Papua New Guinea - Nucleus Estate and Smallholder (Milne Bay) Project

Docum.t of- The World-Bank FOR OFFICIAL USE ONLY Rq,t N.. 5381-PNG STAFF APPRAISAL REPORT PAPUA NEW GUINEA NUCLEUS ESTATE AND SMALLHOLDEER I (MILNE BAY) PROJECT April 5, 1985 Regional Project Department East Asia and Pacific Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CJRRENCY EQUIVALENTS la (as of August 1984) Current Unit Kina (k) US$1.122 K I K 0.891 US$1.00 WEIGHTS AND MEASURES I kilogram (kg) = 2.2046 pounds 1 metric ton (mt) = 2,204.6 pounds 1 kilometer (km) = 0.6214 miles 1 meter (m) 1.0937 vards 1 centimeter (cm) 0.3937 inches FISCAL YEAR January to December ABBREVIATIONS ABPNG - Agriculture Bank of Papua New Guinea CDC - Commonwealth Development Corporation Company - Milne Bay Estates Proprietary Ltd. DBE - Dry bean equivalent (cocoa) DOF - Department of Finance DPI - Department of Primary Industries (Agriculture) DWS - Department of Works and Supply ERR - Economic Rate of Return ffb - Fresh fruit bunch (oil palm) IRR - Internal Rate of Return (financial) LIBOR - London Interbank Offered Rate OCC - Opportunity Cost of CapitaL PC - Project Coordinator PNG - Papua New Guinea SOE - Statement of Expenditure /a The Kina is tied to a basket of currencies and floats against the dollar on a day-to-day basis. The impact of these variations on project costs is less than five percent.  FM OMCIAL USK ONLY PAPUA V GUINEA NES I (MILNE BAY) PROJECT Table of Contents Page No. Loan and Project Summary ..... .............................. i I. BACKCROUND ........ * ............*.*..... ......... 1 Introduction ................ ................................ 1 Agriculture in PNG .......................................................1 Tree Crop Subsector ................. .......... ..... 1 Tree Crop Support Services and Institutions ................ 4 Agricultural Development Strategy ....... oo..o ........... 6 The Bank's Role ....................... ...... ......... 7 The C-ompany .................................... .................... 0 8 {I. THE PROJECT AREA ... ......... . .8 Climate o................ ........... 0.0 9 SoiLs and Topography ...o ...... ............. * 9 Infrastructure ............ .................. 9 Current Land Use and Production ..... ...................... 10 Population and Social Customs .............................. 10 III. THE PROJECT ................ 11 Objectives and Strategy ................ ........... . 11 Rationale for Bank Involvemento. ........... o....... .o. 12 Brief Descriptions ............ 12 Detailed Features - Nucleus Estate ........ ................. 13 Oil Palm Plantation and Nursery .....ooo..................... 13 Cocoa Plantation and Nursery ............................... 14 Oil Palm Processing ............ .......................o .... 14 Cocoa Processing ..... . 0 ...... ... ....... .. ..0. .... 15 Administrative Support ....................o....... 15 Housing ........ ...... .... .... o..* ... .o...... 16 Detailed Features - Smallholder Areas and Infrastructure ... 16 Smallbolder Oilpalm ............0 ................ ...... 16 Physical Infrastructure ...... 17 Social Infrastructure ......... - ......................... 17 Extension, Research and Studies ..................... 17 Environmental Aspects .............. .............. 18 This report is based on the findings of an appraisal mission comprising Messrs. T.P.L. Sinha, A. KhAn, C. H. Shearing and do. C. Clark which visited PNG in June/July 1984. The report was reviewed by Mr. R. Hevson. I This document a -trce disttiou and my be und by rije oa i the psufo mmfe or thei offica duie Its conen may nt odteii be dioded witout Wodd Dak au_hritu  Page No. IV. PROJECT COST AND FINANCING ... .. ...... .............. ..... 18 Project Cost .... ............*............................. 18 Financing ..........................**....*....*...........* . 18 Procurement ., . . ......... *........................ 21 Disbursement . ............................................ .. 22 Accounting and Audit ... ............................. 23 V. ORCANIZAIION AND NANAGEMEET .............. 24 The Company ........................*....*............*... *... 24 The Department of Primary Industries .............. .......... 25 Other Implementing Agencies ................................ 26 Project Implementation Plan and Actions . ................... 26 Vl. PRODUCTION, MARKETS AND PRICES ............................ 27 Yields ................................................ 27 Production ........... ...................................... 28 Markets and Prices ........................................ 29 VII. FINANCIAL ANALYSIS ................................ 29 Smallholder Financial Returns .... ............... .......... 29 Nucleus Estate - Financial Benefits ...... .................. 30 Nucleus Estate - Operating Costs ............ . .............. 31 Financial Rates of Return for the Nucleus Estate ........... 32 Financial Structure of the Company ....................... .... 32 VIII. PROJECT JUSTIFICATION AND ECONOMIC ANALYSIS ................ 33 General .......... *.*.**.*.*.... *.........*..... o.......... 33 Benefits ................................................... 34 Non-quantified Benefits ... ................................ 34 Economic Analysis ............. . ...... ................... ... 34 Project Risks and Sensitivity Analysis ..................... 35 IX. ASSURANCES TO BE SOUGHT AND RECOOMENDATIONS ................ 37 TABLES IN TEXT 1.1 Tree Crop Production in PNG ....... ...... .... . . ..... ........ 2 1.2 Tree Crop Exports ................ .............. .......... 2 2.1 Project Area Current Land Use ........- .... .......... ..... 10 3.1 Oil Palm Planting Program .............. .o.....-.......... 13 3.2 Cocoa Planting Program E ........**......*.....*. ....***.... 14 4.1 Project Costs .......... - 19 4.2 Financing Plan ....o .............-....... ............. 20 4.3 Procurement Arrangements ............ .. ............. ... 21  Page No. 6.1 Nucleus Estate Oil Palm Yield Projection .................. 27 6.2 Smallholder Oil Palm Yield Projection ...................... 27 6.3 Nucleus Estate Cocoa Yield Projection .......... ............ 28 6.4 Annual Production ........**.*....................... 28 7.1 Nucleus Estate Income (Year 10) ............................ 31 7.2 Nucleus Estate Operating Costs ............................. 32 7.3 Projected Balance Sheet and Financial Ratios ................. 33 8.1 Economic Rate of-Return ........................... 34 8.2 Switching Values ........ ................................... 36 ANNEXES 1. Project Cost Summary Tables 2. Financing Plan and Disbursement 3. Organization and Implementation Charts 4. Production, Yields and Prices 5. Financial Projections 6. Economic Cash Flow Projections and Returns 7. Sedlected Documents Available in Project Files LIST OF MAPS IBRD Map No. 18332  PAPUA NEW GUINEA NUCLEUS ESTATE AND SMALLHOLDER I (MILNE BAY) PROJECT Loan and Project Sumzarn Borrower: The Independent State of Papua New Guinea. Beneficiaries: The Milne Bay Estates Pty. Ltd (Company) and smallholder farmers in the Milne Bay Province. Loan Amount: US$27.6 million equivalent Terms: Repayable in 17 years, including 6.5 years grace at standard variable interest rate. Onlending Terms: The Government of Papua New Guinea (GOPNG) will onlend US$18.5M equivalent equivalent to the Company at variable interest rate with a margin of 1.55% above six-month LIBOR and US$1.6M as equity contribution. The Company will bear the foreign exchange risk. GOPNG will also lend US$0.7M equivalent to the Agricultural Bank of Papua New Guinea (ABPNG) at 8% p.a. for onlending to small- holder farmers at 11Z p.a. with GOPNG bearing the foreign exchange risk. The grace periods and terms of loans to the Company and ABPNG will be the same as those of the Bank loan. The remainder of the Bank loan proceeds (US$6.8 M equivalent) will be retained by COPNG and used for other project works, including infrastructural improvements. Project Description: The project aims at increasing foreign exchange earnings of Papua New Guinea (PNG); partially offsetting declines in cocoa exports and accelerating economic development in one of the less developed provinces of PNG. The project will develop about 3,700 ha of oil palm plantation, 750 ha of cocoa plantation and 1,000 ha of smAllholder oil palm blocks in the Milne Bay Province. The project will also provide associated processing facilities and infrastructural support, including construction of an oil palm mill, a cocoa fermentary, and improvements in proj- ect area roads, bridges, health, education and housing facilities. The project is expected to increase PNG's annual exports of palm oil and kernel by about US$13M and cocoa by US$2M. The project fazes no special risks.  - ii - Cost Estimates: Local Foreign Total US$ Killion Nucleus estate development 18.3 20.5 38.8 Smallholder oil paLm development 1.0 0.6 1.6 Infrastructure support 2.1 2.4 4.5 Base Cost 21.4 23.5 44.9 Physical contingencies. 1.0 1.5 2.5 Price contingencies 5.9 5.9 11.8 - Total Project Cost /a 28.3 30.9 59.2 Interest during construction /b 0.9 8.2 9.1 Total Financing Required 29.2 39.1 68.3 Financing Plan: Local Foreign Total "U$ Million IBRD 7.4 20.2 27.6 CDC 12.9 18.9 31.8 Smallholders 0.6 - 0.6 GOPEG 8.3 - 8.3 Total 29.2 39.1 68.3 Estimated Disbursements: Bank FY 1986 1987 1988 1989 1990 1991 1992 1993 Annual 0.9 2.3 6.4 14.0 2.6 1.0 0.3 0.1 Cummulative 0.9 3.2 9.6 23.6 26.2 27.2 27.5 27.6 Rate of Return: 14% Staff Appraisal Report: No. 5318-PNG dated April 5, 1985. Map IBRD 18332 /a Includes local duties and taxes (US$2.0 million). /b Includes on-lending fee (US$0.9 million).  1. BACKGROUND Introduction 1.01 The Government of the Independent State of Papua New Guinea (GOPNG) has requested Bank assistance for a project to increase the production and processing of export oriented tree crops (mainly oil palm). The project was pr-cpared during 1983 by the Commonwealth Development Corporation (CDC) with thie participation of GOPNG's Department of Primary Industries (DPI) and the Bank. In May 1984, GOPNG invited the Bank to send a pre-appraisal mission to review the project. A preappraisal mission consisting of Messrs T.P.N. Sinha, A Rhan, C. Shearing and Ms C. Clark visited Papua New Guinea (PNG) during June/July 1984, and in view of agreements reached on a restructured project, it was later converted into an appraisal mission. This report is based on the mission's findings. Agriculture in PNG 1.02 Role in the economy: Agriculture plays a dominant role in the PNG economy as employer and provider of food and income to the great majority (over 80%) of PNG's population. The sector, including forestry, fisheries and livestock, accounted for more than 40% of PNG's K 687 million exports in 1983 and about a third of its GDP. 1.03 Resources: PNG enjoys a humid tropical climate which is conducive to agriculiural production, especially of tree crops. The land ares of 500,000 km is sparsely populated (an average of six persons per km ) and nearly 15 million ha (30%) is topographically, geologically and climatically suited to agriculture. With only about half of this suitable land currently used for agriculture, there is considerable scope for increased utilization. 1.04 Structure: Agriculture in PNG follows three modes of production: (a) smallholders following subsistence farming based mainly on root crops and vegetables for their own consumption; (b) estates which hire labor and produce mainly tree crops for export; and (c) smallholders growing cash crops, mainly tree crops for export in addition to some food crops. Estimates of subsis- tence output are weak, although such output is believed to comprise about 40% of total agricultural production. Subsistence agriculture is suited to remote areas where poor infrastructure hinders trading activity; its importance is expected to decline gradually as infrastructural improvements permit trading at lower cost, and thereby encourage greater cultivation of tree crops. Tree crop products already account for about 40% of the agricultural production, and over 77% of agricultural exports. Tree Crop Subsector 1.05 Tree crops cover about 476,000 ha (1%) of land in PNG, of which about 55% is under coconut; 27%, cocoa; and 18%, other tree crops. About 65% of the area is managed by smallholders, and 35Z by estates. Production from major tree crops during 1983 is shown below:  -2- Table 1.1: TREE CROP PRODUCTION IN PUG (1983) Production Price Value Value CROP (1,000 tons) (1983 Kina/ton) (1983 K M) (Z) Coffee 52.5 1,803 94.7 43 Cocoa 26.3 1,572 41.3 19 Copra 78.7 306 24A0 11 Copra oil 36.2 554 20.0 9 Palm oil 77.9 306 23.8 11 Palm kernel 9.1 152 1.4 1 Tea 7.2 1,436 10.3 5 Rubber 2.7 792 2.1 1 Total 290.6 217.8 100 1.06 Tree crop production volume has increased by 4Z p.a., mainly due to increases in oil palm and coffee. Most other tree crops have shown a decli- ning trend. The slow growth coupled with reduction in comnodity prices since 1978 has resulted in stagnation of export values (Table 1.2). Table 1.2: TREE CROP EXPORTS Value in millions Growth rate (Z p.a) of current Kina Value Volume 1978 1983 (nominal) Coffee 107.2 94.7 -2.4 2.8 Cocoa 63 41.4 -8.1 -0.6 Copra & Products 36.5 45.5 4.5 -0.6 Palm Oil & Kernel 11.2 25.1 17.5 21.7 Other 10.4 12.6 3.7 -2.3 Total 227.3 219.3 -0.7 4.0 The performance and prospects of major tree crops in PNG are discussed below. 1.07 Coffee: Coffee is the most important tree crop in PNG, accounting for almost half of PNG's tree crop export value. About 86Z of the 47,000 ha coffee area is cultivated by smallholders. Arabica coffee comprises about 90% of the crop and is grown in the highland provinces. The main constraint to future expansion of coffee area is the high level of current coffee production in relation to market opportunity. PNG is a member of the International  -3- Coffee Agreement (ICA), and in most of the recent years its export quota has been below 70Z of its production. Since local consumption is low (5%), a sub- stantial proportion of productijn (over 25%) has to be exported to non ICA countries at heavily discounted prices. Until PNG is able to get a substan- tial quota increase, incentives for expansion of coffee area would be small. 1.08 Cocoa: The cocoa area at 128,000 ha is more extensive than that of coffee, but production volume and value are lower so that cocoa accounts for only about 19% of tree crop exports. While the majority (57%) of the cocoa area is cultivated by smallholders, plantations also cover a substantial area (some 55,000 ha). Cocoa production has declined by about 20% since its peak production of about 35,000 tons in 1974/75 due to senility, pests and dis- eases, and current average yields of about 0.3 tons/ha are very low. However, future yield prospects are better. Locally selected disease resistant varie- ties are now available and, under good management conditions, the prospects for increasing cocoa yields are excellent. The proposed project will make a modest beginning in this direction, which will only partly offset previous production declines. 1.09 Coconut: Copra production is PNG's longest established industry and provided 9OZ of its exports in 1900. Even now, coconut covers 57% of tree crop area, but accounts for only 15Z of tree crop exports due to the emergence of other tree crop exports. About 64Z of the 263,000 h- coconut area is under smallholder management. Copra yields are variable but average about 0.7 tons per ha. Increased yields are now possible through the utilization of hybrid planting material. DPI has established coconut seed gardens which will support planting of about 3000 ha p.a. 1.10 Oil Palm. Oil palm is grown and processed on a commercial scale at Cape Hoskins (13,200 ha) and Biala (6,100 ha) in West New Britain Province, and at Popondetta (9,400 ha) in Oro Province. Of the total 28,700 ha of oil palm, about 58% is managed by smallholders. Cultivation, processing and export of this crop are increasing and represent the fastest growing segment of the tree crop sector in PNG. Production and export of palm products are growing at an average annual rate of more than 20% from 32,600 tons in 1978 to 87,000 tons in 1983. The high growth rate relative to other crops results from the higher profitability of oil palm which in turn is due to high yields and a good market demand. 1.11 Oil Palm Yields: The favorable climatic and soil conditions in many parts of the country allow PNG oil palm yields to rank amongst the best in the world. Even under smallhylder management conditions, yields as high as 34 tons ffb/ha per annum - had been reached prior to 1980, with average annual yields at maturity ranging between 19-24 tons ffb/ha per annum. Since then, technological improvements such as introduction of the pollinating weevil and further improved planting material are permitting yield increases to levels around 28 tons ffb/ha per annum on nucleus estates and about 22 tons I/ Report No.3070: Impact evaluation report, PNG: New Britain Smallholder Projects of July 7, 1980.  -4- ffb/ha per annum on smallholder farms. The weevil has also improved oil and kernel extraction rates which are now around 24Z and 5Z respectively. 1.12 Oil Palm Production and Exports: In 1983, PNG produced and exported 77,900 tons of palm oil and 9,100 tons of palm kernel worth K 25.1 million. In the five year period ending in 1983, export volume almost tripled, and in spite of price declines, the palm product export value has increased by 124%. PNG crude palm oil is of excellent quality and is sold at a slight premium (2%). PNG palm oil exports to Europe enter duty-free and therefore attract an additional premium of about 4%. Such favorable prices considered alongside good fruit yields, provide PNG with a competative advantage over other oil palm producers. 1.13 Tea and Rubber: PNG also has small areas of rubber (6,500 ha) and tea (2,800 ha). Low annual rubber yields (0.6 ton per ha) from aging trees, high labor costs and recent depressed prices have led to declines in rubber area and production. Like rubber, the tea industry in PNG is small and declining. Tea is even more labor-intensive than rubber, requiring very careful plucking (harvesting) techniques. Declining real prices coupled with high labor costs in PNG make tea production less attractive than other tree crops. While production increases from existing tea areas are possible, it is unlikely that any new project will be started. Tree Crop Support Services and Institutions 1.14 Direct responsibility for all agricultural extension is with Provincial Departments of Primary Industries (DPI), under technical guidance from the National DPI. For new projects the National DPI establishes a project team to coordinate and facilitate tree crop planting and maintenance, and provision of inputs and credit. Once the project is completed, extension responsibility is turned over to the Provincial DPI. This arrangement has caused deterioration of extension support in the post project phase due to weaknesses in the provincial extension services. In the future, the problem should diminish because of strengthening of extension training to be carried out under the Bank-assisted Agricultural Support Services Project (Ln. 2276). The design of the proposed project has also been adapted to strengthen extension support after project completion. 1.15 Research: National DPI is also responsible for the tree crop research stations at Keravat, Aiyura, Kuk, Bisianumu and Omuru. In addition, industry-based, cess-financed research is being carried out for oil palm (at Dami), cocoa (at Keravat), and coffee (at Kera'at and Aiyura). Tree crop research priorities are as follows. (a) Plant Breeding: PNG has yet to take full advantage of the plant breeding advances made in other countries. A wider range of plant- ing material should be introduced, especially in cocoa, coconut and coffee. (b) Nutrition of High Yielding Varieties. Generally, soils on which tree crops are grown in PNG have been of sufficient fertility to produce satisfactory yields with the varieties used. Newer varie-  -5- ties already in the country and others which should be introducea have higher yield potential. The achievement of this potential will require higher fertilizer dosage than existing varieites. Fertilizer trials will be required for newer varieties in different cultural situations. (c) Pest and Disease Investigations. Past entomological and patho- logical work has produced effective methods of controlling most economically-significant plant pests and diseases in PNG, especially those related to tree crops. However, because of staff shortages, work in these areas has slowed. It will be important to have adequate entomological and pathological services available if new planting materials are to be imported. GOPNC, recognizing the shortcomings of its recent agricultural research effort, is now implementing the Bank-assisted Agricultural Support Services Project. 1.16 Oil Palm Research and Technology: Thus far, oil palm genetic research has been the responsibility of the New Britain Palm Oil Development Company and applied research has been carried out by an association of oil palm producers (PNGOPRA). A comprehensive program has been developed during the past fourteen years, covering breeding, seed production techniques, pollination, nutrition, palm density and thinning and pests and diseases. However, more work is required in the areas of weevil pollination, pest problems, and smallholder farming of oil palms. 1.17 Cocoa Research and Technology. Considerable experimentation has already been undertaken on planting materials, shade management, density/ spacing, manuring, pruning, and pest and disease management. Until recently, major technical constraints to cocoa cultivation have been presented by the pests and diseases. However, suitable remedies have been or are being dis- covered. The major pests are the wood-borers, the cocoa weevil (Pantorhytes plutus), and longicorn borers (Clenea spp.) Others are the podsuckers - mirids (often called capsids) and leaf-eating beetles and caterpillars. Gen- erally, these pests have been well researched and satisfactory recommendations for prevention and/or control have been made. For Pantorhytes, which can be controlled chemically but only with high rates, frequent application, and costly products, more promising results are being achieved through biological control especially using crazy ants. Vascular streak dieback (Onchobasidium theobromae) has been the most serious disease and reached epidemic proportions in PNG in the early 60s, but has now declined partly due to an increase in the field resistance of the surviving cocoa population. Current DPI research is also directed towards finding a fungicide which would protect young seedlings during the particuiarly vulnerable first two-three years. Stem canker (Phytophthora palmivora), also the causal agent of black pod, is a dangerous disease. However, control can be achieved if action is taken sufficiently early. This requires sound management which could be available on estate and supervised smallholders. A number of sound technical packages have been developed for both low and high input conditions..  6 1.18 Agricultural Credit: Credit for smallholder agriculture is provided by the Agricultural Bank of Papua New Guinea (ABPNG) which was established in 1965. ABPNG is authorized to grant loans to and receive deposits from the public. However, in practice, it does not receive deposits and acts only as an investment bank. It operates 10 branches, 3 sub-branches, and 14 field representative offices. In line with GOPNG development policy, the agricul- tural sector is the major recipient of ABPNG loans, and agricultural loans comprise 57Z (K 30 million) of the total portfolio. While about 21Z of all loans are in arrears, the situation for loans to oil palm smalLholders is much better, with only 5Z of the loans in arrears. This is because there is no parallel market for paLm fruit whicb is processed only in factories controlled by companies partially owned by COPNG. These factories cooperate fully with ABPNG and deduct credit repayments before paying smaLLholders for the fruit which they sell to the factory. There is no opportunity for smallholders to avoid credit repayments. 1.19 Marketing and Input Suppl: Oil palm prsiucts are processed and marketed by nucleus estates (NE) which also provide agricultural inputs to participating smallholders in their area. Because of the need to collect and process oil palm fruits soon after harvesting, all oil palm smallholder areas in PNG are in close proximity to the three NEs at Hoskins, Bialla, and HigaturulPopondetta. Processing mills at Hoskins, Bialla and Higaturn are all operational. These NEs collect oil palm fruit, process it, and export palm oil and kernels. Smallholder_ are paid for their fruit at prices calculated using a formula established by GOPNG and agreed by the Bank. The formula allows for calculation of the fruit price based on f.o.b. prices of palm oil and kernel less processing and marketing costs. The residual price paid to smallholders has fluctuated along with oil palm f.o.b. prices and caused considerable hardship to smallholders when prices were low. Therefore GOPNG has recently established a stabilization fund for oil palm smallholders . This fund will help dampen price fluctuations for smallholders by paying out a bounty when prices are lower than the seven year moving average price and charging a levy when higher. The bountyllevy compensates for 50Z of the price difference from the seven year moving average price. Agricultural Development Strategy 1.20 The main goals of agricultural development in PSG are: to improve the livelihood of rural families; to increase and broaden agricultural exports; and to reduce food imports. To achieve this, GOPNG's agricultural and rural development srategy 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 tradi- tional groups as recognised legal entities while acknowledging individual land rights in clan lands as a basis for long-term farm improvements; (c) the dele- gation of major development responsibilities to the provincial level; (d) financial and management assistance 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 conditions of agricultural support staff. There has been a renewed awareness within the Goverment that agriculture will remain the mainstay of PIG's economy for many years. This recognition is manifested  -7- in the greater flexibility of Government on expatriate ownership and manage- ment of plantations, in the formulation of a national food and nutrition policy, and in its efforts to improve agricultural services such as research, extension and credit. The Bank's Role 1.21 Since the country's independence in 1975, the Bank has supported agricultural development in PNG through six projects: (a) Popondetta Small- holder Oil Palm Development (PSOPD) Project - La. 1333-PNG of US$12 million, effective January 6, 1977; (b) Southern Highlands Rural Development Project - Cr. 841-PNG of US$20 million, effective February 26, 1979; (c) Second Agricultural Credit Project - Cr. 1149-PNG of US$15 million, effective Kay 26, 1982; (d) Enga Provincial Development Project - Ln. 2125/Cr. 1227-PNG of US$ 6 million, and US$2 million, effective September 16, 1982; (e) Agricultural Support Services Project - Ln. 2276-PNG of US$14.1 million, effective October 21, 1983, and (f) West Sepik Provincial Development Project - Ln. 2475-0-PNG of US$9.7 million approved October 30, 1984. Of these projects only PSOPD Project has provided assistance for oil palm smallholder development and will be completed on December 31, 1984. In addition, IDA credits 137, and 175-PNG for the New Britain Smallholder Development (NBSD) Project (1969-70) also provided assistance for smallholder oil palm development prior to PNG's independence. A PPAR (Report No. 1400) of December 28, 1976 and an impact evaLuation report (IEL) of July 7, 1980 (Report No. 3070) are available. The following lessons were learnt: (a) Due to extremely fertile soils and favorable climatic conditions palms began producing harvestable fruit bunches some two and a half years after field planting, which was about six months earlier than expected at appraisal, and reached peak production levels within seven years. Actual peak yields for smaallholders at 24 ton/ha for phase I and 19 tons/ha for phase II were also above appraisal esti- mates of 18 tons/ha. Consequently, the appraisal ERR of 15Z was reestimated at 19Z by PPAR in 1976, and at 25Z by IER in 1980. (b) IER found that 1978179 average family incomes from oil palm and surplus food sales was US$4,000 - 4,500 almost twice the appraisal estimates. Consequently loans were repaid faster than expected. The high incomes raised some equity considerations and IER recommended taxation of oil palm farm incomes. (c) Extension standards at NBSD dropped after project completion because of reduced involvement of the more experienced national DPI staff. However, the NE recognized that it was in their interest to improve extension standards and therefore appointed an experienced expa- triate as a smallholJer liaison officer. Under the proposed project, similar arrangements will be made. (d) Some friction between out-of-province settlers and local farmers developed but was resolved. Since the proposed project will not have auy settlers, such problems are not anticipated.  8- (e) Some smallholders fell behind with their farm maintenance activities due to personal and social commitments and later found the accumu- lated maintenance too daunting. This resulted in abandonment of some farms. Later the NE offered to rehabilitate such farms with costs to be recovered from fruit sales. Provision of such services by the NE has worked satisfatorily and will be adopted in proposed project. These lessons are reflected in the design of the proposed project. The Company 1.22 The Milne Bay Estates Pty Ltd. (Company) was established in PNG in 1983 under PNG's Companies Aret Ch. 146 with the following objectives: (a) To carry on trades or businesses of planters, cultivators, harves- ters, millers, processors, buyers, sellers, marketers, exporters, brokers of and dealers in agricultural plants, produce or crops and products thereof at any place; (b) To provide further employment opportunities for the people of PNC and provide training for them in all aspects of the Company's activities; {c) To act as consultants and advisers; and (d) To erect and construct buildings and machinery for the purposes of the Company. 1.23 The Company was set up with an initial share capital of K 0.5f, wholly owned by GOPNG. It has the power to increase or reduce its capital, but the number of shareholders cannot exceed 50, and the Company cannot make public offerings. The Articles of Association provide for three directors, and require proper accounts and records to be kept and audited at least once every year by independent auditors. The Company was set up specifically to invest in and implement the nucleus estate components of the proposed project, and it is expected that the Commonwealth Development Corporation (CDC) of U.K. would invest about 60Z of the equity required to implement the proposed project and would also provide top level managers under a management agree- ment. Even though the Company is new, its managers (CDC) have long experience in managing tree crop enterprises in many countries including a previous oil palm nucleus estate at Higaturu in PNG. They are highly respected in this sector, and under their management the Higaturu nucleus estate in PNC is a profitable enterprise. II. THE PROJECT AREA 2.01 The project is located in the .Gumini and Sagarai areas of the Milne Bay Province near Alotau; the provincial capital (Nap). The province is located in the ea:tern part of PNG (150