Document of

FrLE CO PY The World BankFOR OFFICIAL USE ONLY

Report No. P-2265-PNG

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED CREDIT

TO PAPUA NEW GUINEA

FOR A

RURAL DEVELOPMENT PROJECT

July 5, 1978

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authoriation.

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CURRENCY EQUIVALENTS

Currency Unit - Kina (K)KR - $1.37$1 K 0.73K 1,000,000 = $1,370,000

ABBREVIATIONS

Council - Local government councilAFTSEMU - Agricultural Field Trials, Studies, Extension

and Monitoring UnitHQPCC - Headquarters Project Coordinating CommitteeHQPM - Headquarters Project ManagerPNG - Papua New GuineaPNGBC - Papua New Guinea Banking CorporationPNGDB - Papua New Guinea Development BankPPCC - Provincial Project Coordinating CommitteePPM - Provincial Project ManagerSHDC - Southern Highlands Development Corporation

(Holdings) Pty. Ltd.SHMA - Southern Highlands Management Authority

GOVERNMENT OF PAPUA NEW GUINEAFISCAL YEAR

January 1-December 31

FOR OFFICIAL USE ONLY

PAPUA NEW GUINEA

RURAL DEVELOPMENT PROJECT

Credit and Project Summary

Borrower: Papua New Guinea (PNG)

Amount: $20.0 million equivalent

Terms: Standard.

Onlending: An amount of $3.6 million from the credit would be chan-nelled through the PNG Development Bank or the PNG BankingCorporation to finance cash crop development. The interestrate to subborrowers would be the prevailing commercial ratefor this type of lending (presently about 9%), with maturi-ties of up to 15 years, including up to 5 years of grace,depending on the subborrower and the crop. Terms foronlending of funds to the PNG Development Bank and the PNGBanking Corporation would be the commercial rate whichapplies to their subloans, minus an average spread of 3%;onlending would be amortized in accordance with the amorti-zation schedules applicable to the subloans. The Governmentwould bear the foreign exchange risk.

ProjectDescription: The Southern Highlands Province is one of the poorest

provinces in PNG. It has a population of about 235,000 (8%of the national total), and the vast majority have a way oflife which has remained unchanged since neolithic times.Basic needs such as food, education, health, clothing andshelter are less adequately met in the province than inalmost any other region of PNG. The proposed project wouldhelp the Government in its efforts to promote development inthe province. It would provide improved access to educationand health services, lay the foundation for improved agricul-tural practices and nutrition in the future, and raise cashincomes. The risk of not achieving project objectives orrate of return is no greater than can normally be expectedwith operations of this type. Specifically, the projectwould include:

(a) development of knowledge about, and capacity to effect,improvements in the subsistence sector through the establish-ment of an Agricultural Field Trials, Studies, Extension andMonitoring Unit;

(b) establishment of about 1,280 ha of coffee, 850 ha of tea,and the related processing and support services;

(c) establishment of 100 ha of cardamoms;

(d) expansion of the infant silk industry;

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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(e) construction of 60 km of electricity transmission line mainlyto supply power to the coffee mill and tea factory;

(f) construction and operation of a nursing school and in-servicetraining complex, three health subcenters, and support for adata collection and epidemiology unit;

(g) upgrading and construction of 138 km of main road, 40.5 kmof feeder road, and the installation of small bridges andculverts on about 900 km of minor feeder roads;

(h) construction and operation of two secondary schools, andprovision of materials to provincial primary and secondaryschools and the teachers college; and

(i) strengthening the staff devoted to nonformal education.

Estimated Cost: The table below summarizes the total cost of the project.

Local Foreign Total-------- ($ million) ----------

Nutrition/subsistence 1.1 0.9 2.0Coffee 1.2 1.2 2.4Tea 2.4 2.5 4.9Cardamoms 0.1 0.1 0.2Silk 0.3 0.2 0.5Electrification 0.4 0.2 0.6Health 1.5 1.0 2.5Roads 4.5 5.0 9.5Formal Education 0.8 0.5 1.3Nonformal Education 0.5 0.3 0.8Management 0.3 0.3 0.6

Subtotal: base cost 13.1 12.2 25.3

Physical contingencies 0.9 0.9 1.8Expected price increases 2.7 2.4 5.1

Total project cost 16.7 15.5 32.2

Financing Plan:

Government 8.4 - 8.4IDA 4.5 15.5 20.0Beneficiaries 3.8 - 3.8

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Estimated Disbursements: IDA FY 1979 1980 1981 1982 1983 1984-------------- ($ million) --------------

Annual 1.0 2.8 5.2 5.2 4.0 1.8Cumulative 1.0 3.8 9.0 14.2 18.2 20.0

Rate of Return: The weighted average for the coffee, tea, cardamom,silk, and road components (69% of project base cost)is 13%; quantification of benefits was not attemptedfor the other components.

Staff Appraisal Report: No. 1985-PNG, dated June 22, 1978.

REPORT AND RECOMMENDATION OF THE PRESIDENTCr T771 T'vmRNATIONAL DEVELOPMENT ASSOCIATION

TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TOPAPUA NEW GUINEA FOR A RURAL DEVELOPMENT PROJECT

1. I submit the following report and recommendation on a proposeddevelopment credit to Papua New Guinea (PNG) for the equivalent of$20.0 million on standard IDA terms to help finance a rural developmentproject. From the credit proceeds about $3.6 million would be channeledthrough the PNG Development Bank (PNGDB) and the PNG Banking Corporation(PNGBC) for cash crop development. This amount would be made available toPNGDB and PNGBC at the commercial rate which applies to their subloans(presently about 9%), minus an average spread of 3%, and would be amortizedin accordance with the amortization schedules applicable to the subloans.The Government would bear the foreign exchange risk.

PART I - THE ECONOMY /1

2. An economic mission visited Papua New Guinea (PNG) in early 1976,and its report (No. 1150-PNG), "Papua New Guinea: Economic Situation andDevelopment Prospects," was dated July 14, 1976. A smaller mission in late1976 led to the writing of a Country Economic Memorandum (Report No. 1428-PNG),which was dated October 5, 1977. The following discussion of the economy of

PNG is based on these two reports. Country Data Sheets are attached asAnnex I.

3. Papua New Guinea achieved internal self-government on December 1,1973, and independence from Australia on September 16, 1975. It is a land ofmountainous terrain, endowed with reasonably good soils, abundant rainfall,considerable mineral resources, and forestry and fishery resources of goodcommercial potential. The capital city, Port Moresby, is the largest urbansettlement in what remains an overwhelmingly rural society. Only seventowns have more than 10,000 inhabitants. Of the arable land, 90% is stillunder subsistence agriculture, and 60% to 70% of the population are subsis-tence farmers, many of whom have only recently emerged from a neolithicculture.

4. The most striking feature of the economy is the contrast betweenthe relatively small modern monetary sector and the subsistence sector.Papua New Guinea is a clear example of a dual economy. This dualism is wellrecognized by the Government, and the economic policies which have beendeveloped since independence are directed towards reducing the contrastsbetween the modern and the subsistence sectors and directing developmentefforts towards the latter. The modern sector consists of a large coppermine, contributing about 20% to 25% of the GDP; the government sector anda variety of small manufacturing, wholesale and retail trade, tourism,banking and insurance, contributing another 50% of the GDP. Agriculture,forestry and fisheries provide the remaining 25-30% of the GDP mainly

/1 Parts I and II are essentially the same as those contained in thePresident's Report (No. 2283-PNG, dated April 3, 1978), for the SecondPorts Project which was approved on April 18, 1978.

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within a subsistence form of production. Within this structure, subsistenceagriculture is slowly being converted into a subsistence-plus-cash-cropagriculture; cash-crop farming is predominantly export oriented, and the500 to 600 plantations are completely export oriented. The main agriculturalexports are coffee, cocoa, and copra.

5. The modern sector of the economy is dominated by the Bougainvillecopper mine which came into production in 1972. However, the dualisticnature of the economy predates the mine. Before independence, the Governmentwas staffed entirely by Australians whose salary levels were determined byAustralian conditions. Similarly, the commercial sector was oriented tomeeting the needs of expatriates, including both the civil service and theowners and managers of plantations. The level of public services providedcould not be financed by local revenues and was supported by subventions fromAustralia. The modern sector was heavily dependent upon imports which werealso financed by the support from Australia. This situation continued afterindependence, with the Australian grant now formalized under an agreementwhich covers a five-year period.

6. Real GDP in Papua New Guinea grew at an average of more than 8%per annum during the period 1967/68 to 1973/74. This growth was led by themonetary sector, growing at over 10% per annum, while the subsistence sectorgrew at less than 1% per annum. As a result, the share in GDP of the subsis-tence sector declined by about one-half to its present level of about one-fifth. Real GDP fell in both 1974/75 and 1975/76, but improvements in theworld economy, particularly rising prices for PNG's major exports, contributedto a more favorable economic performance in 1976/77. The growth rate of theindigenous population is at present about 2.6% per annum, an increase over the2.5% per annum rate of ten years ago, due mainly to a halving of the infant/childmortality rate. Per capita GNP in 1976 was $?490, but this average includesthe high-income expatriate sector. The per capita GNF of the local populationin the subsistence sector is probably no more than $200 per capita.

7. The dependence of the economy upon the outside world is reflectedin a structural balance of payments deficit. The need to import mostof the capital and consumer goods required, including food, has meant thatthere is normally a current account deficit. Exports consisted, until 1972,of a few agricultural commodities total value of which covered about halfthe total import bill. The other half was covered by the Australiangrant. After the Bougainville copper mine came into production in April1972, the 1972/73 level of agricultural exports of about $90 million wassuddenly dwarfed by copper exports of more than $200 million, and PNG'straditionally negative trade balance became positive. However, in 1974,copper prices fell sharply, and copper's contribution to the country'sexports dropped from 70% to about 50%.

8. The Bougainville copper mine has played an important role in thecountry's economy through its impact upon exports and public finances.As an enclave operation its contribution to employment has been small.Mining's share in GDP rose from 2% in 1968/69 to 32% in 1973/74. The impactof Bougainville on national investment was aLso large; during the constructionphase, it accounted for nearly 60% of all fixed capital formation in the

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country. As indicated above, the impact on exports has been enormous; between1972 and 1975, the copper mine doubled PNG's export earnings. Furthermore,the growth of exports from the mine has accounted for the bulk of incrementalGDP in the last few years. Papua New Guinea receives a fair share of theearnings from the Bougainville mine as a result of the renegotiation of theagreement with the operating company in 1974. Furthermore, the impact offluctuating copper earnings on the Government's budget has been stabilizedthrough the operation of the Mineral Resources Stabilization Fund establishedin 1974. Payments into the fund include the revenues from company income andexcess profits taxes, Government dividends, and the proceeds of the withhold-ing tax on dividends paid overseas. These funds are then transferred inpredetermined amounts to the budget, where they are used according toGovernment priorities. Another large copper mine is expected to be con-structed within the next few years, and its operation will be governed by anagreement similar to that reached in Bougainville.

9. Government activities are the second most important influence inthe economy. Real expenditures by the Government increased at a rate of closeto 5% per annum during the past five years. This rise was mainly the resultof a substantial increase in current outlays, dominated by wages and salaries(45-50% of total current expenditures), and the purchase of goods and ser-vices (35-40%). Government employment of staff grew at close to 6% per annumfrom 1971 to 1975 and, simultaneously, there were substantial increases inwage and salary levels, influenced by strong trade union traditions which hadbeen introduced before independence. However, internal revenues have grownat a faster rate than have expenditures, but not sufficiently to offsetthe current account deficit, which is met by grants from Australia.

10. PNG benefits greatly from Australian assistance, both financial and

technical, although the relative importance of such assistance is declining.Australian grants provided 42% of the 1976/77 budget, down from the 70%provided in 1963. The commencement of copper production in 1972 contributedto the decreased dependence on Australia by expanding domestic revenues byabout one third. Under the terms of a recent agreement, Australia's aidprogram for PNG for the period 1976-81 will amount to approximately A$1 bil-lion ($1.1 billion). Subsequent to the agreement, a series of revaluationsof the kina relative to the Australian dollar have reduced the kina value ofAustralian aid, but this loss should be partially compensated by lower priceson goods imported from Australia, PNG's major trading partner.

11. Papua New Guinea's dependence on outsiders for its technicalexpertise is gradually declining. Expatriates, largely Australians, accountedfor 11% of the Government staff as of April 1977, compared to 20% in 1971.In the private sector, many senior administrative, professional, and highertechnical posts are also now filled by expatriates. The Government attachesgreat importance to restraining both employment and salary increases, and hasrecently taken steps to ensure such restraint. It has also placed a highpriority on technical education to train Papua New Guineans to replace thehigher paid expatriates.

12. A few large-scale natural resource-based projects, such as theexpected new copper mine at Ok Tedi and a possible hydropower scheme along

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the Purari River, will be encouraged as the main sources of revenue to reducereliance on foreign aid. A recent government policy statement, however, callsfor the concentration of a higher proportion of the nation's resources inrural areas (see Part III - The Rural Sector). These policies reflect a sub-stantial shift of emphasis in comparison with the First Five-Year DevelopmentPlan (1969-73), which concentrated on the build-up of infrastructure and thedevelopment of the modern sector of the economy.

13. Papua New Guinea faces special problems of nationhood arising fromits geographical situation, an archipelago of islands without developedtransport links. Its people also come from diverse cultural and ethnicbackgrounds. In order to respond to these characteristics and to tap localinitiatives, Papua New Guinea is introducing a system of provincial govern-ments. The aim is to devise a workable system which does not give riseto a costly government structure, but which gives local people the respon-sibility for initiating and implementing development projects. These devel-opments should reinforce the central government policies to give priority todevelopment outside the modern sector.

14. Total external public debt outstanding as of December 31, 1976,amounted to $336 million, of which $96.6 million was owed to the BankGroup. Public debt service payments in 1975/76 were about 5% of the grossvalue of exports of goods and nonfactor services. Debt payments to the BankGroup were only about 16% of total debt service payments. Debt service isexpected to fall to about 4% of exports by the early 1980s. About one fifthof total debt service obligations would be due to the Bank Group. In addition,there are considerable interest and dividend payments abroad, mainly as aresult of the Bougainville copper project. PNG is considered creditworthyfor a limited amount of Bank Group lending. In addition to Australia, otherbilateral sources (e.g. Japan and New Zealand) are also expected to make aidfunds available. The Asian Development Bank has lent to PNG from its SpecialFund and is expected to continue lending to PNG in the future, and severalcommercial loans have recently been arranged. In view of the structuralbalance of payments deficit (para. 7), some local cost financing would bejustified.

PART II - BANK GROUP OPERATIONS

15. As of June 30,1978, Bank Group assistance to Papua New Guineaconsisted of seven loans ($71.0 million) and seven development credits($48.2 million), which together have helped to finance thirteen projects.This assistance has focused largely on infrastructure development - 80% oftotal Bank Group assistance has been for power, telecommunications, highways,and ports. Agricultural projects - mainly oil palm and livestock - and oneeducation project have absorbed the remaining 20% of Bank Group assistance.IFC has not been involved in PNG.

16. Project implementation has been satisfactory although, in somecases, it was slowed down by the transition to self-government and indepen-dence. Disbursements have sometimes been slow because of administrativeprocedures requiring multiple clearances for preparing withdrawal applica-tions. Annex II contains a summary statement of Bank loans and IDA creditsas of May 31, 1978, and notes on the execution of ongoing projects.

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17. In view of PNG's very scant infrastructure base, the past emphasisof Bank Group assistance was appropriate in helping to open up remote areasand to establish a basic foundation for future economic development. However,in the coming years, a somewhat different strategy appears more appropriatewith greater emphasis on agriculture and rural development projects, whichwould have a direct impact on the subsistence sector. The proposed projectrepresents the first such project. About two thirds of PNG's populationrely on subsistence production for the bulk of its livelihood, and livingconditions for these people are among the most primitive found anywhere inthe world. Bank Group assistance for these people would mainly consist of anintegrated package of components, aimed at increasing and diversifyingagricultural production and incomes through improved indigenous cash and foodcropping methods, and at raising rural living standards through the provisionof agricultural credit and social and economic infrastructure. However,because of the primitive condition of these areas and the Government's verylimited preparation capability, designing such projects requires considerablelead time. Consequently, the number of such projects which the Bank Groupcan realistically expect to assist in the coming years and the level of suchlending the Bank Group can hope to achieve will be constrained.

18. Infrastructure development still has a vital role to play inPNG's economic development and it is proposed that the Bank Group continueassisting such projects, but on an increasingly selective basis. Thefurther development of the transport sector will be of critical importancein realizing the potential of many presently backward areas. However,manpower capable of planning sectoral investment strategy and of identifyingand preparing projects, is extremely scarce. A transport sector mission isscheduled for the Fall of 1978 to review the Government's investmentstrategy, focusing particularly on the needs of primitive rural areas and onan appropriate balance and coordination between various transport modes.Based on the findings of this mission, it is expected that further transportprojects, such as rural access roads and coastal shipping, which coulddirectly assist PNG's subsistence population, would be identified. Finally,Bank staff are working with the Government to determine rural water supplyand electrification requirements; this could lead to the preparation ofprojects for inclusion in the lending program for FY80 and FY81.

19. While the manpower constraint which confronts PNG has been relievedto some extent by aggressive recruitment of expatriates, skilled, technicaland administrative personnel remain very scarce relative to the need. TheGovernment's ability to identify and prepare projects is extremely weak.Bank staff discussed with UNDP the possibility of setting up a projectpreparation facility which could help to ameliorate the situation. However,UNDP funds are fully committed and Bank staff are, therefore. exploringother possible sources of finance. However, even if arrangements could bemade for the provision of this facility, it would be some time beforeits benefits would begin to be realized. In the meantime, the Bank Group'stechnical advice and support in project preparation and implementation willbe especially important. Moreover, a particular effort will have to be madeto identify and include technical assistance components as appropriate inforthcoming projects.

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20. A major developmental decision confronting Papua New Guinea is howto balance the allocation of national resources between revenue generatingprojects, geared to the exploitation of its very considerable mineral wealth,and projects which aim directly at increased incomes and improved welfare forthe subsistence population. On occasion in the past, PNG has sought theBank's advice on such strategy questions. Moreover, in response to theGovernment's request, the Bank has offered advice to the Government onparticular resource-based projects (such as a possible scheme to harness thehydropower potential of the Purai River in Central Papua) in their earlystages of conceptualization.

PART III - THE RURAL SECTOR

Background

21. Some 2.4 million people, or 86% of the population, live in ruralareas, the great bulk of whom depend on subsistence agriculture for a living,while subsistence production contributes only about 16% of GDP (agricultureoverall contributes about 30% of GDP). It is, furthermore, estimated that aboutthree quarters of the rural population live in absolute poverty. Livingconditions for this group contrast sharply with those found in urban areas inthat there is poor or no access to social services and widespread malnutritionand illiteracy, combined with a growing awareness of the disparity betweenthe monetary and subsistence segments of the population.

22. The bulk of PNG's population, until this century, was almostentirely isolated from outside influences. The comparatively rapid economicand social changes which these people are now undergoing present a difficultset of circumstances to Government policy makers. The central developmentproblem facing the Government is the dualistic nature of the society that isemerging. This duality not only raises issues of equity and social justice,but also affects the very cohesion of the nation. How to contain the socialpressures resulting from this duality, while pursuing economic growth andmodernization, is the essence of the problem facing the Government.

Government Objectives

23. Due to the overwhelming importance of the rural sector in PNG, theGovernment's policies for this sector largely represent overall nationalobjectives and development strategies. The Government White Paper, entitled"National Development Strategy", published by the National Planning Officein October 1976, sets out the key priorities and objectives as follows:

(a) Improved Distribution of Income. The White Paper states that a moreequitable distribution of income is a Government objective. Italso explicitly states that the development strategy is not one ofmaximizing growth, and recognizes that trade-offs may exist betweenthe goals of maximizing growth of the total economy and bringingabout a more equitable distribution of income.

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(b) Improved Regional Distribution of Social Services. Since access tosocial services (such as health care and education) varies tremendouslybetween provinces, the Government objective is to concentrate onimproving access to social services in the provinces with the lowestlevels of such services.

(c) Satisfaction of Basic Needs. Given the backwardness and poverty ofPNG, the Government considers that direct action to remedy theproblems of malnutrition, illiteracy, sickness, inadequate clothingand poor housing is the most efficient way of addressing these needs.

(d) National Integration. Given the problems of communications in PNGand the vital importance of further integrating such a diversepeople politically, economically, socially and culturally, theGovernment places high priority on road construction and othermeans of communication.

(e) Increasing the Monetary Sector. The long-term objective of theGovernment is for all the people to participate in the monetaryeconomy.

Government Strategies

24. The strategies proposed for attaining these objectives are asfollows:

(a) Nutrition StrategV. The Government White Paper states that animportant element of the National Expenditure Plan will be jointprograms of extension and health education aimed at introducingnutritionally superior food crops and at educating rural peopleregarding more suitable diets, particularly for children. TheGovernment gives the highest priority to the development of

farming systems that increase or sustain subsistence production.With 70% of the population depending on subsistence farming for aliving, the importance of these efforts is apparent. The Govern-ment is also committed to correcting and preventing deleteriousnutritional practices.

(b) Rural Development Strategy. Directing a higher proportion ofgovernment expenditures to rural areas, especially the poorerprovinces, is the principal government instrument to improve boththe regional and interpersonal distribution of income, to focusdirectly on basic needs, and to further national integration. Ascentral government activities generate 20-25% of domestic output,the allocation of government expenditures bears directly andpowerfully on the distribution of income. Since, in 1976, onlyabout 28% of the work force were in monetized activities and only13% in wage employment, price policies and the like are not directlyeffective instruments to achieve government objectives for over 70%of the population. The key policies concerning rural developmentdeal with coordination of extension services, which are now pro-vided by specialists from a number of departments; diversification

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and improvement of agricultural production, with high prioritygiven to food for domestic markets and improved nutrition; introduc-tion of appropriate, usually labor-intrensive technology; promotionof small-scale industries that are located in rural areas orsupport rural industry; development of means to mobilize localsavings for local investment; redirection of the education systemaway from formal schooling towards nonformal and vocationaltraining; and the provision of health services in the ruralareas. Recognizing the need for basic road communication, theGovernment places high priority on providing road access to allvillages.

(c) Self-Employment Strategy. Growth of wage employment is likely to bewell under 3% p.a. for the next decade and will cover less than 20%of the labor force by 1990. Therefore, the Government's developmentpolicies aim at the generation of additional opportunities forincome earning through self-employment, especially in the ruralareas. Cash cropping and livestock production are regarded as theprincipal areas with good opportunities and prospects.

25. The Government's National Development Strategy serves well as ageneral outline for future development. However, the capability to translatethese broadly stated objectives into actual programs and projects is extremelyweak. Manpower capable of identifying and preparing projects is very scarceand, consequently, the pipeline of development projects is limited. As partof the establishment of provincial governments in PNG, provinces will bedelegated much of the responsibility for project planning, preparation andimplementation. As provincial staff at present are even less equipped toplan and implement projects than the staff of the Central Government, therate of project generation is unlikely to be rapid for some time to come.As discussed above (para. 19), efforts are being made to improve PNG'sproject preparation capability.

Bank Group Involvement in the Sector

26. There is basic agreement between the Government and the Bank Groupon the problems of the rural areas and the most effective strategies forcoping with these problems. The Government has encouraged Bank involvementin rural development. Consequently, increased involvement by the Bank Groupin this sector is expected over the coming years.

27. Past lending in rural areas has been for roads, education, cashcropping and livestock production. While such involvement was, and stillis, consistent with the Government's development strategy, the scope of theBank Group involvement needs to be broadened and integrated. The proposedproject involves new initiatives and would help the Government to makea comprehensive and coordinated attack on the problems of one province in away consistent with national objectives and capabilities.

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PART IV - THE PROJECT

28. The proposed project was prepared by public servants of various

ministries working in the project area, with assistance from the Association.

It was appraised in August/September 1977. A Staff Appraisal Report entitled

"Rural Development Project" (No. 1985-PNG, dated June 22, 1978) is beingdistributed separately. Supplementary project data are provided in AnnexIII. Negotiations were held in Washington from June 5 to 9, 1978 with a PNG

delegation led by Ms. Patricia Curley, Acting First Assistant Secretary,Ministry of Finance.

Project Area

29. The proposed project would be carried out in the Southern Highlands

Province. The greater part of the province is at an altitude of between1,500 m and 4,000 m and consists of highland valleys and steep limestone

ridges. Rainfall is high, the lowest mean annual amount being 2,450 mm and

the highest 4,500 mm. In general, the soils are infertile. Generally,areas below 1,800 m are frost-free, but, above 2,500 m, frosts are common.The climate is characterized by a lack of seasonal contrast. The combination

of high rainfall and poor soils greatly limits the agricultural potential ofthe area. Coffee, tea, cardamoms and mulberries appear to be the onlypromising cash crops.

30. The people in the Southern Highlands Province do not live in villages

but in scattered garden hamlets. They wear a minimum of clothing. Houses

are constructed mainly of grass or pandanus leaves on a light timber framewith the roof close to the ground (to conserve warmth); the normally smoky

atmosphere inside contributes to the prevalence of pneumonia and other

respiratory diseases. The culture of the people prior to World War II wasneolithic, since sustained contact with the outside world has occurred onlyafter the War.

31. The population of the province is about 235,000, with an averagefamily size of 6.3. It is estimated that about 90% of the provincial labor

force (age 10 years and over) are involved in subsistence agriculture and homeduties, and only 4% in money raising activities (coffee, tea, cattle, cardamomsand silk) on a more or less permanent basis. The remaining 6% are eitherstudents or otherwise occupied.

32. According to the 1971 census, some 8.1% of the population of the

Southern Highlands Province over 10 years old were literate (national average31%). Some 6.4% of those aged over 10 years could speak English and 5.6%Pidgin; the rest could speak one or more of the 16 indigenous languages or

dialects of the province. Nationally, 57% of 7-12 year olds and about 14%of 13-17 year olds are enrolled in school, whereas in the Southern HighlandsProvince the respective figures are 44% and 6.5%. These are among the

lowest rates in the country. Only about 15% of high school students in theprovince are female, compared to a national figure of 29%.

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33. The Southern Highlands Province ranks last nationally in per capita

expenditure for health. In 1977, the per capita expenditure was about $4

and, of this, about 44% was spent on the Mendi Hospital, to which relatively

few people have effective access. A major problem is the high turnover ofnursing staff because they wish to return to their home districts, usually on

the coast. The primary health care level in the Southern Highlands Province

is near the bottom nationally with an aid post/population ratio of 1:2,060.

Over 53% of the population live more than one hour's walk from the nearest

aid post. Malnutrition (<80% of standard weight for a particular age) occurs

in 30-40% of children less than 5 years old and severe malnutrition (<60% of

standard) ranges between 0.2 and 5.5%. In the Southern Highlands Province, about

203 children per 1,000 born die before reaching five years, which is the

second highest rate among the 19 provinces of PNG.

Project Objectives

34. The proposed project would aim at helping to achieve the Government'ssector objectives of a more equitable interregional distribution of income,

improved regional distribution of social services, satisfaction of nutrition

and some other basic needs, national integration and increasing the percentage

of the population in the monetary economy. The Association's participation

is expected to contribute to improvements in project design and implementation

procedures and to a systematic monitoring of the project's impact. Theproject would represent the first step in what will clearly be a long

process to develop the economy of the province, and help the Southern

Highlanders to raise their present low standard of living to a substantiallyhigher level. The individual components are presented in the following

paragraphs in order of their potential to offer benefits to the people of

the Southern Highlands and not in order of the proportion of total costswhich they represent.

Detailed Features of the Project

35. Nutrition/Subsistence Component. Because the population of the

province is so precariously perched on the border between nutritionaladequacy and malnutrition, great care has to be exercised in introducing

change into the subsistence farming system. For these reasons, the nutritioncomponent of the project would concentrate on generating information needed

to effect changes in food crop production which would improve the quality of

the diet, and on training the agricultural extension and health service

staff.

36. The project would staff, house and equip an Agricultural Field

Trials, Studies, Extension and Monitoring Unit (AFTSEMU) in Mendi. During

negotiations an assurance was obtained that AFTSEMU would be set up by

October 1, 1978, and that its organization and functions would be satisfactory

to the Association (Section 3.03(a) of the draft Development Credit Agreement).Assurances were also obtained that AFTSEMU would consult the Association

before employing key staff members and consultants (Section 3.03 (b) and(c) of the draft Development Credit Agreement). AFTSEMU would conduct field

trials and village demonstrations of new crops, varieties and husbandry

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methods. It would provide in-service training courses for extension workersin food crop improvements. It would also review existing information onsubsistence farming in the Highlands and collect data on land use, farmmanagement, nutrition and demography necessary for monitoring project results.Relevant information from such reviews would be incorporated in a report onsubsistence agriculture, including policy recommendations for furtherimprovements, to be submitted to the Association by December 31, 1981,(Section 3.03 (d) of the draft Development Credit Agreement).

37. The project would also construct and staff a Media Unit at Mendi,to be run by the Ministry of Information and Broadcasting, to provide logisticaland advisory support in communication techniques to all government extensionservices working in the province. An assurance was obtained that the Associa-tion would be consulted prior to the appointment of the Director of the Unit(Section 3.04 of the draft Development Credit Agreement).

38. The project would provide AFTSEMU and the Media Unit with seveninternationally recruited staff, together with associated housing, vehicles,equipment, training facilities, consultants, aerial photography and operat-ing costs, required to carry out its functions.

39. Cash Crops. Coffee, tea and, to a much lesser extent, cardamomand mulberry are the only cash crops that at present seem to offer expansionpossibilities, and these would be supported under this project. Cash croppingin the Southern Highlands Province commenced very recently: cardamom wasintroduced in about 1974, tea and mulberry in about 1969, and coffee in the1960s. While efforts to promote cash crops (e.g. pepper and pyrethrum)among subsistence farmers (smallholders) have generally failed in theSouthern Highlands, a small number of such farmers are presently engaged incash cropping (mainly coffee). It would be unrealistic, however, to expectsufficient commitment (financial and otherwise) from the great majority ofsubsistence farmers in the Southern Highlands, who have no prior experience,to begin production now on their smallholdings. Therefore, the cash cropcomponent of the proposed project is modeled on the successful experience ofmany neighboring provinces where coffee cultivation was originally introducedby estates and was gradually accepted by smallholders; today, about 70% of thecoffee is grown by smallholders in these areas. The local government council-owned coffee blocks would serve a similar demonstration function for subsis-tence farmers and, it is expected, would attract them eventually into coffeeproduction.

40. Specifically the coffee component of the project would:

(a) extend the 350 ha area of the ten existing local government council(council) coffee blocks by 50 ha in total, and establish a furtherfive council blocks with an average size of 50 ha;

(b) establish about 45 group coffee blocks owned by about 1,800subsistence farmers, the total area to be planted being 450 ha;the blocks would be owned by some or all of the members of theclan who own the particular pieces of land developed;

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(c) establish approximately 530 ha of smallholder coffee on about 2,500holdings, thus increasing the area of smallholder coffee in theSouthern Highlands Province from 500 ha to 1,030 ha;

(d) construct a coffee mill in the province for hulling parchment coffeeproduced by the council blocks, group blocks, smallholders and theprivate estate that exists in the province. The mill would beowned by the Southern Highlands Development Corporation (Holdings)Pty. Ltd. (SHDC), a recently established holding company owned bythe provincial government (para. 59);

(e) recruit a Coffee and Candamom Supervisor to the extension staff tooversee the overall development of the coffee component in thewestern part of the province and also supervise the cardamomcomponent; and

(f) recruit a Coffee Extension Specialist to work with smallholders.

41. In order to avoid establishing a provincial economy totallydependent on coffee, steps would also be taken to expand the present meageracreage under tea cultivation and to establish a tea industry. The long-termexpectation is that this industry too would become predominantly a smallholderindustry. Initially tea production is generally a vertically integratedoperation based on estate production, because before planting tea an assuredfactory outlet is necessary, and before building the factory a guaranteedsupply of green leaf must be assured. In the proposed project, each of thefive tea blocks would be owned by a company in which the provincial govern-ment, through SHDC, its holding company, would be the major shareholder, othershareholders may include the local council and local residents. The teafactory would be owned by the SHDC, possibly in partnership with a privatetea company. Smallholder tea production would be encouraged by the extensionservice concurrently with the block development under this project, but amajor expansion in smallholder tea production is not expected to occuruntil later.

42. Specifically the tea component would:

(a) establish five tea blocks on government-owned land in the foureastern council areas of the province, with a total area of about800 ha (the present area is about 140 ha).

(b) establish about 50 ha of tea dispersed on about 125 smallholdings(the present area is about 20 ha);

(c) build a tea factory; and

(d) pave and upgrade some 40.5 km of feeder roads serving the tea areas.

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43. The climatic conditions in the Southern Highlands appear to be

suitable for the production of cardamoms and silk; under the proposed

project these would also be established on a small scale as cash crops,

to determine their suitability for eventual smallholder production. Specifi-

cally, this component would include:

(a) the establishment of a 50 ha council block at Erave and 25 ha

council blocks at Pimaga and Komo for the production of cardamoms,

which would serve as demonstration units;

(b) the encouragement of cardamom production by smallholders in the

vicinity of the cardamom council blocks; and

(c) the cultivation of 40 ha of mulberries by 400 smallholders in eight

locations and the associated developments necessary to produce

silk, which would be managed by the Office of Business Development

of the Department of Commerce.

44. Electrification. The project would construct about 60 km of

transmission lines by extending the existing grid westward into the Southern

Highlands Province mainly to supply power to the coffee and tea factories.

45. Health Services. Delivery of health services in the Southern

Highlands requires considerable strengthening. In fact, the National Health

Plan gives priority to expanding nurses training in Mendi, the Southern

Highlands provincial capital. With no expansion of present personnel, by the

early 1980's there would be a shortage of 114 nurses in the province. At

present there are no nurses training facilities in the Southern Highlands;

most nurses are trained in coastal areas. Moreover, because of the conserva-

tive attitude of parents which makes them reluctant to permit children,

particularly girls, to go to the coastal areas for schooling, only 30% of

nurses working in the Southern Highlands are Southern Highlanders. The high

proportion of non-southern Highlanders results in high turnover and frequent

staff vacancies. The proposed project would establish a nurse and in-service

training complex to be attached to the Mendi Hospital. The facility would

have capacity for 30 first year students, 25 second year students, 20 third

year students and 30 nursing aides and would be able to accommodate 12 male and

12 female in-service training personnel.

46. Training of health field staff at present is usually done outside

the Southern Highlands at centers unable to simulate relevant field situations.

The heavy workload of supervisory staff has prevented adequate attention

being devoted to on-going training of field staff, and supervisory staff

visit field staff only once every three to six months. Under the proposed

project, field health staff would be given in-service training at Mendi

Hospital for a minimum of two weeks per year. More frequent supervisory field

visits would also be encouraged.

47. Two districts in the province have particularly inadequate health

services. These are Kagua and Ialibu each with a population of about 25,000

and with only three qualified nurses at present. This is a ratio of about

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one nurse per 8,000 population, whereas the national norm is one nurse per3,000 population. The proposed project would construct two health subcentersin the Kagua district, and one in the Ialibu district of the province, eachto be staffed with two trained nurses and four nurses aides.

48. The Pneumonia Research Unit at Tari has compiled a valuable bankof data on demographic trends, mortality and disease, nutrition, migration,income levels and sources, housing, and education in the Tari area. Thecontinued gathering of this information would provide a unique opportunityto monitor the impact of economic development on these parameters. Provisionis being made under the proposed project to permit the Unit to continue tooperate its data collection system.

49. Roads. A major factor contributing to the isolation of theSouthern Highlands has been its poor road access both to the rest of thecountry, as well as within the province itself. The project would upgradeand/or construct the main road through the province from Poroma to Koroba(138 km) to an all-weather rural (i.e. unpaved) standard. In addition, itwould install small bridges and culverts as appropriate on about 900 kmof feeder roads throughout the province.

50. Formal Education. The proposed project would address severalobvious and immediate needs and help to correct provincial imbalances inaccess to secondary education. It would construct two new high schools, oneat Koroba and one at Pangia, each with 230 places. A permanent position foran agricultural lecturer would be provided at the Dauli Teachers College toteach pre-service and in-service students agricultural practices relevant tothe province. Moreover, community schools, high schools and the DauliTeachers College would be provided with materials and equipment for demon-strating community development projects, mainly improved subsistencefarming and nutrition practices (e.g. gardening equipment, cooking utensils,and equipment for raising poultry and livestock).

51. Nonformal Education. At present there is one provincial adulteducation officer in the Southern Highlands to handle nonformal adult educa-tion. The proposed project would expand the program of adult education byproviding one provincial coordinator and seven district officers. Thecoordinator would be recruited internationally for three years with theintention that the provincial officer assume his functions by the end of thecontract. The district officers would each be provided with adequate trans-port, accommodation and travel funds, learning materials, and funds forvillage training courses. In addition, short training courses would beconducted for selected villagers focussing on local community development andpractical solutions to village problems.

52. The vocational center at Pangia is one of five centers in thecountry testing pilot programs in community education, introduced under theEducation Project (Credit 661). The center is placing greater emphasis onextension, and identifying and studying local needs. This reorientationbegan only in 1977 and, thus, it is too early to evaluate its results.Meaningful results should be available within the next year or two and, if

- 15 -

warranted, the present project would provide funds to similarly reorient theother three vocational centers in the province. Funds would be provided forin-service training, vehicles and equipment to enable the vocational centersto better meet local needs.

53. Finally a specialist in appropriate technologies would be recruitedfor about two years. Essentially, he would be a tradesman/craftsman whowould work alongside village people and help to develop and apply suitabletechnologies, which would have potential for improving living standards andrural incomes. Short-term consultant contracts might be required to supple-ment the experience of the Appropriate Technologist in introducing certainnew techniques to the province.

Project Costs and Financing

54. Total project costs (inclusive of taxes and duties) are estimatedat $32.2 million, of which $15.5 million, or 48%, represents foreign exchange.Physical contingencies of 10% have been added to the base cost estimatesfor the noncommercial activities (otherwise physical contingencies areincorporated in the base cost estimates). Price increases were assumed asfollows: for civil works and services, 8% in 1978, 7.5% in 1979, and 7%thereafter; for vehicles and equipment, 7% in 1978, 6.5% in 1979, and 6%thereafter. Expected price increases amount to 19% of base costs plusphysical contingencies. The proposed credit of $20.0 million would financethe full foreign exchange cost of the project and $4.5 million of localcosts, equivalent to 66% of project costs, exclusive of taxes and duties.For civil works, government services, studies, field trials, extension andmonitoring, 36% of the costs would be met by Government and 64% from theproceeds of the proposed credit. The Office of Business Development (OBD)within the Department of Commerce would finance 36% of the costs of silkdevelopment, with the balance being provided from the proposed credit. Thecash costs of individual smallholder developments would be about $100 andare expected to be financed entirely by the smallholders; however, shouldany additional financing be required, it would be provided under the projectthrough the PNG Development Bank (PNGDB) and the PNG Banking Corporation(PNGBC). In all other cases of commercial development, the beneficiarieswould make a substantial equity contribution of land and cash, and eitherthe PNGDB or the PNGBC would finance the balance with loan funds. A totalof 70 man-years of technical assistance, including consultants, would beprovided under the project at an average cost of about $2,500 per man-month.

Procurement

55. Since all commercial ventures, including smallholder development(26% of base cost), would be undertaken by independent private, public, ormixed public-private enterprises, procurement would be decentralized andwidely scattered over the Southern Highlands Province. Consequently, inter-national competitive bidding would not be generally feasible or appropriate.PNGDB and PNGBC would, however, require, as a condition for making subloans,that at least three bids be obtained from at least two countries for items of

- 16 -

machinery and equipment costing in excess of $100,000 (Schedule 3, para. 1 tothe draft Development Credit Agreement). Construction of civil works,including roads, would be by force account but using hired plant, whereappropriate. Contracts for materials and vehicles would be let in accordancewith local procedures that are acceptable to the Association (Section 2.03 ofthe draft Development Credit Agreement).

Disbursements

56. Disbursements of the proceeds of the proposed credit againstsubloans by PNGDB or PNGBC for coffee, tea and cardamom development wouldbe at the rate of 100%, provided the subloan did not exceed 64% of the totalcost of the subproject. Disbursements for civil works, vehicles, materials,salaries and consultant services would be at the rate of 64% of total costs,except for the construction of the two secondary schools; in this lattercase disbursements would be at the rate of either 64% of total costs or 100%of government expenditure, whichever is less. Disbursements for operatingcosts in the health subcenters and training complex and two secondaryschools, however, would decline from 64% to a rate of 50% in 1982, and 30%thereafter until project completion. This declining rate of disbursement isintended to accustom the implementing agencies to financing their ownoperating costs. No disbursements would be made for tea development untilan overall financial plan for this component was prepared that was acceptableto the Association (Schedule 1, para. 3(ii) of the draft Development CreditAgreement). This requirement is particularly to ensure that necessary equitywill be available to finance the tea factory. Normal supporting documentswould be submitted for vehicles, materials and for civil works performed bycontractors. Certificates of expenditure would be submitted for subloans,force account work and for salaries and operating costs. Retroactivefinancing of $600,000 for roads and some key project staff from January 1,1978 is proposed. It is expected that disbursements would be completed byJune 30, 1984, approximately six months after the end of construction.

Organization and Management

57. The proposed project calls for implementation by a large number ofCentral and Provincial Government agencies and departments. While thevarious components require only minimum coordination during implementation,the number of agencies involved suggests the need for an interagency oversee-ing mechanism. The proposed project management system has three objectives:firstly, to monitor the implementation of project components by all of therespective departments and agencies both at headquarters and at field level;secondly, to ensure easy access to funds through a central project budgetallocation; and thirdly, to maintain effective channels of communicationbetween field and headquarters.

58. Organization at Headquarters Level. At headquarters 12 governmentdepartments and agencies would be involved in one or more aspects of projectimplementation (Departments of Finance, Southern Highlands within the Ministryof Decentralization, Primary Industry, Works and Supply, Commerce, Health,Education, the Public Services Commission, the Housing Commission, the Electri-city Commission, the PNGDB and the PNGBC). In order to ensure coordinationamong all agencies, a Headquarters Project Coordinating Committee (HQPCC)

- 17 -

would be established by October 1, 1978, its organization, membership,

procedures, powers and responsibilities being satisfactory to the Association

(Section 3.01(b)(i) of the draft Development Credit Agreement). Its functions

would be to coordinate the establishment of project operating policies and

practices, assist in solving problems, and resolve differences between

government agencies. The members of the HQPCC would be the heads of govern-

ment departments involved in the project. The Managing Director of the PNGDB

would be an ex officio, non-voting member of this committee. A Headquarters

Project Manager (HQPM), whose qualifications and experience and terms and

conditions of employment would be satisfactory to the Association, would be

appointed as a condition of effectiveness and made responsible for project

implementation and for overall direction and coordination (Sections

3.01(b)(ii) and 5.01(a) of the draft Development Credit Agreement). The HQPM

would be a non-voting member and secretary of the HQPCC and would be the

principal contact with the heads of departments, as well as with project

management at the provincial level.

59. Organization at Provincial Level. At the provincial level, the

project would call for the close monitoring and coordination of project

activities by councils; the Divisions of Provincial Affairs, Primary Industry,

Health, Education and Commerce within the Department of the Southern Highlands

of the Ministry of Decentralization; the Public Services Commission; and the

Department of Works and Supply. The existing Southern Highlands Development

Authority would be replaced by two new institutions, namely the recently

established Southern Highlands Development Corporation (SHDC) and the Southern

Highlands Management Authority (SHMA). During negotiations, the Articles and

Memorandum of Association of SHDC were reviewed, and assurances were obtained

that certain amendments would be effected as a condition of credit effective-

ness which would ensure that the project's benefits would accrue to the local

people (Section 5.01(b) of the draft Development Credit Agreement). The SHMA

would also be established as a condition of effectiveness (Section 3.06(a)

and 5.01(b) of the draft Development Credit Agreement); it would be responsible

for providing management and technical assistance for commercial coffee, tea

and cardamom development. The extension staff would provide technical

assistance to smallholders. The appointment of a Provincial Project Manager

(PPM), based in Mendi, whose qualifications and experience and terms and

conditions of employment would be satisfactory to the Association, is

an additional condition of effectiveness (Section 3.01(b) and 5.01(a) of the

draft Development Credit Agreement). He would be directly responsible to the

HQPM for direction, control and coordination of project field operations at

provincial, district and council levels. There would be a Provincial Project

Coordinating Committee (PPCC) with functions similar to those of the HQPCC

but at the provincial level (Section 3.01(b)(i) of the draft Development

Credit Agreement). The members of the PPCC would be the provincial heads of

agencies involved in the project and located in the province. The PPM would

be a non-voting member and secretary of PPCC; he would bear a functional

relationship to the HQPCC and may be co-opted to its meetings as and when

necessary. A Provincial Project Financial Controller would be appointed by

December 31, 1978 (Section 3.01(b)(iii) of the draft Development Credit

Agreement).

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Operation and Maintenance

60. Operation and maintenance would be the responsibility of the respec-

tive government agencies involved. The important roads would be maintained bythe Department of Works and Supply. Operation and maintenance by governmentagencies in the province has been satisfactory to date.

Cost Recovery

61. The proceeds of the proposed credit allocated for development ofcash crops ($3.6 million) would be channelled through the PNGDB and thePNGBC. Onlending terms would be determined on the basis of the prevailing

commercial rate for the relevant type of lending applicable to the varioussubborrowers (companies, groups and smallholders); currently this rateaverages about 9%. The PNGDB and the PNGBC would be allowed a fixed averagespread of 3% to cover their administrative costs, resulting in an averageonlending rate of about 6% to these institutions. Fluctuations in thecommercial rate charged to subborrowers would result in equivalent changes inthe onlending rates to participating banks; the 3% average spread wouldremain fixed. Loans to subborrowers would have maturities of up to 15 years,including grace periods of up to 5 years, depending on the crop and thesubborrower; onlending would be amortized in accordance with the amortizationschedules applicable to the subloans (Section 3.02 and Schedule 3 of thedraft Development Credit Agreement). Subloans to individual enterprisesamounting to more than $45,000 in the aggregate would be forwarded to theAssociation for its prior approval (Section 3.02 (d) of the draft DevelopmentCredit Agreement). Health care, education and road services would beprovided under the project with no attempt to recover costs.

Project Monitoring and Evaluation

62. The Agricultural Economist, who would be recruited under the AFTSEMU,would be responsible for collecting information for project monitoring, includ-ing data on the progress of the cash cropping component. This would be inaddition to the quarterly report from each agency to the HQPM on the physicaland financial progress of each subproject. The Pneumonia Research Unit atTari would also provide valuable data required to evaluate the impact of theproject as a whole. The Institute of Applied Social and Economic Research inPort Moresby would have responsibility for project evaluation.

Project Benefits, Justification and Risk

63. The Southern Highlands Province is one of the most primitive andbackward areas in Papua New Guinea. Its people suffer from inadequate nutri-tion, poor health, low levels of education and incomes. Poor road connectionswithin the Province and with the rest of the Highlands have kept provincialvillages remote from one another, thus maintaining the province's backwardness.The proposed project is comprised of a relatively large number of componentswhich would address these needs. The project focuses heavily on nutrition andhealth, which are seen to be the most immediate basic needs of the SouthernHighlanders; in addition, the project would improve education, raise cash

- 19 -

incomes and improve the provincial road network. Each of these components can

be evaluated and justified in terms of its own benefit stream, which in the

short run is largely independent of the other project items. In the longer

term, however, it is anticipated that there will be a collective developmental

benefit greater chan the sum of its parts. The long-term objective of the

project is to bring the people of the Southern Highlands into the cash economy

and, more generally, into the modern world. In addition, many project compo-

nents, especially roads and education, would help to foster greater communica-

tion and, thus, fuller integration of the Southern Highlands with the rest of

the country. Development is desired very strongly by the local population who

realize that other parts of the country are more "modern" and that from this

stems significantly improved welfare.

64. Because of the unique situation of the Southern Highlands Province

and its people, the lack of immediately applicable agronomic practices and a

shortage of suitably trained extension staff, there are severe limitations at

present on what can be done to improve the subsistence economy of about 90% of

the population (210,000 people). The nutrition component of the project is a

necessary step toward overcoming these limitations. The overriding concept of

this component would be to lay the groundwork of knowledge, training, and

communications for raising productivity of subsistence farmers and improving

nutrition. Whatever is learned would be fed directly into the extension

services and communicated through various media. Information gained from

field trials and data collection would assist an agronomist trainer in conduct-

ing in-service training courses in subsistence food crop improvement for

extension workers. Material for village demonstration would be developed by

the trainer. Finally, a media center would provide logistical and advisory

support in communication techniques to all government extension workers

(agriculture and health staff, teachers) in the Southern Highlands Province.

65. In developing the cash crop component, the project has taken cogni-

zance of nutritional implications. Studies have shown a higher incidence of

malnutrition among families in which adult males were employed away from home

in the monetary economy. Families of male workers in the cash economy who

lived at home and continued to tend their gardens and participate in local

affairs were nutritionally better off than those wholly dependent on the

subsistence economy or those who had to live away from home to find work.

These observations were taken into account in designing the proposed project.

Thus the sites for coffee, tea and cardomom blocks have been widely separated

to enable workers, as far as possible, to live at home and continue to tend

their gardens.

66. The coffee, tea and cardamom blocks would generally be on land that

is not presently in the subsistence economy, because it is either of poor

quality or located at altitudes where frost frequently damages the sweet

potato crop, the staple of the diet.

67. Schools in the province are often used as community gathering

points. It is not uncommon for parents to devote up to one full-work day a

week to assist in maintaining the school and for work in the school gardens.

Thus, there is the opportunity to use the school garden as a demonstration

plot for both parents and school children. The garden would be used to

demonstrate which crops are of high nutritional value and how to maximize

- 20 -

garden output. The school would serve as a focal point for general extensionincluding the distribution of seeds and materials. The project would supply agardening kit to each primary and secondary school. These kits would includetools, seeds and information. Within the schools' curricula, increasedemphasis would be given to cooking classes (preparation of nutritious meals)and nutrition education.

68. The project puts major emphasis on improvement of rural health.There is increasing evidence that early treatment of infectious diseases(especially respiratory and gastrointestinal) decreases a child's weight lossand enhances the child's chance of rapidly returning to its pre-illnessweight. Data from the Tari area suggest that inaccessibility to healthfacilities may well increase the risk of developing severe malnutrition.In-service training programs and nurses' education would devote significanttime to the study and practical experience in preventing and treating malnutri-tion. By locating the training facilities in Mendi, the provincial capital,with field units throughout the province, the relevance of nutrition teachingmaterial would be ensured. Women are the key to improved nutrition in theSouthern Highlands Province and would, therefore, be the target group ofproject efforts in this respect.

69. A necessary foundation to ensure the maximum impact of many of theproject's components and, more generally, to promote the future developmentof the province is improved road transport. Without the road linking Poromato Koroba, development of the greater part of the province would be greatlyrestricted. The justification for this minimum standard road is essentiallysocial and only secondarily economic. The potential benefits from the Poromato Koroba road would be further enhanced by the installation of permanentculverts on about 900 km of feeder roads. This culverting program wouldresult in maintenance savings of about 30%. The delivery of social serviceswould be greatly improved as a result of these road improvements.

70. With the establishment of provincial governments throughout PNG,many of the functions which previously were the responsibility of the CentralGovernment are being decentralized. This presents a particularly difficultproblem for the poorer provinces such as the Southern Highlands, which have aninadequate tax base. The cash cropping components are designed to provide anopportunity for smallholders, councils, and the Provincial Government toengage in cash generating activities and, thus, have the ability to meet moreof the people's basic needs. Due to the poor soils, climate, and distancefrom markets, coffee, tea, cardamoms and silk appear as the only promisingoptions. Cash cropping would:

(a) increase the incomes of about 4,800 families (13% of provincial total);

(b) in addition, provide employment opportunities for about 1,500 peoplein the vicinity of the coffee, tea, cardamom and silk production andprocessing facilities;

(c) support the infant silk industry that exists in the province as abasis for creating off-farm means of income supplementation,especially for women;

- 21 -

(d) provide a source of revenue for all councils through their produc-tion of coffee and/or cardamoms on blocks. Twelve councils wouldproduce coffee and three, cardamoms; and

(e) provide additional revenues for the Provincial Government throughits majority shareholding in the companies that would produce teaand process coffee and tea.

71. The economic rate of return is estimated to be 8% for the Poromato Koroba road, the cost of which is $8.4 million; 23% for-the culvertingprogram, the cost of which is $1.0 million; 20% for coffee, the cost of whichis $2.5 million; 15% for tea, the cost of which is $4.9 million; and 31% forcardamoms and silk, the cost of which is $0.7 million. The average economicrate of return on these components, which account for 69% of the project'sbase cost, is 13%. Should the price of coffee and tea drop by 20%, then therespective economic rates of return would be 14% and 7%. The project wouldrequire about $0.9 million annually of additional government expenditures tomaintain and service the project facilities. However, increased tax revenuewould amount to about $0.2 million p.a., and dividends to the ProvincialGovernment and councils may reach $0.7 million by 1990.

72. Given the fact that the government programs to be assisted by theproject are under the management of established agencies, and that provisionfor recruitment of additional experienced staff has been budgeted wherewarranted, the risk of not achieving the project objectives or rate of returnis believed to be no greater than can normally be expected with operations ofthis type. Risks associated with managing such a large number of componentsare lessened because to a large extent the implementation of the variouscomponents would not be interdependent. Rather, the project would requireadequate monitoring of all project items and the proposed management schemeshould be adequate for this purpose. The tea component carries the highestrisk because it could be severely affected by a long period of depressedprices. However, given that tea and coffee are the only cash crops that havethe potential for significant expansion in the Southern Highlands, the inclusionof the two crops together in the project lessens somewhat the risk to theprovincial economy from fluctuating commodity prices. The other intangible isthe effect the establishment of the provincial governments will have on thefunctioning of the public service and budgetary allocations to poor provinces,like the Southern Highlands Province. Funding for social services is onlyguaranteed to the provinces by the Central Government at the levels prevailingin 1976/77; hence, the importance of increasing the revenue sources of thecouncils and the Southern Highlands Provincial Government.

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PART V - LEGAL INSTRUMENTS AND AUTHORITY

73. The draft Development Credit Agreement between Papua New Guinea andthe Association and the recommendation of the Committee provided for inArticle V, Section 1(d) of the Articles of Agreement are being distributedseparately.

74. The special features of this credit are listed in Section III ofAnnex III. Additional conditions of effectiveness are the appointment of theHeadquarters and Provincial Project Managers, the establishment of the SouthernHighlands Management Authority and the amendment of the Memorandum and Articlesof Association of the Southern Highlands Development Corporation.

75. I am satisfied that the proposed credit would comply with the Articlesof Agreement of the Association.

PART VI - RECOMMENDATION

76. I recommend that the Executive Directors approve the proposedcredit.

Robert S. McNamaraPresident

Attachments

Washington, D.C.July 5, 1978

ANNEX IPage 1 of 4 pages

TABLE 3APAPUA NEW GUINEA - SOCIAL INDICATORS DATA SHEET

LAND AREA (THOU KM2) --------- --------- ---- - - -------- -------

TOTAL------- PAPUA NEW GUINEA REFERENCE COUNTRIES (1970)TOtAL 461.7 MOST RECENTAGRIC. 4.5 1960 1970 ESTIMATE LIBERIA IVORY COAST TRINIDAD AND TOBAGO*

GNP PER CAPITA (USS) 160.0 310.0 490.0 280.0 350.0 1260.0

POPULATION AND VITAL STATISTICS

POPULATION (MID-YR. MILLION) 1.9 2.4 2.8 1.3 5.4 1.0

POPULATION DENSITYPER SQUARE KM. 4.0 5.0 6.0 12.0 16.0 200.0

PER SO. KM. AGRICULTURAL LAND 504.0 552.0 618.0 217.0 32.0 708.0

VITAL STATISTICSCRUDE BIRTH RATE (/THOU. AV) 44.4 43.1 40.6 42.8 46.1 32.5

CRUDE DEATH RATE (/THOU.AV) 25.5 20.2 17.1 23.5 23.3 7.1

INFANT MORTALITY RATE (/THOU) . . 137.3 .. 34.4

LIFE EXPECTANCY AT BIRTH (YRS) 38.6 45.1 47 7 41.0 41.0 66.1

GROSS REPRODUCTION RATE .. 2.9 2.9 2.6 3.1 2.0

POPULATION GROWTH RATE (X)TOTAL 2.7 2.4 2.6 3.3 ia 3.4 /a 2.1L/aURBAN 12.6 13.0 10.5 * 8.7 /b 3.1

URBAN POPULATION (% OF TOTAL) 3.3 8.9 12.9 26.2 28.0 24.1

AGE STRUCTURF (PERCENT)0 TO 14 YEARS 40.5 42.0 41.9 40.7 42.5 41.2

15 TO 64 YEARS 56.6 55.0 54.9 56.0 542. 5541

65 YEARS AND OVER 2.9 3.0 3.2 3.3 2.7 3.7

AGE DEPENDENCY RATIO 0.8 0.8 0.9 0.8 0.8 0.8

ECONOMIC DEPENDENCY RATIO 0.8/a 0.9 0.9/a 1.0 /b 0.9 /c 1.3

FAMILY PLANNINGACCEPTORS (CUMULATIVE. THOU) . 25.4

USERS (% OF MARRIED WOMEN) 5 4 .. .

EMPLOYMENT

TOTAL LABOR FORCE (THOUSAND) 1040.0 1260.0/a 1410.0 580.0 2600.0 350.0 /bLABOR FORCE IN AGRICULTURE (%) 89.0 86.0C 83.0 72.0 82.0 22.0

UNEMPLOYED (% OF LABOR FORCE) .. .. . 20.0/C .. 12.5

INCOME DISTRIBUTION

% OF PRIVATE INCOME RECOD BY-HIGHEST 5% OF HOUSEHOLDS .. .. .. 61.7 /dHIGHEST 20% OF HOUSEHOLDS . .. 12.6

I.QWEST 20% OF HOUSEHOLDS 5.3 7TfWEST 40% O HOUSS6OLDS .. .. .. 10.9 7 .

DISTRIBUTION OF LAND OWNERSHIP_____________________________

X OWNED BY TOP 10% OF OWNERS .. .. ..

% OWNED BY SMALLEST 10% OWNERS .. .. .. ..

HEALTH AND NUTRITION

POPULATION PER PHYSICIAN 14390 .0Ib I11630. 0 11590.0 11590.0 15320.0 2330.0POPULATION PER NURSING PERSON 2450.0/bc 2370.0 2050.0/b 4590.0 2830.0/d 400.0/C

POPULATION PER HOSPITAL BED 170.01r- 150.0 . 5BO.0 1150.0- 230.0-

PER CAPITA SUPPLY OF -CALORIES (% OF REQUIREMENTS) .. .. .. 84.0 114.0 97.0

PROTEIN (GRAMS PER DAY) .. .. .. 6 0 60 0 64 0

-OF WHICH ANIMAL AND PULSE .. .. .. i oLe 18/ 3 4 :0 /d

DEATH RATE (/THOU) AGES 1-4 .. .. .. 18.2 .. 1.8

EDUCATION

AD.JUSTED ENROLLMENT RATIOPRIMARY SCHOOL . 59.0 53.0 76.0 112.0

SECONDARY SCHOOL 1.0 8.0 12.0 9.0 1t.0 36.0

YEARS OF SCHOOLING PROVIDED(FIRST AND SECOND LEVEL) ".C 10.0 1o.0 12.0 13.0 15.0

VOCATIONAL ENROLLMENTII OF SECONDARY) 22.0 19.0 22.1 8.4 7.0 6.o/e

ADULT LITERACY RATE (1 .. 3 ts.0 20.0 88.0

HOUSING

PERSONS PER ROOM (URBAN) 0.7/Ld .. .. . .. .7/f

OCCUPIED DWELLINGS WITHOUTPIPED WATER I%) .. .. .. .. .. 64.0/&

ACCESS TO ELECTRICITY(% OF ALL DWELLINGS) *h .. .. .. .. _

RURAL DWELLINGS CONNECTEDTO ELECTRICITY (Xl .. .. .. ..

CONSUMPTION

RADIO RECEIVERS (PER THOU POP) .. .. .0 132.0 t O 276 0

PASSENGER CARS (PER THOU POp) 2.0 7.0 6.0 11n.0 100 73.0

ELECTRICITY (KWH/YR PER CAP) 31.0 74.0 352.0 330.0 95.0 1172.0

NEWSPRINT (KG/YR PER CAP) .. 0.2 0.3a _ 0.1 0.2 5.9…____________________________________________ _- --- … -…-- - - --_

SEE NOTES AND DEFINITIONS ON REVERSE

ANNEX IPage 2 of 4 pages

NOTES

Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961, for 1970 between 1969 and 1971, and for Most Recent Eitimate between1973 and 1976.

0 Trinidad and Tebago has beer selected as an objective c..try because both on.ntries are sma.l tilend naticn and 1-c both coontoia are dependent

no agrl_niture for their linelihood, and both countries possess significant agricolt-em poten-al.

PAPUA NEW CUI_NEA 1960 Ia Ratio of populstion under 15 and 60 snd over to total labor force; /b 1964; ln-iaditg asniatant r-arsa;/d Total, arban and rural

1970 /a 1966,

MOST RECENT ESThAaTE: /a Ratio of popalation under 15 end 65 and over to total labor force; /b 1n-inding midwives;/c 1972.

LIBERIA 1970 /I Due te itemigration population growth rste is higher than rota of natural incocase; /b Ratio of popolationAnder 15 and 65 and over to total labor force; /c Unemployed and partially -mployod; Id Popolation, 1975lochk Efooroi Report. Sigher inoena c-i-ula.td as r-Idcal, nrlodeoen parriate; Ie 1964-66.

IVOR1 COAST 19710 /a De to ieig-ratio. population growth rate is higher than rate of nat-ral irlrease; lb 1964-70; /c Ratioof population onder 15 and 65 and over to total labor force; /d Governmnnt only, itclodinog idiven;Ie 1964-66.

TRINTIAD ANl TOBAGO 1970 /t Due to emigration popalatien growth rate is lower that rate of naturul imcrees; In Labor icr00 age 15-64 yoar;Ic Incloding midwiven; /d 1964-66; /e iovernment matintai-nd and aided schools only; /f Total, urbanand rural; IR Inside only; /h 1966.

R8, July 5, 1978

DUF;INITIOMC OF SOCIAL INDICATORS

land Ares (tbon kt2

) Poeplution Per earsi tee ..rson - Poy-latin diried by -nber oI pracaicingTotul - Total t nrface area s ot prising lood area and inland waters. sale and feale gruduate snraos * trained' or '-reratied" nurese, and

aorit - Moa: rea-ca estate of ugricul_nra 1reanueed temporarily or pe ms- uxiIiary personnel niah arsisis- oreoperlance.neatly tar cropar, ypaitres, markot h birches gardens or to lie fulia. PoPulation per hospital bed - Popnlation ditided by ausber of hbpital bead

available in public and private goer -1 and iperialized hospital andiNP ver caeioa (107U - GNP per capita e- tiete- at current rarkat pritces, rehabilitatton censeas; n dcloso -nasing hboes and eitabli e t-a fo

aeloelated by sane co tversnna seahbd as World Oank nolan (1974-76 basis); -codial and preventive care.1960; 1970 and 1976 duts. Per capita sopply of calories i(7 n renelremesto) - Cqpured frc, energy

eqivIlet of net food suppil fe esiuble ir cannetry Par espit. per day;l'ocatlatn a-d vtitl stoiis alaiaeilable op plies _uor_e dresesta production iperas Iees e-ports .andPoenlatioc (rid-year cillioni As of July first: if sot aveilabla, averuge changene in otok; ret eappliers -rclde caial feed, seedn, q-antitien coed

of awn end-year estbrates; 1916f, 1970 and 1976 dia. in fond processing and l7Psen in di.tor,inoti; reqaiveey unt hea ti-atedby yAO base.d on physiolgicalsneeis for noma ac.tivity and helh -rnid-

PupaIation deseiry - per anqare kb - Mid-ysar yapalution per square kiloter erina esvirossoantal t"aperaore, body aeighto, oge end see distributions of(100 hectares) of tnal area. population, and ullowiag 107 far oseto at hos--hold level.

Pmpction denatY- _er sqnure he of aorit laid - Cp.ted as ubone for Per capita supply of protein (crabs per davy - Protein rontent of per capitaegrirnia-ral land only. nt supply of fond per day; s- supply af food is defined as sboe; require-

tnest for all ounrtree e-ablinhed by USDA Eonaie Research slrvice-Vital stat ttisn Provid for atfaonallownce of~O 60ras of .tota pacasis per Lday, asd1Crde birbtarate cot a .ounand. aneraRe- Annual lice births per th"nsand of 70 gras nf anial und pel1e protein, of obtab 10 grot abs ha ann

old-year populuatno; tee-yost uritshrtic averages ending in 1960 and 1970, protei; these standards are lessr thun those of 75 grues of antul pr-etinsnd fine-ya a averag.e ending it 1975 fto neZu recast eatinere. and 23 grt=o of animal protein 00 an nvaroge far the world, proposed by FAO

frudn death raut per tbouna=dt anerge - annal dauta per thouasnd of mid-year is tbe Third gUrld Food urvay.population; te-year arithretic nverages ending in 1960 und 1970 snd fine- Per capita protein sneply faa animal und pnlo - frnteein tpply of fedyear arerage endino in 1975 for acet .reesteutima-n. dertoed frp naefoals sod pulses in gres per day.

Infant mortaulty rate (Uthon) - Ans. l deaths of infants onder one Yeur of age Death rute (/thed,) ageS 1-4 - An I.. t de atth per thennod Iin age gaop 1-4pe h..... ad tinebirths. year, an ildtes in this eS. group; -uggs-s an an indi--te of

Life espec.auny at birth (vra) - Anerage saber of years of life remuining at r1setritier.birth; usually finy-year averages nodfng in 1960, 1970 and 1975 for develop-im countrie-. Educatiop

Gronsrnprodrdion rate - erag-.g. uber of lire d.ughters n w bnan will bear Adlaatad -erolLe=et ratio - priatry nhool - EnrolL- eet of all ageu us per-it her normal reproductin period if ah beperieeces present age-a pecific rentage of prinary shonl-age pepalatlon; lacldes abildran aged 6-11 yearsfertility rates; mually fivne-yar overagen endi=g in 1960, 1970 and 1975 hat adjosred for different lengths of primary ed-ation; for coontries withfor denvlopitg -cpntries. unelnrsol nc tonice, "eacllaien ay enceed 100. since s-ms pupiln are bel-w

PocPlation grwth rate (Ti - total - CPpou=d anunl growth rateo of mid-near or alone the official school age.populutton for 1950-60, 1960-70 sad 1970-75. .diunaed enrollment ornio-seroadarst.ool - Cqputed ai sbone; nelond.ry

Po.alation goath an9 (TI -lrban- Capeed likf gr-wth rae of total ednestion aequtres at leattour years of npp--ved patra5y itroatine;popalation; differe.c definitionm of urban areas rny affect caporabiliry of provides general, nectional or teacher training instroott for papiloiota annag contrerts. of 12 an 17 Y.oa o f a p; -orresponds-aemrose are gone-aly e..claded."rhan popu7atioP (7. of total) - fatin of arhban total population; diff-rent soirs of a-hli p-vded (fir t and -econd -evels - Tntel years atdsficitions of urban aress may affect nonpatability of data among countaieo. schooling; at secondary leve1 --uatinnal iln.-tiOu may he partially or

caopletely ... laded.

/an atruatare (percent) - Children (0-14 years), notking-age (11-64 years), Vonational enrollment (7. If secodary - Vocational inotitotio.. incladeand retired (65 years snd over) a _ percentagno of nid-ysaa popalatien. technical, i.dcaicall nr ntnra pragauss which operac- independe-tiy or as

Agt dependency ratio - cauia of population nder 15 and 65 and -ont to those depa-m-eet of -erondary iniiutios.of ages 15 through 64. LdIlt literac rtat ) - Lit-'rnt ndolts (nble to lned nd atme) as par-

acuncatla decandenry aeclo- in R f populfeion under 15 srd 65 and cysr to cer-ng. or -nal adult Poanlatr_n aged 11 yeats und oust.

abs labor lace in age croup of 15-64 rears.fail 0 puanic - accecpori (fc,ulstive, thou) - funularire n.nber of acceptors bouting

of birth-control d-iren .nder enspipce of natinaul fmuil planning progree Persons per ronm (uaba) - Aerage naub-r of peronop pea toa it occopiedsince inception. conrcntional dwellIngs i nahian areas; dvellinga excrludre o_-pr.daneet

family plnnai. -c sts. (T of married wome) - Per-cetageo of narried wonen of a ar c__reo and unocopied Partchild-bearing aoe (15-44 _sarn) who uen bitb-coscr deo icers to all married 0ccupied dwellings nithont riced outer (7. - f.copied con-enoionul dwellings

neasnineo aage group. in -rbac and rural rn aithoct imaids at ou-tide piped outer facilities

us perceatage of all occnpisd d-wllings.Epptloyment Access to elecericitn (/. of ull d1eelianc) - tontnonol d-allingn itloctal Inbor force (thoanandi - tEona-iclly ariom perunon, inaludiag arTed electricity in lining qourartr as perceac of totas dvellingn in otban and

torcirn sd noemploynd bat eacl- didg hou-neives, stadroas, etc.; definitions aural .reso.

in varioun countries are nor conprah.nb. Rural dwellings connected to electricity (T) - Capated as above ft rauralLabor force in agriculture i7) - faricolaturl labor farce fe fiatming, forestry, dwellings only.

hu.,aing sad fishing) as perc_erugr of total labor farce.Unemployed (. of labor force) - Ufmuployed are - sin defired as personsa wo Connauption

are able and willing to ase a job. cot of job on a gien day, -emained oat Radio re. ivero (pea rhce pop) - All types of raceineas for radio broadcastsof a job, and neeking vork ror a spe-ified sisi,o- period uot er-eedioc onee an eneral p bl Ia yea rhua.and of pIpurfon rbine ,nitenad rerriar.esk; may not be caparuble betwee c -tntrins doe ta differeat definitions in countries and in years when registration of radio setn vas in etfeca;

of unemplayed and snurce of dait, g. , maployneat office statiutica, aaple duag fon recent years nay nor hr canperubc since most cobarrias abolishedsurreys. capui-ory nuneplonmeet issurasce. licensing.

"uIssoetar fea ~t~hee ,pop - Pase-9e -rs caPria ectet car setinglocuse diotriharlone- Percentage of pri-atne inar (bfth in cash and kind) Jsa alas eight pers eacladet abulu-ceo, hearse and o ilite-r

receivnd by richest 57, richest 207, pooront 2007, ned poorest 407. of hbse- vehicles.bn1ds. EUntalicity fhkh/rl Percar ) A-nal coneaplion of industrial caereial

public aed private el-cairoty in kilwatt boats Part -pits, gearaIlYDintributioa of land osaserebie -Perce-tages of land sned by seaIthiest 10 based on predaction data, wiahoat aleesa.ce for losses in grids but allow-

snd poorer ilo/ ct land Ossern ing for imports and emp-ots of electric tiy.NeesprInt klayr oa cep) - Per -spito anua Iosplnic hkOlogram

Health end Nutrition estImated fr_ d astic paod-ctio- plot net inports of newsprintPopulation per phyticisn - Population dinided by mahber of practicing

phyaltiant qnalifled faa a medical school ntintrslcy Irval.

ANNEX IPage 3 of 4 pages

ECONOMIC INDICATORS - PAPUA NEW GUINEA

GROSS DOMESTIC PRODUCT IN FY76 /a ANNUAL RATE OF GROWTH (% FY69 constant price)(at current prices)

US$Million % FY71/72 FY72/73 FY73/74 FY74/75 FY75/76

GDP at Market Prices 1,286.8 100.0 2.8 20.1/b 1.2Gross DomesticInvestment 221.1 17.2 -20.1 -43.7 -37.5 33.0 -10.6

Gross Domestic Saving 250.3 19.5 -32.9 243.4 86.3Current Account Balance -17.3 -0.1 - 104.2 18.6Exports of Goods, NFS 536.2 41.7 36.3 68.6 26.3 -6.5 2.3Imports of Goods, NFS 586.5 45.6 -5.7 -23.3 -2.0 17.5 -11.3

OUTPUT, LABOR FORCE ANDPRODUCTIVITY IN 1972

Value Added Ic Labor Force V. A. Per WorkerUS$ Million % 000% % of National

Averape

Agriculture 258.7 40.1 158 48.8 1,637 82.2Industry 189.7 29.4 43 13.3 4,411 221.4Services 197.1 30.5 123 37.9 1,602 80.4

Total/Average 645.5 100.0 324 100.0 1,992 100.0

GOVERNMENT FINANCECentral Government

(K Million) % of GDPFY75 FY76 FY72/73 FY74 FY75 FY76

Current Receipts 179.7 220.4 12.3 13.6 18.0 21.8Current Expenditures /d 341.0 369.5 27.8 27.6 34.2 36.5Current Deficit 161.3 149.1 15.5 14.0 16.2 14.7Capital Expenditures 33.1 43.0 5.8 3.0 3.3 4.2External Assistance (net) /d 137.6 126.9 16.2 15.2 13.8 12.5

MONEY, CREDIT AND PRICES FY74 FY75 FY76(Million K outstanding end of period)

Money and Quasi Money |e 284.0 240.2 224.2Bank Credit to Public Sector -12.4 8.8 13.5Bank Credit to Private Sector 137.9 165.6 181.8

(Percentages or Index Numbers)

Money and Quasi Money as % of GDP 27.3 23.8 22.1Consumer Price Index (1971 = 100) 143.3 154.1 167.3Annual Percentage Changes in:

Consumer Price Index (1971 = 100) 29.1 7.5 8.6Bank Credit to Public Sector -164.2 167.7 53.4Bark Credit to Private Sector 16.6 20.1 9.8

/a Preliminary.

/b High growth rate due to large exports from Bougainville copper mine underfavorable price conditions.

/c At factor cost.

/d Includes salaries and allowance paid by the Australian Government to itsoverseas officers in the PNG public service.

/e PNG was until recently part of the Australian monetary and banking system.Figures on money and quasi money through PY75 are therefore only estimates.

June 23, 1978

ANNEX I

Page 4 of 4 pages

ECONOMIC INDICATORS - PAPUA NEW GUINEA

BALANCE OF PAYMENTS /a MERCHANDISE EXPORTS (AVERAGE FY74-76)

FY74 FY75 FY76 /b US$ Million %

(US$ million)

Exports of Goods 676.3 514.4 455.8 Coffee 47.3 9.2

Import of Goods 330.4 493.9 445.4 Cocoa 42.0 8.2

NF-Service (net) -29.6 -52.2 -60.7 Copra & Copra Products 48.2 9.4

Resource Gap (deficit = -) 316.3 -31.7 -50.3 Timber 22.3 4.4

Copper Ore &

Factor Service Payments Concentrates 328.1 64.0

(net) -306.3 -161.7 -89.7 All Other Commodities 24.4 4.8

Net Transfers 222.6 158.2 122.7 Total

Balance on Current (excl. Re-exports) 512.3 100.0

Account 232.6 -35.2 -17.3

Private Capital -95.4 -34.4 -9.1 EXTERNAL DEBT, DECEMBER 31, 1976

Public MLT loans (net) 53.8 45.2 19.2

Direct Investment 210.2 97.7 48.9 US$ Million

Other Capital n.e.i. 163.7 -143.6 -66.0

Residual (surplus) 237.5 -70.3 -24.3 Public Debt, incl. Guaranteed 336

Nonguaranteed Private Debt -

Net reserves (end year) - 161.1 127.5 Total Outstanding & Disbursed 336

FUEL AND RELATED MATERIALS DEBT SERVICE RATIO FOR FY76 Ic

FY74 FY75 FY76 %

(US $ million)

Imports 28.9 52.5 60.0 Public Debt, incl. Guaranteed 4.7

Exports - 0.1 0.1 Nonguaranteed Private Debt -

Total Outstanding & Disbursed 4.7

RATE OF EXCHANGE IBRD/IDA LENDING (as of 05/31/78)

FY71 FY75 IBRD IDA

US$1.00 = KO.89 US$1.00 = KO.79 (US$ million)

Kl.00 = US$1.12 Kl.00 = US$1.37

Outstanding & Disbursed 54.6 31.3

FY72 FY76 Undisbursed 16.4 16.9

US$1.00 = KO.85 US$1.00 = KO.79 Outstanding incl.

Kl.O0 = US$1.18 K1.00 = US$1.27 Undisbursed 71.0 48.2

FY73 7/1/76 - present

US$1.00 = KO.78 US$1.00 = KO.80K.O00 = US$1.29 KI.00 = US$1.25

FY74US$1.00 = KO.68KI.00 = US$1.47

/a PNG as part of the Australian monetary system had no complete, separate balance of

payments. Figures on private capital and monetary movements are rough estimates. The

country has not had foreign exchange reserves on its own until the last year.

/b Preliminary.

/c Ratio of debt service to exports of goods and nonfactor services.

June 23, 1978

ANNEX IIPage 1

THE STATUS OF BANK GROUP OPERATIONS IN PNG

A. STATEMENT OF BANK LOANS AND IDA CREDITSAs of May 31, 1978

Loan orCredit Amounts (US$ millions)Number Year Borrower Purpose Bank IDA Undisbursed

Three credits and four loans fully disbursed 44.7 11.0 -

326-PNG 1972 PNG Ports 9.2 0.6348-PNG 1973 PNG Livestock 5.0 1.7999-PNG 1974 PNG Power II 10.8 0.9

1333-PNG 1976 PNG Agriculture 12.0 12.0661-PNG 1976 PNG Education 4.0 3.6677-PNG 1977 PNG Roads 19.0 11.0

1551-PNG /a 1978 PNG Ports II 3.5 3.5

Total 71.0 48.2 33.3of which has been repaid 3.8Total now outstanding 67.2 48.2

Amount sold 7.9Repaid 2.2 5.7

Total now held by Bankand IDA 61.5 48.2

Total undisbursed 16.4 16.9 33.3

/a Not yet effective

B. PROJECTS IN EXECUTION /1

Credit No. 326 First Ports Project; US$9.2 Million Credit of July 21,1972; Effective Date: February 8, 1973; Closing Date:April 30, 1978

The original project consisted of extending port facilities at Laeand Kieta, land reclamation for new storage facilities at Port Moresby, a

/1 These notes are designed to inform the Executive Directors regardingthe progress of projects in execution and, in particular, to reportany problems which are being encountered, and the action being takento remedy them. They should be read in this sense, and with the under-standing that they do not purport to present a balanced evaluation ofstrengths and weaknesses in project execution.

ANNEX IIPage 2

new port development at Alotau, provisions of mechanical handling equipment,

and consultant services. Work on all the original port improvements included

in the project has been completed; the contract for improvements to the Ocean

Wharf at Kieta, subsequently included in the project, has been let. Therewill not be any expenditures for mechanical equipment as originally foreseen.

Papua New Guinea Harbours Board's revenues have not kept pace with increasing

operating costs and, in 1976, an operating deficit occurred. Further tariffincreases are required to preserve PNGHB's sound financial position; the

appraisal mission for the Second Ports Project estimated that tariff increases

would permit PNGHB to earn an acceptable return on net fixed assets. Total

cost of the civil engineering projects is practically the same as previously

reported. In order to fully utilize the credit, it was agreed to expand the

area of reclaimed land in the port area in preparation for the proposed

second project. The small remaining balance is expected to be disbursed very

soon, and it is therefore not intended to extend the closing date.

Credit No. 348 Smallholder Livestock Credit Project; US$5.0 MillionCredit of January 4, 1973; Effective Date: May 11, 1973;Closing Date: June 30, 1978

The project supports the Government's program for development of

livestock production by smallholders. Subloans are made through the Papua

New Guinea Development Bank (PNGDB) to smallholders for beef, pig, andpoultry production. Technical assistance to smallholder livestock producers

is provided by the Department of Primary Industry (DPI). The project also

provides for farmer training, in-service training of DPI extension staff, and

for upgrading livestock research. Physical progress of the project has been

good in that the total number of subloans has been in excess of the appraisal

estimate. However, the size of subloans has been much smaller than

anticipated at appraisal and only about 66% of the credit was disbursed atMay 31, 1978. Despite major changes within PNG following independence, the

project has proceeded quite well. The major recommendation of the lastsupervision mission is that DPI and PNGDB establish a system to monitor and

evaluate the projects in order to improve overall project management. In

order to fully utilize the credit, an extenion of the closing date will be

necessary.

Loan No. 999 Second Power Project; US$10.8 Million Loan of

June 12, 1974; Effective Date: December 27, 1974;Closing Date: December 31, 1979

This project consists of three distinct items:

(i) training of local staff to permit an early andrapid reduction of expatriates;

(ii) modest distribution expansion covering needsthrough 1979; and

(iii) a shortfall in foreign exchange for Loan 737-PNGbecause of the devaluation of the US dollar.

ANNEX IIPage 3

Procurement of distribution materials is under way. As for staffrecruitment, ELCOM did experience some difficulty at the time of independencein reaching the target figure due to movement of overseas staff back toAustralia and suitable replacements. Expatriates originally selected astrainers have not always been suitable. To overcome these problems partially,ELCOM employed management consultants to conduct training courses or toprovide guidance. The results have been very encouraging and the project nowseems to be proceeding satisfactorily. Local staff have been graduallytaking over daily operations.

Loan No. 1333 Popondetta Smallholder Oil Palm Development Project;US$12.0 Million Loan of November 19, 1976; EffectiveDate: January 6, 1977; Closing Date: December 31, 1984

The project is designed to establish 9,600 ha of oil palm plantingsand processing facilities around Popondetta. The 4,000 ha nucleus estate andfactory, which are to serve both estate and smallholder production, are beingdeveloped as a joint venture between the Government and the CommonwealthDevelopment Corporation. The Bank-financed portion of the project includes:5,600 ha of oil palm plantings, subdivided into 1,400 smallholder plots;long-term credit facilities for smallholders to be provided through thePNGDB; extension and visiting inspection services; and technical assistancefor project management, social infrastructure, and improvement of the roadnetwork. The nucleus estate company started oil palm plantings in Feb-ruary 1977, about eight months ahead of appraisal estimates. Oil palm andcover-crop establishment, and maintenance standards are satisfactory.Residing settlers have completed about 300 ha of oil palm planting and thenucleus estate about 600 ha, which is ahead of schedule. Smallholder plantmaterial is raised in the estate nursery where seedlings develop satisfac-torily. The oil palm research program is being reviewed by CDC and DPI. Thefirst nursery fertilizer trial has been laid out.

Credit No. 661 Education Project: US$4.0 Million Credit of November 19,1976; Effective Date: January 3, 1977; Closing Date:December 31, 1981

The project is helping to finance the expansion of five educationalinstitutions (in agricultural, health, primary and secondary teacher training,and technical fields) and, in addition, supports planning and studies essen-tial to long-term development of the education and training sector, includingan experimental program at five rural vocational centers. Generally, projectimplementation is on schedule. Progress on civil works is satisfactory.About two thirds of all civil works contracts have been awarded and construc-tion has started at four out of five institutions. Equipment procurement andrecruitment of technical assistance experts are slightly behind schedule.Both the Project Management Committee and the Office of Project Coordinationhave been established. Disbursements are expected to be made on schedule.

ANNEX IIPage 4

Credit No. 677 Second Highlands Road Improvement Project; US$19.0 MillionCredit of January 28, 1977, Effective Date: March 29, 1977;Closing Date: June 30, 1981.

The project would improve and pave 68 km of the Highlands Highway.It would, further, provide detailed engineering and feasibility studies ofthe same highway, in preparation for further improvements in rural develop-ment studies of the Enga and Chimbu Provinces, and technical assistance tolocal civil engineering contractors. Civil works are proceeding generallyon schedule. The Chimbu rural development study will be delayed by aboutnine months, and the Enga study by about 14 months, pending completion of theappraisal of a rural development project in the Southern Highlands, whichshould provide some useful lessons for the Enga and Chimbu studies. Appoint-ment of consultants for the technical-assistance component is expected byJuly 1978.

Loan No. 1551 Second Port Project; US$3.5 Million Loan of May 18, 1978,Planned Date of Effectiveness: August 16, 1978; ClosingDate: June 30, 1981

The project will provide container handling facilities at PortMoresby, with the objective of avoiding ship waiting time, reducing shipturnaround time and significantly reducing cargo handling costs, therebyenabling Port Moresby to realize fully the greater efficiency of containershipping. Major components include land reclamation of 1.6 ha, a 125 mberth, an extension of the present container freight station, and improve-ments to the port access road. Also included in the project are a 30 mcoastal berth at Samarai, located on a small island off the coast of SouthernPapua, and consulting services for project design and implementation, and fortraining Papua New Guinea Harbours Board staff.

ANNEX IIIPage 1

PAPUA NEW GUINEA

RURAL DEVELOPMENT PROJECT

Supplementary Project Data Sheet

Section I: Timetable of Key Events

(a) Time taken to prepare the project : 2 years

(b) The agencies which have prepared theproject: : Departments of Finance;

Primary Industry; Health;Education; Decentraliza-tion; Commerce; Works andSupply; Public ServicesCommission.

(c) Date of first presentation to IDA : August 1974

Date of first IDA mission to considerthe project : February 25, 1975

(d) Date of departure of appraisalmission : August 25, 1977

(e) Date of completion of negotiations : June 9, 1978

(f) Planned date of effectiveness : November 15, 1978

Section II: Special IDA Implementation Actions

The Association plans to send a supervision mission shortly afterBoard approval.

Section III: Special Conditions

(a) Government to establish Agricultural Field Trials, StudiesExtension and Monitoring Unit (para. 36);

(b) Government to establish Media Unit (para. 37);

ANNEX IIIPage 2

(c) PNGDB and PNGBC to require, as a condition for making subloans,that at least three bids be obtained from at least two countries

for items of machinery and equipment costing in excess of $100,000;Government to use local procurement procedures, including forceaccount using hired plant, where appropriate (para. 55);

(d) Receipt of a satisfactory financial plan for tea developmentas a condition of disbursement (para. 56);

(e) Establishment of Headquarters and Provincial Project CoordinatingCommittees and appointment of respective managers as conditions ofeffectiveness, and appointment of Provincial Project FinancialController by December 31, 1978 (paras. 58 and 59);

(f) Government to establish Southern Highlands Management Authority,

and amend the Articles and Memorandum of Association of the SouthernHighlands Development Corporation, as conditions of effectiveness(para. 59);

(g) Onlending terms to PNGDB and PNGBC and terms to subborrowers

(para. 61).

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