit. . . . . . . . . . . . . . . . . . . . 21 IV. PROJECT IMPLEMENTATION. . . . . . . . . . . . . . . . . . . 21 Organization and Management . . . . . . . . . . . . . . . 21 Lending Procedures, Terms and Conditions. . . . . . . . . 22 V. INPUTSANDYIELDS ................. 24 Inputs: Agriculture . . . . . . . . . . . . . . . . . . 24 Piggeries and Poultry . . . . . . . . . . . . . 25 Yields . . . . . . . . . . . . . . . . . . . . . . . . . 25 This report is based on the findings of an appraisal team composed of J. Andreu, F. Hutchison and A. Hasan (Bank) which visited Papua New Guinea in April/May 1980. 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.  - ii - Page No. VI. MARKETING, PRICES, FINANCIAL ANALYSIS AND COST RECOVERY . . 26 Marketing . . . . . . . . . . . . . . . . . . . . . . . . 26 Prices ......................... 27 Project Impact on Participating Farmers . . . . . . . . . 28 Project Impact on PNGDB ...... .. .. .. . .. . . 28 Project Impact on Government and Cost Recovery. . . . . . 29 VII. BENEFITS, RISKS AND JUSTIFICATION . . . . . . . . . . . . . 29 Beneficiaries and Benefits. . . . . . . . . . . . . . . . 29 Economic Analyses . . . . . . . . . . . . . . . . . . . . 31 Sensitivity Analyses . . . . . . . . . . . . . . . . . . 31 Risks . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Environmental Impact ....... .. .. .. .. .. . 32 VIII. AGREEMENTS REACHED AND RECOMMENDATIONS. . . . . . . . . . . 32 List of Tables and Charts in Main Text Table 1 : Project Cost Estimates . . . . . . . . . . . . 18 2 : Financing Plan ......... ... .... . 19 3 : Estimated Disbursement Schedule . . . . . . . . 21 4 : Price Forecasts ........ .. ... .. . 27 5 : Project Impact on PNGDB . . . . . . . . . . . . 28 6 : Project Beneficiaries . . . . . . . . . . . . . 29 Annexes in Main Text Annex 1 : PNGDB Organization Chart 2 : PNGDB's Income and Expenditure, 1974-1979 3 : PNGDB's Balance Sheets, 1974-1979 4 : PNGDB's Cashflow Projection (without the Project), 1980-1984 5 : Project Investments, 1980-1983 6 : Project Financial Impact on PNGDB, 1980-1990 7 : Economic Costs and Benefits 8 : Selected Documents and Data Available in Project Files Maps IBRD 15008-Agricultural Area IBRD 15009-Location of Main Cash Crop Areas and of PNGDB's Field Offices  PAPUA NEW GUINEA SECOND AGRICULTURAL CREDIT PROJECT - APPRAISAL I. AGRICULTURAL BACKGROUND General 1.01 The basic factors which bear on PNG-s agricultural development are a widely scattered population, difficult geography, low quality of many soils, land usage conflicts and poor support services. These result in narrow profit margins derived from relatively small volumes of output and necessitate the concentration of the development effort in the most favorable geographic areas to achieve economically viable activities. 1.02 PNG has a land area of about 500,000 sq km and a population of only about three million, 85% of whom are largely subsistence farmers living in traditional societies in sparsely populated rural areas. However, there are areas, e.g. Central Highlands, Simbu, Gazelle Peninsula, with high popula- tion densities and important migration difficulties to other agricultural areas. Population is growing at 3% p.a. 1.03 The country's topography is characterized by central mountain chains (both in the mainland and each of the main islands) and generally rugged terrain covered by forests with the balance largely under swamps. These important physical barriers give rise to many microclimates. Temperatures vary largely according to altitude and rainfall ranges mostly between 1,000 and 5,000 mm. p.a. Soils are generally volcanic in the eastern islands, basalts and andesites predominate in mountainous areas, and there are large alluvial deposits in the plains which form part of large river basins. A general characteristic of all soils is heavy leaching, which together with the difficult topography, severely limits the country's agricultural potential (Map IBRD 15008). 1.04 The large land area relative to population and difficult physical access have resulted in widely dispersed and isolated rural communities which are difficult to link with a road network. The resulting heavy dependence on air and inadequate coastal shipping transport, which can only handle relatively small volumes of cargo at very high unit costs, has important negative implications for the general welfare of the population, and for economic development. To improve this, Government is emphasizing construction of highways linking the main population areas, and of farm to market roads. The Agricultural Sector 1.05 In spite of its many constraints, the agricultural sector represents the country-s main development possibility. Although the sector accounts for only about one third of GDP and export earnings it employs almost nine out of ten economically active people.  - 2 - 1.06 Production for subsistence and for the market is carried out in the same farms by smallholders and cashcropping is also carried out by plantations. Nationals have been acquiring the latter from expatriates with Government support. 1.07 In 1979, the main cash crops (practically all for export) were (in m tons): copra (105,000), coffee (47,000), cocoa (27,000), palm oil (30,000) and rubber (4,500). The first three are cultivated over large areas of smallholdings and plantations and the last two in small consolidated settlement areas. Their geographic distribution is given in Map IBRD 15009. The main subsistence crops are sweet potatoes, bananas and taro. Most families keep pigs. Beef and poultry production on a modest scale is being developed through commercial units. Crop yields are low under native practices, but higher yields have been obtained under good management in the Highlands (coffee) and in New Britain (oil palms). In the past, production increases were brought about by expansion of the cultivated area. There is strong evidence, however, that good agricultural land (reasonably accessible with moderate to high fertility and suitable topography) is becoming scarce mainly because of severe limitations imposed by customary control of land (which impedes its use by the more enterprising villagers) and generalized land tenure disputes originating in complex traditional practices. 1.08 The short-term prospects for the economy are also worrisome. Imports of goods and services have increased substantially in the last five years while the volume of most exports has largely stagnated. Large Australian Government grants have helped close the resource gap in recent years but the grants are being progressively reduced. This situation must be redressed by increases in agricultural productivity and exports (with due regard to maintenance of adequate levels of subsistence production). Such programs should be based on gradual change of traditional organization and practices in order to provide opportunities and incentives clearly perceived by villagers. Development Issues and Government Strategy 1.09 The basic question facing Papua New Guineans is how to develop agriculture in the short term to close an important resource gap and in the long term to provide employment and adequate incomes and promote the welfare of the overwhelming majority of the population which lives in the countryside and faces serious sociological and physical constraints. The specific issues faced by Government are: (a) how to use fiscal and monetary tools to strengthen the private sector; (b) how to adapt traditional village organization and customs (including importantly land tenure systems) to the needs of continued and balanced agricultural development;  - 3 -- (c) how to ensure effective participation in development of many dissimilar and often antagonistic clan groups; (d) how to effect a steady transfer of plantations from expatriates to nationals with minimum losses of productivity and production; and (e) how to train, employ, motivate and organize adequate numbers of young, poorly trained, inexperienced people to provide the required support services. 1.10 In the last decade, Government's strategy has emphasized develop- ment of the poorer provinces and has paid specific attention to improved nutrition and the social welfare of rural people. Specifically Government has: (a) maintained an open economy based on a strong private sector supported by sound agricultural credit and export marketing structures, and export crop stabilization funds; (b) enabled clans and other traditional groups to operate agricul- tural lands as legally recognized groups and to guarantee individual rights in clan lands to bring about long-term farm improvements; (c) decentralized many development responsibilities down to the provincial level; (d) helped transfer control of expatriate owned plantations to nationals by providing them with funding and with management training and support; (e) expanded specialized agricultural instruction (agricultural colleges and other vocational schools) and in-service training; and giving more attractive remuneration to some categories of staff. 1.11 The immediate limitations faced by this strategy are: continued uncertainties regarding land tenure; lack of adequate incentives for increasing production of cash crops in many areas of the country; and other factors such as shortage of medium and long-term funds; weakening extension and other support services due to the still continuing decentralization * process and to the difficulties of replacing experienced expatriate staff; and difficulties in coordinating plantation management and the provincial extension services with credit delivery. The above have resulted in stagnant or declining production of important cash crops and high rates of rural migration.  - 4 - 1.12 The Government has recently initiated steps towards alleviation of some of the above constraints. On the one hand it has undertaken, with assistance from the Bank, a review of the agricultural support services and is planning to strengthen these services (para. 1.13). Complementing this initiative, it has increased the financial incentives to farmers through partial subsidization of development cost of new projects and interest rates, with a view to inducing urgently needed new development and rehabilitation in cash cropping, livestock and fishery subsectors./l The subsidy has two com- ponents: (a) subsidy of up to K 3,000 for new projects, mainly for management agency fees./2 (In view of the weak extension services PNGDB generally requires its borrowers to hire services of management companies); (b) lowering of the interest rate (to the extent that it exceeds 5% p.a., para. 2.19) for projects located in the disadvantaged districts ranked according to per capita cash income and a number of other socio-economic indicators. Of the ninety districts in the country, the lowest 30% have been selected by the Government as being eligible for the interest subsidy at the present time. Based on the existing and estimated mix of PNGDB's agricultural lending and its expected growth, the size of the total subsidy is not large and unlikely to exceed K 250,000 per year. A positive feature of this subsidy package is the temporary nature of the management fee subsidy. The fees charged by manage- ment companies (mostly expatriate personnel) are a costly but temporary charges on commercial production. The temporary nature arises from the fact that with the strengthening of extension services the need for management company services would decline. Bank Group Participation 1.13 The Bank Group has financed projects related to livestock and oil palms, and more recently a provincial integrated rural development project. Further investment in provincial programs is expected. The proposed project addresses some of the problems identified in para. 1.11. At Government's request the Bank undertook a review to help Government strengthen agricultural support services at the national and provincial levels. The Bank's report has been recently submitted to the Government and discussions are underway about the possibility of Bank support for an agricultural support services project. /1 Interest subsidy applies to both rehabilitation and new development. However, rehabilitation projects are ineligible for development cost subsidy since these do not require special management input and also as ground preparation and initial planting is already done. /2 The development cost subsidy of K 3,000 comprises: (a) subsidy of K 2,400/project, for management agency fees and (b) K 600 for costs of land survey, soil tests and tools (para. 3.09).  - 5 - II. SOCIOLOGICAL AND INSTITUTIONAL FRAMEWORK Traditional Setting 2.01 There are approximately 700 separate cultural and linguistic groups in Papua New Guinea, although two lingua franca (Melanesian Pidgin and Hiri Motu) are understood in wide areas throughout the country. English is spoken in urban centers and by some rural elites. Most rural people still live in traditional societies, which went undisturbed until recently. As an example, the first outside contact with the heavily populated highland areas did not take place until the 1930s. These contacts, however, are rapidly expanding and affecting traditional society. 2.02 The basic traditional organization unit is the clan, which is composed of several extended families, usually living in single villages or groups of villages isolated from the rest of the country by physical barriers. This isolation has traditionally impeded trade and other forms of communi- cation, and has fostered differentiation, hostility and open warfare among clans. 2.03 About 95% of the land area is customary land with right patterns which vary considerably within and between ethnic groups. Customary rights to land are widely fragmented and overlapping and depend on whether the possessor of the land is a man or a woman; a chief, a clan leader or a commoner. Inheritance may be patrilinear or matrilinear and involves a number of social obligations. Rights are specific to cultivation, use of timber resources, hunting, fishing or other purposes. In the past, land rights have been maintained by force and have changed hands often as a result. 2.04 The main practical consequences of the above are as follows: (a) the adjudication and registration of land rights is extremely difficult and rights may be contested for a long time; (b) there is no tradition in the system of secure, individual, rights to land; and (c) there are import- ant land allocation and usage imbalances among clans. These factors are important limitations to rural development and a major effort is required to modify and adapt existing practices to development needs without unduly disrupting the fabric of society. 2.05 The Government aims at incorporating traditional groups and indi- viduals into the market economy by enabling them to borrow from banks on the basis of well established communal boundaries and of clan-recognized indi- vidual family plots, both without the need for documentation. Traditional groups are also being encouraged to organize legally and to register their lands. They are also included in land clearing, cultivation, harvesting, marketing, and processing, the latter two often under more formal cooperative arrangements. Initial emphasis has been placed on more stable traditional areas, on plantations purchased from expatriates, and on new settlement  areas, all of which offer the fundamental advantage of generally recognized rights to specific land parcels. But the fact remains that land tenure is a difficult policy matter and that there is no organized and accepted system to settle land disputes. As a result only limited areas are available for organized agricultural development. 2.06 Another important and related aspect of traditional society which has a bearing on development is in the area of incentives. Subsistence production is largely undertaken together with some cash cropping and the latter relatively recent development attests to the existence of basic economic motivation among villagers. However, incentives for borrowing and investing are not always effective because of many economic and non-economic factors. These are the desire to work only on a part-time basis, long visits to relatives in other villages or towns, preferences for different self- and wage employment mixes and dependence on more successful family members. These factors bear on the willingness and ability to work in a disciplined fashion in the expectation of future benefits which in the case of permanent tree crops (by and large the most important cash crops) take years to obtain. There is thus uncertainty regarding farmers' commitment to on-farm develop- ment, and future efficiency levels, and caution and flexibility in the design of rural projects are, therefore, essential. 2.07 Finally, traditional customs, such as rearing of large numbers of pigs which compete with humans for food, the use of pigs for ceremonial pur- poses (as opposed to sustained consumption throughout the year), the reduc- tion in subsistence plantings originating in the exodus of young males to urban centers because of lack of opportunities in village life, and newly acquired and less desirable consumption habits, all have negative effects on rural peoples nutrition and health; these in turn affect productivity and production. These issues are being addressed by government through balanced subsistence/cash crop development, provision of basic social services to villages, and through efforts to diminish the prestige value of some traditional activities and ceremonies, but such changes will occur only slowly. Structure of Government 2.08 Papua New Guinea has a parliamentary system of Government, the most salient characteristic of which is its high degree of decentralization, in recognition of the wide diversity of peoples in the country. 2.09 The Organic Law on Provincial Government was passed in early 1977. Since then a number of provincial constitutions have been approved and provincial assemblies and executive councils have been established based on direct popular elections. 2.10 Primarily provincial functions where provincial law overrides national law are the coordination of local governments and courts, primary  education, housing and regulation of trade (other than banks), cultural activities and public entertainment. Concurrent (or shared) functions which allow provincial government latitude in matters exclusively affecting the province include agriculture and land development. 2.11 To discharge the above responsibilities the provinces have organized provincial secretariats and departments with their own by-laws and staff transferred from the corresponding national units. Among these are primary industries (i.e. agriculture fisheries and forestry) and education. Provin- ces are allowed to introduce fees and taxes on retail sales, trading licen- ses, land, head tax and public entertainment. The National Government also refunds to the provinces the proceeds of certain taxes collected in the provinces, and 1.25% of the export value of goods produced in the province and exported as well as provides grants tied to projects or programs. Most importantly, the National Government provides the provinces with uncondi- tional guaranteed minimum grants to cover capital and operating costs. All the above measures ensure an effective delegation of responsibilities to provincial governments and the intention is to proceed in similar fashion down to the local level. 2.12 With regard to agricultural development the main implications are that agricultural supporting services, such as applied research, extension and basic vocational education must be organized through the provincial governments, but that in the transitional period high standards and coordi- nation are still difficult to bring about. The main entities with national responsibilities which need to be coordinated with the responsibilities of provincial governments are the Papua New Guinea Development Bank (PNGDB), the Department of Primary Industries (DPI), the plantation management units, and the crop marketing agencies, all of which are dealt with below. The Papua New Guinea Development Bank (PNGDB) 2.13 Background. There is a substantial amount of village agricultural development being financed by the villagers themselves through clan support arrangements but at low efficiency levels. Institutional agricultural financing in the country is largely provided by PNGDB, while private commercial banks and the publicly owned Banking Corporation limit them- selves to short-term financing of large (and mostly foreign-owned) plantations and crop marketing enterprises. 2.14 Origin, Legal Status and General Policies. PNGDB was established in December, 1965 and began operations in July, 1967. It is set up as a publicly owned corporate body and has been enabled to acquire, hold and dispose of real and personal property, and sue and be sued. Initially, PNGDB limited itself to financing specific export crops and livestock, importantly by participating in projects supported by IDA financing. In the last few years PNGDB has broadened its lending criteria to include small non-secured loans but has continued to support ventures which are in line  - 8 - with Government's development priorities, which are deemed technically and economically viable and which have a large impact on employment of nationals. Beneficiaries are expected to make meaningful contributions in land, cash, kind or labor to their projects. PNGDB finances investments in primary industries, processing, and services with loan terms in line with prospective enterprise cashflows. 2.15 Organization and Management. The Board consists of a chairman, his deputy and eleven members, all appointed by Government's National Executive Council with the exception of PNGDB's Managing Director and his deputy, who are ex-officio members. Appointments are for three years and can be extended. Meetings are held quarterly and this is considered adequate. The Board has overall policy guidance and supervision responsibilities, and approves plans and guidelines on commitment of resources. 2.16 PNGDB's organization chart is in Annex 1. There are five head office departments directly reporting to the Deputy Managing Director and through him to the Managing Director and the Board. The Administration Department is responsible for staffing and training; the Internal and Liaison Services Department, for economic analyses, branch inspections, internal audit, organization and methods and public relations. The Accounts Department handles data collection and central accounting. The Operations Department is responsible for loan approvals and records and receives assistance from the Technical Department for project evaluation and technical studies. The Technical Department also promotes new enterprises in associa- tion with nationals. PNGDB has recently carried out an extensive expansion of field offices to reach more smallholders. There are at present nine branches, four sub-branches and eighteen representative offices (the latter staffed by two men each) in the field. The location of these well distributed offices is given in Map IBRD 15009. 2.17 Staffing and Training. At December 31, 1979 staff numbered 381 and of these 38% were in head office. Expatriate numbers have declined over the years and consist of 17 staff at present, although six additional ones will be recruited shortly as the minimum necessary for efficient operation of headquarters and two field branches. The most serious problem facing the Bank is staff turnover, which amounted to about one fifth of the staff in 1979 (compared to less than 5% annually up to 1977/78) and is largely due to staff leaving for more attractive employment, often with provincial governments. Although turnover is declining, the situation is likely to improve only slowly and require a substantial amount of recruiting and training through 1985, essentially because of the inadequate overall supply of qualified people for the jobs available throughout the public and private sectors. Although the Bank's salary levels are above those of the public sector in general and competitive with those of private banks, additional remuneration in the form of fringe benefits is being contemplated to retain a higher percentage of qualified staff to allow PNGDB to work efficiently.  - 9 - 2.18 Operating and Lending Procedures. PNGDB's operational procedures are similar to those of commercial banks and are set out in a comprehensive set of operational manuals which include instructions for loans, branch management, securities, hire purchase and management training. The Bank and DPI have designed a very useful, siraplified procedures manual for lending to smallholders. MIajor improvements, however, are required in coordinating management/extension support with credit delivery. The ongoing Government/ Bank review of agricultural support services is expected to address this particular problem. 2.19 Loans (with the exception of a number of mini loans each below K 1,000 or US$ 1,500 in the last two years) are well analyzed both regarding technical/financial aspects and creditwortlhiness. Clan lands loans, special purpose leases and group guarantee arrangements have allowed the Bank to increase its lending to nationals who can offer no collateral, and are working well. Interest spreads are substantial at six to ten percent and, except for agricultural lending in disadvantaged areas, interest rates to beneficiaries at eight to eleven and a half percent are positive in real terms. These rates are above the projected (7.5%) long-term inflation rates. As of January 1, 1981, the Government lowered the interest rates on agricultural loans, in disadvantaged districts, to five percent (para. 1.12). For such loans the Government would provide annual subsidy to PNGDB to enable it to have a spread of at least six percent. The interest subsidy applies to both loans outstanding as of January 1, 1981 and new loans made (subsequent to this date), for new development and rehabilitation. Loan terms and conditions reflect the needs of the specific investments. The overwhelming majority of loans which are below K 10,000 (US$15,000) are short term, and are made on personal knowledge of borrowers and/or on co-signatory members of the borrowers' clans. These are approved at branch level or below in less than one week from receipt of a request. 2.20 Accounting and Auditing. During 1979, a centralized computer system was introduced and this will make possible, among other operations, updating and systematizing information on arrears. During 1980, further improvements are expected and these should be followed by a consultant's review in 1981 including a cost/benefit analysis of the system in operation at that time. External auditing is carried out adequately by the Auditor General. 2.21 Operational Performance. PNGDB's overall performance is good. In its 12-1/2 years of operation up to end-1979, PNGDB had approved a total of 27,400 loans amounting to K 106 million. During 1979 of K 16 million in loan approvals almost 50% of the value and 60% of the number of loans had been made for agricultural development, about 30% for services and the balance for trade and industry. These proportions are generally in line with Government's priorities. Practically all loans were made to nationals and the geographic distribution by regions was well balanced based on potential and on population numbers. The average size of agricultural loans has increased from K 2,000 to K 3,000 in the last five years.  - 10 - 2.22 Although promotion among nationals has been stepped up, the volume of new loans in real terms has grown only at 2.5% p.a. in the last four years and the number of agricultural loans actually declined from about 2,900 to 2,300 between 1978 and 1979. This is mainly due to intertribal warfare in the highlands, a decision to reduce drastically the volume of mini loans (which were not being satisfactorily repaid) and continued deterioration of DPI extension services as agents for PNGDB (para. 2.33). Portfolio growth has not kept pace with a staff increase of 35% (due largely to upgrading and expansion of field units in preparation for increased future lending) in 1977-79. 2.23 Another negative factor has been loan arrears. Collections repre- sented only 75% of overdues and repayments falling due in 1979, and for agriculture this was still lower at 68%. A large part of this is due to lack of proper analysis of small agricultural loans by provincial extension staff, and mini-loans which resulted in 66% arrears for this loan category, as well as inadequate data processing and updating of collection information in the branches prior to 1979/80. These problems are being forcefully addressed. More reliance is being placed on private management agents (instead of provincial extension staff, who have become unreliable) for farm development supervision, and on PNGDB's own staff for loan processing and collection. Granting of mini-loans has been stopped and the recently installed computer system is producing up-to-date information on arrears which will be followed up with energetic collection drives in the field. 2.24 Other areas which need strengthening are staff training, loan collection, volume of agricultural lending and support by management/extension services. Action is already being taken or is planned in these areas and major improvements should be forthcoming beginning in 1980/81. 2.25 Financial Condition. PNGDB's Profit and Loss and Balance Sheet statements are given in Annexes 2 and 3. They attest to the Bank-s healthy financial condition, especially when due account is taken of its special development role, which entails higher than average lending risks and administrative costs (11% of average loan portfolio in 1979), both connected with rapid increases in staff and training costs, and lending to scattered traditional agricultural producers. 2.26 Net profits have been about K 300,000 (US$450,000) in each of 1978 and 1979 and have been the rule in the last five years with the exception of 1976 when there was a K 30,000 (US$45,000) deficit. However, this may present an unduly optimistic picture for the last two years given the loan arrears and a provision for bad debts at 5% of loan volume outstanding which may not be adequate to cover eventual losses originating in 1978 and 1979 operations. 2.27 Assets amounted to K 37 million, liabilities to K 10 million and equity to K 27 million at December 31, 1979. PNGDB's sound financial  - 11 - condition (attested by a current ratio of 2.3 and a debt/equity ratio of 0.3) is due in no small measure to its large equity base, which would allow the Bank to expand lending substantially in the near future. Lending and income expenditure projections through 1984 have been prepared (Annex 4) and show a sustained net income position in the next five years of operations. Financial assistance for training and for meeting expatriate salary costs would improve profitability substantially. 2.28 Performance of IDA-Assisted Projects. PNGDB's performance under IDA-assisted projects has been good. According to the PPAR of December 28, 1976, the New Britain Smallholder Development Projects (Credit 137-PNG and the oil palm component in Credit 175-PNG) have been successful with respect to all their major objectives: production, export earnings, stable settle- ment and smallholder prosperity. Credit 175-PNG's $0.3 million coconut component did not take off due to fears of nationalization among nonnational owners of plantations. The Credit's cattle component was successful and contributed to the development of the livestock subsector (PPAR of February 9, 1978). The Popondetta Smallholder Oil Palm project (Credit 1333-PNG) is progressing well regarding all its main components, e.g. smallholder and plantation development; construction of an oil mill, housing and other buildings; and roads. Measures are being taken to improve smallholder accounting. The Smallholder Livestock project (Credit 348-PNG) has been completed in spite of difficulties experienced with the rapid losses of nonnational staff and extension staff, provincialization which delayed field development and especially affected the quality and timing of reporting to management and to IDA. These have been taken into account under the proposed project by bringing in management agents (para. 4.03) and by streamlining of data processing (para. 2.20). 2.29 Summary. In summary, PNGDB is a well managed, experienced institution with a good operating performance and financial condition. The need for specific improvements has been identified by management and action is being taken or is planned on these. Department of Primary Industry (DPI) 2.30 Organization. The DPI is responsible for agriculture, forestry, livestock and fisheries development. As a result of decentralization the public services of DPI have been divided between the national and the pro- vincial authorities. At the national level DPI is responsible for overall policy and planning, operation of agricultural research stations and agri- cultural colleges, provision of specialized technical support, pest and disease eradication, quality control and implementation of large projects, such as settlement schemes. These activities are performed by divisions, which report to the Minister through a Permanent Secretary. The provincial DPIs handle extension, preparation and execution of provincial development plans, farmer training, support for PNGDB lending and supervision of forestry operations. Typically, provincial staff report to the Provincial Administra- tive Secretary (PAS) through the Provincial Rural Development Officer (PRDO).  - 12 - The PAS in turn reports to the Provincial Minister for Agriculture. There are no formal lines of communication or authority between the National and the provincial DPIs. 2.31 Staffing and Training. The national DPI has a staff of 1,370 or 43% of the total staff in agricultural, forestry, fisheries and livestock services. Of these about 18% or 250 are expatriates. At February 28, 1980 the provincial DPIs had 19 PRDOs, 386 Rural Development Officers (RDOs, 3 year diploma holders in agriculture), 552 Rural Development Technicians (2-year certificate holders) and 885 Rural Development Assistants (with no formal agricultural training) for a total staff of 1,842 or 57% of the total, with very few expatriates. The quality of provincial staff is generally low because many staff are inexperienced and lack formal technical training or on the job training. 2.32 Planned Work Program. The national DPI is directly in charge of several large ranch/beef cattle projects (Markham Valley) three oil palm, (Hoskins, Biala and Popondetta) and two rubber (Gavieng and Cape Rodney) settlement schemes as well as a national hybrid seed coconut production and breeding production center in the Omuru station in Madang. The Department is also heavily involved in a sugar/grains/cattle project in the valley of the Ramu river. Under these projects all required services are provided totally independently of provincial resources. Provincial staff lack the guidance, substantive commitment of resources and expertise to carry out more than token farmer training and extension services. Their work programs are, therefore, largely inadequate. More recently provincial governments have started preparing provincial development plans and this should prove useful in future. 2.33 Performance. The centrally managed national and settlement projects are being successfully developed. However, the ongoing decentralization has in the short term contributed to weakening extension services all over the country. The main reasons seem to be the resignation or termination of con- tracts of large numbers of experienced expatriates and lack of suitable replacements among nationals; lack of adequate coordination between national and provincial staff; lack of leadership and a certain degree of politiciza- tion of provincial staff; lack of goal-oriented activities in the provinces; and largely inadequate on-the-job training. These problems are analyzed in the Government/Bank support services review noted above. Plantation Management 2.34 Coconut plantations were developed by expatriates from the beginning of the century along the northern coasts of Papua, New Britain and New Ireland. Coconut plantations and cocoa plantations (which were mostly started in the early 1950s) account for about one half of 146,000 ha under these two crops. More recently rubber development in about 3,000 ha was largely carried out by plantation enterprises. Even before independence  - 13 - uncertainty over future ownership and control of expatriate owned lands created serious disincentives to investments and general upkeep of planta- tions. The situation worsened when large numbers of managers left PNG after Government announced its policy of transferring plantation ownership to nationals. Inadequate maintenance and lack of management resulted in a dramatic 30% reduction between 1974 and 1978 in the output of cocoa, copra and rubber plantations. The Government recognizing the vacuum created in the plantation management field has established a Plantation Management Training Program (PMTP) and a National Plantation Management Agency (NPMA). 2.35 The PMTP was initiated in 1976 with assistance from UNDP/ILO. The training program is conducted by the Business Development Program Unit of the Ministry of Commerce. The program is mainly aimed at providing training to nationals in the fields of plantation operations and management, as well as for operation of cocoa fermentaries. PMTP has a staff of nine of whom four are expatriates and six additional staff are being recruited. So far about 40 people who are working as manager/assistant managers of plantations and as members of boards of directors of plantations have been trained. In addition, training has been given to 256 people in the field of cocoa fer- mentary operations. Training is both theoretical and practical. PMTP using specialist services from Government and private sources to augment its resources. So far PMTP has played only a limited successful role in pro- viding trained plantation managers and submanagers, because entrants have had limited education and no prior field experience. 2.36 In 1977 the Government established NPMA mainly to provide management services to plantations which had been taken over by nationals. NPMA is wholly owned by the Government and has nine directors of whom two are appointed by the Government, five are representatives from the plantation industry and two are from PNGDB and PNG Banking Corporation. NPMA has its head office in Port Moresby and five regional offices in Rabaul, Madang, Goroka, Mt. Hagen and Port Moresby. It has a total staff of 80, of whom about one half are expatriates. The staff is generally highly qualified and experienced. The agency manages 48 plantations and the demand for its services is strong. The Government is giving consideration to strengthening NPMA's staff and finances so that it can take on the management of more plantations. In addition to NPMA there are about 14 private management companies and also individuals who are providing assistance to plantations under separate contracts. NPMA's and private management services are essential in expanding agricultural productivity and production given the present lack of management expertise among nationals. Marketing Agencies 2.37 Statutory marketing boards exist for copra, coffee and cocoa. These boards are primarily producer boards but include Government representation.  - 14 - 2.38 The Copra Marketing Board is the only one which is directly involved in physical marketing and is the sole exporter of copra in PNG. The Board operates collection depots throughout the major producing areas /1 and is also responsible for administering the copra stabilization fund which is a price support scheme funded by compulsory levies on copra and coconut oil exports. The levies are only imposed when prices are above the level needed to give producers incomes which would provide for a decent livelihood. Bounties are paid when price falls below this level. The Fund did provide relief to growers in the years 1971-73 and again in 1975-76. Total accumulated funds as of December 31, 1979 stood at K 11 million. 2.39 The coffee and cocoa boards do not enter into physical marketing of these crops but function as export regulatory agencies, registering processors and exporters and approving overseas sales contracts. The boards require all processing facilities to be registered and regulate the activities of buyers and dealers. The boards also administer stabilization funds which provide for price support schemes for these crops. Funds for these purposes and for operation of the boards are obtained from levies on exports. The levies or bounties are equal to 50% of the difference between actual export price and the average export price of the previous ten years, adjusted for inflation. The coffee and cocoa funds have not so far paid out any bounties and have accumulated substantial reserves, amounting to K 145 million (US$218 million) by the end of 1979 owing to the high prices which have generally prevailed in the last ten years. 2.40 The Papuan Rubber Pool (a group of forwarding agents) coordinates rubber exports. While there is a Rubber Board, its function presently is limited to adjudicating on appeals arising from disputes over inspection undertaken at the time of export. The Government is however giving consid- eration to expanding the role of this Board. Palm oil and kernels are exported by the respective nucleus estate companies under government super- vision and tea is exported by private brokers. Commercial pigs and poultry are sold through well established marketing channels in the main population areas. They represent a very small proportion of total production, which is carried out (especially for pigs) by villagers for their own consumption. 2.41 In summary, marketing of the main cash crops and commercial pigs and poultry is well organized and functions properly. Regrettably, this cannot be said of annual crops for domestic consumption. In 1976 the government established the Food Marketing Corporation to provide marketing services mainly for fruits and vegetables. Up until this year, the Corporation's performance has been unsatisfactory since its inception and it has incurred /1 Producers receive an initial payment of around 90% of the estimated final price on delivery with the balance paid at the end of the trading year taking into account the actual export prices.  - 15 - heavy losses in the process. Operations are expected to reach break-even level this year. The Government is contemplating a reorganization and additional funding of the Corporation. III. THE PROJECT Origin 3.01 The proposed project follows up on four previous crop and livestock oriented IDA-financed projects involving PNGDB which go back to 1968: three of these agricultural development projects (Credits 137, 175 and 348), have been completed and the fourth, Credit 1333 is expected to be completed ahead of schedule. Performance under all four projects has been generally good (para. 2.28). The proposed project was identified and prepared by Government with the help of consultants. Objectives 3.02 The main objective of the Project is to improve the standard of living of about 4,000 subsistence farm families particularly in the dis- advantaged areas of the country by increasing productivity, production (and exports) of tree crops, and to a lesser degree, of pigs and poultry, which together account for the bulk of existing and potential marketable agricul- tural production in the country. The project would lead to substantial increases in employment, participation of nationals in the cash economy and transfer to smallholders of improved farming practices including land conser- vation which would also have an impact on subsistence agriculture. A subsidiary project objective is to lay the basis for future development of coastal areas by substantially increasing supplies of hybrid coconut planting material. Brief Description 3.03 The project would finance over a period of three years (mid-1980 to mid-1983) a share of PNGDB's planned agricultural lending and also support the expansion of related agricultural services. The Project consists of two principal components: (a) lending for field development of coffee, cocoa, oil palms and rubber in a flexible manner based on demand; and of piggery and poultry enterprises (US$23 million); and (b) supporting services, such as expansion of hybrid coconut planting material supplies, plantation management, extension. Provision is also made for monitoring/ evaluation, consultants to help PNGDB with data processing and evaluation, and financial planning, and studies (US$ 6 million).  - 16 - Detailed Features 3.04 Field Development. The present estimate is that funds would be used to clear about 8,000 ha and plant about 2,500 ha of coffee, 1,200 ha of cacao, 2,800 ha of rubber and 1,500 ha of oil palms largely in blocks adja- cent to existing plantings or in new settlement areas which would permit economic exploitation of holdings. However, the areas indicated are for illustrative purposes only since it would be impossible to estimate accu- rately the location and volume of potential subloan demand. Planned field development is based on the most promising investments based on current investor familiarity and interest, available management and favorable marketing prospects. During implementation it is proposed that lending for other crops be included if it is established to the satisfaction of PNGDB and Government that such lending is justified. In the livestock sector it is proposed to finance only a few commercial size piggeries and broiler units owned by about 4,000 small rural investors and serviced by 200-300 small fattening enterprises in the areas of Lae and Port Moresby, which offer the best prospects. The proposed concentration of management (but not of ownership) is based on poor results obtained with small family-size opera- tions scattered over many parts of the country under previous projects. Assurances were obtained from Government that project investments would be completed beyond 1983. 3.05 Support Services. The proposal for coconut development is limited to establishing the basis for future large scale plantings of higher yield- ing hybrids by increasing the area and number of hybrid seed gardens, e.g. a 10-ha extension to Omuru central station and two new 40-ha gardens in Central Province and New Ireland; the opening of 100 one-ha hybrid observa- ion/demonstration plots in major coconut growing areas and distribution of hybrid seednuts to estates and smallholdings. 3.06 Also under support services Government funds would be made avail- able: (a) to NPMA mainly for staff quarters and offices; (b) to PNGDB to staff a pilot cocoa smallholder rehabilitation program in New Britain (which will be eventually transferred to the provincial government) and to hire consultants for data processing, financial planning and evaluation; (c) to provincial governments (as is the case already in Eastern Highlands province) for the staffing, vehicle purchases and establishment of other facilities to organize and initially operate crop development teams which would help with the preparation of farm plans, registration of farmers groups and lands and supervision; and (d) to the appropriate agencies to pay for studies recommended during the ongoing review of support services. 3.07 Monitoring and Evaluation. It is essential to provide effective project monitoring and evaluation given the paucity of data at smallholder level and the importance of the project for future development of the country. Monitoring data would be regularly collected by management agents and settlement authorities and relayed to PNGDB. It would include input  - 17 - supplies, planting material production, area cleared and planted, and harvested yields. This monitoring system is in the process of being intro- duced by PNGDB and would be particularly helpful in detecting quickly chang-s in costs, yields, marketing conditions and demand for loans which might lead to changing project mixes. Evaluation including the impact of increased project-induced production on villagers' incomes would be carried out by a consultant hired by PNGDB. Estimated Cost 3.08 The total cost of the project, including contingencies, is esti- mated at about K 19 million (US$29 million ) of which about 38% would repre- sent foreign exchange requirements. The high proportion of local costs is due to the nature of the project, which deals largely with subsistence smallholders and which involves a high labor component. Of the total cost, about 3% is for taxes and duties. Costs are based on December 1980 prices. No contingencies are included in the field development (credit) component. For the support services component, a physical contingency of 5% and esti- mated price escalations amounting to 9% in 1981, 8.5% in 1982, and 7.5% in 1983/84 have been included. Together, the contingencies would amount to US$800,000 or 15% of the total cost of the support services. Project costs are presented in Annex 5, and are summarized in Table 1. Financing 3.09 Beneficiaries would contribute US$2.3 million or 10% of field development costs (in line with established PNGDB arrangements); PNGDB, US$7.2 million or 32%; Government, US$0.6 million or 3% as its subsidy towards development costs of new subprojects;/l and IDA, US$12.6 million or 55%. For support services Government would contribute US$3.5 million or 60% and IDA, US$2.4 million or 40%. Of the $15.0 million IDA Credit, $4.0 million would finance local costs. Local cost financing is required because the types of projects to be financed tend to be relatively small and labor- intensive, and have low foreign exchange components. Such financing would be consistent with the IDA country strategy of supporting the Government's plans to bring cash crop development to subsistence farmers. Government would be the borrower and would assume the foreign exchange risk. Addition- ally, and not included in project costs, (because it predates the project and is not limited to it) Government is financing through 1983 PNGDB's staff training costs of about US$1 million. Project financing is summarized in Table 2. /1 The amount of US$0.6 million is an estimate as the exact amount would depend on the actual number and mix of the subprojects. About 80% of this development cost subsidy would go towards management fees with the remaining for costs of land survey, soil tests and tools.  - 18 - Table 1: PROJECT COST ESTIMATES Local Foreign Total Local Foreign Total foreign --- (K M) ------- ------ (US$ M) ----- exchange I. Field Development Coffee 4.8 2.2 7.0 7.2 3.3 10.5 32 Rubber 1.4 1.0 2.4 2.1 1.5 3.6 41 Cocoa 1.5 0.3 1.8 2.2 0.5 2.7 16 Oil palms 0.9 0.1 1.0 1.3 0.2 1.5 7 Crop processing 0.2 0.4 0.6 0.3 0.6 0.9 66 Piggeries/poultry 1.3 1.0 2.3 2.0 1.5 3.5 44 Subtotal 10.1 5.0 15.1 15.1 7.6 22.7 33 II. Support Services Hybrid coconuts 1.0 0.8 1.8 1.5 1-2 2.7 44 NPMA buildings 0.2 0.3 0.5 0.3 0.4 0.7 57 Cocoa New Britain 0.2 0.1 0.3 0.3 0.2 0.5 25 Crop development teams 0.2 0.1 0.3 0.3 0.2 0.5 25 Consultants - 0.2 0.2 - 0.3 0.3 100 Studies - 0.3 0.3 - 0.4 0.4 100 Subtotal 1.6 1.8 3.4 2.4 2.7 5.1 52 Total Baseline Costs 11.7 6.8 18.5 17.5 10.3 27.8 36 Support services contingencies: Physical 0.05 0.1 0.2 0.1 0.2 0.3 70 Price 0.1 0.2 0.3 0.2 0.3 0.5 60 Total Project Costs 11.9 7.1 19.0 17.8 10.8 28.6 38  - 19 - Table 2: FINANCING PLAN Beneficiaries PNGDB Government IDA Total US$M % US$M % US$M % US$M % US$M I. Field Development 2.3 10 7.2 32 0.6 3 12.6 55 22.7 II. Support Services - - - - 3.5 60 2.4 40 5.9 Total Project Cost 2.3 8 7.2 25 4.1 15 15.0 52 28.6 3.10 The Government would enter into a subsidiary loan agreement (SLA) with PNGDB under which $12.6 million of project funds would be transferred to PNGDB at 3% interest rate repayable in 22 years including 5 years of grace for principal. These terms are in line with expected project generated cashflows. The SLA would be agreed with IDA, and its signing would be a condition of effectiveness. Retroactive financing for up to US$1.5 million would be made available to cover drawdowns on PNGDB lending beginning June 1, 1980 and based on policies and procedures which are deemed adequate. Retro- active financing is required because PNGDB has already incurred considerable expenditures during the past 10 months to enlarge its lending, in expectation of this project. If PNGDB had not enlarged its lending, farmers' loan demand would have diminished as a result of uncertainty and farm management agreements could have become ineffective. Additionally, the hybrid coconut program would have been delayed. 3.11 In addition, PNGDB would receive supplementary funds from the Government to implement the latter's subsidy scheme for agricultural development (para. 1.12). These funds would provide for: (a) reimbursement to PNGDB for granting subloans at lower interest rates of 5% p.a. in dis- advantaged districts,/l and (b) the Government's contribution towards meeting /1 PNGDB's regular on-lending rate would be 9% under the project. The additional funds would make up the difference between the subsidized and regular rates. While, the exact size of the additional funds is difficult to estimate as it would depend upon the location, size and mix of subprojects, however broad estimates indicate that subloans in disadvantaged districts are unlikely to exceed 30% of total lending under project. On this basis, the interest subsidy would total about K 2.1 million (US$3.1 million) over full repayment period (22 years) of subloans financed under project.  - 20 - part of the development costs of new subprojects. PNGDB would pass on these development costs subsidies to the management companies reponsible for developing subprojects./I Procurement 3.12 Land clearing and preparation, planting and upkeep (amounting to about $17.0 million) would be carried out by the beneficiaries themselves or by hired labor. Planting materials (US$2.0 million) would be acquired through local shopping arrangements from the few existing local sources. These have adequate supplies. Building materials, small machinery, equipment and accesories (US$2.9 million) and fertilizer and chemicals (US$1.6 million) would be supplied through agents of local and foreign firms (which are well represented in the country) through prudent shopping in accordance with Government's procedures which are satisfactory. Civil works would be awarded following similar procedures. Field management (US$2.7 million) would be contracted by participating farmers to experienced local firms which offer these services on the basis of a preselection made by the PNGDB. These arrangements have proven satisfactory in the past. Approximately 27 man- months of short term and largely foreign expenditure would be required at a total cost of about US$260,000. The average man-month cost of the experts is estimated at US$7,000 and includes fees, vehicles, travel and allowances. 3.13 Terms of reference for data processing, financial planning and evaluation reviews (US$0.3 million) will be prepared in consultation with IDA. Assurances were obtained on this, as well as that terms of reference for the studies and for the consultants (US$0.5 million) would be prepared in consultation with IDA. Disbursements 3.14 Disbursements against the IDA credit would be made on the basis of (a) 35% of the cost of civil works; (b) 35% of expenditures for vehicles and equipment, which are to be procured locally; (c) 100% of the cost of consultants services; (d) 66% of subloans made by PNGDB for crops and livestock; and (e) 66% of staff salaries for crop development programs. Disbursements against free-limit subloans (para. 4.04) and staff salaries for crop development programs would be made on the basis of certified statements of expenditure; supporting documentation would be retained by PNGDB for subloans and by DPI for staff salaries, and would be made available for review by supervision missions. All other disbursements would be made against full documentation. Disbursements are expected to be completed by June 30, 1984. An estimated schedule of disbursements is summarized below. /1 Total development cost subsidy for subprojects financed under proposed project is estimated to amount to K 0.4 million (US$0.6 million) over three years (para. 3.09).  - 21 - Table 3 ESTIMATED DISBURSEMENT SCHEDULE (US$ million) IDA fiscal Disbursements year during year Cumulative 1982 6.4 6.4 1983 5.6 12.0 1984 3.0 15.0 Accounts and Audit 3.15 PNGDB has an efficient accounting and record keeping system and its internal audits are well organized. External audit would continue to be carried out by the Auditor General. PNGDB and other participating agencies would keep separate project accounts and audited project and agency accounts and these will be furnished to the Bank within six months of the closing of its fiscal year. The auditors reports will contain opinions on the procedures used for preparing PNGDB financial statements. Assurances were obtained to this effect. IV. PROJECT IMPLEMENTATION Organization and Management 4.01 Project organization would consist of the following: (a) overall project management: a Project Steering Committee (SC) chaired by the Secretary of Finance, and including PNGDB's managing director, the Secretaries of the departments of Primary Industries, Lands and Commerce, the Registrar General and relevant provincial government representatives would meet at least twice a year and would be responsible for policy, inter-agency coordina- tion, budget approval and overall review of operations. Estab- lishment of the SC and appointment of its members will be a condition of effectiveness. (b) project's field development component: PNGDB would be responsible for channeling funds and for supervision through its branches with the support of technical staff at headquarters, and with the participation of NPMA and private persons and firms to be appointed by project beneficiaries from short lists prepared by PNGDB (mainly for coffee, pigs and poultry), and settlement authorities and DPI staff (for cocoa, rubber and oil palms).  - 22 - These would manage the establishment and development of farms and pigs/poultry enterprises until PNGDB ascertains that the owners can perform these satisfactorily. (c) support services: (i) PNGDB would be responsible for an intensi- fied provincial cocoa development effort in New Britain, as well as for the preparation of a follow-up project; PNGDB would prepare the terms of reference and appoint the consultancies affecting PNGDB; (ii) DPI's coconut development unit would be responsible for the hybrid coconut program; (iii) the Finance Department would directly supervise the investments in NPMA and and the studies and (iv) provincial governments would be respon- sible for the crop development teams./l Both PNGDB's managing, and deputy, director-s terms of office expire in October, 1981. Government will take steps to ensure PNGDB management continuity during project implementation. Lending Procedures, Terms and Conditions 4.02 Lending Procedures. As in the past, in existing cocoa and coffee areas, farmers or clan leaders would be contacted by staff of either PNGDB, management agencies, crop development teams or provincial extension services and informed about the project. Farmers who show definite interest would be helped by the above staff in organizing themselves legally as business groups. These in turn would obtain title to their previously surveyed and demarcated lands, which must be in minimum of 15/20 ha blocks. There would be at least six blocks reasonably close to each other to justify hiring and paying for professional management. This process is slow and complicated, involving staff of the Decentralization and Land departments, as well as provincial staff. However, it is expected that for the project it would take about three months based on experience gained already with land titling at the provincial level and most importantly because management agents would help with group registration and titling with the assistance of private solicitors and surveyors in cases where provincial and national government staff could not do the job in a timely fashion. At May 31, 1980 147 loan requests had been fully processed and lending was planned to start immediately. Processing of new requests is being continued to provide a steady flow of lending through the project period. 4.03 The relevant PNGDB field office, after being approached for a loan by one or more business groups would establish that there were at least six such groups in reasonable proximity to each other before asking them to /1 One is already operating and two more are planned for coffee before the end of 1980 in the Eastern Highlands. Teams would help farmers with the processing of documents for organizing legally recognized groups of owners and establishing clear titles to their lands.  - 23 - choose a manager from a PNGDB-approved list./l The manager would subse- quently prepare a farm plan, arrange for creditworthiness analysis of the potential borrowers and subsequently would be in charge of developing the blocks (with the assistance of selected farmers, PMTP trainees and extension staff) including land clearing and preparation, maintenance, input supplies and marketing of produce. The Government would subsidize part of the manage- ment fees (up to K 2,400/subproject) while the remaining management fees would become part of the subloan extended by PNGDB./2 The phasing out of management services would be over 4 years to 7 years for each group depending on the group's ability to assume management responsibilities as determined by PNGDB's branch managers. Government subsidy for management fees would be channelled through PNGDB. For oil palm and rubber settlement areas which have families and land rights already established and settlement authorities already in place procedures would be limited to PNGDB approval of management and subsequent loan processing. Commercial poultry and piggery investors will be relatively few in number and will be in much better position than participating farmers to arrange for land leases and adequate management, and hence no complications are expected. The above procedures have proved satisfactory in the past. 4.04 Terms and Conditions. The following terms and conditions which would be included in the Subsidiary Loan Agreement would apply to lending under the project: (a) Interest Rates payable by subborrowers would be a minimum of 9%./3 (b) Repayment Terms would be based on the technical/financial profile of the field investments to be made. The repayment periods (in years and grace period in parenthesis) are expected to be as follows: coffee and cocoa, 12(5); oil palm, 9(5); rubber, 14(8). (c) Free Limit of K 100,000 is proposed. Individual subloan in excess of K 100,000 would be submitted to IDA for approval before it is approved by PNGDB. /1 There would be about fourteen private management companies available for the project additional to NPMA, which is more than adequate to handle an estimated 360 holdings covering an area of 3,700 ha. /2 The contribution of K 2,400/subproject amounts to about 8% (20 ha coffee/cocoa subproject) of total management fees over six years. /3 PNGDB lends at 9% to smallholders and up to 11.5% for plantations.  - 24 - (d) Subborrowers Contribution. The subborrowers would make an average 10% equity contribution to their farm investments in form of cash, labor and materials. 4.05 Notwithstanding the subloan terms and conditions in para. 4.04 above, eligible subborrowers (in disadvantaged districts and those undertaking new subprojects) would receive subsidies in line with the Government-s subsidy program (para. 1.12) as follows: (a) in disadvantaged districts, subborrowers would be charged a lower interest rate amounting to 5% p.a. Interest subsidy would only apply to first K 100,000 of the subloan, and (b) subsidy of upto K 3000/subproject would be provided to cover part of the development costs of new subprojects. PNGDB would implement this subsidy program, on behalf of the Government, for which it would receive supplementary funds (para. 3.11). V. INPUTS AND YIELDS Inputs: Agriculture 5.01 Planting Material. In an effort to introduce high yielding, certified (and in the case of cocoa, dieback-resistant) planting material, government and settlement area nurseries provide seedlings at cost. This practice would be continued under the project. Planting material would be supplied by the Highlands Agricultural Experiment Station for coffee; by Keravat and provincial nurseries for cocoa; by Dami Research Station for oil palms; and by DPI nurseries for rubber. Present land and facilities are adequate for anticipated demand, including the project. 5.02 Fertilizer and Pesticides. All fertilizers and pesticides will be imported and distributed by private dealers as in the past. Fertilizers would be applied according to existing recommendations or following soil and foliar analyses for which the facilities and arrangements exist locally. 5.03 Labor. Most of the land clearing, preparation, planting and upkeep will be done manually and in selected cases with the help of chainsaws (purchased and maintained by the respective managements) by the beneficiaries themselves, and by members of their clans. In cases when these were inade- quate, hired labor from neighboring villages would be used. No labor shortages are expected based on past experience, the participation of other clan members in members sub-projects and on the wide geographic dispersal of investments. 5.04 Management and Supervision. The supply to individual farms of all inputs would be made under the direct control of management agents and their field staff. The latter would be recruited from among beneficiary groups to ensure their acceptability, but managers would have complete freedom of  - 25 - appointment and firing in consultation with the groups of farmers to maintain high operating standards. Inputs: Piggeries and Poultry 5.05 Breeding Boars, Sows and Chicks. These breeding stock would be imported as in the past duty free from well established sources, which offer high quality, reliable supplies and low costs, based on their proximity to PNG and through existing distribution channels. 5.06 Feed and Medicines. PNG has been steadily expanding domestic grain production (mainly maize and sorghum) in the Markham valley (close to Lae) and around Port Moresby at costs that are 10-20% lower than landed costs of imports. Under the project it is expected that initially local grain supplies would represent 30% of total needs and would expand to about 50% of requirements three years later. The balance of grains, as well as other feed ingredients (and medicines) would be imported. Existing feed mills in Lae and Port Moresby are running at about 20% under capacity and would make the balanced feeds required for different stages of breeding and fattening. 5.07 Sheds, Machinery and Vehicles. Sheds would be built with imported and local materials, and vehicles, machinery, and equipment would be imported directly by the poultry/piggery operators or from local dealers of foreign firms. 5.08 Labor. Breeding and processing facilities would hire labor and fatteners would provide family labor. 5.09 Management and Supervision. Commercial managers of the breeding/ processing facilities would procure inputs directly from shippers and would provide inputs and supervision to fattener contractors. These arrangements have worked well in the past. Yields 5.10 Coffee. Most of the investments would be made for arabica coffee in 20 ha blocks owned by clans in the Highlands. At full development, yields are expected to average 2.5 m tons/ha green beans per ha, which, although high by world standards is a realistic estimate based on PNG experience in the Highlands, where soils and climate are particularly favorable. In small- holder blocks developed largely under their own initiative yields are expec- ted to average 0.9 m tons/ha. Cocoa would largely be developed in New Britain and North Solomons, where favorable ecological conditions, use of hybrids and adequate management should result in yields at full production of about 1.2 m tons/ha somewhat higher than elsewhere in the world. Under smallholder conditions, yields are assumed to be 600 kg/ha in peak years. Rubber would be planted in the Cape Rodney (Central Province) and Gavien  - 26 - (East Sepik) settlement schemes and in village blocks. Yields at maturity are estimated to average 1.6 m tons/ha dry rubber content for settlers and about 20% less for villagers, which is conservative for modern high-yielding material. Oil palms would be planted on settlement and village blocks at Hoskins in New Britain. Average yields are estimated at 16 m tons/ha/p.a. fresh fruit bunch. This is based on specific conditions which apply in PNG, such as early peak yields, and take into account pollination problems. All of these relatively high yields would be obtained by concentrating invest- ments in the relatively few ecologically favorable areas of the country. 5.11 Piggeries and Broilers. Minimum size operations would consist of 150 sows, and 5,000 birds per week, respectively, which can justify profes- sional management and improved inputs. Litter size of eight, with two farrowings a year for pigs; and eight-week growing period with average weight of 1.70 kg for birds are assumed. The above yields are based on sound, pro- fessional management and supervision provided by experienced private agents. IV. MARKETING, PRICES, FINANCIAL ANALYSIS AND COST RECOVERY Marketing 6.01 The main features of the marketing of PNG's most important crops are the relatively small volumes handled, the very important role of the private sector, their overwhelming orientation towards exports, their physical concentration in a few processing and export points, and the high degree of organization of collection, processing and sales. 6.02 In the cases of coffee and cocoa small farmers typically sell their crops to competing middlemen at roadside or to processors (based on regular price information provided through the radio) who subsequently sell to exporters. Plantations usually sell directly to exporters in processed form. Government has established boards for both coffee and cocoa (para. 2.39) which help with orderly marketing and price stabilization. Processing and sales of palm oil and kernels are handled by the nucleus estate companies and their overseas representatives, while rubber marketing is carried out by the Papuan Rubber Pool (para. 2.40). Future marketing of project - induced copra and coconut oil would be handled by the Copra Marketing Board (para. 2.38) which buys dry copra from farmers at roadside, and sells abroad. Marketing arrangements for the above crops are adequate. 6.03 Present volumes of annual production and project-induced annual production by 1990 (in parentheses) for the above crops are (in m tons): coffee 47,000 (8,000); cocoa, 27,000 (1,400); palm oil, 30,000 (5,000); and rubber 4,200 (3,500). No difficulties are foreseen in marketing the incremental production of these crops given their insignificant size in relation to the size of the world market, and specifically in view of the  - 27 - preferential treatment accorded by Australia (priority in buying and duty-free status) to imports from PNG. 6.04 Pork and broiler meat would replace imports and would be sold locally in Lae and Port Moresby using existing retail channels which should be adequate. Project-induced production would represent about 25% of projected total national production of broilers and less than 2% of pork, through 1995. The percentage for pork would be about 20% of the projected supplies for Lae and Port Moresby (the two main consumption centers) for the same period. Prices 6.05 The mission assumed the following world market prices for 1985-90 at 1980 prices: Table 4: PRICE FORECASTS 1980 1985 1990 Coffee (US$/kg) 3.62 3.04 3.33 Cocoa (US$/kg) 3.52 2.68 1.83 Palm oil (US$/MT) 611 615 594 kernels (US$/MT) 462 470 454 Rubber (US$/kg) 1.44 1.52 1.67 Farmgate prices are based on the above and are estimated to be about 85% to 90% of FOB prices. In the case of cocoa they would be supported by the Cocoa Board at about the level of expected 1985 world market prices, which would stil be attractive to farmers. The relatively narrow margins are due mainly to favorable location of project areas and access to good roads, as well as to marketing margins of the order of only 5% which are due to a high level of competition among traders and processors (coffee and cocoa) and to reasonably low management authority fees (rubber and palm oil). 6.06 Pork prices ex-abattoir are estimated to average K 2/kg and dressed broilers should sell for K 1.70/kg or roughly at the same levels of import prices. The general price trend is favorable, with demand in Lae and Port Moresby (the two largest and fastest growing urban centers) projected to surpass domestic supply through 1990.  - 28 - Project Impact on Participating Farmers 6.07 Detailed farm models are found in project files. Annex 8, Table 2 summarizes the financial and economic rates of return of typical invest- ments to be financed. The typical farm models show reasonably attractive net cash flow positions. The key to this favorable financial performance is the professional management which would be made available to farmers. Incremental net cash family incomes per annum between US$450 (cocoa) and US$3,200 (rubber) at maturity would represent from 145 to 360% of incomes without the project. The estimated financial rates of return to partici- pating farmers would be from about 17% to 30%. Selfcontained pig breeding/ fattening units, and 5,000 birds per week broiler operations would produce rates of return of 20% to 23%. Project Impact on PNGDB 6.08 The Project's impact on PNGDB is detailed in Annex 7, which shows a generally improving net income and liquidity position through 1990./1 PNGDB-s average loan portfolio would increase as follows: Table 5: PROJECT IMPACT ON PNGDB (K million) 1980 1981 1982 1983 Average Loan Portfolio Without the Project 31.0 33.0 36.4 39.7 With the Project 32.9 39.1 47.5 52.8 % of increase 6 18 30 33 The substantial percentage increases indicate the importance of the project in expanding PNGDB's lending operations. This is especially true for medium and long-term agricultural investments. 6.09 Additional to this the project would have other benefits for PNGDB. First, it would enable PNGDB to make use of the increased staffing and facilities, and of field management arrangements and promotion among farmers, all of which were made in expectation of increased funding. Second, it would help substantially to reduce arrears through the improved field technical support and supervision by management agents and the geographic and crop concentration of investments. /1 Subsidized lending by PNGDB in disadvantaged district would not have any adverse financial impact on PNGDB as it would be fully compensated by the Government.  - 29 - Project Impact on Government and Cost Recovery 6.10 Over the project's three-year period, central government would contribute K 2.3 million to defray part of the costs of support services. In addition its contribution towards development costs subsidy and interest sub- sidy is estimated to amount to K 0.4 million (over 3 years) and K 2.1 million (over 22 years) respectively, in nominal terms (para. 3.11). These expendi- tures amount to K 2.8 in present value terms at 12%. Of this, about K 1.3 million would be recovered, over a 10-year period at 12%, from sale of hybrid coconut seedlings and NPMA fees. Export duties at 2.5% of fob value of project generated incremental production would produce an estimated additional government revenues of K 1.7 million discounted at 12% over a 30-year period. In summary all project associated costs borne by government through its budget, would be fully recovered. VII. BENEFITS, RISKS AND JUSTIFICATION Beneficiaries and Benefits 7.01 The number of farmers who would be project beneficiaries is diffi- cult to estimate with any accuracy given the impossibility of predicting the relative shares of the different crops which would be financed, which in turn depends on effective demand in several large and different geographic areas of the country. An additional difficulty is that in many cases the beneficiaries would be clans, with income being distributed in different proportions and often including clan members who did not actively participate in farm development. However, assuming that basic tentative estimates are correct (based on farm sizes per crop as stated elsewhere), the probable number of beneficiaries would be:  - 30 - Table 6: PROJECT BENEFICIARIES Total Crop or enterprise Size No. of Families no. of of farm farms per farm families (ha) Coffee 20 125 10 1,250 Cocoa 5 240 2 480 Rubber 2 1,400 1 1,400 Oil palms 2 750 1 750 Subtotal - - - 3,880 Piggeries/poultry fatteners 220 Total 4,100 Additionally, from 4,000 families to 5,000 families who would be small shareholders in the central piggeries/poultry enterprises would also benefit from the project. PNGDB would ensure as in the past that shareholding will be widely spread among the people of the areas where these investments would be made. 7.02 A large majority of beneficiaries would be families with present per capita annual incomes of US$275 to US$350 which are only slightly above the absolute per capita poverty income level in rural areas of US$275 for 1979. Although rural income differentials are difficult to estimate in the absence of any kind of reliable statistical data, it appears reasonable to assume that income differentials are generally rather small because of the prevalent system of clan welfare. As a result of the latter, there would be a diffusion of benefits beyond those who are direct project participants. 7.03 PNGDB will benefit by increasing lending volume to utilize existing, underutilized staff and facilities. These would result in an improved financial condition which should be self-sustaining in future. Experience gained with existing and new (hybrid coconuts) permanent tree crops and piggeries/poultry would be applicable in future expanded programs for the development of the priority agricultural areas. 7.04 Government, while ultimately recovering its investments, would also benefit by setting the basis for larger, well balanced development of those geographic areas where the bulk of the rural population live at present. Increased economic activity and incomes will justify additional infrastruc- ture and complementary field investments, such as for grains production used  - 31 - for feed, and associated subsistence food production in participating and neighboring farms. The demonstration effect is bound to be large. Finally, participating farmers, field supervisors, provincial extension staff and management trainees will gain experience by working with capable managers. Economic Analyses 7.05 The estimated economic rate of return (representing an average of various farm models used) would be: coffee - 35%, cocoa - 15%, rubber - 27%, oil palms - 34%, piggeries and broilers - 26%. The estimated overall econo- mic rate of return over a 25-year period is 30% (Annex 7, Table 1). 7.06 The above estimates are based on the following assumptions: (a) a shadow field manual wage at 60% of the prevailing K 2.30 (US$3.45) per day minimum official rural wage. This takes into consideration the levels of wages and value of food paid for self-help projects which indicate a degree of underemployment; and (b) local costs adjusted by a standard conversion factor of 0.96 to bring costs to border price levels. Sensitivity Analyses 7.07 The most probable and relevant variables affecting the project are changes in output prices and yields. Sensitivity analyses for the nine most probable farm models (Annex 7, Table 2) using 12% as the opportunity cost of capital shows that overall project investments would be justified even with a yield or price decline of the order of 40% or cost increases of 75% above base estimates. However, smallholder cocoa is much more sensitive than the other investments. It would only take a 11% unfavorable change in benefits or a 17% change in labor costs to bring down the return from 15% to 12% (Annex 7, Table 2). Risks 7.08 The project is national in scope and supports investments in several crops as well as livestock, and caters for a large number of individual borrowers drawn from diverse cultural backgrounds, many of whom are entering market-oriented production for the first time. Consequently, the project faces some organizational risks, legal problems associated with land ownership, difficulties in ensuring adequate labor supplies at reasonable cost, and the possibility of crop and livestock diseases. However, improved management, which is an important feature of the project, should ensure cost-effective operations, deal with some of the organizational and legal problems, and minimize any losses stemming from diseases. Moreover, the project allows considerable flexibility in  - 32 - financing subprojects as conditions warrant, and overall risks would therefore be minimized. Given the limited application of fertilizers and chemicals, there are limited risks associated with increases in their prices, while pig and poultry prices are expected to remain relatively stable because the products are intended for the local markets which are expected to be undersupplied for about a decade. Environmental Impact 7.09 The areas to be developed agriculturally are presently under old plantings, primary or secondary forests, often in undulating or steeper topography. The project will help reduce uncontrolled shifting cultivation in highly erodable terrain by introducing permanent trees in a stable, long lasting agricultural system which will preserve favorable ecological conditions. VIII. AGREEMENTS REACHED AND RECOMMNDATIONS 8.01 The following agreements with Government were obtained during negotiations: (a) that credit-related investments will be completed using government and/or PNGDB funds beyond the termination of project funding (para. 3.04); (b) terms of reference for consultants and for studies will be prepared in consultation with IDA (para. 3.13); and (c) participating agencies will maintain separate project accounts and audited project and agency accounts will be furnished to IDA within six months of the closing of the fiscal year (para. 3.15). 8.02 Conditions of effectiveness will be: (a) the signing of the subsidiary loan agreement between Government and PNGDB (para. 3.10); and (b) the establishment of the Steering Committee and the appointment of its members (para. 4.01). 8.03 Subject to the above the project constitutes a suitable basis for an IDA credit of US$15 million.  PAPUA NEW GUINEA SECOND AGRICULTURAL CREDIT PROJECT PAPUA NEW GUINEA DEVELOPNENT BANK Organization Chart Board of Directors Managing Director Deputy Managing Director Administsrationce | Acou nts Tehia OpXera:ions l Department l liso Seprvient ls Department Department IDepartment l -------------------_ | BRANCHES (9) ( Agentstaf Sub-Branches (4) REPRESENTATIVES (18) ____ January 21, 1980 As at January 21, 1980  - 34 - ANNEX 2 PAPUA NEW GUINEA SECOND AGRICULTURAL CREDIT PROJECT Papua New Guinea Development Bank Income and Expenditure: Mid-1974 to End-1979 (K millions) Year to June 30 Year to December 31 1975 1976 1977 1977 1978 1979 (1/2 yr) /a /b Income Interest on loans 1.78 2.07 2.07 1.26 2.72 3.06 Interest on bonds & deposits 0.63 0.43 0.71 0.21 0.24 0.18 Other income 0.17 0.46 0.37 0.28 0.45 0.59 Total Income 2.58 2.96 3.15 1.75 3.42 3.83 Expenditure Interest on borrowings 0.07 0.09 0.12 0.07 0.15 0.16 Administrative expenses Personnel 1.64 2.01 1.64 0.79 1.66 2.02 Depreciation 0.10 0.16 0.21 0.14 0.30 0.35 Others 0.46 0.52 0.59 0.36 0.71 0.76 Subtotal 2.20 2.69 2.44 1.29 2.67 3.13 Provision & allowances Bad & doubtful debts - - 0.18 - - - Others 0.09 0.01 0.06 - - - Contingency reserve 0.17 0.20 0.16 0.29 0.30 0.26 Total Expenditure 2.53 2.99 2.96 1.65 3.12 3.55 Net Profit (Loss) 0.05 (0.03) 0.20 0.10 0.30 0.28 /a Provisional. /b Provisional and unaudited.  - 35 - ANNEX 3 Table 1 PAPUA NEW GUINEA SECOND AGRICULTURAL CREDIT PROJECT Papua New Guinea Development Bank Balance Sheets: Mid-1974 to End-1979 (in K millions) Year to June 30 Year to December 31 1975 1976 1977 1977 1978 1979 (1/2 yr) /a /b Assets Current Cash & deposits 1.64 2.01 1.64 0.79 1.66 2.02 Bills receivable 0.15 0.42 0.53 0.54 0.64 0.69 Subtotal 3.67 4.97 4.97 3.59 1.64 3.72 Investments Government bonds - 2.00 2.00 2.00 1.50 1.00 Shares & debentures 3.24 0.61 0.84 0.84 0.82 0.95 Others 0.14 0.04 - - - Subtotal 3.38 2.65 2.84 2.34 2.32 1.95 Term loans Hire purchase 3.14 2.26 2.08 2.39 2.48 2.07 Equipment financing 2.25 2.48 2.24 2.52 3.52 3.04 Agricultural up to K 10,000 2.95 3.35 3.38 3.60 4.33 4.67 Agricultural above K 10,000 2.16 2.28 2.65 2.94 3.71 4.26 Oil palm 1.06 1.09 0.83 0.77 1.23 1.89 Commercial 4.88 6.06 7.88 8.88 9.24 9.46 Industrial 3.44 3.39 3.65 3.25 3.11 2.63 Milk - - 0.33 0.86 1.16 0.82 Subtotal 19.85 20.91 23.04 25.21 25.80 28.92 Less: Provisions for bad & doubtful loans (0.62) (0.65) (0.81) (0.92) (1.38) (1.41) Net term loans 19.21 20.26 22.23 24.29 27.41 27.51 NLB and ESCS loans 4.06 3.53 3.29 3.19 2.77 2.26 Less: Provisions for same (4.28) (3.61) (3.29) (3.19) (2.77) (2.26) Net NLB & ESCS (0.22) 0.09 - - - Net Term Loans 19.02 20.17 22.23 24.29 27.41 27.51 Net Fixed Assets 2.80 2.92 3.06 3.11 3.26 3.64 Other Assets 0.59 0.25 0.30 0.32 0.30 0.09 Total Assets 29.45 31.05 33.40 34.14 34.93 36.90 a Provisional. /b Provisional and unaudited.  -36 - ANNEX 3 Table 2 Balance Sheets: Mid-1974 to End-1979 (in K millions) Year to June 30 Year to December 31 1975 1976 1977 1977 1978 1979 (1/2 yr) /a /b Liabilities Current Bills payable 0.64 0.64 0.87 0.92 1.28 1.35 Others 0.09 0.10 0.01 0.20 0.19 0.25 Subtotal 0.73 0.74 0.87 1.12 1.47 1.60 Long Term IDA 2.74 3.38 3.76 3.97 4.03 5.07 ADB 0.80 1.60 2.68 2.55 2.63 2.93 Subtotal 3.54 4.98 6.44 6.52 6.66 8.00 Provisions & Reserves Staff 0.31 0.17 0.19 0.22 0.13 0.14 Contingencies reserve 0.36 0.41 0.55 0.72 0.55 0.55 Subtotal 0.67 0.58 0.74 0.94 0.68 1.69 Total Liabilities 4.94 6.30 8.06 8.58 8.81 10.29 Equity Paid-up capital 25.44 25.71 26.12 26.24 26.49 26.70 Accumulated losses (0.93) (0.96) (0.78) (0.68) (0.37) (0.09) Total Equity 24.51 24.75 25.34 25.56 26.12 26.61 Liabilities and Equity 29.45 31.05 33.40 34.14 34.93 36.90 /a Provisional. /b Provisional and unaudited.  - 37 - ANNEX 4 PAPUA NEW GUINEA SECOND AGRICULTURAL CREDIT PROJECT Papua New Guinea Development Bank Cash Flow Projection (Without Project), 1980-84 (in K millions) 1980 1981 1982 1983 1984 Approvals 16.5 18.0 20.3 23.0 26.0 Di sbursements 15.0 16.4 18.5 20.9 23.7 Loans Outstanding Opening balance 28.7 30.9 33.0 36.4 39.7 Advances 15.0 16.4 18.5 20.9 23.7 Repayments 12.8 14.3 15.1 17.6 19.8 Closing balance 30.9 33.0 36.4 39.7 43.6 Annual increase in Approvals (%) 2 11 13 13 13 Income Average loan portfolio 29.80 32.00 34.70 38.10 41.70 Interest earned 3.22 3.56 4.03 4.49 5.04 Other income 0.70 0.65 0.65 0.55 0.45 3.92 4.21 4.68 5.04 5.49 Expenditure Interest on borrowings 0.34 0.55 0.67 0.75 0.99 Other expenditure 3.21 3.64 3.91 3.90 4.33 3.55 4.19 4.58 4.65 5.32 Net Income 0.37 0.02 0.10 0.49 0.17 Cash Flow Sources Cash in bank 0.52 3.52 3.59 0.23 - Interest on loans 3.21 3.56 4.03 4.49 5.04 Loans via Government 6.07 2.69 - 1.56/a 4.33/a Others 1.29 1.04 1.54 2.56 0.72 11.09 10.81 9.16 8.84 10.09 Uses Advances less repayments 2.20 2.10 3.40 3.30 3.90 Interest on borrowings 0.34 0.55 0.67 0.75 0.99 Others 5.03 4.57 4.86 4.79 5.20 7.57 7.22 8.93 8.84 10.09 Surplus cash forwarded 3.52 3.59 0.23 - - /a Interest at 10% assumed.  - 38 - PAPUA NEW GUINEA ANNEX 5 SECOND AGRICULTURAL CREDIT PROJECT Project Investments (K million) Calendar years Of which 1980 1981 1982 1983 Total foreign exchange A. Field Development (a) Crops: Loanable funds Rubber 0.1 0.8 0.9 0.4 2.2 1.0 Coffee 0.9 1.8 2.6 1.1 6.4 2.2 Cocoa 0.1 0.6 0.6 0.3 1.6 0.3 Oil Palms 0.2 0.5 0.2 - 0.9 0.1 Processing facilities 0.1 0.1 0.2 0.1 0.5 0.4 Subtotal 1.4 3.8 4.5 1.9 11.6 4.0 Beneficiaries contri. (10%) 0.1 0.4 0.5 0.2 1.2 - Total 1.5 4.2 5.0 2.1 12.8 4.0 (b) Livestock: Loanable funds Poultry 0.4 0.4 0.4 0.2 1.4 0.8 Piggeries 0.1 0.1 0.2 0.1 0.5 0.2 Subtotal 0.5 0.5 0.6 0.3 1.9 1.0 Beneficiaries contri. (20%) 0.1 0.1 0.1 0.1 0.4 - Total 0.6 0.6 0.7 0.4 2.3 1.0 Total Credit Component 2.1 4.8 5.7 2.5 15.1 5.0 B. Support Services Component (a) Hybrid coconuts 0.2 0.8 0.6 0.2 1.8 0.8 (b) Cocoa program (East New Britain) - 0.1 0.1 0.1 0.3 0.1 (c) Crop development teams - 0.5 0.1 0.1 0.2 0.1 (d) NPMA capital contribution - 0.2 0.2 0.1 0.5 0.3 (e) Consultants - 0.15 0.05 - 0.2 0.2 (f) Studies - 0.1 0.1 0.1 0.3 0.3 Subtotal 0.2 1.4 1.2 0.6 3.4 1.8 Contingencies: Physical & Price - 0.1 0.2 0.2 0.5 0.3 Total Supporting Services Comp. 0.2 1.5 1.4 0.8 3.9 2.1 Total Project Costs 2.3 6.3 7.1 3.3 19.0 7.1  PAPUA NEW GUINEA SECOND AGRICULTURAL CREDIT PROJECT Project's Financial Impact on PNGDB (K million) 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 Uses of Funds Administration: Training 0.1 - - - 0.2 0.1 0.1 0.1 0.1 0.1 0.1 General - 0.2 0.3 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 -For field development 1.9 4.3 5.1 2.3 1.7 1.1 0.5 - - - - Repayment of government loan /a - 0.1 0.2 0.3 0.4 0.6 0.6 0.6 0.6 0.6 0.6 Total 2.0 4.6 5.6 3.0 2.7 2.2 1.6 1.1 1.1 1.1 1.1 Sources of Funds PNGDB's own resources 1.8 0.3 1.4 0.3 Bank/IDA - 4.1 3.4 1.5 Government Development Cost Subsidy 0.1 0.1 0.1 0.1 Subtotal 1.9 4.5 4.9 1.9 Subloan repayments - 0.1 0.6 1.0 1.6 2.1 2.7 3.0 3.2 3.5 3.6 Government Interest Subsidy - - 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Total 1.9 4.6 5.6 3.0 1.7 2.2 2.8 3.1 3.3 3.6 3.7 Net cash flow - - - - (1.0) 1.2 2.0 2.2 2.5 2.6 /a Government would onlend the Bank/IDA loan to PNGDB (US$12.6 million) at 3% Interest, repayable in 22 years including 5 years of grace for principal.  L-I,%tC Coat. *ad &0.A.tc- Y- 2 3 4 5 .. 7 8 9 10 I I9 I2 I 3 I 4 I4 1J6 I7 I I 19 Ito 11 a i2 26-74 26 27 2 93 8..o99,a - - - 3133~~~~~~~~~~~~~~~I 807 1.905 2.490 2. 145 k.784 1.647 1.425 1,422 1.47 l ,25, 9..0's 9.425 1,64t5 9, .4 95 .624 .2 49 90 91 4 7,94Is 664 6.4 637 664S 120 177 I77 177 177 y774 74 74 7 7777775 77 77 774 776 5,72- $ I7 27