Papua New Guinea - Third Agricultural Credit Project

Document of The World Bank FOR OMFCUIL USSE ONLY RepowtNo. P-4143.-PNG REPORT AND RECONMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN THE AMOUNT OF US$18.8 MILLION TO THE INDEPENDENT STATE OF PAPUA NEW GUINEA FOR A THIRD AGRICULTURAL CREDIT PROJECT September 5, 1985 Ih' de.t hm a u_dbi dbt h. k ma I. hesi bY ree4b eiydY b the peodame Of omeha idl.. lb mh.k a" m dheihe__ _ be dbdesm go Wm Bek _M.  CURRENCY EQUIVALENTS Currency Unit Kina (K)* CaLendar 1984 March 31, 1985 US$1.00 = K 0.8944 K 0.9435 K 1 = US$1.118 US$1.0599 K 1 million = US$1,118,000 US$1,u59,900 GOVERNMENT OF PAPUA NEW GUINEA AND ABPNG FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES 1 kilogram (kg) = 2.20 pounds 1 metric ton (t) = 2,205 pounds 1 kilometer (km) = 0.62 miles 1 square kilometer (sq km) = 0.39 square miles 1 hectare (ha) = 2.47 acres ABBREVIATIONS AND ACRONYMS USED ABPNG - AgricuLture Bank of Papua New Guinea BPNC - Bank of Papua New Guinea BCL - Bougainville Copper, Ltd. DPI - Department of Primary Industry ICA - International Coffee Agreement NBPOD - New Britain Palm Oil Development Ltd. PNG - Papua New Guinea * The Kina is tied to a basket of currency and floats against the dollar on a day-to-day basis.  FOR OMCIAL USE ONLY 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 would relend the proceeds of the proposed loan to ABPNC at a fixed interest rate of 3Z 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 proceeds at interest rates ranging from 5% to 20X 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 institu- tion. The project would: (a) provide funds to ABPNG to onlend for tree crop development, new crops and other agricultural activities, livestock, agro-processing facilities, and agricultural equipment and vehicles; (b) strengthen ABPNG by providing data processing facili- ties, vehicles, funds for staff training, fellowships, studies, and technical assistance for improving its masn.gewnent and financial performance. The project's benefits include an increase in PNG's annual exports of tree crops by about US$21.5 million, improvement in the standard of living of about 3,400 smallholder families and gradual expansion of ABPNG's lending capacity. The primary project risk is ABPNG's capability to implement the project adequately in view of its organizational problems (e.g. shortage of qualified staff, lack of planning and inadequate financial control). To minimize this risk, the project stresses the institutional develop- ment of ABPNG through an Action Program and Financial Strategy, technical assistance, and staff training. With these safeguards, the risk is acceptable. This docunment has a resed distnbution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disled without World Bank authorization.  Project Costs: /a Local Foreign Total (US$ 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 Incremental 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 sU$ million) 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 22Z to 38Z. Staff Appraisal Report: No. 5635-PNG dated September 3, 1985. Map No. 17314R IBRD /a Including about US$0.2 million equivalent in taxes and duties.  REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE INDEPENDENT STATE OF PAPUA NEW GUINEA FOR A THIRD AGRICULTURAL CREDIT PROJECT 1. I submit the following report and recommendation on a proposed loan to the Independent State of Papua New Guinea (PNG) for the equivalent of US$18.8 million, to help finance a Third Agricultural Credit Project. The loan will have a term of 16 years, including seven years of grace, at the standard variable rate. The Government vill relend the proceeds of the pro- posed loan to ABPNG at a fixed interest rate of 3X p.a. for a period of 16 years with seven years grace. ABPNG in turn will onlend the proceeds at interest rates ranging from 52 to 20% p.a. with variable repayment terms depending on the activities being financed. PART I - THE ECONDOMY 2. The last economic report, "Papua New Guinea: Development Policies and Prospects for the 1980s" (Report No. 3544a-PNG), was distributed to the Executive Directors in December 1981. This section reflects the findings of subsequent econcAic missious and draws upon various country documents and recent IMF work. A Country Economic Memorandum for Papua New Guinea is now under preparation. Structure of the Economy 3. Papua New Guinea is a land of numerous, widely scattered islands, rugged and sometimes impenetrable mountains, and rich valleys and coastal plains. It is favored with abundant rainfall, considerable mineral resources, and forestry and fishery resources of good-commercial potential. The capital city, Port Moresby, with a population of about 134,000, is an enclave, with no road links to other parts of the country, and is the largest urban settlement in what remains an overwhelmingly rural society. Per capita GNP in 1984 was estimated at US$760. Despite this relatively high figure, Papua New Guinea remains an exceedingly poor country, where the majority of the multi-tribal society lives at a level of, or scarcely above, subsistence. The figures for monetary incomes are biased upwards by the inclusion of the incomes of expatriates, and thus give a misleading indication of the income level of the nationals. The population in 1984 is officially estimated at 3.3 million, spread among 19 provinces (with populations ranging from 26,000 to 310,000), each with its own assembly and separate administrative apparatus. 4. The modern sector of the economy is dominated by the enclave sector, particularly copper mining and associated investments, and by the public sector. In the late 1970s copper, mined by Bougainville Copper, Ltd. (BCL), accounted for about 15Z of GDP; by 1982 this had fallen to 7.8Z as prices declined sharply and as the more productive veins were being exhausted. However, new investments in 1982, together with some improvements in copper  and gold prices, brought BCL's value-added to 10.5% of GDP in 1983. With declining ore grades and prices, performance is likely to be considerably lower in 1984. Construction of the new Ok Tedi mine generated about 12% of GDP in 1983 (largely through capital investments representing roughly 45X of PNG's total investments), thus more than compensating for the decline in BCL. Since gold production came onstream in June 1984, Ok Tedi's contribution to value-added in the mining sector has grown to a point where, together with new copper production, it should reach about 12.5% of GDP in 1987. Non-mining industry accounts for about 9% of GDP (low for a country of PNG's per capita income), while government services, heavily dominated by expatriates in the upper ranks, account for about one quarter of the total. Strikingly, the primary sector, which employs about 85% of the labor force, contributes only about 35% of GDP, a large portion of which is in the subsistence sector. 5. PNC's growth record has been quite mixed; for the decade of the 1970s as a whole, real per capita growth was negative at -0.2% per annun despite the strong growth in copper exports. The latter half of the decade was even worse in per capita income terms (-0.5% per annum), despite some good years, particularly 1978-79. The terms of trade effects on GDP during the 1970s were roughly neutral. Between 1980-82, real GDP has stagnated - implying a real decline in per capita income of about 2.4Z. The situation stabilized in 1982, as domestic adjustment policies became effective, and improved significantly in the second half of 1983 as export prices recovered. As a result, GDP growth in 1983 reached 1%, lower than the 2.3% population growth, but still an improvement over the earlier years. In these years the deterioration in the terms of trade did bite as the Government cut back services and capital investments and restricted the growth in the money supply to protect the balance of payments and the value of the kina. With the unfavorable terms of trade effect, gross domestic income has fallen 20Z since 1979. On the other hand, the upturn in the economy gathered momentum in 1984. Real growth reached 2.2% and is expected to be around 6.5% in 1985, largely because of the start-up of the Ok Tedi mine and continued favorable prices for agricultural exports. 6. PNG's growth performance in recent years has been particularly vulnerable to swings in international comodity prices that began in 1980. The price of copper dropped to its lowest level in 30 years, leading to a fall of K 42 million in budgetary resources derived from BCL between 1981 and 1982 and a further decline of K 19 million in 1983. The prices of agricultural export commodities have fallen by half since the late 1970s, although the situation improved in 1983 and 1984. Lower export receipts depressed economic activity and reduced imports through 1982. In 1983 and 1984, however, average export receipts jumped by over 20%, while average imports rose by 7%. After taking account of the budget support grant of about US$255 million a year from Australia, the current account deficit in 1983 was US$367 million, or about 16% of GDP. The US$330 million external current account deficit in 1984, roughly equal to 13% of GDP, was an improvement over 1983. The current account deficit is likely to continue declining in 1985 to about US$260 million (11% of CDP). With a high level of official and private capital flows, the deficits were covered without undue strain on reserves or on the debt-service ratio.  7. In order to reduce the impact of export price fluctuations on the economy and on the producers of export crops, the Government has taken a number of measures. The Mineral Resources Stabilization Fund was designed to smooth the impact of fluctuating copper prices on the budget, and stabiliza- tion funds for coffee, cocoa and copra were designed to reduce the oscilla- tions in prices received by the producers. While these funds for agricultural products have had the effect of dampening price-induced supply responses, they have contributed to the stability of the economy. For the most part they have shielded producers from income declines and, with the exception of the copra fund, their total resources are still relatively healthy as a result of substantial levies accumulating in the late 1970s, when export prices were at historical highs. 8. Between 1972 and 1976, following the establishment of the Minimum Wage Board, real minimum wages had more than doubled, giving PNG the highest wage costs of the developing countries in the region. The urban minimum wage is currently equal to nearly US$50 per week. Since independence from Australia in 1975, two three-year wage agreements lim:ted the rise of both public and private sector wages to that of the consumer price index, subject to an annual maximum of 11.75Z, thus ending the sharp upward spiral of real wages that occurred during the 1972-76 period. The wage situation was accompanied by a "hard kina" policy causing the kina to appreciate vis-a-vis PNG's major trading partners, which had the effect of dampening wage demands and keeping down prices of imports (40Z of GDP by value). This tended to offset somewhat imported inflation, so that the increase in domestic price levels has averaged about 7.5% between 1977 and end-1982 as compared with the international inflation index of 8.7Z. 9. Increasingly concerned about the negative impact of high real wages on the economy, the Government sought to impose a three-year freeze on urban wages starting in 1983. The Minimum Wage Board rejected this stringent approach proposed by the Government,-deciding in favor of full indexation of the first five percentage point change in the CPI, but with no further indexation. This resulted in an approximate 2.8% and 2.5Z erosion in real wages in 1983 and 1984, respectively. The kina had been allowed to appreciate until March 1983, when parity with the Australian dollar was maintained at the time of its 10% devaluation, thus resulting in a 5.5% devaluation of the kina against its basket of currencies. The Government is gradually reducing the real value of the kina, both through wage restraint and - although not officially - through a gradual downward float. 10. The Government has also responded to its straitened revenue position by raising taxes in 1982 and 1983, lowering government expenditure by 10% in the latter year, and laying off some 2,000 employees, about 4% of the total public service. Preliminary estimates indicate that the public account deficit in 1984 was about K 25 million (1.1% of GDP), the lowest deficit in years. As was the case in 1983, little of this was financed by borrowing from the Central Bank. Borrowings from foreign commercial banks are estimated at about US$20 million in 1984, as compared with US$60 million in 1983. The 1985 revised budget estimates show a deficit of K 77 million. However, according to a recently reached understanding between the Governments of Papua New Guinea and Australia, the Australian grant to PNG for 1986-1990 will be  reduced by 3X per annum in real terms. This is likely to result in further curtailment of Government expenditure in order to contain the budgetary deficits within manageable limits over the medium-term. Development Strategy and Planning 11. Since the country's independence in 1975, a concerted effort was made to define a set of economic and social priorities according to which government resources were to be allocated. However, as noted above, more weight had been given to developing a decision-making process for the budgeting of government resources than to the preparation and implementation of a comprehensive development plan. While a National Development Strategy (NDS) was defined and strategic objectives identified as the basis for resource allocation, these had not represented a basis for a growth-oriented development strategy as such. 12. The NDS placed a high priority on improving the quality of life for the rural population, focusing on rural development in the less developed areas of the country. While this focus remains, it is now to be set within the context of a growth-oriented strategy. This objective recognizes not only the agricultural potential of the country, but also the fact that for quite a few generations the agricultural sector will be the main source of employment. 13. For several years, PNG has had a four-year plan known as th2 National Public Expenditure Plan. This plan focuses on capital expenditures for the first year of the (rolling) plan, concentrating on the recurrent costs of capital projects and the ability of the budget to support them. (This feature is rare in developing country planning and is expected to be retained under the new planning system, which is still being worked out.) Currently the Government is in the process of revising its planning procedures, partially in response to Bank recommendations, in order to take a somewhat longer-term view and to ey7ompass -a broader review of both capital and recur- rent budget requirements.- 14. The Government's current approach to carrying out its intentions is to develop a Hediur-Term Development Plan (MTDP). This will: (a) review the current economic situation and forecast how it could be expected to develop over the next five years (1986-90) based on an appropriate financing strategy; (b) involve the preparation of medium-term public investment program and its national allocation among various sectors and agencies; (c) contain a set of policies and strategies that will make it possible to carry out the public investment program. Development Issues 15. The major factors that will affect the Government's ability to pro- mote economic development are the decentralization of government activities, 1/ Ref. "Public Sector Management in Papua New Guinea: An Administrative Overview," June 27, 1983 - Report No. 4396-PNG.  the ability to achieve self-reliance in both staffing and financial resources, and the willingness to take new initiatives in policy formulation and invest- ment in the agricultural sector. 16. Decentralization, which gives the provinces greater control over spending, reduces the national Government's ability to carry through its set priorities, while inadequate staffing limits the capabilities of the provinces to develop their own plans. Decentralization in PNG was a necessary response to local pressures. Provincial governments are gradually assuming regulatory and financial control in some areas and will share power with the national Government in others. They are financed through national government grants and refunds of certain revenues and, to a very limited extent, their own taxation measures. Unconditional grants, which allow provinces to spend according to their own priorities, are by far the most important source of finance; but, whereas in the 1984 budget they comprised over 70% of the total receipts of the provinces, they amounted to less than 25Z of total national government revenues. One of the most serious problems facing provincial governments is the shortage of trained and experienced staff, and the most urgent priority of the provinces is to develop the capability for budgeting, planning, and project identification and preparation. 17. Self-reliance in PNG involves both availability of skilled manpower and financial resources. On the staffing side, the Government has made sub- stantial progress in replacing expatriates with nationals, especially consid- ering that the University of Papua New Guinea produced its first graduates as recently as 1972. However, the country still relies heavily on expatriates for many necessary services. This situation has created a relatively high- cost government. The establishment of provincial governments is adding to the pressures on existing human and financial resources, and the policy of localizing positions held by expatriates adds to the demand for trained Papua New Guineans. 18. The Government's efforts to attain financial self-reliance are reflected in the steady growth of the share of domestic revenue in total budgetary receipts. Domestic revenue accounted for only about 36% of government receipts in FY68,'/ 60S of the total in FY76 (immediately after Independence), and 712 in 1984. Over the past seven years, the Bougainville copper mine has been a major source of domestic revenue, averaging 18% of the total and reaching a peak of 27% in FY76, but falling to about 3Z in 1984. While mineral revenues should be modestly restored in 1985, when the Ok Tedi mine is expected to become fully operational, revenues from these sources may not regain their former share of overall revenues. 19. While economic management has been largely sound, the country's growth performance has been disappointing. Of particular concern is a lack of growth in the agricultural sector, which will have to absorb the bulk of the additions to the labor force in the foreseeable future. Despite a great 2/ PuG's fiscal year was July 1-June 30 until January 1, 1978 when it was changed to coincide with the calendar year.  - 6 - potential for agricultural development, even with the current world price situation, the sector's output remains low, and prospects for the coming decade are not bright unless steps are taken to bolster growth. The major constraints have been inadequate extension services for smallholders, lack of smallholder credit, customary land tenure practices and shortage of managerial expertise. External Debt 20. During the period 1985-1987, PNG is likely to require an average net capital inflow of about US$300 million p.a. The minerals sector is expected to finance considerably more than half of the inflow through direct foreign investment and borrowing: Ok Tedi-related borrowings were US$330 million in 1983. With respect to official borrowings, public debt service ratio, estimated at 11% in 1983, is expected to grow slowly, and by 1990 would be at around 13%. Thus, despite the relatively large current account deficit forecast for 1985, PNG's external position is likely to continue to be comfortable. Total external public debt outstanding as of December 31, 1983 amounted to US$765 million, of which US$149 million (19%) was owed to the Bank Group. Debt service payments to the Bank Group are only about 8Z of total debt service payments. PART II - BANK GROUP OPERATIONS 21. As of March 31, 1985, Bank Group assistance to Papua New Guinea consisted of 14 loans and 13 development credits, totaling US$318.0 million. The first operation was a telecommunications loan of US$7.0 million approved in 1968; more recently a West Sepik development project (US$9.7 million) was approved by the Board in October 1984 and a Nucleus Estate and Smallholder Project (US$27.6 million) on July 23, 1985. In general, project implementa- tion has been satisfactory. The first rural development project in the Southern Highlands experienced some difficulties with recruitment of essential expatriate staff as the rapid turnover of expatriates and the transitional problems of recruiting and training their replacements led to delays. Physical implementation is now approximately on schedule. As of March 31, 1985, nine credits and seven loans were fully disbursed, and the loans and credits to Papua New Guinea held by the Bank and IDA amounted to US$302.8 million. Annex II contains a summary statement of Bank loans and IDA credits. 22. In recent years Bank Group lending has emphasized agriculture, with strong support in education and transport and some lending for energy. The Bank's strategy for future lending is based on three objectives: (a) support for more growth-oriented policies and institutions; (b) development of oppor- tunities for permanent, cash-economy employment based on the substantial agri- cultural resources of the country; and (c) promotion of human resource 3I Part II is essentially the same as the corresponding section of the President's Report for the Bank loan for the Nucleus Estate and Smallholder Project (Report No. P-4066-PNG, dated May 31,1985).  development. A rural roads project and a third power project are under pre- paration. The proposed Third Agricultural Credit Project vill assist in development of the agricultural potential of PNG in line with the above objectives. 23. Disbursement performance on Bank Group projects has been extremely varied. Shortly before and just after independence, disbursement rates were unusually high, reflecting the relatively small and simple pre-independence projects and the fact that they were m"9aged by an experienced expatriate civil service. The disbursement rate 4 for FY85 was 28.31, compared to an average of 30.41 for FY81-85. Disbursement rates for selected comparators for FY81-85 were as follows: Colombia - 27.01; Philippines - 22.2X; Morocco - 16.2%; and Benin - 26.2Z. It does not seem possible to determine a trend since low disbursement years are followed by a high disbursement year, then another low disbursement year. PNC's disbursement figures reflect periodic disbursements of substantial amounts against individual large projects rather than steady disbursements for all projects. PART III - THE AGRICULTURAL SECTOR AND THE AGRICULTURE BANK OF PAPUA NEW GUINEA The Agricultural Sector 24. Agriculture plays a dominant role in the PNG economy as employer and provider of food and income to more than 85Z of PNG's population. The sector, including forestry, fisheries and livestock, accounted for more than 40Z of PNG's K 687 million exports in 1983 and about a third of its GDP. PNG enjoys a humid tropical climate which is conducive to agricultural production, espe- cially of tree crops. The land area of 461,700 km' is Rparsely populated (an average of seven persons per km2) and nearly 150,000 km' (30%) is topographical- ly, 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. 25. Tree Crop Subsector. Tree crops cover about 476,000 ha (1%) of land in PWG, but account for 77Z of agricultural exports and 40% of agricultural production. Tree crop production volume increased by 4X p.a. from 253,500 tons in 1978 to 290,600 tons in 1983, mainly due to increases in oil palm and coffee. However, due to declining commodity prices, the value of these exports declined from K 228.3 million in 1978 to K 217.6 million in 1983. 26. The main tree crops are coffee, cocoa, coconut and oil palm. Coffee is the most important tree crop, accounting for almost half of tree crop 4/ The disbursement rate is derived by dividing the actual disbursement during the fiscal year by the net cumulative undisbursed balance.  - 8 - export value. Production forecasts based on current plantings show a decline due to early plant senility and associated disease susceptibility. About 22 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. Cocoa accounts for about 19Z of the value of tree crop exports. Production has declined by about 20Z since its peak 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 conditions, the prospects for increasing cocoa yields are excellent. Copra accounts for only 15% of tree crop exports and has steadily lost area to the other crops, particularly to oil palm which experienced production and export growth of more than 20% p.a. during 1978-83. Oil palm is now the fastest growing segment of the tree crop subsector in PNG due to its higher profitability, resulting from its high yields and good market demand. For all these crops, smallholders provide the greater part of overall production. 27. Piggery and Poultry. 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. About 99Z of pigs and 75% of poultry are raised 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. Agricultural Development Objectives and Strategy 28. The main goals of Government's agricultural development policies are: to improve the livelihood of rural families, to increase and broaden agricultural exports, and to reduce food imports. Its strategy to accomplish these goals has focussed 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 acknowledging 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 assis- tance to nationals to enable them to assume responsibility for plantations formerly owned and managed by expatriates; and, (e) expansion of specialized agricultural training, and improvements in the remuneration and working condi- tions of agricultural support staff. 29. In the last few years Government has shown renewed awareness that agriculture will remain the mainstay of PNG's economy for many years. This recognition is manifested in its greater flexibility on expatriate 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. World Bank Experience with Past Lending 30. Bank support to agricultural and rural development in PNG began even before the country's independence in 1975. In 1972 the First Agricultural Credit Project (Cr. 348-PNC) provided finance for development of smallholder  - 9 - beef, pig and poultry enterprises. This was followed by the Popondetta Smallholder Oil Palm Project (Ln. 1333-PNG) which assisted some 1,400 small- holders to develop 4 ha oil palm blocks. A Second Agricultural Credit Project (Cr. 1149-PNG) continued assistance for tree crop development by providing funds to ABPNG for this and other agricultural investments. Support has also been provided for provincial development projects in the Southern Highlands (Cr. 841-PNG), Enga (Ln. 2125/Cr. 1227-PNG) and West Sepik (Ln. 2475-0-PNG), three of the country's least developed provinces. A nucleus estate and smallholder project approved on July 23, 1985 would develop oil palm and cocoa in Milne Bay Province (Ln. 2608-PNG). Finally, an Agricultural Support Services Project (Ln. 2276-PNG) is strengthening areas such as research, training, extension and sector planning. 31. The Second Agricultural Credit Project was completed on December 30, 1984 and funds have been fully disbursed. Three major problems were encountered by ABPNG in the course of project implementation: (a) supervision of the management agencies assisting smallholders to carry out subproject activities required strengthening; (b) its budgeting required improvement; and (c) an arrears management program was needed to improve collection and financial performance. ABPNG has taken action to address these problems and the proposed project would further strengthen these efforts, as well as improve ABPNG's capability to supervise subproject implementation. Agricultural Credit and the Agriculture Bank of Papua New Guinea 32. Financial Sector Overview. 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 communi- ties 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 specifically for the provision of agricultural credit and extension. 33. The Bank of Papua New Guinea (BPNG) is the country's central bank, regulating the country's six commercial banks, 114 savings and loan societies (only 39 of which are active), four finance companies and one merchant bank. Except for the Papua New Guinea Banking Corporation all commercial banks are subsidiaries of foreign banks. Government policy toward the commercial banks has recently been geared to encourage more medium and long-term loans for agro-based industry and to expand term lending in the agricultural sector. Interest rates charged by commercial banks on agricultural loans range from 11.25Z to 14.25%, and 11% to 15.25Z on commercial and industrial loans. 34. Agriculture Bank of Papua New Guinea. The largest single lender for agriculture in the country is the Agriculture Bank of Papua New Guinea (ABPNG) which is the only financial institution lending to small rural farmers and agricultural business groups. ASPNG, originally called the PNG Development Bank, was established in 1965 as a multipurpose, wholly Government-owned development finance institution. In February 1985, the Government renamed the bank, directed ABPNG to orient its lending operations to agriculture, and imposed a 20Z ceiling on the proportion of the loan portfolio to be devoted to commercial and industrial projects.  - 10 - 35. Organization and Staffing. ABPNG is managed and controlled by a Board of Directors consisting of a Managing and Deputy Managing Director, the Secretary of the Department of Finance and nine members appointed by the Minister of Finance from the Government and the private sector. ABPNG's head office in Port Moresby is organized into four departments: Operations, Technical, Accounting and Finance, and Administration and Personnel. In early 1984, ABPNG restructured its branch network into four regional offices which supervise the six branches, three sub-branches and five representative offices. The objectives of the reorganization were to streamline branch operations and make them more field oriented. The results of the reorganiza- tion have so far been encouraging. Field personnel are able to maintain frontline contact with the borrowers while loan supervision and arrears control have improved. 36. ABPNG has a staff of 334 comprising 131 professionals (21 expatri- ates) and 203 support staff. Almost half of the staff are in the head office. ABPNG suffers from a shortage of qualified and trained staff, from difficul- ties in attracting qualified staff and a high staff turnover rate. At the same time, due to the presence of expatriate staff and in an effort to retain its qualified personnel, the salary bill of ABPNG is higher than most agricul- tural credit banks in other developing countries. To address these problems, ABPNG began a long-term manpower and career development program including: Ca) an evaluation of existing manpower resources and identification of needs; (b) organization of training programs; (c) a localization program to decrease reliance on expatriate staff; and (d) programs to meet future manpower requirements. Progress of the program has been satisfactory, and both the staff turnover rate and the number of expatriate officers have been declin- ing. ABPNG is also improving staff training through in-house courses and overseas programs. Its training efforts will, however, need to be expanded to meet its growing needs. 37. Lending and Investment Policies. ABPNG's policies include the following exposure limits which are judged prudent: (a) liabilities should not be more than three times the bank's 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 single enterpriSe should not exceed 10% of bank equity; (d) total exposure in hire-purchase - and equipment financing should not exceed equity; and (d) aggregate equity investments should not exceed 15Z of bank equity. 38. Loan and Investment Procedures. With assistance under the Bank- supported Second Agricultural Credit Project (Cr. 1149-PNG) significant strides have been achieved in improving ABPNG's project appraisal, loan processing and supervision standards. A comprehensive field manual has been issued, with procedures for field reporting, project appraisal, inspection and loan processing. In addition, technical manuals have been prepared to deter- mine the agronomic feasibility of coffee or rubber development projects. For 5/ Loans for vehicles under which ABPNG retains title to the vehicles until the loan is fully paid.  - 11 - large agricultural loans (over K 65,000) and investment operations, the tech- nical manuals are supplemented by appraisal criteria requiring a detailed feasibility study on the technical, marketing, financial and economic aspects of the project. 39. Budgeting and Planning. ABPNC'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 the availabil- ity ot 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. ABPNG has, however, recruited an economist and begun to prepare a corporate plan. The proposed project would reinforce ABPNG's efforts to strengthen its budgeting and planning. 40. Loan Portfolio and Arrears. ABPNG's portfolio at December 31, 1984 comprised 8,658 loans amounting to K 49.7 million (before provisions for bad debts). Agricultural loans comprised K 31.5 million of the total portfolio or about 63% of loans outstanding. ABPNG is working to control its arrears problems and improve collections through an arrears management program begun in 1981, and the early identification of problem projects. Better procedures for appraising subloans have recently been introduced, and the monitoring and supervision of ongoing operations have been stepped up. ABPNG's debt write- off policy is also being refined in order to delineate the timing, responsi- bility and authority for writing-off loans. All these efforts have been productive, resulting in a significant improvement in ABPNG's arrears situa- tion in 1984. ABPNG's equity investments (K1.8 miLlion) have been limited to companies established as promotional ventures or acquired from expatriates for transfer to nationals. The overall equity and lending portfolio is sound. In line with the Government's policy of reducing ABPNG's involvement in commercial and industrial sectors, ABPNG has embarked on a five-year portfolio divestment program to sell its holdings in these areas to new sponsors. 41. Financial Position. Operating results show a declining trend in ABPNG's net income from K 21,000 in 1980 to a loss of K 627,000 in 1984. Although interest and other income grew at an average annual rate of 12Z during the last five years, it has not kept pace with increased expenses. Total expenses as a percentage of the loan portfolio were 13.4% in 1980, 27% in 1982 and 16.5Z in 1984. Salaries comprise the highest share of ABPNG's expenses (40%), while borrowing expenses constitute 29%, and bad debts, 18%. 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 commun- ities. Due to a limited market, ABPNG's overhead costs are spread over a smaller loan base. ABPNG's ratio of operating expenses to loan portfolio is, hcwever, comparable to other financial institutions in PNG. ABPNG is making a major effort to reduce personnel and operating costs through staff reductions, branch reorganization, and the gradual replacement of expatriate staff by local staff. However, these programs will take time and should be undertaken without impairing the efficient operations of the bank.  - 12 - 42. The debt-equity ratio of ABPNG has risen to 49:51 from much lower levels, but this poses no problem since the Government has routinely increased ABPNG's capital since mid-1982 to assist ABPNG in financing long-term agricultural loans. ABPNG's current ratio of 3.1 is high because of advances provided by the Government which allowed ABPNC to increase its current assets. Owing to its large equity base, ABPNC has a satisfactory financial position as measured against conventional indicators. Issues in Agricultural Credit 43. Interest Rates. An important issue confronting agricultural credit in PNG is the interest rate policy. Interest rates in the country are primarily determined by market forces. However, in order to accelerate agricultural production and increase smallholder incomes, the Government is subsidizing the interest rates on ABPNC subloans to specified target groups (charging 7% for smallholders, 5% for disadvantaged districts and 8% for tree crop projects, except oil palm, during the development phase). The rates charged the remaining borrowers range from 9.5% to 20X (paragraph 53), and are positive given that the average inflation rate in PNG over the 1981-84 period was 7Z and the projected long-term inflation rate is 5%. They are also significantly higher than the savings deposit rate of 3-6Z. In addition to subsidizing interest rates, the Government is providing ABPNG low cost funds 3%) for relending, as well as funds to cover its operating losses. 44. Due to concerns about the effect of interest rate subsidies, the Bank suspended processing of this project in November 1983, and reappraised the project in February/March 1985, only after an intensive policy dialogue with the Government. Agreements were reached with the Government and confirmed 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 thA Bank, commencing not later than December 31, 1986, with a view to identifying other incentives for stimulating smallholder production, and reducing subsidies during the implementation period of the project (draft Loan Agreement, Section 4.01-4.02); and (c) the subsidies would be directed only to individual farmers or group of farmers living at or below the estimated poverty level (draft Project Agreement, Schedule 2, B.1). Under these conditions, credit subsidies would be sharply focused on specific target groups, explicitly provided and accounted for in the public budget, and subject to ongoing efforts to assess whether alternative, more efficient, instruments could be used in their place. The average 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 subsidized loans would constitute only 10% to 15% of the projected total loan disbursements of ABPNC over the  - 13 - next five years. The total subsidies would be less than 0.5Z of the projected national budget. 45. Institutional Weaknesses. Although ABPNG's performance has improved significantly since 1983 (see paras. 35,36, and 38-40), ABPNG still faces organizational problems which constrain its lending capability. These include the absence of a Deputy Managing Director to assist management, shortage of qualified and trained staff, inadequate planning and budgeting, high adminis- trative costs, an inadequace management information system, and poor financial performance. This project has been prepared to alleviate these problems. The project would strengthen the institutional development of ABPNG through tech- nical 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 ABPNG's costs, strengthen its financial management and arrears control, improve ABPNG's planning, budgeting and accounting, strengthen organization and management and improve the bank's management information system and data collection. (See para. 61.) PART IV - THE PROJECT 46. The proposed project was identified by the Government in May 1982 and prepared by the Government with Bank assistance. The project was appraised in May 1983 and reappraised in February/March 1985. Negotiations were held in Washington, D.C., from July 9-12, 1985. The PNG delegation was led by Mr. Ian Morris, First Assistant Secretary, Department of Finance. A Staff Appraisal Report (No. 5635-PNG) dated September 3, 1985 is being distributed separately. Supplementary project data are provided in Annex III. Objectives and Rationale for Bank Involvement 47. The proposed project would continue Bank support to Government's program of rehabilitating and developing the tree crop subsector begun under the Second Agricultural Credit Project. The project also addresses Govern- ment's development objectives of: (a) increasing and broadening agricultural exports through investments in crops for which PNG has a comparative advan- tage; (b) reducing food imports through modest investments in piggery and poultry enterprises; and (c) improving the standard of living of subsistence farm families, especially in disadvantaged areas. The project would also strengthen ABPNG as a development finance institution able to perform its role effectively as the main conduit for agricultural credit in the country. By its involvement in the project, the Bank would contribute particularly to development of the country's rural financial sector and to the institutional strengthening of ABPNG which was begun under the previous project. The Bank would also make a significant contribution to interest rate policy reform by assuring a periodic review of government interest rate subsidies, with a view to reducing these subsidies gradually over the project period.  - 14 - Project Description 48. The project would: (a) finance a three-year slice of ABPNG's agricultural lending and (b) strengthen ABPNG by providing data processing facilities, vehicles, funds for staff training, fellowships and studies, as well as technical assistance for improving management and financial performance. 49. The total subproject costs would amount to about US$23.7 million for development of a projected 4,580 ha of cocoa, 4,800 ha of oil palm, new crops, other agricultural activities including coffee rehabilitation and replacement planting (not more than 1000 ha), investments in poultry and piggery enter- prises, agro-processing facilities, and agricultural equipment and vehicles. Since tree crop subprojects will require financing beyond the project period, an assurance was obtained at negotiations that all investments begun under the project would be completed using Government and/or ABPNG funds beyond the termination of project funding (draft Loan Agreement, Section 3.01(d) and draft Project Agreement, Section 2.01(b). An assurance was also obtained 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 and other agricultural activities including the technical, economic and financial justification for such lending (draft Project Agreement, Section 2.09). 50. The project would finance a staff training and fellowship program to train about 279 staff in loan administration, lending guidelines and principles, accounting and budgeting, project appraisal and supervision, training and management skills. The training component would be carried out under a plan agreed with the Bank. Funds would be provided for vehicles to support ABPNG's intensified supervision and expanded collection and arrears management program, and for computer equipment and software to upgrade ABPNG's data processing capability. The project would also finance about nine man- years of consultant services to enable ABPNG to strengthen its overall lending capability. A senior development banker would be engaged for three years to fill the position of ABPNG's Deputy Managing Director, which is now vacant. He would strengthen ABPNG management by assisting the Managing Director with short- and long-term plans for reorganization, financial management and control, the manpower development program and coordination of ABPNG's various offices. The appointment of a suitably qualified individual as Deputy Managing Director would be a condition of loan effectiveness (draft Loan Agreement, Section 6.01(b)). A training specialist would be engaged for two years to define manpower skill gaps, identify training needs, evaluate and improve in-house training programs, upgrade the staff training capability of existing ABPNC trainers, and assist in the implementation of the fellowship program. A systems analyst/electronic data processing specialist would, over a two and a half year period, develop and test computer software and train ABPNG staff in use of the computer for use of the computer for accounting, subloan monitoring, collection and arrears reporting and other operational requirements. Finally, tree crop agronomists would be engaged for short-term periods totalling one and a half years to prepare and/or update technical guidelines and lending manuals on agricultural projects, prepare farm models for agricultural projects, advise on agronomic aspects of loan approval and  - 15 - supervision of the plantation management agencies engaged by the borrowers to implement field development, and train ABPNG s.aff on these aspects. The systems analyst and tree crop agronomists were engaged by ABPNG under the Second Agricultural Credit Project and the extension of these services would be supported under the proposed project. The projecL would also finance studies to monitor and evaluate the project's impact on beneficiaries. ABPNG incremental operational expenses incurred in administering the project are also incLuded in project costs. Project Cost 51. Project costs would amount to US$31.3 million equivalent, including taxes and duties of US$200,000 equivalent and foreign exchange of US$17.0 mil- lion equivalent (55%). 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, contingency allowances have been integ- rated 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. Financing 52. Of the total project cost net of taxes and duties, the Bank would contribute US$18.8 million or about 60Z; the Goverpment, US$5.5 million or about 18%; ABPNG, US$4.2 million or about 13%; and the subborrowers US$2.8 million or about 9%. The Bank loan would cover the full foreign exchange requirement and US$1.8 million of local costs. Local cost financing is justified in view of the local content of the anticipated subloans for smallholder agricultural development and the high priority the Government attaches to expanding t-lis development. The Government would be the Borrower and would assume the foreign exchange and interest risks. Retroactive financing of up to US$1.8 million would be made available to cover eligible expenditures beginning March 1, 1985. This is required to sustain both the lending momentum achieved under the Second Agricultural Credit Project and the planting program already begun. Retroactive financing will also assure the continuity of consultants engaged under the previous project. 53. Relending Terms. The Government would enter into a Subsidiary Loan Agreement with ABPNG under which US$18.8 million of project funds would be made available to ABPNG at 3% interest repayable in 16 years including seven years of grace. These terms are in line with expected subloan repayments. The Subsidiary Loan Agreement would be agreed with the Bank, and its signing would be a condition of loan effectiveness (draft Loan Agreement, Section 6.01(a)). ABPNG would receive supplementary funds from the Government amounting to US$2.1 million as a loan under the same terms as the Bank loan and US$3.4 million in the form of equity. ABPNG would onlend the loan proceeds to its subborrowers at the following standard rates: cocoa, poultry/piggery, cocoa processing, new crops, other agriculture (9.5X); oil palm (10.5%); agricultural transport (20%); and agricultural equipment (18%). Repayment terms would be based on the technical/financial profile of the field investments to be made. The actual borrowing costs for residents of disadvantaged districts, smallholders, and tree crop projects during the  - 16 - development phase (except oil palm) would be at lower rates of 52, 7% and 8%, respectively, and the Government will pay ABPNG the difference between the standard and subsidized rates. Procurement 54. The range of goods to be financed under the project for on-farm investments 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 materials, 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 (about US$3.1 million) would be carried out by the beneficiaries, members of their clan, or hired labor. Planting materials (US$1.6 million) would be acquired through local shopping arrangements from local sources which have adequate supplies. Building materials, small machin- ery, equipment and accessories (US$1.4 million) 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 bidding (ICB) would not be feasible for the procurement of agri- cultural transport (US$4.2 million) and agricultural equipment (US$5.4 mil- lion) by the subborrowers because the size of individual investments would be too small and bulking of contracts is not practicable due to their expected diversity and wide dispersal both in location and time. Field management (US$1.8 million) would be contracted by participating farmers to experienced local firms on the basis of a preselection made by ABPNC. These arrangements have proved satisfactory in the past. Forty-six four-wheel drive vehicles and data processing equipment (US$0.5 million) would be procured through ICB in accordance with Bank guidelines. The contract of 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 Director has been advertised and a suitably qualified individual is expected to be appointed by December 31, 1985. Terms of reference of the tree crop agrono- mists were prepared under the Second Agricultural Credit Project and would not be changed under this project. Terms of reference for the training specialist and the monitoring and evaluation studies would be prepared by ABPNG in consultation with the Bank by December 31, 1985. Consultancy services would be contracted in accordance with the Bank's Guidelines for the Use of Consultants. Disbursement 55. Disbursements from the proposed loan would be made on the basis of: (a) 69X of subloans disbursed by ABPFNG; (b) 100% of the cost of consultants' services, ABPNG staff training expenses and fellowships and studies; and (c) 100% of foreign expenditures and 65Z of local expenditures for vehicles and equipment. Disbursements will be fully documented except those against subloans and staff training expenses which would be based on certified state- ments of expenditure. During negotiations, an assurance was obtained that ABPNG would submit all subloans exceeding K 120,000 to the Bank for prior  - 17 - approval along with appraisal reports on the technical, marketing, financial and economic feasibility of the subproject (draft Loan Agreement, Section 2.02(b)). Supporting documentation would be made available for review by supervision missions. Disbursements are expected to be completed by June 30, 1989. The introduction of a special account was discussed during negotiations but was not considered feasible by the Government delegation. Accounting and Auditing 56. "Profit center" accounting and budgeting would be established to provide revenue, cost, and lending data by operations centers (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 introduced to provide appropriate collection and arrears reports. Revised accounting centers would be integrated with an improved budget system to facilitate financial planning. 57. Project accounts including those under statements of expenditure would be maintained separately for individual project components in accordance with sound accounting practices (draft Project Agreement, Section 4.01). An assurance was obtained during 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 and would contain opinions on the findings and procedures used in preparing financial statements, the quality of the portfolio, and the adequacy of provisions for bad and doubtful debts (draft Project Agreement, Section 4.01(b)). Monitoring and Reporting Requirements 58. Project monitoring and reporting requirements will be the same as those followed under the Second Agricultural Credit Project. 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. Project Implementation 59. ABPNG would be responsible for project implementation. It would channel funds to and supervise the subloans extended under the project, while management services to clan blocks, plantations or individual borrowers would be provided by the National Plantation Management Agency, private management agencies, ABPNG staff, and central processors (for poultry and piggery). Staff from the Department of Primary Industry would provide assistance on technical aspects of the subprojects and land utilization studies prior to ABPNG lending in new agricultural areas. ABPNC would also be responsible for execution of the institutional strengthening component. 60. Status of Preparation. ABPNG has capable managers and key staff in place who have carried out similar programs. The post of Deputy Managing Director has been advertised and the recruitment of a suitably qualified individual, a condition of loan effectiveness, is expected by December 31,  - 18 - 2985. The systems analyst is 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 monitoring 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 for carrying out the training component of the project. A five-year vehicle and equipment procurement plan has been preparea by ABPNG and bidding documents are under preparation for the first year requirement. Eligible subloan approvals commenced March 1, 1985. 61. Action Program and Financial Strategy. In order to strengthen ABPNG's capacity to implement the project and improve its profitability, an agreement was reached at negotiations that ABPNG would undertake an agreed Action Program and Financial Strategy (draft Project Agreement, Section 2.11). The most important components are: (a) completion of annual and five- year corporate plans for submission to the Department of Finance and the Bank by March 31, 1986 and preparation of annual budgets of approvals and expected disbursements which would be consistent with available government budget funds, external loans and internally generated funds; (b) the establishment of 'profit center' accounting by March 31, 1986 to facilitate financial planning; (c) completion of an internal audit program for inspection of head office and branches by January 31, 1986; and (d) improvements in computer programning and management information systems to provide ABPNG managers with the information required for sound decision-making. 62. Pricing of Smallholder Oil Palm. In the past, oil palm smallholders in the Hoskins area were inadequately paid for their produce by New Britain Palm Oil Development Ltd. (NBPOD), the cvapany which operates the nucleus estate. Although prices have increased and smallholders are now adequately compensated, the Government still seeks to ensure sufficient incentives for oil palm smallholders operating in nucleus estate arrangements under the project. An assurance was obtained at negotiations that the Government would examine, on a quarterly basis, the monthly statements of cost coefficients used 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 (draft Loan Agreement, Section 4.03). 63. ABPNG Financial Performance with the Project. A projection of ABPNC's 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 borrowing expenses, and provisions for bad debts and contingen- cies that are large relative to total income. The increasing share of lower yielding agricultural loans to the total loan portfolio as mandated by the Government also contributes to accumulating losses. The ratio of income to the average loan portfolio would range from 12.7% to 14.1%, but total expenses as a proportion of loans would amount to 15.6-18%. 64. Under the project, ABPNG would undertake a comprehensive Action Program and Financial Strategy in order to address its deteriorating financial performance (para. 41). The financial aspects of this plan include: (a) a staff retrenchment program tc reduce staffing from the present 334 to 317 in 1989; (b) a continuing localization program to replace expatriates with PNG  - 19 - nationals; (c) a portfolio divestment program; and (d) improved arrears management and collections. An agreement was reached during negotiations that ABPNG arrearages would not be more than 20% of total loans in repayment (draft Project Agreement, Section 4.05). Moreover, the interest rate structure would be reviewed annually by the Government with the Bank with a view to gradually reduce subsidies and increase ABPNG's interest rates on agricultural loans. The Government has also allocated funds to cover the operating losses of ABPNG. Following these actions, ABPNG should be in better financial health in 1990. 65. Cash flow estimates indicate that ABPNG will continue to be finan- cially constrained due to: (a) loan disbursements exceeding repayments; (b) increased operating expenditures; and (c) increased borrowing expenses. In view of this constraint, the Government 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. 66. 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. An agreement was reached during negotiations that ABPNG would not exceed a debt-equity ratio ceiling of 75:25 during the project period (draft Project Agreement, Section 4.03). This limit is prudent in view of the level of arrears, uncer- tainty of future subloan repayment performance and expected provisions for bad debt in 1986-89. 67. Financial Rates of Return. The average financial rates of return of typical investments to be financed under the project are estimated at 30% for cocoa and 45% for oil palm. Estimated pre-project income is less than K 1,200 per family. An analysis of financial costs, benefits and risks indicates that the subprojects would be financially attractive to the beneficiaries. Incre- mental net cash family incomes p.a. of US$2,898 (6 ha cocoa) and US$2,869 (4 ha oil palm) at maturity would represent significant increases over incomes without the project. Benefits and Economic Analysis 68. The project would directly benefit 3,400 smallholder families, 55% 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 underuti- '-zed land resources. The total value (in constant 1985 prices) of project- related exports would be about US$21.5 million annually at full development, yielding revenues to the Government 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 ABPNC as a development finance 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 an improved financial condition of the bank in the long run. The estimated average economic rates of return (ERR) for the various farm models are 30X for cocoa, and 33Z for oil palm.  - 20 - 69. Risks. The primary risk is that ABPNG might not be able to imple- ment the project properly, in view of ABPNG's organizational problems coupLed with a borrowing clientele drawn from diverse cultural backgrounds who may be entering the market-oriented economy for the first time. To reduce the like- lihood and potential impact of this risk, the project stresses the institu- tional development of ABPNC through an Action Program and Financial Strategy, technical assistance, staff training and provision of adequate vehicLes and equipment. More efficient performance by the management agencies, which would be closely supervised by ABPEG, should ensure acceptable field development quality, cost-effective operations, adequate attention to land ownership prob- lems, and mobilization of the necessary amount of labor. As additional pro- tection, the collection performance and arrears position of the bank would be closely monitored. Taking the above safeguards into account, the project's indicated risk is judged acceptable. PART V - LEGAL INSTRUMENTS AND AUTHORITY 70. The Loan Agreement between the Independent State of Papua New Guinea and the Bank, the Project Agreement between the Bank and ABPNC and the report provided for in Article III, Section 4 (iii) of the Articles of Agreement are being distributed separately to the Executive Directors. Special conditions of effectiveness are (i) signing of a Subsidiary Loan Agreement, satisfactory to the Bank, between the Government and ABPNG (para. 53); and (ii) appoint- ment by ABPNG of a Deputy Managing Director (para. 50). Special conditions of the project are listed in Section III of Annex III. PART VI - RECOMMENDATION 71. I am satisfied that the proposed loan will comply with the Articles of Agreement of the Bank. 72. I recomuend that the Executive Directors approve the proposed loan. A.W. Clausen President Attachments September 5, 1985 Washington, D.C.  - 21 - ANNEX I .Page 1 of 6 iwolk 1970Lk *iuL AU*6 lACmC LAT. AlMICQ a cG mu ct . no TDTL *461.7 41.7 461.7 NM P.IU 3.7 4.A 4.l. _m cdm (on) .. .. 760.0 1011.1 173.9 _ ainTm awnm uxa or O.L quvArum 37.0 114.0 240.0 36.B MA imiA vmn amusorm POIU.anUUINI-13 CT3 105) 193.0 U16.0 3300 /h . Una P03uLAI (3 OF D rzW 2.7 9.6 13.5 - 33:. 67.7 3aMU= IN TM 20o0 CML) 4* nTAZ*31 nUUIAUOU (3M112) 9.0 Mu sq. M. *.2 3.2 6.9 36.3 44. PM sq. M. uI. IM 320.a 333.9 635.7 1391.2 91.1 POMWATON AO3 US1II3 (2) 0-14 1u 40.4 .2.0 42. 36.2 36.3 15-6 13 3.6 36.9 33. 3SJ. 37.1 sa MAuen 2.4 3.0 3.6 3.3 4.2 POPULAIO G032 am* CS) 2.3 /h TOTAL 1.4 2.2 * - 2.3 2.4 DUU61 13.3 13.2 7.3 4.1 3.6 co3 aIm am CPU 1o3) 44.0 41.3 35.0 30.1 30.9 c l D*3r un (M 1Ms) 23.2 16.1 14.0 9. e.0 @6M 35150C110 3AT3 3.0 3.0 2.4 1.9 2.0 FAMLY ruIN A 5. A5AL t. (TI.. ). Cs OiF orMIa V_) .. .. 5A0 3. 43*.3 ur or FM PRO. P CAu C1969-71-100) 100.0 100.0 99. 124.4 O9.6 Pu CAPIT 50111. Of CaLOas (3 or CSqof 5U1) 71.0 76.0 84.0 115J 113.2 PBI35 (0*3 P DAt) 33.0 42.0 45.0 603 ".4 or VNIM AZNA 4D AMMAE 17.0 20.0 20.0 A 14.1 34.2 cUL (AO tS 1-4) WM I= 26.1 19.9 12.0 7.2 4.* LI EMU. AT KM (13AN) 40.4 46.4 33.3 40.6 4J DnPr m. 3am (3 T05s) 163.0 133.0 37.0 . 397 mm3ss TO mm 643 (DO) 70AL .. 13.J 16.0, 44.0 633 LIMu .. 4.3 553.0 57. 76.3 l .. 10.0 10.0 37.1 44.2 As T0 AX 0DISPOSAL (I or swaom ToL . 6. 14.0 50.1 6. 035*1 .. 42.0 6.0 L S2J 734 IZAX. .. S3.0 3.0 44.7 23.3 POOLAIW Pu TMICIA 193".0 11630.0 13390.0 7731.7 109.7 POPl. I, 303 ffOA . 2 1600.0 960.0 J2464A 80.2 POP. Pu momu2M TOTAL 140.0 i 130.0 230.0 A 1112.1 362.0 0333 .. 30.0 100.0 S 631.4 *22.0 lUAL .. 260.0 270.0 236. 2716.7 3 PM 311AL .. .. .. 41.1 27.5 Avg*5 SIM OF UI5LD TOTAL 3.1 mU .. .. . .. NIZAL .. .. . .. AVSus. Or uuMOMsI TOTAL 0.7 .. 031*3.. .. . .. SEAL .. .. pnCMrAM or UU.Ia5 V113 UZLc. TOTAL 30.0 .. ORM.. NODAL,. ..  - 22 - ANNEX I T AS L 3A Page 2 of 6 PAPUA MEg GUINEA - SOCIAL INDICATORS DATA SHEET PAPDA NEW CUINEA REFENCE GROUPS (iticTED AvERAGEs) /a MOST (NOST RECENT ESTIMATE) /b RECENT MISDfLE INCOME NIDDLE NICOME 1960kb 197af-b pSIT!L.b ASIA & PACIFIC LAT. AMERICA 6 CAR UaTI ADJUSTED ZNROLLMENT RATIOS PRIMKAK: OTrAL 32.0 52.0 65.0 100.7 106.7 MALE 59.0 63.0 73.0 104.4 108.5 FEMALE 7.0 39.0 53.0 97.2 104.6 SECONDARY: TOTAL 1.0 8.0 13.0 47.8 44.2 MALE 2.0 11.0 17.0 50.6 42.7 FEMALE 1.0 4.0 8.0 44.8 44.9 VOCATIONAL Et OF SECONDAIRY) 16.0 19.4 16.2 18.4 13.3 PUPIL-TEACHER RAT1O PRZKARY 35.0 30.0 32.0 30.4 29.9 SECONDARY 18.0 .. 22.0 22.2 16.7 coWsoTo PASSEGERb CARSITiWUSAD POP 2.0 7.2 6.1 la 10.1 46.0 RADIO RCEIVERSTOUSAND POP .. .. 67.1 172.9 328.3 TV RECEIVERS/THOUSAND POP .. . .. 58.5 112.4 NEWSPAPER ("DAILY CENERAL INTEReST") CIRCULATION PER THOUSAND POPULATION .. . 9.3 65.3 81.1 CINEM ANNUAL AlTERDANCE/CAPrTA .. .. .. 3.4 2.4 1 ORnE TOTAL LANOR FORC (THOlS) 1058.0 1257.0 1550.0 PEALE (PERUCT) 41.4 41.3 40.9 33.6 23.6 AGRIWCLTUPE (PERCENT) 89.0 86.0 85 0 /h 52 2 31.4 INmUSR (PERCENT) 4.3 5.8 7;7 17.9 24.3 PARTZCIPATION RATE CPERCT) TOTAL 54.8 52.0 48.6 38.9 33.5 KALE 61.2 58.5 55.3 50.8 51.3 FElALE 47.7 44.9 41.0 26.8 15.9 ECONON{C DEPENDENCI RATIO 0.8 0.9 1.0 1.1 1.3 INUDI SENITI PERCENT OF PRIVATE INCM RECEIVED BT RICHEST s oP OEOLDS .. .... HIGELST 20: OF 6OUSUO1S .. .. .. 48.0 LOVEST 20S OF HOUSEHOLDS . . .. 6.4 LOUIST 40S OF HO.SEHOLDS 15.5 ES2TMATED ABSOLUTE POVERTY INCO1E LEVEL (O#$ PER CArT URDMI .. .. 400.0/C 288.3 RURAL .. .. 275.0 151.9 185.3 ESTDIATED RELATVE POVERTY INCOME LEVEL (USS PER CAPITA) URBAM .. . .. 177.9 519.8 RURAL .. .. .. 164.7 359.7 ESTILATED POP. B1OW ALSOLTS POVETY INCOME LEEL (S) UR8A . . 10.0 /R23.5 . RURAL 75.0 37.8 ..T 2VArLABIZ .NOT APPLICABL ffO0T E S /a The group aerages for each indicator arm popnLatiou-wigbtad ax1timatlc mean. Cowera of councrElo _ano tba LndIc-tora depauds on *vallabLItty of data and IA not niorm. lb Unle-o othOriaaO noted 'Data tfor 1960" refer to an yar betw_e 1959 mad 1961; "Data for 1970" betw_n 1969 and 1971; and data for "Noat Rseent Eatimats" btween 1981 and 1983. /c 1977; /d 1980; /a 1978; /f 1964; gL 17. /h 1984 JINE. 1985  - 23 - ANNEX I Page 3 of 6 DEDINMONS OF SOCAL INDICATOES No Although the data ar drawn ra soumroc denuraly jdged te mot uthariutive a reliablIc it should alo be noted a tbhey my nt be interntionlly comprmbk becmuse of Le lack of sandardid dienitionx and concepts used by different countrics in collcting the dat. The data a*re. netd usefu to dscribe orders ofmagnitude. indicate tendk and chracgeni cernin major diflfwenc betwe countriet The reference groups atm (1) the mane country group of the subjt country and (23 a country group with somewhat higher average income than the country group or the subjet country (except for -High Incowe Oil Exporte group where iMieddl Inconje North Africa sad Middle Eat is choen beause or tronger iociocitwsl allinities). In the reference group dat the d avages e population wigted arithmetik mrn for ch ndicsor and shown only when majority of the ouetries in group has data for tht indic tor Since the coveg of cuntries among the indicator dcpnds on the availability ofdata an is not unilrorn, caution must ec xercised in relating aveges or one indicator to another Thces avege are only umetl in compasing the walu clone indicator at a tine among ihc contry and refereinr goupL AREA (thousand sq.km.) Crude Irth Rate (per thosusadI-Number of live births in the year Total-Total surface area comprising !and area and inland waters; per thousand of mid-year population: 1960. 1970. and 1983 data. 1960. 1970 and 1983 data. Cme Death Rae (per thomasd)-Number of deaths in the year Agriclaral-Estimate of agricultural area used temporarily or per thousand of mid-year population: 1960, 1970. and 1983 data. permanently for crops. pastures. market and kitchen prdens or to Gras ReprodAeto. Rate-Average number of daughters a woman le fallow. 1960. 1970 and 1982 data. will bear in her nornal reproductive period if she experiences present age-specific fertility rates: usually five-year averages ending GNP PER CAPITA (USS)-GNP per capita estimates at current in 1960. 1970. and 1983. market prices, cakulated by same conversion method as Werld Faly PfAmahg-Acceprors, Ama) (showssnd-Annual nun- Rank Atlas (1981483 basis); 1983 data. ber of aeceptors of birth-control devics under auspices ofrnational ENERGY CONSUMPTION PER CAPrIA-Annual apparent family plnning program. consumption of commercial primary energy (coal and lignite. FaUdfy Phsnmdn-fn (perc of arre,d )-Thc peren- petrolum. natural gas and hydro-. nuclear and geothermal er, tapg of married women of child-bearing age who are pacticing or tricity) in kilograms of oil equivalent per capita; 1960. 1970. and those husbands are practicing any form orcontraceptiotL Women 1982 data. of child-bearing age are geneally women aged 15-49, although for some countries contraceptive usage is mcasured for other age POPULATION AND VITAL STATISTICS groups- Totad Ptp.aikn. Mid-1Yew (the odsJ-As of July 1: 1960. 1970. FOOD AND NUTRllON and 1983 data. Ind ex of Food Proldctio Per Cqha (1969-71 = IOOJ-Index of per Urba PopuIaiou (prer of otael)-Ratio of urban to total capita annual production of all food commodities. Production population; different definitions of urban areas may affect compar- exdude a*nal feed and sqedifor agriculture. Foo commodities ability or data among countries 1960. 1970. and 1983 data. nclude primy oommodisies (e.g. sugarcane instead of sugar) Prpuato Pwjecroio which are edible and contain nutrients (e.g coffee and tea are Popudlaon Mi year 2000-The projection of population for 2000. exduded); they comprise cereals, root crops. pubes oil seeds. made for each economy separately. Starting with informauon on vegetabes, fruits. nuts, sugarcane and sugar beets. liestock, and total population by age and sex, fertlity rates, mortalty rates. and livesock products. Aggregate production of each country is based international migration in the base year 1980. these parameters on national average producer price weights; 196145, 1970. and were projected at five-year intervals on the basis of generalized 1982 data. assumptions until the population became stationary. PAe Ca,a. Supy ofGCao (pecen up) rqu w s)-Comput- Starior-y popdation-Is one in which age- and sex-specific mor- ed from calorie equivalent of net food supplies available in country tality rates have not changed over a long period. while age-specific per capita per day Available supplies comprise domestic produc- fertility rates have simultaneously remained at replacement level tion imports less exports, and changes in stock. Net supplies (net reproduction rate= 1). In such a population. the birth rate is exclude aninal feed. seeds for use in agriculture. quantities used ir constant and equal to the death rate, the age structure is also food processing, and losses in distribution. Requirements we constant. and the growth rate is zero. The stationary population estimated by FAO based on physiological needs for normal activity size was estimated on the basis of the projected characteristics of and health considering environmental temperature, bodv weights the population in the year 2000. and the rate of decline of fertility ageand sex distribution of population. and allowing 10 percent for rate to replacement lvel. waste at household kved 1961. 1970 and 1982 data. Poulation Mom aentm-ls the tendency for population growth to Per Capita Supply ofProein (gram per dayf-Protein content of continue beyond the time that replacement-level fertilitv has been per capita net supply of food per day. Net supply of food is defined achieved; that is. evrn after the net reproduction rate has reached as above. Requirements for all countries established by USID unity. The momentum of a population in the year t is neasured as provide for minimum allowances of 60 grams of total protein per a ratio of tL- uliamate stationary population to the population in day and 20 grams of animal and pulse protein. of which 10 grams the year rL given the assumption that fertility remains at replace- should be animal protein. These standards are lower than those of ment level from year t onward. 1985 data. 75 grams of total protein and 23 grams of animal protein as an Popdniai D&xsiity average for the world, proposed by FAO in the Third World Food Per sqJin.-Mid-year population per square kilometer (100 hec- Supply; 1961. 1970 and 1982 data. tanes) of total area; 1960. 1970. and 1983 data. Per Capi Proteir Supply romr A tf ad hPre-Protein supply Per sq km. agrindrural lAnd-Computed as above for agricultural of food derived from animals and pulses in grams per day; 1961 -65. land only. 1960. i970. and 1982 data. 1970 and 1977 data. R_patio Age Structr (percemrs-Children (0-14 years). work- Cd (ages l-4) Deteh Rate (per thomend)-N umber of deaths of ing age (15-64 years), and retired (65 years and ovcr) as percentage chdildren aged 1-4 years per thousand children in the same age of mid-year population; 1960. 1970. and 1983 data. group in a givcn year. For most developing countries data dcrivcd RFbplantiou Growth Rate (perreanl-rotal-Annual growth rates of from life tables; 1960. 1970 and 1983 data. total mid-year population for 1950-60. 1960-70. and 1970-83. HEALTH Populaoi Growth Rate (percen)-_rarhn--Annual growth rates Life Expectanwy at Bh (years)-Number of years a newbom of urban population for 1950-60. 1960-70. and 1970-83 data. infant would livc if prevailing patterns of mortality for all people  -24 - ANNEX I Page 4 of 6 at the time of of its birth were to atay the saie througbout its lire; PpUrewlher Rtato - pimry, and seconAary-Total students en- 1960. 1970 and 1983 data. rolled in primary and secndary levek divided by numbers of lmfi*w MtartJ Rte (per thassod)-Number of infants who die teachers in the corrsponding kvds. before reaching one year of age per thouand live birth in a given year. 1960, 1970 and 1983 data. CONSUM7flON Acs to Se *Ww (peeut of H1r1dM. Aid Ph u _w Cwt (per t*kusooi papiliti.)-Fhissenser cars com- rd-Number of people (total, urban. and rural) with reasonbe pria motor c seating les than ight perons; excludes ambul- acs to sLfe water supply (indudes treated surface watsm or anos, hearses and military vehices. untrated but uncontmminated water such as that from protected abdb RecIm (er tho_ Itpin-All types of ivers borehoks. springs and anitary wel) as percentaes of their rexa>c for radio broadcasts to genral public per thousand of population; tive populations. In an urban ana a public fountain or sun dpost excludes un-licensed receivers in countnes and in yeas when located not more than 200 meters from a house may be considered rgstrto of rdio st was in efect data for recent year may as being within resonable access of that house. In nual areas not be compable since most countries abolishe licening. reasonable access would inply that the housewife or members of the household do not have to spend a disproportionate part of the day TVRdas (p mt- ceivsfrfor broadcast in fetching the family's water needs to Fnal public per thousnd population; exdudes unlicesed TV incen th Exe Dfa iys waer t of rcivers i countruies and in yeas when mgistration of TV sets ws 1d ruNt-Number of people (total, urban, and rural) served by in ect exceta disposal as petrentages of their respective populadons. W CIcUhtE (pgr l oskaasmdIeI rt)-Shows the aver- Excrt disposal may include the collction and disposal, with or age circuiation of daily genal interet newspaper," defined as a without treatment, or human exca nd waste-water by water- periodical publication devoted prim y to recordig gnea news borne systens or the use of pit privies and similar insJhlationL It is consdred to be -daly" if it appears at least four times a weck. Populaue per Physkiaw-Population divided by number of pnu> CGum A _sual Attndance per Cpta pr Ye_-Based on the tising physicians qualified from a medical school at univernity vel. number of tickets sold durig the year, including admissions to Poplaiu per Nasuag Prsop.-Fbpulation divided by number of drivein cinemas and mobile units. practicng male and female graduate nurses, assstant nues, practical nurscs and nursing auxiliaries. LBOR FORCE Populabon per li,pid , ardies, w Toed Lilb P rte (etkesadl)-Economrcally active pewns in- (totaL urban, and rural) divided by their reetve number of cluding armed forces and unemployed but excluding housewives. hospital beds available in public and private, g0a-1 and Pdi students. etc., covering population of al ages. Definitions in hospitals and rehabilitation centes Hospitals estabishmcnts various counties are not comparable; 1960, 1970 and 1983 data. permanently staffed by at last one physician. Establishments prov- k (perceat)-Fernale labor brce as percentage of tota labor iding principally custodial care a not included. Rural hospitals, force. however, include hbelth and mnedil centers not permanently stalfed A_ieuwe frprcu -Labor formc i farming, forestry, hunting by z physicin (but by a medical assistnt, urse, midwife, etc.) and fishing as peontge of tot labor fore; 1960. 1970 and 1980 which offer in-patient accommodation and provide a limited rane data. of medical facilities hia_ry (percet)-Labor force in mining, construction manu- Adssdm per iespisl Bed-Total number of admissions to or facturing and eectricity. water and gas as percentage of total labor discharges from hospitals divided by the number of beds. force; 1960, 1970 and 1980 data. uA idptM Rote (p_rcew)-.* alk, dj k nipo HOUSING or acivity rates are computed as total, male, and fiemle labor force A-re Sie of Heo tM (psa- per 11e,l11t11M , as percentages of totaL male and female population or all aM audrad-A household consists ofa group of individuals who sbhe respectively 1960, 1970, and 1983 data. These are based on ILO's lving quarters and their mai meals. A boarder or dger may or partopati rates rilectingage-sex sutru of tpopulaon. and may not be included in the household for statistical purpose. lng time trend- A few esmates are from national sources Aee Number of PAsr per RoAoe_IJd rban, nd yad- Eceumic Depedey RIP-Ratio of population under IS. and Averag number of persons per room in all urban. and runl 65 and over to the working age population (those aged 15-64). occupied conventional dwelbngs, respectively. Dwelings exclude non-permanent stuctrs and unoccupied parts. INCOME DISMEBUsION Peredg of Dielias with E teci'icy-4tt, atm . Jnd trd- Page of Trd Dhparbk Icom (beth un cask m kiuf)- Conventional dwedling with electricity in lving quarters as percen- Accruing to percentie groups of households ranked by total bouse- tage of total, urban, and rural dwelings rspectdvdy, hold income. EDUCATION POVERTY TARGET GROUPS A*4ssed ovfi.w Raios The followng estimates are very approxinate neasurs of poverty Nary school - tota mak mid fem totaL r an le nd k and should be interpreted with considerable caution. female enrolment of aD ages at the prmary lvd as percentages of Estimated A slate Po ert lamer Le ed (5 per cap re) d-_rba respcive primary school-age populations. Whilc many countries md rural-Absolute poverty income level is that income lvel consider prinary school age to be 6-11 year, others do not The below which a minimal nutritionally adequate diet plus essential differnces in country practices in the ages and duration of school non-food requirenmnts is not affordable ar reflected in the ratios given. For some counmtries with univrsal fEtibared Rdmaw P 1rty luen Level (55 per capies)-_JAm educatui, gross enroUment may aeced 100 peacent since some end Fao-Rural relative poverty income lcvd is one-third of pupils are below or above the country's stndard primary-schol aveage per capita personal income of the country. Urban level is age. derived from the rural level with adjustment for higher cost of Secony school - toral, mae and ferak-Computed as above; living in urban areas. secondary education requires at least four years of approved pri- Estimed Plpetaa Beow Afsolae Povety Inens Leld (per- Diary i0nsuion, provides Seneral vocakoai or teacher tranUMg cawt-uorba ad rad- Pecent of population (urban and rural instructions for pupils usually of 12 to 17 years of age; correspond- who are "absolute poor. once courses are generally exdcuded Voain EiAro&mn (perce of sacody y)-Vocational institu- Comparative Analysis and Data Division tions include technical, indusutia, or other programs which operate Economic Analysis and Projecions Depatment indepedetly or as deparmnents of secondary institutions June 1985  - 25 - ANNEX I Page 5 of 6 COUNTRY DATA - PAPUA NEW GUINEA /a GROSS NATIONAL PRODUCE IN 1984 ANNUAL RATE OF GROWTH (at current prices) 1980-69 1970-76 1975-84 US$ mln - (constant prices) - GNP at Market Prices 2,309.4 100.0 6.5/b 2.7/b 1.9/b Gross Domestic Investment 581.3 25.2 19.2 5.6 3.0 Gross National Savings 307.7 13.3 Current Account Balance -330.3 -14.3 Exports of Goods, NFS 1,017.0 44.0 9.9 18.1 2.2 Imports of Goods, NFS 1,290.7 55.9 16.5 2.7 1.9 OUTPUT. EMPLOYMENT AND PRODUCTIVITY IN 1979 Value Added /c Employment Value Added per Worker US$ mlin Z 000 Z US$ Z of National Average Agriculture 659.4 32.1 996 87.6 774 39.9 Industry 699.0 34.1 27 2.4 25,141 1,295.3 Services 696.3 33.9 114 10.0 6,642 342.2 Total/Average 2,054.7 100.0 1,137 100.0 1.941 100.0 GOVERNMENT FINANCE Central Government K million Z GDP 1984 1984 1976-78 Current Domestic Receipts 479.0 22.1 19.7 Current Expendituree 633.0 29.2 32.2 Current Deficit 154.0 7.1 12.4 Capital Expenditures 107.0 /d 4.9 4.5 External Assistance (net) 228.0 10.5 13.5 /a As of January 1, 1978, PNG changed its fiscal year from July 1 - June 30 to January 1 - December 31. All data have been adjusted to a calendar year basis. /b Growth rates are calculated in line at end-ponts. T_ At factor cost. These figures are for 1981. More recent data not available. /d These include capital transfers to provincial governments and to public enterprises. not applicable not available October 1985  - 26 - ANNEX I Page 6 of 6 COUNTRY DATA - PAPUA NEW GUINEA MONEY, CREDIT and PRICES 1979 1980 1981 1982 1983 1984 (Million K outstanding at end of period) Money and Quasl Money 571.7 553.1 554.7 567.8 649.6 750.3 Bank CLedit to Public Sector, net 35.0 8.1 43.4 71.1 4.9 -5.4 Bank Credit to Private Sector, net 229.0 280.0 321.6 454.6 412.5 501.1 (Percentage or Index Numbers) Money and Quasi Money as 2 of GDP 35.3 31.9 33.5 32.5 32.5 34.6 Consumer Price Index (1977 - 100) 111.9 125.5 135.6 143.0 154.3 165.8 Annual Percentage Change in: Consumer Price Index 5.8 12.1 8.0 5.5 7.8 7.5 Bank Credit to Private Sector 18.2 11.7 12.7 8.9 20.3 19.0 BALANCE OF PAYMENTS MERCRANDISE EXPORTS (AVERAGE 1980-84) 1982 1983 1984 US$ min x Exports of Goods, NFS 863.6 926.0 1,017.0 Coffee 126.7 14.5 Imports Qf Goods, NFS 1 395.3 1,360.0 1,290.7 Cocoa 58.6 6.7 Resource Gap (Deficit - -) -531.7 -434.9 -273.7 Copra & Copra Products 62.1 7.1 Timber & Timber Products 71.1 8.1 Factor Services (net) -93.4 -96.3 -263.4 Copper Concentrates 181.4 20.7 Transfers (net) 138.2 160.7 168.0 Cold 232.4 26.6 Balance on Current Account -486.9 -370.5 -330.3 All other commodities 142.4 16.3 Private Capital (net) 378.3 312.9 247.5 Total 874.7 100.0 Public MLT Loans (net) 101.7 152.3 16.8 Errors and Omissions /a -32.6 14.4 115.4 Increase in Reserves -40.7 109.1 28.0 EXTERNAL DEBT. DECEMBER 31, 1983 uS$ min Import of fuel and related materials 198.1 200.7 175.1 Public Debt, incl. guaranteed 765.6 Nonguaranteed Private Debt 820.1 Total Outstanding & Disbursed 1,585.7 PUBLIC DEBT SERVICE RATIO FOR 1983 /b z RATE OF EXCHANGE Public Debt, incl. guaranteed 11.0 1978-79 1980 Nonguaranteed Private Debt 18.3 US$1.00 - K 0.71 USS1.00 - K 0.67 Total Outstanding & Disbursed 29.3 K 1.00 - US$1.41 K 1.00 - US$1.49 1981 1982 IBRD/IDA LENDING (AS OF MARCH 31. 1985) US$1.00 - K 0.67 US$1.00 - K 0.74 USS mln K 1.00 = US$1.49 K 1.00 - US$1.36 IBRD IDA 1983 1984 Outstanding & Disbursed 89.1 110.2 Undisbursed 100.3 3.2 US$1.00 - K 0.83 US$1.00 - K 0.89 K 1.00 - US$1.20 K 1.00 - US$1.12 Outstanding inc. undisb. 189.4 113.4 /a Including capital n.e.i 7_ Ratio of debt service to exports of goods and services. October 1985  - 27 - ANNEX II THE STATUS OF BANK GROUP OPERATIONS IN PNC A. Statement of Bank Loans and IDA Credits /a (as of March 31, 1985) Loan or Amounts (US$ millions) credit (less cancellations) number Year Borrower Purpose Bank IDA Undisbursed Seven loans and nine credits fully disbursed 75.5 64.4 - 1333-PNG 1976 PUC Agriculture 12.0 - 0.55 841-PNG 1978 PNC Rural Development - 20.0 1.31 1934-PNG 1981 PNG Primary Education 6.0 - 5.90 1087-PNG 1981 PNC Primary Education - 12.0/b 0.34/c 1149-PNG 1981 PNG Second Agric. Credit - 15.071 0.347- 2125-PNG 1982 PNG Enga Provincial Dev. 6.0 - 4.61 1279-PUG 1983 PUG Petroleum Tech. Assis. - 3.0/e 1.18/c 2265-PUG 1983 PNG Road Improvement 31.0 - 27.97 2276-PNG 1983 PNG Agric. Support Serv. 14.1 - 13.49 2395-PNC 1984 PNG Secondary Education 49.3 - 47.53 2475-PNG 1984 PNG West Sepik Provincial 9.7 - - Total 203.6 114.4 103.22 of which has been repaid 14.2 1.0 Total now outstanding L89.4 113.4 Amount sold 8.1 0 Repaid 8.1 Total now held by Bank and IDA 189.4 113.4 Total undisbursed 100.05 3.17 103.22 B. Statement of IFC Investments None /a The scatus of the projects listed in Part A is described in a separate report on all Bank/IDA financed projects in execution, which is updated twice yearly and circulated to the Executive Directors on April 30 and October 31. /b Credic amount is SDR 9.4 million (equivalent of US$12.0 million at time of conmicment). /c Amount expressed here is US$ equivalent of undisbursed SDR amount in terms of US$ commitment. {d Credic amount is SDR 12.3 million (equivalent of US$15.0 million at time of commitment). /e Credit amount is SDR 2.7 million (equivalent of US$3.0 million at time of commitment).  - 28- ANNEX III Page 1 PAPUA NEW CUINEA THIRD AGRICULTURE CREDIT PROJECT Supplementary Data Sheet Section I: Timetable of Key Events Time taken to prepare the project One year Project Preparation Agency: Agriculture Bank of Papua New Cuinea with Bank assistance First presentation of the project to the Bank: May 21, 1982 Departure of ap;raisal mission: May 1983 Departure of post-appraisal mission: February 1985 Date of negotiations: July 9, 1985 Planned date of effectiveness: December 1985 Section II: Special Bank Implementation Action None Section II:: Special Conditions Assurances were be obtained from Government on the following: (a) the subsidy payments to ASPNC would not exceed K12 zillion during the period January 1, 1986 to December 31, 1988; the level of subsidies and interest rates would be reviewed annually with the Bank commencing not later than December 31, 1986; and subsidies would be directed at farmers living at or below the poverty level (para. 44); (b) agricultural investments begun under the project would be completed using Covernment and/or ABPNC funds beyond the termination of ploject funding (para. 49); (c) two months prior to the start of ABPNC's fiscal year, ABPNC would submit to the Bank for review and approval an annual program for lending to new crops and other agricultural activities including the technical, economic and financial justification for such lending (para. 49); (d) individual subloans above K 120,000 would be submitted to the Bank for approval prior to ABPNC approval (para. 55); (e) ASPNC would undertake an agreed Action Program and Financial strategy (para. 61); (f) Covernment would examine on a quarterly basis the monthly statements of the cost coefficients used in calculating FFB prices for  - 29 - AN=El III Page 2 smallholders and cause such coefficients to be adjusted, if necessary to ensure that the prices provide sufficient incentive for the smallholders to replant and harvest the oil palm (para. 62); and (g) AIPNG-arrearages would not be more than 20Z of total Loans in repayment and the debt-equity ratio ceiling would be 75:25 (paras. 64 and 66). Conditions of effectiveness would be the appointment of a suitably qualified individual as Deputy Managing Director (para. 50) and signing of the Subsidiary Loan Agreement satisfactory to the Bank by Government and ABPNG (para. 53). I ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~I i'  IBRD 17314P _ PAPUA NEW GUINEA M A N U S -U - LG'ma0 I A I , AD THIRD AGRICULTURAL CREDIT PROJECT VInsrra i - : ~ '-r4K I / I i~ jn sqW - i, =- X ~~~~~~~I _ s , I ia * Jd__~E I = &; - I -________ - I WESg aE c Ai w < e 16"I - n - - i_' XS~ ~~ f !