Document of The World Bank FOR OFFICIAL USE ONLY gp. 2(->Y=-4/6 Report No. 5635-PNG STAFF APPRAISAL REPORT PAPUA NEW GUINEA THIRD AGRICULTURAL C1REDIT PROJECT September 3, 1985 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 offiel duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (as of March 31. 1985) Currency Unit = Kina (K) K i = US$1.0599 US$ 1 = K 0.94 GOVERNMENT OF PAPUA NEW GUINEA AND ABPNG FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES 1 kilogram (kg) = 2.20 pounds I metric ton (t) = 2,205 pounds 1 kilometer (km) = 0.62 miles I square kilometer (sq km) = 0.39 square miles 1 hectare (ha) = 2.47 acres PRINCIPAL ABBREVIATIONS AND ACRONYMS USED ABPNG - Agriculture Bank of Papua New Guinea ADB - Asian Development Bank APRACA - Asia and Pacific Regional Agriculture Credit Association BPNG - Bank of Papua New Guinea CF - Conversion Factors DPI - Department of Primary Industry ffb - fresh fruit bunch GOPNG - Government of Papua New Guinea ICA - International Coffee Agreement ICF - Investment Corporation Fund ICPNG - Investment Corporation of Papua New Guinea NBPOD - New Britain Palm Oil Development Ltd. NIDA - National Investment Development Authority NPMA - National Plantation Management Agency PNG - Papua New Guinea PNGBC - Papua New Guinea Banking Corporation PNGDB - Papua New Guinea Development Bank SLA - Subsidiary Loan Agreement FOR OMCIAL USE ONLY PAPUA NEW GUrNEA THrRD AGrICULTURE CREDIT PROJECT STAFF APPRAISAL REPORT TabLe of Contents Page No. LOAN AND PROJECT S 669..... .0........... 60**............. iv A. The Agricultural. Sector *.............. ............... 1 The Tree Crop Subsector ..... . 2 Piggery and Poultry ..................... * 4 B. Agricultural Development Objectives and Strategy ........ 4 C. World Bank Experience with Past Lending .................. 4 rr. AGRICULTURAL CREDIT AND AGRICULTURE BANK OF PAPUA NEW GUINEA (ABPNG) ..................... ** g.......... 5 A. Financial Sector Overvie...............e................... 5 B. Agricultural Investment and Lending ............. ......... 8 C. Agriculture Bank of Papua New Guinea..................... 8 Legal Framework and Scope of'Operations................ 8 Organization and Management ............................ 8 Staff and Training ..................................... 9 Lending and Investment Policies ........................ 10 Loan and Investment Procedures ......................... 11 Budgeting and ...........a.i........................... 12 Loan Operations ................................... 12 Loan Portfolio and Arrears .. ..... 13 Equity Investments . ......................... ......... 16 Income Statements ............................ 16 Balance Sheet .......................................... 17 D. rssues in Agricultural Credit ............................ 18 Interest Rates ...... 18 Institutional Weaknesses .oe.o..eogg.gg..........o....... 20 E. Rationale for Bank Involvement ........................... 21 III. TJE PROJECT...........e*ee.................................. 21 A. Project Objictives ....................................... 21 This report is based on the findings of an appraisal mission in May 1983 comprising Messrs. J. Caparas, C. Carlier (Consultant), P. Melkye (Consultant) and Ms. C. Tanchoco and a mission comprising Ms. C. Tanchoco and Mr. M. Pinnix (Consultant) which reappraised the project in February/March 1985 following a Government decision to restructure the implementing agency and its interest rate policy. r documt has a sruad dittbutim and may be umd by ncipie omnly in the pefPio -lM X ordic i cil dimd . Is mus may mt otbuwie be dimd wiht World _k autho*im. - ii - Page No. B. Project Description.... . e.e.......................e.... 22 Subprojects ........................ 22 ABPNG Strengthening ........................... 25 C. Project Cost.... ........................................ 27 Do Finalncing ............oo ... 27 ReLending Trs............. 28 E. Procurement ......... ........ ...... . 29 F. Disbursement ......................o....o.......... 30 G. Accounting and Auditing ............................a.e o 30 H. Monitoring and Reporting Requirements.................... 31 IV. PROJECT IMPLEMENTA........................................ ..... 31 A. ABPMG as Implementing Agency .... ...... .................. 31 B. Action Program and Financial Strategy ................... 32 C. Lending Procedures ....................................... 0 32 D. Supervision of Subloans ...................... .... ... ... 33 Pricing of Smallholder Oil Palm........................ 34 E. Financial Projections .............. ... .................. 34 V. PRODUCTION, MARKETS, PRICES AND FINANCIAL ANALYSIS .......... 35 A. Production and Yield ..................................... 36 B. Markets ......................... 36 C. Price Structure .......................................... 37 D. Financial Analysis .... ............................ .... 37 VI. BENEFITS. RISKS AND JUSTIFICATIONS ........................... 39 A. Benefits ................................... 39 B. Economic Analysis .......... 39 C. Sensitivity Ans lysis...................................... 40 E. Environmental Impact. ...... .... ... 41 VII. AGREEMENTS REACHED AND RECOM(ENDATION. .......... 41 Tables in the Text 1.1 Tree Crop Production in PNG (1983) 1.2 Tree Crop Exports 2.1 Interest Rates 2.2 Summary of Loan Approvals by Sector 2.3 Summary of Loan Arrears 2.4 ABPNG Arrears by Type of Loan 2.5 Summary Statement of Income 2.6 Summary Balance Sheet 2.7 ABPNG Interest Rates - iii - Tables in the Tezt (cont'd) 3.1 Subproject Cost Estimate 3.2 Summary of Projected Subloan Approvals and Disbursements 3.3 Project Cost Summary 3.4 Project Financing Plan 6.1 Economic Rates of Return 6.2 Sensitivity Analysis ANNEXES Annex 1: Tables for the Main Report Table 1: Project Cost Estimates Table 2: Staff Training Program, 1985-88 Table 3: Estimated Schedule of Disbursement Table 4: Proposed Allocation of Loan Proceeds Annex 2: ABPNG Head Office, Regional Offices and Branches Table 1: Details of Loan Operations, 1977-84 Table 2: Portfolio and Arrears Situation, 1979-84 Table 3: Collection of Loans as at December 31, 1984 Table 4: Subsidiaries and Associate Companies, 1984 TabLe 5: Projected Loan Approvals under the Project, 1985-88 Table 6: Projected Total Loan Approvals, 1985-89 Table 7: Projected Total Loan Disbursements, 1985-89 Table 8: Implementation Schedule Table 9: Profit/Loss Account Projection, 1985-89 Table 10: Cash Flow Projection, 1985-89 Table 11: Projected Balance Sheet, 1985-89 Table 12: Cost Analysis Based on Net Portfolio Annex 3: Action Program and Financial Strategy for Agriculture Bank of PNG Annex 4: Prices Table 1: Agriculture Price Structure Annex 5: Financial Analysis and Cash Flow Table 1: 100 ha cocoa Table 2: 20 ha cocoa Table 3: 6 ha cocoa Table 4: 4 ha oil palm Annex 6: Economic Analysis Table 1: Economic Costs and Benefits Annex 7: FFB Pricing Guidelines Annes 8: Related Documents in Project File IBRD Map 17314R: Location of Second and Third Agricultural Credit Project Financial Areas - iv - PAPUA NEW GUINEA THIRD AGRICULTURAL CREDIT PROJECT Loan and Project Summary Borrower: Independent State of Papua New Guinea Beneficiary: Agriculture Bank of Papua New Guinea (ABPNG) Loan Amount: US$18.8 million equivalent Terms: Repayment in 16 years including 7 years of grace at the standard variable rate. Relending Terms: The Government of Papua New Guinea (GOPNG) would relend the proceeds of the proposed loan to ABPNG at a fixed interest rate of 3% p.a. for a period of 16 years including seven years of grace, and bear the foreign exchange and interest rate risks. ABPNG would onlend the loan proceeds to its subborrowers at interest rates ranging from 5% to 20% p.a. with variable repayment terms depending on the activities being financed. Project Description: The project aims at increasing and broadening the agricul- tural exports of Papua New Guinea (PNG), providing a better livelihood for rural families, and gradually strengthening ABPNG as a development finance institution. The project would: (a) provide funds to ABPNG to onlend for tree crop development, new crops and other agricultural activities, livestock, and agro-processing facilities and agricultural equipment and vehicles; and (b) strengthen ABPNG by pro- viding data processing facilities, vehicles, funds for staff training, fellowships, studies, and technical assistance for improving its management and financial performance. The project's benefits include an increase in PNG's annual exports of tree crops by about US$21.5 million, improvement in the standard of living of about 3,400 smallholder families and gradual expansion of ABPNG's lending capability. The primary project risk is ABPNG's capability to implement the project adequately in view of its organizational problems (e.g., shortage of qualified staff, lack of planning and inadequate financial control). To minimize this risks, the project stresses the institutional development of ABPNG through an Action Program and Financial Strategy, technical assistance and staff training. With these safeguards, the risk is acceptable. Project Costs: /a Local Foreign Total -~ (US$ million) -- Subprojects 9.5 14.2 23.7 Vehicles and equipment - 0.5 0.5 Technical assistance 0.1 0.7 0.8 Staff training and fellowships 0.5 0.5 1.0 Studies - 0.1 0.1 Iccremental operating expenses 4.2 1.0 5.2 Total Project Cost 14.3 17.0 31.3 Financing Plan: IBRD 1.8 17.0 18.8 Government 5.5 - 5.5 ABPNG 4.2 - 4.2 Beneficiaries 2.8 - 2.8 TotaL 14.3 17.0 31.3 Estimated Disbursements: Bank FY 1986 1987 1988 1989. usUS$ milli-on)-3- Annual 2.4 6.2 9.0 1.2 Cumulative 2.4 8.6 17.6 18.8 Rate of Return: Rates of return of farm models for the various subprojects range from 22% to 38%. /a Including about US$0.2 million in taxes and duties. PAPUA NEW GUINEA THIRD AGRICULTURAL CREDIT PROJECT STAFF APPRAISAL REPORT I. BACKGROUND 1.01 Introduction. The Government of Papua New Guinea (GOPNG) has requested Bank assistance for a project to expand and improve the supply of term credit to smallholders available through the Agriculture Bank of Papua New Guinea (ABPNG). The project, a follow-on to the Second Agricultural Credit Project (Cr. 1149-PNG), was identified by the Government in May 1982 and prepared by the Government with Bank assistance. The project was appraised in May 1983 but processing was suspended following a GOPNG decision to restructure the implementing agency and its interest rate policy. As a result of intensive policy discussions between the Government and the Bank, and significant improvement in ABPNG's performance, the project was reappraised in February/March 1985. The proposed project would help establish an appropriate policy framework for deveLopment of a financially sound rural credit market in the country and strengthen ABPNG as a development finance institution. A. The Agricultural Sector 1.02 Agriculture plays a dominant role in the economy of Papua New Guinea (PNG) as employer and provider of food and income to the great majority (about 85%) of PNG's population. The sector, including forestry, fisheries and livestock, accounted for more than 40% of PNG's K 687 million of exports in 1983 and about a third of its GDP. PNG has a humid tropical climate which is conducive to agricultural production, especially of tree crops. The land area of 461,700 km' is sparsely populated (an average of 7 persons per k2) and nearly 150,000 km2 (30Z) is topographically, geologically and climatically suited to agriculture. With only about half of this suitable land currently used for agriculture, there is considerable scope for increased utilization. 1.03 Agriculture in PNG follows three modes of production: (a) small- holder subsistence farming based mainly on root crops and vegetables for farmers' own consunption; (b) estates which hire labor and produce mainly tree crops for export; and (c) smallholders growing cash crops, mainly tree crops for export, in addition to some food crops. Estimates of subsistence output are weak, although such output is believed to comprise about 40Z of total agricultural production. Subsistence agriculture is suited to remote areas where poor infrastructure hinders trading activity; its importance is expected to decline gradually as infrastructural improvements permit trading at lower cost, and thereby encourage greater cultivation of tree crops. Tree crop products already account for about 40X of agricultural production, and over 77Z of agricultural exports. -2- The Tree Crop Subsector 1.04 Tree crops cover about 476,000 ha (1Z) of land in PNG, __! which about 55Z is under coconut; 27Z, cocoa; and 182, other tree crops. About 652 of the area is managed by smallholders, and 352 by estates. Production from major tree crops during 1983 is_shown below: Table 1.1: TREE CROP PRODUCTION IN PNG (1983) Production Price Value Value Crop (1,000 tons) (1983 Kina/ton) (1983 K M) (Z) Coffee 52.5 ls803 94.7 43 Cocoa 26.3 1,572 41.3 19 Copra 78.7 306 24.0 11 Copra oil 36.2 554 20.0 9 Palm oil 77.9 306 23.8 11 Palm kernel 9.1 152 1.4 1 Tea 7.2 1,436 10.3 5 Rubber 2.7 792 2.1 1 Total 290.6 217.6 100 1.05 Between 1978 and 1983, the volume of tree crop production increased by 4% p.a., mainly due to increases in oil palm and coffee. Most other tree crops have shown a declining trend. Slow growth coupled with reduction in commodity prices since 1978 has resulted in stagnation of export values (Table 1.2). The performance and prospects of major tree crops in PNC are discussed below. Table 1.2: TREE CROP EXPORTS Value in millions Growth rate (X2p.a) of current Kina Value Volume 1978 1983 (nominal) Coffee 107.2 94.7 -2.4 2.8 Cocoa 63.0 41.4 -8.1 -0.6 Copra & Products 36.5 45.5 4.5 -0.6 Palm Oil & Kernel 11.2 25.1 17.5 21.7 OLaer 10.4 12.6 3.7 -2.3 Total 228.3 219.3 -0.7 4.0 - 3 - 1.06 Coffee. Coffee is the most important tree crop, accounting for almost half of PNG's tree crop export value. About 86X of the 47,000 ha coffee area is cultivated by smallholders. Most of the coffee (95Z) is grown in the Highlands area which is the most densely populated and economically depressed area in PNG. PNG is a member of the International Coffee Agreement (ICA), and in the past its ezport quota under the ICA has been below 70 of its production. Since local consumption is low (5Z), a substantial proportion of production (over 25Z) had to be ezported to non-ICA cbuntries at discounted prices. More recently, however, a reduction in 1984 production to about 45,000 tons compared with 1983 production of about 52,500 tons and a policy change in favor of higher buffer stocks have eliminated non-quota sales in 1985. Production forecasts based on current plantings show a decline due to early plant senility and associated disease susceptibility. About 2Z of PNG's total coffee area needs to be replanted/rehabilitated per year in order to maintain its current average production level of about 50,000 tons. 1.07 Cocoa. The cocoa area at 128,000 ha is more extensive than that of coffee, but production volume and value are lower so that cocoa accounts for only about 19Z of the value of tree crop exports. While the majority (57Z) of the cocoa area is cultivated by smallholders, plantations also cover a sub- stantial area (some 55,000 ha). Cocoa production has declined by about 20% since its peak production of about 35,000 tons in 1974/75 due to tree Senility, pests and diseases, and current low average yields of about 0.3 tons/ha. However, locally selected disease-resistant varieties are now available and, given good management, the prospects for increasing cocoa yields are excellent. 1.08 Coconut. Copra production is PNG's longest established industry but now accounts for only 15X of tree crop exports. About 64Z of the 263,000 ha coconut area is under smallholder management. Copra yields are variable but average about 0.7 tons per ha. Increased yields are now possible through the utilization of hybrid planting material. 1.09 Oil Palm. Oil palm is grown and processed on a commercial scale at Cape Hoskins (13,200 ha) and Biala (6,100 ha) in West New Britain Province, and at Popondetta (9,400 ha) in Oro Province. Of the total 28,700 ha of oil palm, about 58Z is managed by smallholders. Production and export of palm products have grown at an average annual rate of more than 20Z from 32,600 tons in 1978 to 87,000 tons in 1983 giving oil palm the highest growth rate relative to other crops in PNG. This is due to its higher profitability, a result of high yields and good market demand. 1.10 Tea and Rubber. PNG also has small areas of rubber (6,500 hAm' and tea (2,800 ha). Low annual rubber yields (0.6 ton per ha) from aging trees, high labor costs and recent depressed prices have led te declines in the rubber area and production. The tea industry in PNG is also small and declining. Tea is even more labor-intensive than rubber, requiring very careful harvesting techniques. Declining real prices coupled with high labor costs make tea production less attractive than other tree crops. While production increases from existing tea areas are possible, it is unlikely that any new project will be started. -4- Piggery and Poultry 1.11 Pigs and chickens have traditionally been part of the subsistence farming systems of PNG smallholders and are gaining increasing importance in the commercial sector as well. It is estimated that the non-indigenous livestock resource consists of 1.5 million pigs and 1.5 million poultry dispersed widely throughout the country. About 99Z of pigs and 75% of poultry are reared by smallhoLders. Recent growth performance of these industries has been strong as indicated by a 25% annual growth rate for poultry and 13% for pigs over the last five years. Future growth will be Limited to expansion of local consumption which is expected to be about 82 per year. B. Agricultural Development Objectives and Strategy 1.12 The main goals of the Cover-Lment's agricultural development policies are: to improve the livelihood of rural families, to increase and broaden agricultural exports, and to reduce food imports. During the last decade, the Government's agricultural and rural development strategy has focused on: (a) an open economy with emphasis on a strong private sector supported by agricultural credit and export crop stabilization funds; (b) the support of clans and other traditional groups as recognized legal entities while acknow- ledging individual land rights in clan lands as a basis for long-term farm improvements; (c) the delegation of major development responsibilities to the provincial level; (d) financial and management assistance to nationals to enable them -o assume responsibility for plantations formerly owned and man- aged by expatriates; and (e) expansion of specialized agricultural training and improvements in the remuneration and working conditions of agricultural support staff. 1.13 Recently, the Government has shorn renewed awareness that agricul- ture will remain the mainstay of PNG's economy for many years. This recogni- tion is manifested in the greater flexibility of Government regarding expatri- ate ownership and management of plantations, in the formulation of a medium- term development strategy, and in its efforts to improve agricultural services such as research, extension and credit. C. World Bank Experience with Past Lending 1.14 Since the country's independence in 1975, the World Bank has suppor- ted agricultural development in PNG through six projects: (a) the Popondetta Smallholder Oil Palm Development Project (Ln. 1333-PNG); (b) Southern High- lands Rural Development (Cr. 841-PNG); (c) Enga Provincial Development (Ln. 2125/Cr. 1227-FNG); (d) West Sepik Provincial Development (Ln. 2475-0-PNG); (e) Agricultural Support Services Project (Ln. 2276-PNG); (f) Second Agricultural Credit Project (Cr. 1149-PNG) and (g) Nucleus Estate and Smallholder I Project (Ln. 2608-PNG). In addition, Agriculture Credit I (Cr. 348) provided assistance for the development of smallholder beef, pig and poultry enterprises through loans by the Papua New Guinea Development Bank (PNGDB) (now ABPNG) prior to PNG's independence. 1.15 The Popondetta project assists in the development of 4-ha oil palm blocks for 1,400 smallholders, together with investments in infrastructure, extension and inspection services and a transport company for the smallholder production. The Southern Highlands, Enga, and West Sepik Projects assist integrated rural development efforts in three of PNG's least developed pro- vinces. The Agricultural Support Services Project aims to strengthen PNG's agricultural support services in the areas of research, education and train- ing, extension services, sector planning, agricultural project development, and regulatory services. The Nucleus Estate and Smallholder I Project would develop oil palm and cocoa in Milne Bay Province. A PPAR (Report No. 3997) of June 23, 1982 on Agriculture Credit I emphasized the need for: (a) expert technical and financial management; (b) the concentration of pig and poultry production in integrated firms; and (c) the clarification of the roles of the Department of Primary Industry (DPI) and PNCDB. 1.16 The Second Agricultural Credit Project (SDR 12.3 million), which financed a share of ABPNG's lending for tree crop development and other agricultural subprojects, was completed on December 30, 1984, and the funds have been fully disbursed. In the course of project implementation, three main lessons were learned: (a) ABPNG's supervision of the private management agencies which assist smallholders to carry out subpro,ect activities should be strengthened to ensure successful subproject implementation. (b) Budgeting and programming of loan and investment operations at ABPNG need to be improved so that loan approvals and disbursements are in line with available funds, and subloan disbursements are not delayed. (c) A systematic arrears management program for A3UNG is required to identify problem areas, define a necessary course of action for dealing with the arrears, and improve collection and financial performance. These lessons are reflected in the design of the proposed project. II. AGRICULTURAL CREDIT AND THE AGRICULTURE BANK OF PAPUA NEW GUINEA A. Financial Sector Overview 2.01 PNG's financial sector is young and underdeveloped with a clientele who are relatively new entrants to the cash economy and the credit market. It operates within a physical environment which is geographically fragmented giving rise to numerous isolated communities which are separated from one another by physical, linguistic and cultural barriers. This natural and human diversity poses considerable problems for administration in general, and for specific functions such as agricultural credit and extension. - 6 - 2.02 Bank of Papua New Guinea (BPNG). BPNC is the country's central bank. It is the sole issuer of legal currency in PNG, acts as a banker to Government and the commercial banks, and administers the nation's interna- tional reserves and foreign exchange rules and regulations. It regulates the country's six commercial banks, 114 savings and loan societies (only 39 of which are active), four finance companies and one merchant bank. BPNG con- trols interest rates of the commercial banks and influences the volume of credit and investment through its normal rediscounting facilities and by stipulating the liquid asset requirements that commercial banks must observe, currently set at 18Z. BPNG acts as a lender-of-last-resort if the banks have a shortage of liquidity, and operates special rediscount facilities to encourage investment in specific areas. In agriculture, for example, BPNG established an Agricultural Export Development Facility on December 2, 1981, under which BPNG lent a total of K 15 million to the commercial banks at a rate of 8X p.a. The banks then onlent to appropriate (large-scale) borrowers at a rate of 11 p.a. for redevelopment of plantations producing export crops. The entire K 15 million was committed during 1982 and drawdowns amounted to K 7.6 million as of August. 30, 1984. This scheme was succeeded in 1983 by the Agricultural Export Development Scheme which was aiso aimed at plantation redevelopment. The commercial banks lend their own funds (rather than funds advanced by BPNG) up to a maximum of [ 15 million at rates approved by the Department of Finance. The banks then receive a 3% interest rate sub- sidy from the Government on approved loans. The subsidy allows the borrower to obtain funds at 3Z less than he otherwise would pay. About K 6.0 million in loans were approved in the first 21 months after the scheme's introduction, with interest rates at the prime lending rate, maturity of 7-8 years, and no grace period. The current prime lending-rate in PNG is 12-12.25%. A previous minimum saviL.gs rate on passbook accounts has been abolished and as a result the passbook rate has declined from the 8% minimum in September 1983 to 3-6% today. A summary of interest rates is given below. - 7 - Table 2.1: INTEREST RATES (as of February 26, 1985) Lending Rates (in x p.a.) Commercial Banks Fully-drawn advances/a 11-15.25 Overdraft/b 11-15.25 Personal loans 11-15.5 Agricultural loans 11.25-14.25 Commercial 11-15.25 Industrial 11-14.75 Lease/c 19-21.5 Finance Companies Lease/c 18-24 Hire purchase 12-17 Deposit Rates Passbook 3-6 Time deposits Under K 10,000 6-8.5 Over K 10,000 7.25-10 /a This loan provides a fixed amount of funds at a point in time, with repayment specified over a fixed time period. lb Line of credit, normally to cover general business operating expenses. /c Finance for equipment and machinery through leasing arrangements. 2.03 CommerciaL Banks. With the excepLion of the Papua New Guinea Banking Corporation (PNGBC), all coumercial banks are subsidiaries of foreign banks. PNGBC is wholly owned by the Government and holds slightly more than 50% of the assets of the commercial banking system. Loans made by foreign banks in the agricuLture sector have been largely related to agricultural export financing. Government policy for the commercial banks has recently been geared to encourage more mediur- and long-term loans for agro-based industry and to expand term lending in the agricultural sector. PNGBC presently makes 5 to 8-year term loans for rehabilitation/development of coffee, cocoa, coconut, tea, palm oil, cattle raising, etc., to both nationals and expatriates. PNGBC's agricultural loans currently bear interest rates of 11.25X to 14.25% p.a. 2.04 Financial Markets. In recent years, the Government has taken steps to develop financiaL markets in PIG. A treasury bill auction system has been operating since August 1980 and there are Government inscribed stock offerings (i.e., long-term bonds) at rates of about 10.25-12.25%. However, there is - 8 - little participation in these issues other than by commercial banks and super- annuation funds. The Government securities market is still underdeveloped and there is no real short-term money market. The first public stock offering of a bank stock met with only limited success, and bonds or debentures to raise business funds are practically nonexistent. B. Agricultural Investment and Lending 2.05 Foreign investment in agriculture is encouraged through the National Investment and Development Authority (NIDA) which was established in 1974. Large-scale local investors are assisted by the National Investor Scheme which has committed about two thirds of its fundc to agricultural and forestry pro- jects. In addition, the Investment Corporation of Papua New Guinea (ICPNG) was created in 1971 to take up equity investments and make them available to PNG nationals through its Investment Corporation Fund (ICF). The largest single lender for agriculture is the Agriculture Bank of Papua New Guinea (ABPNG) which is the onLy financial institution providing credit to small rural farmers and small agricultural business groups. ABPNG accounts for the major portion of long-term investments in agriculture through its loans for coffee, cocoa, oil palm, rubber, and livestock development. Its contribution to value added and exports is estimated to be an average of about US$45 million and US$47 million p.a., respectively. C. Agriculture Bank of Papua New Guinea 2.06 Legal Framework and Scope of Operations. ABPNG, originally called the PNG Development Bank, was established by the Development Bank Act of 1965 as a multipurpose, wholly Government-owned development finance institution. In February 1985, the Government renamed the bank and directed it to orient its lending operations essentially for agricuLture, and imposed a 20% ceiling on the proportion of the loan portfolio to be devoted to commercial and industrial projects. Although ABPNG is under the general supervision of the Minister of Finance, it is autonomous and lies outside the administrative or operational control of the Department of Finance with regard to policy decisions and day-to-day operations. ABPNG is authorized to grant loans; acquire, develop, and manage property for sale or lease; form subsidiaries or promote companies or enterprises in any manner permitted by law; receive deposits from the public; issue securities or debentures; underwrite loans and capital issues; provide guarantees; and invest in shares or own capital interests. All ABPNG liabilities are guaranteed by the Government as to their repayment. 2.07 Organization and Management. ABPNG is managed and controlled by a Board of Directors consisting of the Managing and Deputy Managing Directors, the Secretary of the Department of Finance and nine members appointed by the Minister of Finance from the Government and the private sector. The Board decides the policies and direction of ABPNG operations and approves major loans (over K 250,000) and equity investments. The Chief Executive Officer is the Managing Director (a PNG national) appointed by the National Executive Council (the Cabinet) upon recommendation of the Minister of Finance for a maximum term of 7 years. The incumbent Managing Director has had a long career in civil service prior to joining ABPNG and the departmental managers - 9 - are long-standing employees of the Bank. The position of Deputy Managing Director is now vacant but would be filled under the technical assistance component of the proposed project. A condition of effectiveness would be the appointment of a suitably qualified individual as Deputy Managing Director. 2.08 ABPNG's head office in Port Moresby is organized into four depart- ments: Operations, Technical, Accounting and Finance, and Administration and Personnel. An Organization Chart of ABPNG is provided in Annex 2. The Operations Department is in charge of all lending and investment operations, and as such is responsible for appraisal, loan processing, approval and supervision. The Technical Department is charged with providing support to the Operations Department in evaluating the technical viability of projects particularly agriculture. All new lending areas are assessed by this Depart- ment before they are generally accepted. Larger projects are evaluated and monitored and the Department is responsible for supervision and monitoring of equity investment. The Accounting and Finance Department has responsibility for all aspects of ABPNG's accounting operations including its borrower accounts. The Administration and Personnel Department is responsible for all personnel, training and property matters. Two units report directly to the Managing Director - Economics and Audit and Inspection. The Economics Unit is in charge of monitoring development trends, reporting of loan statistics, liaison with the Asian Development Bank (ADB) and the World Bank, and corpo- rate planning. The primary functions of the Audit and Inspection Unit are to review accounting, financial and other operational activities of ABPNG and ensure the adequacy of its internal controls. The Computer Operations Unit which reports directly to the Deputy Managing Director is responsible for data recording, analysis and reporting as well as development and maintenance of computer hardware and software equipment. 2.09 In early 1984, ABPNG reorganized its branch network into four regional offices at Port Moresby, Lae, Rabaul and Mt. Hagen. In turn, these supervise the six branches, three sub-branches and five representative offices. The objectives of the reorganization were to reduce administrative costs, streamline branch operations and make them field oriented. All loan and general administration activities (documentation, securities, loan accounting, statistics, property management, etc.) are centralized in the regional offices. Technical personnel in the regional offices and branches then concentrate on promotion of the bank's services, inspecting prospective borrowers' sites and projects, supervising loans, and collection and arrears control. The results of the reorganization have so far been encouraging. The field personnel are able to maintain frontline contact with the borrowers while loan supervision and arrears control have improved. The regionalization of branches facilitates loan approval and disbursement, strengthens technical expertise in the field, promotes a good bank-borrower relationship, and expands the bank's outreach. 2.10 Staff and Training. ABPNG has a staff of 334, comprising 131 professionals (21 expatriates) and 203 support staff. Almost half the staff are in the head office. Due to scarce trained manpower in PNG and high turn- over of national and expatriate staff, ABPNG is inadequately staffed with qualified and trained personnel. At the same time, due to the presence of expatriate staff and in an effort to retain its qualified personnel, the - 10 - salary bill of ABPNG is higher than most agricultural credit banks in other developing countries. Only about 20Z of the national staff are diploma holders or college graduates. Under a recent ADB project (Loan 611), ABPNG began a long-term manpower and career development program. The plan includes: (a) an evaluation of existing manpower resources and identifying needy areas; (b) organization of training programs; (c) localization, i.e., replacement of expatriate staff with local staff; and (d) programs to meet future manpower requirements. Consistent with revised staff allocations within the branches and the need to reduce personnel and administrative costs, ABPNG has started a staff retrenchment program. Staff has been reduced from 425 in 1980 to the present level of 334, with reductions primarily in records and loan clerks and excess administrative personnel. In order to attract qualified staff and reduce staff turnover, ABPNG has initiated measures to improve benefits and ensure remuneration competitive with the private sector. The rate of staff turnover has in fact declined from a peak of 27Z in 1981 to 12Z in 1984. The localization program is proceeding at a satisfactory pace without sacrificing the efficiency of the bank and its lending and investment operations. From 54 expatriate officers in 1974, the number has declined to 35 in 1980 and 21 in March 1985. 2.11 As part of its manpower plan, ABPNG is improving its in-house training which deals with project appraisal, project promotion, arrears man- agement and business finance. In addition, local colleges such as the Banker's ColLege, Administrative College, and Institute of Management have trained at Least 60 officers in the last 5 years. Short-term overseas train- ing programs are also available, mostly on project appraisal, trainer training and management, including courses at the Australia Administrative College and programs sponsored by ADB, New Zealand, and the Asia and Pacific Regional Agriculture Credit Association (APRACA). From 1980 to 1984, about 358 person- nel participated in in-house training programs and 43 in overseas programs. ABPNG's training capability was substantially improved during 1984 through secondment of four experienced rural lenders from the New Zealand Rural Bank. These are employed in a consultancy capacity, essentially to revise existing agricultural loan appraisal and review procedures, introduce new forms of documentation, and train national officers in both office and field situations. Funding of secondees' salaries is by grant through New Zealand aid with ABPNG meeting only cost of accommodation and internal travel. ABPNG is, however, still faced with a shortage of qualified and trained staff. Only 1% of total income over recent years has been devoted to staff training, and the high turnover of senior expatriate personnel has not been conducive to training of national personnel. The proposed project would assist ABPNG's training efforts, particularly agricultural lending, electronic data processing and corporate planning. 2.12 Lending and Investment Policies. The operational policies of ABPNG are governed in practice by the May 1977 PoLicy Statement of its Board. The Statement directs ABPNG to provide maximum benefits to PNG's indigenous people and to ensure the balanced development of the economy. To minimize investment risks and maintain a sound portfolio, ABPNG's policies include the following exposure limits: (a) liabilities should not be more than three times its paid-up capital plus surplus reserves; (b) total loans outstanding to a single enterprise should not exceed 25% of bank equity; (c) equity investments in a - 11 - single enterprise should na ezceed IO of ABPNG's equity; (d) ABPNG's total exposure in hire-purchase - and equipment financing should not exceed its own equity; and Ce) aggregate equity investments should not exceed 15X of its own equity. The exposure limits followed by ABPNG are prudent. 2.13 Although ABPNC has concentrated on providing term loans and a limited amount of equity investments, its policies and development efforts have been innovative. ABPNG is responsible for initiating development of successful medium-sized cocoa and coffee plantations through arrangements for pooling of clan lands. Under the scheme, ABPNG has developed over 100 coffee plantations with an average size of 20 ha in the Highland Provinces and about 35 cocoa plantations in similar schemes. ABPNG actively promotes the "nucleus estate" concept, notably in oil palm andf poultry, where weLl-managed companies assist smallholders with the provision of inputs, processing and marketing. In the commercial sector, ABPNC launched the "Stret Pasin Stoa Scheme" designed to introduce nationals to retail trade. Under the scheme, ABPNC acquires retail outlets in urban areas from expatriate owners and transfers manAgement to nationals who have received training in ABPNG's subsidiary, Retail Management Services, Pty. Ltd. 2.14 Loan and Investment Procedures. ABPNG's operational procedures at head office and at the branches are patterned after those of comercial banks. Its operational and lending manuals are well written and provide standards for project appraisal, loan processing, branch management, and other operations. Recently, significant improvements have been achieved on ABPNG's project appraisal, loan processing and supervision standards. Two agricultural devel- opment bankers engaged under the Second Agricultural Credit Project assisted ABPNC in devising a set of detailed and comprehensive schedules for origi- nating agricultural loans and a comprehensive field manual of procedures for field reporting, project appraisal, inspection and loan processing. In addi- tion, two tree crop specialists were recruited on a short-term basis under the Second Agricultural Credit Project to prepare detailed guidelines and norms for the systematic assessment of the agronomic feasibility of a coffee or rubber development project. For large agricultural loans (over K 65,000) and investment operations, the technical manuals are supplemented by appraisal criteria requiring a detailed feasibility study on the technical, marketing, financial and economic aspects of the project. While no new forms have been designed for commercial and industrial loans, the present narrative form is fairly comprehensive and more thorough appraisal reports are being produced. 2.15 Under current regulations, ABPNG's Operations Department is responsible for all lending operations. All large loans (above K 100,000) and others as required are referred to the Technical Department for investigation and evaluation, but the Operations Department processes the majority of appli- cations and has final responsibility for loan approval. The authority for loan approval and disbursement is highly centralized in the head office in view of the shortage of technical expertise for project appraisal. ABPNG has 1/ Loans for vehicles under which ABPNC retains title to the vehicle until the loan is fully paid. - 12 - increased the level of discretionary authority of Regional Managers to approve and control loans in order to facilitate the lending process. Regional offices can now approve loans for amounts up to K 35,000 and disburse funds on approved loans to an upper limit of K 150,000 in accordance with terms and conditions of loan approval. 2.16 Following normal banking practice, ABPNG seeks to obtain adequate collateral on its loans. A first mortgage or equitable mortgage is arranged for all industrial and commercial projects, but security is difficult to obtain in agricultural projects. Collateral is usually not available since over 95% of the land in PNG is customary land owned by clans, with many individuals having usage rights. ABPNG has devised a system of "Clan Land Usage Agreements" which assure borrowers undisturbed usage of the land. ABPNG requests clan members to act as guarantors who, should the need arise, would take over the project if the original borrowers default. 2.17 Budgeting and Planning. ABPNG's budgeting for loan and investment operations is deficient and has led to severe cash flow constraints when loan approvals and disbursements have not been planned in line with internally generated funds, budget funds from Government or external loan sources. Allocations have tended to be ad hoc or based on historical lending patterns rather than sectoral priorities determined through economic analyses or a portfolio plan. ABPNG, cognizant of the importance of economic factors in the determination of annual lending programs, has recruited an economist and begun the preparation of a corporate plan. The proposed project would reinforce ABPNG's ongoing efforts to strengthen both the economic direction of its portfolio and corporate financial management. 2.18 Loan Operations. ABPNG loan operations from 1980 through 1984 are summarized below and details are in Annex 2, Table 1: Table 2.2: SUMMARY OF LOAN APPROVALS BY SECTOR (K million) 1980 1981 1982 1983 1984 Total Amt % Amt Z Amt Z Amt % Amt Z mt Z Agriculture 11.0 51 14.9 61 5.1 57 11.3 60 13.8 73 55.8 60 Industry 2.1 10 2.3 9 0.8 9 1.2 6 0.7 3 7.1 8 Service 5.6 26 4.4 18 1.9 21 6.3 34 2.8 14 14.7 16 Commercial 2.7 13 2.9 12 1.1 12 1.9 10 14.9 16 Total 21.4 100 24.5 100 8.9 100 18.8 100 19.2 100 92.5 100 Commercial loans were mostly for retail stores (Stret Pasin Stoas) and wholesale trade, while loans for the service sector were for transport, - 13 - shipping, hotels, etc. Loans to industry were for building and construction, ship and boat building, timber milling, mining and quarrying, etc. In line with Government development policy, the agricultural sector is the major recipient of ABPNG loans. Until 1982, loan approvals to agriculture increased on average by 30Z annually from K 6.9 million in 1978 to K 14.9 million in 1981, largely due to the promotion of 20 ha cocoa and coffee schemes under the Second Agricultural Credit Project and expanded lending for oil palm develop- ment. Coffee and cocoa loan approvals comprised 85% of total agricultural loans in 1983. During the same period, ABPNG reduced lending to service industries in favor of more productive industrial loans in mining and manufac- turing. In 1982, however, the overall lending level dropped by about 64Z. This large reduction resulted in part from ABPNG's tight liquidity position and poor repayment performance. The staff concentrated on the collection of past due accounts rather than on the appraisal of new loans. The volume of agricultural loans recovered in 1983 and 1984, more than doubling to K 11.3 million in 1983, and increasing again by 23% to K 13.8 million in 1984. ABPNG is now promoting a smaller number of more productive loans with larger average loan size. Average loan size for all lending increased from K 2,562 in 1980 to K 5,749 in 1984. 2.19 Loan Portfolio and Arrears. In assessing the quality of ABPNG's loan portfolio, the following must be considered: (a) ABPNG is a lender-of- Last-resort devoted to the development of agriculture and industry even in higher-risk situations; (b) an ABPNG loan is most likely the first exposure of the borrower to a financial institution, and thus borrowers have no prior operating history that ABPNG can use to appraise the borrower's creditworthi- ness and the viability of his enterprise; (c) agricultural projects have long gestation periods and are subject to adverse weather conditions, weak world market prices, and other conditions beyond the control of ABPNG; and (d) com- munications between ABPNG personnel and many borrowers is difficult because of the remote location of the borrowers. 2.20 Details of ABPNG's loan portfolio (outstandings) are shown in Annex 2, Table 2. The portfolio at December 31, 1984 comprises 8,658 loans amounting to K 49.7 million (before provisions for bad debts). Agricultural loans comprise K 31.5 million of the total portfolio or about 63% of out- standings and are expected to rise to 80% of the total portfolio. 2.21 One of the problems confronting ABPNG in its efforts to improve its financial performance is the level of arrears. Details of arrears are pro- vided in Annex 2, Table 2, and are summarized below: - 14 - Table 2.3: SUMMARY OF LOAN ARREARS /a (K'000) As of December 1979 1980 1981 1982 1983 1984 Total loans outstanding 29,076 32,501 40,395 44,360 49,437 49,774 Loans at repayment stage 23,890 26,675 31,641 32,889 36,485 34,661 Total arrears 4,720 5,475 7,966 8,778 8,533 4,542 Ratios Arrears as a percentage of outstanding loans 16.2 16.8 19.7 19.8 17.3 9.1 Arrears as a percentage of loans at repayment stage 19.8 20.5 25.2 26.7 23.4 13.1 /a Includes principal and interest, and before bad debts written off. At December 1984, arrears are reported at K 4.5 million and represented 13% of the loans on repayment. However, this figure underestimates ABPNG's arrears and bad debt situation because of a "credit arrears" figure amounting to K 2.2 million which represents prepayments, repayments on loans with incorrect repayment schedules, and other technical problems involving erroneous loan information in the computer. Discounting "credit arrears", the gross arrears would amount to K 6.8 million, approximately 19.5Z of the loans on repayment and 13.7Z of loans outstanding. About 62Z of the arrears are overdues exceed- ing one year. Using the gross arrears figure and distributing total doubtful debts among the loan categories, arrears at end 1984 are as follows: Table 2.4: ABPNG AEREARS, BY TYPE OF LOAN (at December 30, 1984) Amount Percent Loan category (W'O00) distribution Agriculture Small (below K 10,000) 925.9 14 Large (above K 10,000) 1,848.6 27 Oil palm (2,228.6) - Commercial and industrial 1,955.3 29 Equipment finance 1,579.3 23 Hire-purchase 261.9 4 Mini loans 199.7 3 Total 6,770.7 100 - 15 - Agricultural loan defaults account for 41Z of total arrears, commercial and industrial loans, 29Z and equipment finance 23%. Lower arrears are evidenced in hire-purchase loans since the vehicles are owned by ABPNC until full pay- ment of the loan. Mini loans, a small loans program promoted by the Government and granted with superficial appraisal, constitute only 3Z of the arrears although the program is 100Z in arrears and has been discontinued. ABPNG's arrears have been caused by inadequate or faulty appraisal of the subloan application, insufficient monitoring and supervision of projects, difficulty of collecting from large numbers of widely dispersed borrowers, and lack of vigor in dealing with defaults. The recession and poor commodity prices a few years ago have also resulted in poor performance of large numbers of commercial and industrial projects and inadequate incomes for smallholders. 2.22 ABPNG is initiating the necessary measures to control its level of arrears and improve collections. An arrears management program for the branches begun in September 1981 has had encouraging results; it is now being expanded to include head office accounts which represent about 65% of ABPNG's portfolio. ABPNG has developed a systematic approach to arrears management including improved planning for collections, routine arrears reporting, priority collection trips by the head office and branch personnel and optimum use of manpower and vehicles to reach remote areas. For the small rural loans, a system of sending monthly arrears lists to the field offices is used; each field office then submits a three-month plan to visit each account in arrears followed by a monthly report on the actual visits and collections. The larger arrears are dealt with on an individual basis - foreclosure on collateral, petitioning for receivers, forced sale, management takeover, rehabilitation, etc. At the same time, operations staff are concentrating on identification of problem projects in the early stages of loan supervision and disbursement. Better procedures for appraising subloans have recently been established (para. 2.14) and the monitoring and supervision of ongoing opera- tions have been stepped up. All these efforts have been productive, resulting in a significant improvement in ABPNG's arrears situation in 1984. From the 1982 peak level of K 8.8 million, arrears have declined to K 6.8 million in 1984 while the ratio of arrears to loans at repayment decreased from 26.7% to 19.5Z over the same period. The collection ratio (cash collectionsltotal due for collection) also rose from 58% to 78Z. 2.23 ABPNG is also taking steps to correct and improve their loans and arrears statistics by reviewing all loan accounts, eliminating suspense account listings (i.e., loans that have been implemented but not accounted for in the computer), and developing a software program for accounting interest and principal separately. The Rural Lending and Commercial and Industrial Lending Divisions in the Operations Department in coordination with the Branch Lending and Arrears Division are in the process of reviewing each account in arrears with a view toward formulating an action program for dealing with the past due account in terms of rescheduling, additional financing, securing the collateral, or write-off. The provision for bad debts, K 6.0 million plus K 1.7 million reserve for contingencies (about 15% of loans outstanding) is presently adequate but should be reviewed periodically. ABPNG's debt write- off policy is also being refined in order to delineate the timing, responsibi- lity and authority for writing-off loans. Despite all these measures, there is need for further improvements in ABPNG's arrears position which will be undertaken under the proposed project. - 16 - 2.24 Equity Investments. Investments made under ABPNG's equity portfolio total about K 1.8 million which is small in relation to lending operations (Annex 2, Table 4). Equity investments have been limited to companies estab- lished as promotional ventures or acquired from expatriates for transfer to nationals. The subsidiaries in commerce and industry are engaged in printing, car rental, food manufacturing, retail trade and janitorial services. Equity investments in agriculture are mostly in livestock production - poultry, pig- gery and cattle. ABPNG has lent a total of K 18.0 million to its subsidiaries and associate companies, of which K 9.9 million are outstanding and K 0.4 mil- lion (4Z of loans outstanding) are in arrears. ABPNC has not guaranteed any loans of its subsidiaries and associate companies. The overall equity and lending portfolio is sound. Dividends received in 1984 was equivalent to a 23.1% return on capital invested. In line with GOPNG policy of reducing ABPNG's involvement in commercial and industrial sectors and to improve its liquidity position, ABPNG has embarked on a five-year portfolio divestment program to sell its holdings in these areas to new sponsors. The sale of non- agriculture ABPNG shareholdings is expected to be completed by end 1989. 2.25 Income Statements. ABPNG's comparative income statements ior 1980- 1984 are summarized below: Table 2.5: SUMKARY STATEMENT OF INCOME (K 000) 1980 1981 1982 1983 1984 Income Interest on loans 3,094 4,144 4,907 5,087 5,332 Others 1,096 686 653 962 1,274 Total Income 4,190 4,830 5,560 6,049 6,606 Expenses Interest on borrowings 302 494 781 1,189 1,105 Administrative 3,541 4,347 4,326 4,138 4,177 Provisions and contingencies 326 384 5,424 1,207 1,951 Total Expenses 4,169 5,225 10,531 6,534 7,233 Net Income (Loss) 21 (395) (4,971) (485) (627) Ratios: Adm. expenses/Total assets (Z) 8.9 9.3 7.9 6.9 6.7 Return on equity (Z) 0.1 - - - - Interest spread (Z) 7.9 7.9 8.9 7.2 7.4 Income/Loan Portfolio (%) 13.5 12.9 14.3 13.8 15.0 Expenses/Loan Portfolio (Z) 13.4 13.5 27.2/a 14.9 16.5 Cost of borrowed funds 2.8 2.9 3.7 4.4 4.9 /a Increase is due to bad debt expense of about K 5.4 million. - 17 - 2.26 Operating results show a declining trend in net income from K 21,000 in 1980 to a loss of K 4.97 million in 1982 and K 627,000 in 1984. Without provisions for bad debts of about K 5.4 million (12%) of its loan portfolio in 1982, ABPNG would have shown a slight profit of K 0.4 million. Previous provisions for bad and doubtful debts averaging about 1% in recent years have been inadequate. ABPNG's interest spread increased to 8.9% in 1982 resulting from previous increases in lending rates, the low cost of borrowed funds under concessionary external loans, and cost-free equity provided by the Govern- ment. Although interest and other income grew at an average annual rate of 12% during the last five years, it has not kept pace with increased expenses. Total expenses (including cost of provisions for bad debt) as a percentage of the loan portfolio rose from 13.4% in 1980 to 27% in 1982 and 16.5% in 1984. Administrative expenses are high in ABPNG because of the expatriate staff, the number of branches needed to serve a large number of borrowers scattered throughout the rural areas and the high cost of travel to isolated communities. Due to a limited market, ABPNG's overhead costs are spread over a small loan base. ABPNG's ratio of operating expenses to loan portfolio is however comparable to other financial institutions in PNG. For example, the operating expenses ratio of PNGBC is 17.4% but its ratio of income to loans outstanding is 18%, thus providing a slim profit. Salaries comprise the highest share of ABPNG's expenses (40%) while borrowing expenses constitute 29%, and bad debts, 18%. About 25% of total salaries go to 6% of the total staff, the expatriate officers. Substantial savings may be gained by intensive training of local staff to replace the expatriate officers (an estimated K 616,000 - K 770,000 p.a.), and a localization program is currently underway to achieve this. ABPNG is making a major effort to reduce personnel and operating costs with staff reduction (a decrease of 91 personnel from 1980 to 1984), branch reorganization, and localization (a decrease of 14 expatriate officers over the 1980-L984 period). However, these programs will take time and should be undertaken without impairing the efficient operations of the bank. 2.27 Balance Sheet. ABPNG's balance sLeets for L980-1984 are summarized below: - 18 - Table 2.6: SUMMARY BALANCE SHEET (K' 000) 1980 1981 1982 1983 1984 Current asset. 3,700 2,078 3,229 3,248 5,450 Investments 1,729 1,510 1,784 1,816 1,816 Term loans, net /a 31,040 38,254 38,690 43,977 43,760 Fixed assets, net 3,846 4,228 10,960 10,923 10,862 Total Assets 40,315 46,070 54,663 59,964 61,888 Current liability 1,530 1,731 807 758 1,809 Long-term debt 10,911 17,130 21,092 27,082 28,591 Allowances 393 477 2,347 2,193 2,143 Total Liabilities 12,834 19,338 24,246 30,033 32,543 Capital and reserves/b 27,481 26,732 30,417 29,931 29,345 Total Liabilities and Equity 40,315 46,070 54,663 59,964 61,888 Ratios: Current ratio 2.4 1.2 4.0 4.3 3.0 Debt/equity ratio 28:72 39:61 43:57 48:52 49:51 /a Net of provisions for bad and doubtful loans.- 7b Net of accumulated losses. While the debt/equity ratio has risen to 49:51 from much lower levels, this is not a cause for alarm as the Government has routinely increased ABPNG's capital since mid-1982 to assist ABPNG in financing long-term agricultural loans. A revaluation of fixed assets in 1982 amounting to K 6.6 million further increased capital. ANPNG's current-ratio of 3.1 is high because of advances provided by the Government which allowed ABPNG to increase its current assets. Owing to its large equity base, ABPNG has a satisfactory financial position as measured against conventional indicators. D. Issues in Agricultural Credit Interest Rates 2.28 An important issue confronting agricultural credit in PNG is the interest rate policy. Interest rates in the country are primarily determined by market forces. A previous floor on the passbook savings rate has been abolished and there are no ceilings on lending rates (para. 2.02). For ABPNG, however, since November 1984, the Government has prescribed the interest rate - 19 - structure (shown below) which not only sets rates below those of the co _er- cial bank rates but also incorporates subsidies to specific target groups. ABPNG lends at the "official" rates prescribed by Government (see column 1) but targetted beneficiaries are charged lower rates (column 2), with Government paying ABPNG the difference. Table 2.7: ABPNG INTEREST RATES (Z p.a.) "Official Lending" "Subsidized't Types of Loans rates rates Agricultural Loan. Smallholders 8.5 7 Disadvantaged districts 5.0 5 Tree crop projects 9.5 8 /a Oil palm projects 10.5 Livestock development 9.5 Large agricultural loans 9.5 Coamercial/Industrial Loans (C&I) Hire-purchase (including agricultural vehicles) 20.0 Trading stores 13.0 Equipment finance (including agricultural equipment) 18.0 C&I small loans 11.25 C&I large loans 13.5 /a Applies only to the development period before tree crops begin bearing. 2.29 The objectives of the interest rate subsidy are to accelerate the growth of the agricultural sector and tree crop production and exports; increase the incomes of smallholders and those in disadvantaged districts; and increase the productivity of smallholders by making available subsidized finance for cash inputs and the adoption of a higher level of technology. In order to implement this subsidy scheme the Government has already committed over the next four years: (a) K 40 million of loan funds to ABPNG at 3Z p.a. for relending; (b) K 10 million to cover the subsidies on interest rates; and (c) K 5 million to cover operating losses of ABPNG as the real costs of lend- ing by ABPNG exceed their income even at the official lending rates. 2.30 The Bank recognizes the importance of GOPNG's objective to accel- erate agricultural production by providing a measure of credit subsidy to the smallholder sector through ABPNG. However, among the Bank's concerns are that the interest rate subsidies would defeat the long-term viability of ABPNC, lead to misallocation of resources, and aggravate the inequitable distribution - 20 - of income as less profitable enterprises aria bigger farmers would tend to receive the cheap loans. Thus, the Bank suspended the processing of this proposed project in November 1983 and reappraised the project in February/ March 1985 only after intensive policy dialogue with GOPNG on interest rates and significant improvements in ABPNG's performance. An agreement was reachea with the Government during negotiations that: (a) the subsidy payments to ABPNG would not exceed K 12 million during the period January 1, 1986 to December 31, 1988; (b) the level of subsidies and interest rates would; be reviewed annually with the Bank, commencing not later than December 31, 1986 with a view to: (i) monitoring the level of subsidies and their impact on subloan demand; (ii) assessing the effectiveness of the subsidies; (iii) identifying other incentives for stimulating smallholder production; and (iv) making recommendations for reduction of interest rate during the implementation period of the project. .c) the interest rate subsidies would be directed to individual farmers or groups of farmers living at or below the poverty level (estimated by the Bank to be about K 275 per capita p.a.). Under these conditions, credit subsidies would be sharply focused on specific target groups, explicitly provided for in the public budget so that there could be an accounting, and subject to ongoing efforts to assess whether alternative, more efficient instruments could be used in their place. More- over, ABPNG's onlending rates are positive compared with the average inflation rate over the 1981-84 period (7.5%) and projected inflation in 1986 (7.5%), 1987-90 (8Z) and 1991 onwards (5%). They are also significantly higher than the savings deposit rate of 3-6%. The annual cost of subsidies to ABPNG is estimated to be about K 144,000-K 1.1 million for the lower cost of funds and K 1.2-K 1.9 million to cover the bank's operating losses. The interest rate subsidies to the target beneficiaries would cost about K 16,000-K 194,000 p.a. since the subloans at subsidized rates would constitute only 10% to 151 of the projected total loan disbursements of ABPNG over the next five years. The total subsidies would be Less than 0.5% of the projected national budget. Institutional Weaknesses 2.31 Since appraisal in 1983, ABPNG has achieved substantial progress in: (a) streamLining its branch network; (b) reducing both local and expatri- ate staff; (c) improving lending procedures and supervision; (d) initiating a corporate plan; and (e) improving the arrears position. Despite these achievements, ABPNG still faces organizational problems which constrain its lending capability. These include the absence of a Deputy Managing Director - 21 - to assist management, shortage of qualified and trained staff, inadequate planning and budgeting, high administrative costs, inadequate management information system, and poor financial performance. Administrative expenses are high in ABPNG compared to development finance institutions in other devel- oping countries because ABPNG employs expatriate staff, has a small loan base, and caters to a clientele of widely diverse cultural backgrounds located in isolated communities. The arrears position of ABPNG also needs to be improved further through an intensified collection campaign. This project has been prepared to alleviate these problems. The project would strengthen the insti- tutional development of ABPNG through technical assistance, staff training, provision of adequate vehicles and data processing equipment, and an Action Program and Financial Strategy. The action program is designed to reduce ABPNC's costs, strengthen financial management and arrears control, improve ABPNG's planning, budgeting and accounting, strengthen organization and man- agement and improve the bank's manAgement information system and data collection (Annex 3 and paras. 4.03-4.04). E. Rationale for Bank Involvement 2.32 By its support to the proposed project, the Bank would encourage greater inflow of investment into PNG's agriculture sector and assist in accelerating the development of less developed provinces in the country. The Bank would aLso encourage greater smallholder participation, institution building, sectoral development and training of sectoral staff. Through the project, the Bank would assist in developing the financial sector and in fos- tering the growth of the rural credit markets. The Bank would support the institution building efforts of GOPNG started under the Second Agricultural Credit Project by strengthening the lending capability and implementation capacity of ABPNG. Through its involvement in the project, the Bank wouLd contribute to interest rate policy reform by assuring a periodic review of interest rate subsidies with a view to gradually reducing these subsidies over the project implementation period. III. THE PROJECT A. Project Objectives 3.01 The proposed project would continue Bank support to the Government's program of rehabilitating and deveLoping the tree crop sector through loans to ABPNC, which was started under the Second Agricultural Credit Project (Cr. 1149). The project would strengthen ABPNC as a deveiopment financing institution to enable it to perform its role effectively as the main conduit for agricultural credit in the country. The project also addresses GOPNG's development objectives of: (a) increasing and broadening agriculturaL exports through investments in crops for which PNG has a competitive advantage; (b) reducing food imports through modest investments in piggery and poultry enterprises; (c) providing a better livelihood for rural families. - 22 - B. Project Description 3.02 The Project would, over a three-year period: (a) provide funds to ARPNC for lending in tree crop development, poultry, piggery, new crops and other agricultural subprojects, agro-processing facilities, and agricultural equipment and transport vehicles; and (b) strengthen ABPNG by providing data processing facilities, vehicles, funds for staff training, fellowships, studies and administrative expenses and technical assistance for the engage- ment of consultants who would assist in improving its management and financial performance. The project would finance a three-year stice (1985-88) of ABPNG's planned agricultural lending, i.e., subloans approved and disbursed from March 1, 1985 to September 30, 1988. Since subprojects for tree crop establishment will require financing beyond the project period, an agreement was reached with Government during negotiations that all investments begun under the project will be completed using Government and/or ABPNG funds for the period not covered by project financing. Subprojects 3.03 A summary of subproject investment costs under the project is in Table 3.1. These are indicative targets based on potential subloan demand, investor interest and management capability. About US$4.9 million (21Z) is expected to be invested in cocoa production and US$2.6 million (1lX) for the replanting of oil palm for export. Piggery and poultry enterprises would receive about llZ of the subproject funds while US$3.3 million is allocated for new crops, other agricultural production activities and agro-processing. About US$4.4 million (191) is expected to go to the purchase of agricultural transport vehicles and US$5.8 million (24X) to agricultural equipment. Table 3.1: SUBPROJECT COST ESTIKAIE Amount Distribution No. of subloans (US$ million) (X) Cocoa 4.9 21 270 Oil palm 2.6 11 1,200 Poultry and piggery 2.7 11 21 New crops 0.8 3 12 Miscellaneous agriculture 1.9 8 46 Agroprocessing 0.6 3 81 Agricultural transport 4.4 19 n.a. Agricultural equipment 5.8 24 n.a. 23.7 100 1,630 - 23 - 3.04 Approvals and Disbursements. ABPNG approvals and disbursements under the project and portfolio operations are detailed in Annex 2, Tables 5-8 and are sumnarized below. Table 3.2: SUMMARY OF PROJECTED SUBLOAN APPROVALS AND DISBURSEMENTS (KI'OOO) 1985 1986 1987 1988 1989 Total Loan approvals under the project 4,365 5,432 7,218 7,037 - 24,052 Loan disbursements under the project 3,052 4,140 6,388 6,791 - 20,371 Total disbursements 13,976 15,793 15,770 14,981 14,550 75,070 Total outstanding portfolio /a 50,733 53,543 53,476 58,929 64,862 Loan repayments 13,089 13,573 15,331 15,135 15,914 73,042 /a Net of bad debts. 3.05 New loan approvals under the project are expected to increase from K 4.4 million in 1985 to about K 7.0 million by 1988 (Annex 2, Tables 5 and 6). Disbursements under the project would increase from about K 3.1 million in 1985 to K 6.8 million in 1988, comprising about 22-45% of the projected total loan disbursements of ABPNG over the four-year period (Annex 2, Table 7). Detailed assumptions of all financial projections are available in staff working papers. 3.06 Cocoa Development. Project funds would support subloans for developing cocoa areas totalling about 4,580 ha. Three types of cocoa devel- opment would be financed: (a) replanting of 100 ha blocks of existing estates owned by nationals belonging to clan or business groups; (b) new development of 20 ha blocks owned by nationals belonging to business groups; (c) replant- ing of 6.0 ha blocks belonging to smallholders in the Warangoi settlement in East New Britain. The first scheme would cover 1,600 ha of existing estates in East New Britain (601), New Ireland and North Solomon (20%), and Madang (20%). Replanting would be done within one year after land clearing, followed by the construction of a fermentary/drier in the fourth year. The 20 ha cocoa development would cover 2,080 ha situated in East New Britain (10), North Solomon (40Z), Madang (30%), Sepik (1O%), and West New Britain and North Ireland (10%). Under the Warengoi resettlement scheme, 150 settler families would replant about 900 ha using budded and/or hybrid cocoa as planting material. Cocoa subloans would help reverse the production declines experienced in the cocoa industry since 1974-75. - 24 - 3.07 Oil Palm Development. At the Hoskins resettlement scheme in West New Britain, about 1,200 settler families would each replant a 4.0 ha block of oil palm. Smallholder oil palm was originally planted on this area in 1968-73 under Credit 137-PNG with the assistance of the New Britain Palm Oil Development Ltd. (NBPOD), a company jointly owned by the Government and Harrisons and Crossfield. Trees planted in 1968-69 now require replanting because of declining yields and, at heights of more than 15 meters, harvesting has become extremely difficult. 3.08 Livestock Development. In the livestock sector, project funds would finance small poultry producers who are contract growers of large broiler processing firms such as Ilimo Farm Products in Port Moresby and New Guinea Table Birds in Lae. The subloan would cover the construction of broiler sheds and the purchase and installation of the necessary equipment. The processing firm would advance day-old chicks and feed on credit basis; provide supervi- sion, technical advice and veterinary services free of charge; and buy back the 8-week old broilers on a liveweight basis. Only about 10 commercial size piggeries linked to central processors in Lae and Port Moresby are expected to be financed under the project. This is proposed since small family-size operations financed under previous projects have not been successful. 3.09 New Crops and Other Agricultural Projects. The project would encourage lending for non-traditional agricultural projects (e.g., cardamom, pyrethrum, vegetable, corn, citrus, etc.) to assist in the diversification of the production pattern in the country. It would also finance rehabilitation and replacement planting of a limited area (not exceeding 1,000 ha) of coffee. This would help sustain the current average level of coffee production in P1NG. During negotiations an agreement was reached that, two months prior to the start of ABPNG's fiscal year, ABPNG would submit to the Bank for review and approval an annual program for lending to new crops or other agricultural projects including the technical, economic and financial justification for such lending. 3.10 Agro-Processing. The subloans for agro-processing facilities would be for small and large-scale cocoa dryers/fermentaries and coffee processing facilities. Small facilities (200-300 kg) would be for weLl established smallholders on 6 ha blocks who have previously demonstrated their ability to repay their loans to ABPNG. The borrowers would process their own crop but would have the opportunity to process outside crops on a contract basis. The large plants would be sited on large developing plantations (about 100 ha) which have not borrowed from ABPNG for field development but have the necessary amount of raw materials to process and the capacity to repay the loan. 3.11 Agricultural Transport and Equipment. Vehicles to transport agricultural produce (trucks, boats, outboard motors, small planes, etc.) would be financed on a hire-purchase basis, i.e., ABPNG would retain title to the vehicle until full payment of the loan at which time the borrower assumes ownership of the asset. The agricultural equipment to be financed would include earthmoving equipment, portable sawmills, and other agricultural machinery. Subloans for agricultural transport vehicles and equipment are considered essential in the provision of better transport, processing and - 25 - marketing facilities to support che incremental production capacity that would be generated from the project. These subloans are also quick disbursing, more profitable and fully secured; hence, they will improve ABPNG's liquidity and profitability. Smallholders and estates have virtually no alternative sources of financing their agricultural transport and equipment purchases other than through ABPNG since other financial institutions lack branches outside Port Moresby and deal mostly with large commercial enterprises and foreign owned plantations. ABPNG Strengthening 3.12 Vehicles and Data Processing Equipment. The project would provide vehicles to support the intensified supervision and arrears collection camr- paign of ABPNG. This would increase the number of field visits by project officers and the frequency of contacts with delinquent borrowers. To improve the management information system of the bank, data processing equipment and software would be financed under the project. Under the current Electronic Data Processing (EDP) plan, computer terminals and printers would be installed in the regional offices and key departments of the head office. The present UPS (Uninterrupted Power Supply) which is obsolete and insufficient will be replaced and security devices for the computer would be installed to prevent accidental destruction or loss in any of the systems. Computer software would also be upgraded to replace the current accounting system which is inadequate and based on a non-standard language. 3.13 Technical Assistance. The project would finance about 108 man- months of consultant services in the following disciplines to enable ABPNG to strengthen its overall lending capability: (a) senior development banker (3 years) for the position of Deputy Managing Director to strengthen ABPNG management, assist the Managing Director with short and long term plans for reorganization, financial management and control, the manpower development program and coordination of the various departments, regional offices and branches of ABPNG; (b) training specialist (2 years) to define manpower skill gaps, identify training needs, evaluate and improve in-house training programs, upgrade the staff training capability of existing ABPNG staff, and assist in the implementation of the fellowship program; (c) systems analyst/electronic data processing specialist (2.5 years) to develop and test computer software and train ABPNG staff in their use in accounting, subloan monitoring, collection and arrears reporting and other operational requirements; and (d) tree crop agronomists (1.5 years) for short-term periods to prepare and/or update technical guidelines and lending manuaLs on agricul- tural projects, prepare farm models on new agricultural projects, advise on agronomic aspects of loan approval and supervision of the plantation management agencies engaged by the borrowers to implement field development and train ABPNG staff on these aspects. - 26 - The systems analyst and short-term consultants on tree crops were engaged by ABPNG under the Second Agricultural Credit Project. The extension of the services of the systems analyst and the availability of short-term consultancies on tree crop agronomy would be supported under this project. 3.14 Staff Training and Fellowships. Staff training expenses, eight fellowships overseas for degree courses in accounting, banking and finance and various short-term development banking courses abroad, would be financed by the project. The training program will emphasize management training for local staff who would fill the expatriate positions that are expected to be vacant in the next five years. The training specialist to be recruited would evaluate manpower skill gaps, assess the effectiveness of existing training programs, ensure that training is given in all departments by existing senior personnel and develop an improved program and curriculum for in-house training. The consultant will also assist ABPNG in screening participants to the overseas degree courses, identifying suitable colleges and programs which would meet the needs of ABPNG personnel and administering the fellowship program. 3.15 Over the next three years, ABPNG would train 279 staff from all leveLs on various aspects of bank operations (Annex 1, Table 2). Courses would cover loan administration (e.g., records procedures, securities and business communication), lending guideLines and principles, accounting and budgeting, project appraisal and supervision, training and management skills. Field training of the growing force of rural project officers and supervision by the regional offices and branches would be emphasized as well as on-the-job training for Head Office staff. Other course work is to be held in the Secretarial College, Administrative College, Bankers College, and selected universities in PNG. The overseas courses would mostly be short term sponsored by APRACA, ADB, New Zealand, Australia and other donors except for the eight fellowships to be financed under this project. The project would finance the salaries of the training division, materials and curriculum development, travel expenses, allowances, accommodation and meals of partici- pants, course fees and tuition, books and other operational expenses related to training. An agreement was reached at negotiations that the training component of the project would be carried out under a plan agreed with the Bank. 3.16 Studies. Under the Second Agricultural Credit Project, the major concerns have been the implementation capability and financial condition of ABPNG. Subloan approval and disbursement, performance of management agencies and the status of field development were monitored regularly. However, a large information gap exists on the impact of the project on beneficiaries. The proposed project would finance case studies which would monitor and evaluate the impact of the subloans on farmers' income, expenditure pattern, financial condition, attitudes and social well-being. The Monitoring and Evaluation (MWE) of "grass roots" socioeconomic and cultural factors and of beneficiary attitudes would be essential to assure the desired quality, impact and eventual repayment of subloans. - 27 - C. Project Cost 3.17 Project coots over the three-year project implementation period would amount to US$31.3 million equivalent, including taxes and duties of US$200,000 equivalent and foreign exchange of US$17.0 million equivalent, (552). The project costs include incremental operational expenses of ABPUG required to implement the project such as personnel salaries, office and equipment rental, travel expenditures, utilities, etc. Costs are calculated in March 1985 prices updated to July 1985. Since this project is essentially a line of credit to help finance a program defined in financial terms, contin- gency allowances have been integrated into the cost of individual subprojects and non-credit components. It is expected that any cost changes would lead to an adjustment in. the number of subloans. Project costs by component are su ma rized in Table 3.3 and presented in detail in Annex 1, Table 1. Table 3.3: PROJECT COST SUMMARY _i Foreign exchange Local Foreign Total Local Foreign Total as Z of -== (K million) -- -- (US$ million) -- cost Subprojects 8.9 13.4 22.3 9.5 14.2 23.7 62 Vehicles and equipment - 0.5 0.5 - 0.5 0.5 100 Technical assistance 0.1 0.6 0.7 0.1 0.7 0.8 92 Staff training and fellowships 0.4 0.4 0.8 0.5 0.5 1.0 48 Studies - 0.1 0.1 - 0.1 0.1 70 Incremental operating expenses 4.0 1.0 5.0 4.2 1.0 5.2 20 Total Project Cost /b 13.4 16.1 29.5 14.3 17.0 31.3 55 /a Figures may not add up due to rounding. ,b7 Includes taxes and duties of about US$0.2 million equivalent. D. Financing 3.18 Of the total project cost net of taxes and duties, the Bank would contribute US$18.8 million or 60Z; the Government, USS5.5 million or 18X; ABPMG, US$4.2 million or 13Z; and the subborrovers, US$2.8 million or 9X (Table 3.4). The Bank loan would cover the full foreign exchange requirement and US$1.8 million of the local cost. Local cost financing is justified in view of the local content of the anticipated subloans for smallholder agricul- tural development and the high priority Government attaches to this type of development. The loan would be at standard variable interest rate for 16 years with a 7 year grace period. Government would be the Borrower and would assume the foreign exchange and interest risks. Retroactive financing for up to US$1.8 million would be made available to cover eligible expenditures - 28 - beginning March 1, 1985. Retroactive -finane-ing is required because ABPNC has already enlarged its lending program in expectation of this project. If ABPNC had not sustained the lending momentum achieved under the Second Agricultural Credit Project, farmers' Loar demand would have diminished as a result of uncertainty, loan disbursements would be unreasonabLy delayed and the planting program would suffer a setback. In addition, retroactive financing would assure the continuity of service of the consultants engaged under the Second Agricultural Credit Project. Table 3.4: PROJECT FINANCING PLAN Beneficiaries ABPNG Government IBRD Total US$ mln X US$ mLn Z USS mln Z US$ mln Z US$ mln Subprojects 2.8 12 - - 4.5 19 16.4 69 23.7 Vehicles and equipment - - - - - - 0.5 100 0.5 Technical assistance - - - - - - 0.8 100 0.8 Staff training and fellowships - - - - - - 1.0 100 1.0 Studies - - - - - - 0.1 100 0.1 Operating expenses - - 4.2 80 1.0 19 - - 5.2 Total 2.8 9 4.2 13 5.5 18 18.8 60 31.3 3.19 Relending Terms. The Government would enter into a subsidiary loan agreement (SLA) with ABPNC under which US$18.8 million of project funds would be available to ABPNG at 3Z interest repayable in 16 years, including 7 years of grace. The terms are in line with expected subloan repayments. The SLA would be agreed with the Bank, and its signing would be a condition of effec- tiveness. As part of the Government's credit subsidy scheme (para. 2.29), ABPNC would receive supplementary funds from the Government amounting to US$2.1 million as a loan under the same terms as the SLA and US$3.4 million in the form of equity. The subsidy to ABPIC is required to minimize the negative effects of the Government's interest rate policy on the financial condition of the bank. GOPNG has prescribed low interest ceilings on agricultural loans and mandated the increase in the share of agricultural loans in ABPNG's total loan portfolio. This lowers the average yield and increases the risk of ABPNC lending. ABPNC will also continue to operate under difficult conditions due to the high cost of lending to small and widely scattered projects with a clientele that is net- to the concept of credit, commercial enterprise and entrepreneurship. The subsidies, however, would be reviewed annually with the Bank with a view to gradually phasing them out and raising interest rates to more adequately cover costs. - 29 - 3.20 ABPNG would onlend the loan proceeds tolits subborrowers at the following rates: cocoa, pouLtry/piggery, agro-processing, new crops, other agriculture (9.5M); oil palm (10.5Z); agricultural transport (20Z); and agri- cultural equipment (181). 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 parentheses) are expected to be as follows: tree crops other than oil paLm, 12 (5); oil palm, 9 (5); piggery and poultry, 10 (0); new crops and other agricultural production activities, depending on the cash flow but not more than 12 (5); agro-processing, 3 (0); agricultural transport vehicles and equipment, 3 (0). Subborrowers will provide an equity contribution, equal to about 51 of their farm investments, in the form of cash, labor and materials and 20Z of the cost of agricultural vehicles and equipment and oil palm replanting. The actual borrowing costs of disadvan- taged districts, smallholders, and tree crop projects during the development phase (except oil palm) would be at lower rates of 5Z, 7% and 8Z, respectively and the Government will pay ABPNG the difference between its onlending rates and the subsidized rates. E. Procurement 3.21 The range of goods to be financed under the project for on-farm inv.stments is varied and would not be suitable for bulk procurement. As under the Second Agricultural Credit Project, borrowers would purchase plant- ing materials, fertilizer and chemicals, building material, machinery, tools and equipment in accordance with their own choice, through normal commercial channels by shopping with at least three suppliers. Competition for the various inputs expected to be procured by individual borrowers would be keen and prices competitive with world market prices. Land clearing and prepara- tion, planting and upkeep (amounting to about US$3.1 million) would be carried out by the beneficiaries themselves, by members of their clan, or in cases of shortage by bired labor. Planting materials (US$1.6 million) would be acquired through local shopping arrangements from local sources which have adequate supplies. For cocoa projects situated around the city of Rabaul, planting material would be provided by ABPNG's nursery. The nucleus estate would provide oil palm planting materials to the settlers from its nurseries. Building materials, small machinery, equipment and accessories (US$1.4 mil- lion) and fertilizer and chemicals (US$0.8 million), which would be delivered to widely dispersed areas, would continue to be imported and distributed by private dealers. International competitive biddin't (ICB) would not be feasible for the procurement by subborrowers of agricultural transport (US$4.2 million) and agricultural equipment (US$5.4 million) because the size of individual investments would be too small and bulking of contracts is not practicable due to cheir expected diversity and wide dispersal both in loca- tion and time. Field management (US$1.8 million) would be contracted by participating farmers to experienced local firms on the basis of a preselec- tion made by ABPNG. These arrangements have proved satisfactory in the past. Forty-six (46) four-wheel drive vehicles (US$0.4 million) and data processing equipment (US$O.1 million) for ABPNG operations would be procured by ICB in accordance with Bank guidelines. The contract for the systems analyst engaged under the Second Agricultural Credit Project would be extended by 2.5 years under the same terms of reference. The post for Deputy Managing - 30 - Director has been advertised and a suitably qualified individual is expected to be recruited by December 31, 1985. The terms of reference of the tree crop agronomists were prepared under the Second Agricultural Credit Project and would not be changed under this project. The terms of reference for the training specialist and the monitoring and evaluation studies would be pre- pared by ABPNG in consultation with the Bank by December 31, 1985. Consul- tancy services would be contracted in accordance with the Bank's Guidelines for the Use of Consultants. F. Disbursement 3.22 Disbursements from the proposed loan would be made on the basis of: (a) 69Z of subloans disbursed by ABPNG; (b) 100X of the cost of consult- ant's services, ABPNG staff training expenses and fellowships, and studies; and (c) 100% of foreign expenditures and 65% of local expenditures for vehicles and-equipment. During negotiations, an agreement was reached that ABPNG would submit all subloans exceeding K 120,000 to the Bank for prior approval along with appraisal reports on the technical, marketing, financial and economic feasibility of the subproject. The introduction of a special account was discussed during negotiations but was not considered feasible by the Goveranent delegation. Disbursements will be fully documented except those against subloans and staff training expenses which would be based on certified statements of expenditure (SOE). Supporting documentation would be made available for review by supervision missions. Loan closing is expected by June 30, 1989. An estimated schedule of disbursements is given in Annex 1, Table 3 and a proposed allocation of loan proceeds in Annex 1, Table 4. The projected disbursement schedule deviates from the historical profile of dis- bursements for agricultural projects in Indonesia, PNG and the Pacific Islands because of the presence of retroactive financing in the first semester and the nature of the project. Since this is an agricultural project which would finance a specific time slice (1985-88) of ABPNG's Lending operations, dis- bursements would be terminated at the completion of the three-year period. Moreover, the projected disbursement schedule is consistent with the disburse- ment profile of the Second Agricultural Credit Project. ABPNG has also accumulated sufficient experience in handling subloans financed under previous Bank projects which would tend to accelerate disbursement. C. Accounting and Auditing 3.23 ABPNG's accounting is computerized but present software neither adequately covers requirements of lending operations, nor provides readily retrievable accounts and management information. The accounting system and computer utilization in ABPNG operations is being improved with assistance under the Second Agricultural Credit Project. "Profit center" accounting would be introduced to provide revenue, cost, and lending data by operations center (branches or head office), and data would become available on loans and subborrowers by loan category, loan size, crop, area of development, etc. Computer program improvements would be carried out under the proposed project to provide appropriate collection and arrears reports. Revised accounting centers would be integrated with an improved budget system to facilitate financial planning. - 31 - 3.24 An agreement was reached at negotiations that project accounts including those disbursed against SOE would be maintained separately for individual project components in accordance with sound accounting practices. These would be made available for Bank examination d9 requested. ABPNG's accounts are audited by the Auditor-General of PNC and more recently by independent auditors. Audit reports in the past have not provided full financial assessments of ABPNG operations or accounting procedures. An agreement was reached at negotiations that an annual audit of ABPNG would be carried out by independent auditors acceptable to the Bank on behalf of the Auditor General according to the Illustrative Form of Audit Report for Development Finance Companies. Audit reports would be submitted to the Bank within six months of the close of each fiscal year. These audit reports would contain opinions on the findings and procedures used in preparing financial statements, the quality of the portfolio, and the aaequacy of provisions for bad and doubtful debts. H. Monitoring and Reporting Requirements 3.25 Project monitoring and reporting requirements will be the same as those followed under the Second Agricultural Credit Project. ABPNG would submit to the Bank quarterly and annual progress reports on its subloan dis- bursements, action program, financial condition, arrears and collection, withdrawal of Bank funding, training program, and terms of reference, execut- ing agencies and costs of special studies and consultancies. In addition, each regional office would maintain up-to-date files and statistics of its project subloans which would be available for review by the Bank. ABPNG would also prepare a Project Completion Report to be submitted to the Bank not later than six months after the closing date of the loan. IV. PROJECT IMPLEMENTATION A. ABPNG as Implementing Agenc 4.01 ABPNG would be the implementing agency of the proposed project. It would channel funds to and supervise the subprojects through its Operations and Technical Departments and its regional offices and branches. Management services to clan blocks, plantations or individual borrowers would be provided by the National Plantation Management Agency (NPMA), private management agen- cies, ABPNG staff, and central processors (for poultry and piggery). DPI staff would provide assistance on technical aspects of the subprojects and land utilization studies prior to ABPNG lending in new agricultural areas. The Administration and Personnel and Accounting and Finance Departments would handle studies, technical assistance, staff training, fellowships, vehicles, data processing equipment, and administrative expenses. Status of Preparation 4.02 ABPNG has capable managers and key staff in place who have carried out similar programs. The post of Deputy Managing Director has been adver- tised and the recruitment of a suitably qualified individual. a condition of loan effectiveness, is expected by December 31, 1985. The systems analyst is - 32 - in place and the terms of reference for the tree crop agronomists have been prepared. The terms of reference for the training specialist and the monitor- ing and evaluation studies will be prepared by ABPNG, in consultation with the Bank, by December 31, 1985. A plan has been agreed with the Bank on carrying out the training component of the project. A five-year vehicle procurement plan has been prepared by ABPNG and bidding documents are under preparation for the first year requirements of vehicles and equipment to be purchased under ICB. The approval of eligible subloans commenced March 1, 1985. B. Action Program and Financial Strategy 4.03 In order to strengthen the capacity of ABPNG to implement this project and improve its profitability, an agreement was reached at negotia- tions that ABPNG would carry out the Action Program and Financial Strategy outlined in Annex 3 according to the timetable indicated therein. The finan- cial aspects of this plan include: (a) a staff retrenchment program from the present 334 to 317 in 1989 to reduce costs; (b) a continuing localization program to reduce the cost of expatriate staff; (c) a portfolio divestment program; and (d) improved arrears management and collections. ABPNG would also complete annual and five-year corporate plans for submission to the Ministry of Finance and the Bank by March 31, 1986 and prepare annual budgets of approvals and expected disbursements which would be consistent with avail- able government budget funds, external loans and internally generated funds. The corporate plan would provide direction to ABPNG's lending and investment activities and a framework for developing its annual lending programs and expenditure budgets. The Action Program also includes: (a) the establishment of profit center accounting by March 31, 1986 to facilitate financial plan- ning; (b) completion of an internal audit program for inspection of the head office and branches by January 31, 1986; and (c) improvements in computer programming and management information systems to provide ABPNG managers with the information required for sound decision-making. 4.04 The Action Program for ABPNG is just one of several measures to resolve ABPNG's financial difficulties. ABPNG is continually improving loan appraisal, supervision and monitoring of subborrowers with the assistance of development banking specialists provided under a New Zealand grant to train branch field staff. This would enable ABPNG to make better loans and improve the quality of its subprojects. Moreover, the interest rate structure would be reviewed annually by GOPNG with the Bank with a view to gradually reduce subsidies and increase ABPNG's interest rates on agricultural loans. GOPNG has also allocated funds to cover the operating losses of ABPNG. Following these actions, ABPNG should be in better financial health in 1990. C. Lending Procedures 4.05 As in the Second Agriculture Credit Project, farmers or clan leaders interested in 20 ha cocoa development would be contacted by staff of either ABPNG, management agencies 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 - 33 - would obtain title to their previously surveyed and demarcated lands which must be in minimum blocks of 15 to 20 ha. This process is expected to take about three months and will be handled by staff of the Decentralization and Land Departments and provincial staff, assisted when necessary by management agents, private solicitors and surveyors. 4.06 The relevant ABPNG 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 choose a manager from a ABPNC-approved list. The manager would subsequently prepare a farm plan, assess the creditworthiness of the potential borrowers, and sub- sequently would be in charge of developing the blocks, including land clearing and preparation, maintenance, input supplies and marketing of produce. The group members would be required to contribute as equity the clearing of the land, drainage, roads, lining, shade establishment, and establishment of a hybrid cocoa nursery. This equity input would make the project area ready for the field planting of cocoa. During this period, the approved management agency will be paid a premanagement fee (up to K 2,400/subproject) for a period of up to one year to supervise the group's equity work, and the bank will make funds available, when required, for the cost of the nursery, the shade materials, tools, etc. The Government would subsidize the premanagement fees while the remaining management fees would become part of the subloan extended by ABPNG. The phasing out of management services would be over a 4-7 year period depending on each group's ability to assume management responsibilities as determined by ABPNG's branch managers. 4.07 For cocoa estates, oil palm and cocoa settlement areas which have families and land rights already established and settlement authorities in place, procedures would be limited to ABPNG loan approval and supervision. Commercial poultry and piggery investors will be relatively few in number and will be in a much better position than participating farmers to arrange for land leases and adequate management, and hence no complications are expected. The borrowers for development of new crops or other agricultural enterprises will most likely be national husine3s groups or .:ompanies and would thus be handled in a similar manner as the 20-ha cocoa groups. Eligible borrowers for agricultural transport vehicles and equipment would be only farmers, national business groups, and companies engaged in agricultural enterprises. The standard ABPNG procedures for loan processing, approval, and supervision would apply. These lending procedures have been improved and are considered satisfactory (para. 2.14). D. Supervision of Subloans 4.08 Agricultural projects financed by ABPNG are currently being super- vised by DPI for rubber and oil palm, plantation management agencies for coffee and cocoa, and ABPNG staff for the Warengoi cocoa rehabilitation scheme. The ABPNG supervision of the Warengoi scheme has produced the best results in terms of the involvement of smallholders, quality of plantings, and cost of tree crop establishment. The projects being supervised by DPI are performing satisfactorily, but the shortage of qualified and trained staff might constrain implementation of future subloans. The performance of manage- - 34 - ment agencies under the previous project was highly variable, ranging from poor to adequate. They were deficient in involving the clan groups in planta- tion activities, completing the planting within a reasonable period of time, maintaining the plantings in good condition and in advising the clan group of their current indebtedness. The agencies had full control of the loan pro- ceeds but were not accountable for the success or failure of the project. They received their management fee per hectare for the total area being financed regardless of the area planted and of the quality of plantings. There was also no mechanism to evaluate the performance of these agencies and to compensate them accordingly. However, where ABPNG provided technical staff to supervise the management agencies, as in cocoa projects in East New Britain, the results were satisfactory. ABPNC has therefore instituted measures to correct the deficiencies o' the system and strengthen supervision in the field. Technical manuals were prepared by consultants under the Second Agricultural Credit Project setting appropriate guidelines on project imple- mentation. A system of periodic reviews in the field has been established to assess the performance of management agencies. New field appraisal and review procedures have been drawn up, including standardized and improved monthly and quarterly returns, and forecast budgets submitted by management agencies. A tripartite agreement involving ABPNG, the management agency and the owners has been formulated which bases the management agency fee on the area planted, gives ABPNG full control over the disbursement of funds, and delineates more clearly the responsibilities of the management agency. With these measures, the quality of field development shoald improve, thus enhano'ing the capability of borrowers to repay the loan. 4.09 Pricing of Smallholder Oil Palm. With respect to the financing of oil palm replanting by smallholders in Hoskins, the appraisal mission found that in 1982 smallholders were inadequately paid for their produce by the New Britain Palm Oil Development (NBPOD), the company which operates the nucleus estate. Consequently, the smallholders had little incentive to harvest their crops, and had been reluctant to participate in the replanting scheme. Although prices have now been increased, Government still seeks to ensure maximum benefits for the oil palm smallholders to be financed under the proj- ect. An agreement was reached at negotiations that Government would examine on a quarterly basis the monthly statements of cost coefficients used by nucleus estate companies in calculating FFB prices for smallholders and cause such coefficients to be adjusted, if necessary, to ensure that the prices provide a sufficient incentive for the smallholders to replant and harvest oil palm. Detailed guidelines for accounting for prices to be paid to smallhold- ers for their production are summarized in Annex 7. E. Financial Projections 4.10 Projected Balance Sheet, Income and Cash Flow Statements of ABPNG under the project are provided in Annex 2, Tables 9-li. The Profit and Loss Statement shows increasing losses up to 1987 and lower losses in 1988-89. This is a result of inadequate interest rates, increased operating and borrow- ing expenses, and provisions for bad debts and contingencies that are large relative to total income. The increasing share of lower yielding agricultural loans to total loan portfolic as mandated by Government also contributes to - 35 - accumulating losses. A cost analysis of the portfolio is provided in Annex 2, Table 12. The ratio of income to average loan portfolio would range from 12.7Z to 14.1% but total expenses as a proportion to loans would amount to 15.6-18x. The upward trend of operating expenses in the first three years of the project is a result of the additional expenses of consultants, intensified staff training, increased number of vehicles for supervision and collection, and added travel, repaix and maintenance costs which are necessary for the institution-building efforts of ABPNG. Borrowing expenses would be maintained at 2.4% to 3.3% of the loan portfolio, and bad debts and contingencies provi- sion, at 2.5-2.9Z. 4.11 Cash flow estimates indicate that ABPNG will continue to be financially constrained due to: (a) loan disbursements exceeding repayments; (b) increased operating expenditures; and (c) increased borrowing expenses. In view of this constraint, GOPNG will have to make injections of equity capitaL amounting to K 3.2 million and provide loans of about K 2.0 million to ABPNG in addition to the loan proceeds from the Bank. 4.12 Projected balance sheets indicate total assets would increase from K 60.3 million in 1985 to K 75.3 million in 1989. Correspondingly, total Long-term debt will rise from K 25.5 million to K 39.3 million. In view of the level of debt and in order to sustain a debt-equity ratio no greater than 75:25, Government's commitment of K 3.2 million of funds for the project to ABPNC as equity is essential. An agreement was reached during negotiations that ABPNG would not exceed a debt-equity ratio ceiling of 75:25 during the project period. The 75:25 limit set for the bank is prudent in view of tbd level of arrears, uncertainty in future sub-loan repayment performance and expected provisions for bad debt in 1986-89. ABPNG's arrears situation is now under control. However, to keep arrears at a manageable level, an agreement was reached during negotiations that ABPNG would not exceed an arrears to loans in repayment percentage of 20%. V. PRODUCTION, MARKETS, PRICES AND FIANCIL ANALYSIS 5.01 The project's aggregate incremental production, financial and cconomic rates of return cannot be estimated since the actual mix of subloans will depend on market forces. Thus, detailed financial and economic analyses have been conducted only on subprojects for which established farm models exist: namely cocoa and oil palm. There are no illustrative models for agricultural transport and equipment loans since each loan would vary from each other in terms of size, type of vehicle or equipment, location, purpose, etc. ABPNG has not developed specific farm models for poultry and piggery enterprises owing to their diverse nature. - 36 - A. Production and Yield 5.02 Incremental production at full development of subprojects would be about 7,325 tons of cocoa dry bean, and 121,260 tons of oil palm fresh fruit bunches (ffb). Peak crop yields are expected to be as follows: Tons per Hectare 100 ha cocoa ...................ss........ 1.60 dry bean 20 ha cocoa............................... 1.75 dry bean 6 ha cocoa .....ee....e................... 1.25 dry bean Oil palm... ............................... 18 ffb The attainment of these yields is contingent upon good management services and a high quality of tree crop establishment. The agronomic conditions, soil and climate in the project areas are extremely favorable to the types of crops being developed. Based on past experience under the Second Agricultural Credit Project, cocoa is expected to yield about 1.25-1.75 tons/ha at full maturity depending on the farm model. This is higher than most countries but lower than the peak yield of about 3.0 tons/ha reached at Keravat Research Station in PNG. Oil palm yields are expected to average about 18 tons ffb per ha at full development comparable to the range of smallholder yields (19-24 tons ffb/ha) reported under a previous oil palm project in PNG. The projected yields are below the 34-35 tons ffb/ha yield achieved on some nucleus estate farms because soil conditions and management supervision would not be uniformly ideal. B. Markets 5.03 PNG's marketing arrangements are characterized by the relatively small volumes handled, the very important role of the private sector, the overwhelming orientation towards exports, and the high degree of organization of collection, processing and sales. Smallholders usually sell their cocoa to middlemen at roadside or to processors who in turn sell to exporters regis- tered by the Cocoa Industry Board. Plantations sell directly to exporters in processed form. The Cocoa Board assists effectively in orderly marketing and price stabilization. It functions as an export regulatory agency, registering processors and exporters, regulating the activities of buyers and dealers and approving sales contracts. The Board also administers stabilization funds obtained from levies on exports which provide a price support for cocoa. Processing and sales of palm oil and kernels are handled by the nucleus estate companies and their overseas representatives. In 1983, an oil palm commodity stabilization fund was established to reduce the impact of fluctuations of world prices on growers' incomes. As of December L984, the stabilization funds for coffee, cocoa, copra and oil palm had accumulated reserves amounting to K 159 million (US$168 million) with coffee accounting for more than half, cocoa 30Z, oil palm 6% and, copra the remainder. 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. On - 37 - the whole, marketing of the main cash crops and commercial pigs and poultry in PNG is well organized and functions properly. 5.04 No major difficulties are foreseen in marketing the incremental production of this project given its insignificant size in relation to the size of the world market, and specifically in view of the preferential treat- ment accorded by Australia (priority in buying and duty-free status) to imports from PNG. World trade in cocoa is currently about 1.5 million tons, with PNG contributing 2Z. Project incremental production of 7,325 tons would be only 0.5Z of world trade. This production would partially offset the 8,700 ton decline in PNG production since 1975 when PNG exports formed 2.4Z of world trade. World exports of palm oil are about 3 million tons of which PNG's share is more than 3Z. Palm oil accounts for 14% of world traee in edible oils and fats, second only to soyabean oil. PNG's market share of palm oil has been growing, and PNG now accounts for 30% of the annual increase of some 75,000 tons in world trade of oils and fats. In view of this the incremental production of 27,900 tons over 11 years would be absorbed easily. PNG's share of the 520,000 ton worLd trade in palm kernel and palm kernel oil is about 3Z. The incremental production increase of some 4,800 tons of palm kernel oil would also not pose a marketing problem. 5.05 Pork and broiler meat would substitute for imports, and domestic demand is expected to be strong. From 1973 to 1980, per capita chicken meat consumption increased from 1.18 kg to 3.05 kg, and by 1985 this is anticipated to rise to 3.21 kg. Project-induced production would represent a small proportion of the present supply of broilers and pork, and thus would be easily marketed. The meat would be sold in the main consumption centers of Port Moresby, Lae, Highlands and Rabaul using existing retail channels which should be adequate. C. Price Structure 5.06 Farm inputs and outputs have been valued in terms of constant 1985 prices for both the farm budgets and economic analyses. Price projections were based on world market price forecasts produced by the Bank's Comr,odity Division, adjusted for transportation, processing and handling costs to the farmgate. Annex 4, Table I gives the price structure for agricultural outputs under the project. The cocoa price is currently US$2,081/ton in New York and is expected to drop to US$1,724 in 1990. However, the price is projected to increase by 15Z from 1990 to 1995, at which time the f.o.b. price is expected to be about K 1,672/ton. The oil palm price, presently US$602/ton c.i.f. Europe, is expected to decline by 10 over the next 10 years. The f.o.b. price in 1995 is expected to be K 429/ton. The 1985 price of palm kernel is US$411/ton c.i.f. Europe but is expected to decrease by 35Z over the period 1985-1995. The projected f.o.b. price in 1995 is about K 190/ton. D. Financial Analysis 5.07 The main financial beneficiaries of the project would be small- holders in the Eastern Highlands, North Solomons, Madang, East and West New - 38 - Britain Provinces. Borrowers for 6 ha cocoa and 4 ha oil palm development are mostly settlers from overcrowded parts of the country. The 20 ha cocoa devel- opment subloans are usually to traditional landowners who would form a business group as a legal borrowing entity. Each business group usually consists of 10-15 families with each family head as a director in the business group. With an average family size of 5, the group's total number is about 50 to 75 persons, with about 20-30 persons of working age who will work on the block. Owners of the 100 ha cocoa estates could be: (a) a business group usually composed of more than one hundred persons which has been organized to take over an existing plantation from expatriate owners with financial assist- ance from the Lands Department's Plantation Redistribution Acquisition Scheme; (b) a business arm of a provincial government, local council or a church to help raise funds for public welfare-related works; (c) a private company with less than 25% foreign shareholding. Most of the loans are expected to fall under the first two categories. Income of business group members ranges from nil (self-sufficient subsistence farming with no cash transaction) to the ownership of some coconut and a few old cocoa trees with yields less than K 1,200 per family. 5.08 An analysis of financial costs, benefits and risks indicates the subprojects would be financially attractive to the beneficiaries. The estima- ted financial rates of return of typical investments to be financed under the project are: 100 ha cocoa, 34%; 20 ha cocoa, 26%; 6 ha cocoa resettlement scheme, 31X; and 4 ha oil palm, 45Z (See Annex 5 for details). Smallholder family incomes can be calculated only for the 6 ha cocoa and 4 ha oil palm models since the 120 ha and 20 ha cocoa farms would be jointly owned by a number of families and clan groups. Incremental net cash family incomes p.a. of US$2,898 (6 ha cocoa) and US$2,869 (4 ha oil palm) at maturity would repre- sent significant increases over incomes without the project. The annual outlay for fertilizer, chemicals, and other cash inputs would comprise only 102 and 9% of cocoa and oil palm gross revenues, respectively. Even if impu- ted costs of labor are included, the operating costs would be 42% of cocoa revenues and 29Z of oil palm revenues. Debt service is reasonable and would amount to only 28Z and 18% of the net cash flow before debt service of the 6 ha cocoa and 4 ha oil palm farms, respectively. Such favorable financial performance assumes optimal agronomic conditions. timely inputs, and profes- sional management by private agencies and ABP1r staff which would be made available to farmers. Details of projected farm production, production costs and labor requirements under various farm models are given in project working papers. The financial incentives to borrowers who would purchase agricultural vehicles and equipment depends on the demand from smallholders and estates who are being assisted by the project. Since the primary production activities are expected to be highly profitable, the derived demand for transport, and marketing facilities is expected to be substantial. The lending procedures, and terms and conditions under the project would ensure that these subloans are financially viable (paras. 3.20, 3.22, 4.06). - 39 - VI. BENEFITS, RISKS AND JUSTIFICATION A. Benefits 6.01 In addition to increased agricultural production (para. 5.01), the project is expected to directly benefit about 3,400 smallholder families, 85% of which are considered poor (earning less than K 275 per capita p.a.). It would provide full-time employment for about 3,500 people, expand exports of cocoa and oil palm and ensure a productive and sustainable use of under- utilized land resources. The total value (in constant 1985 prices) of project-related exports is estimated at about US$21.5 million annually at full development, yielding revenues to COPNG of about US$0.6 million annually from taxes. About 60% of the project costs are directed to the poor and the share of the poor in total benefits is estimated to be about 70%. The project would also have the beneficial effect of strengthening ABPNG as a development financing institution, increasing its lending capability, and improving the planning, supervision and implementation of subprojects. The expansion of ABPNG's lending volume would maximize the use of existing staff and facilities and result in the bank's improved financial condition in the long run. Experience gained in the development of tree crops and livestock enterprises would be useful in future expanded programs for the development of priority agricultural areas. B. Economic Analysis 6.02 The estimated economic rates of return (ERR) of the main farm models are: Table 6.1: ECONOMIC RATES OF RETURN 100 ha cocoa ............38 20 ha cocoa ..................30 6 ha cocoa ..............o... .......... o.o.o.oe*e.o22 4 ha oil palm ............ ..o...... o...o.. ooo..o....33 The benefit/cost analysis is made in border Kina. International prices have been converted to Kina at the current exchange rate. Local prices have been converted to border Kina using appropriate conversion factors (CF). A standard CF of 0.965 has been used in converting m4st local costs to border Kina since PNG has a relatively open economy, and except for labor wages, has few price distortions. The current rural minimum wage rate is K 2.95 per day, which is high compared to both the market wage and labor productivity. Accordingly, ERRs for the farm models have been calculated using a CF for labor of 0.65. Without project revenues are considered negligible: prior to development, the estates are either abandoned or neglected, and in such poor condition that revenues generated range from nil to barely enough to cover - 40 - maintenance costs. Similarly, the 6 ha farms are usually in various stages of deterioration, with old and severely diseased trees yielding negligible income. The 4 ha oil palm areas have been planted from 12-17 years ago and yields are expected to be negligible without project development. The 20 ha cocoa development areas are in an unimproved state normally covered by rain forest. Annex 6, Table 1 shows the streams of costs and benefits used for the economic analysis. C. Sensitivity Analysis 6.03 Sensitivity analysis was used to determine which variable would be most crucial to the success of the subproject. Crossover values for a 10l discount rate, the opportunity cost of capital in PNG, reveal that farm investments would be justified even with large reductions in revenues or increases in costs (Table 6.2). The ERRs are not very sensitive to changes in costs as costs can increase from 52% to 130Z without reducing the farm model ERRs below 10%. Sensitivity to changes in cocoa and oil palm revenues is small, and even if revenues are reduced individually by up to 56%, the subproject returns would remain above 1OZ. Similarly, subproject benefits can be delayed by three years and the ERRs would still be above 10%. Table 6.2: SENSITIVITY ANALYSIS Appraisal Crossover value value Z (K '000) (K '000) change 100 ha cocoa Total costs 710 1,382 95 Total benefits 1,382 710 -49 20 ha cocoa Total costs 166 288 74 Total benefits 288 166 -42 6 ha cocoa Total costs 22 34 52 Total benefits 34 22 -34 4 ha oil palm Total costs 6 15 130 Total benefits 15 6 -56 D. Risks 6.04 The primary project risk is ABPNG's capability to implement the project adequately, in view of ABPNC's organizational problems coupled with a - 41 - borrowing clientele drawn from diverse culturaL backgrounds who may be enter- ing the market-oriented economy for the first time. To reduce the likelihood and potential impact of these risks, the project stresses the institutional development of ASPNG through an Action Program and Financial Strategy, tech- nical assistance, staff training and fellowships and the provision of adequate vehicles and equipment. More efficient performance by the management agencies which would be closely supervised by ABPNG, should ensure acceptabLe field development quality, cost-effective operations, and mobilization of the necessary amount of labor. As additional protection, the collection perfor- mance and arrears position of the bank would be closeLy monitored. Taking the above safeguards into account the project's indicated risks are judged acceptable. E. Environmental Impact 6.05 The areas to be developed agriculturally are presently under old plantings, kunai grass (Imperata Cylindrica), often in undulating or steeper topography. The project would make more efficient use of existing land resources and help reduce uncontrolled shifting cultivation in highly erodable terrain by establishing tree crops in a stable, long-term agricultural system which would preserve favorable ecoLogical conditions. VII. ACREEMENTS REACHED AND RECOMMENDATION 7.01 During negotiations, agreements were reached with the Government that: (a) with respect to the subsidy payments to ABPNG (para. 2.30): (i the subsidy would not exceed K 12 million between January 1, 1986 and December 31, 1988; (ii) the level of subsidies and interest rates would be reviewed Annually with the Bank, commencing not later than December 31, 1986 with a view to: 1. monitoring the level of subsidies and their impact on subloan demand; 2. assessing the effectiveness of the subsidies; 3. identifying other incentives for stimulating smallholder production; and 4. making recommendations for reduction of interest rate subsidy during the implementation period of the project. (b) credit related investments would be completed using Government and/or ABPNC funds beyond the termination of project funding (para. 3.02); - 42 - (c) Government would ezamine on a quarterly basis the cost coefficients used in calculating prices for smallholders in order to ensure that farmers are adequately compensated for their produce (para 4.09). 7.02 During negotiations, agreements were reached with ABPNG that: (a) the interest rate subsidies would be directed to individuaL farmers or groups of farmers living at or below the poverty level (estimated by the World Bank to be about K 275 per capita p.a.) (para. 2.30); (b) an annual program for lending to new crops and other agricultural projects including the technical, economic and financial justifica- tion for such lending would be submitted to the Bank for review and approval two months prior to the start of ABPNG's fiscal year (para. 3.09); tc) the training component of the project would be carried out under a plan agreed with the Bank (para. 3.15); (d) all subloans above K 120,000 with appraisal reports on the technical, marketing, financial and economic feasibility of the sub- projects would be submitted to the Bank for approval prior to the approval of the subloans by ABPNG (para. 3.22); (e) separate project accounts which would be available for Bank ezamination as requested would be maintained (para. 3.24); (f) annual audits of ABPNG accounts would be carried out by independent auditors on behalf of the Auditor General in accordance with the Illustrated Form of Audit of Development Finance Companies and submitted to the Bank within six months of the closing of the fiscal year (para. 3.24); (g) the Action Program and Financial Strategy outlined in Amnex 3 would be undertaken according to the timetable indicated therein (para. 4.03); and (h) ABPNG would not exceed a debt-equity ratio ceiling of 75:25 and an arrears to loans in repayment percentage of 202 (para. 4.12). 7.03 Conditions of effectiveness would be (a) appointment of a suitably qualified individual as Deputy Managing Director (para. 2.07) and (b) signing of the Subsidiary Loan Agreement acceptable to the Bank between Government and ABPNG (para. 3.19). 7.04 Subject to the above, the project would be suitable for a Bank loan to GOPNG of US$18.8 million equivalent, and retroactive financing of up to US$1.8 million for eligible expenditures after March 1, 1985. The loan would be for 16 years including 7 years of grace at the standard variable rate. AM I - 43 Table I PAPUA NEW GUINEA TRIRD AGRICULTURAL CREDrT PROJECT Prolect Cost Estimates /a Foreign Local Foreign Total Local Foreign Total as 2 (Kina million) - - (US$ million) - of total Investment Costs SubproJects Cocoa 3.4 1.2 4.6 3.7 I.2 4.9 25 oil palm 1.6 0.8 2.4 1.7 0.9 2.6 35 Poultry and piggery 1.8 0.8 2.6 1.9 0.8 2.7 30 New crops 0.5 0.2 0.7 0.6 0.2 0.8 30 Other agriculture 1.3 0.5 1.8 1.3 0.6 1.9 30 Cocoa processing 0.3 0.3 0.6 0.3 0.3 0.6 50 Agricultural transport - 4.2 4.2 - 4.4 &.4 100 Agricultural equipment - 5.4 5.4 - 5.8 5.8 100 Subtotal subprojects 8.9 13.4 22.3 9.5 14.2 23.7 62 Vehicles and Equipment Vehicles - 0.4 0.4 - 0.4 0.4 100 Equipment - 0.1 0.1 - 0.1 0.1 100 Subtotal vehicles and equipment - 0.5 0.5 _ 0.5 0.5 100 Technical assistance 0.1 0.6 0.7 0.1 0.7 0.8 92 Staff training and fellowships 0.4 0.4 0.8 0.5 0.5 1.0 48 Studies - 0.1 0.1 - 0.1 0.1 70 Total Investment Costs 9.4 15.1 24.5 10.1 16.0 26.1 64 Recurrent Costs Incremental oper-ting expenses 4.0 1.0 5.0 4.2 1.0 5.2 20 Total Prolect Costs /b 13.4 16.1 29.5 14.3 17.0 31.3 55 /a Costs are at March 1985 prices updated to July 1985. Identifiable taxes and duties total about K 0.2 million (US$0.2 million); total project cost net of taxes is K 29.3 million (US$31.2 million). /b Columns may not add up due to rounding. ANNEX I - 44 - Thble 2 PAPUA NEW GUINEA THIRD AGRICULTURAL CREDIT PROJECT Agriculture Bank of Papua Nbw Guinea Staff Training Program, 1985-88 1985 1986 1987 1988 Total (4th qtr) (man years) In-House Records procedures 10 - - 12 22 Intermediate lending 5 12 - 12 29 Securities - - 12 - 12 Advanced lending 6 12 - 12 30 Train the trainers - 4 4 - 8 Bsiness communications - - - 6 6 Supervisors - 12 12 - 24 Appraisers 6 - - 12 18 Managers - - 6 3 9 Subtotal 27 40 34 57 158 External - PNG Secretarial College - 2 3 3 8 Administrative College - - - 2 2 Bankers College 6 20 24 24 74 PNG universities - 2 5 2 9 Subtotal 6 24 32 31 93 External - Overseas Overseas 2 5 5 8 20 World Bank - 6 6 4 16 Subtotal 2 11 11 12 36 Total 35 75 77 100 287 ANNE 1 - 45 - Table 3 PAPUA NEW GUINEA THIRD AGLICULTURAL CREDIT PROJECT Estimated Schedule of Disbursements Bank Projected Historic profile fiscal disbursement Second Agricultural Division year Semester US$ million z Year Credit Project projects 1986 1st 1.8/a 10 1 0 2nd 2.4 13 13 5 1987 1st 4.7 25 2 43 19 2nd 8.6 46 69 1988 1st 13.6 72 3 86 36 2nd 17.6 94 96 1989 1st 18.8 100 4 100 51 2ad 1990 1st 65 2nd 1991 1st 6 2nd 78 1992 1st 7 2ad ~~~~~~~~~~~~~~90 1993 1st 8 96 1994 100 /a Retroactive financing. ANNEM 1 - 46 - Table 4 PAPUA NEW GUINEA THIRD AGRICULTURAL CREDIT PROJECT Proposed Allocation of Loan Proceeds (US$ million) Foreign Loan Total exchange Amount 2 disbursed Subloans 23.7 14.2 16.4 69 Vehicles and equipment 0.5 0.5 0.5 100 Technical assistance 0.8 0.7 0.8 100 Staff training and fellcwships 1.0 0.5 1.0 100 Studies 0.1 0.1 0.1 100 Incremental operating expenses 5.2 1.0 - - Total 31.3 17.0 18.8 -47- AMN 2 Mhart I L~z u~~~~~~~~p m~~~~~~~~~~~~~~~~~~N Fit ~ ~ ~ ~ ~ M I4~~~~~4c 41*~~~~~c go) A~g 2 - 48 Taul PAPUA NMU CUDNA TRD AM:CULTURAL CREDIT PDJWCT ARrceulture Unk of Papua Now Culnea Details of T..oa Op" tione. 1977-84 (K000) 1977 1978 1979 1980 1981 1982 1983 1984 Jul-Dee Jan-Dec Dec Dec Oec 11ec Dec Dec Avproval.s Kiri purebac 1,894 3,310 2,271 3,511 3,013 679 1,391 1,686 Equipment finance 672 2,858 2,357 3,300 2,120 1,392 1,587 1,818 Coumercial & Industrial loanm Above 5 10,000 1,327 1,704 2,424 2,527 3,784 1,671 4,368 1,935 .low K 10,000 398 689 214 733 722 86 599 498 Agrlcultural loans Below x 10,000 1,138 2,502 1,748 2,157 1,781 635 528 674 Above K 10,000 165 2,006 4,686 6,751 12,231 4,226 9,785 11,326 Oil pali 588 2,627 1,758 2,122 703 202 508 1,272 Mini loasm 1,223 1,890 954 326 139. 1 5 1 Total Approvals 7.405 17.586 16.412 21.427 24.493 8.892 18.771 19.205 Disbursemsets - Kire purchase 1,386 2,817 2,180 2,439 2,298 600 939 1,116 Equipment finance 1,206 3,322 2,080 3,035 1,453 1,238 988 1,416 Comercil & industrial loans kboe K 10,000 1,979 3,107 2,680 1,527 2,667 3,254 3,633 1,997 below K 10,000 397 - - 962 766 191 343 343 Agrlcultural loans Welo X 10,000 901 1,994 1.600 528 452 389 375 498 Above K 10,000 298 1,707 1,730 3,196 4,455 4,303 3,578 4,636 oil pals Popondetta 99 794 860 2,335 2,728 785 282 303 Ualla - - - - - 120 311 Kiube - - - - - - 155 122 Nini loens 1,223 1,890 1,260 27.3 144 4 4 5 nIB &ESCS /a - - - 3 106 2 - - Total Disburseammts 7489 15.631 12.400 14.298 15.069 10.766 10.417 10.748 Repawmntc Hire purchase 1,090 2,523 2,790 2,478 2,380 2,153 1,338 1,450 Equipment finance 941 2,401 2,940 2,525 2,431 2,406 1,789 2,420 CoomercIAl & industrial loan Above K 10,000 974 2,890 4,360 2,568 2,823 3,759 2,903 3,9"2 elow K 10,000 891 - - 1,347 835 725 552 470 Agricultural loans 3l.w I 10,000 521 1,210 1,500 783 709 678 491 516 Above XK 10,000 159 829 1,260 1,366 810 860 1,486 1,399 Oil pals Popondetta 158 347 360 146 68 239 505 1,743 Rtala - - - - 767 902 Xiube - - - - - - 187 2,155 wlni 1oans 583 1,768 1,580 769 279 106 71 38 ULI & ISCS - - - 215 194 83 43 100 Total Repaymnts 5.318 11.968 14.790 12,197 11.029 11.009 10.132 15.185 /a Natve Loans Poard and Ex-Servicmmen's Credit Schme. These are progrm In existene before AIWPG's establiebuent which are being liquidated by ARMNC as agent; collections are treted s Governent contributions to APRG's capital. PAPUA NlE GUINEA THIRD AGRICULTURAL CREDIT PROJMCT Agriculture Bank of Papua New Chinea Portfolio and Arrears Situation. 1979-84 (1'00O) As of December 31, 1979 1980 1981 1982 1983 1984 Amount X No. AMount I No. Amount - No. Amount X No. Amount Z No. Amt Portfolio Mire purchase 2,040 7 1,326 2,600 8 1,245 2,902 7 1,021 1,201 3 814 1,136 2 721 1,205 2 Equipment finance 3,003 10 689 3,856 12 684 3,607 9 587 3,377 7 546 2,644 5 452 1,998 4 Co_erctal & industrial loans 11,687 40 1,329 10,368 32 1,168 11,890 29 970 12,308 28 901 12,491 25 529 11,102 24 Agricultural loans below K 10,000 4,685 16 3,661 3,433 11 3,187 4,125 10 3,001 3,275 7 3,046 2,454 5 1,866 2,261 5 Agricultural loans above K 10,000 4,586 16 146 7,120 22 183 10,925 27 245 16,173 36 279 18,513 37 301 23,863 48 Oil pals 1,887 7 2,707 3,732 11 3,621 5,632 14 3,635 6,511 16 3,789 6,591 13 3,887 3,326 7 KinL loan. 863 3 2,830 727 2 1,330 557 2 989 416 1 852 51 - 69 5 - Doubtful debts 325 1 - 665 2 - 757 2 1,117 1,099 2 1,203 5,557 13 833 6,014 10 Total Portfolio 29,076 100 12,688 32,501 100 11,418 40,395 100 11.565 44.360 100 11.430 49,437 100 8.658 49.774 100 * Loans at Rlpayuat Stage 23,890 82 5,226 26,675 82 9,896 31,641 78 9,437 32,889 74 9,623 36,485 70 7,639 34,661 71 Arrears by loan Catesory a Hire purchase - - 501 389 7 944 461 6 527 475 5 123 119 1 132 103 2 iquipumnt finance 1,100 23 300 891 16 526 1,331 17 392 1,689 19 156 1,378 14 150 754 17 Cownrcial & industrial loans 1,410 30 648 1,906 35 979 3,109 39 747 2,466 28 258 1,438 16 223 1,105 24 Agricultural loans below K 10,000 1,200 25 1,748 878 16 2,841 1,181 15 2,589 1,400 16 1,198 440 6 1,022 638 14 Agricultural loans above X 10,000 460 10 51 S15 9 170 696 9 234 1,222 14 52 1,355 14 54 1,549 34 Oil pals - - 180 58 1 3,341 146 3 3,388 415 5 1,311 316 3 544 (2,226) (48) Kini loans 550 12 1,798 575 11 1,095 451 5 755 380 4 62 28 - 20 10 - Doubtful debts - - - 261 5 - 491 6 805 731 9 1,203 3,459 46 673 2,609 57 Total Arrears 43f1 720 1 .226 5,473 j00 9.896 7.966 00 ,J37 8,778 100 4,363 8,533 100 2#818 4,542 .100 Aas of Arrears 2-4 month. 590 12 - 730 13 - 900 11 - 246 3 - 96 1 - (2,770) (61) 4-6 oatho 880 19 - 261 5 - 264 3 - 227 3 - 185 2 - 134 3 6-12 uonths 3,250 69 - 1,042 19 - 1,100 14 - 556 6 - 471 6 - 365 a Over 12 month. - - - 3,442 63 - 5,702 72 - 7,739 88 - 7,781 91 - 6,813 150 Total 4,720 100 5.,75 100 - 7.966 00 8.778 100 - 8533 100 - 4.542 100 Ratios Arrears as Z of outstandiag loans 16.2 16.8 19.7 19.8 17.3 9.1 Arrears a. % of loan. et repay- ment stage 19.8 20.5 25.2 26.7 23.4 13.1 Collection eatioo (Z, annualled) 69.0 58.0 56.0 56.0 78.0 / including principal and interest. ANNEX 2 50 Table 3 PAPUA NEW GUINEA THIRD AGRICULTURAL CREDIT PROJECT Agriculture lank of Papua New Guinea Collections of Loans as at December 31, 1984 (K:000) 1980 1981 1982 1983 1984 Arrears at the beginning of the period (1) 4,720 5,475 7,966 8,778 8,533 Current dues during the period (2) 12,952 13,520 -11,821 9,427 11,029 Total Dues for Collection (1 + 2) 17,672 18,995 19,787 18,205 19,562 Loans adjustment - - - 460 165 Cash collection 12,197 11,029 11,009 10,132 15,185 Arrears at the End of the Period 5,475 7,966 8,1778 8,533 4,542 Collection ratio (cash collectionltotal dues for collection in X) 69 58 56 56 78 PAPUA NEW GUINEA TRIRD AGRICULTURAL CUDIT PROJECT Agrlculture Bank of Papua New Gultea Subsidiaries and AssocLate Companies, 1984 Dividends Inagemeat ABPNG shares Loans Loans paid fees paid Nana Type of busineas Kin. Z approved outstanding Arreara for 1984 for 1984 Hebano Press Printers 72.002 67.00 294,365 99,662 (420) 12,960 3.600 Nationwide Rent a Car Pty. Ltd. Car rental 97,500 48.75 460,000 78,145 - 43,875 800 Bohola Soft Drinks Pty. Ltd. Food manufacturing 148,000 98.67 230,000 48,155 - - Coastal Investment Retail 17,048 30.00 - - Hammonds Motu Office cleaners 2,800 30.00 - - - - - Koita-Oro Boroaa Piggery 40W000 100.00 565 000 662,262 39,500 - 6,500 Kew Quince Table Bird Poultry processing 706.112 50.00 3.600,000 2,800,000 - 60,000 100,000 Sugu Bulmakau Cattle 95o000 65.00 414,500 650,162 77,982 - - Wiru Buluakau Cattle 40,002 61.00 83,000 104,022 80 - PRO Investment Corporation Investment 208,736 n.a. - - - 27,342 Hsba Developments Pty. Ltd. Cattle, rubber, cocoa 389,002 100.00 780,000 1,020,494 45,000 - - Yareba Sulsakau Co. Pty. Ltd. Cattle 2 /a 508,045 617,923 69,388 - 13,000 Zifanlag Cattle Ranch P/L Cattle 2 7i 385,672 407,478 - - 6,500 Rural )hnagement Services HsMnageznt services 2 Oir.o00 - - - - 5,000 Takuasa Cattle Ranch Pty. Ltd. Cattle 2 /a 204,100 142.599 - - - Laun Development Pty. Ltd. Cocoa/cattle 2 a 359,298 not drawn - - - Balwaia Cattle Cattle 2 TiA D.e. n.e. - - - Raru Development Cocoa/coconut 2 75{ 5.0 Uln not drawn - - - Retail Nhnagement ServLces Ihnaguemnt services 2 100.00 146,942 100,196 - - - Trading stores (Stret/Pasin Stoas) Retail 96 100.00 5,017,628 3,170,407 172,158 276,324 - Total 1.816.314 18.048.550 9.901.52S 403.688 420.501 135.600 /a AIPNI holds nomoial shares which constitute leos than 1% of total equity. E1 PAPPA NEW GUINE TRIRD AClRICULTURAL CREDIT PROJECT Artlculture Nenk of P1mm New GuClnea Prolected Loan Apgro1val Under the Prolect. 1985-68 (X 000) Parm No. of nodel Loan schewe 1985 1986 1987 1988 Total 1989 Agriculture lendig (ha) mount subloans No. Amount No. Amount No. Amount o. AMount amount No. Amount Cocoa Warangot & Vunapalodlg 6 6.0 150 30 180.0 40 240,0 40 240.0 40 240.0 900.0 40 240.0 1 New block planting 20 54.2 104 11 596.2 15 813.0 38 2,059.6 40 2,168.0 5,636.8 45 2,439.0 w Rstate planting 100 132.0 16 4 528.0 4 528.0 4 528.0 4 528.0 2,112.0 4 52R.O Oil Pali Replanting 4 2.1 1,200 300 630.0 300 630.0 300 630.0 300 630.0 2,520.0 250 525.0 Poultry/pigs (no./unit) a 100.0 21 4 400.0 5 500.0 6 600.0 6 600.0 2,100.0 6 600.0 Laroe cocoa proceasing plants Ji. SO.O 6 - - 2 100.0 2 100.0 2 100.0 300.0 2 100.0 Small cocoa processing plants 2.5 75 15 37.5 20 50,0 20 50.0 20 50.0 187.5 20 50.0 miscellaneous agriculture - 40.0 *46 10 400.0 13 500.0 13 500.0 10 400.0 I,80O.0 - 600.0 New crops - 50.0 12 2 100.0 4 200,0 4 200.0 2. 100.0 600.0 - - Total 1.630 376 2.871.7 403 3.561.0 427 4.907.6 424 4.816.0 16.1S6.3 6.666.0 js Poultry: 100,000-bird fattening unlt. n Large cocoa plants' capacityl 250 tonk/year. ZiSmall cocoa plants' capacity: 15 tons/year. ANNEX 2 -53- Table 6 PAPUA NEW GUINEA THIRD AGRICULTURAL CREDIT PROJECT Agrlculture lank of Papua New Guinea Projected Total Loan Approvals, 1985-89 (K'O00) 1985 1986 1987 1988 1989 Total I. Agricultural Third Agricultural Credit Project Field development & livestock, agro-processing 2,872 3,561 4,908 4,816 - 16,157 Agricultural transport 675 838 1,015 1,020 - 3,548 Agricultural equipment 818 1,033 1,295 1,201 - 4,347 Subtotal 4,365 5,432 7,218 7,037 - 24,052 Smallholder agricultural development program 1,478 1,583 1,600 1,550 1,500 7,711 Tree crops & other agricultural support activities 1,400 1,432 1,727 2,353 10,920 17,832 Subtotal 7,243 8,447 10,545 10,940 12,420 49,595 II. Commerce, Industry & Service Hire purchase 1,221 985 842 709 590 4,347 Equipment finance 1,299 925 868 730 611 4,433 Small commercial and industrial 535 497 468 494 533 2,527 Large commercial and industrial 1,328 1,030 1,385 884 660 5,287 Stret Pasin Stoas (Trading Stores) 1,471 1,112 957 830 711 5,081 Subtotal 5,854 4v549 4,520 3,647 3,105 21,675 Total 13,097 12,996 15,065 14,587 15,525 71,270 ANNEX 2 ~ 54 W Tabla 7 PAPUA NEW GUINEA THIRD AGR.ICULTURAL CREDIT PROJECT Agriculture Bank of Papua New Guinea Projected Total Loan Disbursements, 1985-89 (K'000) 1985 1986' 1987 1988 1989 Agriculture Third Agricultural Credit Cocoa 124 356 1,535 2,409 - Oil palm 409 571 820 638 - Livestock 487 626 792 680 - New crops 139 183 236 188 - MisceLlaneous agriculture 334 416 519 516 - Cocoa processing Small 42 51 59 46 - Large 42 66 117 93 Agricultural transport 657 838 1,015 1,020 - Agricultural equipment 818 1,033 1,295 1,201 - Subtotal 3,052 4,140 6.388 6,79: - Loans approved Before March 1, 1985 Second Agricultural Credit Coffee 1,161 654 337 - - Cocoa 1,168 1,536 1,007 27 - Oil palm 274 808 - - - Rubber 310 391 100 - - Other agriculture 20 30 - - - Subtotal 2,933 3,419 1.444 27 - Outside Second Agricultural Credit Cocoa 848 920 883 944 1,176 Smallholder agricultural development program 889 ',334 1,308 1,219 1,500 Tree crop and other agricultural support activities 400 1,431 1,227 2,353 8,769 Total Agriculture 8,122 11,244 11,250 11,334 11,445 Commercial, Industrial, Service Hire purchase 1,021 985 842 709 590 Equipment finance 1,099 925 868 730 611 Small commercial and industrial loan 535 497 468 494 533 Large commercial and industrial loan 1,328 1,030 1,385 884 660 Stret Pasin Stoas (trading stores) 1,871 1,112 957 830 711 ToalComrcialIndustrial,Service 5,854 4,549 4,520 3,647 3,105 GRAND TOTAL 13,976 15,793 15,770 14.981 14,550 Z of Third Agricultural Credit Project disbursements to total disbursements 22 26 40 45 - PAPUA NEW GUINEA THIRD AGRICULTURAL CREDIT PROJECT Implementation Schedule October 1985 - September 1988 1985 1986 1987 1988 Total No. of Area No. of Area No. of Area No. of Area No. of Area subloans (ha) subloans (ha) subloans (ha) subloans (ha) subloans (ha) Cocoa (6 ha) 30 180 40 240 40 240 40 240 150 900 Cocoa (20 ha) 11 220 15 300 38 760 40 800 104 2,080 Cocoa (100 ha) 4 400 4 400 4 400 4 400 16 1,600 Replanting oil palm (4 ha) 300 1,200 300 1,200 300 1,200 300 1,200 1,200 4,800 Poultry/piggery 4 - 5 - 6 - 6 - 21 Cocoa processing Large - - 2 - 2 - 2 - 6 - Small 15 - 29 - 29 - 29 - 75 New Crops 2 40 4 80 4 80 2 40 12 240 Miscellaneous agriculture 10 100 13 130 13 130 10 100 46 460 Total 376 2,140 403 2,350 427 2,810 424 2,780 1,630 10,080 . .~~~~E ANNEX 2 -56 Table 9 PAPUA NEW GUINEA THIRD AGRICULTURAL CREDIT PROJECT Agriculture Bank of Papua New Guinea Profit/Loss Account Projection, 1985-89 (K'OOO) 1985 1986 1987 1988 1989 Income Interest income Loans 5,261 5,907 6,S41 6,923 7,480 Interest Bearing Deposits, etc. 125 125 125 125 125 Earnings on stocks & shares 233 201 181 151 151 Other income 385 396 410 422 433 Total Income 6,004 6,629 7,057 7,621 8,189 ' of average portfolio Less Operating Expenses Personnel expenditure 3,365 3,529 3,725 3,773 3,898 Administration expenditure 520 678 701 726 467 Depreciation 210 234 247 258 265 Banks premises (maintenance, e2-c:.) 656 739 883 882 736 Travel expenditure 286 315 334 354 375 Subtotal operating expenditure 5,037 5,495 5,890 5,993 5,741 Borrowing Expenses EEC Cattle 6 6 6 6 6 IDA 841 27 27 27 27 27 IDA 348 20 17 14 12 9 ADB 342 307 307 307 275 243 ADB 84 52 47 42 38 33 IERD 1333 145 129 114 102 93 BIALLA (Gov't) 130 125 120 115 110 IDA 137 7 6 6 6 6 IDA 175 21 21 21 21 20 IDA 1149 375 375 375 375 375 Coffee Lending 30 30 30 30 30 ADB 611 - 102 255 301 348 Ag. Credit III 39 149 316 502 592 Total Borrowing Expenses 1,159 1,341 1,633 1,810 1,892 Bad debts/contingencies 1,194 1,345 1,483 1,584 1,719 Total Expenses 7,390 8,181 9,006 9,387 Net Profit (Loss) (1,386) (1,552) (1,949) (1,766) (1,163) ANNEX 2 57 -1Table 10 PAPUA NEW GUINEA THIRD AGRICULTURAL CREDIT PROJECT Agriculture Bank of Papua New Guinea Cash Flow Projection, 1985-89 (K 000) 1985 1986 1987 1988 1989 Cash Receipts Loan repayment (principal & interest)/a 13,089 13,573 15,331 15,135 15,914 Interest on deposit 125 125 125 125 125 Sale of investments 160 260 351 202 - Earnings on stocks & shares 233 201 181 151 151 Other income (including rent) 385 396 410 422 433 Funding ADB (Loan 611) - 1,400 3,100 1,550 1,550 Government loans - Ag. Credit III 658 435 472 415 - Government equity - Ag. Credit III 935 867 852 556 _ Funding Ag. Credit III IBRD 2,222 5,816 5,088 4,627 - Government loan - - - - 4,820 Total Receipts 17,807 23,073 25,910 23,183 22,993 Cash Payments Loan disbursement - Ag. Credit III 3,052 4,140 6,388 6,791 - Loan disbursement - Other than Ag. Credit III 10,924 11,653 9,382 8,190 14,550 Operating expenditure (cash) 4,827 5,261 5,643 5,735 5,476 Repayment of loan funds (P) 665 602 573 1,080 1,056 Capital expenditure 924 480 490 505 522 Borrowing expenses 1,159 1,341 1,633 1,810 1,892 Total Payments 21,551 23,477 24,109 24,111 23,496 Cash at beginning of year 4,867 1,123 719 2,520 1,592 Plus receipts 17,807 23,073 25,910 23,183 22,993 Less payments 21,551 23,477 24,109 24,111 23,496 Cash at end of year 1,123 719 2,520 1,592 1,089 /a Based on the analysis of trends from 1979 to 1980. ANNE% 2 - 58 - Table 11 PAPUA NEW GUINEA THIRD AGRICULTURAL CREDIT PROJECT Agriculture Bank of Papua New Guinea Projected Balance Sheet, 1985-89 (K'000) 1985 1986 1987 1988 1989 Carrent Assets Cash 219 219 219 219 219 NMney deposit 781 781 3,428 1,211 1,014 Total Current Assets 1,000 1,0('0 3,647 1,430 1,233 Long-Term Assets Stocks and shares 1,727 1,615 1,462 1,254 1,254 Loans /a 57,277 60,791 61,390 67,299 73,857 Less: Reserve for bad debt (6,544) (7,248) (7,914) (8,370) (8,995) Reserve for con- tingencies (3,198) (3,346) (3,544) (3,544) (3,544) Net loans 47,535 50,197 49,932 55,385 61,318 Fixed assets 11,735 11,981 12,224 12,471 12,728 Total Assets 60,270 63,178 65,803 69,286 75,297 Liabilities Bills payable 758 758 758 758 758 Long term debt (IBRD, IDA, ADB) /b 25,509 28,419 30,768 35,328 39,272 Government loans 2,773 3,939 5,519 6,229 9,441 Total Liabilities 29,040 33,116 37,045 42,315 49,471 Capital 32,131 32,515 33,160 33,139 33,139 Assets revaluation reserve 6,582 6,582 6,582 6,582 6,582 Profit/loss for year (1,386) (1,552) (1,949) (1,766) (1,163) Accum. loss prior year (6,097) (7,483) (9,035) (10,984) (12,750) Total accumulated loss (7,483) (9,035) (10,984) (12,750) (13,913) Total capital and reserves 31,230 30,062 28,758 26,971 25,805 Total Equity and 60,270 63,178 65,803 69,286 75,279 and Liabilities /a Excludes Native Loans Board and Ex-Servicemen's Credit Schemes. /b Includes World Bank loan of US$18.8 million to be drawn down through 1988, although loan will be to Government, which will in turn relend to ABPNG. ANNEX 2 - 59 - Table 12 PAPUA NEW GUINEA THIRD AGRICULTURAL CREDIT PROJECT Agriculture Bank of Papua New Guinea Cost Analysis Based on Net Portfolio, 1985-89 (Z) 1985 1986 1987 1988 1989 Income Interest on loans 11.1 11.8 12.7 12.5 12.2 Other income 1.6 1.4 1.4 1.3 1.2 Total Income 12.7 13.2 14.1 13.8 13.4 Operating Expenses Personnel 7.1 7.0 7.5 6.8 6.4 Administration 1.1 1.4 1.4 1.3 0.8 Depreciation 0.5 0.5 0.5 0.5 0.4 Bank premises 1.4 1.5 1.8 1.6 1.2 Travel 0.6 0.6 0.7 0.6 0.6 Total Operations 10.6 11.0 12.0 10.8 9.4 Borrowing expenses 2.4 2.7 3.3 3.3 3.1 Bad debts and contingen- cies provision 2.5 2.7 2.9 2.9 2.8 Total Expenses 15.6 16.3 18.0 17.0 15.2 Profit (Loss) (2.9) (3.1) (3.9) (3.2) (1.8) Note: Columns may not add up due to rounding. - 60- ANNEX 3 Page 1 PAPUA NEW GUINEA THIRD ACRICULTURAL CREDIT PROJECT Action Program and Financial Strategy for Agriculture Bank of Papua New Guinea Action Responsibility Completion Date I. Cost Reduction A. Staff Retrenchment Program 1. Preparation of targets Manager, Administra- Dec. 31, 1985 tion & Personnel 2. Identification of Redundant Managing Director Feb. 28, 1986 Personnel 3. Completion of Staff Managing Director Jun. 30, 1986 Reductin Program B. Localization Program 1. Set targets for number of expatriate positions to be Managing Director Dec. 31, 1985 localized 2. ImpLement Program Managing Director Annually II. Financial Policy and Arrears Management A. Five Year Portfolio Divestment Prog Manager, Technical Completed 1. Identification and Department and Manager selection of investments to Accounting & Finance be sold 2. Sale of shares " Annually B. Arrears Control 1. Completion of write-off of Managers of Accounting Mar. 31, 1986 provisions for bad debt & Finance, Arrears made in 1984 and before, Control, Internal recovery of security Auditor & Board of Directors - 61 - ANNE 3 Page 2 Action Responsibility Completion Date 2. Review of all loans in Managers of Commercial Mar. 31, 1986 arrears and formulation of & Industrial and Rural action program to deal with Lending, Arrears arrears and provision for Control, Regional & bad debts including fore- Branch Managers closure, intensified col- lection, rescheduling, write-off, etc. 3. Periodic review of loans in Managers of C & I & Quarterly arrears, provisions, Rural Lending, Arrears recoveries and write-offs Control, Regional & Branch Managers 4. Improve arrears statistics Managers, Arrears Mar. 31, 1986 reporting by eliminating Control & Accounting & credit arrears & suspense Finance accounts & separating principal & interest C. Audit Program 1. Completion of audit program Internal Auditor Jan. 31 1986 for inspection of head office and branches 2. Submission of internal Managing Director Mar. 31, 1986 audit reports to Board of Directors III. Planning, Budgeting and Accounting A. Corporate Plan and Lending Program 1. Completion of annual & 5 Economist and Managing Mar. 31, 1986 year corprate plan & Director submission to Ministry of Finance and Bank 2. Preparation of annual lend- Managers, Operation & 3 months prior ing program by industry, Technical Departments to start of loan type, profit centers, and Economist plan fiscal etc., and submission to year Ministry of Finance and the Bank - 62 - ANNEX 3 Page 3 Action Responsibility Completion Date B. Profit Center Accounting & Budgeting 1. Definition of revenue and Manager, Accounting & Jan. 31, 1986 expense centers (by loan Finance type, regions/branches, department) 2. Budgeting and accounting by Manager, Accounting & Mar. 31, 1986 profit center Finance IV. Management and Organization A. Consultants 1. Appointment of Deputy Mirister for Finance Dec. 31, 1985 Managing Director 2. Appointment of Training Managing Director Mar. 31, 1986 Specialist 3. Engagement of Tree Crop Managing Director As need arises Agronomist B. Reorganization 1 Completion of regionaliza- Managing Director Jan. 31, 1986 tion and rationalization of representative offices 2. Review of functions of Managing Director Jan. 31, 1986 arrears management and branch lending division V. Management Information & Statistics A. Data Processing 1. Preparation of 5-year EDP Managers, Computer Completed Plan Operations 2. Purchase and develop new Managers, Computer, June 30, 1986 software packages and Operations & Admin- required iaardware istration & Personnel, Accounting & Finance - 63 - AUIEX 3 Page 4 Action Responsibility Completion Date 3. Training of staff to Managers, Computer & Dec. 31, 1986 maintain computer Operations operations 4. Install computer terminal & Managers, Computer & March 31, 1986 printers in regional Operations offices/head office departments B. Management Information System 1. Definition of reporting Managers, Operations Jan. 31, 1986 requirements to management, Technical, Accounting World Bank, ADB, Ministry & Finance Departments of Finance 2. Improved loan statistics Managers, Operations June 30, 1986 reporting (disbursements by Dept., Computer loan type, industry loan Division size, location, interest rate, type of borrower, etc.) 3. Preparation of terms of Managers, Operations & Dec. 31, 1985 reference for studies on Technical Depts. and monitoring and evaluation Economist of project impact at beneficiary level SIcR 4 P9*- 08113 73I13 AGIU LTURAL CU?? POCr Acriculturl Price Structure 1985 1934 1987 193 1989 1W0 1991 1992 1993 1994 19935 Oil Pal. -T.UWturap. (UI/toa) C02 52 577 372 567 5U1 558 555 531 S49 346 2. CIF trap. (fine/tan) 5A6 550 545 340 536 530 527 524 520 519 516 3. lase: Weigpt C 71 73 74 73 76 74 76 76 76 74 4. Lest. Ieuranen, miUllng and lea ve 11 11 11 11 11 31 11 11 11 11 11 5. 1.0.5. value (WIuN) 491 464 461 455 450 443 440 437 433 432 429 6. %ort levy (2.5:) 12 12 12 11 11 11 11 11 it it 11 7. Adiling, pui. *nd took lav operetlon 2 I 2 2 2 2 2 2 a 2 2 S. Crrying coat (2.753) 14 13 13 12 12 12 12 12 12 12 12 9. Ncada aS" traport (Kul to port) 3 3 5 5 5 5 5 5 5 5 5 10. 1r-1lI price 458 436 429 425 420 413 410 407 403 402 3" It. b-port prlm C5-6) 479 436 449 444 439 432 429 426 422 421 418 Pfle Iernwl 12. CU Serape (w/tan) 411 345 337 330 22 314 312 310 309 307 305 13. CxF nla (CKnsliton) 388 326 318 312 304 297 295 293 292 290 2N 14. Tena Pteight ad Ineuren e 66 66 71 72 74 75 75 75 75 75 75 15. taeal bilingaudlaeou hl IS 14 13 13 13 13 13 13 13 13 13 16. Xaut: ftrt chargee an handling 10 10 10 10 10 10 10 10 10 10 10 17. F.0.S. value (flee) 297 234 224 217 207 199 197 195 194 192 190 14. Leas Ie ryia aet (2.75Z) 4 6 6 4 6 5 5 5 5 3 3 19. see: Pcking land transport (.411 to part) 17 17 17 17 17 17 17 n 17 17 17 20. 111l price 272 211 201 194 184 177 175 173 172 170 164 "eas Frult teh 21. Cotriation fri - Palo ill (221) .01 96 94 94 92 91 90 90 of 89 a3 22. - brAWA 41 11 3 8 a 7 7 7 7 7 7 7 23. Shbtotal 112 104 102 102 SS 93 97 97 96 95 95 ieee: W.m HILL - Ioterest, deprecietloa aud profit 24 24 24 24 24 24 24 24 24 24 24 25. - Overhads 6 6 6 G 6 6 6 6 6 6 26. - erating costs 8 a a 6 S 3 a a a S 27. HPN A Cosn I 1 1 1 1 1 I 1 1 1 1 28. unfizte value 73 65 63 A 60 i9 se se 57 36 56 'W. Treaport tate 5 5 5 3 5 5 g5 5 5 30. treete prleo o8 60 58 58 55 54 53 53 52 51 51 31. Immmic pri /C 69 61 59 59 56 55 54 54 53 52 52 Cat z.C37 gm lork (U/etm) 2,081 1,907 1.861 1.815 1,770 1,724 1,777 1,630 1.8U3 1.936 1.99 33. CI? _ York (Xtua/ton) 1.965 tU801 1,757 1714 1;671 1,523 1,673 1,726 1,778 1.82 1,378 34. Lsa Freight 1" 143 146 168 148 168 146 165 18 I"4 13ie 35. ae:s anrance, inteet, fumietlon (21) 39 36 35 34 33 32 34 34 36 36 33 36. r.O.3. 326483. 1,758 1,397 1.354 1,512 1,470 1.428 1.476 1,326 1.574 1.624 1,472 37. t"ae Sport t (2.SZ F. 0..) /d 40 39 38 37 36 37 3J 39 41 42 38. taces : leedLng fee (A4 P.0.5.) 70 64 62 60 59 57 59 41 63 65 67 39. lac: Levy to tca mndactry Uori 30 30 30 30 30 30 30 30 30 30 30 40. Price to large grare 1.614 1,443 1,42 1.34 1,344 1,305 1,350 1.397 1,42 1,46 1.533 41. tcanoc pri s 1,688 1,563 1,492 1,452 1,411 1,371 1.447 1,465 1.511 1,559 1,605 42. = l c S vin & coets 110 113 125 125 125 125 125 125 125 125 125 43. toe. mrgin 1.304 1,345 1.298 1,259 1.219 1.180 1.225 1.272 1.317 1,363 1,403 4. hae: Losce t to dry (403) 902 807 779 735 731 708 735 76 3 790 613 345 45. Least Poceecsr mrgin (135) 226 202 195 189 13 177 163 190 190 204 211 46. Pric pald to a1L. mreere vet 376 336 324 315 303 295 307 319 329 341 352 47. _oootc prie A 393 359 340 330 320 310 329 334 343 357 368 /a l namc (0.18011 of 103S of CIF); eeltinS ageuc rokerae cd caelosdm (1.02 of CXI); ehippis loee*e (O.51 of CI7) iCeis -S IZ of CI,) etodorLng and bnadling (O.1IS of Cl?). loaws (2.1S of CIF) Add heck PIIGPIA tax. Rapuort ta rdpoeed I* July 1983. Add beck e*port tax aud lavy to CDoa Indusry tard. Ratlo of fiuacial to ecooneic pric for larg graver, app1lid to smal grower. to account for dedection of aubeidies, _ewlee ad tost. ~~~~~~~~~~~~~........ ........ ........ ........ ........ .............. ..... ;.;.;..'. ..... ' .... ii ---- ' .... ii ..... !' ... !:' ! ; 5 1 1 N3 4it; 1h3 6li,. 111s1 it;S ItM 3 0 ] lli* 32 14 , itti li t:........... it 14605 aPsis (14550,) ~ l" 601 5.1i is I snmuufrsesuue s iceS~~~~~~~ ee Isle$s s s sov ste sel 1o Wea04 lo 16 lg 98 . ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ . .. .. . .. ... ........ .. ..... - - - - - - - - - - - - -- - - tames ccii sisal * a*,i*s IVieS *5,046 *5.316 lessee 34,536 3~~~~~4.516 5.6 3 .316 56,5 -30 SOl .343368 14,33 Sill 565283 ratlG'" t, S iis t .. . Ii , itllst 111(1:' 1z ,5 Ii,e 50 :e1:1 *,| 1ee 111 T,:1 1 T : 11,e 1,| 1,| 1l,|e 01 1 1usd111 1 I I 1:11;1 .s9, 1:111 :111 .1011 s :. a:sU 1: 2311 t11 I':ls a:so is S:d i1 565V111116 ce l ii ... ....... ... .... I I I "in t~~~~~~~~~in ')III 11lI ;H Iw III fIII f:fjj I :11i ~ Ijf f:Q fIII j 1I f{ ^L1sef I I !!!.A1fri 111 lse 244 3,0 i:H1 '1:ff00 e.e7c assess i3ssss 13s.s@ Misgs..32. 7.0 is.sd0 13826 1 "16 132 . .. ... . .. . .. . . . . . . . .. ... ... . . .... . .. .. . .. .. . .. .. . ..._. .. .. ..._. .. .. . ..._. .. ... .. .. . !VM1 T!it toesgb l isle$ MM U40. tools?$ 97,388 lssooll 1489014 M.ago m,@$$ 14 9.3 3366 1..5 3.66 . ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ . . .. .. . .. .. . .. . . .. .. . .. . . . . . .._.. .. . . . . . .. .. . . ... _ _ .... ... 10* ti uun sm 630 s (I'lln 4
Группа Всемирного банка · Staff Appraisal Report
Papua New Guinea - Third Agricultural Credit Project
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Папуа — Новая Гвинея
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