Papua New Guinea - Third Agricultural Credit Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 9539 PROJECT COMPLETION REPORT PAPUA NEW GUINEA THIRD AGRICULTURAL CREDIT PROJECT (LOAN 2624-PNG) APRIL 30, 1991 Agriculture Operations Division Country Department V Asia Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENT Name of currency - Kina (K) Exchange Rate Appraisal Year Average (1985) - $1.00 = K 0.94 Intervening Years Average (1986-88) - $1.00 = K 0.91 Completion Year Average (1989) - $1.00 = K 0.86 FISCAL YEAR Government of Papua New Guinea and Agricultural Bank of Papua New Guinea January 1 - December 31 PRINCIPAL ABBREVIATIONS AND ACRONYMS USED ABPNG - Agricultural Bank of Papua New Guinea AGO - Auditor General's Office DAL - Department of Agriculture and Livestock DL - Department of Lands ERR - Economic Rate of Return FFB - Fresh Fruit Bunch FRR - Financial Rate of Return IASER - Institute of Applied Social and Economic Research OECF - Overseas Economic Cooperation Fund OFL - Over Free Limit PNG - Papua New Guinea PNGDB - Papua New Guinea Development Bank  VOl OFFcIAL USE ONLY THE WORLD SANK Washington, D.C. 20433 U.S.A. OpstC oattew IVimIIIN Opee d lO6moor April 30, 1991 HEMORtMIDUI0 TOE EXECUTIVE DIRECTORS MID THe PRESIDENT SUBJECTt Project Completion Report - Papua New Guinea: Third Aaricultural Credit Prolect (Loan 2624-PNG) Attached, for information, is a copy of a report entitled "Project Completion Report - Papua New Guinea: Third Agricultural Credit Project (Loan 2624-PNG) prepared by the Asia Regional Office. No audit of this project has been made by the Operations Evaluation Department at this time. Attachment This document has a restricted distribution and may be used by recipients only In the performance of their omcial duties. Its contents may not otherwise be disclosed without World Bank authoriation.  FOR OFmFCIAL USE ONLY PROJECT COMPLETION REPORT PAPUA NEW GUINEA THIRD AGRICULTURAL CREDIT PROJECT (LOAN 2624-PNG) TABLE OF CONTENTS Page No. Preface . . . . . . . . . . . . . . . . . ... . i Evaluation Summary . . . . . . . . . . . . . . . . . . . . . . 11. 1. Project Review from Bank's Perspective Project Identity . . . . . . . . . . . . . . . . . . . .1 Background .... . . . . . . . . . . . . . . . . . . 1 ProJect ObJectives and Description . . . . . . . . . . . 2 Project Design and Organization . . . . . . . . . . . . 2 Project Implementation . . . . . . . . . . . . . . . . 3 Project Results . . . . . . . . . . . . . . . . . . . . 7 Project Sustainability .. . . . . . . 10 Bank Performance . rforzna....c... ... .e....... 10 Borrower Performance . . . . . . . . . . . . . . . . . . 11 Project Relationships . . . . . . . . . . . . . . . . . 12 Consulting Services 9*99.. ..... ... . . . . . . . 12 Project Documentation and data . . . . . . . . . . . . . 12 II. Proiect Review from Borrower's Perspective Bank's Performance . . . . . . . . . . . . . . . . . . . 13 Borrower's Performance . . . . . . . . . . . . . . . . . 14 Socioeconomic Impact of Rural Credit: An IASER Report . 17 Purpose as Defined at Appraisal . . . . . . . . . . . 17 Status of the Studies .... . . .. . .. .. . 18 Impact of the Studies .9.. 9. 9. ....... . 18 III. Statistical Information Table 1: Related Bank Loans and/or Credits . . . . . . 19 Table 2: Project Timetable . . . . . . . . . . . . . . 19 Table 3s Loan Disbursements . . . . . . . . . . . . . . 20 Table 4s Project Implementation . . . . . . . . . . . . 20 As Subloan Approvals and Disbursements . . . . . 20 Bs Subloan Disbursement . . . . . . .. . .. 21 C: Loan Size . . . . *.. . * . . . . . . . . . . 21 D: Area Planted . . . . . . . . . . . . . . . . . 21 Es Project Beneficiaries . . . . . . . . . . . . 22 Table 5: Project Costs and Financing . . . . . . . . . 23 A: Project Costs ........ .. . . . . . . . 23 B: Project Financing . . . . . . . . . . . . . . 24 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.  Page No. Table 6: Project Results . . . . . . . . . . . . . . . 25 A: Direct Benefits . . . . . . . . . . . . . . . 25 B: Eco.aomic Impact . . . . . . . . . . . . . . . 26 C: Financial Impact . . . . . . . . . . . . . . . 26 D: Studies . . . . . . . . . . . . . . . . . . . 27 Table 7: Status of Covenants . . . . . . . . . . . . . 27 Table 8: Use of Bank Resources . . . . . . . . . . . . 28 A: Staff Inputs ... .... . . . . . . . . . . 28 B: Missions . . . . . . . . . . . . . . . . . . . 28 C: Costs . . . . . . . . . . . . . . . . . . . . 28 Economic Costs and Benefits: 9A: 4 Ha. Oil Palm Model . . . . . . . . . . . . . 29 9B: 6 Ha. Cocoa Model . . . . . . . . . . . . . . 30 9C: 20 Ha. Cocoa Model . . . . . . . . . . . . . . 31 9D: 100 Ha. Cocoa Model . . . . . . . . . . . . . 32 IV. Ma IBRD No. 17314R  PROJECT COMPLETION REPORT PAPUA NEW GUINEA THIRD AGRICULTURAL CREDIT PROJECT (LOAN 2624-PNG) PREFACE This is the Project Completion Report (PCR) for the Third Agricultural Credit in Papua New Guinea (PNG) for which Loan 2624-PNG in the amount of $18.8 million was approved on September 19, 1985. The loan was closed on January 16, 1990, six months behind schedule. It was fully disbursed and the last disbursement was on January 16, 1990. The PCR was prepared by an FAO/World Bank Cooperative Program mission which visited Papua New Guinea in May 1990. Its preparation was based on a review of the Staff Appraisal Report (5635-PNG) dated September 3, 1985, the Loan Agreement dated May 23, 1986, the Project Agreement dated May 23, 1986 and a review of the Bank's supervision reports and project files; field visits to selected project areas, discussions with the Borrower's project staff and interviews with World Bank staff associated with the project.  iii PROJECT COHrLETION REPORT PAPUA NEW GUINEA THIRD AGRICULTURAL CREDIT PROJECT (LOAN 2624-PNG) EYALUATION SIMIRY Obiectives 1. This project was the third Bank-supported agricultural credit project in Papua New CLinea. The objectives of the project were to increase and broaden agricultural exports, reduce food imports, particularly of pigs and poultry, provide improved living standards for some 3,400 rural families, and strengthen the Agricultural Bank of Papua New Guinea (ABPNG) as a development finance institution to enable it to perform its role effectively as the main conduit for agricultural credit in the country. To attain these objectives, the project included a lending program for development of tree crops, mostly cocoa and oil palm, pig and poultry farming, and other agricultural subprojects, as well as a component for strengthening ABPNG by providing data processing facilities, vehicles, funds for staff training, fellowships, studies and administrative expenses and technical assistance for management and financial performance. 2. Through the project, the Bank also expected to make a significant contribution to interest rate policy reform by assuring a periodic review of Government interest subsidies, with a view to reducing those subsidies over the project period. Implementation Experience 3. The project was implemented between 1986 and 1989 and was extended by six months to allow drawdown of loan proceeds fully by December 31, 1989. At project completion, the final cost was $30.5 million, about 3 Z lower than the appraised estimate due to savings from the institutional support component. The total value of subloan approvals amounted to K 27.5 million, about 14 Z higher than anticipated at appraisal. Actual subloan disbursements were higher than appraisal estimates by 155 1 for cocoa (which absorbed the highest share 51 Z of disbursements), 28 2 for oil palm, 7 Z for agricultural equipment and transport, but lower for the other activities. Average subloan size increased considerably for cocoa from an originally planned K 16,300 to K 77,000, and oil palm from K 2,000 to K 3,000. Other components--technical assistance, staff training, vehicles and equipment, and studies--have essentially been completed as intended with satisfactory results. Although the training specialist was not recruited, the manager of ABPNG's Staff Training Division has greatly improved training programs. Future attention will need to be focused on the improvements of ABPNG's Electronic Data Processing System through streamlining of the data base and intensive staff training for the new software system. The main problems encountered during implementation were the continuous decline in commodity prlces, resulting in 100 Z of large coffee loans (above 20 ha) and 75 X of large cocoa loans (above 20 ha) being charged to provision for loan losses in 1989, increased dependence of ABPNG on Government subsidies during 1986-88 which amounted to  IV K 20 million, exceeding the limit of K 12 million mandated under the Loan Agreement (Section 4.02), and issues relating to land tenure and the variable performance of management agencies (both of which had been experienced during the course of the completed second project). Moreover, the operating losses of ABPNG have sharply increased from K 2.5 million in 1985 to about K 44 million in 1989, mainly due to the high level of loan arrears, high administrative expenses, poor portfolio mix and low interest rates. Prolect Results 4. The main objective of increasing agricultural output and specifically increasing export crop production would be achieved by the project. The physical planting targets of cocoa were exceeded while there was a shortfall (19 Z) in oil palm targets. Because of the variability in the quality of plantings, however, crop yields are somewhat lower than appraisal estimates. Also, prices of the main project commodities cocoa and oil palm decreased in the international markets since 1985-89. Consequently, economic and financial rates of return (ERR and FRR respectively) are much lower than expected. ERRs are still acceptable for all selected models (15 - 18 Z) except for the 4 ha oil palm replanting model whose ERR is estimated at 8 2. The financial rate of return for this model also dropped to 6 2 as the cost of housing was too high to be offset by the use of family labor. Except for the 6 ha cocoa model which relied almost entirely on family labor, none of the cocoa models are financially viable. Despite lower rates of return than those anticipated at appraisal, the project has directly benefitted 2,995 rural families, about 400 less than targeted at appraisal (para. 1.22). 5. The institutional capability of ABPNG has been strengthened. However, reform of ABPNG's lending rates has not taken place as envisaged, the bank's financial position has weakened, and the objective of developing a financially sound rural credit market in PNG is still far from being achieved. The Government is still pursuing a policy which implicitly provides for cross- subsidization among ABPNG's borrowers and explicitly provides a budget allocation to the bank to offer low-cost loans. Sustainability 6. The prospects for sustainability of lending for similar projects by ABPNG do not appear good because of shortage of loanable funds, lack of saving mobilization by ABPNG, continuous fall in commodity prices and lack of interest and participation of landowning farmers during project implementation. Findings and Lessons Learned 7. The main lessons to be learned are: (a) the need for freedom from interference by the Government to determine interest rates and portfolio mix of the bank; (b) the prime requirement of adequate financial managempnt for all credit-related projects; (c) the need for carefully examining the tenurial aspects of land to ensure equitable distribution of benefits and to devise practical means of securing loans; and (d) the need for a better system for selecting management agencies and for remunerating them on the basis of performance standards.  I PROCT