Papua New Guinea - Agricultural Development Project

RESTRICTED I1I@ 0ppYZ Report No. P -766 FILE COPYRprNo This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE ADMINISTRATION OF THE TERRITORY OF PAPUA AND NEW GUINEA December 29, 1969  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOM;ENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE ADMINISTRATION OF THE TERRITORY OF PAPUA AND NEW GUINEA 1. I submit the following Report and Recommendation on a proposed credit in an amount in various currencies equivalent to US$5.0 million to the Administration of the Territory of Papua and New Guinea. PART I - HISTORICAL 2. In 1967 the Territory Administration applied for an IDA credit of $6.0 million to help finance a project comprising: (i) the planting and replanting of coconut palms; (ii) the development and stocking of beef cattle ranches; (iii) an oil palm smallholder scheme - a new venture in the Territory; and (iv) infrastructure related to it. The project was appraised in early 1968. Owing to the lack of IDA funds, however, only part of the project could be financed at that time. The oil palm smallholder sub-project was selected as being of the most immediate benefit to the indigenes and an IDA credit of $1.5 million for this was approved in January 1969. An IDA mission reappraised the three other sub-projects in May 1969 and also examined the Territory Administration's request for IDA assistance in implementing a second phase of the oil palm smallholder scheme. 3. Negotiations were held in Washington from November 25 to December 9, 1969. Mr. G.A. Low, Financial Minister at the Australian Embassy, represented the Commonwealth Government and the Territory Administration. 4. The Territory has received one Bank loan and one IDA credit to date. The following is a summary statement relating to these as of November 30, 1969:  -2- Loan or Amount (US $ million) Credit No. Year Borrower Purpose Bank IDA Undisbursed 546 1968 Administration of Telecommuni- 7.0 - 6.9 Territory of Papua cations and New Guinea 137 1969 Administration of Agriculture 1.5 1.4 Territory of Papua and New Guinea Total 7.0 1.5 of which has been repaid to Bank and others - - Total now outstanding 7.0 1.5 Amount sold 0.2 of which has been repaid - 0.2 Total now held by Bank and IDA 6.8 1.5 Total undisbursed 6.9 1.4 8.3 == =_ 5. A highway construction project stemming from a recently completed UNDP transportation survey, fer which the Bank acted as the Executing Agency, was appraised in December 1969; I expect to present it to the Exe-cutive Directors during this fiscal year. The Territory Administration has also requested financial assistance for a hydro- electric project which is being studied. PART II - DESCRIPTION OF THE PROPOSED CREDIT -6.- Borrower: The Administration of the Territory of Papua and New Guinea . Amount: The equivalent in varinus currencies of US$5.0 million Purpose: To help finance an agricultural develop- ment project which consists of increasing the cultivation of mil palms and coconut palms, helping the beef cattle industry, and associated services. Amortization: In fifty years, including a ten-year period of grace, through semi-annual installments of half of 1% from December 15, 1979 through June 15, 1989 and lVo from December 15, 1989 through June 15, 2019.  - 3 - Service Charge: 3/4 of l% per annum PART III - THE PROJECT 7. A report entitled .r1.c li;u-cal iDevel.opTen PAroject - Po.uua led HTer 3uim-ea` (P-25a) d0ited Dec-.bar 23, 1969 is attached. 8. The Territory's economy is predominantly agricultural. More than half the people in paid employment and most of those who are self- employed are engaged in agricultural pursuits. Agriculture earns nearly all the Territory's export income and almost two-thirds of the gross national product is derived from it. Investments in the agricul- tural sector are expected to yield substantial economic benefits by introducing indigenes and land resources into the monetized sector of the economy and reducing the present heavy dependence of the Territory on subsistence farming. Variou.s Bank missions to the Territory have recommended encouragement of cash cropping and cattle production through a strengthening of extension services and the provision of credit facilities. The proposed project will further these objectives and support the Administration's efforts to diversify and increase the production of crops for export and to lessen the need for high-cost meat imports. 9. The proposed project consists of four sub-projects which are: (i) a five-year tranche of a ten-year program for the planting and re- planting of 10,000 acres of existing coconu.t estates; (ii) the develop- ment and stocking of 150,000 acres on private beef cattle ranches and the improvement of government services to the beef cattle industry; (iii) the settlement of 980 smallholders who will grow oil palms over an area of about 8,000 acres on the island of New Britain adjacent to the area covered by the previous IDA project, and (iv) the constru.ction of a wharf at Kimbe to serve the oil palm project. 10. The Department of Agriculture, Stock and Fisheries (DASF) of the Territory Administration will be responsible jointly with the Papua and New Guinea Development Bank (PNGDB) for the implementation of the coconut, beef cattle and oil palm sub-projects. Experience gained under the on-going New Britain Smallholder Project has shown that DASF and PNGDB have suitably qualified staff for this purpose. The construction of the Kimbe W4harf will be supervised by the Au.stralian Department of Public Works. Approximately $2.5 million of the proceeds of the proposed credit will be on-lent to PNGDB, an au.tonomous institution, for a 25-year term with interest at lVo. PNGDB, in turn, will make loans to coconut planters, oil palm smallholders and beef cattle ranchers for periods of up to twenty years. Oil palm smallholders, as in the case of the New Britain project will pay interest at the rate of 6% per annum; coconut planters will pay interest at 6-3/4% per annum. Beef cattle production is more remunerative than coconu.t development; therefore, interest will be charged to ranchers at the rate of at least 7% per annum. PNGDB  raised its interest rate for loans of this type from 6% to 6-3/4% in October 1969 and is reluctant to increase it by a further V. per annum to the required level immediately but has undertaken to do so not later than July 1, 1970. 11. The oil palm sub-project is a continuation of, and very similar to, the New Britain Smallholder Project which is being financed by IDA. Progress on the latter has been impressive. My recommendation that the Association support the second phase of the smallholder project is also based on the fact that optimal conditions for oil palm development obtain in the Territory and this activity appears to be one of the most attract- ive in terms of the expected return on the planned investment. The Administration, together with Harrisons & Crosfield, an experienced plantation company, set up the New Britain Palm Oil Development Company (INBPOD) which operates a nucleus estate and oil palm processing facilities in the vicinity of the smallholder project ares. NBPOD supp'lies small- holders with planting materials; it also processes and markets their output. An agreement extending these arrangements for the sub-project is a condition of effectiveness of the proposed credit. 12. The Kimbe Wqharf sub-project aims primarily at providing port facilities to serve the section of New Britain Island being developed for the oil palm program. A link road and bridge is being constructed between the port site and the palm oil mill to serve the project area. 13. The project is estimated to cost a total of $8.76 million equivalent. The proposed $5.0 million IDA credit would cover 57% of the cost, equivalent to the estimated import component of the project. IDA financing is related closely to expenditures on imported items and dis- bursements would be made on a percentage basis against expenditures incurred on (i) construction of plantation roads and agricultural extension services; (ii) loans extended to beef cattle ranchers, coconut planters and oil palm smallholders; and (iii) contracts for the Kimbe Wharf. The total estimated cost of each sub-project is as follows (figures in parentheses are the approximate amounts of IDA financing budgeted for them): coconut planting and replanting - $1.1 million ($300,000); beef cattle ranching - $2.7 million ($1.7 million); oil palm smallholder development - $3.9 million ($1.9 million); Kimbe Wharf construction - $1.0 million ($700,000). 1h. Work on all four sub-projects has begun. A contract for the supply of steel piling for the Kimbe Wharf has been awarded and tenders for its construction are being evaluated. IDA's international competitive bidding procedures have been followed by the Administration in this regard. I recommend that eligible expenditures on the project after June 30, 1969, be reimbursable from the credit; they are un- likely to have exceeded $600,000 up to the date of this report. 15. The project is economically and financially justified. Apart from increasing agricultural production and providing a significant number of jobs for indigenes, it will encourage two relatively new  activities in the Territory - cattle breeding and oil palm cultivation. Cattle ranching could be extended to some 10,000,000 acres of natural grassland which is presently unused. There is also substantial scope for oil palm development. Copra is the Territory's main export. It is therefore important to maintain and, if possible, to increase the production from existing coconut estates. Investment opportunities at the present stage of the Territory's development are limited and, of those available, the proposed project appears to be very promising. The rates of return expected for the sub-projects are acceptable. They are as follows: coconut plantations - 9%; beef cattle stocking and development - 11%; Phase II alone of the oil palm development - about 20%; Phases I and II and the Kimbe Wharf considered together - 15%. PART IV - LEGAL INSTRUMETTS AND AUTHORITY 16. The draft Development Credit Agreement between the Association and the Adrninistration of the Territory of Papua and New Guinea, the Report of the Committee required by Article V, Section I(d) of the Articles of Agreement of the Association and the text of a Resolution approving the proposed credit are being distributed separately. Necessary modifications have been made to General Conditions applicable to Develop- ment Credit Agreements to take into account the fact that the Borrower is not a member. A draft of a letter from the Commonwealth stating certain financial assurances and tax privileges is also being distributed. 17. An amendment of the existing Agreement between the Administration and NBPOD to make it applicable to the proposed oil palm sub-project is a condition of effectiveness, as is the execution of a subsidiary Loan Agreement between the Administration and PNGDB. PART V - THE ECONOMY 18. A report "Current Economic Position and Prospects of the Terri- tory of Papua and New Guinea" (EAP-8a) was circulated to the Executive Directors on September 9, 1969. The Territory's economy, of which agriculture is the mainstay, has made steady progress in several respects during the past decade. The monetary sector's contribution to GNP has been growing at the rate of 10% annually; GNP, as a whole, has risen by about 5-6% per annum. The Territory's first development plan was launched in 1968. It is based on assurances of the continuation of substantial financial support from the Commonwealth and the intensifica- tion of efforts to mobilize local resources. 19. Exports expanded in 1967/68 by 29% because of the buoyant world market for copra, cocoa and coffee - the Territory's major export commodities. Tea was also added to the export list. In 1968/69 there was a more normal increase in exports of about 9%0. The percentage of imports financed by exports increased from 40% in 1966/67 to 44% in 1967/68 and 1968/69. The merchandise trade gap in absolute terms, how-  - 6 - ever, widened from $A75 million in 1967/68 to $A81 million in 1968/69, albeit at a slower rate than before 1966/67. This, together with the deficit on invisible account, was largely financed by Australian grants which amounted to $A78 mill-ion in 1967/68 and $A87 million in 1968/69. 20. The Administrationts total expenditure for FY1968/69 increased by 12% over the previous year and is budgeted to increase by 18% in FY1969/70, as the development program gets under way. This compares with an expected 10% annual growth in the GNP of the monetized sector. The composition of expenditure is also changing, writh a slow down in current expenditure and an acceleration of capital expenditure. Capital expenditure as a percentage of total public expenditure increased from 28% during the early sixties to 33% during FY1964/65-FY1967/68. Witlhin current expenditure, more emphasis has recently been placed on outlays necessary for social and economic development. Internal revenue collection continued to increase rapidly - it rose by 15' in 1968/69 and is expected to increase by 23% in FY1969/70. It amounted, however, to only 37% of the total expenditure in 1968/69; this being less than current expenditure, public saving was negative. Domestic revenues as a percentage of the total financial resources of the public sector are rising slowly. The budget deficits have been covered mainly by Australian grants and the Territory is likely to require similar assistance for many years to come. 21. The first development program (1968/69-1972/73) wias announced in September 1968, incorporating many recommendations of the Bank's 1963 survey mission and its 1967 economic mission. The principal objective of the program is the expansion of production with greater participation by the indigenes. 22. The plan envisages a high rate of investment in the monetized sector totalling $A838 million during the five-year period. Approximate- ly 46% of this will be public investment - largely for agriculture, transport and other infrastructural services. Private investment is expected to play a major role in agriculture, industry, mining and tourism. The activities which will be encouraged by the proposed credit have high priority in the agricultural sector of the development plan. 23. The discovery of large copper ore deposits on Bougainville Island may result in a major breakthrough in the Territory's economic viability and have a substantial impact on exports and public revenues. Even so, Australian Government grants will continue to be a major source of finance for implementing the program. 24. The Territory - being a separate political entity under Australian administration and heading towards independence - is qualified for IDA assistance on the ground of low per capita income (US$100 per person for the indigenes), improving economic performance, and a relatively weak balance of payments position.  - 7 - PART VI - COIPLIANCE WITH ARTICLES OF AGREE1MET 25. I am satisfied that the proposed Development Agreement would comply with the Articles of Agreement of the Association. PART VII - RECOIIENDATION 26. I recommend that the Executive Directors approve the proposed credit. Attachment Robert S. McNamara President December 29, 1969 by J. Burke Knapp