1)ocurnent ot The World Bank FILE COPY FOR OFFICIAL USE ONLY Report No. 3161-PNG COUNTRY SECTOR REPORT PAPUA NEW GUINEA AGRICULTURAL SERVICES REVIEW (TWO VOLUMES COMBINED) VOLUME I - RECOMMENDATIONS VOLUME II - ANNEXES January 30, 1981 Projects Department, Agriculture Division II East Asia and Pacific Regional Office This document has a restricted distribution and maN be used b) recipients only in the performance of their official duties. Its contents may not otherwise he disclosed without World Bank authorization. PAPUA NEW GUINEA FOR OFFICIAL USE ONLY AGRICULTURAL SERVICES REVIEW Table of Contents Page No. PREFACE . i . . . . . . . . . . . . . . . . . . . . . . . . . . . VOLUME I: RECOMMENDATIONS A. Background I. THE ROLE AND ORGANIZATION OF AGRICULTURE . . . . . . . . . . 1 Agriculture in the Economy . . . . . . . . . . . . . . . . 1 The Structure of Agriculture . . . . . . . . . . . 1 . . . Economic Policies . . . . . . . . 2 . . . . . . . . . . . 2 Agricultural Services . . . . . . . . . . . . . . . . . . 3 II. PERFORMANCE AND PROBLEMS IN THE AGRICULTURAL SECTOR . . . . 3 Production and Value . . . . . . . . . . . . . . . . . . . 3 Investment . . . . . . . . . . . . . . . . . . . . . . . . 5 Constraints in the Estate Sector . . . . . . . . . . . . . 6 Smallholder Problems .... . . . . . . . . . . . . . . . 7 Decentralization . . . . . . . . . . . . . . . . . . . . . 8 Extension and Research . . . . . . . . . . . . . . . . . . 8 Manpower, Planning and Budgeting . . . . . . . . . . . . . 8 B. Recommendations III. OVERVIEW AND SUMMARY . . . . . . . . . . . . . . . . . . . . 9 Principles ..... . . . . . . . . . . . . . . . . . . . 9 Summary of Recommendations . . . . . . . . . . . . . . . . 11 IV. THE ORGANIZATION AND MANAGMENT OF DPI. . . . . . . . . . . . 14 A National Agricultural Council. . . . . . . . . . . . . . 14 A National Agricultual Advisory Council. . . . . . . . . . 15 Regional Support Units . . . . . . . . . . . . . . . . . . 15 Provincial Rural Development Officers . . . . . . . . . . 16 Reorganization of Central DPI. . . . . . . . . . . . . . . 16 Coordination with Other Departments . . . . . . . . . . . 17 Administration and Staffing . . . . . . . . . . . . . . . 19 Housing and Offices . . . . . . . . . . . . . . . . . . . 20 Divisional Administration. . . . . . . . . . . . . . . . . 20 Data Storage . . . . . . . . . . . . . . . . . . . . . . . 20 Staff Travel . . . . . . . . . . . . . . . . . . . . . . . 21 Job Descriptions and Salaries . . . . . . . . . . . . . . 21 | This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. -2- Page No. V. POLICY FORMULATION AND PLANNING . . . . . . . . . . . . . . 22 National Level Planning .22 Use of Strategic Objectives. . . . . . . . . . . . . . . . 22 NPEP Documentation and Review . . . . . . . . . . . . . . 23 Provincial Planning . . . . . . . . . . . . . . . . . . . 23 A DPI Five-Year Development Plan .23 VI. AGRICULTURAL EXTENSION SERVICES . . . . . . . . . . . . . . 24 Extension Division .24 Regional Units .25 Provincial Organizations . . . . . . . . . . . . . . . . . 25 Livestock and Fisheries Extension . . . . . . . . . . . . 26 Field Credit Services .26 Development Programs .27 Information Branch .27 VII. RESEARCH SERVICES .27 Research Organization .28 Field Stations .28 Liaison with Extension Staff . . . . . . . . . . . . . . . 28 Evaluation of Research Programs . . . . . . . . . . . . . 29 Industry-organized Research . . . . . . . . . . . . . . . 29 Research Priorities .30 Labor Productivity Research . . . . . . . . . . . . . . . 31 A Research Services Subproject . . . . . . . . . . . . . . 32 VIII. MARKETING OF EXPORT CROPS . . . . . . . . . . . . . . . . . 32 DPI Commodity Purchasing .32 Quality Control .33 Price Stabilization .33 Coffee Board Management Levy . . . . . . . . . . . . . . . 34 Copra Two-Payments System .34 IX. ENCOURAGEMENT OF THE PRIVATE SECTOR . . . . . . . . . . . . 34 The Estate Sector .35 Land Legislation and Administration . . . . . . . . . . . 37 Private Sector Services .38 Negotiations with Investors . . . . . . . . . . . . . . . 38 National Investment Priorities Schedule (NIPS) . . . . . . 38 Monetary and Related Policies . . . . . . . . . . . . . . 39 Replanting Incentives .39 Export Taxes .40 Import Substitution ................. .. . 40 -3- Page No. APPENDICES 1. Proposals for Further Work. ................. 41 Five-Year Agricultural Development Plan.41 Manpower and Training Review.42 Preparation of a Support Services Project. . . . b..c.v. 43 Review of the Estate Sector . . . Industry45 Tree Crop Replanting Levies and Subsidies. .46 Research on Land Policy Issues.47 Review of DPI Marketing Section Operations.47 Quality Control of Export Crops. . Service48 Job Descriptions and Salary Rview of DPIC.48 Exchange Rate Policy and the Export Sector.48 Import Substitution Studies .49 2. Production and Exports of Major Crops. ........... 50 FIGURE 1: Draft Organization for DPI ....... ....... 18 VOLUME II: THE ANNEXES A. The Departmnent of Primnary Industry: Organization, Staffing and Management B. Policy Formulation and Planning Appendix 1: 1980 NPEP Allocations by Strategic Objectives Appendix 2: Government Spending in Primary Industry Appendix 3: NPEP Implementation, DPI, 1978 and 1979 C. Agricultural Research Services D. Crop Production and Extension Services Appendix 1: Outline of an Improved Extension Service E. Marketing and Credit F. Investment Incentives and Constraints G. Land Tenure PREFACE 1. This review was requested by the Government of Papua New Guinea (PNG), particularly as a result of concern at the recent disappointing production performance of the agricultural sector and at low levels of maintenance and reinvestment within the sector which col ~e affect future production. This concern related especially to the tree crop export industries, largely in the estate sector. There was also widespread concern over the standard of services being provided to agriculture and the lack of progress in achieving government objectives, including that of increasing food production. 2. The terms of reference for the mission /1, which visited PNG from May 21 to June 13, 1980, were to review and evaluate the structure and effectiveness of services available to the agricultural sector and assess local capacity to develop appropriate strategies and policies and prepare projects in the sector, and to make proposals to Government for strengthening these services. In order to limit its tasks in a short visit, the mission focussed on the tree crop subsector but did not confine itself to this area if the opportunity to broaden the enquiry presented itself. 3. In PNG the mission held discussions with staff of most of the agencies involved with the agricultural sectors. These included, inter alia, the Department of Primary Industry (DPI), the National Planning Office (NPO), the Department of Finance, the PNG Development Bank (PNGDB), the Public Services Commission, the University of PNG, the Departments of Lands, Commerce and Decentralization and the National Investment and Development Authority. Outside the government sector, discussions were held with small farmers, planters, management agencies, marketing agencies, industry boards, banks and other firms providing services to the sector. Various members of the mission made visits to 9 of the 19 provinces where they were received by provincial officials and field staff. At the conclusion of its stay in PNG the mission was honored by a meeting with the Prime Minister, Sir Julius Chan. 4. A draft of the report was issued in October 1980 and sent to Papua New Guinea for review. The reactions of staff in the various Divisions of DPI, and in NPO, Finance and PNGDB where elicited by two members of the mission /2 who visited Port Moresby in December. The major changes made to the report as a result of those meetings are that a few factual errors in /1 The mission and their principal responsibilities were: John Cleave, Chief of Mission; Alice Galenson, Central and Provincial Planning, Marketing and Incentives; Brian Gray, Research (Bank); Phillip Judd, Extension; Kenneth Woodward, DPI Organization and Planning and Land Tenure (Consultants). /2 John Cleave and Alice Galenson. - ii - the draft have been corrected; a summary of recommendations has been added (paras. 3.07-3.18); the proposed content of a Manpower and Training Study has been enlarged upon (Appendix 1, paras. 3-5); and footnotes have been added to bring the report up to date, particularly in regard to initiatives already taken by government. The most important of these arise from the 1981 budget speech of the Minister of Finance, delivered on November 4, 1980. 5. This report consists of two parts. Volume I comprises a brief background to the agricultural sector and its problems, a summary of the mission's comments and recommendations, and some suggestions for further work (Appendix 1). It is addressed principally to the Government of PNG rather than the Bank. It does not, therefore, include any more background than is needed for reviewers to understand the setting. Volume II is a series of Annexes based on the subject papers prepared by individual mission members on their areas of responsibility, in which the arguments are more fully developed. The reader interested solely in the broad thrust of the mission's views could confine his or her attention to Volume I. 6. Inevitably this report presents an outsider-s view. However, many of the positions the mission has embraced originated from people in Papua New Guinea, and in this the mission was most fortunate, for it found a wealtb of experience and ideas on which to draw, and wcAl articulated views to test. It wishes to acknowledge the patient help, courtesy and hospitality of all those in government and the private sector who so unstintingly gave of their time and knowledge and who in so many ways helped the mission in its task and made its stay in Papua New Guinea both pleasant and rewarding. PAPUA NEW GUINEA AGRICULTURAL SERVICES REVIEW A. Background I. THE ROLE AND ORGANIZATION OF AGRICULTURE 1.01 Agriculture in the Economy. The agricultural sector in PNG contri- butes roughly one-third of gross domestic product. Agricultural exports contribute over 40% of total exports, or over 50% if forestry products and fish are included./l They are the only major exports from PNG outside of the copper concentrate produced by one large mine, and so are of great importance to the balance of payments. Within the sector, three tree crops - coffee, cocoa, and copra - contribute about 90% of the export earnings for agricul- tural goods. On the import side, food imports make up close to one-quarter of total imports and provide about one-quarter of domestic food consumption. A large proportion goes to the major urban centers, Port Moresby and Lae. 1.02 Agriculture is even more important for employment and incomes than it is for output or the balance of payments, since the copper mine operates as an enclave and employs few people. Some 85% of the population live in rural areas, and most of them are engaged to some extent in agricultural activities. 1.03 The Structure of Agriculture. There are three basic modes of agricultural production. The subsistence sector, which contributes an estimated 40-50% of total agricultural output, encompasses most of the rural population, as well as some urban residents, although probably less than 5% of the population relies exclusively on this means of support. Second, most of the rural population is also engaged to some extent in the commercial sector, producing cash crops on smallholdings for the domestic market and for export. The first experience in the market for many people is through the sale of surplus subsistence production; and even when they have started to produce for sale, they usually maintain some subsistence cultivation and move in and out of the market in response to relative prices. A few smallholders are organized around nucleus estates (notably in oil palm), and some others have formed groups to purchase and operate plantations formerly owned by nonnationals. Third, there are some 500-600 export-oriented plantations on which many Papua New Guineans work for wages./2 These /1 Further references to the agricultural sector will exclude forestry and fishing unless otherwise specified. /2 Estimates of agricultural employment vary widely, but they give at least an order of magnitude. One estimate is that approximately 385,000 self- employed smallholders are engaged in export crop production and about 45,000 people work for wages in the sector. This compares with esti- mated nonagricultural wage employment of roughly 150,000. - 2 - plantations, which were mostly owned by nonnationals, are gradually being taken over by nationals, or by the Government as a first step in transferring them to national ownership./l The Government also participates to a small extent as a partner in the development of estates. 1.04 Agriculture figures prominently in the Government's priorities for investment. The national development strategy articulated in 1976 called for an emphasis on rural development as the major source, in the medium term, of employment and income, and the three National Public Expenditure Plans (NPEP) that have come out since then have reflected this orientation. Within the public sector, the prospect is for steady but modest growth in the real level of total government spending. Over the next few years, this is likely to be about 3% per year, permitting an annual increase per bead of population of under 1%. The share of total government spending going to the recurrent activities of the Department of Primary Industry /2 (DPI) has been stagnant over the past few years at just over 6%O. However, other government spending on the development of primary industries is almost as much again, taking the 1980 appropriation for primary industry spending to about 11-1/2% of total government appropriations. 1.05 Economic Policies. The Government maintains an economy which, in terms of trade and monetary controls, is very open. The balance of payments situation is sound, and the Government maintains a hard currency strategy which helps contain inflation and the growth of money wages. Tariffs are relatively low and recourse to quantitative import restrictions rare. Nonetheless, economic nationalism is an important part of government policy. Investment by foreigners is controlled by NIDA; the employment of foreigners is controlled by the Departments of Labor and Foreign Affairs; the ownership of land by foreigners is restricted. The objective of these controls is to increase the involvement in the economy of PNG citizens both as proprietors and employees. 1.06 The Government also has egalitarian goals regarding the distribution of income within the Papua New Guinean population. It has attempted to moderate the rate of increase of wage differentials between the higher and lower income earners. It has also promoted the ownership of buinesses by groups rather than individuals. Geographically, as well, it has attempted to channel additional resources into areas which are relatively backward in /1 This policy is now being questioned, with a new emphasis on developing new production by nationals in both the smallholder and plantation mode. The term 'nationalV refers to citizens of PNG. -National ownership- is not State ownership. /2 The "primary industries" are agriculture, livestock, forestry and fisheries. - 3 - economic terms. In the light of disappointing rates of economic growth, however, recently greater emphasis has been put on growth in the agricultural sector, and there has been some shift from the distributi -al emphasis for the sector to more growth-oriented goals. The Prime Minister stated in a recent speech that for the next ten years increased productivity must be the primary goal in the agricultural sector./l 1.07 Agricultural Services. Services to the sector are provided by many organizations from both the government and private sectors. Within Government, DPI is the most active. It operates at national level and in the 19 provinces into which the country is divided. At the national level, it is responsible for developing policy in the sector and provides a range of services including research, specialist technical advice, marketing, planning, management and economic services. It also maintains quarantine services, and represents PNG at relevant meetings of international organizations. The extension service was made a provincial responsibility with the creation of provincial government in 1977. It is directed principally at the subsistence and cash crop activities of smallholders. 1.08 Private sector organizations are involved in most aspects of the industry including production, input supply, management, financing, processing, transporting and marketing. In the oil palm industry, a government/private joint venture is also responsible for research. 1.09 Industry or commodity boards have been established by statute for the copra, coffee, cocoa and rubber industries, and government has formed corporations to undertake food marketing, plantation management, and pyrethrum processing. The PNG Development Bank (PNGDB), which is a statutory government institution, has a special role in providing credit for smallholder agricultural development. Other government departments, especially the Department of Lands, Surveys and Environment and the Department of Commerce and Industry assist in the incorporation of agricultural businesses and securing land. The National Investment and Development Authority (NIDA) has a role in promoting investment and assisting potential investors in defined priority areas. II. PERFORMANCE AND PROBLEMS IN THE AGRICULTURAL SECTOR 2.01 Production and Value. In recent years the nominal value of PNG's major agricultural exports has risen over 400%. Even deflating to eliminate general price increases, the purchasing power of these exports rose by some 150% from 1973 to 1979. This result is, however, largely the result of /1 Sir Julius Chan, "State of the Nation," address to the National Parliament, June 24, 1980. - 4 - VALIET OF MAJOR AGRI'rULTITPAL TrXPnpTS (YV000,f.o.b.) (a) (b) (c) (c)/(a) 1973 1976 1079/a 7 CofEee 23,395 100,160 124,996 534 Cocoa 11,175 39,137 60,872 545 Copra and oil/b 13,065 20,341 58,761 450 Rubber 1,993 2,653 3,497 175 Palmi oil 1,148 6,776 14,441 1,25P Tea 2,048 5,114 7,932 390 Total 52,823 174P181 270 549 512 Total 1973 Terms/c 52 823 119,139 130,226 243 /a Preliminary figures. /b Copra oil data for July-June year. /c Deflated by the International Price Index. buoyant prices for key crops: over the same period PNr production of several of these crops has either fallen or stagnated. In spite of good prices, production of copra, cocoa and rubber is below the levels reached in the early 1970's. Palin oil production is slightly up, but is a newj industry expanding from a small base and is still of minor importance. On the other hand coffee and tea production have been expanding steadily. Imports of food, principally rice, canned fish, sugar and maat, have about doubled in real terms as demand has increased. 2.02 This performance has not, however, been uniform across the sector. While production of major crops on smallholdings has increased steadily in recent years, that on largeholdings has been erratic and overall has seriously reduced in the period since independence. Given this performance, SMALLHOLDER PRODUCTION (MT) (a) (b) (c) (c)/(a) 1973-74 1976-77 1979 % Coffee (green beans) 24,382 27,195 33,069 135 Cocoa 11,195 11,905 14,363 128 Copra 54,051 60,494 65,606 121 Rubber 248 554 555 223 Oil Palm (ffb) 98,722/a 90,721 108,438 110 Tea n.a. 235 188 - /a 1974-75 PLANTATION PRODUCTION (MT) (a) (b) (c) (c)/(a) 1973-74 1976-77 1979 % Coffee (green beans) 9,702 7,521 14,104 145 Cocoa 18,067 13,524 11,238 62 Copra 72,696 74,958 62,978 87 Rubber 6,051 3,868 3,688 60 Oil palm (ffb) 50,115/a 58,524 57,769 115 Tea 3,862/a 5,390 6,278/b 163 /a 1974-75 /b 1978 it is not surprising that employment on largeholdings has fallen from about 52,000 in 1970 to under 45,000 at present. 2.03 Investment. Not only has production in the large-scale sector been poor in recent years but private investment in primary industry has also been disappointingly low. This applies particularly to tree crops. Coffee is the only established estate tree crop in which the rate of replanting has been sufficient to maintain production in the long run, and this rate has dropped steadily in the last five years. Indeed, apart from oil palm which was essentially established in the 1970s, the private investment rate has declined throughout the decade, even in money terms, and in some years showed a net disinvestment (Annex F). The data do indicate a more healthy replanting situation in the smallholder sector, but they - 6 - reflect plantings in 1976, prior to decentralization, when the extension service was more experienced and better supported. Recent observation suggests that standards of maintenance and replanting on many smallholdings are in urgent need of attention, though the deterioration may not yet be reflected in production. AREAS AND REPLANTING OF MAJOR CROPS Largeholdings Smallholdings Area New plantings Area New 1976 1976 1979 1976 Plantings (HA) (%) (%) (HA) (7) Coffee 6,600 6.7 5.0 40,600 6.7 Cocoa 54,900 1.9 1.6 73,300 18.7 Coconuts 89,300 1.6 0.3 167,300 9.0 Rubber 7,700 1.0 0.8 n.a. n.a. Tea 3,200 0.2 - n.a. n.a. Source: Annex F, Tables 1, 2. 2.04 Constraints in the Estate Sector. The factors causing the decline in production and investment in the largeholding sector are fairly clear, and have been recognized in PNG. Principal among these is the operation of the Plantation Redistribution Scheme, established in 1974 to facilitate the acquisition of foreign-owned estates and their transfer to traditional landowners. As conceived the scheme was particularly intended to meet the demands of nationals who were short of land for subsistence production, was expected to operate for a limited period, and as far as possible priority was to be given to acquisition of undeveloped alienated land. However, the legislation which emerged in the haste and urgency of the achievement of Independence has proved deficient, and, largely because of PNGCs complex land tenure system, little transfer of acquired plantations to customary owners has taken place so that production could continue under new control. Moreover, uncertainties on whether and when the remaining estates would be acquired, and shortcomings in the valuation system on acquisition, have resulted not only in little reinvestment and maintenance taking place in the estates but in some cases serious neglect and the withdrawal of essential management. 2.05 This situation has been aggravated by the level of wages paid in PNG. Minimum rural wages are legislated and are at a level which is not only several times the earnings typically possible for self-employed smallholders but are also high by Pacific region standards and markedly higher than those in many countries producing similar export crops. However, there is no evidence that rural labor productivity is higher in PNG than elsewhere. - 7 - 2.06 On the other hand there are a number of features of the economy which at least do not inhibit privately financed development in the sector. Export taxes on agricultural produce are nominal and car be suspended when world prices are low. Internal price stabilization schemes, which are applied to most of the export crops, are usually held to be an incentive rather than a disincentive, although this may depend on producers view of their future tenure. The quality controls on exports and industry regula- tions appear to be reasonable although some would bear examination. Govern- ment-s open economy, free enterprise, philosophy creates a general atmosphere conducive to private investment, and - although it could be revised to more emphatically encourage tree crop investment - governments- National Investment Priorities Schedule (NIPS) does hold the door open to foreign investment. Finally, although sometimes questioned, there is no clear evidence that the hard currency strategy has been a major disincentive. As a relatively small supplier to the world market PNG is a price taker and can sell all of its production. While a policy of slow but steady appreciation of the kina will have a long-term impact on the competitiveness of PNG-s products, given the large international price increases of the past decade, profit margins in PNG have probably not been squeezed. Other factors appear to have been much more important influences upon production than the exchange rate. 2.07 Probably the most important factor within the control of government for encouraging new investment in the estates in PNG is to restore long-term security of tenure for investors: "security" in this context not implying an inviolate and perpetual right to a landholding, but a convincing guarantee that any acquisition of alienated land would be at a free market valuation or its equivalent to provide a full discounted return on all productive investment, including maintenance, in the estate. 2.08 Smallholder Problems. Important though they are, largeholdings are not the only, nor even the dominant, area for concern in PNG. Of greater long-term significance is the smallholder sector, both for its production potential and for its strategic importance in meeting the country's Eight Aims which may be summarized: (a) to increase the proportion of the economy under local control; (b) a more equal distribution of economic benefits; (c) a decentralization of economic activity; (d) an emphasis on small-scale indigenous business; (e) self-reliance, which implies, inter alia, an improved balance of payments position; (f) increasing the local revenue base; (g) an increase in the active participation of women; and - 8 - (h) government involvement where necessary to achieve these desired developments. 2.09 The rural population in PNG is in a state of transition, emerging from systems in which agricultural production was entirely for family subsistence to embrace production for sale. Considering how recent exposure to markets has been for most of the rural population and how limited access still is in many parts of the country, the pace of change has been remark- able, the responsiveness of PNG smallholders proven. But while adequate incentives are no less a necessary condition for development and production of smallholders than of estates, there are additional constraints in the smallholder sector which need to be faced and overcome if its potential is to be realized. It was these problems, and in particular the provision of adequate support services, with which the mission was largely concerned in its review. 2.10 Decentralization. The creation of provincial governments envi- saged the sharing of responsibilities and resources between national and provincial authorities to provide for greater control at a local level over the amount and type of services provided. In the case of DPI, responsibility for extension services and local planning and implementation was transferred to provincial government, while central DPI was to provide technical advice to the provinces on all aspects of primary industry. Although this was a logical division of responsibilities, the organization of DPI has not been sufficiently adapted to take account of the change. Changes are needed in recognition that policy powers are now shared between a national Minister for Primary Industry and 19 provincial Ministers for Agriculture; that the provincial DPI extension services are administratively independent of national DPI; and that a major function of national DPI should be the support of provincial extension services. 2.11 Extension and Research. The operation of the extension services in the field leaves much to be desired. Many staff are engaged in a range of activities only marginally related to extension work, there are only limited extension programs, and there is little supervision of extension activity. 2.12 Agricultural research in PNG over the past 30 years appears to have been adequate in the areas dealt with. However, there is a need to improve the conversion of research results into useable extension advice, and new efforts are needed to redress recent declines in research resources, and to keep up with world wide advances in plant breeding. To adapt to the growing dominance of the smallholder in agricultural production, research priorities need to be reviewed and programs adapted. 2.13 Manpower, Planning and Budgeting. The decentralization process, begun shortly after independence, has been complicated by a number factors. There were frequent changes of senior staff postings resulting from loss of - 9 - expatriates and expansion of the national public service. In consequence, many public servants have little experience with their current positions and responsi;bilities. 2.14 Concurrently, the role of the National Planning Office was being expanded and a more rigorous scrutiny at national level of spending proposals introduced. Although commendable in their objective, these appear to run somewhat counter to the thrust of decentralization, and have made new demands on the limited planning and implementation manpower in DPI. Given the need for agricultural growth to provide income and employment for the large majority of the population for many years to come, it could be argued that this sector should receive a higher proportion of government resources, and certainly the objectives adopted for determining priorities favor the allocation of an increasing share for the development of primary industries. However, currently a major problem has been the inability of DPI to expend the funds available to it. B. Recommendations III. OVERVIEW AND SUMMARY Principles 3.01 The key concern for the agricultural sector in PNG today is, with due regard to distributional objectives, how to encourage more resources to flow into the sector, and how to increase the productivity of existing resources in order to promote more rapid development of the sector as a whole. This is largely a structural question: the areas for concern are more the allocation of resources and the organization of services than product pricing in particular or incentives in general, with the important exception of the removal of uncertainties over the future of estates. The structural issues can be resolved into three broad questions: (a) What should be the respective roles of government, para-statal organizations and the private sector in agricultural production and the provision of services to agriculture? (b) What should be the relationship between the central and provin- cial governments in the provision of planning and implementation services to the agricultural sector? (c) What should be the relative roles of plantation mode and small- holder production in the future of Papua New Guinea. 3.02 It is recommended that government consciously encourage the pri- vate sector to engage in the provision of agricultural services whenever - 10 - possible, thus releasing its own scarce resources for areas where it is difficult for private business to capture a return. In particular govern- ment should emphasize services to smallholders and food crop production, leaving estate crop services to the private sector, including industry boards. This should include areas of research and as much marketing as possible. 3.03 The provincial structure is an essential and lasting feature of the country, the creation of which changes the role of central government. Central DPI and other departments are not currently geared either organiza- tionally or in outlook to fulfill what should be their prime role, to assist the provinces in carrying out their allocated functions. It is, therefore, recommended that a reorganisation of the divisions of DPI take place to emphasis this role; that advisory and technical assistance services be decentralized as far as possible (principally to a level corresponding to the former Regions); and that regular policy and executive level meetings between central and provincial personnel be instituted to provide coordi- nation and feedback on areas of mutual concern. 3.04 Plantation mode and smallholder production in PNG are generally complementary to each other rather than competing. Government's strategy should be to develop each according to its comparative advantage. A short- run increase in the rate of agricultural growth can best be achieved by relatively simple, if politically bold, measures to restore the confidence of foreign investors in the estate sector, and these steps should be taken. The longer run future of the country undoubtedly rests with todays smallholders who, however, may - and should be encouraged to develop into diverse organisational forms: family farms, limited or clan groups, outgrowers to nucleus estates, or owners of professionally managed estates. 3.05 In the interests of efficiency, as far as possible, market forces should continue to be allowed to operate in determining the pattern and area of production and the level of services to agriculture. However, within the constraint that overall the agricultural sector will generally have to be able to be self supporting, simply because it is so large and important in the economy, the discrete use of subsidies to help the development of underpriviledged areas or sections of the population should be accepted. In many cases subsidized services, e.g., for marketing and credit, can be obtained most efficiently by paying the private or quasi-private sectors to provide them. 3.06 In sections IV through IX these principles are enlarged upon in the form of detailed recommendations. They should be viewed as a basis for discussion and policy formulation within PNG. Given the resource constraints, government in general and DPI in particular needs to take more definite steps than heretofore to set priorities for action, and this would apply to the ideas expounded below. In particular the extent and timing of adoption of many of the recommendations will depend on the availability of manpower and training facilities. It is understood that the manpower and - 11 - training review, recommended in the report, is already being planned by DPI. This move is strongly endorsed. It is to be hoped that high priority will be given to establishing the key training facilities (or F'eking overseas training positions as appropriate) shown by the review to be needed. As an interim measure maximum use should be made of bilateral or international technical assistance to provide skilled personnel on contract. Summary of Recommendations 3.07 The mission's recommendations have been grouped for convenience into six sections dealing in turn with: the organization and management of DPI; policy formulation and planning; the extension services; research services; marketing of export crops; and the encouragement of the private sector. The key points are summarized in the following paragraphs and developed in sections IV through IX. 3.08 The Organization and Management of DPI. The interrelated recommen- dations in this area are aimed in particular at meeting needs arising from the establishment of provincial governments. It is proposed that a National Agricultural Council (NAC) comprising the national and provincial Ministers of Primary Industry and Agriculture be created and meet regularly to establish policy; and that, at the senior civil service level, a National Agricultural Advisory Council (NAAC), comprising central division heads and Provincial Rural Development Officers (PRDOS), he created both to service NAC and to resolve implementation problems. To improve the technical support to the provincial services it is proposed that as far as possible DPI specialist staff should be decentralized, located in appropriately defined regions. A further major recommendation is for restructuring central DPI into functional divisions including separate extension, crop research, and development service divisions, and that consideration be given to the creation of an additional Deputy Secretary position within DPI, one deputy to oversee the technical areas of DPI work and the other the service functions. Other recommendations concern improved staff training programs and personnel policies. 3.09 Policy Formulation and Planning. Increased use of sectoral programs, rather than strategic objectives, as a means of allocating planned public expenditures to national departments and to provinces is proposed. An enhanced role is seen for the National Planning Office (NPO) in assisting departments and the provinces to plan and prepare projects; for the latter it is proposed that NPO post planning teams to regional centers. Some further simplification of NPEP approval and monitoring procedures would free NPO resources for this function. It is proposed that DPI give high priority to the preparation of a (say) five-year development plan in the context of which there should be a systematic evaluation of DPI-s ongoing activities and a review of priorities. - 12 - 3.10 Because of the need to associate planning with decision-making bodies, preparation of the plan could best be carried out by a policy secretariat which should be established to service the NAC and NAAC (para. 3.08). It is suggested that this be provided by the Planning, Economics and Marketing Division (PEM) which would, however, need strengthening to effectively take on these tasks. 3.11 Agricultural Extension Services. There are four principal recommendations for strengthening agricultural extension services: (a) that an Extension Division be formed in central DPI to provide a section with the specific function of assisting and guiding the operations of the extension service, and providing staff training, extension programming assistance, technical advice, and extension literature; (b) that close support to the provincial extension staff be provided by the establishment of regional support units answerable to the Extension Division; (c) that steps be taken to facilitate the withdrawal of provincial extension staff from as much as possible of their nonextension tasks - credit supervision, marketing, enforcement, statistics collection and development work - to allow them to concentrate on their prime function; and (d) that the training and visit (T&V) system of extension, which appears to be particularly appropriate to PNG conditions, should be tried out on a pilot basis in one or two provinces. 3.12 Research Services. Although dealing in particular with tree crop research, the mission voiced a general concern at the lack of planning of agricultural research activities and coordination among them. It recommends the creation of a single research organization under the control of a Director of Research, supported by a small central technical unit charged, inter alia, with improving liaison between research and extension staff and providing continuous monitoring of the appropriateness of the research program in the light of extension feedback. The unit would help formulate new research proposals and priorities to be reviewed by a regular - probably bi-annual - meeting of senior research and extension personnel, and would also have responsibility for translating research results into practical extension advice. 3.13 Most technical staff should continue to be on field stations. It is desirable that the focus of such stations work corresponds to the agro- ecology of the surrounding areas and to the geographical coverage of the extension service. It is, therefore, recommended that major research centers, supported by a system of substations and adaptive field trials, be established - 13 - in each of the regional administrative areas used to provide decentralized extension support to the provinces (para. 3.11(b)). It is further recommended that the tree crop industries (for which this is particularly feasible) be given every encouragement to fund and carry out their own research, under government supervision, thus freeing government's resources for other purposes. 3.14 Research priorities need to be reviewed in conjunction with the preparation of the five-year plan, with particular consideration given to the need for food crop research, smallholders farming systems research, soil surveys and land use planning and, for tree crops, to plant breeding, the use of high yielding varieties and their nutrition, and pest and disease control. 3.15 Marketing. In line with the recommendation that extension workers should concentrate on that primary function (para. 3.11(c)), and because private operations would be more efficient, it is suggested that as far as possible, private buyers be induced to take over the marketing activities of the extension services. To do this, some measure of support payment to private buyers would be needed, and, to establish what level could be justified, the present costs to extension of marketing work should be calculated. Reviews are also proposed of current approaches to quality control in the main export crops, of the possibilities of cross-borrowing among stabilization funds to reduce the overall funding needed to achieve reasonable internal price stabilization, and of options for the use of STABEX funds available to PNG. 3.16 Encouragement of the Private Sector. The recommendation that DPI divest itself of marketing activities is in keeping with the general principle that maximum advantage should be taken of private participation in production and the provision of services and that government policies and actions should encourage such participation. To this end, the mission endorses the major recommendations of the 1979 Committee of Review into the Plantation Redistribution Scheme in which the important elements are to encourage main- tenance and reinvestment in estates by providing assurance to owners that an decision to acquire an estate will be based on the genuine need of the traditional landowners, that the acquisition price will be a fair market price, and that realistic notice be given of an intention to acquire. To do this, the PRS legislation would need to be repealed, and could be replaced by a relatively minor amendment to the Land Act. 3.17 A survey of unused alienated land, to be followed by feasibility studies of means of developing such land, is urgently needed. Early atten- tion is also needed to building up the country's land administration capacity, a critical constraint on new development being the lack of staff to identify developable land, deal with claims, survey, and issue leases. - 14 - To encourage potential new investors, it is suggested that some reclassifica tion of the National Investment Priorities Schedule (NIPS) be undertaken, particularly for tree crops. 3.18 Further Work. An Appendix to the report makes some proposals for further work, including, inter alia the preparation of a five-year Agricul- tural Development Plan; a manpower and training review; the preparation of a support services project including research, extension and training components; a review of the estate sector to identify priority areas for redevelopment; a study on land policy; and a review of tree-crop replanting levies and subsidies. Provision of funds for such tasks has been made in the Third Agricultural Credit project, a loan for which is expected to be approved in 1981. IV. THE ORGANIZATION AND MANAGEMENT OF DPI 4.01 DPI and the provincial agricultural extension services dominate goverrnment eftorts in agricultural development and their effectiveness is crucial to the performance of the sector. The management structures of thes organizations have not been comprehensively reviewed since the decisiua - o- made to establish provincial governments. The mission believes that several organizational changes should be made to accommodate this and other developments. 4.02 A National Agricultural Council. At the policy level, responsibi- lity for primary industry is shared between the national Minister for Primary Industry, who is responsible for a range of matters of national application, and the provincial Ministers, who are responsible for the operation of exten- sion services. On the one hand, there is a need for extension activities to conform to any policies or constraints imposed from the national level and to maintain some consistency in the type of service provided. On the other, there is a need for the national DPI organization to be responsive to any need for assistance which arises in provinces and to consider the extension implications of national policy issues. 4.03 There is clearly a need for all involved ministers to consult each other regularly and as a group./l No arrangements have yet been made for /1 A decision to form a National Agricultural Committee was announced in the Budget Speech on November 4, 1980. It is to comprise the Prime Minister, as Chairman; the Minister for Primary Industry, Alternate Chairman; and the Ministers for Finance, National Planning and Lands. In August 1980 the Minister of Primary Industry and the provincial ministers met in the first of what is to be an annual conference. At the same time a meeting of PRDO's was held. While this last would not appear to fully meet the proposal of para. 4.04, clearly Government is taking major steps towards establishing a framework for policy development and coordination, and it is understood that steps are to be taken to formalize the role of Assistant Secretaries in the PRDO's meetings. - 15 - such consultation. It is recommended that a National Agricultural Council (NAC) comprised of all ministers of Primary Industry and Agriculture, be established and meet regularly. Meetings once, or even twice, per year would be appropriate but the decision on frequency of meetings shoull be made by those involved in the light of their workloads and logistical considerations. It is desirable, however, that some regular timetable should be adopted, not only because the membership of the NAC would require long notices of meetings if full attendance is to be achieved, but also because there is always a danger that ad hoc meetings will be deferred. Meetings of a Nlational Agricultural Council should be so timed that they can be a key element in the planning cycle for the sector providing an essential input into the planning and budget cycle. 4.04 A National Agricultural Advisory Council. Within the DPI public service there is a similar need for regular, formal contact between national and provincial management. At headquarters the need for contact between top management of the various divisions has been recognized and a Standing Committee formed to provide an appropriate forum. If Provincial Rural Development Officers (PRDOs) were added to the Standing Committee, the expanded committee could perform at the public service level the function the NAC would perform at the political level. It is recommended that the Standing Committee be expanded in this way to form a National Agricultural Advisory Council (NAAC). One of its major functions would be the identification of issues and preparation of material for consideration by NAC. In addition, it would consider issues which did not require referral to NAC. 4.05 It is recognized that membership of the NAAC will be about 30 and that this will cause problems in terms of cost of attending meetings, ensuring full participation in discussion and finding times convenient to all members. However, these problems could be reduced by appointing working subcommittees to deal with particular issues. Division by commodities, for example, would permit some reduction in numbers. In addition, with a capable and active secretariat (para. 5.09) many issues could be resolved outside formal meetings by telephone or by circulating written material. 4.06 Regional Support Units. At this stage of PNG's development, it is not possibIe to provide the full range of technical specialist and other support services to each province. Nevertheless, if the extension services are to be effective they must have access to such support. Some specialist staff of central DPI are located outside Port Moresby, but the vast majority are based at headquarters. This gives rise to problems of access, of high cost of travel to provinces, and consequently of the staff getting out of touch with the extension service and field conditions. It is recommended that as many of these specialist staff as possible be relocated to regional centers. The specialist staff at each region should include at least one economist to provide planning assistance to all provinces in his region. Rabaul, Madang, Mt. Hagen and Port Moresby would appear to be suitable - 16 - regional centers but in selecting centers account would need to be taken of the availability of housing and office accommodation. This move, combined with other clhanges recommended in the extension and research services, should lead to the extension services having more accessible and responsive support and to central DPI having a better appreciation of extension issues. 4.07 This proposal seems to be in line with thinking on more general aspects of decentralization within the Administrative Improvement Programme of the Public Service Commission (para. 4.15). Should other departments also establish regional support centers, the benefits to DPI of relocating some of its staff to regions would be enhanced. 4.08 Provincial Rural Development Officers. The operation of extension services is a Provincial function and PRDOs are responsible for their effective operation. They are administratively separated from the central DPI organization and the position entails heavy responsibilities. In recent years, many of the more experienced and capable PRDOs have been brought to headquarters on promotion to positions which seem to be less important than PRDO positions. 4.09 It is recommended that the level of PRDO positions be reviewed and consideration given to raising their status approximately to that of headquarters Assistant Secretaries. It is also recommended that the national public service retain a strong involvement in the appointment of PRDOs. This should ensure that the most able officers available in the country are appointed and that a secure career can be offered to people accepting PRDO appointments. Consideration might also be given to a systematic rotation of PRDOs between provinces (postings of about three to four years might be appropriate to ensure mobility and the periodic injection of new ideas into provinces, without unreasonably rapid turnover) and the establishment of a clear policy that success in provincial posts opens the way to high-level promotion. 4.10 Reorganization of Central DPI'S A rearrangement of divisional responsibilities within DPI should be considered with several objectives in mind: first, to strengthen and formalize links with the provincial organi- zation; second, to avoid overlapping functional responsibilities as far as possible; and third, to create a balance of size and responsibility between the divisions. To these ends it is recommended that : (a) A separate crop extension division should be established. Its function should be assisting the Provinces in their extension roles and facilitating necessary support from other areas of the central DPI organization; (b) A separate crop research division should be established. The present crop research effort is fragmented and its unification under one management would facilitate the mounting of multi-disciplinary research programs; and - 17 - (c) A separate development services division should be created. It would have responsibility for national development projects, for dealing with potential investors, for field development (as o-posed to general extension) work and for the multiplication and distribution of planting material. 4.11 As a consequence of these changes, the Agriculture and the Policy Review and Coordination (PRC) Divisions would cease to exist in their present forms. The provincial liaison functions of PRC would become the responsibility of the Extension Division and the policy review function could appropriately be transferred to the Planning, Economics and Marketing Division./l The present Agriculture Division would be split among the three new Divisions to be created. The mission noted the existence of the International Cell and Liaison Officer, but did not review their functions and responsibilities. During any reorganization, it is suggested that consideration be given to incorporating such positions into a functional divisional structure. 4.12 In the current operation of DPI there appears to be an unreason- ably heavy burden of supervision and leadership on the Secretary and Deputy Secretary. Two measures are proposed to ease this load. First, considera- tion should be given to the separation of forestry activity from DPI. It is appreciated that there is a general desire within Government not to create new departments, but in this case the organization is already separately housed, has its own Minister and operates fairly independently of the rest of DPI. The existing arrangement of the Secretary of DPI answering to two Ministers is in fact anomalous and there would be advantages both to DPI and to the Office of Forests if it became responsible directly to the Minister for Forests. To provide some balance between the agricultural and forestry portfolios there may also be merit in combining fisheries activities with forestry: the mission was not able to consider this question in any detail, but suggests it as an issue to examine. 4.13 In addition, consideration should be given to the creation of a second position of Deputy Secretary for Primary Industry. The two Deputies would divide responsibilities between what might be termed the technical divisions (Livestock, Fisheries, Crop Research and Crop Extension) and the service divisions (Planning, Economics and Marketing; Management Services; Development Services; and Education and Training). The resultant organization is presented diagrammatically in Figure 1. Clearly the details of any reorganization can only be developed by DPI; it is hoped, however, that these proposals will provide a basis for fruitful discussions. 4.14 Coordination with Other Departments. There are many government agencies involved in some way in, or affected by, agricultural development. There are few formal arrangements for coordinating the activities of these /1 Towards the end of 1980 a policy secretariat was created, but within PRC. It now awaits the endorsement of the Public Service Commission. PAPUA NEW GUINEA Agricultural Sector Review Draft Organization for DPI for Discussion Minister for Primary Industry National Agricultural .Council |National AgricultuLral |--------------- Secretary Advisory Council I Dputy Secretary ||Deputy Secretary|l Crop Crop Management Planning Education Development Livestock Fisheries Research Extension Sevcs EconomiesTringSvce | (Technical) l l (ServServices Marketing T Sv s D - 19 - different agencies and most of the existing arrangements, including interdepartmental committees, are little used for dealing with issues affecting agricultural development. In addition to a reactivation of such committees, steps should be taken to allow the National P] rning Office (NPO) to take a more active coordination role to ensure consideration by affected bodies of all expenditure and policy proposals (para. 5.02). Currently, the approach is a passive one: proposals are circulated among Departments which are expected to react if they identify an area of duplication or conflict with their own plans. However, many Departments are strained by staff shortages and do not respond promptly to opportunities to comment on proposals. Their contribution could be increased if NPO were to identify, for their attention, issues affecting their interests and by the use of ad hoc meetings, possibly called by NPO. The result should be better prepared proposals and a reduction of the ill-feeling and inefficiency which results from interagency conflict during project implementation. Other recommendations regarding planning (paras. 5.03-5.05) would, if adopted, free NPO staff time to accept this more demanding role. 4.15 Administration and Staffing. There are serious and long-standing problems in the staffing and administration of the PNG public service that affect DPI. The problems are well recognized in PNG and were comprehensively documented in 1979 by the ToRobert Committee which inquired into administra- tive problems in the public service. Following the report of that Committee, an Administrative Improvement Programme was established within the Public Service Commission. The most serious problems identified were in the areas of personnel and financial administration; other shortcomings noted included inadequate training programs, lack of administrative skills, high staff turnover, poor supervision and insufficient leadership. 4.16 These problems stem from inexperience and limited training of staff and only gradual improvement can be expected. Within this constraint, however, improvements could be achieved in the short-term through simpli- fication of procedures and clarification of responsibilities. Some programs have been initiated already. The potential for gains in these areas is probably large and would justify outside assistance to be engaged where it would permit more rapid progress. In training programs, priority should he given to staff who in turn will have a training or supervisory role so that maximum impact can be achieved from limited training resources. 4.17 Within DPI, the effects of failure to overcome personnel problems are visible at all levels of the organization. The Deputy Secretary and most of the Assistant Secretaries are performing their duties on an acting basis. These positions should be filled substantively as soon as possible: in most, if not all, cases it appears that the incumbents could be appointed to the positions in which they are acting. If substantively appointed they will be able to provide more vigorous leadership and make necessary changes, secure in the knowledge that they will be able to ensure full implementation. - 20 - 4.18 The administrative arm of central DPI, the Management Services Branch, is also affected by many acting appointments, especially among the section heads, and has many vacancies. Priority should be given to filling the vacancies in this branch, so that the Branch can work on filling vacancies throughout the Department. 4.19 Housing and Offices. Lack of housing limits the ability of DPI to locate its staff where it wants them. This, too, is a problem affecting the whole public service and a committee is investigating it. High priority should be given to implementing any practical solutions which the committee is able to recommend. The key constraints appear to be lack of serviced building allotments and lack of funds. A detailed assessment of the availability of housing in various centers will be needed if Government were to proceed with the recommendation to establish regional support centers (paras. 4.06, 4.07). In some centers DPI may be able to avoid the problems of building houses in towns by using land on its own stations. The location of staff on these stations would also improve communication and coordination between staff from different sections of the Department. 4.20 There are plans to put all DPI headquarters staff in a single office building. The present scatter of the Department makes intra- departmental communication difficult and time-consuming. Offices in one location would assist greatly to reduce this problem. 4.21 Divisional Administration. In the absence of adequate adminis- trative support, highly qualified technical staff have to spend considerable time on administration. This applies to divisional and branch heads as well as officers in charge of DPI field stations. Contributing to this situation is the present central control of administrative staff and functions. There would be advantage in having administrative staff appointed to Divisions and research stations. The supervision of these staff by those who have requested their services should prove more effective than pool-type arrangements and a more responsive administrative service should result. Staff appointed in this way would also become familiar with the work of the organization and this should assist them in carrying out their duties. 4.22 Data Storage. Systematic data storage and retrieval systems in the economics, planning and research areas are lacking with the result that past work is inaccessible and in danger of being lost, especially with the high turnover of staff. Studies and research programs need to be catalogued and manuscript work published. There are many possible approaches to retrieval in all of these areas, including the use of a mini-computer which is easy to operate and inexpensive. The system could be shared with NPO which has a similar need for systematizing retrieval of planning data. It is recommended that the feasibility study be undertaken of the best approach to storing research, economic and planning data. - 21 - 4.23 Staff Travel. To do their jobs effectively many DPI staff must travel between centers and/or carry out field patrols. Staff complained that the travel votes within DPI - for transport and for accommodation and subsistence allowances - have become chronically inadequate in the face of budget cuts with the result that full use cannot always be made of available staff. The mission was unable to determine how far this complaint is justi- fied but recommends that the travel votes be reviewed to ensure that they are in line with staffing levels and job requirements. 4.24 Most road transport is dependent on vehicles supplied by the Plant and Transport Authority (PTA), but vehicles are not always available when required. Mloreover, experience with central pools elsewhere suggests that a more economical and efficient approach to providing transport for advisory and technical services is to make maximum use of officers own transport for which they are paid a mileage allowance. It is difficult to assess how far this approach should be extended in Papua New Guinea where travel between centers must typically be by air, but it would be worth reviewing./1 4.25 Job Descriptions and Salaries. It is recommended that a complete review of job descriptions should be undertaken. Many are already out of date and more would be obsolete if the recommendations of this report on reorganization were accepted. A review should take account of the need to keep the duties of each position consistent with the training and experience of the staff likely to be available. A clear statement of duties would also assist in such matters as estimating the budget requirements for such items as stores, transport and travel, and would permit a proper assessment of salaries. The salaries of public sector technical staff were reviewed in 1979, although the stimulus for that review was discontent in the power and telecommunications industries and DPI was not represented on the salary committess. However, the recommendations of the committees left the way open for further changes. In the light of the number of national staff resignations and the results of expatriate recruitment efforts, it is recommended that the salary question be studied following the rewrite of job descriptions. The task would require a significant commitment of manpower, and it is one in which the use of personnel consultants would both expedite the work and provide wide experience and skills. /1 At the same time the mileage rate structure and level of subsistence allowances should be reviewed. The mission received reports, which it was not able to substantiate, that the mileage allowances which are currently paid are unrealistically low and are a disincentive for eligible officers to use their own transport on official travel, and that as a result of inflation subsistence allowances are inadequate to cover cost. - 22 - V. POLICY FORMULATION AND PLANNING 5.01 The lack of clear policy guidance was advanced by DPI staff at headquarters and in the field as an impediment to achievement. Notwithstand- ing the financial and staff constraints described above a clearer definition of policies and priorities would permit more productive use of the resources which are available. The following recommendations apply to planning and policy formulation both in a government-wide context and within DPI. 5.02 National Level Planning. The National Planning Office (NPO) has overall responsibility within the Government for planning. It acts as the secretariat for the National Planning Committee of Cabinet and is responsible annually for the preparation of the government's main planning document, the National Public Expenditure Plan (NPEP). Operating departments and agencies are responsible for preparing projects for consideration for funding through the NPEP. NPO ensures that submissions are of the required standards and ranks them for ultimate consideration by the National Planning Committpe. 5.u. Highly detailed work is required by deDartments in preparing XQ J a.id by G ii 1G dssessing and screening projects and in monitoring implementation. While the procedures adopted usually result in comprehen- sive documentation of spending proposals, they also impose preparation burdens on departments weak in preparation capacity. The procedures estab- lished are admirable in themselves but - in spite of some recent moves to simplify them - seem too sophisticated for the current situation in PNG, and still do not guarantee full coordination of departmental planning. It is recommended that NPO divert some of its resources away from the detailed evaluation and monitoring work and concentrate more on helping departments to plan and on coordinating departmental planning (para. 4.14). DPI and other departments are short of planning and project preparation expertise and more involvement by NPO staff in project preparation would facilitate their own appraisal work./l Recommendations in paras. 5.04-5.06 should result in a lowering of the NPO staff requirements for project appraisal and screening and free resources for these other functions. 5.04 Use of Strategic Objectives. The nine "strategic objectives" used in the planning process are a comprehensive statement of political priorities. They provide a basis for making a broad division of resources between production, welfare, administrative and training goals, but are probably less useful for allocating expenditures to the achievement of separate objectives than is implied by the extent of their use in current planning procedures. The main difficulty stems from the fact that most expenditure proposals would contribute to the achievement of two or more /1 "Appraisal" is used here in the sense employed by the Bank denoting ex ante assessment of project impact. "Evaluation" is employed by by the Bank for ex post evaluation. - 23 - objectives and their allocation to any one could be arbitrary. Although there does not appear to be a problem at present, there are dangers that some projects (and this danger is particularly acute for agricultural projects) could be unfairly assessed and rejected simply ecause of their designation as directed at a single objective, whilst projects which would otherwise be accorded lower priority but which happen to be written to embrace several objectives are accepted. 5.05 NPO is proposing greater use of sectoral programs in the NPEP, reflecting broad areas of departmental activity. This approach should enable more flexible and appropriate use of the strategic objectives than does the allocation of predetermined projects to objectives. An important secondary benefit would be a reduction in the volume of NPEP paperwork both within departments and in NPO. A change in emphasis in this direction would also give departments the expenditure ceiling and policy guidelines which they need if they are to use their limited planning resources wisely and would give appropriate emphasis to projects which form parts of programs instead of to those which address unrelated activities, as tends to happen at present. 5.06 NPEP Documentation and Review. NPO is currently reviewing NPEP procedures with a view to simplifying them. This review is strongly endorsed and it is hoped that it will result in the raising of the financial ceilings above which more detailed feasibility studies are required. Other reductions in processing by NPO would also be feasible. It should not be necessary to review all project expenditure as often as the quarterly reviews currently carried out. In addition it would be desirable to dele- gate more of the responsibility for monitoring to the implementing agency. 5.07 Provincial Planning. Part of the assistance to departments in planning (para. 5.03) should be provided to provinces. DPI and other Departments have not yet effectively decentralized support services, and shortage of planning capacity is particularly acute in the provinces. It is suggested that NPO post planning teams including appropriate sectoral specialists to regional centers to assist planning, each in 4-5 provinces. The regional location would have advantages in terms of travel cost and access: more importantly, the role of these staff would be more clearly understood by the provinces than appears to be the case at present. 5.08 A DPI Five-Year Development Plan (Annex A, Para. 38). DPI lacks a comprehensive statement of policy objectives and a work program which would achieve these. There is a pressing need to review the possibilities for growth in the sector, the key constraints facing it, and the role of DPI in the sector's development. It is recommended that a development plan for (say) the next five years be drawn up. This should be a priority item for the limited planning resources immediately available. It is recognized that it would be advantageous to have completed a number of the policy studies suggested in this report before drawing up a development plan. However, they will take some time to complete and as any plan should be reviewed and - 24 - updated from time to time, there would be little gain in delaying the establishment of a framework for the detailed development of its parts. One reason for suggesting haste is that the concentration of DPI planning efforts on NPEP projects appears to have resulted in the neglect of systematic evaluation of DPI recurrent activities. However, these latter remain financially important for the Department and a general review of activities and priorities is urgently required. Such a review should take place in the context of, although separate from, the five-year development plan. The early preparation of the plan would also enable DPI to take full advantage of an increased emphasis on sectoral programs (para. 5.05). 5.09 If planning is to be effective it must be linked to decision- making bodies. For this reason, it would be appropriate that the Planning, Economics and Marketing Division (PEM) provide the secretariat for the NAAC and NAC (paras. 4.02-4.05). Procedures should be adopted which ensure that the secretariat has the opportunity to evaluate all policy and spending proposals to be considered by these bodies, and the staffing of the secretariat would need to be appropriate for the function. Currently, the PEM division is seriously understaffed and cannot fully discharge its existing responsibilities. 5.10 The addition of the NAAC/NAC secretariat function, the preparation of a five year plan and the need to provide additional planning help to provinces would make it imperative to recruit additional experienced economists. The transfer of some positions and personnel from PRC division would assist but would not be enough even to fill existing vacancies. Steps should be taken to bring PEM up to strength immediately. In the longer term, an establishment review would be desirable, but recruitment should not wait for a review to to be completed. VI. AGRICULTURAL EXTENSION SERVICES 6.01 Agricultural extension services are one of the major responsi- bilities handed over to the provinces in 1977. Few changes in organization and management have been made to accommodate that change which has lead to an increasing separation of the extension function from the rest of DPI services. At the same time the need for coordination and guidance has grown. This mission had only a limited time and exposure to PNG field conditions. Its proposals for bridging the gap between the provinces and DPI and for strengthening extension operations are therefore in part drawn from experience in other countries and are proposed largely as a basis for further exploration, discussion and trial. 6.02 Extension Division. The headquarters organization of DPI presently has no section with the specific function of assisting and guiding the activities of the extension service. With the handover of extension responsibilities to the province a need for a return to a functional - 25 - structure to overcome the apparent isolation of the provincial extension services from the rest of DPI has emerged. It is recommended that an Extension Division be established in the national DPI organization. Staff should include specialists in extension training, extension programs, relevant technical subjects, publications and information, and the Division should have its own administrative unit. 6.03 Regional Units. It is also recommended, for reasons outlined in paras. 4.06 and 4.07, that regional support units be established by national DPI. These would embrace the same types of expertise as the headquarters organization, with the exception of publications and information services. These units would be answerable to the Extension Division and would work within a defined program to visit and assist extension staff in the four or five provinces within their region. 6.04 Provincial Organizations. Under existing circumstances, extension officers are required to assist in a range of other activities unrelated, or only marginally related to their extension work. Thus they are engaged in credit, marketing, regulatory, statistics and development work, all of which reduces the time they have for their proper role as extension agents. The posting of specialist staff to do much of this work would result in improved performance in extension. The withdrawal from other services could not be complete - in a number of areas there is too little work to justify specialists - but it should be examined how far the extension service can be returned to its basic functions. Marketing and credit work in particular should be and could be separated. The implications of the latter for PNGDB are explored below (paras. 6.09-6.10). 6.05 An approach to extension termed the training and visit (T&V) sys- tem would be particularly appropriate for major areas of Papua New Guinea, although it is recognized that the required middle-level staff commitment would necessitate a gradual adoption of the system, and it would not be easy to apply to all areas because of sparse population and difficult transport conditions. It is, therefore, recommended that initially plans be drawn up for introducing only a pilot T&V system in one or two provinces. It could be externally financed as part of a research/extension project or an area development project (see also para. 7.10). 6.06 A model arr-lo;gement for a T&V approach in PNG is presented in Annex D, Appendix 1. It calls for a strengthening of the provincial extension teams by the addition of an extension program officer and an extension training officer, whose duties are described in Annex D, Appendix 1, para. 7. The approach is aimed at using existing contact staff but increasing their effectiveness by setting priorities and concentrating their efforts in a regionally defined and supervised series of programs for which they are continuously trained. The system would involve: (a) forming groups of farm households as the focus for extension agents visits; - 26 - (b) developing closely supervised and monitored programs of visits by the extension personnel, backed up by specialist support, geared to the local farm cycle; and (c) programming frequent and regular training sessions for the staff at all levels of the extension hierarchy in preparation for the visits. 6.07 Within provinces, it would be desirable to aim for an extension worker: farm household ratio of about one extension worker per 500 households which would be divided into about 10 groups of 40-60 households. Within groups, a group leader and one assistant per 5-6 households would be appointed to work closely with the extension officer. Programs would be established so that extension workers spent one day per fortnight with each group, leaving one working day per fortnight free for training and programming for the subsequent fortnight-s activities. An organization chart for this approach is given in Annex D, Appendix 1, Chart 1. 6.08 Livestock and Fisheries Extension. The mission did not study livestock and fisheries services. It is understood, however, that much of the mixed farming which is practised involves small-stock, mainly pigs and poultry, most work on which could be carried out by general extension officers with appropriate training and advice from specialists under the T&V approach. In areas of high concentration of smallholder cattle projects, however, a specialist livestock officer could be appointed to the district and work with appropriate agricultural extension officers. There may also be reason to make exceptions in the case of freshwater fishponds. If they become popular in a particular area, a fisheries specialist could be appointed to work with a number of general extension workers, preferably on secondment from the fisheries division. 6.09 Field Credit Services. As part of the general move to allow extension officers to concentrate on extension, it is recommended that PNGDB develop its own capacity to deal with smallholder borrowers at the field level. This is currently a responsibility of DPI extension offices who act as agents of the PNGDB. There are constraints on the extent to which this could be achieved in the short run. PNGDB field staff would need some agricultural training and they would have to be recruited in competition with DPI and private agricultural businesses. The importance attached to PNGDB remaining commercially profitable will also limit the amount it can spend on the promotion and administration of small agricultural loans. 6.10 The requirement for field credit officers will vary from place to place and time to time according to the amount of each crop development and borrowing activity. In some areas, one credit officer might be required for every two or three extension offices, in others none may be needed. As a first step PNGDB should probably aim to recruit field officers at an average rate of about one per 10,000 farm families. This would involve twenty odd - 27 - staff and would cost about K300,000 per year./l This additional cost represents PNGDB's net profits during 1978 and 1979 and would not, in the short term at least, generate any additional income. It would be inconsistent with its statutory obligation to act in a commercially prudent manner for the PNGDG to incur these costs unless there we-a some means of defraying them. It is therefore recommended that PNGDB approach the government for assistance to cover the specific costs of undertaking small- holder development work which is, in the short-run, sub-economic. 6.11 Development Programs. There are significant differences between general extension work and the operation of special crop development programs such as the coffee development program. Staff involved in crop development work do not need the breadth of knowledge of an extension worker. The need for crop development work in a particular area will also vary over time as particular programs are initiated and completed. Staff, therefore, need to be mobile, and move to new areas and learn about new crops according to demand. It is, therefore, recommended that a separate cadre of crop development staff be established. It should be part of the Development Services Division. Whether they should be part of central or provincial staff is a matter for discussion between central and provincial governments, although for reasons of mobility and to make best use of a service the demand for which will vary widely between provinces and over time, it may be preferable for them to be central staff. 6.12 Information Branch. The provision of information and visual aids is an important part of the extension service. Within DPI, extension staff are probably the most frequent users of the services of the Information Branch and extension staff should have a close involvement in the release of information for public consumption. It is, therefore, recommended that the Information Branch become part of the Extension Division when it is established. VII. RESEARCH SERVICES 7.01 Agricultural research remains a responsibility of the central DPI. The mission reviewed the organization of agricultural research as a whole (excluding fisheries and livestock research), but in evaluating research programs and services confined itself to the tree crop subsector. Generally the technical quality of tree crop research which has been done in the past has been high and the mission's main concerns have been inadequacies in the planning, direction and evaluation of programs, problems of staffing and administration, links with extension services, and the need to increase Government's concentration on the smallholder sector. /1 This figure is based on PNGDB's own unit cost estimates, and includes costs of housing and transport. However, PNGDB's calculation of the total cost of reassuming all the functions carried out by DPI extension staff is some 50% higher. - 28 - 7.02 Research Organization. The agricultural research efforts of DPI are presently dispersed among different section of the Agriculture Division. Experiments take place on ten research stations. The separate sections are controlled by the Assistant Director of the Agricultural Division who has a wide range of responsibilities other than research. The lack of a separate controller of research and a single research organization is not conducive to coordination of activities or the conduct of cooperative programs involving several scientific disciplines. It is, therefore, recommended that a Crop Research Division be established under the control of a national Director of Research. The Director should be supported by a few centrally based specialists, but the bulk of technical staff should he posted to field stations. 7.03 Field Stations. It is desirable that field research corresponds to the main agro-ecological zones of the country so that it can be relevant to conditions in the surrounding areas, and for there to be some correspon- dence between the geographical coverage of the research and extension organizations so that strong links between the two can be forged. The use of the former four regional administrative areas as a basis for providing decentralized support to the provinces for extension services suggests that a major research center should be located within each of the former regions with responsibilities which, with marginal adjustments as needed, should cover the region. Kerevat and Aiyura stations should serve as two of the major research stations; two more would need to be established. Each would be controlled by a Regional Director of Research. The stations would maintain close contact with the four or five provinces served by the center and staff would maintain close liaison with the provincial extension service. This would be facilitated by the establishment of a system of substations for adaptive field trials and through which wider environmental coverage could be provided. There should be an economist based on each major regional station to undertake investigations of local farm systems and, drawing on these, to work with technical personnel and the extension service in planning, evaluating and deriving recommendations from trials. 7.04 Liaison with Extension Staff. Inspite of ad hoc efforts to strengthen them, the links between extension and resear-cFstaff are at present weak, a situation to which the lack of clear organizational structure and leadership has no doubt contributed. There is a need for the research division to give specific attention to the need for liaison with extension in order on the one hand to translate research findings into economically viable and useable extension advice and promote its use, and, on the other hand to identify farmers- concerns for guidance in formulating research programs. It is recommended that staff be provided at two levels to meet these needs. At headquarters, a unit should be established in the Crop Research Division to interpret research results, produce recommendations and feed them to extension staff and other interested parties in a form suitable for application to farmers. This unit should also be involved in the formulation of new research proposals derived from reports by extension workers and for the evaluation of ongoing work. It should include an economist. The unit should also act as a secretariat for the Director of Research. To ensure local conditions were fully reflected - 29 - the unit should liaise closely with regional field stations, on which a research worker should be assigned to the task of liaison with the local extension service, training institutes and visiting farmers. The establishment of a regional extension unit based on the station (para. 6.03) should enhance the role and effectiveness of this officer. 7.05 Evaluation of Research Programs. A research program needs to be regularly reviewed to ensure that it continues to reflect priorities: that new areas of concern are identified and accommodated, lines of ongoing research reappraised and if necessary modified, and programs which have achieved their objectives are replaced. There has 'been very little such evaluation of research programs in Papua New Guinea: this is a serious shortcoming of the service. It is recommended that a regular - probably biannual - meeting of senior research and extension personnel be established to review the research program with respect to priority, technical soundness and progress. An important part of the work of the headquarters unit proposed in para. 7.04 should be to provide a secretariat for this review, building on its continuous monitoring of the program and on extension feedback. The unit should publish an annual report on the status of research items. It should also be involved in establishing and running that part of the data storage and retrieval system (para. 4.22) which concerns research results. 7.06 It was noted that in a number of cases research results had not been written up due to the departure or transfer of research personnel. To avoid such situations in the case of expatriate researchers, consideration should be given to making the satisfactory write-up of their work a condition of payment of a gratuity at the end of a contract. In the case of national staff it is important that adequate lead time be given to reassignments and that moves be made conditional on an adequate handover of work. The headquarters unit should be responsible for monitoring these conditions. 7.07 Industry-organized Research. Oil palm research has been carried on effectively by the industry and steps are in train to formalize this arrangement. This effort has allowed government to avoid using its scarce resources on this crop. Other tree crop industries could also be more self-reliant in regard to research. In particular, the cocoa, coffee and rubber industry organizations, which are already showing interest in operating their own research, should be encouraged to do so. As well as freeing government resources for other purposes, this strategy places the onus for research where it rightfully belongs - on those whose livelihood depends on it - and may on balance be expected to increase the overall mobilization of the national resource. In other countries there are examples within the tropical tree crop industries of research being conducted in this way with outstanding success. It is recommended that government encourage the development of industry-organized and funded research in all the major tree crops and provide assistance in terms of finance, land and other resources during the establishment period. If conditions merit it Government could also contribute finance to the program on a continuing basis. Government should maintain a "watchdog" role in - 30 - regard to these programs to ensure that research continues at a satisfactory level in periods of depressed prices and that the interests of the nation as a whole and smallholders in particular are protected. A government share in financing would provide leverage in this role. 7.08 Research Priorities. There is a need for a broadly-based and detailed review of the existing research effort to define priorities in order to ensure the most advantageous deployment of limited resources. This should be carried out as a precursor to the periodic review in conjunction with the preparation of a 5-year Agricultural Development Plan (para. 5.08). Among priorities are: (a) Food Research. Food production has high priority in government objectives, but this has not yet been reflected fully in government research programs. Greater use of industry-organized research (para. 7.07) would free government research resources for other purposes and it is recommended that some of these be used to expand the food crop research program. Investigations in this area would be particularly well suited for implementation by national researchers who are familiar with traditional food production systems. Research needs in relation to food crops have been reviewed by H. M. Groszman, who has recommended a general strengthening of the administration and organization of the research effort as well as the appointment of horticulturists to all field stations. His recommendations are endorsed. (b) Farming Systems Research. Almost all smallholders producing cash crops continue to grow food crops as well, frequently in complex cropping patterns, the advantages of which are not well understood. It is recommended that research efforts be directed increasingly towards farming systems in the major agro-ecological areas, rather than concentrated on single crops. This recommenda- tion and that in para. 7.08(a) above implies a greater concentra- tion on the smallholder sector by government researchers while commercial agricultural producers accept more responsibility for their own research (para. 7.07). The economists proposed to be posted to regional research centers would play an active role in farming systems research (para. 7.03). (c) Soil Survey and Land IJtilization Work. The demand for soil survey and land utilization work is already substantial and will be increased further when a 5-year Agricultural Development Plan is prepared (para. 5.08). Staff cannot cope with the existing volume of work and brief reconnaissance surveys are being used where more detailed work would be more appropriate. The Land Utilization Section is negotiating with the CSIRO of Australia to carry out a national land use survey and has proposed a significant increase in staff. Both of these initiatives are supported. If no steps are taken to increase soil surveying capacity, the feasibility of - 31 - sound development planning and the review of the estate sector and unused alienated land (para. 9.05) would be prejudiced. (d) Tree Crop Priorities. Growing conditions for tree crops in PNG are excellent in the right areas. Tree crop research has been generally adequate over a 30-year period, but recent reductions in resources have affected performance and the following research fields have been identified as being of high priority. (i) Plant Breeding. PNG has not taken full advantage of the plant breeding advances made in other countries. A wider range of planting material should be introduced, especially in cocoa, coconuts and coffee. In many cases, programs could be limited to local screening for disease resistance and yield. In the case of coffee, a more extensive breeding program would be necessary. The introduction of new planting material would have to be conducted with strict regard to quarantine requirements. Such a program could form part of an agricultural services project (para. 7.10 below). (ii) Nutrition of High Yielding Varieties. Soils on which tree crops are grown in PNG have been generally of sufficient fertility to produce satisfactory yields with the varieties used. Newer varieties already in the country and others which should be introduced have much higher yield potential. The achievement of this potential will be dependent on adequate plant nutrition and they will often have higher nutritional requirements than existing varieties. It is recommended that trials be set up to monitor the performance of the newer varieties in different cultural situations and assess the desirability of using fertilizer. (iii) Pest and Disease Investigations. Past entomological and pathological work has produced effective methods of controlling most of the plant pests and diseases in PNG, especially those related to tree crops. However, because of staff shortages work in these areas has declined. It was reported, for example, that the pathology section was unable to devote any staff to serious diseases observed in food crops. It will be especially important to have adequate entomology and pathology services available if new planting material is to be imported. It is recommended that priority be given to filling vacancies in the two sections. 7.09 Labor Productivity Research. The high cost of labor relative to comparable costs in competing exporting countries is a cause for concern in the tree crop industries (para. 9.16). It is important in these circumstances to maximize the productivity of labor. Among the approaches to dealing with this problem is the development and encouragement of management and cultural - 32 - practices which could increase the productivity of labor. These should be investigated within the tree crop research program, while analysis of the costs and benefits of piece-rate payments should be handled by PEM. 7.10 A Research Services Subproject. The general strengthening of research services which has been recommended could be achieved in the content of a defined investment project. It is recommended that such a project be prepared. It could be combined with the proposed pilot extension services project (para. 6.05) and submitted for international financing. VIII. MARKETING OF EXPORT CROPS 8.01 The marketing of the major export crops, which is regulated by their respective marketing boards, appears to be reasonably efficient and well managed. Coffee and cocoa marketing is handled by private companies, cooperatives and private truckers while copra is purchased directly by the Copra Marketing Board. The marketing of fresh foods for the domestic market, however, appears to have serious organizational, financial and transport problems which are a factor in the continuing importation of foodstuffs for the major cities (para. 2.01). This deserves further review but was not covered by the mission. The comments in this section refer to export crop marketing and the few areas where Government intervenes. 8.02 DPI Commodity Purchasing. DPI buys commodities in areas where private interests have not provided adequate services, usually because the volumes involved have been too small to justify operations in remote areas. The DPI service is operated by extension staff in addition to their other duties. It involves an indirect subsidy to the producers - in staff time and transport costs - which has been justified on infant industry grounds. There is strong argument for ensuring a market outlet is available but the service is not necessarily best provided in the present manner, and it is not justified regardless of cost. At best, civil service organizations tend to be inefficient in commercial operations and certainly in Papua New Guinea government financial procedures are cumbersome and totally unsuited to marketing. Further, because it appears to be costless, the DPI service may be cutting out potential private participation: at the least, it will be difficult to judge when commercial operations could start. Perhaps the most serious grounds for proposing a review of the present system, however, are that from an extension service viewpoint marketing is an unwanted responsibility which diverts staff from their principal function. It has been suggested (para. 6.04) that as far as possible extension staff should be relieved of such work. It is recommended instead that the subsidy element in DPI marketing be calculated and that in suitable cases private buying be encouraged by offering direct subsidy or other assistance as necessary to make provision of the service worthwhile. It should be possible in most cases to have the service performed privately for less than the present cost to government. It would still be necessary for DPI to monitor the service to ensure that prices were fair and the service - 33 - adequate. In some cases where it is not possible to get private interests to take over, the service should still be provided if it is being used, but efforts should be made to streamline procedures and keep the involvement of extension taff to a minimum. 8.03 Quality Control. There are a number of restrictions and regula- tions in force designed to maintain high quality in export produce. These regulations have costs to the industries concerned and in administration. If they are not necessary to ensure that PNG maintain its position in the market place they should be abolished. Examples of restrictions can be found in relation to dry coffee processing facilities and cocoa fermen- taries. There is also doubt as to whether administratively determined dif- ferentials in prices paid for different grades of copra reflect real differ- ences in its market value. Prices should be used to encourage production of the appropriate quality: but this is not necessarily the highest quality. It is recommended that an expert study should be commissioned of appropriate approaches to quality control in the main export crops. 8.04 Price Stabilization. Government has established price stabiliza- tion funds for the three major export crops - coffee, copra and cocoa - oper ated by the respective industry boards. These funds reduce the impact on output and incomes of commodity price fluctuations and thereby also on the economy as a whole. The stabilization approach is strongly endorsed by the mission. However, some reduction in the level of funds required to achieve given amount of stabilization internally could be achieved by allowing some borrowing among funds for different industries. While it would probably be preferable for this to be done indirectly, through the Bank of PNG or the government, the alternatives need further review before a policy is formulated. Another possible means of maintaining the integrity of the funds in times of low prices would be to draw on the STABEX funds for which PNG is eligible. No policy has yet been formulated for the use of the funds and in the absence of specific plans, funds would simply be channelled into government revenue. It is recommended that options for the use of STABEX funds should be reviewed and a policy formulated. 8.05 It is not clear whether bounty payments paid from the coffee and cocoa stabilization funds would be passed on fully to producers,/l but the situation will be more complex for these crops than in the copra industry (which has already paid bounties) as there are more buyers involved and prices are not set administratively as they are for copra. It is recommended that plans be made for DPI to monitor farmgate prices when bounty payments for coffee and cocoa commence to ensure that the benefits reach the producer. /1 The first payments on both cocoa and coffee were made after the mission's visit and the working of the system is not yet clear. - 34 - 8.06 Apart from oil palm and rubber (which already has some form of stabilization in its marketing arrangements) the crops which do not have stabilization funds are of relatively minor importance. The mission did not examine them in any detail. The variability of prices and its effect on producers in these commodities needs to be assessed, and if stabilization is required consideration should be given to establishing a multi-commodity board. This may be the only way of providing stabilization at reasonable cost. 8.07 Coffee Board Management Levy. Unlike the cocoa board, the coffee board does not have a separate levy to provide for board operating expenses. While this is not causing any serious problems, it is considered that the Cocoa Industry Board arrangement is the more logical and should be adopted by the coffee industry. The adoption of a mnanagement levy should be accom- panied by a prohibition on the use of stabilization moneys for Board oper- ations. This arrangement would control the expenditure of the Board and at the same time provide it with a more secure source of funds during periods of depressed prices. 8.08 Copra Two-Payments System. Copra prices are paid in two install- ments; an initial payment of 90% of the estimated price and a second payment based on actual Copra Board receipts paid pro rata on copra produced over the year. The second payment may be made as long as 18 months after the date of sale, and in the case of copra marketed through traders, it would appear not to reach the producers. This arrangement seems both cumbersome and inequitable compared to paying out the entire price in one payment. Given the facilities to sell forward and the Board-s monopsonistic position in the market, the risk and possible consequences of error in setting the price to producers seem slight. Any surplus or deficit accumulating as a result of this practice could be compensated by adjustment of prices in subsequent months. IX. ENCOURAGEMENT OF THE PRIVATE SECTOR 9.01 One of the principles adopted in the formulation of these recommendations is that maximum reliance should be placed on the private sector, not only for a rapid increase in the production of key commercial crops, but also for the provision of services both to its own large-scale developments and to smallholders, thus releasing central and provincial DPI resources to concentrate on the vital smallholder sector. Private concerns are already important in marketing and input supply for estates and smallholders; an increased interest of commercial crop industries in research under government overall supervision should be encouraged (Annex C, para. 71 et seq.). The most pressing need is, however, to encourage reinvestment and maintenance in production by estates. - 35 - 9.02 The Estate Sector. Policies related to the estate sector were reviewed in 1979 by the Committee of Review into the Plantation Redistribution Scheme (PRS). The PRS was established by legislation enacted in 1974 to facilitate the acquisition of foreign-owned jstates and their transfer to descendants of the customary landowners. The Committee was formed following concern that investment on plantations had been negligible, that the production performance of the sector was poor, and that the PRS had not been effective in transferring ownership of acquired plantations to the customary owners. 9.03 The Committee made a number of recommendations, the main ones being: (a) that the PRS legislation be repealed and replaced by a relatively minor amendment to the Land Act; (b) that the valuation method be made more commercially realistic and not subject to bureaucratic or political discretion; (c) that transactions be on a normal commercial basis as far as possible and reliance on statutory acquisition be minimized; (d) that more information should be collected on the size and location of plantations and the identity and attitudes of their owners toward purchase, with a view to formulating a systematic approach to plantation purchase; (e) that Government should establish a company to buy and redevelop plantations prior to their eventual sale to groups of Papua New Guineans; (f) that plantation management be strengthened by the encouragement of experienced private management companies, by strengthening the government-owned National Plantation Management Agency (NPMA) and by much greater efforts to train Papua New Guineans in plantation management. It sought through its recommendations to create a climate of management and investment security and to encourage redevelopment of existing plantations and the development of vacant land. 9.04 The mission generally endorses these recommendations which have not yet been acted upon. They should go a long way towards allaying the fears of foreign estate owners and creating a climate which will encourage maintenance and reinvestment. The important elements in this are to provide assurance that a decision to acquire an estate will be based on the genuine need of the traditional landholders and that the acquisition price will be a fair market price, reflecting the potential return on all investment in the property incuding current maintenance and inputs needed to optimize yields. - 36 - A realistic minimum notice of intention to acquire (for most crops probably about 3-4 years) would be an additional encouragement to the present oper- ators: this would only be workable iF acquisition transactions were on a commercial basis, however. For any new estate development which Government may wish to encourage, presumably on a joint venture basis, some guarantee of a minimum period of tenure would be necessary in addition to a free market valuation in the event of eventual takeover. 9.05 For the productive running of acquired estates the recommendations on increased training of Papua New Guineans in plantation management is especially important. The development of estate managers is, however, a complex task requiring initial aptitude for the work, technical knowledge of agriculture, and management ability. Such development is most likely to occur in a situation where there is good on-the-job training combined with formal training in technical and managerial skills. It is recommended that arrangements which could provide for this development should be studied and proposed for financing as part of an agricultural support services project such as outlined in Appendix 1, para. 3. It is also recommended that the survey of existing plantations be extended to cover unused alienated land, and that terms of reference for the proposed study should call for evaluated proposals to government on methods of developing or redeveloping it. This would require the involvement of staff of the Department of Lands, DPI, and possibly NPO. In addition, however, outside consultants would be required if reasonable progress were to be achieved. It would be done in two phases, the first involving the identification of the locality, area, ownership, and capability of land, and the drafting of general guidelines, based on model development budgets, for the usage of various categories of land. The second phase would involve feasibility studies for development of land identified during the first phase as having priority for development. These feasibility studies would need to be of high enough standard to serve as a basis for attracting loan finance or investor interests. 9.06 This study is the most important suggestion arising from the PRS Committee's report. The Government is presently unable to formulate a firm policy on the estate sector because it does not know what land could be available or precisely what estate development could do for PNG in terms of employment, incomes and revenue. It cannot make firm pronouncements on future plantation acquisition because it does not know how many plantations are close to villages which are short of land or whether there is other undeveloped alienated land which could meet their needs. It is recommended that phase one of this survey should be mounted as a matter of urgency. While it is appreciated that the type of staff which DPI and the Department of Lands will be required to provide for the survey are already fully committed, their temporary removal from other pressing duties would be justified in the case of this work which should prove of lasting benefit to both Departments. - 37 - 9.07 The joint venture corporate model used to develop the oil palm industry in PNG appears to have been particularly successful, satisfactory both to government and to the investors. The performance of the industry is impress4ve. This type of ownership structure has advantages over the 100% state ownership structure which was proposed by the PRS Committee for estate redevelopment. It is difficult for governments to manage, or control management of, commercial operations and the most effective control is the incentive to produce profits which an organization has when it has a substantial equity investment. In terms of minimizing the input required from DPI, it is also important that arrangements are made so that management can be trusted to manage effectively with a minimum of supervision. 9.08 Land Legislation and Administration. It is recommended that the proposals of the PRS Committee regarding land legislation be implemented (para. 9.03). It is also to be hoped that the land legislation which is being prepared to deal more comprehensively with customary land, and in particular to provide for registration of customary land, will be completed and enacted quickly. However, while this is important, it should not be expected that legislation alone will bring rapid improvement in terms of the availability of land for agricultural development. 9.09 The Department of Lands is suffering from severe manpower short- ages and it is unlikely that registration of customary land could proceed on any scale even with improved legislation. Moreover, the need for nationwide legislation in order to provide security for smallholder loans is by no means conclusively established. In many areas, loans are not required. In areas where they are, it may be cheaper for government to accept the lending risk than to incur the cost of registration. It may also be a more practi- cal approach: rarely in conditions such as found in PNG can a bank repos- sess and dispose of or use traditional land even if it has been registered. Similarly, the promotion of new development in the estate sector is not immediately dependent on land registration: there are considerable areas of unused alienated land available. The most critical constraint is the unavailability of staff to identify parcels of land which should be made available for development, deal with claims of ownership, survey it and negotiate and issue a lease. 9.10 Since land administration is presently a greater constraint to development than land legislation, it is recommended that urgent attention be given to this area. In particular, the policy and research area of the Department of Lands is handled by only two staff. This shortage of staff is reported to be contributing to the slowness in completing legislation. Similarly, the national projects unit, which among many other duties, would have the task of locating land for development and dealing with potential developers has only two staff. The number of staff available to these two sections is totally inadequate for the functions for which they are responsible. More generally, surveying and particularly drafting capacity is strained and requires strengthening. - 38 - 9.11 With research capacity in the Department at a very low level, research which could have important benefits in developing sound land laws and administrative systems is not being done. It is unlikely that the Department itself could undertake a large volume of research and consideration should be given to arranging for organizations such as the Institute for Applied Social and Economic Research (IASER) to undertake projects on a contract basis. Part of the cost of such studies could be met from the funds being made available in the Bank-assisted Third Agricultural Credit Project. A list of topics is suggested in Annex G, para. 65. 9.12 Private Sector Services. The private sector already provides a range of services, but there are a number of areas of government activity which could be carried out to a greater extent by private enterprise. They include the production of planting materials, management, agricultural research and marketing. As a general rule, government should, unless there is an explicit decision to provide a subsidy, charge producers the full cost of such services which it provides to allow efficient private enterprise to operate at the same or a lower price and earn a profit. In cases where it is desired to subsidize a service, consideration should be given to arranging for a private organization to provide the service and receive a subsidy from government. If businesses are to gear up to provide such services, they will need the assurance of long-term contracts and permission to hire nonnational staff if necessary. In all cases, DPI would need to continue to monitor the provision and pricing of services to ensure that no unreasonable advantage is taken of any privilege granted. 9.13 Negotiations with Investors. In order to proceed with large-scale developments at an accelerated rate, DPI will need to increase its capacity to deal with potential investors. Foreign investors will need assistance in making contacts and gathering technical and financial data. While overall support can be expected from NIDA and the Department of Finance, agricul- tural investors will need help from people with a knowledge of PNG agricul- ture and the industry in question. In preparing for negotiations, it will be necessary for DPI staff to make detailed appraisals of proposals. DPI would also normally be represented on the board of agricultural companies in which government has a shareholding. These responsibilities presently fall on the Development Section of the Agriculture Division which, it is recommended, should become part of a Development Services Division (para. 4.10). If it is decided that estate scale development is to proceed at an increased pace, the Division will need strengthening with additional staff. 9.14 National Investment Priorities Schedule (NIPS). Government's attitude to foreign investments in particular industries is spelled out in the NIPS, which is revised annually. It classifies activities as "priority" in which foreign investment is actively sought, "open" in which foreign investment would normally be permitted but which are not regarded as top priority, or "reserved" in which foreign investment would not normally be permitted. None of the agricultural tree crop industries which were the focus of mission attention, and several of which it regards as ideal for - 39 - expansion, are in the "priority" category. Oil palm, rubber, and cocoa as "selective nucleus estate developments only" are in the open category. It is appreciated that the "open" category does not prevent foreign investment. However, given that it is desirable to involve additiona' foreign investors in these crops (para. 3.04), they should be promoted to the "priority" category in order to give potential investors the clear impression that their participation on suitable terms would be welcomed. 9.15 Monetary and Related Policies. PNG has iaaintained a hard currency strategy /1 as a means of controlling inflation and the growth of money wages. There has been speculation concerning the net effect of this strategy on both the export sector and on import replacement. Debate on the issue has not as yet become intense, probably due to the generally favorable commodity prices which have prevailed since the strategy was adopted. It is recommnended, however, that in order to be prepared for less favorable conditions, the Government should commission a study of the links between the exchange rate, domestic inflation and industry competitiveness. The study should also encompass the possible need for measures such as input subsidies if any negative impact from the hard currency strategy is identified. 9.16 A related issue is the link between the consumer price index (CPI) and money wages. Recent wage agreements have provided a mechanism for the limited but automatic incorporation of CPI increases into the wage structure. In the longer term, this may prove detrimental, especially to the tree crop export industries which must compete with countries in which the cost of labor is not so directly affected by inflation. Consideration should be given to possible ways of improving labor productivity so that the direct link between wages and thie inflation rate is lessened (para. 7.09). Greater use of piece rates is one method by which unit wage costs could be contained without necessarily adversely effecting the estate labor force. 9.17 Replanting Incentives. There is evidence of inadequate replanting of tree crops (para. 2.03). There are clearly a number of reasons for this in the estate sector, but the problem is not confined to large-scale operations. In the smallholder sector also, although new planting is proceeding, existing stands in urgent need of replanting were identified. The Government is considering a number of steps to increase investment and has recently reintroduced a tax holiday for new businesses. More comprehensive measures may be needed, however, for both the estate and the smallholder sectors. It is recommended that the government commission a study of the need for incentives and possible forms of incentives, including but not limited to guaranteed loans, reduced management fees and replanting /1 The strategy aims to maintain the value of the Kina vis-a-vis a basket of the currencies of PNG-s major trading partners. This has the effect of making imports relatively cheap, thereby restraining the CPI which is heavily influenced by imports. - 40 - grants. The study should also consider possible means of financing any incentives it recommends, including industry levies. The Malaysian cess on producers to finance the costs of replanting would be a good example to review. 9.18 Export Taxes. Nominal export taxes are levied on all tree crops in times of satisfactory prices. The taxes avert criticism which might occur if the agricultural sector were not taxed, but are low enough to have negligible effect on output. Pressure to increase these taxes appears inevitable as the direct taxation base is reduced with the replacement of expatriates with nationals at generally lower wage scales, but Government should continue to resist any such demands. The Government has given a general undertaking to suspend the taxes when industries are suffering depressed prices. This policy is logical and has been generally well accepted by the private sector. It would be better accepted if the element of uncertainty surrounding the suspension of the tax were removed. It is recommended that formulae to trigger the suspension of export taxes be developed, adopted and publicized throughout the industries. 9.19 Import Substitution. The production of food to reduce dependence on imports has high priority among the agricultural sector objectives. To encourage the private sector in this area Government has, in the recent past, imposed quotas on rice imports and tariffs and bans on fruit and vegetables. As a general tule, tariffs are preferable to quotas or bans for controlling imports and providing encouragement to local producers, not least because this would reduce the risk of creating food shortages./l If tariffs are used, it is recommended that fixed value per unit rather than percent ad valorem tariffs be used. Percent tariffs are least effective when prices in supplying countries are low, which is when effective measures are needed most. This situation would apply especially to fruit and vegetables, the prices of which are very unstable. An alternative approach would be to subsidize local production and/or marketing on an infant industry basis. 9.20 Such incentives are necessary conditions for both smallholder and large-scale developments. In neither case, however, are they likely to be sufficient in themselves. To encourage new production, smallholders in particular will need initial development assistance and continuing extension advice, market information, and a marketing service. The first two would be provided by DPI, the last by the private sector (with, if needed, direct incentives from Government in the early stages). An effective approach to encouraging large-scale development is for Government to fund and initiate a feasibility study on the basis of which private investment can be offered a majority interest in the development. /1 Currently, tariffs would not be effective in the case of rice, however, since the price of locally produced rice is already well below that of imported rice because of its poor quality. - 41 - Appendix 1 Page 1 PAPUA NEW GUINEA AGRICULTURAL SERVICES REVIEW Proposals for Further Work 1. As indicated in both the Report and its Annexes, further study is needed in a number of areas. Some work is within the capacity of government to execute, other will require the combined efforts of government staff and outside consultants or hired specialists. Some ~300,000 has been earmarked for studies and similar work in the World Bank funded Third Agricultural Credit Project, scheduled for approval in 1981. It is recommended that consideration be given to using these funds for the items summarized below. The proposals are in suggested order of priority. 2. Five-Year Agricultural Development Plan. There is a pressing need for a systematic examnination of the development of the agricultural sector and the likely role of DPI over (say) a five-year period. The plan should assess the possibilities for growth in the sector in relation to the key resources and constraints and in thie context of the achievements of national objectives. Constraints and resources to be considered should include: (a) labor (including competition from other industries and limitations on internal migration); (b) skilled manpower (including management and training facilities); (c) agricultural inputs and their distribution; (d) credit and savings; (e) markets and marketing services; (f) transport infrastructure; (g) land availability and tenure; and (h) business structures. Projections of potential output shioulct be made, targets set (preferably on a provincial basis), and action necessary to overcome the most limiting constraints defined. In particular, the implications of the production targets for the level of DPI services required should be established and this converted to staffing levels and funding which DPI would need to achieve targets. DPI should take the lead in preparing the plan, with technical assistance if needed, but should liaise closely with NPO, and coordinate throughout with other concerned Ministries at the highest level. - 42 - Appendix 1 Page 2 3. Manpower and Training Review.fi An assessment of the needs of the agriculture-related sectors for trained personnel, of the measures required to fill these needs, and of the implications of so doing, is of the greatest importance to the rational planning of agricultural development in PNG. The survey should cover the next 20 years on an indicative basis and the next five years with more precision and detail. It needs to consider professional, technical, vocational and administrative personnel requirements in agriculture, livestock, forestry and fisheries; to embrace extension, nonextension field work, research, administrative and training/educational cadres; to cover the public, quasi-public and private sector demands; and to assess the phasing of these demands over the survey period. 4. Within this framework, a survey would have four distinct components: (a) an assessment of existing manpower. This should determine numbers available by function, skills and experience; identify establish- ments and staff ceilings; identify vacancies and estimate wastage rates; and establish the causes of both. The productivity of existing staff resources should also be assessed and the causes of below capacity performance determined. Possible causes are: inappropriate professional/technical staff ratios; inadequate retraining; shortages of transport, offices, housing, or equip- ment; poor promotional and job-satisfaction opportunities and incentives; or inadequate recurrent budgetary support. (b) an estimate of the 20-year demand for manpower. This must be an assessment of the effective demand for the various categories of manpower. It calls, therefore, on the one hand, for estimates of rural population growth; prediction of changes in the structure of the agricultural sector and of farming systems; agreement on appropriate approaches to extension, research, input supply and other functions; an assessment of the relative values of existing levels of qualification (degree, diploma, certificate); and agreement on suitable support-staff:farmer ratios. On the other hand it requires an assessment of the long-range revenue raising capacity of the country and feasible levels of budgetary allocation to the agriculture sector. This will clearly be easier within the framework of the next five-year plan, and increasingly tentative in the longer-term perspective, particularly in an open economy heavily dependent on the future of the world markets. (c) an assessment of the country-s present capacity to supply trained manpower, the current throughput, and the constraints on expansion. The review should study sources of trainees; wastage and failure rates in training; the costs of training different categories and levels of staff; the appropriateness of curricula for the envisaged work roles; the adequacy in quantity and quality of teachers, administrative support and equipment; and appropriate- ness of budget allocations for the tasks set. /1 In his budget speech in November 1980, the Minister of Primary Industry announced that he had initiated such a review. - 43 - Appendix 1 Page 3 (d) a detailed and quantified assessment of the measures which need to be taken to close the gap between the projectci effective demand and the expected output from existing training capacity. This should include measures to upgrade existing personnel, to develop in-service and on-the-job training opportunities, and to establish new pre-service training capacity. It should include recommendations on the measures needed to ensure a supply of national trainees from the educational system, on steps to reduce wastage at all levels, and on the use to be made both of overseas training institutions and expatriate manpower over the planning period. Most important it should establish a phased investment program for new training institutions and for modifications to existing centers, including housing, transport, demonstration farms and other support investments; make recommendations on curricula, staffing and appropriate incentive levels for teachers and trainers; and determine the role which non-government institutions should play in the future development of skilled agricultural manpower. 5. An effective manpower and training review can be an extremely important input into policy making and development planning, even where hard statistics are scarce, projections tentative, and the end result, therefore, only indicative. Such a review is a deceptively complex under- taking, and to obtain the coverage indicated above could be a costly under- taking. It is, therefore, strongly recommended that the lead in the design and conduct of a survey be taken by experienced consultants with a proven record in this area, and that prior to the contract being let a full under- standing be reached with the consultant of Government's priorities in and hopes for the study, and realistic terms of reference drawn up. It may be desirable to undertake the review in two phases, leaving the qualitative aspects, including curricula content, for the second phase. Either way, a conscious effort will need to be made to provide the consultants with the full support of DPI and other extension, research and training staff. 6. Preparation of a Support Services Project. The weaknesses identified in the planning, research and extension services of DPI could be overcome in part by an internationally financed agricultural support services project which would complement the agricultural credit project recently appraised for World Bank assistance. It should include a training component, the definition of which would emerge from the review of manpower and training in the sector (paras. 3-5 above). 7. Improved planning and policy formulation capacity is critical to effective operation of DPI. Policy guidance at a level which is meaningful and intelligible to staff at all levels of DPI is lacking and this fact will continue to affect performance of the operational arms of the Department if not remedied. The constraint is lack of staff. A planning component should be prepared which would identify, justify and cost the following items: - 44 - Appendix 1 Page 4 (a) incremental staff salaries (preferably separated by expatriate and national); (b) incremental operating costs of these staff (travel, stores, utilities, minor capital items); (c) incremental housing and vehicle requirements; (d) training programs for national staff; (e) consultant services; and (f) data storage equipment. In preparing this component, account should be taken of the need for the PEI4 Division of DPI to provide a secretariat for the NAC and NAAC (paras. 4.02- 4.05), to provide more planning help to provinces (para. 5.07), to play a more active role in the development and evaluation of research programs (para. 7.05) and to produce a 5-year Agricultural Development Plan (para. 5.08 and para. 2 above). In addition, it should be noted that the data storage equipment should also have the capacity to handle data from the Research Division (para 4.22). 8. The recommendations regarding research services include the reorientation of research emphasis, improved management of research, the recruitment of additional scientists, and the expansion of the field station network. The incremental costs associated with implementing these recommen- dations should be established. The component should include (paras. 7.02- 7.08): (a) the staffing of an evaluation and monitoring unit and staff related to research/extension liaison; (b) the establishment and staffing of regional research centers and a network of field substations; (c) increasing soil survey and land utilization capacity; (d) increased pathology and entomology staff; (e) a program of introduction of improved planting material; and (f) incremental staff requirements related to the other changes proposed in research priorities. The component should cover appropriate elements of research to be carried out under the auspices of industry bodies as well as that to be a direct DPI responsibility. - 45 - Appendix 1 Page 5 9. The components under the heading of crop development services and extensior should include the establishment of a crop development section (para. 6.11) and the setting up of a pilot T&V extension service in at least one province (para. 6.05). Crop development services are being financed on a selective basis under the agricultural credit project: the component to be developed should be complementary to that and wider in terms of crops to be covered and geographical areas. Any consequential addition to headquarters staff of the proposed Development Services Division (para. 4.10) should also be included. Appendix 1 of Annex n provides a guide for preparing the extension component. Attention should be paid to the need for funds for additional travel and for the production of extension materials, and to all costs associated with the appointment of additional support staff. Other cost items would be similar to those outlined in paras. 7 and 8 above. 10. Training, additional to the components addressed specifically above, should also be included in the project. Items to consider are: (a) the need for more scientific and agricultural training in universities; (b) expansion of the capacity of agricultural colleges; (c) training of DPI staff in administration and management; and (d) training of plantation managers. As with other components, the jutification of each item would need to be established and incremental costs identified. It is understood that a manpower survey is to be undertaken. This should provide a basis for such costing. 11. Review of the Estate Sector. This review would embrace land which has already been developed as plantations and alienated land which is presently unused. It would involve the following tasks: (a) the identification, location and valuation of all estates; (b) the assessment of the attitudes of the owners of estates towards sale or redevelopment; (c) the assessment of land pressure in villages close to estates and, in case of land pressure, the possibility of providing unused land to relieve this pressure; (d) the identification and location of unused alienated land, the assessment of its suitability for redevelopment and the likelihood of ownership disputes; - 46 - Appendix 1 Page 6 (e) a review, by means of model budgets, of the options in terms of crops, size of holding and ownership for the development/ redevelopment of alienated land; (f) the formulation of recommendations for redevelopment including the identification of priority areas together with estimates of the costs and benefits thereof; and (g) preliminary feasibility studies of the development of areas of land identified as having high priority. 12. The review should be divided into at least two and possibly three phases. Task (g) would need to await the consideration by government of the results of previous steps. Tasks (a)-(d) could be handled separately from tasks (e) and (f). A large amount of field work would be involved and this would be both expensive and time consuming. In view of thiese factors and likely limitations on the rate at which government could implement any redevelopment recommendations, it is suggested work could proceed on a selective basis, concentrating on areas of known land pressure (to meet the most pressing social needs) and larger areas of unused alienated land with known potential (to meet growth objectives). Preliminary feasibility studies would need to be of a sufficiently high standard to serve as a basis for attracting loan finance or investor interest. 13. Tree Crop Replanting Levies and Subsidies. The accumulation of large amounts of money in the coffee and cocoa stabilization funds has emphasized the ability of these industries to generate savings. It has also emphasized the anomolous situation of industries saving large amounts but not reinvesting enough to maintain long-run productivity. In many countries, replanting is assisted by finance from industry levies. It is recommended that the possibilities of following this course in PNG should be investigated. Necessary steps would include: (a) an assessment of why replanting is not occurring and the possible need for incentives; (b) a review of possible forms of incentive, including guaranteed loans, subsidized interest rates, reduced management fees, input subsidies and replanting grants; (c) estimation of the total costs of any subsidy recommended; (d) identification of sources of finance including industry levies; and (e) a detailed assessment of the requirements of levies for stabiliz- ation purposes and possible conflicts with the collection of replanting levies. - 47 - Appendix 1 Page 7 14. Research on Land Policy Issues. Few resources have been devoted to land policy issues and there is an urgent need to initiate research in this area (para. 9.11). It is suggested that negotiations be initiated with the Institute for Applied Social and Economic Research (IASER) or other suitable research bodies to carry out research in priority areas. Topics suggested for study are: (a) attitudes of landowners towards different forms of payment for the use of their land; (b) the feasibility of delegation of authority for land law to provinces; (c) the codification of customary land law; (d) fragmentation of land on succession; (e) the cost and time involved in registering customary land; (f) the effectiveness of dispute settlement procedures; (g) the extent to which customary land law is changing to meet the changing circumstances; and (h) alternative means of providing security for lending for agricul- tural projects on customary land. 15. Review of DPI Marketing Section Operations. As part of a general move to extricate DPI from commercial operations, it is recommended (para. 8.02) that attempts be made to interest the private sector in providing buying services in areas presently served by DPI. Specific contracts and/or subsidies or other incentives should be used if necessary. A detailed costing of DPI marketing services (including staff time as well as explicit cash costs) would be required before firm proposals could be developed. This has already been done for rubber, and the staff of DPI's PEM division should be able to repeat the process for other commodities and areas. Costings would need to be done on a district or subdistrict basis in order to be able to assess the possibilities of a single business entity taking over the function in that area. At the same time as the costing work is proceeding, businesses already established in the area should be assessed with regard to their capacity to provide a buying service and interest in doing so. The Office of Business Development might be able to assist. In the light of the results, a detailed proposal should be prepared for consideration by NAAC and NAC which would define the areas from which DPI might be able to withdraw its services and prescribe a system of incentives or subsidies which would make the provision of services attractive to the private sector. Proposals should also be outlined to monitor the effects and to review the level of subsidy on a regular basis. - 48 - Appendix 1 Page 8 16. Quality control of export crops. Two questions which could not be addressed by the mission would justify examination. They are: Are the costs to industry, government and the industry boards of the various inspection services and grading, and controls on processing and handling, justified in terms of increased commodity prices? Are the methods employed the most cost-effective ways of achieving the objectives? It is recommended that expert assistance be recruited to advise with respect to the main tree crop exports, on: (a) the relationship between price and quality; (b) ways of detecting quality differences at all stages in the processing/marketing chain; (c) factors affecting quality and methods of achieving higher quality; and (d) marketing and regulatory arrangements which would encourage the various sectors of the industries to produce the quality of product which would be most advantageous for them. Particular attention should be paid to the objectives of expanding cash crop production into new areas and the likelihood that production units in such areas would be able to support large and sophisticated processing facili- ties. The appropriate expertise should be sought from the relevant interna- tional commodity organizations and the Tropical Products Institute, London. 17. Job Descriptions and Salary Review of DPI. It is proposed (para. 4.25) that following consideration of the organization and staffing proposals in this report, DPI job descriptions should be rewritten and salaries reviewed. This report has dealt only with the most senior positions and consequential changes in the roles of subordinate staff would need to be considered during the rewrite. It is recommended that professional personnel consultants be appointed to work with DPI staff in completing this task. An essential part of the terms of reference of the consultant would be the training of appropriate staff of the Management Services Division of DPI in this work. 18. Exchange Rate Policy and Agricultural Production. It has been suggested that the hard currency strategy maintained by the Government to control inflation may discourage the expansion of crops in both the export and the import replacement sectors (para. 9.15). This effect may be felt the more strongly as long term prices fall below the buoyant short term levels and small changes become more important. On the other hand, this adverse impact of the policy may be neutralized by its success in holding the rate of inflation below the levels in PNG's major trading partners. This argument depends, inter alia, on the relationship between changes in the exchange rate and inflation; how far the CPI, which is based on an urban consumption basket, is also relevant for rural areas; and the extent that - 49 - Appendix I Page 9 agricultural producers are sensitive to real rather than nominal changes in prices. The importance of the exchange rate as an influence on producer prices is enhanced to the extent that internal price stabilization policies are successful in reducing the swings in world prices. However, these may still outweigh the impact of the exchange rate. 19. Given the potential importance of exchange rate policy for the competitiveness of PNG's agricultural sector, these issues deserve additional study. It is recommended that a study be commissioned, either by a local research group such as IASER or by an outside consultant, which would concentrate on: (a) competitiveness of Papua New Guinean agriculture vis-a-vis other producing countries, i.e., the cost structure for the production of major crops as well as of those which would be suitable for diversification; (b) the degree to which international inflation is transmitted to the domestic economy, e.g., through imports and through the indexation of wages to the CPI, which is heavily influenced by imports; (c) the relationship between changes in the exchange rate and the level of inflation, including an assessment of which exchange rates are the most relevant; (d) the relevance of the CPI for rural areas (e.g. the import content of a rural compared to the urban consumption basket); and (e) the sensitivity of producers to real as opposed to nominal price fluctuation. If the study identifies any adverse effects of the exchange rate policy on production, it should also consider possible measures which could be taken to counteract this effect. 20. Import Substitution Studies. It is suggested in para. 9.20 that the most efficient way for government to proceed in developing any import replacement food industries which might require large-scale investment would be to carry out feasibility studies on an industry basis. DPI will need to do some preliminary screening to identify promising industries and suitable land which could be used. The estate sector review (paras. 11 and 12 above) could prove useful in identifying available land. It is recommended that government hire recognized international consultants to carry out the studies. - 50- Appendix 2 Page 1 PAPUA NEW GUINEA AGRICULTURAL SERVICES REVIEW Production and Exports of Major Crops Page No. Table 1: Smallholder Coffee Production by Province .... ............. 2 Table 2: Plantation Coffee Production by Province .................. 2 Table 3: Total Coffee Production by Province ....................... 3 Table 4: Cocoa Production by Provinces .............................. 3 & 4 Table 5: Copra Production by Provinces ............................. 4 & 5 Table 6: Rubber Production by Provinces ............................ 5 & 6 Table 7: Oil Palm Production ....................................... 6 Table 8: Tea Production ............................................ 7 Table 9: Volume of Export Major Agricultural Products .... .......... 7 Table 10: Value of Major Agricultural Exports ....................... 8 - 51 - Appendix 2 Page 2 Table 1: Smallholder Coffee Production by Province (tonnes green bean) Province 1973-4 1974-5 1975-6 1976-/ 1978 1979 Western Highlands 7,700 7,945 9,369 8,376 9,520 Eastern Highlands 5,950 6,532 6,885 6,312 8,954 Simbu 5,350 6,043 6,486 5,566 6,793 Morobe 2,200 2,437 2,535 2,573 2,505 East Sepik 1,400 1,452 1,282 1,581 2,123 Enga 900 908 1,522 1,146 1,503 Milne Bay 107 63 101 153 177 Northern 400 416 483 553 414 Madang 200 228 305 300 419 West Sepik 37 59 217 346 236 Southern Highlands 58 97 112 252 358 Other 80 61 40 37 67 Total 24,382 26,240 29,337 27,195 33,069 Source: Department of Primary Industry Table 2: Plantation Coffee Production by Province (tonnes green bean) Province 1973-4 1974-5 1975-6 1976-7 1978 1979 Western Highlands 4,884 5,114 3,831 4,816 7,355 8,642 Eastern Highlands 3,724 3,935 3,479 2,237 4,413 4,920 Simbu 350 581 343 6 14 - Morobe 611 747 707 296 379 467 Northern/Milne Bay 24 8 33 2 99 22 Southern Highlands 103 271 341 161 464 47 Others 6 6 11 3 5 6 Total 9,702 10,704 8,745 7,521 12,728 14,104 Sources: Department of Primary Industry and Bureau of Statistics - 52 - Appendix 2 Page 3 Table 3: Total Coffee Production by Province (tonnes green bean) Province 1973-4 1974-5 1975-6 1976-7 1978 1979 Western Highlands 12,584 13,059 13,200 13,192 18,162 Eastern Highlands 9,674 10,467 10,364 8,549 13,874 Simbu 5,700 6,624 6,829 5,572 6,793 Morobe 2,811 3,183 3,242 2,869 2,972 East Sepik 1,400 1,452 1,282 1,581 2,123 Enga 900 916 1,528 1,149 1,509 Milne Bay 107 63 101 153 177 Northern 424 458 516 555 436 Madang 200 228 305 300 419 West Sepik 37 59 217 346 236 Southern Highlands 161 368 453 413 405 Other 86 67 45 37 67 Total 34,084 36,944 38,082 34,716 47,173 Table 4: Cocoa Production by Provinces (tonnes) (a) Smallholder Province 1973-4 1974-5 1975-6 1976-7 1978 1979 E. New Brit. 6,138 6,121 4,721 4,640 4,032 North Sols 4,116 5,246 6,010 5,546 8,700 Madang 349 360 511 503 448 New Ireland 81 149 243 244 n.a. W. New Brit. 202 425 355 175 313 Others 309 354 802 797 869 Total 11,195 12,655 12,642 11,905 14,363 - 53- Appendix 2 Table 4(Cont'd) Page 4 (b) Plantation Province 1973-4 1974-5 1975-6 1976-7 1978 1979 E. New Brit. 7,177 7,394 5,295 4,716 5,119 4,516 North Sols 5,502 5,732 4,947 4,531 5,081 4,815 Madang 1,613 1,668 1,397 1,392 1,410 1,018 New Ireland 2,195 2,200 1,508 1,920 1,810 n.a. W. New Brit. 1,018 1,076 737 611 1,932 667 Others 562 677 524 354 457 223 Total 18,067 18,747 14,408 13,524 15,809 11,238 (c) Total E. New Brit. 13,315 13,515 10,016 9,356 8.547 North Sols. 9,618 10,978 10,957 10,077 13,515 Madang 1,962 2,028 1,908 1,895 1,466 New Ireland 2,276 2,349 1,751 2,164 n.a. W. New Brit. 1,220 1,501 1,092 786 980 Others 871 1,031 1,326 1,151 1,092 Total 29,262 31,402 27,050 25,419 25,601 Sources: Department of Primary Industry and Bu.eau of Statistics Table 5: Copra Production by Provinces (tonnes) (a) Smallholdings Province 1973-4 1974-5 1975-6 1976-7 1978 1979 E. New Brit. 15,588 15,086 16,712 15,017 21,846 North Sols 10,762 10,906 8,370 14,879 11,515 New Ireland 9,350 9,283 93794 10,889 5,687 Madang 4,211 5,488 4,749 6,610 8,120 W. New Brit. 2,044 3,146 3,225 3,238 5,102 Others 12,096 11,641 10,634 9,811 13,336 Total 54,051 55,550 53,484 60,494 65,606 Appendix 2 Page 5 Table 5 (Cont'd) (b) Plantations Province 1973-4 1974-5 1975-6 1976-7 1978 1979 E. New Brit. 17,230 19,280 16,246 15,673 20,220 20,866 North Sols 12,709 13,841 12,726 11,954 14,222 12,258 New Ireland 14,897 15,834 13,566 13,851 11,895 4,846 Madang 10,247 11,193 11,863 11,332 7,917 13,310 W. New Brit. 6,803 8,214 7,332 14,544 3,954 5,416 Others 10,810 10,320 8,635 7,604 10,492 6,282 Total 72,696 78,682 70,370 74,958 68,700 62,978 (c) Total E. New Brit. 32,818 34,366 32,958 30,740 42,712 North Sols 23,471 24,747 21,098 26,833 23,773 New Ireland 24,247 25,117 23,360 24,720 10,533 Madang 14,458 16,681 16,612 17,942 21,430 W. New Brit. 8,847 11,360 10,557 17,782 10,518 Others 22,906 21,961 19,269 17,415 19,618 Total 126,747 134,232 123,854 135,452 128,584 Sources: Department of Primary Industry and Bureau of Statistics Table 6: Rubber Production by Provinces (tonnes) (a) Smallholder Province 1973-4 1974-5 1975-6 1976-7 1978 1979 Western/Gulf 55 61 Figure 99 n.a. n.a. wrong Central 120 141 1,119 320 n.a. n.a. Milne Bay/Northern 70 65 47 133 n.a. n.a. Others 3 2 Figure 2 n.a. n.a. wrong Total 248 269 1,137 554 417 555 Appendix 2 Page 6 Table 6 (Cont'd) (b) Plantations Province 1973-4 1974-5 1975-6 1976-7 1978 1979 West/Gulf 394 289 219 137 n.a. n.a. Central 4,809 4,267 2,926 3,355 n.a. n.a. Milne Bay/Northern 740 554 484 218 n.a. n.a. Others 108 176 145 158 n.a. n.a. Total 6,051 5,286 3,774 3,868 3,568 3,688 (c) Total West/Gulf 449 350 - 236 n.a. n.a. Central 4,929 4,408 4,045 3,6753 n.a. n.a. Milne Bay/Northern 810 619 531 351 n.a. n.a. Others 111 178 - 160 n.a. n.a. Total 6,299 5,555 4,911 4,422 3,985 4,243 Table 7: Oil Palm Production (tonnes) Fresh fruit 1975-6 1976-7 1977-8 1978-9 Smallholder ) 98,722 87,369 94,031 102,231 Village ) 3,353 4,274 6,207 Estate 50,115 58,524 47,765 57,769 Total 148,838 149,246 146,070 166,207 Total oil 27,086 27,628 28,673 32,395 Kernel 2,046 3,035 3,558 4,806 Appendix 2 _ 56 _ Page 7 Table 8: Tea Production (tonnes) 1974-5 1975-6 1976-7 1978 Smallholder n.a. 150 235 188 Estate 3,862 4,454 5,390 6,278 Total 3,862 4,604 5,625 6,466 Table 9: Volume of Export Major Agricultural Products (tonnes) Commodity Copra Copra Palm Coffee Cocoa Tea Rubber oil oil beans beans 1.970 85,617 21.670a - 25,783 23,700 689 6,330 1971 92,021 27,161a - 23,934 27,827 1,169 6,337 a 1972 87,515 26,501 3,464 28,193 29,269 1,803 5,934 1973 79,785 27,713a 8,066 31,158 22,071 2,792 5,616 1974 73,568 26,806a 8,734 32,713 28,742 3,965 6,127 1975 95,455 26,565a 18,438 36,769 35,498 4,489 5,474 1976 92,764 25,482 27,087 37,182 30,431 5,633 4,662 1977 87,733 29,743 24,532 36,965 29,392 6,142 4,152 1978 92,164 29,088 28,4±3 45,801 27,129 6,979 4,135 1979P 90,880 30,822 34,527 49,486 28,085 6,978 4,024 p - preliminary a - data for July-June year Source : Bureau of Statistics Table 10: Value of Major Agricultural Exports (K '000 f.o.b.) Copra Copra Palm Coffee Cocoa Tea Rubber Total Oil Oil 1970 13,340 5,801(a) - 20,182 15,549 645 2,798 58,315 1971 14,207 7,805(a) - 20,572 13,643 1,094 2,297 53,618 1972 9,392 5,880(a) 515 20,454 11,021 1,500 1,995 50,757 1973 8,083 4,982(a) 1,148 23,395 11,175 2,048 1,998 52,823 1 1974 23,672 13,761(a) 2,685 28,847 23,338 2,601 3,563 98,467 _ 1975 28,841 14,284(a) 6,786 33,554 40,067 3,866 2,585 129,983 1976 12,133 8,208 6,776 100,160 39,137 5,114 2,653 174,181 1977 22,959 12,577 8,582 143,441 86,349 9,765 2,896 286,569 1978 23,023 12,449 10,483 107,225 62,955 7,833 2,630 226,598 1979P 38,162 20,599 14,441 124,996 60,872 7,982 3,497 270,549 p - preliminary m a 4 (a) - data for July-June year m x Source: Bureau of Statistics PAPUA NEW GUINEA AGRICULTURAL SERVICES REVIEW Table of Contents VOLUME II: THE ANNEXES Page No. A. THE DEPARTMENT OF PRIMARY INDUSTRY: ORGANIZATION STAFFING AND MANAGEMENT .............................................. 1 B. POLICY FORMULATION AND PLANNING ............. .. ................. 22 Appendix 1: 1980 NPEP Allocations by Strategic Objective ....................................... 36 Appendix 2: Government Spending in Primary Industry ... ...... 37 Appendix 3: NPEP Implementation, DPI, 1978-1979 .... ......... 45 C. AGRICULTURAL RESEARCH SERVICES ................................. 46 D. CROP PRODUCTION AND EXTENSION SERVICES ........................ 71 Appendix 1: Outline of an Improved Extension Service ... ..... 80 Chart 1: Organization Chart for an Improved Extension Service ........................................... 87 E. MARKETING AND CREDIT ........................................... 88 F. INVESTMENT INCENTIVES AND CONSTRAINTS ......................... 109 G. LAND TENURE ................................................... 132 ANNEX A PAPUA NEW GUINEA AGRICULTURAL SERVICES REVIEW THE DEPARTMENT OF PRIMARY INDUSTRY: ORGANIZATION, STAFFING AND MANAGEMENT Table of Contents ANNEX Page No. Structure . . . . . . . . . . . . . . . . . . .. . . . . . . . . . 1 Headquarters . . . . . . ... . . . . . . . . * . 2 Provinces . . . . . . . . . . . . . . . .. . 3 Policy Formulation and Planning ... . . . . . . . . . . . . . . 4 Existing Capacity . . . . . . . . . . . . . . . . . . . . ... . 4 Requirements . . . . . . . .. . 6 driorities . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Coordination . . . . . . . . o . . . 8 Headquarters . . . . . . . . . . . 8 Provincial . . . . . . . . . . . . . . . . . . . . . . . 10 Central-Provincial Links . . . . . . . . . . . . . o . * . . *.. 10 Staffing and Administration . . . . . . . . . . . . . . . . . . . . 12 Facilities and Mobility . . . . . . . . . . . . . . . . . . . . . . 16 The Role of DPI in Rural Development . . . . . . . . . . . . . . . 17 Key Issues and Recommendations ..... . . . . .......... 18 Decentralization . . . . . . . . . . . . . . . . . . . . . 18 Policy Formulation .............. . 18 Headquarters Senior Management ... . . ...... .... . 19 Staff Appointments .... . . ..... . . . . . 20 Figure 1: Draft Organization for DPI for Discussion 21 ANNEX A -2- Page 1 PAPUA NEW GUINEA AGRICULTURAL SERVICES REVIEW THE DEPARTMENT OF PRIMARY INDUSTRY: ORGANIZATION, STAFFING AND MANAGEMENT 1. The Department of Primary Industry (DPI) has the main responsi- bility for rural development within the PNG government structure. It operates by way of a network of field extension staff (which accounts for about 60% of its total staff strength), supported by a range of support services in the fields of research, specialist technical advice, marketing, planning, management and economics. In addition, the Department is respon- sible for the protection of the long-term interests of PNG agriculture and the agricultural industries through the administration of quarantine and other legislation and by representing the rural sector both within PNG, for example in national policy formulation, and externally such as at inter- national commodity organization meetings. The extension service is con- trolled by provincial governments and staff are part of the provincial government structures. The functions related to national policies and control as well as the specialist services intended to support extension efforts are the responsibility of the national government. 2. Primary industries are served by a number of other institutions apart from DPI. Within Government, the Departments of Lands and Environment and Commerce and Industry provide very important services to the farm sector. Statutory institutions, such as the PNG Development Bank, the universities, Industry Boards and the Investment Corporation of PNG, also provide important inputs. Special purpose corporations have also been set up by Government to deal with, for example, food marketing, plantation management and pyrethrum processing. In addition, the private sector is heavily involved with primary industry both in production and in providing management, finance, processing and marketing services. Structure 3. DPI operates under the direction of two Ministers. The Minister for Primary Industry is responsible for activities related to agriculture, livestock and fisheries and there is a separate Minister for Forests. All Department staff report to the Secretary for Primary Industry, though the Division of Forests has its own Director. The arrangement of responsibili- ties for these functions has changed several times in recent years. Prior to 1976, the former Department of Agriculture, Stock and Fisheries and the Department of Forests were separate and had their own Ministers. They were then merged to form the Department of Primary Industry, responsible to one Minister. The separate Ministry of Forests was recreated in 1980. - 3 - ANNEX A Page 2 Apart from the Division of Forests, the Department is divided into seven headquarters divisions and branches. 4. Headquarters. The division of responsibilities within DPI head- quarters is based on the following principles: - All basic technical functions related to a particular set of commodities are grouped within a functional branch (The Agricul- ture, Livestock and Fisheries Divisions were created on this basis). - Services which can be provided more effectively on a Department- wide basis and Departmental control functions are grouped in separate branches. 5. The commodity based branches (Agriculture, Livestock and Fisheries) report to the Deputy Secretary, while the service and control branches (planning, economics and marketing; policy review and coordination; agri- cultural education and training; and management services) report directly to the Secretary. 6. The responsibilities of these branches and divisions are summarized below: (a) Agriculture. The Agriculture Division includes a range of specialist branches, such as agronomy, agricultural chemistry, entomology, horticulture, land utilization and plant pathology, which provide support services to people involved in development. As well, there is a separate branch concerned with the develop- ment of major agricultural projects and the provision of spe- cialist advice on certain crops. This division also operates research stations, produces and distributes planting material and maintains the plant quarantine service. (b) Livestock. The Livestock Division has branches and sections which provide the various supporting services required for live- stock development. These include the operation of livestock production and research stations, extension centers, abattoirs, veterinary services and diagnostic laboratories. (c) Agricultural Education and Training. The Agricultural Education and Training Branch includes the formal agricultural training institutions, staff assessment and inservice training, staff development and information services, both within the Department and to the general public. (d) Fisheries. The Fisheries Division was only established as such in 1975 and is responsible for the development of the fisheries - 4 - ANNEX A Page 3 sector. It operates a training college, a research and survey unit and licensing and inspection services. (e) Planning, Economics and Marketing. This Division is responsible for the coordination of Departmental planning, the administra- tion of marketing legislation, provision of marketing services for smallholders, and general economic planning and marketing assistance to Departmental staff. A Development Engineering Branch is administratively part of the Division. (f) Policy Review and Coordination. This Division is responsible for the evaluation of Departmental policies and programs in their relationships to government objectives. It is also responsible, through four Area Coordinators, for the coordination of Depart- mental field activities. (g) Management Services. This Division provides personnel, accounting, clerical, supply and office services to the Department. It has a major role in coordinating budget preparation and controlling expenditure within the Department. 7. Provinces. Under the Australian administration, Papua New Guinea was divided for administrative purposes into 19 districts and about 80 sub- districts. Most of the authority and responsibility rested with central government and departments located in Port Moresby. Following Independence, the Organic Law on Provincial Government was passed by Parliament in March 1977. This provided for the establishment of provincial governments and the transfer of responsibilities and financial powers for several key activities from central government to provinces. In agriculture, provision is made for provincial government to assume responsibility for most activities with the exception of research, credit, quality control and marketing of export commodities and quarantine. 8. The Provincial Agricultural Service is a division within each of the 19 provincial secretariats. The Secretariat includes divisions for business development, community development, forestry, district services, public health, education, information and administration and finance, in addition to the Rural Development Division. The Rural Development Division is headed by a Provincial Rural Development Officer (PRDO) who is usually a diplomate from an agricultural college with several years experience. He reports to the Provincial Secretary and the Provincial Minister of Agricul- ture, and is responsible for the planning and implementation of all agricul- tural programs within the province, but excluding large-scale national development projects. The PRDO and his staff have many responsibilities, including assistance with the collection of statistics, regulatory work (e.g. inspection of processing facilities for the Industry Boards), develop- ment work (e.g. replanting programs), collection and marketing of produce for farmers in remote areas, credit and extension. The PRDO is assisted at - 5 - ANNEX A Page 4 Provincial Head Office by several RDOs in charge of divisions or sections reflecting the main activities, and which vary from province to province. The basic positions are usually - Provincial Agriculture Officer, Provincial Livestock Officer, Provincial Fisheries Officer, and Provincial Staff Devel- opment Officer. A Provincial Forestry Officer may be included in lieu of a Provincial Forestry Division where forestry activities are limited. These are supplemented by RDOs heading special purpose sections. These usually include nutrition and subsistence crops, and a special duties RDO to assist the PRDO and work on the preparation or implementation of special projects. In East New Britain there are additional RDOs for cocoa rehabilitation, and vegetable and hybrid coconut promotion, as the key crops are copra and cocoa. 9. The process of decentralization of powers and the establishment of viable provincial government and service departments is still underway, and many issues still have to be resolved regarding the relative roles of central and provincial departments and the working relationships. Division of a relatively small country of 3 million population into 19 semi-autonomous provincial units has thrown tremendous pressure on the small cadre of well- trained and experienced personnel to staff and effectively run the full range of basic departments at both central and provincial levels. Policy Formulation and Planning 10. Existing Capacity. Within the Department, responsibility for policy formulation and planning falls mainly on the Planning, Economics and Marketing (PEM) and Policy Review and Coordination (PRC) Divisions. As well as its policy evaluation role, the PRC Division is required to coordinate field activities. In addition, DPI staff involved in two ongoing integrated rural development projects and the National Capital District are administra- tively attached to PRC Division. 11. Since this Division was established, the task of coordinating field activities has increased in size and complexity following the estab- lishment of provincial governments and the vesting in them of powers over agricultural extension services. Ad hoc projects such as the South Coast Food Project and agricultural aspects of the 0 Tedi mining development have also been given to the Division. 12. The headquarters establishment consists of only fourteen positions. These are an assistant secretary, four area coordinators and clerical, administrative and stenographic support. Of the senior positions, the assistant secretary and two of the area coordinators are acting appointments. Of :he other two area coordinators, one is on a training course and the other has to cope with a substantial work load in addition to that laid down in the area coordinator's duty statement. 13. In short, PRC Division has been overtaken by events and its establishment is now completely inadequate to discharge its responsibilities. The current temporary tenure of the occupants of senior positions is a -6- ANNEX A Page 5 further serious impediment to efficiency. Given the inability to cope with the full workload, the Division has given priority to its responsibility for field operations. The policy evaluation role has consequently suffered. 14. The PEM Division contains the Departmental Statistics Section and produce purchase and marketing operations, as well as the economics and planning sections. The planning section is responsible for headquarters planning and for assisting planning by provincial governments. It has thirteen positions of which seven are presently vacant. Two staff, including the Chief Planning Officer are acting appointees. Only two of the section staff have economics qualifications. 15. Planning within DPI is heavily concentrated on National Public Expenditure Plan (NPEP) projects. The reason for this is the fact that the Department sees the NPEP as the only means of getting additional resources. An adverse consequence of this concentration is the neglect of the recurrent and continuing activities of the Department which are financially more important than NPEP projects (almost 60% of total DPI appropriations in 1980). A diversion of some planning expertise. to an examination of the use of recurrent DPI resources could be far more pro- ductive than the generation of more NPEP projects which will only add to the existing administrative and implementation problems. Such a diversion would be necessary if it is decided to attempt a zero base budgeting exercise for DPI. 16. The economics section contains the field economists as well as those at headquarters. Field economists are required to assist in provin- cial planning, as well as carry out economic survey and research work. Headquarters economists carry out economic investigations at a national level and represent or advise the Department on matters relating to commodity marketing boards and international commodity agreements. The section has twenty positions, nine of which are presently not filled. Two officers, including the Chief Economist, are acting appointees. The Chief and Senior Economists have heavy line responsibilities within the section as well as being expected to provide leadership and supervision. 17. The field economists are responsible directly to the Chief Economist and tend to operate independently. This arrangement is probably satisfactory for experienced officers, but is not for inexperienced staff, either national or expatriate. The section has a poor record of retaining national graduate staff and work carried out by a specially appointed train- ing officer indicates that the lack of supervision and assistance is a major factor causing national staff to leave. 18. The economics and planning sections, like the PRC Divisions, are severely understaffed and consequently their capacity to carry out policy analysis and planning is limited. - 7 - ANNEX A Page 6 19. Requirements. Within DPI the requirements for economic, planning and policy analysis include the following: (a) A Capacity to research and analyze policy questions. This capacity would need to be linked with the Departmental policy-making bodies as the major source of advice. It should be located at national, provincial and any other level of DPI organization at which policies are formulated. The policymaking bodies should also establish the work priorities in policy analysis. Initially, staff work4ng in this area should concentrate on the consolidation and review of existing policies, since no comprehensive policy state- ment currently exists. In developing new policies, the ready acceptance by field staff of commodity based policies should be borne in mind. As well as analyzing DPI policies, policy analysis staff should be responsible for monitoring and evaluating policy proposals of other Government departments and agencies which affect rural development. (b) Capacity and authority to coordinate planning and project prepara- tion. Planning staff should work with staff of technical divisions and with provincial staff in preparing projects and other spending proposals for consideration. To guarantee the necessary involve- ment of planning staff, appropriate procedural requirements, such as some form of certification by the Chief Planning Officer or his equivalent, could be incorporated into the decision-making process. Close ties should also be established between planning and Departmental accounting staff. At provincial level, there is already pressure from many PRDOs to have economists responsible for planning in all provincial DPI staff establishments. This is clearly impossible with current staff strength and in any case this question would need to be considered in conjunction with the roles and numbers of field economists to be employed. Any move to establish regional suppc-t.,,enters for DPI provincial staff would also affect the need for economists in provinces. In addition, any move by the National Planning Office to provide more general planning staff to provinces would impinge on DPI provincial planning requirements. (c) Capacity to carry out economic surveys and analysis. This should embrace questions of both production and marketing, since they are generally closely related and the basic skills required are the same. Given the likely continued shortage of skilled staff, work should be of an applied rather than theoretical or academic nature. It should be addressed to current policy or management issues. In the marketing area work could include the analysis of alternative marketing systems, surveillance of marketing margins, scrutiny of Government produce purchasing operations, market assessment for -8- ANNEX A Page 7 new products and market intelligence work. The work of advising and representing the Department on questions related to the commodity marketing boards and international agreements would continue to be a major responsibility in this area. Outside the marketing area, there will be a continuing need for industry surveys and there is a great need for farm management research and extension, especially in the smallholder sector. Extension would necessarily be mostly through the existing extension network by in-service training of extension staff on particular farm manage- ment questions and by collaboration between field economists and extension staff. 19. If the economic work is to be useful, it must be accepted by the rest of the Department. It must be both relevant and of a high standard if it is to be accepted. One way of ensuring relevance is to allow the rest of the Department a say in the formulation of work programs. This could be included in the agenda of the conferences between the different elements of DPI which, it is proposed later in this annex, should occur as part of routine Departmental management. Standards can best be preserved by using the most senior and experienced staff in supervisory and assisting roles with junior staff. This requirement applies especially to field economists who are currently largely divorced from the mainstream PEM activities. 20. A further development which would enhance the efficiency of the section would be a more systematic approach to data storage and retrieval. Much earlier DPI economic work is not readily accessible and there is a danger that some could be completely lost if there is continuing high turn- over of staff. This might lend itself to mechanization and consideration should be given to the use of a mini computer for this purpose. The costing work involved in planning and research data storage and retrieval would be similarly suited to computerization and these operations might be able to share one machine. 21. Priorities. The most urgent priority for the PEM division is to fill with properly qualified staff the positions which are currently vacant. After this has been achieved and the new recruits are on the job, a review of the establishment should be carried out. A salary review might also be necessary in the light of the success of the recruitment program. Following the filling of lower level positions, more senior staff would have to spend less time on their own projects and more time supervising junior staff. This review would have to take cognizance of the overall level of resources available to the Department and may need to be slanted towards the most productive use of a given level of staff rather than a staff requirement to complete all economic and planning tasks. 22. Urgent attention should also be given to the administrative requirements of the division. Professional officers complain of having to spend a high proportion of their time on administrative work which could be - 9 - ANNEX A Page 8 done at much less cost by specialist administrators. Simplification of administrative procedures would also help. The maintenance of a divisional data system could be an additional responsibility for an administrative officer(s). 23. The Senior Economist (Training), whose position is temporarily funded by EEC, has already directed his attention to the needs of field economists for support from headquarters. In particular, he has proposed a number of measures designed to make field economists more productive and to increase retention of national staff. Most important of these are the pro- vision of more professional support and the preparation of career development plans for each officer. His appointment is initially for two years, but it is likely that such a person would be required indefinitely. Consideration should be given to the creation of a permanent position for a senior economist to supervise, assist and train feld economists. Coordination 24. Headquarters. At national level, political responsibility for the policies of DPI rests with the Minister and the Secretary is responsible for the efficient operation of the department. The policies and directions chosen by the Minister must conform with the overall objectives of the government. In administering the department, the Secretary must follow procedures applying to the public service generally and rely on the services of central servicing agencies. He is also subject to the control of several committees established to regulate certain aspects of public service activity. 25. Operations which are subject to external control or are performed out outside the Department include recruitment, the purchase of equipment, overseas travel, the hiring of consultants, the allocation of housing and office accommodation and the allocation of land. The extent to which external controls restrict departmental heads was criticized by the Committee on Administrative Problems which reported in July 1979. These controls apply notwithstanding the overall financial controls which are embodied in the budget and National Public Expenditure Plan processes. 26. Within the Department several committees operate to assist coordi- nation. The most important at the policy level is the Standing Committee (SC) which consists of the Secretary, Deputy Secretary, Assistant Secretaries and Area Coordinators. The SC meets every 5-6 weeks to consider policy questions and make recommendations to the Secretary. When the Secretary is in attendance, final decisions can be made on the spot. 27. The SC appears to be performing a very useful function, but its effectiveness is limited by a number of factors. Agenda items can be intro- duced by any committee member and this can lead to piecemeal and disjointed definition of the role and power of the committee relative to that of the - 10 - ANNEX A Page 9 Assistant Secretaries. There seems to be little incentive or requirement for Assistant Secretaries to use the SC rather than recommend directly to the Secretary. In addition, some proposals cannot be decided upon because the submission is incomplete or inadequate. The adoption of a standard format for submissions could overcome this problem. 28. The most serious deficiency in the organization of the SC is the lack of an adequate secretariat. This should take an active role, in consultation with the Secretary, in formulating the agenda to ensure that the SC, which includes the most influential and able officers in the Department, discusses the issues most important to the Department. The Secretariat should also ensure that submissions are of a sufficiently high standard and follow-up where necessary to ensure that final decisions of the Secretary are communicated to committee members. It should also monitor the implementation of decisions. 29. The members of the SC also meet for one hour weekly as a "clearing house" for information within the Department and to consider less signifi- cant but urgent matters. This also appears to be a useful arrangement and the time commitment is reasonable. 30. Other important groups in the Department include the Staff Develop- ment Committee and the Study Group to investigate administrative problems in the Department. The latter, which is chaired by the Assistant Secretary, Management Services, has wide-ranging terms of reference to recommend solu- tions to the range of administrative matters causing concern within the Department. The International Cell and Liaison Officer who operate at a high level, but are not under the control of an Assistant Secretary, also perform coordination roles. Their roles, relative to those of the Assistant Secre- taries, are not, however, well understood and attention should be given to clarifying these roles to avoid confusion and possible resentment. 31. Within divisions and branches, the assistant secretaries are responsible for the coordination of activities. The coordination task varies considerably but in the case of the Agriculture Division, which employs a total of over 1,000 people including laborers, is demanding. The effective- ness of divisional coordination must be suffering from the preponderance of acting appointments. There have also been frequent changes in Assistant Secretary appointments and this is not conducive to effective coordination as that requires appointees to have a comprehensive knowledge of their divisions, something they can only acquire if they remain in them for a reasonable time. 32. The Secretary and Deputy Secretary obviously must play key roles in departmental coordination, especially when divisions with coordination responsibility are seriously understaffed. There are presently seven assistant secretaries plus the Director of Forests reporting directly to these officers and this must create a heavy workl and for them. It may be - 11 - AATEX A Page 10 desirable to reduce their span of control by requiring more coordination and acceptance of responsibility at a lower level. This could be achieved by two methods. 33. A second Deputy Secretary position could be established and the two Deputy Secretaries would each be responsible for part of the Department. Alternatively, the Secretary and Deputy Secretary positions could be retained as they are and some of the existing divisions merged and placed under the control of First Assistant Secretaries. 'ither method would result in the Secretary having fewer staff directly responsible to him and make his work- load more manageable. During such a rearrangement consideration could also be given to the recreation of a separate Department of Forests. The mission favors the creation of a second Deputy Secretary position as well as the rationalization of other divisions and the separation of the forestry activities. 34. Provincial. The coordination of field activities of DPI in the provinces is the responsibility of the PRDO who is responsible to the Provincial Secretary and the Provincial H'inister for Agriculture. Coordination of the activities of all departments in the provinces is the responsibility of the Provincial Secretary and the Provincial Secretariat. Similar arrangements exist at District level where DPI activities are the responsibility of a District Rural Developnent Officer and there is a District Officer and District Coordinating Committee responsible for coordinating the activities of all government personnel posted to that District. 35. The position of PPDO involves much more responsibility than that of its equivalent prior to provincialization. Its status and salary remains, however, inferior to that of many headquarters positions with the result that there is a continuing loss of the more capable and experienced PRDOs to headquarters to occupy positions of seemingly less importance. Some provinces have also appointed PRDOs from that province notwithstanding the fact that there may have been better qualified candidates available for the position. Tt is suggested that the status of PP.DOs should be upgraded to approximately that of headquarters divisional heads and that the national public service ensure that only the best qualified officers are appointed to these positions. 36. Central-Provincial Links. The most serious deficiency in DPI coordination is the lack of adequate links between headquarters and the provinces. Policy control is shared between the national Yinister for Primary Industry and Provincial HTinisters for Agriculture yet there is no formal and regular forum in which they can discuss policy issues. Similarly, there is no formal advisory body comprising the Secretary for DPI, PRDOs and key headquarters officials to prepare material for consideration by a meeting of ministers. The only formal recognition within the DPI organization of - 12 - ANYEX A Page 11 this need is through the PRC division which, as is pointed out in above, is understaffed and in any case has many other responsibilities. 37. It is recommended that a National Agricultural Council (NAC) should be established, comprising the Ifinisters for Primary Industry and Agricul- ture and that it should meet once or twice a year to resolve policy issues, determine mutually suitable development programs and to provide full political commitment by Provincial and National Governments to agreed policies and programs. It is also recommended that the membership of the Standing Committee be expanded to include PRDOs and that this body he responsible for preparing material for the MAC. It is also suggested that it be renamed the National Agricultural Advisory Council (NAAC). In addition, it should consider other issues which do not require ministerial involvement. It might also be desirable for the Standing Committee to continue to meet in its present form for consideration of issues not requiring the involvement of all PRDOs. It is recognized that the NAAC will have a membership of about thirty and that meetings will be time-consuming and expensive. The benefits in Departmental morale and performance should, however, more than compensate. There are also ways in which the undesirable consequences of the establish- nent of the NMAC could be reduced: with a capable secretariat some business could be transacted by phone or mail, sound preparation and precirculation of material will reduce discussion time and some issues could be handled by smaller working committees drawn from the membership of N-AAC. 38. These bodies could be used to prepare a comprehensive five year agricultural development plan. The lack of general departmental policy directives was criticized by all sections of DPI and with decentralization there is a risk that provinces and national flPI could adopt inconsistent policies if a comprehensive plan is not adopted. Steps in preparing a plan would be: (i) NAC to prepare a joint statment of objectives and priorities for a five-year period; (ii) national and provincial DPI planners to collaborate in drafting a plan covering all commodities and sectors; (iii) review of the draft by bTAC; and (iv) final drafting by DPI planners. Such a plan could provide a basis for the allocation of finance and other resources over a five-year period. Preparation should not await the resolution of all of DPI's staffing and organization problens; it should proceed immediately using outside assistance as required. The process should be repeated on a regular basis, hopefully with improvements in quality with each repetition. - 13 - ANNEX A Page 12 Staffing and Administration 39. The provision of management services to DPI headquarters is cen- tralized in the Management Services Branch. In provinces, they are provided by the Bureau of Management Services which seems in general to be affected by the same problems faced by the Management Services Branch. The Management Services branch employs a total of over 100 staff working in the fields of personnel management, finance and office services. The position of Assistant Secretary is filled on an acting basis by a former extension officer who substantively holds an Area Coordinator position. Until his recent appoint- ment, the position had been held by a series of senior officers and at one stage the duties were discharged by a committee of three. 40. The sections of the branch and their staffing positions are: (a) Staff Development. The section head is acting, but the other three positions are substantively filled. (b) Lands and Buildings. Two of the three positions are filled sub- stantively. (c) Budget Section. The only two positions are occupied by acting appointees. (d) Accounts Section. The section head is substantively appointed and twenty-six out of thirty-four positions are filled. However, twenty of the twenty-six are appointed only on an acting basis. (e) Organization and Methods. The section head and two other staff are acting. Five of nine positions are filled. (f) Office Services. The section head is acting and twenty-one of thirty-five positions are filled. (g) Typing Pool. The head is acting and fourteen of sixteen positions are filled. (h) Recruitment. This section contains only three positions, two of which are filled on an acting basis. (i) Personnel. The head is acting, as are eight others of the eighteen staff on strength. The section contains twenty-one positions. (j) Internal Audit. The section head is acting and seven of the twelve positions are filled. 41. The staff of the Management Services Branch is seriously run-down. Eight of ten section heads are acting appointees. Of the 139 positions in - 14 - ANNEX A Page 13 sections, only 101 are occupied and of these 46 are filled on an acting basis. The high incidence of acting appointments could be caused by a very high staff turnover, by a slow recruitment process or by the fact that there are not enough qualified people. In the case of the Management Services Branch, all three factors are probably present and are reflected by what is seen throughout the Department as generally poor administrative support. 42. The concern at poor administrative performance within the Department is reflected in the breadth of the terms of reference of the Study Group to investigate administrative problems. They embrace auditing and accounting, basic services such as typing, telex, telephone and registry, staff morale, discipline and productivity. This group is chaired by the acting Assistant Secretary, Management Services and draws on the expertise of other senior Departmental staff. No doubt it will, in the course of time, produce sound recommendations on the issues which it tackles. Implementa- tion may be more difficult since it will depend largely on the services of Management Services staff which is very much under strength. 43. Within divisions this concern is being reflected by the unofficial appointment of administrative support staff. The alternative as seen by the Assistant Secretaries is to use highly qualified technical staff as adminis- trators. 44. The administrative problems affecting DPI have been noted by the Committee on Administrative Problems in 1979 as affecting the whole public service. Complicated procedures and inexperienced staff were seen to be particular problems in the fields of accounting and personnel management. This being the case, it is unlikely that the problems of the Department can be solved by the recruitment of experienced national staff from outside the Department. If that were successful, it would only be at the expense of other Departments. The simplification of procedures could produce benefits in the short-run but would probably require the hiring of outside management expertise. In many instances also, this task would need to be tackled on a public service-wide basis since the procedures and regulations are imposed on a general, not departmental basis. 45. Within the Department as a whole, the staffing position is confused by the fact that some provinces have assumed complete responsibility for DPI extension staff and by poor maintenance of statistics. Nevertheless, in September 1979, the Department had 3,106 staff which was 17.3% below the staff ceiling. By March 1980, total staff had increased to 3,257 but this was still well short of the 1978 staff ceiling which presumably indicated what was considered to be necessary staff numbers at that time. The increase came from increased employment of national staff as the number of expatriate staff decreased from 369 to 303 over the period. 46. At the total work force only 9% are expatriates. Only 6% are university graduates, 42% have attended agricultural college, and the balance are mostly staff with no formal training in agriculture. The majority of - 15 - ANNEX A Page 14 experienced expatriate and graduate staff are located in Central Offices. About 1,842 or 57% of the work force is stationed in the provinces. About 22% hold a diploma, 30% hold a certificate in agriculture, and the balance (48%) are Rural Development Assistants (RDAs) with no formal training in agriculture. Key problems may be summarized as follows: 47. Too many of the total staff, and especially experienced staff, are located in Central Offices, which seriously reduces the capacity of the provinces to plan and implement programs. This reflects current organiza- tion, salary structure and working conditions in the provinces. Although there may be lack of housing and services and a higher cost of living in some of the less-developed areas, there are no zone allowances to attract and keep capable staff in those areas. There are inadequate senior positions, and the salary range of key positions such as PRDO or head of section is not sufficient to keep well-qualified experienced men in the post. High quality staff must move to Port Moresby or join the private sector to advance their c areer and salary. 48. There is an overall lack of well-trained experienced staff through- out the system. There is a high percentage of RDAs, a very low percentage of university graduates, and although reliable statistics are not available, it is understood that many of the diploma and certificate holders have limited experience. This can be attributed to a number of factors: the large loss of expatriates after independence; too rapid a move toward nationalizing the service before sufficient nationals had gained adequate experience; limited opportunities for effective on-job training, due to the thin spread of experienced personnel, and difficulties in recruiting well- trained and/or experienced personnel for key positions. 49. The overall level of experience also gives rise to concern. This is especially the case with expatriate officers, over half of whom had less than five years service in PNG. Details of staff experience are shown in Table 1. Table 1: PERIOD OF SERVICE OF DPI STAFF (PERCENT) Years 0-4 5-9 10-15 15 Overseas 55.9 23.2 11.3 9.6 National 30.5 25.6 27.4 16.4 Source: Public Service Commission Statistics Section - 16 - ANNEX A Page 15 50. The retention of expatriate staff employed on contracts requires either long-term contracts, which may be politically unacceptable, or alert personnel management. If it is desired to retain an officer, this desire must be made known to him well before the expiry of his contract and before he starts to seek other employment. This will require close cooperation between Divisions and the personnel section. Advance warning of expiry of contracts must be provided to divisions on a routine basis and the division in turn must make a decision promptly and advise the officer concerned and the personnel section. 51. The position with regard to the supply of diplomates and certifi- cated officers is reasonably satisfactory. The four agricultural colleges have a potential output of 400 per year, which approximate estimates of future requirements. It is DPI policy to replace the RDAs progressively with certificated personnel but the details of the program have not been worked out, and there may be practical difficulties in persuading RDTs to work in the more remote areas without adequate incentives. In the meantime, the uncertainties have led to a drop in the morale and performance of the RDA and it is important to resolve this issue as quickly as possible. The supply of agricultural graduates is unsatisfactory. Estimated demand is at least 100 yer year, but planned output is only about 25 per year, with only 20 graduating in 1979. Further, there is inadequate provision for students to specialize, leading to an acute shortage of well-trained entomologists, pathologists and chemists. Recruitment of experienced expatriates to key technical and managerial posts to train understudies and their staff, offers an immediate solution, but this is difficult under present circumstances. There is a ceiling on the number of expatriates that can be recruited. Salaries and working conditions are marginal to attract the high caliber experienced personnel required, and an acute lack of suitable housing throughout the country is a key constraint. Under present recruiting procedures, national contenders must be screened before overseas applicants can be informed of the progress of their application. This may take up to three months. With this type of delay many good overseas candidates are lost. Due to the constraints imposed by the bureaucracy in recruiting and retaining high caliber expatriate or national staff, there is discussion in some quarters of establishing management agencies which can operate outside the rules imposed by the public service. This is a clear signal to Govern- ment that the total system needs review. 52. It is clear from the above that there is an enormous demand for effective training of nationals. As indicated, effective on-job training is seriously limited by the thin and unequal spread of experienced personnel through the service; the heavy administrative load imposed by an inefficient management system, and lack of well-defined supervision and on-job training procedures to meet present circumstances. Further, there are cases where a first-rate expatriate is available, but has insufficient qualified national staff to work with him. Given its limited capacity, the training section of DPI appears to do a reasonable job in arranging training courses, but suffers several constraints: - 17 - ANNEX A Page 16 (a) there are insufficient seats in the National Administration, management and secretarial colleges to meet DPI requirements; (b) ad hoc training sources arranged within DPI are not always fully effective, due to the lack of teaching skills of staff presenting the courses; (c) overseas training courses are not always used effectively, due to the low educational standards of trainees, the short notice given for the courses, and the lengthy procedures necessary to process prospective candidates; and (d) the high mobility of staff within the service seriously reduces the impact of all forms of training and concurrently increases the demand when staff switch to different disciplines to gain promotion. 53. In general, there seems to be very little management information generated on a routine basis by the Management Services Division. Top departmental management including the Secretary and the Standing Committee need to be able to review informative summaries of the staffing and financial situations on a regular basis. Attention to this area could assist in improving the performance of the Department in general and its below-par NPEP implementation in particular. Facilities and Mobility 54. There is sufficient office space, facilities and basic equipment in most sectors of the agricultural service for the staff to perform their duties satisfactorily. Lack of adequate recurrent budget for their maintenance and supplies is a common problem, and there would be obvious advantages to housing central DPI in one building, as opposed to the scatter of temporary buildings as at present. While the present arrangement is workable, it reduces regular contact between various sections of the depart- ment, and makes effective supervision and communication rather difficult. 55. A critical constraint is lack of suitable staff housing in Port Moresby and many of the provinces and outstations. This is a key factor affecting the recruitment and posting of staff and staff morale, and appears to be a major constraint throughout the Public Service. Large numbers of expatriates and their families must spend prolonged periods living in hotels at considerable expense to Government, and Nationals are often forced to leave their families and find temporary accommodation with relatives and friends. It is reported that even when finance is available and a building program has been approved, it may take 2-3 years for the houses to be built. This problem is the subject of investigation by a separate committee and it is hoped that workable solutions will be produced. 56. Staff travel is provided for in three ways - the use of Government vehicles, the use of private vehicles and the use of public transport. The Plant and Transport Authority (PTA) purchases vehicles on behalf of the - 18 - ANNEX A Page 17 various sections of the service, maintains them and hires them back to the service. Only a few vehicles are on permanent hire and the majority are kept in the transport pool. In other cases government officers are allowed to use their own vehicles for work and claim a mileage allowance. In several sections of the service the following constraints were reported. Hire rates charged by the PTA are excessively high and vehicles are not always available when required. Mileage allowances paid to officers for use of their own transport are not adequate. Budget allocations for travel by public transport are not adequate in undeveloped provinces, where a large amount of air or sea travel is required. Where boats are owned and operated by the province services, maintenance and repairs present a major problem. Allow- ances paid to staff while travelling have not been adjusted since 1974, and are not adequate. This indicates that there are several disincentives for staff to travel, and it could be expected that field coverage, frequency of field visits, and supervision of production areas and staff would suffer as a result. The Role of DPI in Rural Development 57. DPI is the main government department involved with rural develop- ment, but its efforts are supplemented by those of other agencies in both the private and public sectors. Within government, the National Planning Office Finance Department, National Investment and Development Authority, Depart- ment of Foreign Affairs, Department of Lands, Department of Commerce, Depart- ment of Decentralization, Marketing Boards, the Development Bank, the Invest- ment Corporation and several government corporations are involved with the agricultural sector. In the private sector, businesses and missions perform a range of operations including input supply, extension advice, production, processing and marketing. 58. Historically, DPI's field activities have been aimed mainly at smallholders, with larger scale developments being more independent of government support. With the increased emphasis on growth in the smallholder sector there has been a corresponding increase in the demands on DPI to stimulate development. The lower levels of large-scale private investment (discussed in Annex F) in agriculture over the past decade are intensify- ing these demands. 59. DPI has provided a full range of support services to smallholders. As well as advice, smallholders are often provided with planting material, assistance in obtaining credit, transport, processing and marketing services. At the same time, other smallholders have developed enterprises with virtually no government assistance. Given the present and likely future limitations on DPI resources, a review should be carried out of the range of services provided. This review should aim at identifying those tasks which the smallholders themselves can perform, those services for which they should pay and those which could be provided by some organization other than DPI. To the extent that services are provided to estates, the exercise should be repeated for that sector. - 19 - ANNEX A Page 18 60. Within the public sector, all organizations are affected by similar problems and in particular by a shortage of experienced staff. Careful coordination of the rural development activities of all agencies is required to ensure that efforts are not duplicated and that the program is internally consistent. This should occur to some extent in the budget and planning processes but there may be a need for more inter-departmental and agency committees to coordinate activities in particular areas. In addition, there may be a need for existing coordinating committees to become more active. Key Issues and Recommendations 61. Decentralization. The organization of DPI does not yet reflect the fact that the extension services, arguably the end product of most DPI activity, are the responsibility of provincial government. Provincial DPI structures have not been adjusted to take account of their more autonomous status and greater responsibility. Nor have headquarters structures been adapted to perform the function of supporting and assisting provincial extension staff. This function must be seen as the most important part of the responsibilities of DPI headquarters. 62. The status of PRDOs must be enhanced and the status of field positions generally reviewed to reverse what the mission sees as an undesir- able tendency for the most capable and experienced staff to be drawn into headquarters. Similarly, provincial ministers for Agriculture and PRDOs must be brought into the policy formulation process in a systematic and formal way. It is recommended that a National Agricultural Council comprising the Ministers for Primary Industry and Agriculture be created and that this body be serviced by an officials committee comprising the existing Standing Committee and PRDOs. 63. The headquarters organization of DPI should also be changed so as to give more effective support to the provinces. Where possible, specialist support staff should be located in regional centers rather than Port Moresby and a specialist extension branch should be created whose responsibility is supporting provincial extension activities. Other head- quarters function should be also be reorganized to correspond with provincial activities. These issues are discussed more fully in Annexes C and D. 64. Policy Formulation. There is an urgent need for DPI to review its policies. Its resources are limited, the demands made on it everincreasing and implementation capacity is strained. Under these circumstances, it is vital that Departmental efforts should be concentrated on high priority activities and that low priority activities should be reduced or eliminated. shortages have resulted in Departmental priority-setting being relatively neglected in recent years. The concentration of planning efforts on the somewhat piecemeal preparation of NPEP projects may also have contributed to The changes accompanying provincialization, staff turnovers and staff this neglect. - 20 - ANNEX A Page 19 65. The section responsible for policy formulation is, as far as that function is concerned, not staffed at all and the planning section is seriously understaffed both quantitatively and qualitatively. Policies and plans will not be developed unless there are trained staff allocated to do that work. It is recommended that the policy formulation and planning roles be combined and located in the PEM Division. Initially, action should be taken to fill the vacant positions in that Division. Later, a fuller review of the establishment may be desirable, but recruitment should not await that review. 66. Provinces also need a capacity to prepare policies and plans. An ideal solution might be the provision of an economist to each Province but that solution is not practicable in the near future. As an immediate measure, the exercise of greater control over the work of field economists, and travelling by headquarters economists and planners could give all Provinces access to planning expertise for their most pressing requirements. 67. The planning capacity should also be explicitly linked to the policy-making process by acting as secretariat to the NAAC and NAC. In order to ensure consistency, sections and divisions should be required to use its services and proposals should not be considered by the policy-making bodies until the planning section has had an opportunity to scrutinize them. 68. Headquarters Senior Management. Certain changes in the arrangement of divisions and branches at headquarters would be desirable to reflect the changes which have occurred in its role. A proposed arrangement is outline below. This proposal differs from the current organization in the following ways: (i) The current Agriculture Division is split into extension and research arms. This is suggested because of the need to provide a specific extension support unit for provincial governments, the need to reunite the various research sections to make management easier and because of the size of the Agriculture Division. (ii) The Policy Review and Coordination Division is disbanded. The provincial liaison role would be taken over by the Extension Division and the policy review role would be taken over by the Planning, Economics and Marketing Division. (iii) A new Development Services Division would be created. This would include the Development Section which was formerly part the production and distribution of planting material and the operation of planting programs as opposed to more general field extension. In addition, this Division would be respon- of the Agriculture Division. It would also be responsible for sible for assisting and dealing with larger scale investors interested in agricultural projects. - 22.- ANNEX A Page 20 (iv) Forestry would be recreated as a separate department. It has its own Minister, office facilities and Director and little overlap with DPI activities. Its removal would reduce the heavy workload of the Secretary of DPI. (v) A second position of Deputy Secretary would be created in order to keep the spans of control of the departmental top management personnel to reasonable levels. It is suggested that one Deputy Secretary would be responsible for fisheries, livestock, extension and research and the second for management services; planning, economics and marketing; education and training; and production services. 69. It should be stressed that while the mission believes some reorgani- zation must occur, it does not wish to appear dogmatic about the details. This proposal is submitted as a basis for discussion. The reasons for the proposal have been outlined, but the details would be better decided by those who will have to make the new organization function. The proposal is presented diagrammatically in Figure 1. 70. Staff Appointments. Urgent action must be taken to fill all the Deputy Secretary and Assistant Secretary positions on a substantive basis. Hopefully the capable officers now filling them will be appointed to most positions, but their morale should be boosted greatly by having secure tenure of their position. More far-sighted management of the Department should result. If it is likely that positions will be changed quickly as a result of Departmental reorganization this action should be delayed. If long delays (greater than six months) are likely, action should proceed on the basis of existing positions. 71. In addition, urgent action is required to fill key positions which are currently vacant. The Management Services and PEM Divisions are severely affected by vacancies and are especially important since they are service divisions on whom other divisions rely. Where previous attempts to fill posi- tions from within the national public service have failed, consideration should be given to overseas recruitment. In addition, careful attention should be given to methods of retaining capable expatriate staff in order to minimize the emerging problem of inexperience. PAPUA NEW GUINEA Agricultural Sector Review Draft Organization for DPI for Discussion | Minister for Primary Industry| National Agricultural Council National Agricultural |------| Secretary Advisory Council Livestock FisheriesCrop Crop Management Planning Education Development Dveepy Research Extension Services Marketing (TechniTrni Seerivice (D > - 22 - ANNEX B PAPUA NEW GUINEA AGRICULTURAL SERVICES REVIEW POLICY FORMULATION AND PLANNING Table of Contents ANNEX Page No. p. Determination of Priorities . . . . . . . . . . . . . . . . . . 2 24 The Preparation of National Projects . . . . . . . . . . . . . . . 4 26 Provincial Projects and Planning ..... . . . . . . .. .... . 5 27 Shortcomings of the Project Approach. . . . . . . . . . . . . . . . 7 29 Programming Approach to Planning. . . . . . . . . . . .. . . . . . . 8 30 Monitoring and Implementation ... . . . . . . . . ...... . 10 32 Summary and Recommendations . . . . . . . . . . . . . . . . . . 11 33 Appendix 1: 1980 NPEP Allocations by Strategic Objectives . . . . . . . . . 36 Appendix 2: Government Spending in Primary Industry . . . . . . . . . . . . 37 Appendix 3: NPEP Implementation, DPI, 1978 and 1979 .. . . ... . 45 -23 - ANNEX B Page 1 PAPUA NEW GUINEA AGRICULTURAL SERVICES REVIEW POLICY FORMULATION AND PLANNING 1. Papua New Guinea has made a determined effort over the last few years to define a set of economic and social policies and to establish a capa- bility for allocating government resources in a disciplined and consistent manner. The first step was the articulation in 1976 of a national development strategy, which focussed on rural development, particularly in less developed areas, as the major source of employment and income in the medium term. There was an explicit recognition that this strategy would not necessarily maximize the growth of total income. The development of a few large natural resource projects would be the main avenue for achieving economic self- reliance from the present very heavy reliance on aid. The vehicle for carrying out the strategy was to be the National Public Expenditure Plan (NPEP), which would allocate the funds required for the implementation of all new projects over a multi-year period and which would be rolled over annually. The first NPEP was formulated in 1977 for the years 1978-81. Although it included only projects scheduled to start in 1978 and a four-year profile of their costs, it was the Government's intention gradually to build up a pipeline of projects so that eventually each plan would be a true four-year plan. The 1980-83 NPEP makes a start in this direction by including new starts in years beyond 1980. 2. The NPEP discards the conventional allocation of funds by sector or along departmental lines and instead classifies government expenditures according to nine strategic objectives (para. 5, below). Political decision making focusses on the relative size of the allocations to each objective, and government departments are then assigned portions of each category. Meanwhile, the departments must come up with proposals for projects, along with supporting documentation, to make use of these funds. With the estab- lishment of provincial governments and their increasing control over their budgets, it has become necessary to modify the format of the NPEP to take into account provincial priorities as well. Sectoral programs were introduced which enable provinces to allocate their own spending within the general priorities and limits set by the central Government. 3. While the basic aims of the NPEP are to link the planning process with overall macroeconomic policy and to direct public spending to the activities with the highest national priority, its impact is limited by the fact that it does not cover a large portion of ongoing expenditures. The first NPEP covered only new projects beginning in the first year and accounted for only 4% of total 1978 expenditures (K 20 million). The importance of the - 24 - ANNEX B Page 2 NPEP is growing annually, however, as government revenues grow (and the increase is fed into the NPEP), ongoing projects are completed, and a gradual review of existing expenditures leads either to their elimination or their reformulation and inclusion in the NPEP (zero-base budgeting). By 1980, the NPEP encompassed 22% of the budget. 4. Planning is the responsibility of the National Planning Office (NPO), under the Minister for National Planning. NPO has three branches and a National Coordination Unit which provides general administrative and tech- nical support. The Research and Policy Branch prepares the macroeconomic framework for the NPEP. The Area Planning and Project Implementation Branch provides regional and provincial planning assistance and deals with the sectoral (provincial) programs. Finally, the Planning and Programs Branch deals with national NPEP projects. There is some overlap of the latter two branches in their dealings with sectoral programs which are both national (they are administered by national departments) and provincial (the funds are distributed to the provinces by the national departments). Determination of Priorities 5. The aim of the NPEP is to ensure that government expenditures reflect government policy rather than past expenditures or the relative ability of various departments to spend money. Thus the first step in the NPEP process is to decide, independently of project preparedness, the best allocation of funds. This allocation is done not by department, but by the following broad objectives:/1 (a) Increasing rural welfare (e.g. coastal fisheries, rural health, and primary education). (b) Helping less developed areas (e.g. integrated rural development projects). (c) Improving general welfare (e.g. health and population programs). (d) Increasing economic production (e.g. national highways, mining developments, large forestry and fishing schemes). (e) Improving food production, subsistence and nutrition (e.g. import substitution and nutritional improvement projects). /1 NPO, National Public Expenditure Plan, 1980-1983, 1979, pp. 4-5. - 25 - ANNEX B Page 3 -(f) Improved training and increased Papua New Guinean participation in the economy (e.g. secondary and technical education). (g) Urban management. (h) Effective administration (e.g. expenditures by Department of Finance, Justice Department, and police). (i) Environmental protection. It is clear that these objectives cut across many departments and that therefore the allocation of resources among the objectives is a separate exercise from the departmental allocations. The former allocations are made by the National Planning Committee (NPC, a group of six senior ministers, chaired by the Prime Minister), on advice from the NPO. Appendix 1 shows the 1980 NPC targets for each objective./I Economic production leads, with 35% of total NPEP expenditures, followed by rural welfare, with 20% of the total. These targets may be revised as a result of the Prime Minister's June 24, 1980 speech calling for increased agricultural productivity to take precedence over distribution. 6. Meanwhile, each department draws up a set of projects, ranked by order of priority at the ministerial level, relates each of them to one of the strategic objectives, and submits the list to the NPO. NPO evaluates the project submissions through a series of committees, which include the relevant departments, and together with the Department of Finance, makes a final recommendation on project selection to the Budget Priorities Committee (BPC), made up of senior public servants. The BPC makes up a short list and sends the selected projects back to the departments for detailed costing./2 Once the projects are resubmitted, the BPC sends the list on to the NPC, which reviews the recommendations and incorporates them into a new NPEP for consideration by the National Executive Council (NEC, the Cabinet) and finally the Parliament. The end result of this process does not always match the original allocation by strategic objective, as can be seen from the fifth column of Appendix 1, which shows the actual proportions given to each objective in 1980. The main cause of allocations being below target is a shortage of well-prepared projects./3 /1 The National Fiscal Commission provides additional funds to the least developed provinces, based on a number of social and economic indicators. /2 For 1981, total departmental requests amounted to K 54 million. NPO cut the total down to K 35 million and the BPC must trim it further to the K 24 million that is available for new projects. /3 This was not, however, the case in the category of "economic production" where the difference between actual and target allocations is attributed to projects carried out by a statutory corporation under loan agreements with the Government and on a commercial basis, and therefore additional to the NPEP spending targets (NPEP, 1980-83, p. 11). - 26 - ANNEX B Page 4 7. Under this method of determining priorities, the departments are given no overall ceilings and do not know what their final allocation will be when they are in the process of preparing projects. This occurs because allocations are made in the first instance to the strategic objectives, and the correspondence between objectives and the departments is not one-to-one. In fact, many projects will meet several objectives, and if the assignment of projects to the objectives can be arbitrary, then there is no guarantee that the process will result in the attainment of specific goals as envisaged by the planners. Now that a system of sectoral programs is being estab- lished, each with a specific goal, these programs might prove to be a useful categorization for allocating public expenditures to national departments as well as to provinces, while the strategic objectives could be retained as a check to make sure that all projects fit in with the Government's broad goals and to help establish priorities among projects. The Preparation of National Pro-jects 8. The bulk of NPEP funds goes to projects prepared by national departments./1 The agricultural sector is more decentralized and more diverse than many others, however, and the national DPI received less than one-third of the 1980 NPEP allocation to agriculture (Appendix 2). Neverthe- less, DPI's allocation for 1980 was surpassed by those of only three other departments,/2 and its program includes 47 projects, more than any other department. 9. Each branch of DPI prepares proposals and projects in its area of responsibility, and a Standing Committee (SC) meets every 5-6 weeks to review them. The projects are categorized by the strategic objectives, assigned priorities, and sent to NPO. Because it does not know the final level of its allocation, the department generally prepares more projects than it expects to have funded, and the result is probably a lower overall standard of preparation./3 Furthermore, with no general guidance on poli- cies, the choice of projects tends to be rather arbitrary. DPI has no departmental goals or strategy, so each branch works on its own and many projects are simply additions to ongoing projects, with less attention paid to the development of new projects. Once NPO and the BPC have reviewed the departmental submissions and made up a short list, the department is asked to present a more complete evaluation of those projects, including cost benefit analysis where appropriate. Few projects meet NPEP standards, due mainly to the rather stringent requirements and to a shortage of trained manpower capable of meeting them. /1 The 1980 NPEP gave national departments K 83 million, or 70% of the total K 118 million. /2 DPI received K 6.6 million in the 1980 NPEP. /3 For 1981, DPI submitted fewer projects - 30 compared to 80 the year before - but only the first two were ranked. -27- ANNEX B Page 5 10. In addition to the Department of Primary Industry, many other national departments carry out activities involving the agricultural sector. For example, the plantation management training program is run hy the Department of Commerce; the Department of Finance is involved in coffee and oil palm development and rural development projects with agricultural components; Foreign Affairs and Trade has a border development program that includes agro-economic activities; Labor and Industry is studying the growing and processing of essential oils; Lands, Surveys and Environment provides survey support and is in charge of conservation; Minerals and Energy covers firewood cropping and the production of fuel from plants; the Prime Minister's Department is organizing the preparation of studies for rural development projects; Decentralization has a center to train agricul- tural extension workers; and Transport and Civil Aviation provides the infrastructure needed for rural development. A number of statutory bodies, such as the industry (marketing) boards, the Development Bank and the National Investment and Development Authority, are active in the sector as well. 11. Each of the agencies prepares its own projects for subbiission to NPO, and although the system formally provides for comments by other departments that may be concerned, this consultation often does not take place. Consultation is also supposed to occur through inter-departmental committees in a number of areas. Some committees have been established, but they do not meet regularly./I The results of inadequate coordination can be quite disruptive. For example, a DPI project might be accepted which included the construction of a new road, for which the Department of Transport and Civil Aviation is responsible. If the latter were not aware of the project and did not include the road in its program, it would be forced to drop some other item on which it might place a higher priority. Provincial Projects and Planning 12. About one quarter of central government expenditures go directly to provincial governments. Of the total, the largest sum is the uncondi- tional grant which is based on the level of spending carried out by the central Government in each province before decentralization. Receipt of this grant is automatic and does not require the preparation or submission of projects. Although it can be used for any purpose, it is intended to cover recurrent expenditures, and most provinces have little flexibility in its use. The unconditional grant provides about four-fifths of provincial revenue in the 1980 budget, but its relative importance will decline since it will be held constant in money terms. Another source of provincial revenue is provincially based; the central government refunds to the provinces half of the export tax collected on their output as well as /1 For example, the less developed areas working group has met only a couple of times in two years. - 28 - ANNEX B Page 6 revenues from vehicle and liquor licenses and royalty payments from com- panies developing natural resources in the province. Provinces also levy retail sales and land taxes. Provincially based revenues account for nearly 10% of all provincial government revenue in the 1980 budget. The final 10% of the provincial revenue comes through the NPEP (including the National Fiscal Commission) and is tied to specific projects. In the agricultural sector, many functions that were previously a national responsibility have been shifted to the provinces, and they received almost half of the 1980 NPEP allocation for agricultural items (Table 4, Appendix 2). 13. Provincial NPEP projects can be funded in three ways. First, they can be submitted directly to NPO to be considered individually. Provinces will receive K 2.4 million in this way in 1980. Second, they can be considered by the National Fiscal Commission which has K 7 million in 1980 to distribute to the poorer provinces./I Third, they can be included in the sectoral programs. Allocations for these programs are made to national departments which then distribute the funds to the provinces, based on a number of social and economic indicators. Provinces are to receive K 12.2 million through sectoral programs in 1980. 14. The provinces themselves are responsible for preparing their projects, although they are assisted in varying degrees by NPO and other central agencies. Projects intended for direct inclusion in the NPEP are sent directly to NPO, which then sends them on to the relevant department for technical review. The projects may then be included in the regular NPEP process or sent back to the provinces for inclusion in one of the sectoral programs. In the agricultural sector, provinces may be assisted to prepare projects by DPI through its area economists, although these people tend to be active mainly in the province where they reside. In addition, NPO and some of the departments give workshops on project planning, evaluation, and implementation. This assistance is badly needed, since most provincial staff have never been involved in preparing projects and have little understanding of the techniques or the procedures. 15. Many provinces have begun to draw up provincial plans as a way of establishing their priorities and ensuring that their still weak capacity for preparing projects is used as efficiently as possible. A provincial data system has been established under the NPEP, with full provincial involvement, to provide data for planning purposes. A provincial planning unit in DPI was established to help the provinces set up their planning systems, but the unit has only two staff at present. Each province has a provincial planner, and NPO has four regional planners, but many of the people filling these positions have no planning experience and little idea of how to proceed. People with the necessary backgrounds are simply not in /1 This appropriation could be considered an addition to the allocation for the strategic objective of helping less developed areas. - 29- ANNEX B Page 7 sufficient supply, and their use is further restricted by the desire on part of the provinces to use someone local for planning jobs. Some provinces have hired consultants to help with their plans, but it would be difficult to staff all 19 provinces in this way. Similarly, the central government could not provide additional staff in the necessary numbers, at the necessary levels, to each province. While fully staffed planning units in each province may be a long-term goal, the medium-term solution may be to establish four regional planning offices, with specialists in each of the key sectors to give concrete support to the provinces. Some departments, such as Decentralization, Works and Supply, and Finance, already have regional staff, but there is little coordination among them. Regional offices could coordinate national assistance to the provinces and also serve as the point of contact between the provinces and the center. Their work would need to be organized in such a way that they gave equal attention, or attention as necessary to each province in the region rather than concen- trating on only one or two. 16. An alternative way to organize provincial support would be through provincial teams, but concentrating the scarce manpower in some of the least developed provinces, or those with the weakest planning capability. For example, four teams spending two years in each province could cover all nineteen provinces in a period of ten years. The teams would be expected not only to design plans for the provinces, but also to train the provincial staff eventually to take over their functions. This alternative, while providing more intensive support to individual provinces then regional teams, might result in charges of inequity from provinces not covered in the earlier years. Furthermore, provinces might resent this outside influence in their affairs and might prefer regional teams on whom they could rely for advice but who would not control the planning process. Shortcomings of the Project Approach 17. The emphasis on preparation of projects for the NPEP has tended to lead to the neglect of a number of important factors. The focus is on new, rather than recurrent, expenditures, and although it is intended that the latter be provided by a further NPEP project, the effectiveness of this procedure remains to be seen. The procedure does appear to be unduly cumbersome. The unconditional grants, which are shrinking in size relative to total provincial revenues, are intended to cover only the existing costs at the time provincial governments were formed, not the recurrent costs of new investment. The zero-base budgeting exercise which is planned eventually to cover all departments will remove automatic allocations and place all expenditures under the NPEP. Thus, it will become increasingly important, both in the center and in the provinces, to ensure that this process is workable and to take full account of the implications for recurrent costs of all new projects. - 30 ANNEX B Page 8 18. Policy formation is a second area which is neglected under the present system. The forms required for each project proposal include a space for policy issues, but because the projects are prepared individually, often by specialists, and rarely placed in a broader context, this space is usually left blank. Policy issues should be handled by the Policy Review and Coordination Division in DPI, but this division is inadequately staffed for this function (see Annex A). The provincial planners should be responsible for policy issues in the provinces, but they too are overburdened and often not trained for this function. A regional unit, could provide the support needed by the provinces. 19. Better staffed and trained planning units both in the center and in the provinces would also be able to deal more effectively with the need for integrated planning. Once more, the need to find projects suitable for NPEP funding has led to a relative neglect of the overall framework for develop- ment. This framework would recognize the interrelationships among projects, sectors and subsectors, as well as the need for forward programming. The disregard for planning and for preparation of projects to be funded in future years may largely be due to a concentration of scarce manpower in the most urgent area, preparing projects for immediate funding. Shortages of manpower are likely to prevail for many years, however, and the Government is presently reviewing the documentation for project submissions with a view to reducing the requirements. A longer time than four years might be appro- priate for some projects and would reduce the need for project justification, allowing departments to concentrate on new projects. 20. Lack of information about the level of funds to be made available also makes it difficult to plan. Provinces and departments may not know their total allocations for a given year until their project submissions for that year have been screened. Knowledge of probable ceilings, not only for the present year, but for several years in the future, would encourage an orderly planning process rather than a scramble for projects to submit immediately to NPO. Given the present low capacity of departments to prepare projects, a start could be made by assigning each department a minimum allocation as well as a maximum. The difference between the two levels would come out of a pool of funds to be assigned among departments on a basis of the adequacy of preparation of projects as well as their appropri- ateness for government objectives. Programming Approach to Planning 21. The Government has already taken steps to deal with the overconcen- tration on projects to the exclusion of adequate planning. Three such steps are the policy hearings to be carried out for each department, the zero-base budgeting exercise, and the introduction of sectoral programs in a number of key areas. 22. The departmental policy hearings are intended to encourage depart- ments to plan their expenditures in the context of national and sectoral - 31 - ANNEX B Page 9 policies and objectives, as well as to give them some indication of the level of funds that will be available to them. Policy hearings have been held for only three departments so far - Education, Health, and Transport and Civil Aviation - with mixed results, depending upon the interest within the departments in establishing a forward planning approach. The hearings cannot impose a planning framework on the departments, but at least they can provide the information necessary for such an approach. Policy hearings for DPI are scheduled for the second half of 1980. 23. Zero-base budgeting has been carried out for a number of activities within departments. This exercise is intended to transfer expenditures from the recurrent budget cycle to the NPEP cycle, thus forcing a reassessment and justification of each item. By this process the Government hopes to eliminate all unnecessary expenditures and ensure that the remaining ones fit in with the department's priorities. It can also help to identify areas that could benefit from a reorganization. 24. Sectoral programs have been introduced to improve the distribution of resources to the provinces and to give them additional guidance in setting their own priorities. Allocations are made to programs, each one the responsibility of a national ministry, rather than to individual projects. Each program is assigned ceilings within the strategic objectives, according to national priorities, and over the four-year NPEP horizon. The national departments in charge then allocate the funds among the provinces, based on social or economic indicators relevant to the program./I The provinces determine their own priorities, within the limits set by the national departments, but must submit project proposals in order to receive the funds./2 The departments are expected to assist provinces that do not submit adequately prepared projects. Thus, the provinces have a known level of resources as well as access to technical assistance./3 They also have an idea of the national targets to which they will be expected to contribute (e.g. planting targets for specific crops). 25. A sectoral approach might be useful at the national, as well as provincial, level to supplement the policy hearings and zero base budgeting procedures already underway. Neither of the latter approaches requires the /1 For example, national support for construction and staff for provincial high schools will be directed at provinces with secondary school attendance below the national average. /2 DPI actually requires all bills to be submitted to the center before it will release the funds to the province. This has led to problems with late release of funds, since DPI cannot cope with the volume submitted. /3 This assistance, however, presumes that sufficient and qualified staff will be available at the national level, which is often not the case. - 32 - ANNEX B Page 10 central departments to formulate their expenditures in terms of integrated programs. Such an exercise would encourage increased coordination among projects. 26. All of the exercises described above deal with the complaint that departments and provinces cannot plan if they do not know what resources will be available to them beyond the present. They cannot, however, solve the problem of inadequate staffing and coordination within the departments which effectively prevents an integrated approach to the selection of projects, let alone planning for the future. The proposals for staffing and organization in Annex 1 would, if implemented, help DPI to take advantage of the information that will become available through policy hearings and sectoral programs. Monitoring and Implementation 27. The Government monitors the physical and financial performance of NPEP projects on a quarterly basis. Monitoring requirements alone thus create a substantial burden of work and, in fact, like the original project proposals, the monitoring forms are often incomplete. It is, of course, important to ensure that funds are being spent as they are meant to be and to identify problem areas that may need assistance, but given the already critical shortage of trained manpower in the country, a reduction in monitoring requirements, both in the number of reviews and in the paper work for each review, is certainly justified. 28. Implementation under the NPEP so far has fallen far short of targets, though this was not unexpected. In 1978, the first year of the NPEP, actual expenditures only reached slightly over half of planned expenditures./I Overall government spending was on target, since other projects were found to fill in the gaps, but the underspending on NPEP projects may have meant that the strategic objectives were not being met. Shortfalls occurred again in 1979, but performance in general improved to about 80% of targets. Performance by DPI was well behind the average, with a recorded implementation rate of only 37% (See Appendix 3)./2 This poor record was due in part to delays in a few large projects, particularly in the fisheries subsector, but a number of general problems can also be identified: (a) DPI was overambitious and simply submitted too many projects; /I NPEP, 1980-83, p. 6. /2 Inadequate accounting results in some expenditures being charged to the wrong vote, so actual implementation may differ from that which is recorded. - 33 - ANNEX B Page 11 (b) recruitment of both nationals and nonnationals was behind target. In the case of nonnationals, salaries were not adequate to attract the necessary personnel, whereas in the case of nationals, the problem may be a combination of unattractive career and salary prospects in comparison with the private sector, along with a shortage of people with the necessary skills. Housing shortages are also a severe impediment to recruitment; (c) the difficulties of acquiring land were not adequately allowed for in implementation schedules; and (d) lack of familiarity with NPEP procedures and poor coordination caused some delays. DPI conducts many of its operations in the field and has a large field component. Thus, it faces more serious problems of coordination than some other departments. In addition, it suffers delays due to a shortage of financial delegates in the field authorized to sign purchase orders. Some of these problems can be expected to improve with experience, but others, such as recruitment and land acquisition may require policy decisions by the Government before they can be resolved. 29. Provincial projects also fell well behind target in 1979, with expenditures by mid-year reaching only 10% of the total allocation. The provinces faced many of the problems described above and had the additional burden of being responsible for planning and budgeting for the first time. A certain amount of waste could be expected under these circumstances which might be compensated for by the training element of performing the new functions. Summary and Recommendations 30. PNG has gone far in a short time towards instituting a planning system able to translate general national objectives and priorities into concrete programs. The NPEP began with the realistic goal of allocating only new expenditures year by year and the means of expanding gradually to cover the entire public sector budget over a longer time horizon. Presented with the problem of financing provincial expenditures within the framework of national priorities, the planners developed a set of sectoral programs which allow the provinces to plan their own programs within certain sectoral cei- lings. Policy hearings and zero-base budgeting for departments have been introduced to encourage better coordinated and longer term planning within departments and provinces. Thus the planning process, now in only its third year, has become an integral part of the budget cycle. 31. It is not surprising that some problems have not yet been solved in the three years since the inauguration of the NPEP, nor that continued adjustments to the planning process will be required. As originally con- ceived, the first NPEP was to cover new projects for one year only, but - 34 - ANNEX B Page 12 including a four-year spending profile for those projects. Prepared annually, the NPEP was to expand its planning horizon as the project pipeline grew to cover new projects for each of the four years in the plan. This process has started - the 1980-83 NPEP includes new starts for both 1980 and 1981 - but there is still a long way to go before it will be complete. One problem is the lack of information for departments and provinces, in terms of both policy and expenditure guidelines. Discussion of policy issues associated with sec- tors and subsectors, and their relation to the national objectives, would focus attention on the need for an integrated, rather than a project-by- project approach, and an indication of the probable level of funds to be available over a multi-year period would encourage better programming of expenditures, recurrent as well as new. This process could be expedited by requiring departments, and provinces, to present their projects in groups as part of a coordinated approach to particular goals, rather than on an individual basis. 32. The planning process suffers from a lack of coordination among, as well as within, departments. Although formal arrangements exist for inter- departmental consultation and coordination, they are not being used, even in cases where a project prepared by one department requires participation by another department for its implementation. The interdepartmental coordi- nating committees should meet on a regular schedule, and perhaps more of them should be established in key areas. For example, all agricultural development projects that might require new or improved transport facilities should be discussed with the Department of Transport. NPO should ensure that departments comment on all projects in which they might be expected to participate or which might otherwise affect their own plans and that this is done before the final project selection is made. It is recognized that special efforts might be necessary to get some Departments to comment and that this would mean extra work for NPO. However, more emphasis on sectoral programs and less frequent monitoring should free the necessary manpower. 33. Provincial governments are naturally eager to take over the planning for their own development, and they already have control over a number of key areas (e.g. agricultural extension and primary education). Most of them, however, do not have the trained manpower required to produce provincial development plans, and consequently they rely to a great extent on assistance from the central Government and from consultants. Both of these resources are limited, and it is probably not feasible, given the scarce resources even at the national level, to support all nineteen provinces individually. Already a framework exists for assistance at the regional level, and the Government might consider formally establishing four regional teams to help the provinces with planning, as well as management and implementation, with specialists in each of the main sectors. 34. Finally, the shortage of trained manpower, at both the national and the provincial levels, is aggravated by the rather extensive documen- tation required for project submissions and monitoring. The procedures that 35 - ANNEX B Page 13 have been established may be sensible, and failure to complete them may result in some poorly prepared and implemented projects, but they are costly, are not being followed in the large majority of cases and may serve only to create resentment and an even more overworked staff. The problem could be alleviated by reducing the amount of paperwork and preparation required for project submissions (e.g. by cutting down the needs for justi- fication at least of smaller projects) and eliminating some of the quarterly monitoring requirements. - 36 - ANNEX B Appendix 1 1980 NPEP ALLOCATIONS BY STRATEGIC OBJECTIVES (K million) % of Percen- Sectoral total tage NPC Objective Ongoing New program Total NPEP targets Rural welfare 6.0 1.9 10.7 18.6 15.8 20 Helping less developed areas 8.7 - 2.5 11.2 9.5 9 General welfare 7.0 4.2 - 11.2 9.5 7 Economic production 24.4 7.4 - 31.8/a 27.0 35 Food production & nutrition 0.8 0.8 1.0 2.6 2.2 5 Training & participation 3.3 1.6 0.9 5.8 4.9 5 Urban management 6.3 1.5 - 7.8 6.6 2 Effective administration 12.2 7.4 0.5/b 20.1 17.1 11 Environmental management 1.4 0.3 - 1.7 1.5 1 Fiscal Commission - 7.0 - 7.0 5.9 5 Total 70.1 32.1 15.6 117.8 100.0 100.0 /a Does not include commercial projects valued at K 9.0 million. /b Held in Secretary's advance. Source: National Planning Office, National Public Expenditure Plan, 1980-83, p. 10. - 37 - ANNEX B APPENDIX 2 Page 1 GOVERNMENT SPENDING ON PRIMARY INDUSTRY 1. The definition of government spending on primary industry is complicatd by the fact that many government activities are necessary for but not specifically directed towards primary producton. Clearly, expenditure by the Department of Primary Industry is entirely directed at the sector but it could also be argued that the activities related for example, to main- taining general infrastructure, law and order and foreign trade relations are necessary for continued agricultural production. In the following cost- ings, account is only taken of activities related mainly to agriculture and for this reason, expenditure related to primary industry is understated. DPI Expenditure 2. Levels of DPI expenditure for 1976-80 both recurrent and capital are shown in Table 1. The position is complicated by the establishment of provincial governments, their assuming responsibility for agricultural extension, and the fact that several now have full financial control and do not receive separate appropriations for their different Departmental opera- tions. Allowance is made for the omission of spending in these provinces. 3. When these statistics are adjusted for inflation, total expenditure by DPI is seen to be relatively stable, varying in 1977 prices from K 28.1 m in 1976 to K 28.9 m in 1979. In 1979 there was a substantial real increase in the DPI appropriation but this was accompanied by under-expenditure in the national department's recurrent operations of 20%. In terms of total government spending, DPI spending is also fairly stable, varying between 6.0 and 6.5% over the period. This situation is similar to that reported by Densley in 1977. He found that between 1975-6 and 1976-7 "despite substan- tial absolute increases in funds allocated, increases in salaries for exist- ing staff and increases in the cost of overheads have meant that in real terms, the amount of funds available for new development has been substan- tially eroded."/I 4. The net cost to Government of the DPI allocation is reduced by recovery of substantial sums from DPI operations. These items are shown in the budget as "appropriation in-aid items" and are estimated to amount to K 1.76 million in 1980. Recoveries are made from sales of livestock, sale of planting material and crops from research stations, cash crop marketing and fisheries division marketing. These items are listed in Table 2. /1 Densley, D.R.G. and G. Dick "Rural Extension and Agricultural Education" in Densley (ed.) Agriculture in the Economy Department of Primary Industry, 1977. - 38 - ANNEX B APPENDIX 2 Page 2 5. The functional distribution of DPI expenditure is shown in Table 3. Of the total 1980 appropriation of K 24.88 million, 13.6% is allocated to the Office of Forests. Within the agriculture, livestock and fisheries opera- tions, research and development takes the largest share with 36.3% of the total. Fisheries is another big item, with almost 15% of the total. 6. In 1979, there was 20% underexpenditure within the Department as a whole. Most serious was in the Fisheries Divsion which spent less than half its allocation. The research and development allocation for agriculture and livestock was also heavily underspent. This underexpenditure is due in large part to the staffing and administrative problems within the Department which are outlined in more detail in Annex A. 7. Densley and Dick have attempted to allocate th,e JLstribution in 1977 of DPI provincial extension staff among the various industries in PNG. Industries receiving the largest shares of the extension effort were identi- fied as: Cattle 18.6% Coffee 15.7% Pigs and poultry 8.8% Fisheries 8.8% Fruit and ve-et¾)les 8.2% Subsistence crops 7.7% Cocoa 6.9% Coconuts 5.5% Rice 5.3% In addition, there has been a substantial continuing extension effort on the major oil palm schemes. 8. The high level of extension cominitrneiit to cattle is associated with the implementation of IDA Smallholder Livestock Credit 348. The levels of commitment to cocoa and coconuts are surprisingly low given the importance of these industries. 9. DPI extension services have played key roles in the dlevelopment of the newer smallholder industries such as rubber, chillies, spices, pyrethrum, rice and cattle. In addition DPI has made a major contribution to the development of the oil palm industry in conjunction with private investors and other departments. The relative lack of dynamism in the cocoa and coconut industries probably reflect their low shares of the total exten- sion effort relative to their size and importance. - 39 - ANNEX B APPENDIX 2 Page 3 Other Primary Industry Expenditure 10. The generally stagnant nature of DPI recurrent finances is not sur- prising since there is a firm government policy to limit the growth of recurrent spending. The National Public Expenditure Plan (NPEP) has been - introduced to provide additional finance to departments for items with clearly defined objectives and in project form. Funding of some large agri- cultural development is also provided through the National Development Project's budget of the Department of Finance. In addition, some departments other than DPI run projects which have specific agricultural objectives. 11. Financial allocations to NPEP items related to agriculture are shown in Table 4. Some are administered through DPI headquarters, but many are run by provincial governments and a limited number are operated through other national departments. The sum involved is very substantial, amounting to over two-thirds the general DPI allocation in 1980. With provinces, the amounts of over K 1 million are all related to large projects instigated by the national government. 12. Amounts allocated to agriculturally-based national development projects are shown in Table 5. These will amount to almost K 4 million on two integrated rural development projects and an oil palm development in 1980. 13. Government has also made substantial investments in commercial agricultural projects. At the end of 1979, equity investments in agriculture (at historical cost) amounted to over K 13 million. Loans associated with these equity holdings amounted to a further K 1.4 million. Indirectly, the government has further investments through its wholly-owned Investment Corporation of PNG. This Corporation has total assets of over K 30 million and about 12% of its investments are in primary industry operations. 14. The Government has also made a major contribution to agricultural financing through PNGDB. To the end of 1979, total loan approvals for agriculture amounted to K 30.3 million out of total approvals of K 76.7 million. This lending has been assisted in some cases by grants from the Government's Village Economic Development Fund. Grants can be used to fund up to 40% of the capital cost of projects and 20-30% of the value of grants have been made for agricultural projects. 15. Other items of government expenditure which are likely to be used to support agricultural projects are the Feasibility Study Scheme and the National Investor Scheme. These schemes have been appropriated a total of K 2.2 million in 1980 and can be used to assist planning of larger projects by Papua New Guinean businessmen and facilitate their financing from commer- cial sources. - 40 - ANNEX B APPENDIX 2 Page 4 Total Government SpendinR on Primary Industry 16. Budget appropriations for primary industry spending for 1980 are shown in Table 6. They amount to a total of K 65.18 million. Of this, only about one-third is allocated to national DPI for its recurrent activities. The total allocation amounts to 11.4% of total government appropriations or 14% of total appropriations excluding a special appropriation, the majority of which is for debt servicing. - 41 - ANNEX B APPENDIX 2 Page 5 Table 1: DEPARTMENT OF PRIMARY INDUSTRY FINANCE, 1976-80 (I million) Jul - Dec 1976-7 1977 1978 1979 1980 All Approp. 439.7 240.7 485.8 535.4 573.8 Government Expend. 436.2 233.4 503.3 537.6 - Spending under (-) % -1 -3 +4 +.5 - over (+) Department of Approp. 25.1 13.2 18.4 24.6 22.5 Primary Expend. 6.2 14.2 19.5 19.6 - Industry under (-) % +4 +7.6 +6 -20 - over (+) Provincial Approp. - - 10.4ja 10.5/b 10.2/Lc Primary Expend. - - 9.7/a 11.0/b - Industry under (-) % - - -7/a +5 - over (+) DPI Approp. 1.8 1.2 1.0 1.2 2.0 Capital Expend. 1.3 0.8 1.0 0.8 - Works under (-) -28 -36 0 -36 - over (+) Allowance omitted provinces - - 0.3 0.9 1.4 Total DPI Approp. 26.9 14.4 30.1 37.2 36.1 Expend. 27.5 15.0 30.5 32.3 - under (-) +2 +4 +1 -13 over (+) Total in 1977 Consumer price prices Index - 97.7 101.8 105.8 111.9 - Approp. 27.5 28.3jd 28.4 33.2 - Expend. 28.1 29.5/d 28.8 28.9 - DPI: All Approp. 6.1 6.0 6.2 6.9 6.3 Government (Z) Expend. 6.3 6.4 6.1 6.0 - /a Excludes North Solomons Province. lb Excludes North Solomons, East New Pritain and New Ireland. /c Excludes all of (b) and Eastern Highlands Province. /d Doubled to get an annual equivalent figure. Sources: Department of Finance, Budget section; Bureau of Statistics. - 42 - ANNEX B APPENDIX 2 Page 6 Table 2: DPI APPROPRIATION-IN-AID ITEMS 1980 (K '000) Item Amount Sales of livestock 481 Sales from Crop Research Stations 129 Cash Crop Marketing 1,000 Fisheries Division Sales 150 Total 1,760 Source: Department of Finance, Estimates of Revenue and Expenditure, 1980. Government Printer, Port Moresby, 1 979. Table 3: FUNCTIONAL BREAKDOWN OF DPI SPENDING 1979-80 (K '000) 1979 1979 under(-) 1980 Per Approp. Expend. over(+) Approp. cent General Services (AS&F) /a 973 974 - 807 3.6 Planning Economic Services 470 429 -9 2,742 12.2 Agricultural Training 2,048 2,171 +6 2,607 11.6 Research and Development (AS&F) /a 10,440 8,267 -21 8,173 36.3 Produce Inspection 244 230 -6 256 1.1 Cash Crop Marketing 1,396 1,574 +13 1,382 6.1 Quarantine Services 108 103 -5 113 0.5 Fisheries Administration 4,833 2,244 -54 3,354 14.9 Forestry Division 4.106 3,637 -11 3,054 13.6 Total 24,618 19,629 -20 22,488 100.0 /a AS&F = Agriculture, livestock and fisheries. Source: Department of Finance, Estimates of Revenue and Expenditure, 1980. - 43 - ANNEX B APPENDIX 2 Page 7 Table 4: ALLOCATIONS TO DPI AND AGRICULTURAL ITEMS IN NPEP (K '000) /a 1980 1981 1982 1983 DPI architectural works 1,961 4,412 1,993 1,642 Other national DPI 6,139 5,092 3,062 2,903 Plantation management training 170 177 145 - Ramu sugar 4,950 1,750 1,600 3,189 Coffee development (national) - 1,498 2,597 3,189 Provincial - Western 114 111 75 65 Gulf 64 35 32 - Central 1,735 3,197 2,826 2,616 Milne Bay 271 31 31 - Oro 1,008 571 268 253 S. Highlands 2,770 2,000 320 - Morobe 233 90 90 Madang 136 - - E. Sepik 2,508 1,184 1,295 1,427 W. Sepik 21 22 22 - E. Highlands 148 224 176 Simbu 10 10 10 - W. Highlands 31 53 22 16 Enga 117 44 36 37 Manus - - - _ New Ireland 49 282 96 128 E. New Britain 41 42 42 15 W. New Britain 3,061 2,016 87 92 North Sols. - - - - Total National 13,220 12,929 9,397 7,897 Total provinces 12,307 9,912 5,428 4,649 Total NPEP 25,527 22,841 14,825 12,546 /a Excludes forestry and fisheries. Source: National Planning Office, National Public Expenditure Plan, 1980-83. - 44- ANNEX B APPENDIX 2 Page 8 Table 5: EXPENDITURE ON AGRICULTURALLY-BASED NATIONAL DEVELOPMENT PROJECTS 1976-80 (K '000) Jul-Dec Approp. 1976-7 1977 1978 1979 1980 Popondetta oil palm 871 63 n.a. 723 758 East Sepik IRD - 252 n.a. 1,003 1,688 Southern Highlands IRD - - n.a. 948 1,474 Biala oil palm - 271 n.a. - - Total agricultural projects 871 586 2,636 2,674 3,920 n.a.: not available Source: Department of Finance Budgets Division. Table 6: TOTAL GOVERNMENT APPROPRIATION FOR PRIMARY INDUSTRY DEVELOPMENT (K '000) 1980 DPI recurrent 22,488 Provincial primary industry 11,584 DPI capital works 1,961 NPEP national 13,230 NPEP provincial 12,307 National development projects 3.920 Total Primary Industry 65,180 Source: Tables 1-5. NPEP IMPLEMENTATION, DPI, 1978 and 1979 (K '000) 1978 1979 Appropriation Expenditure Performance Appropriation Expenditure Performance Agricultural support services 89.0 43.0 48.3 473.2 251.3 53.1 Food crops 1,003.0 287.5 28.7 1,056.9 203.9 19.3 Export crops - - - 922.6 347.7 37.7 1 Livestock /a 211.0 114.6 54.3 780.3 294.6 37.8 F Fisheries /a 2,121.0 259.6 12.1 3,052.2 816.2 26.7 > Forests 317.5 182.4 57.4 1,214.4 848.2 69.8 Total 3,741.5 887.1 23.7 7,499.6 2,761.9 36.8 la Includes support services. Source: National Planning Office. Z - 46 - AP7EX C PAPIJA NETT GTJINEA AGRICULTURAL SERVICES REVIEW Table of Contents AGRICULTURAL RESEARCH SERVICES Page lb. The Current System 1 DPI Crop Research Sections 1 Research Stations and Laboratories 4 Table 1: Experiment Stations for Tree Crop Research 5 The Organization and Management of Tree Crop Research 4 Evaluation of Research Services for Tree Crops 7 Cocoa 8 Coconuts 10 Arabica Coffee 13 Robusta Coffee 14 Rubber 15 Oil Palm 15 Tree Crop Farming Systems 16 The Research Focus 16 Tree Crops 16 Crop Research in General 18 Key Constraints and Recommendations 19 Organization 19 Administration 20 Research Priorities 20 Research Program Evaluation 20 Responsibility for Tree Crop Research 21 Allocation of Nationals to Food Crops Research 22 Terms and Conditions for Research Staff 22 Establishment of a Data Bank 22 Economic Evaluation of Agricultural Sector Objectives 23 Preparation of a Research Project for External Financing 23 - 47 - ANNEX C Page 1 PAPUA NEW GUINEA AGRICULTURAL SERVICES REVIEW AGRICULTURAL RESEARCH SERVICES The Current System 1. The mission studied the provision of services, including research, to the whole agricultural sector of Papua New Guinea. Within research, in order to be able to provide detailed recommendations, it focussed on the tree crop subsector. It did not cover research on field crops in detail, nor livestock and fisheries. In this annex, sections 1, 4 and 5 deal with general aspects of agricultural research, while sections 2 and 3 examine in more detail the tree crop industries and their research requirements. 2. Agricultural research is the responsibility of the Agriculture Division of the Department of Primary Industry (DPI). Six separate Crop Re- search sections contribute to the overall effort, and there are ten agricultural experiment stations. Their roles and capabilities are discussed below. (a) DPI Crop Research Sections 3. The Land Utilization Section. The section is housed separately from sections at Hohola in the National Capital District. The unit is responsible for all soil, land use and land capability surveys for agricultural develop- pment and is also responsible for soil conservation and land rehabilitation. It currently has 7 Scientific Officers, 2 RDOs, 8 RDTs and 1 Illustrator. Five Scientific Officers and 9 Technicians are stationed at HQ, but travel to the field for survey work. Two scientific officers and two technicians are allocated to a soil conservation study at Chimbu. The section has no drafting and mapping unit and no soils laboratory. Drafting staff were seconded to the Forestry Division which now does all map preparation based on fair drawings prepared by the land utilization staff. Soil analyses are carried out by the Agricultural Chemistry section of the Agricultural Branch. The section is not satisfied with the range and reliability of analyses carried out by Agri- cultural Chemistry, and lacks the number and quality of staff to perform its functions effectively. The section receives requests from National Government, Provincial Government, DPI Development section, Lands Department, Industry Boards and the Office of Forests to carry out soil and land use surveys. In theory, priorities for work are determined by the Assistant Secretary of the Agricultural Branch. In practice, political pressures determine the actual program. Under present conditions, the section estimates that it can only handle about 20% of requests, and a brief reconnaissance visit by an experienced soils officer often has to substitute for an adequate survey to avoid holding up development programs. - 48 - ANNEX C Page 2 4. The Agronomy Section. Responsibility for research, production of foundation planting materials, and dissemination of technical information and technical support for the extension service for all crops with the exception of food crops nests with the Agronomy Section. It shares field stations and facilities with the Horticulture Section (para. 6). Agronomy section is comprised of a small supervision unit located at DPI headquarters, Konedobu, and a series of field stations. These are listed in Table 1. 5. The main emphasis in crop research programs is given to screening and selection of planting materials and the effects of management practices on production. A limited amount of work is carried out on primary process- ing. The section has an establishment of 28 Scientific Officers, 17 RDOs and 35 RDTs to act as technical assistants, 17 lower grade RDTs as labor and field supervisors, and 72 RDA positions for field recording, supervising labor and clerical duties. Currently only 15 of the Scientific Officer positions are filled and three experienced expatriate SCOs will be leaving the service later in 1980. There are many vacancies in the technician and field staff grades, but these staff cannot be effectively utilized without a full complement of experienced SCOs. While available equipment and facilities are reasonable, lack of experienced staff and recurrent budget for materials and supplies prevents full use of available resources. 6. The Horticulture Section. Established in 1975, it was only in 1978 that the Horticulture Section had sufficient staff to carry out effective work. The section is responsible for research, production of superior planting materials, and technical support to the extension service for all crops with the exception of plantation crops. The section is also involved to a limited extent in post harvest handling and processing of food crops and the supervision of Botanic Gardens. In terms of field research, the section is currently running programs on dry zone food crops and vegetables at Laloki, food crops and farming systems at Kerevat and Aiyura, and Irish potato and temperate vegetables at Kuk. It has a small laboratory at Port Moresby for post-harvest handling research. The section staff establishment is 25 Scientific Officers, 22 RDOs and 22 RDTs. Current staff strength is 20 SCOs, 9 RDOs and 4 RDTs. The most critical shortage is in terms of experienced grade 2 and grade 3 SCOs to plan and supervise effective work programs. The section suffers the same problems outlined for the agronomy section and finds it difficult to discharge its responsibilities effectively. 7. The Agricultural Chemistry Section. This section provides analytical services to DPI, with much of the work coming from the experiment stations and the land utilization section. It also services other Government Departments, e.g. Lands and Environment, Minerals and Energy, to assist in environmental studies, mining studies and starch analysis for ethanol production. The unit handled samples for the private sector until 1974, including samples from plantations. This function has now been taken over by the University of Technology at Lae which operates on a service fee basis. The section operates the Rubber Standards Laboratory which tests the quality - 49 - ANMIX C Page 3 and certifies the products prior to export. The section is divided into three units: general chemistry and natural products, which carries out routine analysis on a wide range of materials; the plant and soil unit which analyses plant and soil samples mainly for the land utilization section and experiment stations, and the Rubber Standards Unit. The section has a total staff establishment of 43, with 13 SCOs, 10 technical officers, 10 RDOs and 10 RDTs. Present staff strength is 18 with 4 SCOs (including 2 expatriates), 6 technical officers, 5 RDTs and 3 laborers. The laboratories are reasonably well equipped and the unit has laboratory facilities at the Keravat station which have now been closed down. The key prQblem is lack of staff and the quality of staff, and the section has little hope of coping with the volume of work and maintaining reasonable standards of accuracy and reliability under present circumstances. 8. The Entomology Section. The entomoloty section is responsible for entomological research for all crops and stored products, routine identification of specimens and technical support for the extension service. The section has reasonable laboratory facilities at HQ, Keravat, and Bubia, but facilities at Kuk need upgrading. Keravat concentrates on cocoa and copra pests, Yuk on pests of tea and vegetables, Bubia on pest control in field crops, and Popondetta on pests of oil palm. There is currently no work on coffee and rubber as pest problems are minimal. The private sector has some technicians and is working with commercial growers on the control of pests in tobacco. All routine identification of samples is handled in Port ltoresby. The section has an establishment of 13 SCOs and support staff. Present staff strength is 11 SCOs plus a few technicians. Two SCOs are located at HO, 2 are located at each of the stations, i.e. Keravat, Bubia and Kuk, and I is located at Popondetta. Unfortunately, 3 of the most experienced staff are heavily involved in administration, two are new National graduates with limited experience, leaving only 6 effective full- time entomologists to service the whole country. The section proposes to recruit one SCO to work on stored products and one SCO to work on lowland vegetables. Shortage of experienced staff, the heavy administrative load of senior staff and limited recurrent budget are the main constraints to effective operation of the section. 9. The Plant Pathology Section. Plant pathological research for allcrops, production of rhizobium for legune inoculation, routine identification of diseases and technical support for the extension service rest with the plant pathology section. The section maintains a laboratory at HQ for the production of rhizobium, identification of diseases on specimens sent in from the Provinces and inspection of plant materials for the quarantine service. It also has a laboratory at Keravat. The staff establishment for the section is 9 SCOs and 22 technicians. Present staff strength is 4 SCOs (2 expatriates and 2 Nationals) and about 6 technicians. One pathologist is stationed at Keravat, the balance are located at HnO. The poor status of the unit is largely due to the exodus of expatriate pathologists following Independence, the lack of National graduates specializing in pathology and difficulties in recruitment of experienced personnel. Under present circumstances, the unit has little hope of ANNEX C -50- Page 4 of providing a viable research and technical support service to meet National requirements. (b) Research Stations and Laboratories 10. There are ten agricultural experiment stations which deal with research into food crops (horticulture) and tree crops (agronomy). The tree crop stations are listed in Table 1. The major research effort is centered on Aiyura in the Eastern Highlands, for highland food crops and coffee and Keravat in East New Britain for lowland food crops, cocoa, coco- nuts and coffee. The former station has about 500 ha available for planting the latter about 700 ha. The remaining seven stations have available land areas ranging from 70 ha (Omuru) to 315 ha (Kuk). The total number of graduate staff for all crop research (horticulture and agronomy) on the stations amounts to 31 (early 1980), of which ten are at Keravat, nine at Aiyura, five at Bubia and four at Kuk. Omuru, Popondetta and Tambul have one graduate staff member each, while there are no graduates on Bisianumu and Lejo. The staff distribution reflects the greater attention given to food crops in recent years and the corresponding reduction of work on cocoa, coconuts and coffee. Apart from the crop research on the above stations, involving plant breeding, agronomy, entomology and pathology, research is carried out by the Chemistry Section at Konedobu into soil fertility and plant nutrition and general chemistry and natural products. Research is also conducted within the Agriculture Branch of DPI into Stock, Fisheries and Forestry. Outside the DPI, oil palm research is in progress at Dami Research Station, West New Britain, under the control of the New Britain Palm Oil Development Company, jointly owned by Government and the well known plantations organization Harrisons & Crosfield, Ltd. 11. The land, buildings and equipment available on the DPI research stations are generally adequate. However, due to shortage of funds and/or the inadequate experience of station managers (non-technical staff), the upkeep and maintenance of experiment stations and trial areas is deterior- ating. The Organization and Management of Tree Crop Research 12. Within the Agriculture Branch of DPI, the Officers in charge (OIC) of the crop experiment stations report to the Chief Agronomist at DPI headquarters. The OIC is administratively responsible for management of an experiment station but specialists, e.g. entomologists, are technically responsible to the Senior Specialist, in this case the Chief Entomologist at DPI headquarters. 13. DPI itself is critical of the present procedures for definition of research priorities and for evaluation of research programs. Generally, individual research staff submit research programs for the coming year through the OIC to the Chief of the Section at DPI headquarters. Financial - 51 - ANNEX C Page 5 Table 1 Experiment Stations for Tree Crop Research Station Location Approximate Area (ha) Main Research Functions Aiyura Kainantu 500 Highlands food crops E. Highlands Altitude - 1,500 m Rainfall - 2,100 mm Bisianumu Sogeri 120 Rubber Central Altitude - 350 m Rainfall - 2,60C mm Bubia Lae 220 Lowland food crops, sugar, Morobe pasture Altitude - lowland Rainfall 2,500 mm Keravat Keravat 700 Lowland food crops, coco- East New Britain nuts, cocoa, coffee Altitude - lowland Rainfall - 2,700 mm Kuk Mt. Hagen 315 (?) Tea, vegetables Western Highlands Altitude - highland Lejo Popondetta 194 Cocoa Northern Altitude - lowland Omuru Omuru 70 Coconuts Madang Altitude - lowland Rainfall - 2,300 mm Popondetta Popondetta n.a. /1 Entomology Northern Altitude - lowland Tambul Tambul 200 Pyrethrum W. Highlands Altitude - 2,200 m /I Laboratory facilities only - 52 - ANNEX C Page 6 allocations for particular programs are largely decided on the basis of past allocations. Review and evaluation of ongoing and new programs is done from time to time, but in view of staff and financing constraints (section 1(a)), on an irregular and ad hoc basis. Recommendations for improvement of review and evaluation procedures are in para. 70). 14. The staffing of the Agronomy Section reflects the major effort being made by the Chief Agronomist to apply limited staff resources to problems in the field to the maximum extent possible. Staff at headquarters comprise the Chief Agronomist and one Biometrician. All other staff are posted to experiment stations under an OIC. Staffing of the experiment stations with respect to Agronomy graduate personnel is given below: Staff Establishment Actual Chief Agronomist Class 5 1 1 Scientific Officer Class 4 3 3 Class 3 8 3 Class 2 11 6 Class 1 6 4 Total 29 16 In addition, there are 17 non-graduate Rural Development Officers (RDOs) as follows: Grade 4 (one), Grade 3 (four), Grade 2 (six), Grade 1 (six), and 35 Rural Development Technicians (RDTs): Grade 1 (20), Grade 2 (15), making a total of 52 RDOs and RDTs available for research work. Some 17 RDTs and 72 RDAs are engaged on field recording and supervision of experiment station labor. 15. The graduate staff establishment above has never been filled. All three Scientific Officers, Class 4, will leave the service in October 1980, reducing staff numbers to 13, or approximately 40% of the establishment. Advertising overseas is in progress for some eight or nine Class 3 and Class 4 positions for threeyear contracts, but is is likely that the Public Service Commission will only agree to employment of two or three additional expatriate staff for these positions. The number of RDOs employe on agronomy research is considered sufficient in relation to the low number of scientific officers. 16. The major constraints to recruitment of experienced expatriate agronomists appear to be (i) insufficiently attractive terms and conditions of employment in relation to opportunities elsewhere and (ii) the reluctance of the Public Service Commission to recruit expatriates on the scale required. - 53 - ANNEX C Page 7 17. For the funding of research, each Section submits an annual request. Allocations for the coming year are however determined largely on the basis of previous allocations. Provision of funds from the recurrent budget has not: kept pace with inflation and, unless the system is changed, there will be a serious shortage of funds. Where funds for new programs are likely that in future there will have to be greater recourse to this source, merely to cover the increasing inflationary costs of present programs. Apart from the trend towards financial stringency, the administration of finance for research gives rise to numerous problems in terms of tedious and time- consuming procedures, lack of flexibility and too much detail. Because of the inadequate qualifications and experience of administrative, accounting and supporting staff, senior agricultural technical personnel have to spend the bulk of their time on administrative tasks. The basic weaknesses in administration are long-standing but are now amplified by inadequate staff training and several other important factors (Annex A). 18. In-service training is mainly on an informal rather than a systematic continuing basis. Short courses for new recruits are arranged following entry to the service, e.g. on use of statistical techniques in research and on report writing. University education in PNG is still of a general nature and so far there have been few courses sufficiently specialized in content to be useful to graduate research staff. The possibility now exists, however, for research staff to do M.Sc. work in PNG but the operational details have still to be worked out. The National Public Service Training Section considers requests for overseas training and recently a few staff have had three-month courses overseas, e.g. one staff member at IITA and another in Australia, sponsored by UNDP/ IBPGR. There are numerous training opportunities on offer but generally these are not relevant to staff needs. But an overriding constraint to training is the problem of releasing staff, in view of the limited staff resources which are already spread very thin over existing programs. 19. The mission considers that there is a serious gap between the research and extension services. This is fully appreciated by DPI. Although contact is totally inadequate, considerable efforts are being made within the serious constraints of time and resources. The experiment stations finance and organize extension field days, training courses and issue technical bulletins and two conferences have been held in recent years, for Agronomy in 1978 and Horticulture in early 1980, with a third on Food Crops planned for July 1980. Proposals which would improve research/extension linkages are made in paras. 65-67 of this annex. Evaluation of Research Services for Tree Crops 20. The DPI has published a great deal of useful information on the major tree crops at different technical levels, in the form of farming notes, information bulletins and papers in the international technical journals. However, the results of much of the research work completed in recent years have not yet been written up and may never be satisfactorily reported, as the research staff responsible have left the country. ANNEX C Page 8 - 54- 21. Generally, with the exception of rubber, which has not been a key crop, research progress has been satisfactory over the past thirty years, particularly when one takes into account that all tree crops other than coconuts have a relatively short history in PNG. However, recent trends give cause for much concern. The following sections review the re- search effort on the principal tree crops. (a) Cocoa 22. Agronomic suitability and potential. The rainfall maximum is considered to be around 3,750 mm. There is little experience in PNG of cocoa cultivation below 2,000 mm, although this is common in major cocoa countries such as Brazil, Ivory Coast and Nigeria. Black pod and bark canker have become more serious problems in recent years and this is leading to a reexamination of rainfall limits with the likelihood that cocoa will not be encouraged at the upper end of the rainfall range. The best production is achieved on volcanic soils; the corraline soils are somewhat less productive, while mixed results have been obtained on the alluvials. The areas of best potential are considered to be North Solomons (volcanics and alluvials), West New Britain (volcanics), Northern Province (volcanics), Central Province (alluvials) and possibly parts of Western Sepik. 23. Planting materials. The major planting of cocoa occurred from 1950 to early 1960; a considerable proportion of trees are therefore in the 20-30 year age category. The DPI estimate that the average life of a well-maintained cocoa tree is around 25 years, but under the conditions of poor management and serious pest and disease problems, which have often occurred in recent years, consider that the economic life could fall to around 15 years. There is therefore a need to replant and Government has formulated a Cocoa Development Plan, which includes establishment of six to eight, eight-acre seed gardens for supply of Upper Amazon (U.A.) hybrid material concentrated in the existing cocoa areas. (In addition, the Cocoa Board for their part, propose to set up a 50-acre garden in the Gazelle Gazelle Peninsula). Existing plantings are composed of Trinitario seedlings and some estates have Trinitario clones. The early yield results from U.A. x Trinitario crosses are said to be promising, a useful range of U.A. and Trinitario clones is reported available, and for the medium and longer term it appears likely that the DPI recommendation will be to forego the flavor market advantages of Trinitario in return for the much higher genetic yield potential estimated at 2,500 kg/ha of U.A. x Trinitario and inter-U.A. population hybrids. In the short term, only Trinitario seed or clones will be available. Where satisfactory management standards are likely, and the genetic potential can be achieved, it would be advisable to delay replanting for three-four years until hybrid material becomes available. 24. Shade. Wherever possible, cocoa is established under existing coconuts for several reasons which include intensification of cropping, savings on establishment of artificial shade, ease of lining and planting and apparent reduction of the Pantorhytes insect problem. In the absence of ANNEX C - 55 - Page 9 coconuts, artificial shade is used, Leucaena being the most common. At Lejo Experiment Station, there is an interesting trial planted in the early 1970s, in which cocoa is planted under the following types of shade -Gliricidia, rubber, Casuarina, Kamarere (Eucalyptus deglupta) and natural rain forest. The trial is not fully replicated, but indications are that the best cocoa yields are obtained under Gliricidia (1) and rubber (2) with rain forest as the worst treatment. 25. Density/Spacing. On the basis of trial results, a spacing of 3 m triangular is recommended by DPI for seedling plantings. In effect, the yield difference per unit area in the range 2.5 m (8 ft) and 3.7 m (12 ft) triangular is small. 26. Fertilizer. Generally cocoa has been planted on the better soils. Yields are not high (in 1973/74 they were recorded at 440 kg/ha for estates and 310 kg/ha for smallholders). Some of the larger estates use fertilizer in higher yielding areas, but in the smallholder subsector, fertilizer is hardly used. In the conditions of fairly heavy shade, often found on smallholdings, response to fertilizer is unlikely to be important, particularly with nitrogen. 27. Pruning. The recommendations aim at simplicity and smallholders have therefore adopted pruning to a greater extent than in several countries where more complicated techniques are practiced. Pruning consists of maintaining a single storey by cutting off new shoots (the chupons) that grow out from the main stem and the main branches, and by removal of branches infected with dieback. 28. Pests and diseases. These are the major technical constraints to cocoa cultivation. The major pests are the wood-borers (Pantorhytes plutus) (the cocoa weevil), and Glenea spp. (longicorn borers). Others are the podsuckers -- mirids (often called capsids) and leaf-eating beetles and caterpillars. Generally, these pests have been well researched and satisfactory recommendations for prevention and/or control have been worked out. In the case of Pantorhytes, which is the most serious pest, different species may be involved in different areas and this will complicate the research effort. (It appears to be less serious in coconut areas)./l This pest can be controlled chemically but only with high rates, frequent application and costly products, and with present yields control may be barely economic. The crazy ant gives reasonable biological control where a sufficient population is built up and is being introduced on a small scale. To further this research on biological control the DPI are endeavouring to recruit a specialist on ants. /1 Eggs are laid in roughened bark or cracks in the coco wood. The larvae then bore into the sapwood of the trunk and main branches, causing serious weakening or ring barking, with branch or tree death. ANNEX C - 56 - Page 10 29. Vascular streak dieback (Onchobasidium theobromae) has been the most serious disease and reached epidemic proportions in PNG in the early 60s, but has now declined attributed to an increase in the field resistance of the surviving cocoa population. Resistance to VSD is now one of the major selection criteria in the screening of improved clones and a number of promising tolerant or partly resistant clones of the Trinitario type exist. It is important now, as a long term measure, to select resistant U.A. materials. In the meantime, cultural treatment consisting of removal of infected branches on a 14-day inspection round should be continued. Current DPI research is also directed towards finding a fungicide which would protect young seedlings during the particularly vulnerable first two-three years period, but so far without success. 30. Stem canker (Phytophthora palmivora, also the causal agent of black pod) has become a dangerous disease. If trees are untreated, stem canker builds up with age, becoming very serious at 15-20 years. In the worst areas, loses at the rate of 2% per month have been recorded. Control can be achieved if action is taken sufficiently early by (i) black pod control, and (ii) painting stems with Rudomil. With respect to black pod, the incidence has also increased in recent years. Rudomil treatment again appears effective with two monthly applications, which cost around KIOO/ha/year and are only economic where yields in the range of 800-900 kg/ha are obtained. 31. Technical package. The technical issues are well known and a sound technical package has been developed. Its success is critically dependent however on the level of management. It is commendable that research has been directed towards two levels of technology appropriate to different situations: (i) low input, with shade and no fertilizer, and (ii) high input, high output with no shade and regular fertilizer. (b) Coconuts 32. Agronomic suitability and potential. Satisfactory coconut yields have been obtained within a rainfall range of 1,500-4,000 mm. Development of coconuts is limited in those areas of Central Province where rainfall is low and Gulf Province where rainfall reaches 6,000 mm and land is swampy. In the latter area, plantings are restriced to river levees and occasional well drained land. Some areas of Western Province subject to seasonal floods and droughts are unsuitable. In the East Sepik plains, soil fertility is too poor for coconuts, whereas in the S.W. of N. Solomons coconuts have performed less well than formerly thought likely, probably due to high rainfall (4,500 mm) and excess cloud cover. Generally, however, the lowland areas of PNG are well suited climatically to coconuts and wherever settlement occurs along the coast, there is generally a fringe of coconuts. The areas most suitable for coconut development (ignoring land tenure issues) are the volcanic soils of West and East New Britain on both north and south coasts, the volcanic soils of Northern Province and the east coast ANNEX C 57 - Page 11 of N. Solomons (oil palms could also be grown on these volcanic soils). A category of lower fertility soils, but still suitable for coconuts, includes the alluvials and black sands along the south coast of Central Province and the Milne Bay area (these soils could often support cocoa also, but with high inputs). 33. Soils and nutrition. Research into coconut nutrition is a priority under PNG conditions, and much has been done, particularly on the coral- derived soils of New Ireland, although not generally applied by the industry. Soils with nutritional problems include coralderived soils; the sulphur and nitrogen deficient soils; the alluvial soils; the swamps and the infertile East Sepik plains. The coral-derived soils, particularly in New Ireland, are often potassium deficient. The older soils are leached of Ca and have pH of less than 5.0. The sulphur and nitrogen deficient soils have not shown much response to fertilizer, although this may change when high-yielding hybrids are planted. The alluvial soils along the south coast also have potassium deficiency but high magnesium levels. It is thought that with good management and high levels of inputs yields on the coraline and alluvial soils could be considerably increased to a satisfactory level. There has been considerable research into leaf analysis. However, fertilizer recommendations would not be made on the basis of leaf analysis alone; in PNG, fertilizer trials are necessary also. To summarize, nutritional requirements are broadly well-known and there is sufficient technical in- formation to provide fertilizer recommendations for the main areas. For the future, fertilizer trials with high-yielding hybrids should have priority. 34. Planting materials. A 40 ha seed garden was planted up during 1974-77 at Omuru (Madang Province). This garden is largely based on Malaysian red dwarfs and Rennell Island talls and should be sufficient to provide planting material for around 2,000 ha of field planting per year. The garden is currently being extended by a further 10 ha. During the next two years, two more gardens, eah of 50 ha, are planned to be established near to ports to facilitate seed nut distribution, in Central Province and either New Britain or New Ireland. The plantation companies, New Britain Palm Oil Development and Carpenters, are also establishing seed gardens. (As a forerunner to any large-scale planting of coconuts, a demonstration program, consisting of establishment of 100 x one ha plots in all the main coconut areas with a range of ecological conditions, is planned). The female parent will be Malaysian dwarf with Karkar, Markham (both local varieties) and Rennell and West African tall as male parents. For comparison, local talls will be included in each plot and fertilzer treatment will be compared with no fertilizer. A progeny trial planted during February-December 1975 compares five hybrid and five tall progenies. So far the highest yields have been obtained from Malaysian dwarf x Rennell tall (1), Malaysian dwarf x Solomons tall (2) and Rennell tall (3). Surprisingly, the Malaysian dwarf x West African tall cross in this trial is not impressive. The main feature of interest is the incredible growth rate with production commencing at 2-1/2-3 years after planting. Rennell talls reached production at three years. ANNEX C -58- Page 12 35. Land clearing techniques. As in other countries, there are still problems in disposal of the old coconut stand at replanting. However considerable advances are being made, particularly in the Philippines in the use of coconut wood for sawn timber. A mill has been set up in Lae (Morobe Province) for this purpose and DPI should follow its progress and where feasible, encourage further investment of this type. 36. Maintenance. Imperata grass is a major problem, although control measures are well known. Intercropping with food crops is encouraged for both food production and as a means of weed control. In the early years sweet potato, taro (on fertile soils), bananas and plantains are encouraged, with pineapples as shade increases. At present mixed cropping with cocoa is strongly recommended and fully supported by the mission. 37. Pests and diseases. Scapanes is the main pest problem in coconuts from 2-6 years old. Damage is similar to that of the more widely known Oryctes or rhinoceros beetle (in PNG, Oryctes is largely restricted to the Gazelle area of New Britain, to New Ireland, Manus and parts of the mainland). Scapanes poses particular problems in areas planted from rain forest, as it breeds in the interface between large rotting logs and soil. The main preventive measure would be, therefore, clean clearing. Application of lindane granules in the palm crown at 30-60 gm every three-four months is fairly effective, and done regularly over a four-year period would reduce damage by about 80%. Biological control has not yet been developed and efforts are directed towards production of a strain of the Metarrhizium fungus effective against Oryctes, Rhyncophorus (red stripe weevil) and Scapanes. For the future, major problems can be expected from Scapanes in hybrid coconut areas. A Baculo virus was released some two years ago in the three main Oryctes areas - the Gazelle, Manus and New Ireland. There has been some evidence of reduction in attack after 12 months. Good control is now expected from six to eight years, after which new releases of the same virus would be made from deep frozen virus material. Another important pest is the Brontispa leaf eating beetle, which attacks young seedlings in the field. It is readily controlled with contact insecticides, but the pest could be serious where management is inefficient. Some of the introduced varieties, in particular Malaysian and Sri Lankan talls, are more susceptible in the mature stage than are the PNG talls. Other pests of note for which control measures exist, are Sexava grasshoppers, mainly in New Britain and New Ireland, Promethocetha leaf miner on the south coast of New Britain, and Aspidiotus scale insects. There are no diseases of significance. 38. Technical packages. As with cocoa, the technical issues and constraints are well known at the research level. A satisfactory technical package exists, although it is said that data are scattered and not adequately documented. Nevertheless, there are adequate data available to back up a coconut development program. ANNEX C - 59 - Page 13 (c) Arabica Coffee 39. Agronomic suitability and potential. The arabica industry, which comprises 80% of the total coffee industry, is practically all in the High- lands, at an altitude over 1,500 m. The rainfall at Aiyura, the main arabica research station, is 2,200 mm. Generally, the climatic and soil conditions of the Highlands are very suitable to arabica. Coffee growth is vigorous and healthy, without major pest and disease problems, and well-managed estates yield 3,000 kg/ha of clean coffee. Very large land areas for further expansion of coffee exist in the Highlands and the only major constraint will be market demand. 40. Planting materials. The coffee industry in PNG was originally established with the Blue Mountain variety from Jamaica, now replaced with two varieties, Arusha and Bourbon. The former has the advantage of being more drought tolerant, particularly at close spacings. The DPI has imported over 100 of the best varieties in the world and tested some 40 of these against Arusha and Bourbon. At present, coffee rust does not occur in PNG, but its establishment in the country could have devastating effects. The major issue in coffee breeding is therefore selection of varieties combining high yield with an adequate measure of rust resistance, in that there are some 30 strains of rust and no variety is resistant to all of these (see Technical Package). Future varietal testing planned at Aiyura includes Caturra (a dwarf variety) and Mundo Novo (a promising conventional variety). Aiyura is at present the only source of Arabica seed, producing sufficient to plant 4,000-5,000 ha/year. 41. Shade and nutrition. Techniques of shading with Casuarina (perma- nent) or Crotolaria (temporary) have been satisfactorily developed. The species of Casuarina in use fixes nitrogen. It is planted at 1,300 trees/ha and thinned out to 400 trees/ha, with thinning commencing at two years and continuing to 7-8 years. These high densities greatly reduce weed problems in the early years. Generally, shade is recommended for all smallholders, but where weed control and fertilizer application are likely to be adequate, a reduction in shade level is advisable. Coffee will then respond to higher rates of fertilizer and reach higher production levels. Fertilizer combined with no shade can give yields 50% larger than no fertilizer plus shade. Considerable work remains to be done in the field of fertilizer/shade inter- action and the physiological aspects of production levels, bush nutritional balance and overbearing problems. However, it is commendable that, as in cocoa, research has been oriented towards those shade and fertilizer techniques appropriate to smallholders responsive to a low-cost technology, as well as to a higher cost estate technology. 42. Spacing/Pruning. These two factors have been found to interact and should be considered together. For smallholders, a spacing of 2.5 m x 1.5 m is generally recommended (2,667/ha), with 2.4 m x 1.2 m (3,400/ha) in the drier areas. There are plans to investigate higher densities up to 10,000/ha. It has been determined in several trials that single stem ANNEX C - 60 - Page 14 bushes give higher yields than multiple stem, although more work is needed on this question. However, the general recommendation is for multiple stem bushes of 5 uprights, removing one each year and allowing one new one to develop each year. A multiple stem bush system requires less labor for weeding and harvesting, is less susceptible to pink disease and allows easier access. Investigations show no need to stump back every five years. 43. Pests and diseases. Pest and disease problems are fortunately minor. A green scale (scale insect) is found on leaves, which become covered with sooty mould. Pink disease (Colletotrichum) is on the increase and is controlled with copper oxychloride. For smallholders, removal of diseased tissues is recommended, along with conversion to the multiple stem system./1 44. Renovation. Trials aim to change from an old variety to a new one without losing production. This is being investigated by interplanting with a new variety, cutting out the old one when the new variety reaches production. 45. Technical package. The package is satisfactory in relation to the favorable growing environment and easy pest and disease situation. There is adequate information to allow yields of 2,500 kg/ha from well-managed estates and 1,000 kg/ha from smallholders receiving assistance from the crop development teams. For the future, possibly more difficut situation as the crop expands, the DPI and the mission consider much more work is needed on plant breeding with field testing of a range of imported rust resistant varieties and wider testing of Caturra; nutrition/ physiology in relation to overbearing and dieback in particular; agronomy with respect to (i) developing high density systems with subsequent thinning, and (ii) pruning systems and pathology for pink disease investigations. The DPI has never employed a coffee specialist of wide experience and the mission recommend that as a first step a consultant is recruited to plan a research program to investigte the technical issues mentioned in this paragraph. (d) Robusta Coffee 46. Robusta is an important crop in the East Sepik, where a general agricultural experiment station has been set up under an ADB financed project. There is no work in progress due to the difficulty of recruiting a research officer. Research on plant breeding and pruning systems is important. There are no major pest and disease problems. /1 A multiple stem bush has five upright stems. One is removed each year and a new one allowed to develop. Properly managed, a multiple stem bush is easier to harvest and less susceptible to pink disease. ANNEX C - 61 - Page 15 (e) Rubber 47. Agronomic suitability and potential. Rubber is the least demanding of the main tree crops in relation to soil. There are large areas of PNG suitable for rubber development. Rubber is presently located largely in Papua, in Central, Gulf and Western Provinces. Development has also commenced in East Sepik (ADB) and other possible areas for the future are West Sepik and Milne Bay. Generally it can be stated that rubber growth and yields in any of these areas should be comparable to S.E. Asia. 48. Techniques. Fortunately, much of the planting material developed in S.E. Asia is suitable, subject to screening, for PNG. Similarly, a great deal of the technical information on agronomy, exploitation, pests and diseases and processing from S.E. Asia can be applied in PNG and the FAO/ UNDP team and the UNIDO advisor stationed in Port Moresby can be expected to facilitate this. So far, very little research has been done in PNG, but with the assistance of UNDP/FAO, it is intended to set up some 200 ha of trials with six proven clones on selected estates (GRI, PR255 and 261, PB217, RRIM527 and 600). PB217 and RRIM527 are of interest in that they yield well at low tapping intensity. In addition, a series of 2 ha monocline block trials will be set up to evaluate a range of tapping systems (6 systems per clone). This work is particularly important to PNG, where it is necessary to reduce the labor input in tapping to a minimum. 49. Technical package. There are no major technical constraints and based on S.E. Asian research and development findings a satisfactory technical package has been devised for the Cape Rodney Settlement Project, subject to refinement (now in progress) of exploitation and collection and processing techniques. (f) Oil Palm 50. Agronomic suitability and potential. The ongoing nucleus estate/ smallholder projects in West New Britain (Hoskins and Bialla) and Northern Province (Popondetta) have amply demonstrated that on good volcanic soils with well distributed rainfall, oil palm yields are at least comparable to the best areas elsewhere in the world. Further suitable areas for oil palm development exist in West New Britain and possibly also in Gulf Province and the Galley Reach area and also undoubtedly elsewhere, particularly on the higher rainfall volcanics, which are more suited to oil palm than cocoa. 51. Techniques. Oil palm research has been the responsibility so far of the New Britain Palm Oil Development Company (a joint venture between Government and Harrisons and Crosfield Ltd.). A comprehensive program has been developed during the past ten years, covering oil palm breeding, seed production techniques, assisted pollination, insect pollination, nutrition, palm thinning and pests and diseases. This program and information drawn from S.E. Asia has served the industry adequately. - 62- ANNEX C Page 16 52. Technical package. The major technical constraints are rapid palm height increment and inadequate fruit set on palm bunches. These are well known and satisfactory research to overcome these constraints is in progress. Otherwise, an adequate technical package is available. (g) Tree Crop Farming Systems 53. Intercropping with food crops is fairly common in PNG in the early non-productive period of all of the abovementioned tree crops, wherever overhead shade is not limiting and soil and topographic conditions permit. Some work has been done by the Experiment Station at Keravat on intercropping coconuts with a range of food crops, on mixed cropping of coconuts with cocoa and bananas and on food gardening followed by cocoa/coconut plantings. Generally this work has confirmed results from other countries that the effect of intercropping/ mixed cropping of coconuts tends to be beneficial to coconut yields and that the integration of food cropping with coconuts provides a substantially improved return per hectare. Data are inadequate, however, to draw up a technical package for other than subsistence level food cropping. The Research Focus (a) Tree Crops 54. Within the tree crop industries in PNG the major technical issues and constraints are well known. Where research programs are inadequate to deal with technical constraints, the reasons lie in inability to recruit key research staff and inadequacy of research funds rather than in non recognition of research problems. In fact, the research achievements realized under complex physical and cultural conditions with limited resources have been impressive; as has the attention paid to smallholder technologies with cocoa, coconuts and coffee. The areas in which an expansion of research is particularly necessary is in (i) plant breeding, (ii) nutrition of high-yielding varieties, and (iii) pests and diseases. Unfortunately, there is a serious shortage of specialist research workers in the above categories relative to the supply of agronomists. Expansion of research is also required in the sphere of tree crop farming systems. 55. With regard to plant breeding, the oil palm breeding work being carried out by New Britain Palm Oil Development is satisfactory. There is no need for rubber breeding work (nor is any contemlated) as clones developed in S.E. Asia can readily be imported for testing. The need lies with cocoa, coconuts and coffee. In the cocoa world there is a wide diversity of genetic resources that has been only very lightly exploited. High-yielding Upper Amazon x Trinitario and inter-Upper Amazon population hybrids capable of yielding about 3,000 kg/ha under good conditions and management now exist in Malaysia and the hybrids available in PNG are thought by DPI to have a genetic potential of 2,500 kg/ha. The DPI should continue to collect and select high-yielding materials, both seedlings - 63 - ANNEX C Page 17 and clones, and also select for improved secondary characteristics such as bean size and uniformity, pest, disease and drought tolerance. Similarly with coconuts the world sources of germplasm have hardly been utilized. This however is a task for an internationally supported project./l In the meantime, the DPI should (subject of course to availability of resources) test a much wider range of hybrid combinations and of tall varieties and collect and conserve germplasm, particularly local materials. In the case of coffee, as already stated, much more breeding and selection work is required in relation to development of rust resistant varieties. 56. PNG has been fortunate in its generally fertile soils. However, the increased aspirations of small farmers require higher yields and the high-yielding materials now becoming available will in turn demand higher fertilizer levels. Therefore, DPI and the mission consider priority attention should be given to studies of the nutritional requirements of high-yielding materials at a range of densities and in different farming systems -- i.e. in intercrop and mixed situations. 57. Some excellent pest and disease work has been done in PNG. How- ever, the intensity of the research effort has declined and there is a need to restore the former priority of such research. The major constraint is staff. In entomology there are only eight economic entomologists for the whole country. The two at Keravat have to deal with the crop problems of all the islands. There is a similar shortage of pathologists, to the extent that it is reported that three important diseases of food crops are not being adequately investigated. 58. Apart from the work on rubber tapping systems, there is little explicit effort within the program to investigate the productivity of labor. With steadily rising rural wage rates, this is become an issue of increas- ing concern, particularly of the estate sector, but also of smallholders. It is recommended that studies of labor productivity should be incorporated into the program. This would require inputs from economists or farm manage- ment specialists and possibly agricultural engineers, as well as agri- culturalists. Some work would need to be done off research stations and the cooperation of private plantation managers would be required. 59. If research is intensified in line with the major priorities of plant breeding, nutrition, pests and diseases and labor productivity out- lined above, then the mission would consider that research would be adquately oriented towards the industry's present problems. It should be noted, however, that the level of available technical knowledge runs far ahead of its general application in the case of all tree crops, in particular cocoa, /1 The identification, collection and testing of coconut germplasm from a wide range of environments and countries, in several of which there are serious disease problems, could only be achieved under the conditions of cooperation, management, technical expertise and finance of an internationally supported project. - 64 - ANNEX C Page 18 coconuts and rubber, and to a lesser extent coffee and oil palms. Average yields for the former crops are in the range of cocoa (350-450 kg/ha); coconuts (600 kg/ha of copra); rubber 500 kg/ha). Under conditions of good management, the potential yields from cocoa, coconuts and rubber could be increased at least four-five-fold; with coffee, the best estates obtain yields three to four times larger than the average smallholder yield and with oil palms yields achieved by estates and the best smallholders are 50% larger than those of the average smallholder. Overall priority within the agricultural sector should be given, therefore, to improvement of field management standards. 60. The relevance of research to future needs will in part depend upon the emphasis to be given to replanting and rehabilitation on the one hand and new planting in new geographical areas on the other. It is clear that major advances can be made through replanting/rehabilitation of the largely low-yielding smallholder and estate subsectors in existing areas and therefore intensification of research in existing areas would be appropriate. Major probable areas of future new development are said to be Central, Gulf and Western provinces, Sepik, the Madang coast, New Britain and New Ireland. As the mode of new development in these areas is likely to be of the nucleus estate/settlement type, it should be possible to build in the adaptive field experimentation necessitated by different soil and climatic conditions in the particular project. (b) Crop Research in General 61. If the proposal advanced in para. 71 et seq of this annex is accepted, the focus of research in DPI should be on cash and subsistence crops in the smallholder sector. The organization and management of research should be geared towards screening and selecting improved planting materials, developing appropriate component technology, and developing farming systems appropriate to the needs of farmers and extension services in each of the major agro-climatic zones in PNG. The program should include adaptive field trials conducted off research stations as joint exercises by extension and station staff and emphasis should be given to farming systems as opposed to individual crop research. Lack of up to date and detailed information on soils and land utilization is also a serious impediment to the preparation of a comprehensive agricultural development plan. The staffing of the Land Utilization Section is not adequate to cope with the work entailed in surveys of the scale required. The Section is negotiating with the CSIRO of Australia to carry out a national land use survey and has also proposed a significant increase in staff. If neither of these initiatives is succesful, the ability of DPI to plan effectively will be prejudiced and the task of reviewing the estate sector (proposed in Annex _ ) will be made more complex. 62. Research needs in relation to food crops in general have been reviewed by H.M. Groszman and food losses due to poor harvesting, handling and storage have been studied by a mission from the Australian CSIRO. Groszman recommends strengthening of administrative, organizational and ANNEX C - 65 - Page 19 administrative, organizational and management functions as well as the appointment of an effective field horticulturalist to each station to liaise with extension w'6rkers. His recommendations are endorsed by the mission. 63. The CSIRO mission recommended the provision of training courses in post harvest technology in PNG^s two universities and that DPI should collaborate with these institutions in research and training programs. It also recommended that DPI appoint experienced post-harvest horticulturalists to its central laboratory and to Kuk research station. It also suggested that Government should request from CSIRO a continuing program of technical assistance in this area. No decisions have yet been made on these proposals. Key Constraints and Recommendations 64. The research efforts of DPI is affected by a number of constraints which apply to the whole of DPI and seemingly most of the PNG public service. These are discussed in this annex and also in Annex A. They are: (i) inadequacies in planning, direction and evaluation, (ii) insufficient numbers of experienced staff, (iii) inappropriate staff training arrangements, (iv) cumbersome financial procedures and shortage of experienced administrative staff, (v) increasing difficulty in funding. In the research area the above constraints largely stem from the shortage of experienced technical and administrative staff and to a lesser extent from increasing difficulty in obtaining funds for research. The outcome is that research staff at all levels, particularly senior levels, are heavily overloaded with administrative work to the serious detriment of research and to linkages with extension. A further consequence is that the research effort has been spread too thinly, an inevitable result in a situation where the numbers of senior staff have declined so rapidly. Measures to mitigate the effects of these constraints are proposed below. 65. Organization. The research function is dispersed between 4-5 sections of the Agricultural Division, and the Development Engineering unit which should be an integral part of the research service is attached to the PEM Branch. While it is true that technical personnel appear to work fairly well together and share common station facilities, there are inherent weaknesses in the arrangement. It increases the need to use limited expertise for administration. It increases the difficulty of determining research priorities and focusing limited resources on those projects. It reduces the possibility of using the best expertise and research experience from the different sections, to head up national research projects of importance. Coordination of research effort is more difficult, and - 66 - AEX C Page 20 Provincial services have several contacts for research rather than one. In addition, the dispersion of research capacity is not conducive to the conduct of inter-disciplinary programs such as would be required if other recommendations made in this annex are adopted. 66. It is therefore recommended that all DPI crop research services be united in a single Division under the control of a national Director of Research. The Director would be supported by appropriate national specialists but the bulk of the technical staff should be posted to regional research centers under the control of Regional Directors of Research. Tle would maintain close contact with the four-five Provinces in his region and staff would be appointed to maintain liaison with the extension service. 67. There should be an economist at each regional station to work with technical personnel and the extension service in planning, evaluating and deriving recommendations from trials. N'ational specialists could be appointed for cropping systems and each major commodity. They would be located at the most appropriate regional station for that activity and would act as national advisers in their field as well as being involved in the planning, implementation and evaluation of trials. 68. Administration. To relieve research staff of time-consuming administrative work and release some 75% of their time for research (as opposed to the present 25% or less), emphasis should be given to recruiting and training staff to fill the positions of experiment station managers and executive administrative assistants to the officers in charge of the stations. These should be career positions and sufficiently attractive to retain competent administrators. It is proposed in a DPI Report prepared for the mission (April 1980) that "the Department's general administrative branch should be overhauled to provide appropriate support". The need for this action is confirmed by the mission. 69. Research priorities. The present research workload is too large for the staff available. Research priorities should be redefined in relation to major national development strategies, to farmers' needs, and to the projected staff capacity for implementation of programs over the next few years. Work on lower priorities should be minimized and certain programs terminated. Small isolated experiment stations should be closed down, handed over or put on a care and maintenance basis, e.g. Lejo and Popondetta Entomology Laboratory. 70. Research program evaluation. Procedures for planning, direction and evaluation of research are inadequate. The mission recommends establishment of a monitoring and evaluation unit within the proposed Research Division and headed by a Senior Research Planning and Evaluation Officer. The functions of the unit would be to: (i) develop a uniform system for effective planning, direction, evaluation and overall management of research; ANNEX C - 67 - Page 21 (ii) establish and operate the system; (iii) carry out an annual internal review of all research programs with respect to priority, technical soundness and progress in implementation; (iv) provide data for the annual budget review; (v) publish annual technical reports; (vi) develop, establish and operate a data retrieval system; (vii) in coordination with research heads, evaluate research results and develop a long-term agricultural research strategy. 71. Responsibility for tree crop research. The alternatives are (i) to continue with present arrangements, where Government has a major involvement in the execution of tree crop research, or (ii) follow the model used with the oil palm industry in PNG and progressively, as an industry becomes able to stand on its own feet, hand over more responsibility for research to the industry. Under the second alternative, Government would of course maintain a necessary presence on industry research boards so as to ensure (i) adequate funding for research, even in low commodity price periods, (ii) that research programs take adequate account of national goals, and (iii) that smallholder technologies are adequately catered for. 72. There are several examples in the sphere of tropical tree crops of the outstanding success of the second alternative given above -- CEPLAC with cocoa in Brazil, the Rubber Research Institute of Malaysia, the oil palm industries of Malaysia and Indonesia. There are also many instances of ineffective tree crop research largely attributable to inadequate management by Government departments unable to provide the single minded attention required in terms of direction, funding or support. As pointed out above, Government departments have a role to play throughout all stages of a tree crop research effort, but it should be largely of a "watch dog" nature, with the exception of the early years, when a new industry is unable to stand on its own feet by virtue of its size and a Government lead is vital. 73. The second alternative is in line with DPI and industry thinking. It is the model used for oil palm and now being further refined; the cocoa industry is now financing part of cocoa research; the coffee and rubber industries see the importance of industry responsibility and self-sufficiency for research. The large oil palm growers, which include Government as a shareholder in the three nucleus estates have set up a Palm Oil Producers Association. The Association will manage and operate research through a twp-tier Board -- the upper Board for management, the lower for research. Major functions of the former would be management of finance and allocation of the research levy collected on production; of the latter, ANNEX C - 68 - Page 22 approval of proposed research programs and funding and review and evaluation of ongoing research programs. The Director of Oil Palm Research would be a member of both Boards. 74. In the case of rubber, new legislation is currently being drafted in respect of the powers of the Rubber Industry Board which will be modelled on the Cocoa Industry Board. The functions of the Board will include responsibility for collection of a replanting levy, investment in industry development, research, quality standards and marketing. As the Board cannot be self-supporting immediately, it is likely that Government will finance the operating costs for the first three years. This arrangement embodies the logical approach whereby Government finances research until such time as the industry can take over. By allowing the industry to become responsible and self-sufficient for its research needs, costs to Government will in time be greatly reduced, scarce Government staff can be used elsewhere and the onus to perform is where it should be rightfully placed on those whose livelihood depends directly on the industry. It is recommended that this approach to research be promoted for all tree crop industries and that the Government be prepared to provide financial support during the formative stages. The successful implementation of this recommendation would free more of the limited Government research resources for other fields notably for food crop and smallholder farming system research. 75. Allocation of nationals to food crops research. If tree crop research is progressively handed over to industry responsibility, the industry can be relied upon to attract and recruit suitable expatriate and national staff. A number of national research staff should be placed on the industry experiment stations for intensive training so that in the longer term a group of experienced national tree crop researchers becomes available. However, the majority of national research staff should be employed on food crops research in view of its priority and of their comparative advantage with respect to their awareness of traditional farming practices and the socio-economic issues involved. Food crops research would still require a considerable input of expatriates with experience in the rapidly evolving metholology for research into farming systems. 76. Terms and conditions for research staff. As progress in agri- cultural research is basic to the success of future national development there is a need to reexamine the terms and conditions of employment to determine whether these are sufficient to continue to attract staff of high capability. With respect to expatriate staff, contracts should be provided for periods of five to seven years. The present arrangement of three years is quite inadequate to allow a new research worker time to understand the research problems and to conduct adequate programs to solve these. 77. Establishment of a data bank. The DPI are rightly concerned that existing research work is not being adequately written up for publication. This is a particular problem where expatriate staff with long experience are leaving the country effectively forever. The DPI have proposed that ANNEX C - 69 - Page 23 generally new work should not be undertaken by individual research staff until the bulk of existing work has been prepared for final use. The mission would support this proposal and also recommend that payment of part of the contract bonus for expatriates should be dependent on satisfactory write up of their work. Encouragement, perhaps as a criterion for promotion should also be given to national staff to complete their work in this way. There is a need also to establish a system for rapid retrieval of the substantial amount of recorded research data which is available, but difficult to locate. These data are in the literature, technical bulletins, DPI memoranda, experiment station reports, etc. The needs in this regard are similar to those of the Planning, Economics and Marketing Divisin as outlined in Annex A. A combined data bank should be considered for these two Divisions. 78. Economic evaluation of agricultural sector objectives. As the agricultural research program must relate to national objectives for the agricultural sector, an economic evaluation of the importance and future role of the different subsectors -agriculture, livestock, fisheries, forestry - is necessary. This requirement would be met by the preparation of a five year development plan as proposed in Annex A. Such a plan would be of benefit to all Divisions of DPI, not only to the Research Division. Within agriculture, priority must be assigned to food crops and then tree crops and within the latter to particular crops, according to comparative advantage, returns to growers and market demand. This exercise would be followed by comprehensive planning for the various types of agriculture practised in PNG by determining the agroecological characteristics of major regions and developing a particular development strategy for each region (or province). The areas of greatest agricultural potential should be identified and research planned in relation to the needs of present and future agricultural systems in these areas. 79. Preparation of a research project for external financing. It is recommended that DPI prepare a research subproject, as part of an agri- cultural support services project. The subproject would include finance for components such as research management, technical assistance for research and extension liaison training, facilities and incremental operating costs. In a research subproject, emphasis would be placed on farming sysems research, particularly for food crops, but also on tree crops which were specifically studied by the mission. Research should examine tree crop farming systems in relation to the benefits of intercropping and mixed cropping of tree crops with food crops and various semi-perennial and perennial crops. It may be necessary also to finance a number of sub-stations for tree crop research as dictated by national production objectives and agroecological conditions. The functions of sub-stations as opposed to main stations would include: (i) varietal screening; ANNEX C - 70- _Page 24 (ii) smallholder management systems, and to allow consolidation of support services activities; (iii) provision of a base for planting materials production, food crop research and extension services. -71- A NEX D PAPUJA NETW GUINEA AGRICULTURAL SERVICES REVIEW CROP PRODUCTION AND EXTENSION SEPRVICFS Table of Contents Page No. Present Position . . . . . . . . . . . . . . . . . . . . . . . . 72 Organizational Aspects . . . . . . . . . . . . . . . . . . . . . . 73 Links with the Provices ... . . . . . ..... . . . . . . . 75 Research/Extension Liaison ... . . . . . .. . . . . . . . . 75 Farmer Contact . . . . . . . . . . . . . . . . . . . . . . . . 75 Management Aspects .... . . . . . . . . . . . . . . . . . . . 77 Staff and Staff Training . . . . . . . . . . . . . . . . . . . 77 Program Planning . .............. ........ 78 Appendix 1: Outline of an Improved Extension Service . . . 80 Introduction . . . . . . . . . . . . . . . . . . . . . . . 80 Organization . . . . . . . . . . . . . . . . . . . . . . . 80 Management and Methodology . . . . . . . . . . . . . . . . 81 Field Extension Officers (Didimen) . . . . . . . . . . . 81 District Extension Officers . . . . . . . . . . . . . . 82 Provincial Extension Officers . . . . . . . . . . . . . 82 Regional Extension Officers . . . . . . . . . . . . . . 83 Extension Division . . . . . . . . . . . . . . . . . . . 83 Evaluation & Planning ... . . . . ... . . . . . . . 84 Discussion . . . . . . . . . . . . . . . . . . . . . . . . 85 Chart 1: Organization Chart for an Improved Extension Service 87 - 72 - ANNEX n Page 1 PAPUA NEW GTUINEA AGRICILTtRAL SEPVICES REVIETT CPOP PRODUCTION AND EXTENSION SERVICES The Present Position 1. An effective agricultural service system is basic to the success of any agricultural development program, and programs to upgrade services may be the most cost-effective way of bringing some benefit to the majority of the rural population in a relatively short time. In Papua Nw Cuinea 85% of the population rely on food crops and cash crops for their livelihood, and an effective program to tackle current deficiencies should thus receive high priority. Unfortunately, full impact from improved services requires areas with reasonable access, reasonable population density and good production potential, and each of these factors is missing in parts of PNG. However, although no detailed information is available regarding the potential of each district DPI personnel estimate that 65% of rural households, or about 250,000 farm families, could receive appreciable benefit from improved crop production services. Yields and production from cash crops are disappointing and in some areas problems are being encountered with declining food supply, due to competition for land and labor. An effective extension service is needed to disseminate improved technology to the majority of the farmers, and to encourage adoption via frequent and regular visits from a Didiman, who is backed up by effective technical, credit, input supply and regulatory services. It is claimed that farmers are reluctant to replant and adopt improved management practices, and that there is little demand for smallholder credit. This largely reflects the lack of effective extension and appropriate supporting services. Currently, Didimen contact only about 20-30% of farmers on a regular basis. 2. All aspects of crop production services need strengthening. There is a wide range of problems, and few appropriate changes in organization and management have been made to accommodate the "provincialization" of services. This would be an opportune time for the Government to make the fairly radical changes needed to meet changed circumstances. A piecemeal approach would not be effective, and opportunities would be missed to strategically re-deploy the scarce expertise available throughout the service. In view of the limited manpower resources, it would be appropriate for DPI to concentrate effort and resources on the smallholder sector, and encourage the private sector to meet the service needs of plantations and the larger enterprises. Careful selection of international companies with adequate research and development capacity for joint-venture, larger-scale development projects, would assist this aim. It is suggested that the appropriate approach to tackling the crop production service problems is to prepare a master plan of a total system - 73 - AN1IEX D Page 2 appropriate to the future needs, and to phase improvements to achieve the goal, based on development priorities and available resources. The mission had limited time and manpower, and limited exposure to PEE field conditions. The most useful contribution that can be made at this stage is to present principles and ideas drawn from experience in other countries and Bank projects for consideration in the reform of the existing system and the preparation of a master-plan. This should help to focus discussion and highlight the policy decisions that Government has to make to bring about improvements. Once Government has made decisions on key issues, and determined the organizational structure and the nanagement principles to be adopted, the stage is set for detailed preparation of each component. Organizational Aspects 3. Any crop production service system should be designed to reach the majority of farmers with the basic services they need to improve produc- tion and net income. The key organizational questions are who should carry out what services and how should these be combined to be efficient and economical. In PM the components to be operated by DPI and provincial agricultural services comprise: research and its extension; provision of planting materials and assistance with planting and replanting; regulatory work to protect the industry; and assistance with marketing in remote areas and for pioneer crops. Credit services, supplied by PWtTDR for smallholders, must be closely tied in with the rest of the system. The private sector can be expected to continue to take care of the supply of other inputs and most of the marketing where there is sufficient volume of business. In determining the organization of services consideration must be given to the compatibility of different functions, the roles of each component service, the capability of field workers. 4. Experience in other countries has shown that the establishment of an effective extension service is critical to success. Without an effective net- work of extension workers to contact the majority of farmers on a frequent and regular basis, and to inform, educate, and encourage them to adopt improved practices and programs relevant to their immediate needs, the impact and effectiveness of other services are minimal. To be effective, extension workers should concentrate as far as possible on extension and not be burdened with other duties, e.g. collecting statistics, regulatory work, logistics, and credit supervision. Regulatory work and credit supervision are incompatible with extension. Other duties are likely to seriously disrupt visiting schedules, the complete coverage of farmers, and the time available to identify with farmers and encourage them to adopt innovations. However, an extension service without the backing of a well-organized research service to provide a continuing flow of relevant information, and well-organized services to support the farmers undertaking the programs and practices that extension is promoting, soon loses credibility and clients. 74- AN "EX P Page 3 5. The approach recommended is to establish an effective extension service as the core of the servicing system, and then develop viable support services, e.g., research, credit, replanting and regulatory units to effec- tively support it. As the front line service, the organization and management of extension should be carefully planned. The organization and management of other key support services, e.g, research, credit, replanting, etc., should be tailored to provide the close linkages required with extension for planning, implementation and evaluation. 6. Taking into consideration the above points and the support needed by the PRDO to fulfil his functions effectively, the appropriate organization of a Provincial Rural Development Division for agricultural services /1 might be as follows: (a) An Extension unit. (b) A Crop Production unit to propagate and distribute planting materials, and provide support services to smallholders for planting and rehabilitation of perennial cash crops, via mobile teams. (c) A Regulatory unit to take care of quarantine, crop protection and the control of major pest outbreaks, registration of processing facilities and marketing services for remote areas. (d) A Planning, Evaluation and Statistics unit to collect and collate basic agricultural statistics, carry out surveys, and have overall responsibility for formulating provincial agricultural policy and programs, and monitoring the effectiveness of services and programs. (e) An Administrative unit, with an executive officer to assist the PPPO and unit chiefs with administration, a staff development and training officer to take care of personnel matters, and a basic cadre of typists and clerks to look after day-to-day requirements and liaise with BMIS to keep accounts and records up to date. 7. Credit should generally be handled by PNGDB, for which PW(DB would need to recruit additional field credit officers to work with the extension service. Credit officers should be responsible for processing applications, disbursement of loans, regular supervision, and the collection of repayments. The extension service should promote the credit programs, as appropriate, put /1 Fisheries and Livestock units are dealing with a limited number of discrete farmer groups and projects, and servicing requirements for these activities are rather different. They could be retained as commodity units, covering the whole range of activities, for the present. However, they should be linked to the extension service where appropriate. - 75 - ANNEX D Page 4 farmer groups in touch with the PNGDB credit officer, and provide technical supervision. Other agricultural units should provide the logistic support needed with planting and replanting programs. 8. Links with the Provinces. To facilitate clear linkages and effective professional and technical support from central DPI to the province Rural Development Divisions, central DPI should be reorganized to establish a central counterpart unit for each service unit established within the provinces (see Annex A). As the provinces are critically short of skilled experienced personnel, and many are not within easy reach of Port Moresby, it would be necessary for DPI to establish regional units, and concentrate most of the staff in the regions, to provide the level of support needed. There is considerable disparity between the provinces in terms of the number of experienced personnel. Further, there is now limited opportunity for senior provincial personnel to be transferred around the country, to gain broader professional experience. Under these circumstances it would be desirable to retain the PRDO and the chiefs of each of his sections in the national DPI service. They could be administratively responsible to the province and implement provincial policy and programs, but retain formal technical and professional links with central DPI. Movement of staff around the country could be subject to consultation between central and province government, and a maximum appointment period to protect the interests of the officers. The adoption of these principles would result in the establishment of an Extension unit, Crop Production unit, Regulatory unit, and a Planning, Evaluation abd Statistics unit at DPI national headquarters, but with the bulk of their staff located in regional service units at Rabaul, Madang, Mt. Hagen and Port Moresby, to provide the close support needed by the 4-5 provinces in each region. It is recommended that the Information Section of the Education and Training Branch be transferred to the Extension Unit and be given responsibility for on-the-job extension training. As administrators of provincial services, provision should be made for PRDOs to have direct links with the Secretary of DPI./1 9. Research/Extension Liaison. It is proposed in Annex C that research services be organized on a regional basis and that special staff be devoted to liaison with extension staff. This should assist in bridging the communication gap which currently exists between the two activities. 10. Farmer Contact. Reaching the majority of farmers with a complete package of basic services, and achieving effective coordination in terms of program planning, implementation and evaluation, especially at provincial level, are of prime importance. These objectives can effectively be achieved /1 In Annex A it is also proposed that PRDOs and Provincial Ministers for Agriculture should meet formally with their national counterparts in a National Agricultural Advisory Council. - 76 - ANEX P Page 5 by building the service system around the extension service, which should be the main continuing link between government services and the farmers. 'b service can effectively contact 250,000 farmers on an individual basis. Grouping of farmers is necessary. It should be the role of the extension service to form viable farmer groups as the main point of contact for services. In the proposal outlined in Appendix 1, an extension worker would form farmer groups of about 40-60 households, based on the clan or village as appropriate, with a group leader and progressive farmers appointed within the group at a ratio of 1 to 5-6 households. The group leader and his assistants would be the prime point of contact between the farmers and the services. They would disseminate information and ideas through the group, and encourage group members to act on recommendations. 11. One extension worker would handle 9 groups, or about 500 farmers, and visit them on a regular visiting schedule for one day every two weeks. If all services work with and through the extension worker and use the same set of farmer groups as the basis for their programs, the stage is set for delivering a full package of services to all farmers, and for coordination of programs. If the vertical organizational structure of key field services is aligned with that of the extension service, i.e., having staff of similar status and responsibility at field, district and province level, the oppor- tunity exists for a team approach and close coordination, in terms of program planning, implementation and evaluation. 12. This principle should also be applied to the provision of credit. Ideally PNCDB should have smallholder credit personnel available at all levels to work with the extension service on smallholder loans. In fact the appointment of field officers will be limited by constraints on finance and the availability of trained manpower. Given PNGDBs charter to operate on a commercially viable basis, the financial constraint on its adopting a develop- ment role among smallholders should overcome with financial assistance from the Government to offset losses in what would normally be a high cost low earnings position. The limited number of field smallholder credit officers should be appointed to the areas of highest demand for smallholder agricultural loans. The number appointed would depend on the buildup of business and the constraints mentioned above. In areas of high credit activity the credit officer:extension agent ratio may need to be as high as 1:2 or 1:3. Such a ratio would be infeasible on a nationwide basis in the foreseeable future, but, as an indication, 20 officers would be required to achieve an average ratio of one per 10,000 farm families serviced, or one per 20 extension workers. This would only involve one per province. Total cost to PNDB at the average rate of administrative expenses per staff member would be of the order of K 150,000 per year. 13. Personnel servicing farmers at field, district and province level, would meet at regular set intervals, for joint program planning and evaluation sessions. This should be built into the job descriptions. ANNEX D page 6 Management Aspects 14. Staff and Staff Training. A shortage of experienced, well-trained staff, relative to the number of inexperienced staff, is a key constraint. This situation is likely to continue. Although formal training programs may be stepped up, and conditions made more attractive, a continuing loss of experienced personnel to more attractive positions within Government and the private sector, can be anticipated. Further, many of the young people of today lack the motivation and the self-discipline to handle their tasks conscientiously. These are problems common to many countries and must be taken into consideration in formulating organization and management proposals. Every effort should be made to: (a) Restrict functions and tasks of less experienced workers in the system to a level they can effectively handle; (b) Systematize and simplify operational procedures to the extent possible prepare clear job descriptions for every level of worker, and prepare simple operational manuals for on-job training purposes; (c) Emphasize physical supervision and adopt appropriate supervisor: supervised ratios appropriate to the level of staff and the task at hand; (d) Appoint the most capable staff on an equitable basis to key supervision and management posts throughout the service system; (e) Systematize the supervision frequency and methods right down the management line; (f) Build effective on-job training and technical/professional support systems into all service units, ensuring that all levels of staff have regular contact with well-qualified, experienced staff, who can provide on-job training and assistance with the tasks at hand on a regular basis, and hence progressively upgrade skills in the work-place; (g) In formal training courses, give top priority to training trainers and supervisors for each unit of the service; (h) Maximize participation of all levels of worker in program planning and evaluation, to motivate staff and to develop skill in this area, and hold regular reviews of performance and programs. - 78 - ANNEX D Page 7 15. Program Planning. Effective coordination of policy formulation, program planning, implementation and evaluation, should be built into the job descriptions of key personnel at field, district, provincial, regional and national levels. The system should require regular meetings at monthly, quarterly, or six-monthly intervals as deemed necessary, under appropriate chairmanship, for all related services, to jointly present and evaluate their respective programs, and plan improvements for the future. The formulation of provincial and national policy and programs would be derived from these regular meetings, which would feed the results of their deliberations up to the next level of management. In turn, top management would feed its decisions on points raised back down through the system for implementation. 16. To develop a clear picture of requirements in terms of manpower training, buildings, equipment, vehicles, operating expenses and total finances, it is recommended that a manpower survey be carried out and a master plan for the improvement of agricultural services over (say) a five-year period be drawn up. This would be a component of the 5-year National Agricul- tural Development Plan proposed in Annex A. In developing the master plan close attention should be given to: (a) identification of key posts necessary to run an effective service with a large cadre of inexperienced personnel and the appointment of available experienced staff to these posts. Gaps should be filled by recruitment of expatriates on a minimum 3-year contract, with appointment of suitable understudies to train for these positions; (b) a complete review of salary structure and allowances, with a view to creating more senior posts at provincial and regional level, and extending salary scales of senior provincial service workers, with the objective of attracting and retaining a high calibre of officer in the provinces;/1 (c) ensuring that travel allowances are adequate and not a distinctive to an officer carrying out his duties. (d) reducing staff turnover possibly by setting a minimum appointment period for every key post, (e) catching up on the backlog of housing, so that both national and expatriate staff have suitable housing to move into when they are posted; /1 Presumably such a review should be undertaken by the Public Service Commission in cooperation with DPI. - 79 - ANNEX D Page 8 (f) reviewing arrangements for the provision of vehicles, motorcycles and boats to staff requiring transport./I (g) orienting formal training toward staff in key technical and management supervision posts; (h) the possible introduction of a bonding system for candidates receiving long-term local or overseas training at Government expense, to keep them in their posts for a reasonable period after training; (i) the establishment of an audio-visual unit in the Education and Training Division for lower level on-job training. This would enable top expertise to be brought to all levels of worker via well-prepared tapes, slides and films, under the supervision of much less-skilled trainers. /1 Encouraging staff to purchase and maintain their own transport via low-interest loans and realistic mileage ceilings and allowances, has proved to be the most effective and cheapest method of providing transport in the long-term for many developing countries in the region. The transport pool should be kept to a minimum. Fleet discounts can still be achieved if the lending agency places bulk orders with the suppliers. - 80 - ANNEX D Appendix I Page 1 PAPUA NEW GUINEA AGRICULTURAL SECTOR REVIEW CROP PRODUCTION AND EXTENSION SERVICES Outline of an Improved Extension Service Introduction 1. The establishment of an effective extension service is the most cost-effective way of increasing the production and net income of the majority of farmers in a relatively short time. As such, it is the most important component of any agricultural service system and should receive high priority in plans to improve services. Many countries in the region have adopted the "Training and Visit" (T & V) system of extension under Bank- financed projects, with good results. It is particularly applicable to situations where there are few experienced, well-trained staff, and a large cadre of relatively unskilled field workers. The principles are highly applicable to the developed areas of PNG. However, the basic pre-requisite to success would be recognition of the need to establish a service and assign staff to work full time on extension at provincial level. An outline of the T & V system is presented below. Organization 2. The organization of a prototype service is presented in Chart 1. To facilitate a contact between the Didiman and the majority of farm households on a regular and frequent basis, farm households would be grouped by clans or neighboring allotments, as appropriate. As clans appear to have an average size of 40-60 households, this would be the range of group size. One Didiman would be assigned to service 9-10 groups, or about 500 households. A DRDO or District Extension Officer would supervise 6 - 10 Didimen, depending on the size of the district. At provincial level, a Provincial Extension Officer, would administer and supervise the provincial extension service. Ideally, he would also be assisted by a team of subject matter specialists for extension, subsistence crops, and major commodities produced in the province. However, PNG could not afford this luxury at present, due to lack of personnel. It would thus be necessary to concen- trate available expertise at regional level. This would require a Regional Extension Officer to support the ppovincial extension Officers with their tasks, and to supervise the activities and programs of a team of specialists to support the provincial extension services in the region. At national headquarters there would be a need for a Chief Extension Officer, assisted - 81 - ANNEX D Appendix 1 Page 2 by a Programs Officer, Extension Training Officer, Extension Specialist, Technical Specialist, Publications and Information Officer, and supporting technical and administrative staff, to coordinate activities at the national level and to supervise the regional units. Management and Methodology 3. Field Extension Officers (Didimen). The Didiman would visit each of his groups for one day, once a fortnight. He would always visit on the same day of the week at the same time, so that his groups and his supervisor knew his schedule and knew exactly where to find him. At each visit he would give the group a training session and, where practical, a demonstration on some aspect of their production program, relevant to their immediate needs. He would conduct a farm walk, to inspect group members' plots and give advice on management problems where he had appropriate knowledge. He would note problems outside his field or beyond his knowledge, for reference to his supervisors, whom he would meet on a set day every two weeks. A typical Didiman's work schedule would be as follows:- M T W Th F S S M T W Th F S S Day 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Group No. 1 2 3 4 5 H H 6 7 8 9 M H H - Repeat - M = Meeting H = Holiday 4. As group size is quite large, each group would appoint a group leader and progressive farmers to assist him, in the ratio of one progres- sive farmer to every five followers. Their role would be to meet regularly with the Didiman at each of his visits, and encourage the followers to attend; disseminate information coming from the meeting to their followers; and organize group action on programs and recommendations resulting from meetings with the Didiman. The Didiman's role would be to encourage groups, through training sessions, discussions, practical demonstration of technique and observation plots, to adopt improved technology and management techniques that would improve their production and income. His training and demonstration session at each visit would be geared to field activities that the farmers would be carrying out during the next two weeks. It would cover subsistence crops and the main cash crops being grown by the groups in his area. At the end of each round of field visits he would meet with his supervisor and subject matter specialists to report progress, resolve problems, and receive a field-oriented training session relevant to field activities his group should be practicing in the subsequent two weeks. He would use this as the basis for his training session with his groups on his next round of visits. - 82 - ANNEX D APpendix 1 Page 3 5. District Extension Officers. The District Extension Officer would supervise 6-10 Didimen. His main tasks would be to work with his Didimen to plan extension programs, relevant to their groups' needs, schedule the training topics to be presented to the groups each fortnight, and plan an appropriate bi-weekly training program for Didimen to match their field visit requirements. On a set day every two weeks, all Didimen would meet at the District office at a meeting chaired by the District Extension Officer and attended by appropriate Provincial staff and subject matter specialists. They would receive a training session covering theory and practice, which would be a model for the training session they would present to their farmer groups during the next round of visits. They would verbally report progress in their service areas, and raise problems for resolution at the meeting or referral to the regional specialists or research stations if the answer was not known. Requests for assistance from other supporting services, e.g., credit, replanting, crop protection, etc. would be reported and relayed to the appropriate service unit for action. Non-agricultural problems raised by the groups through the Didiman would be referred to the District Officer for follow-up and action by the appropriate agency. The District Extension Officer would visit each of his Didimen in the field once a month, to observe their performance, assist to resolve problems and to progressively familiarize himself with every extension group in each Didiman's service area. He would travel into the provincial office on a set day each month to report in to the Provincial Extension Officer, resolve any problems, and arrange any logistic or technical support required by his Didimen during the next month's work. 6. Provincial Extension Officers. The Provincial Extension Officer and his staff would administer and supervise the provincial extension service. He would work with the PRDO and the Regional and Chief Extension Officer to ensure that district extension programs were in line with provincial and national agricultural development programs. He would spend 2-3 days in each of 2-3 districts each month on a regular supervision schedule, to check the performance of the District Extension Officer, and Didimen. His schedule would be arranged so that he progressively visited every Didiman and his service area. He would chair a monthly meeting of District Extension Officers once a month on a set day, to review progress and problems. 7. The extension programs officer would have prime responsibility for working with the District Extension Officers, on a continuous basis, to assist and supervise extension program planning and implementation. He would have responsibility for ensuring that other support services gave timely and adequate response to requests for credit, planting materials, etc. received by the Didiman from his groups. He would have a set schedule for regularly visiting bi-weekly meetings of Didimen held at district level. The extension training officer, with the assistance of the regional training - 83 - ANNEX D Appendix 1 Page 4 officer, and would be responsible for planning, coordinating and scheduling the bi-weekly training sessions for Didimen and would arrange for appropriate regional specialists to prepare the training materials needed. He would attend the Didimen training sessions as possible, and observe Didimen's training sessions with their groups, in order to monitor the relevance of the content and effectiveness of the presentation of the training programs with a view to progressively upgrading the system. 8. Regional Extension Officers. The Regional Extension Officer would be responsible for providing the necessary professional and technical support required by the 4 - 5 provinces in his region. He would be assisted by a Regional Programs Officer, a Regional Training Officer, an extension specialist and a number of commodity specialists and administrative staff. Regional staff would report to Central DPI but spend most of their time in the provinces, using a regular visiting schedule to support their counterparts. The training officer would work with Provincial Training Officers to schedule Didimen's bi-weekly training schedules in a way which allowed regional specialists to minimize travel and attend most of the sessions. He would also arrange for specialists from the national level and other agencies to give training sessions and would establish procedures for monitoring and evaluating training sessions. The programs officer would work with his counterparts to harmonize extension programs with national and provincial development objectives, and arrange for any support needed from the national or regional level to effectively implement programs. 9. The subject matter specialists would spend at least 70% of their time working with the training officer to prepare training materials for the Didimen's bi-weekly training sessions, presenting the material to Didimen, and providing technical field support. The balance of their time would be spent keeping abreast of new technical developments via contact with the research service, and referring field problems they cannot handle to the research service or appropriate national or inter- national agencies to obtain answers for the extension workers. They would work with the research and extension service on the establishment and maintenance of appropriate adaptive field trials on farmer's fields at strategic points throughout the Provinces, to provide practical extension recommendations. 10. Extension Division. The national Extension Division would supervize and coordinate the activities of the regional extension units. It would be primarily concerned with formulation of national extension policy and programs, evaluation, progressive upgrading and standardization of extension methodology management and training techniques, and providing centralized back-up services that could not be realistically provided at - 84 - ANNEX D Appendix 1 Page 5 regional or province level, e.g., printing extension materials, etc. It would advise central government on regional and provincial requirements to be supplied by central funding. 11. Evaluation & Planning. Program planning and evaluation would be arranged to allow full participation by farmer groups and field staff. Every six months the Didiman would devote one round of visits to sitting with each farmer group to critically evaluate the past six months program and to identify key components and set goals for the next six months. Following this exercise, the next bi-weekly meeting with the District Extension Officer would be extended to allow each Didiman to summarize the key points coming out of the group evaluation and to present his proposal for the next six months program in his area. These sessions would be attended by the province programs and training officers and should result in the formulation of a draft district extension program. Didimen visiting schedules would be suspended for two weeks and a provincial extension conference would be convened, attended by all field staff. One session would be devoted to each district, giving a verbal presentation and critical evaluation of the program it conducted in the past six months. Extension, technical, economic and administrative successes and problems would be highlighted and recorded for subsequent sessions that would focus attention on these points. Another session would be devoted to the presen- tation of proposed programs for the next six months. These would be reviewed, conciliated with national and provincial objectives, and ratified as a "draft" provincial program for presentation to provincial and national governments. 12. A session held to deal with technical matters would review current extension recommendations, raise technical and economic problems for discussion and resolution, and list priorities for research. The six-monthly conference would conclude with workshops, short training sessions and seminars led by distinguished speakers, covering topics rele- vant to the field staffs' immediate needs and the next six months work program. 13. Provincial conferences would be staggered so that regional extension staff and some national extension staff could attend each confe- rence, to provide support and to ensure effective coordination between provincial and national objectives and programs. Appropriate staff from the research service would attend technical sessions to assist resolve technical problems, review extension recommendations, and plan relevant research programs to meet the needs of the extension service and farmer groups. 14. It has been proposed (Volume I, para. 8.05) that an annual meeting of senior research and extension personnel be established to review the research program. This would be the occasion on which administrative as - 85 - ANNEX D Appendix 1 Page 6 well as technical and research/extension matters arising from the provincial conferences would be aired. Senior representatives from each of the services supporting extension and the farmers would attend, including research, crop development and regulatory services, marketing and credit, so that decisions could be taken to resolve problems and progressively improve the package of services provided to farmers. Discussion 15. It is emphasized that the system described above is presented as a discussion model. It is presented in some detail to clearly illustrate the principles embodied in the T & V extension system in a way which could be applicable to PNG. It is the principles that are important rather than the operational detail given for illustrative purposes. These can be adjusted to suit local conditions, e.g. the number of groups handled by a Didimen, the frequency of visits and training sessions, the frequency of program review and planning sessions. However, it would be critical that the provinces adopted a standard system to facilitate effective implementation and supervision. 16. The T & V system works on the principle of concentrating Didiman extension efforts on a few critical "impact" points within the farming system that are most likely to give immediate benefits to the farmers in terms of production and income. It is vital for the motivation and self-confidence of the Didiman, and the attitude of the farmers, to achieve a fairly quick success. Further, with young inexperienced staff it ensures that they are not overburdened at training sessions with too many facts and figures, and the principle of training reinforced by immediate field practice is used to best advantage. As farmers' management standards rise, impact points change and the Didiman is progressively exposed to a higher level of technology and wider scope of topics, until ultimately he may become a well-trained polyvalent extension worker capable of handling all situations arising in his service area. However, this takes time. In the interim, if there are farmers in some of his groups operating specialized enterprises outside the range of the Didimens' knowledge and experience, posting of specialist extension workers at district level, to work with those Didimen and their groups involved in specialist activities, is a practical way to solve the problem. 17. In general terms, commercial livestock production is not an important economic activity for the majority of farmers, so there is little demand for livestock extension. Where there are smallholder livestock projects among some of the Didimen's groups, posting a specialist livestock field worker to the district office to work with the Didiman and the farmer groups, and posting a livestock specialist to the regional extension office - 86 - ANNEX D Appendix 1 Page 7 to provide basic training and technical support on livestock activities to Didimen as required, would be an effective way of plugging livestock into the system. 18. This approach would also offer a means of integrating commodity specialists hired by private enterprise into the system, and avoid duplication of services. For example, a private sector coffee specialist should be encouraged to work with the District Extension Officer and make field visits with his Didimen to extension groups specializing in coffee. This way, farmers would receive one set of advice, and the Didiman would gain experience from his private sector counterparts. Likewise, private sector specialists could be effectively used by the Provincial Extension Training Officer for the bi-weekly Didiman training programs, and to provide technical support to Didimen on request. 19. At present there is little freshwater fish culture. If Government wished to promote it, an extension program could be initiated on.the same basis as that described for livestock. The smallholder extension approach has little relevance for marine fishing, for which extension, credit, processing, packaging, storage and marketing facilities should emanate from strategic landing points along the coast line. Marine fisheries services should thus be kept as a separate entity. ANNEX D 87 - Appendix 1 Chart 1 PAPUA NEW GUINEA AGRICULTURAL SERVICES REVIEW CROP PRODUCTION AND EXTENSION SERVICES An Organization Chart for an Improved Extension Service Exenion Division Publications Extension Extension Subject Administrative Information Programs Training Specialist Unit l l ~~~~~Regionalll [4 Regions] I Extension Officer Regional Regional I Subject trail Programs Training Matter Administrative Officer Officer I Specialists Unit I X Provicial [19 Provinces] I Extension Officer Provincial Extension Amnsrte Programs Training l Officer Officer Officer District [3-8 per Province] Extension Officer … - …-- ---------Field Extension Workers -------------- [6-10 per District] Farmer Groups --- [9 Groups, or about 500 40-60 Households households per exten- 1 Group Leader sion worker] 1 Assistant per 5-6 households Administrative/Coordination --------------------- Technical and Professional Support ANNEX E - 88 - PAPUA NEW GUINEA AGRICULTURAL SERVICES REVIEW MARKETING AND CREDIT ANNEX Page No. Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Industry Boards . . . . . . . . . . . . . . . . . . . . . . . 1 Price Stabilization Funds. 3 The Private Sector and the Degree of Competition 6 The Department of Primary Industry . . . . . . . . . . . . . 8 Transportation and Communications . . . . . . . . . . . . . . 10 Quality Control .... . . . . . . . . . . . . . . . . . . . 11 Rural Credit .... . . . . . . . . . . . . . . . . . . . . . . 13 Trading Banks .... . . . . . . . . . . . . . . . . . . . . 13 Table 1: Trading Bank Operations 1977-79 . . . . . . . . . 14 Table 2: Trading Bank Advances to Primary Industry 1977-79 ... . . . . . . . . . . . . . . 15 Savings and Loan Societies ... . . . . . . . . . . . . . . 16 The Papua New Guinea Development Bank (PNGDB) . . . . . . . . 16 Table 3: Papua New Guinea Development Bank Lending by Sector .... . . . . . . . . . . . . . . . . 18 Government Credit Schemes ... . . . . . . . . . . . . . . . 19 The Adequacy of Credit Facilities . . . . . . . . . . . . . . 20 AI'TNEX E Page 1 - 89 - PAPTJA NEPt GI INEA AGRICULTURAL SERVICES REVIETI MARKETING AND CREDIT Marketing 1. 21arketing in PNG is carried out by a mixture of public and private sector organizations and individuals. Four export crops have statutory industry boards, representing growers and Government, which regulate the marketing and processing of the crops and, in one case, purchases and exports of most of the output./l Three of the boards also administer price stabili- zation funds which dampen the impact on incomes of fluctuations in inter- national prices. Numerous private traders operate in a number of crops. Cooperatives are less important now than they were in the past, but they are still involved in processing and marketing of some crops. Finally, DPI acts as a "buyer of last resort," mainly in remote areas where other marketing services are unavailable or unprofitable due to high costs of transport and low volumes of output. 2. Industry Boards. The first statutory board to be established was the Copra Marketing Board in 1954. This Board has a near monopoly over the export of copra and copra products. It buys directly from producers over 80% of all copra produced in PNG, while most of the rest is purchased by independent traders. About 90% of the copra purchased by the Board is received at 11 main depots where the price paid is derived from the f.o.b. price /2 less a 2.5% export tax, stevedoring charges, and the Board's costs, and adjusted by the levy or bounty for stabilization. The rest goes to four subdepots, where additional charges for operation of the depot and transport are deducted. Transport costs are estimated to average K 15-20/ton for plantations (or roughly 5% of the price they receive) and K 25-30/ton for smallholders (up to 10% of the price) depending on the distance to the nearest depot. 3. The producer is paid in two installments, the first, paid upon delivery, representing 90% of the estimated price, and the second based on actual revenues for the year. The second payment simply distributes the Board's surplus pro rata, based on the quantity bought from each producer. It may be paid as much as 18 months after the actual sale, since it is paid in June of the year following the transaction. In the case of copra marketed /1 In addition a government corporation, the Food Marketing Corporation, buys and sells fresh food. /2 The Copra Board sells most copra two months forward and sets producer prices based on its contracts. AYFTY r, Page 2 - 90 - through traders, the latter sometimes keep the second payment as profit, rather than passing it on to the producers. This system would appear to be unnecessarily cumbersome compared to the alternative of paying out the entire price in one installment, at the time of the physical transaction. 4. The Coffee and Cocoa Industry Boards do not engage in marketing activities, but restrict themselves to regulating the processing and marketing of these crops, as well as to administering the respective price stabilization funds. The Coffee Industry Board (then called the Coffee MIarketing Board) was established in 1964 in response to the needs of the rapidly growing industry, particularly with respect to meeting its responsibilities under the Inter- national Coffee Agreement (ICA). The Board is empowered to register coffee dealers, processing facilities, manufacturing facilities, and exporters, hut exercises this power only with respect to processors and exporters. It is also entitled to market coffee itself, and to fix minimum or maximum prices, but it has not done so. The Board is responsible for enforcing any quotas imposed under the ICA and can hold stocks of coffee for this purpose. 5. Funds for managing the Coffee Board are talen out of the stabiliza- tion fund and the interest it earns. In addition, the Board has recently begun to use the fund for coffee nurseries, operated by DPI, which distribute planting materials free of charge to growers. In the crop year ended September 30, 1979, total expenditures by the Board were about 2% of its income, of which nearly three-quarters came from the stabilization levy and most of the rest from interest on the accumulated funds. The greatest single expenditure was for promotion, followed by salaries and expenses of Board staff and members, and coffee nurseries. Although there are no legal limits to use of the stabilization fund by the Board for such purposes, it has agreed to limit its expenditures on activities other than price stabilization to a fixed amount, proportional to the quantity of coffee sold. It is important that this arrangement be maintained, since in a period of high prices, there might be pressure to raise expenditures, and during times of low prices, the Board could find itself unable to continue important activities. The limita- tion on spending could be formalized by the creation of a management levy, separate from the stabilization fund. This should be accompanied by a pro- hibition on the use of stabilization funds for general Board purposes. 6. The Coffee Board has limited the registration of dry processing facilities based on three factors: capacity, nationality of ownership, and adequacy of physical facilities and management. Registration must be renewed each year, and there are presently 53 registered factories in PM. The Board decided three years ago that over-capacity in the industry precluded the registration of additional facilities, except those already established on plantations taken over by nationals./l The Board requires all factories to /1 It is not clear whether over-capacity exists in the industry. AnTEX P Page 3 - 91 - have certain necessary equipment and management with "adequate skills and finance to maintain and operate processing facilities on a profitable basis and produce an acceptable standard of green bean for export."/l Such requirements are somewhat vague and would appear to be unnecessary in any case, since factories producing green bean of unacceptable quality and unable to earn a profit would quickly go out of business. 7. Six exporters are presently registered by the Coffee Board, of which the two largest handle 75% of PWG's coffee exports. The Board approves indvidually each consignment by the exporters who are required to submit details of forward contracts to the Board. The Collector of Customs at each port is responsible for ensuring that the coffee exported does not exceed the approved amount, and export documents are later checked to ensure compliance. The ICA has provisions for the introduction of export controls if world prices fall below a specified level, but current prices are well above that level. 8. The Cocoa Industry Board was established in 1075 to administer the price stabilization fund for cocoa, represent PNG in the International Cocoa Organization, collect the buffer stock levy, and generally regulate the marketing, processing and exporting of cocoa. A few years ago, in a contro- versial move, the Board began to restrict the number of fermentaries, based on their size, in order to improve the quality of PYC's cocoa (para. 34). The Board may also buy and sell cocoa, but has not done so. Other activities include the funding of research and extension, plant breeding and nurseries, and domestic and overseas study. The Board requested a K 15 million loan from the Bank of PNG for rehabilitation of village cocoa blocks, but this project will probably be handled instead by the Development Bank. All of the Board's activities are funded out of a management levy, distinct from the stabiliza- tion levy and currently set at K 20/ton, or roughly 1% of the export price. 9. Rubber exports are coordinated by the Papuan Pubber Pool, a group of forwarding agents. There is a Rubber Industry Board, but its role at present is limited to ruling on appeals arising from disputes over inspection procedures. The Government is planning to expand the functions of the Board along the lines of the Cocoa Board. 10. Price Stabilization Funds. Price stabilization has existed for some crops in PNG since the Copra Stabilization Fund was established in 1q52, followed by the Coffee Industry Fund in 1966 and the Cocoa Stabilization Fund in 1975. The three funds are operated by their respective industry boards. They were originally intended to stabilize incomes, with support prices based on costs of production plus some margin, but production costs vary widely among producers, and it is difficult to establish an average or representative /1 PNG Coffee Industry Board, "Report and Financial Statements, 30th September, 1978." AF1 NFX E Page 4 - 92 - level. Furthermore, such a policy could result in long-term government support of an uneconomic industry. Therefore the concept was altered to one of price stabilization along a moving long-term average export price adjusted for inflation, with levies or bounties equal to 50% of the difference between the actual export price and the average export price of the previous ten years./l A further objective is to stabilize aggregate demand, thereby reducing economic fluctuations in the country in general. To achieve this purpose, at least 60% of the funds are held in the central bank'. 11. Levies are collected at the point of export and their cost is almost certainly passed on to the growers, but the extent of the flow of bounties to producers is not fully known. Since the Copra I4arketing Board buys and exports most copra, it can ensure that bounties reach the growers, but coffee and cocoa are bought mainly by independent traders, processors, and exporters, and the degree of conpetition in buying will determine the extent to which growers receive bounty payments (paras. 16-18). The impact will probably vary geographically, with less accessible areas subject to less competition. Bounties will be paid to the exporters, and their accounts can be examined by accountants attached to the boards to make sure that they pass them on to processors, but beyond that point it is difficult to keep track. Posting of prices and bounties and announcements over the radio, which are already done in some cases, can help provide growers with the knowledge they need to bargain effectively with buyers. Another important step is to allow greater competition in the transport sector, for example, in trucking and coastal shipping, so that the middlemen do not keep the payments as profit (as is presently done with the second copra payment)./2 TJhen the industry boards begin paying bounties, they should watch the markets closely, perhaps through surveys or spot checks, to make sure the growers are receiving the payments, and should be prepared to devise another system of payments if necessary. 12. The Copra Stabilization Fund paid out bounties in the years 1971-73 and 1975-76, but the coffee and cocoa funds have never paid out and have accumulated substantial reserves - K 120 million by late 1979. The levies /1 In the case of coffee, a bounty is not paid until the price falls below 90% of the long-term average and unless the fund holds more than K 65 million. This provision covers the financing of coffee stocks in the event of an international quota. The Copra Fund still operates on a plantation cost basis and the actual trigger price for bounties must be determined by the "EC. This method can lead to confusion and delays, and the Government intends to adopt a formula like those for coffee and cocoa. /2 The Government has recently agreed to deregulate the trucking industry. ANNEX E Page 5 - 93 - have been a significant proportion of the export price, rising as high as one-third of the f.o.b. value. However, the funds were set up at a time of rising prices, and this situation is expected to change over the next few years when prices of coffee and cocoa are projected to fall. Aside from management costs and other small items such as coffee nurseries, the funds are maintained solely for stabilization. Wlhile this arrangement is desirable and effective, it might be possible to use some of the money for investment in the industry without interfering with its main purpose. One way to free some of the money would be to combine the three funds or to arrange for borrowing facilities among them. If historical trends continue, the prices of the three commodities will not follow the same cycles, and the total amounts held could be lower than the sums now needed by the three individual funds.Li Combining the three funds would be a very unpopular move and would probably never be agreed by the mainly producer-representative boards, but a borrowing arrangement might be more acceptable, perhaps operating through the central bank. 13. In a period of low prices, PNG could probably qualify for borrowing under the Stabex Agreement./2 Although no agreements have been made, the Stabex money could be onlent to the stabilization fund for the crop which qualified for the loan, and, in fact, perhaps such an arrangement should be made formally. This would provide additional cash to ensure the integrity of the funds. 14. Aside from the possibility of achieving lower levies through a system of inter-fund lending, it is probably best to reserve the stabilization funds for the sole purpose of stabilization. Funds for investment could be raised through separate levies, as is already done by the Cocoa Board in fund- ing research, extension, and plant breeding out of its management levy, and as was done in 1979 by the Copra Board with a development levy to build new sheds. /1 A hypothetical case worked out for the period 1968-79 shows that in only 3 of the 12 years would all three crops - coffee, cocoa and copra - have required bounty payments, whereas individually they would have paid boun- ties 5, 4 and 8 times, respectively. A net outflow would have occurred in a combined fund 5 times, and a combined fund would have required total net yearly outflows only two-thirds as high as the sum of payments made by three separate funds. /2 The Stabex Agreement among Lome Convention countries provides for interest free loans to developing countries for the difference between actual earnings from an export product and the average of export earnings for that product in the four preceding years, if the earnings from exports to the EEC are at least 6.5% below their four-year average. An additional 1% is provided for statistical errors and omissions. Repayment is over seven years, with two years grace, and may be waived. AI'ThEX F Page 6 - 94 - 15. The success of the existing industry boards and stabilization funds raises the question of whether such institutions should be established for other crops as well, particularly those grown mainly by smallholders. Palm oil, for example, is being considered, as are chillies, pyrethrum and rubber. Another possibility would be to establish a multicommodity board which would have the advantage referred to above of including crops with different price cycles. An additional advantage would be lower costs of administration than separate funds. The results of a multicrop stabilization fund might be to subsidize some crops at the expense of others, rather than simply to promote a particular crop and protect its producers as is presently the case. This would have to grow out of government policy to promote diversification and stabilize incomes of all producers rather than out of an agreement among producers. 16. The Private Sector and The Degree of Competition. Private sector participation in marketing activities is greatest in coffee, where numerous traders buy coffee from producers at the roadside. In most coffee producing areas competition is strong; often the sellers compare the prices offered by several buyers before deciding to sell, or they can choose to sell directly to a factory. Factory door prices are published in newspapers and broadcast on the radio, so growers are well informed. In a few areas private buyers sell to DPI. There are no limits on the number of dealers in unprocessed coffee, but the Coffee Industry Board limits the number of factories to prevent the development of over-capacity. It is not universally agreed that over-capacity exists, however, and tight regulation of the number of factories could lead to a shortage of capacity. There are six registered coffee exporters, two of which handle 75% of all exports. According to the Coffee Board, competition among exporters is strong and margins low. In general, the coffee industry appears to be quite competitive and producers receive good prices for their beans; including the stabilization levy, the producer price averages around 90% of the export price. 17. Cocoa exports are mainly handled by five companies, and there are 1,600 registered fermentaries, many of them run by the growers themselves. Average prices for dry bean are broadcast twice a week on the radio, but the lack of accounting skills and the resulting inadequate knowledge of costs make it difficult to judge the appropriate price for wet beans and the level of profit earned by fermentaries. Tiowever, the large number of fermentaries implies adequate competition. 18. Copra is handled mainly by the Copra Marketing Board; only 20%7 of the output is sold to traders. The Board has a margin of about 15% on its operations, but the portion of output sold through middlemen is subject to a larger margin. In many cases, these people operate in remote areas where competition is probably weak, but where costs are high, so the margins may be needed to cover costs. AtTEX E Page 7 - 95 - 19. Other crops, such as pyrethrum, chillie, tea, and rubber are purchased to a large extent by DPI, which bases its prices on the going market price and subsidizes the growers by under-charging for transport and marketing services. TWhile the growers benefit from this situation, it also has the effect of limiting the role of the private sector by leaving no margin within which it could operate./I 20. Efforts are needed to encourage the growth of private marketing services. The first step could be to allow producer prices to reflect marketing costs; this might be encouragement enough for some entrepreneurs (for example, trade stores which are already established might move into marketing). If the Government still wishes to subsidize producer prices, in order to encourage regular production, it could do so explicitly through the private traders, rather than burying the subsidies in its own budget. The Development Bank lends for trucks, boats and storage sheds, but not for working capital, and perhaps this gap could be filled by the industry boards on the one hand, or government-guaranteed or subsidized loans on the other, as an alternative to subsidized DPI marketing services./2 Assistance might also be needed in the form of training courses in bookkeeping and management, and advice could also be made available through the Provincial Business Development Officers or through existing DPI marketing capacity. 21. The supply of fertilizers and agrochemicals is handled by four major private dealers. The marketing system is not well developed, the range of products is rather restricted, and the costs rather high by Pacific regional standards, although the marketing margins are not excessive. Yey problems facing suppliers are as follows: A low value, low turnover market which demands a wide range of products; high costs of transport and difficulty in storing products in good condition for lengthy periods under tropical conditions; unreliability of supplies, especially from Europe; and the unsuitability of some fertilizers available in Australia and Japan. All suppliers appear to handle all products, which compounds the problems of a low volume market. Government legislation controlling chemicals and ferti- lizers is not effective. Some suppliers see a need to rationalize the marketing system and to develop the smallholder market before the situation can be improved. Some companies currently employ field staff to carry out product development and limited extension work with producers, but they have not had much impact on smallholders. /l An estimate of marketing margins for rubber indicates that growers, who get 85% of the f.o.b. price, earn incomes at least 15% greater than they would if paid a conmercial, nonsubsidized, price. (Bruce Carrad, "The 2Iarketing and Production of Smallholding Pubber in Papua New Guinea."). /2 The Development Bank is investigating the possibility of a loan to the Milne Bay Provincial Development Corporation (PDC) to be onlent for marketing. The PDC would supervise the loans and ensure coordinated shipping schedules. A NEX E Page 8 - 96 - 22. The Department of Primary Industry. DPI is the "buyer of last resort" for agricultural output in PMG, providing marketing services where they are not otherwise available, generally in remote areas. Its purpose is to encourage participation in the cash economy and to prevent the discourage- ment that results from the absence of a market. DPI does not wish to compete with private traders and in fact will "do everything possible to encourage" them, with two exceptions: if the price offered by the private operator "does not fairly reflect the market price," or if the private sector is "ineffective, incompetent, or incomplete,"./l In some cases, DPI buys from or sells to private dealers. Commodity purchases are funded at the national level, but are carried out by extension workers, who are responsible to the provincial governments, which therefore cover all marketing costs other than the actual payment to the farmers. Revenues from sales of produce go into consolidated revenue. This dichotomy between financing and implementation has led to serious problems in the provision of marketing services. 23. DPI buys 20 different commodities, mainly export crops, including all pyrethrum grown in PNG, two-thirds of the chillie, all smallholder tea, and about 20% of rubber output. DPI's share in the major crops - coffee, cocoa, and copra - is very small./2 Last year, DPI purchased approximately 1% of all cash crop production, for a total of about K. 1.5 million. Purchases are made mainly at 135 stations, each one handling only one or two crops, although some buying trips take place. Buying prices in main centers are set monthly by the Commodity Marketing Branch of DPI, taking into account costs such as storage and handling. Out-station prices are set by Provincial Rural Development Officers after deducting freight and handling costs. This two-tiered price system is intended to encourage growers to bring their produce in from the field or private operators to go into marketing, but the differentials are probably not large enough for this purpose. Freight and handling costs are not always known, let alone costs such as an appropriate proportion of the extension worker's salary, so the prices paid to growers often include implicit subsidies. This is counter to government policy and discourages competition by the private sector. Estimates of DPI marketing costs have been made for some crops, and such estimates should be done more widely. Although subsidies can be justified on an "infant industry" basis, to promote diversification, or perhaps for social reasons, they should be made explicitly for these purposes, and their size should he known. The existing pricing system may be giving the wrong signals to producers and creating a group of people who will be permanently dependent upon government subsidies. Other ways of providing assistance to the growers, such as building roads, might be more efficient or equitable, and even if a subsidy is believed to be justified, it might prove more efficient to subsidize marketing by the private sector. /1 It is not clear how these exceptions would be determined. /2 DPI was an important coffee buyer before the growth in roadside buying by private traders. ANNEX E Page 9 - 97 - 24. Extension officers spend as much as half of their time performing marketing activities, even though they have received no training in that area./l The case of rubber illustrates the inefficiency that results when marketing is done by inexperienced government agents with no profit motive. DPI has experienced a high rate of rejection of the rubber it buys, partly due to inadequate attention by the extension agents buying the rubber. In 1977/78, for example, 45% of the rubber purchased by DPI was rejected at the point of export. Excluding one major scheme, the proportion was 90%./2 25. Requirements for documentation of marketing activities are heavy. Each purchase must be recorded at the buying site, on a "produce purchase docket" and witnessed by a second officer. Four copies are prepared, three of which must be accompanied by a "general expenses form" to obtain reimbursement. Each station must keep a register where it records details on each transaction. Transfers of cash crops to another DPI station must be recorded on an "inter-store transfer voucher" in four copies. Sales, to private customers or government departments, are recorded on a "sales advice" (3 copies), crossreferenced to the "collection medium," or receipt. Cash payments are made through the local Department of Finance office, but the Produce Accounts Section of DPI in Port Moresby is responsible for collection of credit sales. Other types of transactions are also possible and require additional documentation. Physical stock counts are required at each station three times a year and discrepancies must be explained in "discrepancy reports."/3 Furthermore, since revenues from marketing revert to consolidated revenues, provinces do not even gain from an activity which ties up their scarce manpower./4 26. Financial arrangements for marketing have proved cumbersome, and shortages of cash have been blamed for restricting DPI's marketing services. Previously DPI funds for marketing were recycled, but now all revenues go back into consolidated revenue. Each year's budget allocates funds to DPI for marketing, based on the previous year's expenditures, but actual release of the funds depends upon timely submissions from the already overburdened extension staff. Only certain financial officers are delegated to sign for /1 The curriculum in agricultural colleges has recently been revised to include courses in marketing. /2 Bruce Carrad, "The Marketing and Production of Smallholding Rubber in Papua New Guinea." /3 A detailed explanation of required documentation can be found in DPI, Commodity Marketing Branch, "Instructions to Field Officers: Produce Accounting." 14 If all costs are taken into account, DPI probably makes no profit on its marketing activities. ANNEX E Page 10 - 98 - cash advances, and they may not be present when funds are required. Most out-stations have only two extension officers authorized to handle cash for crop purposes. Monitoring of funds is poor, partly because of inadequate knowledge of arithmetic and accounting, and cash shortages may occur unexpectedly, resulting in several weeks delay before more cash can be obtained. If cash is not available, some produce may be left to rot, with the further effect of discouraging the grower from participation in the cash economy. This situation is exactly what DPI marketing services are intended to overcome. 27. Marketing is not an appropriate activity for extension officers. It is not part of their training, and it takes time away from their regular duties (Annex D). Furthermore, the government bureaucracy is probably too cumbersome for efficient performance in marketing./I Whenever possible, therefore, marketing should be left to the private sector, even though in some cases this may mean lower prices for producers./2 If the Government wishes to subsidize some groups it can do so through the private operators, explicitly recognizing the subsidy rather than providing it inadvertently through inadequate knowledge of the cost of services provided. The role of DPI would be to monitor prices to ensure that the subsidies reach the producers. In very remote areas where quantities are too small to support a separate marketing organization, it may be necessary for extension workers to continue their marketing activities. In these cases it is important to streamline procedures, by reducing paperwork and facilitating cash advances, in order to reduce the burden on extension officers as much as possible. 28. Transportation and Communications. Because of PNG's extremely mountainous terrain and its difficult soil and climatic conditions, the transportation network is relatively undeveloped. Lack of adequate transport /1 For example, significant wastage, on the order of 30%, occurs in the chillie purchased by DPI, much of which has been attributed to organi- zational problems in DPI, both national and provincial. The marketing chain for commercial enterprises tends to be much shorter than that of DPI. /2 Marketing cooperatives were active in the past, but are no longer very important. This may be due partly to improved communications, which enable farmers to sell their output directly to processors, and partly to problems of poor management and accounting, which led to a number of failures, and a continuing suspicion of cooperatives. Some of the more successful cooperatives were converted into private companies. Cooperatives may have a role mainly in less developed, more remote areas, where the private sector has not yet developed, but these areas are also likely to be short of people with the necessary skills to run a coopera- tive and may need support from the Government. ANNEX E Page 11 - 99 - facilities for marketing is often a major bottleneck to increased production of cash crops. Greater production will not be forthcoming if it cannot be sold, and, if a small producer is once unable to sell his output, he will be reluctant to trust the market economy again. Half of the area under cash crops in PNG is cultivated by smallholders, some of whom carry their produce more than half a day to the nearest road or airstrip and once there face a very high freight rate. People are responsive to the price of transport, sometimes preferring to walk a day to a road rather than sell their output at a nearby airstrip for a lower price. 29. Regular transport services are also important. In a section of West New Britain, for example, copra production fell by half in one year when the regular coastal shipping service ceased. In Milne Bay province, the Goodenough Island Development Corporation provides regular buying services (at least once a week) to most villages on the island. Smallholder copra produc- tion tripled in the first three years of this service. In another area people preferred to walk eleven hours to a selling point rather than walk six hours to a smaller less certain one. Tapping of rubber trees falls off if no regular outlet for the rubber is available. Irregular transport and marketing services can also mean that producers must wait months for payment for produce they have shipped out; this can cause discouragement and reduced output. In remote areas, inadequate knowledge of irregular shipping services results both in lack of transport for crops which may rot and in a lack of cargo for ships which turn up unexpectedly. Both of these events can set up vicious circle of lower production and fewer shipping calls. 30. Inadequate transport has other negative effects as well. It reduces the amount of time available to extension workers for contact with farmers and for their marketing duties, which is likely to affect production. It also restricts the flow of trade store goods into the affected areas, thus limiting the opportunity for spending. People who cannot use their cash will have little motivation for earning more. 31. The transport problem is most severe in areas relying on sea or air transport. Although there is a general over-capacity in the coastal shipping fleet, feeder services are often intermittent and unpredictable, due to the large area to be served and the small tonnages involved. Many places receive no commercial ship calls and rely on the government fleet for outside contact. Small cargoes will continue to be a problem in many areas, but the institution of scheduled service, even if infrequent, would probably induce higher levels of production. Alternatively, a system of timely notification of shipping routes, by radio, would enable growers to get their produce to town at the right time, saving them unnecessary trips and spoiled crops, and ensuring that when boats do arrive they will find cargo waiting for them. 32. Quality Control. Quality control for PNG's export crops is handled by a combination of inspection, pricing policy, registration and regulation. Copra is examined by DPI inspectors before it is sold to the Copra Marketing ANNEX E Page 12 - 100 - Board, and can be rejected by either the inspectors or the Board./l Price differentials are used to distinguish three grades of copra in order to encourage the production of higher quality copra, but it is not clear whether this procedure is economically justified, since all three grades are then bulked and sold together by the Board; the quantity of copra produced by PNG is apparently too small to qualify for a premium on exports. Furthermore, the premium paid for hot air copra is presently too small to justify the installation of new forced air driers, so it has little effect. One response to this situation would be to increase the price spread among the different grades, but it appears to be generally believed that, as long as non-export quality copra is rejected, the price differentials could be eliminated without harming PNG's position in the market. 33. Coffee is exported by eight different grades, with the highest price being as much as 40% above the lowest. Much of the quality difference is introduced at the processing stage, and the price paid to producers does not reflect these differentials. Roadside buying used to be done by three grades, but many growers refuse to let buyers inspect their coffee and the result is no grading, variation of quality in each bag, and a lower overall price. Nonetheless, factories apparently do not find it worthwhile to enforce price differentials. 34. In 1977, concerned about the quality of cocoa produced in PNG, the Cocoa Industry Board ruled that a grower must have at least 5,000 mature cocoa trees (equivalent to a holding of about 5 ha) before he could operate a fermentary, on the rationale that small amounts of cocoa often are not fer- mented properly./2 This rule has proved very controversial, and has even been blamed for a fall in cocoa production by smallholders who are unwilling to sell wet beans at present prices. If this is the case, it implies either that fermentaries are not competitive and are taking monopoly profits or that small operators can ferment wet beans more cheaply than larger ones. The former possibility is unlikely, given that there are 1,600 registered fermentaries. The latter possibility may well be true, but it may also imply a poorer quality of output, which is not reflected in the price./3 If dry /1 Rejected copra can be reconditioned by the producer or trader, and 80% of such produce eventually passes inspection. /2 Maintenance of quality in cocoa production is important, because at the present level, PNG is not subject to levies or quotas on most of its output by the International Cocoa Organization. /3 The wet bean price (dry equivalent) is about 40% of the f.o.b. price whereas the delivered-in-store (d.i.s.) price is as much as 93% of f.o.b. The difference is mainly in fermentary costs, equivalent to over 50% of the f.o.b. price. (Hypothetical calculation by DPI oficial.) Actual data for 1979 show d.i.s. prices ranging from 69-84% of f.o.b. ANNEX E Page 13 - 101 - bean prices adequately reflected quality, smallholders should be indifferent between selling wet and dry beans. The Board argues that it is impossible to distinguish quality at the farm level, that only the manufacturer can judge the quality, by tasting, and that therefore restrictive licensing of fermen- taries cannot be replaced by a system of price differentials. Exporters pay two prices, however, for export and nonexport quality, based on inspection by DPI officers. Apparently, therefore, major differences in quality can be judged at the fermented stage. It may therefore be possible to control quality through the price system without regulating the size of fermentaries. 35. The question of how to perform quality control is a difficult one, and the answer may be different for different crops. The most efficient way to handle it would be to let processors and exporters work through the price system wherever possible, rather than hiring a staff of inspectors, but for some crops this may not be possible. A country's reputation in the inter- national market is important, and a shipment of poor quality produce could damage that reputation and thus have an impact greater than the loss in revenue from any particular shipment. There is a considerable amount of dis- agreement, both within and outside the Government, over the best way to encourage high quality production, or even whether this is a desirable goal. To settle these questions, it might be useful to hire experts to recommend optimal methods of grading and controlling the quality of PNG's main export crops. Rural Credit 36. The PNG financial system has been dominated by four trading banks, but it is becoming more diversified. A merchant bank has recently been incorporated and finance companies have been active for some time as borrowers and lenders. Savings and Loan Societies are also important at the local level as means of encouraging saving and relending to members. The PNG Development Bank is especially important as a lender to Papua New Guinean-owned business and to agriculture in particular. 37. Trading Banks. Agricultural lending by trading banks is limited almost entirely to larger ventures and marketing finance is an important element in it. This causes strong seasonality in advances, especially in the coffee and cocoa industries, with advances rising during the mid-year harvest season but being reduced towards the end of the calendar year. 38. Trading bank operations as they relate to agriculture are summarized in Table 1. Total advances to agriculture have increased substantially between 1977 and 1979, doubling from K16.8 million in November 1977 to K33 million in November 1979. The industry breakdown in Table 2 indicates that increased lending has occurred mainly in the coffee industry and the "other" category. Buoyant coffee prices and good crops would increase marketing finance requirements, and the trading banks have also lent heavily for the purchase of expatriate-owned plantations by national groups. Most of the increased lending in the "other" category would be to the two new oil palm developments which have occurred during the period under review. ANNEX E Page 14 - 102 - Table 1: TRADING BANK OPERATIONS 1977-79 Nov May Nov May Nov 1977 1978 1978 1979 1979 (a) Deposits Total (K million) 324 303 330 377 437 Term (K million) 100 110 116 163 187 Per cent term 31 36 35 43 43 Agriculture, forestry & fishing (K million) 20 18 15 16 25 (b) Advances Agriculture, forestry & fishing outstanding (K million) 16.8 26.8 25.8 34.5 33.0 limits (K million) 23.6 36.1 34.9 46.1 46.3 Total outstanding (K million) 188.4 155.2 179.3 198.6 208.1 limits (K million) 177.2 216.4 226.3 248.0 273.3 Per cent advances agriculture 8.9 17.3 14.4 17.4 12.1 (c) Liquidity Liquid assets ratio (percent) 43.9 42.6 36.2 43.9 46.0 Liquid assets requirement (percent) 25.0 25.0 25.0 25.0 25.0 Source: Bank of Papua New Guinea, Quarterly Economic Bulletin, December 1979. 39. Net lending to agriculture is substantially reduced by the high levels of deposits from that sector. In November 1977, the sector was a net lender to the banks and has maintained total deposits of K15 million to K25 million since then. Net lending has been below K20 million throughout the period under review and more typically in the region of K10 million. 40. Estate management seems generally satisfied with the amount of finance available from the trading banks, but this is probably largely due to the fact that the provisions of the Land Acquisition Act have discouraged on-farm investment and reduced the need for development finance. Those ANNEX E Page 15 - 103 - Table 2: TRADING BANK ADVANCES TO PRIMARY INDUSTRY 1977-79 (KOOO) Nov May Nov May Nov Industry 1977 1978 1978 1979 1979 Coffee 4741 10866 9497 16902 12760 Cocoa 3577 3500 2834 4077 4543 Coconut 1120 2097 2375 921 1009 Rubber 114 271 182 397 506 Tea 1130 1345 1453 1058 1185 Cattle 227 506 791 1131 894 Fisheries 216 601 442 812 397 Forestry 2875 3440 3007 3331 2552 Other 2813 4214 5202 5901 9201 Total 16813 26840 25783 34530 33047 Source: Bank of PNG, Quarterly Economic Bulletin, December 1979. managers who were using bank finance did complain of short repayment periods which were generally five years or less. New tree crop investment obviously could not generate enough income to repay loans over that period. 41. Bank management conceded that this criticism was valid but attributed the short loan terms to uncertainty about security with the Land Acquisition Act in force and the pattern of deposits. The majority of deposits have been on demand or for short-terms, and bank management has been correspondingly unwilling to lend for long periods. In this regard, it was noted that the situation had improved following the offering of interest rate incentives for longer term deposits. This improvement is reflected in the deposit statistics presented in Table 1. 42. Lack of security over land was seen as a problem by bank management, especially for smaller owner-operated estates. Diversified corporate estate owners could offer assets other than land as security. 43. Lack of demand was seen to be the main constraint on rural lending and on commercial lending in general. This situation is reflected in the liquidity statistics presented in Table 1. The banks as a group have maintained liquid asset ratios well above the required minimum for several years. Bank management maintains, however, that the liquidity position is ANNEX E Page 16 - 164- not as favourable as these figures indicate. One concern is the level of unused lending commitments which, at November 1979, would have reduced the liquid asset ratio from 46% to about 30% had they been fully utilized. Several major developments in the final stages of planning will also absorb substantial amounts of credit in the near future, and the development of the Ok Tedi mine will result in further general increases in credit requirements. 44. The total lending by trading banks of K20-35 million to the agricultural, forestry and fishing industries, which in 1979 earned export income of over K300 million, is surprisingly small. From this small base, it is unlikely that the banks could increase their agricultural lending on the scale required to finance estate redevelopment on a broad front without tapping external funds from merchant banks or other sources. 45. Savings and Loan Societies. The Savings and Loan movement operates throughout PNG. There are thirty-four societies affiliated with the Federation of Savings and Loan Societies. Total assets reached K17.2 million in June 1979. During 1978/79, loan approvals for agricultural investments amounted to K384,000 which was 11.4% of total loan approvals. Almost half of the total amount of loan approvals was for vehicle purchase and repairs. Loans for building materials and trade store goods were also important in total lending. These statistics reflect the greater emphasis on consumer lending within the Societies. It is unlikely that they will become major lenders to agriculture in the near future, though they will continue to be important in some localities. The availability of finance for consumer spending could also assist replanting of tree crops by supporting household living standards during the period of temporary loss of income. 46. The Papua New Guinea Development Bank. PNGDB was established in 1967 following a recommendation from a World Bank mission that a finance corporation should be established to promote more national participation in the economy. The Bank-s functions are to provide finance on reasonable terms for primary production, industrial development and commercial undertakings, giving emphasis to small projects, national ownership and the prospects for success of the venture, rather than the security offered. Apart from its central office in Port Moresby, the Bank has nine branch offices, four sub-branch offices and 14 representative offices. Out of a total of about 380 staff, 236 are located in regional offices. The Bank relies heavily on provincial agricultural field staff for smallholder agricultural lending programs. They assist in the preparation and appraisal of projects, provide supervision and are responsible for loan disbursements. The operations of PNGDB have been comprehensively reviewed by consultant A.H. Stoneham. His report is available to Government and the World Bank. 47. The main categories of PNGDB loans are hire purchase, equipment financing agricultural loans up to K 10,000, agricultural loans in excess of K 10,000, oil palm, commercial loans, industrial loans and mini-loans. ANNEX E Page 17 - 105 - Agricultural loans up to K 10,000 are restricted to nationals. Mini-loans were introduced in late 1976 to provide up to K 1,000 to small borrowers. Thee are no seasonal production loans for seeds, fertilizer or insecticides, as there is currently little demand. Loan repayment terms vary with the project and range from 18 months up to 12 years for development loans for tree crops. Interest rates on agricultural loans are 8% to 8.5% on loans below K 10,000, and 9.5% to 11% on loans in excess of K 10,000. Appropriate grace periods for repayment are introduced into the loan agreement for projects with long gestation periods. 48. As there is no land title system covering the bulk of the country, PNGDB had to introduce its own system of obtaining security against loans. For small projects, the "Clan Usage Agreement" and guarantor system is used. While the Bank cannot foreclose or sell the land, the usage agreement ensures that the borrower has use of the land for the duration of the project. Guarantors are usually influential people who, while not having the money to repay the loan, are in a position to influence the borrower to work diligently, assist him with the project when required, and in case of emergency take over the project and see it through. A "Special Purpose Lease" system has been introduced to provide a more secure legal framework for larger-scale projects. Under this system, the Government acquires the land from the clan for a period of 20 years and pays the purchase price to PNGDB as the equity contribution by the clan to the project. The Government registers the title and leases the land back to the the clan for an annual rental which ultimately covers the price of the land. The land reverts to the clan after the 20-year period. In the case of small borrowers with little equity, the amount of labor that the borrower can reasonably put into the project is maximized and nominated as "sweat equity" and is a basic condition of the loan agreement. These arrangements have generally proved effective and acceptable. 49. Statistics on lending to agriculture relative to total PNGDB lending are present in Table 3. The bank has made agricultural loans to a total of K40 million in the thirteen years of its existence. Over three-quarters of this amount has been lent to Papua New Guineans. This represents 34% of total PNGDB lending and 42% of the number of loans made. The cattle industry has received over a quarter of PNGDB's agricultural loan funds, closely followed by the oil palm industry. The coffee, pig, and poultry and processing industries have also received large amounts of PNGDB loan money. 50. In the mid-1970's the Bank adopted policies which had the effect of reducing lending to nonnationals. This change in policy is reflected in Table 3 in the difference in importance of lending to Papua New Guineans between the period prior to 1977 and subsequent years. Prior to 1977 almost half of total lending and one-third of agricultural lending was to nonnationals. Subsequently lending to nonnationals has fallen dramatically and only five agricultural loans were made to non-Papua New Guineans from Table 3: PAPUA NEW GUINEA DEVELOPMENT BANK LENDING BY SECTOR 1967-77 (10 yrs) Jul/Dec 1977 1978 1979 Total No. K000 No. K000 No. K 000 No. K000 No. K-000 Total Lending Agricultural Cattle 3,155 8,592.1 103 244.0 233 955.1 90 715.3 3,581 10,506.5 Pigs and poultry 937 1,483.3 452 593.1 798 934.1 251 1,678.2 2,438 4,688.7 Fishing 1,053 601.3 92 58.4 107 69.9 91 115.2 1,343 844.8 Processing 871 1,952.5 88 139.4 126 200.8 160 226.7 1,245 2,519.4 Oil palm 1,826 4,046.1 219 588.4 649 2,630.2 957 1,943.4 3,561 9,008.1 Cocoa 365 510.2 72 58.4 153 204.4 129 405.0 719 1,178.0 Rubber 493 287.8 59 21.3 237 121.6 114 112.9 903 543.6 Copra 961 791.0 129 68.4 117 60.4 86 59.3 1,293 979.1 Coffee 102 1,112.5 28 26.1 156 1,387.8 103 1,787.0 389 4,313.4 Property transfer 29 1,057.2 2 151.6 3 4.7 1 5.2 35 1,218.7 Rural transport - - - - - - 78 217.6 78 217.6 Other crops 276 1,130.3 50 52.1 54 74.4 95 148.6 475 1,405.4 1 Other agricultural 182 859.2 42 65.4 96 255.4 162 191.6 482 1,371.6 g Total Agricultural 10,250 22,423.5 1,336 2,066.6 2,729 6,898.8 2,317 7,606.0 16,632 38,994.9 Total industrial 878 15,536.9 51 845.2 118 1,019.9 89 1,326.4 1,136 18,728.4 Total commercial 5,806 33,762.0 1,497 4,492.7 2,639 9,667.0 1,596 7,497.1 11,538 55,400.8 Total Lending 16,934 71722.4 2884 7404.5 5,486 17,585.7 4,002 16,411.5 39,306 113,124.1 Lending to Papua New Guineans Agricultural 9,966 14,928.4 1,336 2,066.6 2,724 5,735.6 2,317 7,606.0 16,343 30,366.6 Industrial 497 3,664.0 49 737.3 114 589.2 85 1,205.3 745 6,195.8 Commercial 5,080 19,785.6 1,488 4,397.5 2,619 8,609.4 1,588 7,406.4 10,775 40,198.9 Total 15,543 38,378.0 2,873 7,201.4 5,457 14,934.2 3,990 16,217.7 27,863 76,731.3 Percent agricultural 60 31 46 28 50 39 57 46 42 34 Percent Papua New Guinean 92 53 99.6 97 99.5 85 99.7 99 70.9 68 H M Source: Papua New Guinea Development Bank. ANNEX E Page 19 - 107 - 1977 to 1979. This policy has placed the PNGDB in the situation of having what is in commercial terms the least profitable segment of the agricultural industries as its clientele. 51. The average size of agricultural loans in the years 1975 - 1978 was K2,600 or less. In 1975 and 1977 it was only K1,500. In 1979 it rose to K3,200 due to a number of larger loans for cattle and coffee projects. Typical loans for fishing, cocoa and rubber development are less than K1,000. The small size of agricultural and other loans has made it diffi- cult for the bank to remain profitable. The cost of appraisal and loan administration on small loans relative to the return to the bank in the form of interest make this type of lending a likely loss area. The use of DPI staff as agents for the bank, especially in loan appraisal, has moderated the adverse financial consequences of small loan operations. The use of DPI extension staff in this role has long been a cause of discontent in DPI, but Stoneham notes improvement in this regard following the introduction of a joint DPI/PNGDB procedures manual for smallholder loans. Stoneham also notes a deterioration in the effectiveness of DPI extension staff as agents of the PNGDB and attributes a recent fall-off in smallholder lending in part to this deterioration. Performance of credit functions interferes with the work of extension staff, but in the short run it may continue to be necessary. In the longer run, PNGDB should plan to recruit its own field representatives, but it will be constrained both by the cost, which could however be carried by a subsidy from the Government, and by the availability of trained staff, for which it will probably compete directly with DPI. It is recommended that PNGDB make a modest start in hiring agricultural field officers and that it request financial assistance from the government to meet the additional costs of reaching smallholders. 52. Stoneham concludes that PNGDB's operations have been generally satisfactory and that its financial position is sound, but he is concerned at its likely low profitability during the early 1980s. He sees the use of technical assistance funds for training and providing necessary expatriate expertise as a justified means of improving profitability. 53. Government Credit Schemes. The Government's Infant Industry Loan Scheme will provide a standby loan facility for firms that can identify possible financial problems in the early years of a project. The loan would be unsecured and would not affect other loan-raising. Conditions attached to such loans would include the following: - repayment as soon as possible without rescheduling any other debts; - no dividend to be declared while the infant industry loan is outstanding; ANNEX E Page 20 - 108 - - interest rate marginally higher than other commercial funds available; and - the amount of the loan not to exceed 15% of total capital required for the project. 54. The National Investors Scheme, introduced in the 1980 budget, is available to Papua New Guinean investors initiating relatively large projects with total costs exceeding K125,000. This scheme not only assists with meeting costs of projects but also assists applicants to make arrangements for feasibility studies and project financing. Where financial assistance is provided for a feasibility study and the project proceeds, the financial assistance is converted to a loan. Where funding is to be provided for project development it is provided as an unsecured loan at a rate 1.5% below the Development Bank prime commerical lending rate. The decision on whether or not to provide assistance under this scheme is strongly influenced by the contribution which the project would make to employment and to the economy generally. Another possible role for the Government would be to carry the risk of lending, e.g., by the PNGDB, for development of unregistered land. 55. The Adequacy of Credit Facilities. Existing credit institutions are capable of meeting the current demand for rural credit . The trading banks meet the credit needs of larger scale and foreign-owned ventures while the PNGDB meets the needs of Papua New Guineans and of smallholders in particular. This situation may, however, be misleading. Demand for credit is presently depressed by the existence of the Land Acquisition Act and much greater levels of investment will be required if the main rural industries are to be maintained, let alone expanded. This problem has been recognized by the Governor of the Bank of Papua New Guinea who noted, "A particular and continuing problem is how to achieve adequate financing for the essential redevelopment and expansion of our agricultural industries. Rural financing poses administrative and security problems that are not easily coped with by orthodox banking procedures."/I The Central Bank is continuing to explore means of providing credit for redevelopment and expansion with the Cocoa Board, the PNGDB and interested government departments. /1 Quoted from an address to the Institute of National Affairs, 27th March 1980 in Bank of Papua New Guinea, Quarterly Economic Bulletin, December 1979. - 109 - ANNEX F PAPUA NEW GUINEA AGRICULTURAL SERVICES REVIEW INVESTMENT INCENTIVES AND CONSTRAINTS Table of Contents ANNEX Page No. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Investment in the Agricultural Sector . . . . . . . . . . . . . 1 Table 1: New Plantings of Tree Crops in Large Holdings, 1975-78 . . . . . . . . . . . . . . . . . . . . . 3 Table 2: New Planting of Tree Crops by Smallholders, 1975-76 . . . . . . . . . . . . . . . . . . . . . 4 Table 3: Livestock Numbers, 1974-78 . . . . . . . . . . . 5 Table 4: Private Capital Expenditures in Primary Industry, 1975-79 . . . . . . . . . . . . . . . . 6 Table 5: Foreign Investment in Primary Industry, 1973-77 . . . . . . . . . . . . . . . . . . . . . 6 Commodity Prices . . . . . . . . . . . . . . . . . . . . . . . . 7 Wages and Productivity . . . . . . . . . . . . . . . . . . . . . 9 Table 6: Estimated Wage Employment in Large Holdings, 1970/71-1978 . . . . . . . . . . . . . . . . . . 10 Table 7: Minimum Wage Rates in Selected Countries, 1978 . . . . . . . . . . . . . . . . . . . . . . 11 Subsidies . . . . . . . . . . * * . * . . . . 13 Prices . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Inputs . . . . . . . . . . . . . . . . . 13 Provision of Infrastructure. . . . . . . . . . . . . 14 Feasibility Studies Contribution Scheme . . . . . . . . . . 14 Other Subsidies ............. . 15 Taxes, Duties and Levies . . . . . . . . . . . . . . . . . . . . 15 Taxes on Incomes and Profits . . . . . . . . . . . . . . . 15 Export Tax . . . . . . . . . . . . . . . * . . . . . . . 15 Industry Levies . . . . . . . . . . . . . . . . . . . . . . 16 Import Duties and Restrictions . . . . . . . . . . . . . . 17 Government as an Investor . . . . . . . . . . . . . . . . . . . 18 Guidelines for Foreign Investment . . . . . . . . . . . . . . . 19 Summary and Recommendations .................. 20 - 110 - ANNEX F Page 1 PAPUA NEWI GUINEA AGRICULTURAL SERVICES REVIEW INVESTMIEIT INCENTIVES AND CONSTRAINTS 1. The potential for agricultural growth in PM is great. It has been stated, for example, that the coffee crop could double in two years, on existing acreage, if proper pruning and weeding practices were followed and fences built. Cocoa and copra plantings both have large numbers of old trees, and a replanting/rehabilitation program would go far toward increasing output. Some government officials believe that motivation of producers is the key to increased production and that producers are not replanting their crops because they do not see the need for it. Thus it is clear that the proper incentives could have an impact on levels of production. 2. Any policy which changes costs or prices from levels that would otherwise have prevailed can be said to provide incentives or disincentives to investment and production. In addition, institutional factors can either inhibit or encourage investment and growth of output. Many of the factors influencing PNX's agricultural sector were initiated for reasons unrelated to agricultural production, and for this reason it may be difficult to manipulate the policies in order to provide incentives or remove the disincentives. This Annex reviews past investment in the agricultural sector and then examines the policies and institutions that influence future investment. It covers factors operating through the price system, including both the factors affecting farmgate prices (floor prices, price stabilization, export taxes, import duties and restrictions, and exchange rate policies) and those affecting costs of production (wages, subsidies, taxes, import duties, and also the exchange rate)./I The Government takes the general line that the most effective way to promote investment is by pursuing sound and stable macroeconomic policies rather than by offering particular incentives. However, it recognizes the need for special arrangements for certain industries and circumstances, both for foreign in- vestors and for Papua New Guinean entrepreneurs. These measures will be dis- cussed as well. Investment in the Agricultural Sector 3. Comprehensive statistics on the monetary value of investment in rural industries are not available. An indication of the rate of investment can be obtained, however, from data on changes in their productive bases. Data on new plantings of tree crops on estates are presented in Table 1. The change in coverage outlined in footnote (a) is unfortunate, but the /1 Land tenure, often an important element in investment decisions, is dealt with in Annex G. ANTE7X F Page 2 - 111 - level of new plantings on estates surveyed is nevertheless a useful guide to the level of reinvestment in the industries concerned. These show average annual rates of new plantings on copra estates of about 1% of the total planted area in the four years to 1978. This is not sufficient to maintain long-term production in an industry with a normal age distribution and is certainly not sufficient for an industry with a disproportionate percentage of senile trees (estimated at over 50%). 4. New cocoa plantings were less than 2% of the total area in all years but 1976/77 in which they amounted to 7%. Again, the average annual rate of planting of about 3% is insufficient to maintain productivity when half of the cocoa trees in the country are in need of replanting. 5. The average rate of new plantings on coffee estates of over 4% is more satisfactory. This probably reflects greater profitability in that industry as well as the greater proportion of voluntary purchases of coffee plantations by national groups as opposed to acquisitions under the Land Acquisition Act. 6. Mew rubber plantings average less than 1% of the total planted area. This reflects high wages, low earnings, lack of confidence in the industry and a resultant use of some former rubber land for other enterprises. New tea plantings have been neglibible in recent years. The industry is young and replanting is not yet necessary to maintain produc- tivity and earnings are low so that there would be little interest in planting new areas. 7. Annual data on smallholder plantings are not available. The last survey was carried out in 1975/76. In Table 2, data on new, immature and total plantings are presented. Immature plantings indicate the rate of planting in the years preceding the survey and together with the new planting data give an indication of the average rate of new planting over a number of years. ANYEX F Page 3 - 112 - Table 1: NEIJ PLANTIN OF TREE CROPS IN LARGEHOLDINGS, 1975-78 Total Bew NTew area /a plantings plantings Year ended (ha) (ha) (x) Copra June 30, 1975 104,181 1,272 1.2 June 30, 1976 89,344 1,437 1.6 June 30, 1977 84,929 1,004 1.2 Dec. 31, 1978 95,160 300 0.3 Cocoa June 30, 1975 60,177 1,136 1.9 June 30, 1976 54,933 1,062 1.9 June 30, 1977 53,090 3,730 7.0 Dec. 31, 1978 54,549 872 1.6 Coffee June 30, 1975 6,750 209 3.1 June 30, 1976 6,651 446 6.7 June 30, 1977 5,999 119 2.0 Dec. 31, 1978 6,570 330 5.0 Rubber June 30, 1975 10,080 94 0.9 June 30, 1976 7,742 77 1.0 June 30, 1977 6,440 67 1.1 Dec. 31, 1978 6,460 52 0.8 Tea June 30, 1975 3,439 15 0.4 June 30, 1976 3,169 5 0.2 June 30, 1977 3,168 4 0.1 Dec. 31, 1978 2,758 2 - /a Reductions in total areas reflect the fact that the Bureau of Statistics surveys do not cover largeholdings which have been taken over by citi- zens. Therefore as plantation acquisition proceeds, the area of large- holdings covered by the Bureau surveys will decrease. Source: Bureau of Statistics, Rural Industries 1978. ANNEX F Page 4 - 113 - Table 2: NEII PLANTING OF TREE CROPS BY SMALLHOLDERS, 1975-76 Area (ha) Percent New New Total Immature planting Immature planting Arabica coffee 32,174 3,745 2,390 11.6 7.4 Robusta coffee 8,431 1,051 350 12.5 4.2 Cocoa 73,345 15,631 13,701 21.3 18.7 Coconuts 167,346 41,578 15,037 24.8 9.0 Source: DPI Statistics Section. 8. New and immature plantings of arabica coffee amounted to 19% of the total planted area. this would equal an average rate of 4-5% p.a. which is approximately enough to maintain production in the long term. The period covered would include the years of planting restrictions and it is likely that with the relaxation of restrictions and high prices in recent years the rate of planting would have increased. New and immature plantings of robusta coffee amounted to 16.7% and similar conclusions could be drawn about that industry. 9. New and immature cocoa plantings amounted to 40% of the total area. This is equi-valent to a rate of 8-10% of the total area per year, sufficient to produce a continuing expansion in production. New and immature coconut plantings amount to 33.8% or an annual rate of 5-6% of the total planted area. This rate is also sufficient to permit long-term expansion of production. 10. In general, new planting of tree crops on estates has been insufficient to offset the effects of aging of existing stands, while smallholders have been planting at a rate to increase production. These data are consistent with production performance of the two sectors in recent years. 11. The situation in the livestock industries is shown in Table 3. On largeholdings, there has been a rapid decrease in the dairy industry and stagnation in the beef industry. The poultry industry has expanded strongly but erratically while the pig industry has expanded modestly. The smallholder cattle industry declined during the late 1970s. Tn general, there apears to have been very little net investment in the livestock industries. ANNEX F - 114 - Page 5 Table 3: LIVESTOCK NUMBERS, 1974-78 June June June June June 1974 1975 1976 1977 1978 Largeholdings Dairy cattle 5,142 4,524 3,985 3,939 2,719 Beef cattle 79,386 78,031 78,148 77,001 82,119 Pigs 7,232 7,331 6,745 7,093 7,807 Poultry 208,710 284,442 254,472 148,540 317,276 Smallholder Cattle n.a. n.a. 49,463 n.a. 46,264 Sources: Largeholdings, Bureau of Statistics, Rural Industries 1978. Snallholdings, DPI Statistics Section. 12. The only agricultural industry in which substantial investment has occurred throughout the 1970s is the oil palm industry. It has grown from a near zero base at the beginning of the 1970s to an industry which earned K 14 million in foreign exchange in 1979. This will expand throughout the 1980s as the more recently developed Biala and Popondetta schemes reach full production. Investment in this industry has been on estates and smallholdings, with foreign companies managing the schemes and owning the estates and processing facilities in equal shares with the Government. 13. Data on private investment by enterprises surveyed by the Bureau of Statistics are presented in Table 4. The coverage does not include snallholder investment. Average annual investment in primary industries over the period 1974-79 was K 9.3 million. Investment in later years was lower than that in earlier years, and the decline would be even more marked if these data were adjusted for inflation. In later years, private investment in primary industry has been only 10-12% of total private investment, compared to 20% in the first year covered. Investment in land improvement and plantation development has fallen by nearly half since 1974. In 1978 it made up less than 3% of total private investment, compared to nearly 77 in 1974. As mentioned above, the investment in the oil palm industry accounts for much of the investment recorded for primary industry. ANNEX P - 115- Page 6 Table 4: PRIVATE CAPITAL EXPENDITURE IN PRIMIARY INDUSTRY, 1974-79 Agri- Land culture, improve- Percent forestry ment and agricul- and plantation ture, fishing development Total etc. ------------- (E million) ------------- (%) 1973/74 10.8 3.5 52.6 2n.5 1974/75 10.8 2.9 78.3 13.8 1975/76 10.4 1.7 64.4 16.1 1976/77 6.5 1.3 69.3 9.4 July-Dec. 1977 5.5 0.7 42.4 13.0 1978 8.0 1.9 72.8 11.0 Planned 1979 8.5 n.a. 85.1 10.0 Source: Bureau of Statistics. 14. Data on foreign investment are presented in Table 5. This shows that within the primary industry sector there has been significant new investment in forestry and fishing, but the net foreign investment in agriculture was negligible over the period covered. In two years there was heavy net foreign disinvestment in agriculture and hunting, no doubt associated with the transfer of ownership of plantations to citizens. Net foreign investment in primary industry has been very variable as has the share of total foreign investment going to that sector. Over the period covered it averaged 14%. Table 5: FOREIGN INVFST11ENT IN PRIMARY INDUSTRY, 1973-77 Agri- culture Total Total Percent and primary all primary hunting Forestry Fishing industry sectors industry …____--------------- (K million) -------------------- () 1972/73 2.5 1.1 0.1 3.7 29.3 12.6 1973/74 -1.8 1.0 1.1 0.3 74.3 0.4 1974/75 1.8 0.6 1.0 3.5 27.0 13.0 1975/76 -2.5 2.1 2.9 2.5 24.8 10.1 1976/77 2.9 2.7 2.2 7.8 22.8 34.2 Source: Bureau of Statistics. ANNEX F Page 7 - 116 - Commodity Prices 16. Price incentives are obviously only effective if agricultural production is responsive to prices. Studies of the price elasticity of supply of agricultural commodities indicate sensitivity both to changes in relative prices of different crops and, in the long term, to changes in the terms of trade for agricultural goods./l No studies of the aggregate supply response are available for PN1, but there is some evidence on individual crops and for individual geographical areas to show that farmers there behave the same as those elsewhere. It is difficult to isolate the effect of price changes from that of other variables, but the evidence at least suggests the existence of a relationship. One example was the tremendous upsurge in coffee planting and production (more than 30% in one year) by smallholders in the highlands during the coffee boom of 1976/77, when world prices tripled. Coconut production, hoth by smallholders and by plantations, appears to have fallen due to low prices in 1973 and 1076. In smallholder cocoa, high prices led to better harvesting and maintenance practices, as well as to new plantings, whereas in times of low prices, the harvest fell off to levels needed to meet minimum cash requirements, and growers turned to other forms of employment. A series of interviews with smallholders supports these findings, indicating a positive price elasticity of supply in both the short term (harvesting reactions) and the long term (planting reactions). Price response depends in part upon the utility of money, which in turn depends on the range, quality and accessibility of goods and services for sale in the area. In some remote areas of PNC,, the high costs and low frequency of transport may make this factor critical in determining interest in cash crops. 16. Domestic prices of agricultural products are modified in three ways, through floor prices, price stabilization, and manipulation of the exchange rate. The Glovernment is the buyer of last resort for some cash crops, particularly in isolated areas where private buyers are often nonexistent (see Annex E). Prices offered do not reflect the full costs of transportation and marketing, nor are they adjusted for quality. One estimate is that these arrangements result in a 5-10% subsidy on most crops. The reason for providing a floor price is not simply to increase incomes, but also to encourage regular production. 17. Price stabilization funds have been established for PNE's three major export crops, coffee, cocoa, and copra (see Annex E). The stabiliz- ation funds need not, in principle, affect long-term levels of production, since if the target price is accurately established, and if the producer reactions were equivalent in high and low price ranges, the effects of the levies and bounties could exactly offset one another. In fact, by dampening /1 World Bank, "Agricultural Prices, Subsidies and Taxes: A Summary of Issues." April 17, 1979 (processed), p. 3. ANNEX F Page 8 - 117 - the impact of low prices, the bounties should reduce the discouraging effect of low prices which could result in some producers withdrawing permanently from the market. It is, of course, necessary that the bounties reach the producers for them to have an impact on production. 18. The Papua New Cuinean Government follows an exchange rate policy designed to maintain the purchasing power of the kina. The small, open nature of the economy results in a situation where key domnestic prices are to a large extent determined by external prices beyond the country's control. Even the cost of domestically produced goods and services is sensitive to world prices, since it depends on the cost of raw materials, which are largely imported, and wages, which are indexed to the consumer price index. The CPI, in turn, contains a high proportion of imported items. Thus the exchange rate is used as an instrument to control imported inflation. The success of this strategy can be seen in the low rate of inflation which in recent years has ranged from 4-8%, well below that of PNTG's major trading partners. 19. The hard currency strategy has led to an appreciation of the kina relative to the currencies of several of PNC's major trading partners (e.g., the Australian and US dollars). Although the kina has also depreciated against some currencies (e.g., the yen and the German mark), it has appreciated against baskets of the currencies of countries to which PNTG exports its crops and with which PNG's agricultural exports compete. Thus, since PNG is a price taker for its exports, producers receive lower kina prices for their output than they would with an unchanged exchange rate. This could be a disincentive to agricultural investment and produc- tion. IWeighted by the currencies of countries from which PNG buys its imports, the exchange rate has also appreciated. This has helped restrain the growth of the CPI, but it has also held down the price of imported goods relative to domestically produced goods, and thus may have discouraged the growth of domestic production. 20. The impact of an appreciating kina on prices and incomes is neutralized to the extent that it is reflected in a lower domestic rate of inflation. Producers of exports and import substitutes receive less in nominal terms, but they also pay less for their inputs and for items they consume, whether imported or produced domestically. Rural residents probably spend less than half of their income on imported goods whose prices will rise more slowly as a direct result of an appreciating kina./I Price /I The import content of consumption in rural areas is difficult to estab- lish, but it can be roughly inferred from some studies of individual villages or regions. See, for example, Nfarion Christie, "The Human Impact of the Cash Cropping of Coffee in the Highlands of Papua New Guinea," paper presented at the IJnesco Working Group meeting on the Human Implications of Scientific and Technological Development, Leura, New South W-ales, Australia, October 1978. ANNEX F - 118 Page 9 increases for domestic goods will also be slowed, however, since wages and the cost of imported raw materials will rise more slowly. The real effective exchange rate (adjusted for relative rates of inflation) for an import- weighted basket of currencies has risen at only a fairly slow rate./l The relevance of the CPI for rural aeas in PNG is not clear, since it is based on an urban consumption basket, but it is the only measure of inflation presently available. Even if real incomes do remain unchanged production could be affected, since producers will not be exposed to the potentially stimulating impact that even a rise in nominal farmgate prices could provide through money illusion. 22. In recent years, however, relative changes in farmgate prices which may have been caused by adjustments to the exchange rate have been overshadowed by the impact of other factors. Commodity price fluctuations over the past few years have exceeded the changes in the exchange rate. Between 1976 and 1979, when the kina rose by 12% against the TTS dollar and by 26% against the Australian dollar, the export price of coffee rose by 32%, that of cocoa by 71%, and that of copra nearly tripled. Furthermore, at the price levels prevailing in the last few years, stabilization levies of over 20% of export unit values have been applicable for both coffee and cocoa. Thus recent changes in the exchange rate have probably had little if any impact on output. On the other hand, a policy of slow but steady effective appreciation of the kina probably does have a long-term impact on the competitiveness of PNG's products, and on its ability to diversify production. Given the potential importance of this policy variable, further study of the links between the exchange rate and domestic inflation and competitiveness would be valuable. If the present policy is continued, then greater efforts may be needed to counteract any adverse impact on agricultural output and incomes, through measures such as reductions of export taxes, increases in import duties, input subsidies, provision of marketing, storage and transport facilities, and management support. These measures will be discussed further below. Wages and Productivity 22. Both the level and the structure of wages in PNrT are probably severe disincentives to agricultural production for export or for import substitution. The minimum rural wage for primary industry, which must be paid on all plantations, is about K 12 (US$18) per week. In comparison, the typical self-employed smallholder earns K 100-200 (US$150-300) p.a., or about K 2-4 per week. Even during the coffee boom, average incomes of coffee smallholders reached only about K 400 p.a. Rising rural wages are cited as / lWeighted by export competitors (excluding copper), the real effective exchange rate has actually depreciated. ANNEX F - 119 - Page 10 one of the probable reasons for the drop in the employment of rural wage earners since 1970 (see Table 6),/1 and also for the continuing lack of re-investment on plantations. Table 6: ESTIMIATED WIAGE EMPLOYMEICT IN LAPGE HOLDINGS, 1970/71-1978 /a 1970 1971 1972 1973 1974 1975 1976 Industry /71 /72 /73 /74 /75/b /76 /77 1978 Cocoa 2,589 2,228 1,781 1,929 1,736 Cocoa/copra 20,196 21,315 18,795 19,q70 17,970 Copra 6,899 6,025 3,907 4,119 3,707 Coffee 9,389 9,468 10,733 11,940 10,744 Rubber 5,758 6,227 5,935 5,370 4,833 Tea 5,489 3,898 5,885 5,162 4,645 Other agr. 740 658 1,731 3,233 2,909 Grazing 725 810 694 417 375 Total 51,785 50,629 49,461 52,140 46,933 42,668 44,713 44,726 /a Breakdown by crop not available after 1974/75. /b Total is a final figure; breakdown is provisional and adds up to 46,919. Source: 1I.A. Wlheeler, "Rural Wages, Employment and Migration" in Agricul- ture in the Economy, Vol. 1, p. 3; Bureau of Statistics, Rural Industries, 1978. 23. The high level of wages, which is also high by regional standards (see Table 7), has been blamed for the lack of development of a number of crops that are grown on plantations. For coffee, copra and cocoa, labor costs amount to about 40% of total on-plantation costs, and an analysis of community coffee plantations in the Southern Fighlands showed an internal rate of return of 10% only after using a shadow wage equal to one third of the legal minimum. Labor costs are more than one third of the total cost of tea production and are the main determinant of planting costs. Given the high wages existing at present, the estates are not expected to undertake new planting or replanting, even with higher yielding varieties. A recent /1 One coffee plantation visited by the mission had shifted from hand weeding to weedicides and had cut its permanent work force from 200 to 50. Officials of the Coffee Industry Board confirmed that this is a general trend. A NEX F Page 11 - 120 appraisal of the prospects for rubber development concluded that conditions are not favorable, citing the high wage level and reduced competitiveness resulting from revaluation of the kina as major adverse factors, and similar results were found but they are developing a sugar project. One large expatriate company recently sold its rubber plantation to the Government after workers struck for a 36% increase in wages. The plantation sector, with its experienced (largely expatriate) management and ownership, could be one of the most promising areas for growth in PMN, yet for years it has failed to grow, and production of some crops has even fallen. Figh wages are only one of the probable causes of this stagnation, but their influence cannot be ignored. 24. Available data do not permit a comparison of labor productivity among PNG and other countries, but it is unlikely that Papua New Ouinean productivity exceeds that of competing countries by enough to compensate for the higher wages. Experience indicates just the opposite; management inputs are unusually high to try to increase the productivity of workers. Table 7: MINIMIM UAGE RATES IYT SELECTED COTJ'TRIES 1978 (US$ per day) Agriculture Nfanufacturing Indonesia 0.60-1.75/a Malaysia 1.88-3.27 3.86-5.91 Papua New Guinea 2.58 6.99/b Philippines 1.55-1.74 1.85-2.03 Sri Lanka 0.65-0.84 0.90/c Thailand 1.23-1.38 1.72/b Western Samoa 2.72 3.40 /a Unskilled construction workers, urban and rural. /b Urban minimum wage. /c Public sector minimum wage. Source: Data provided by national authorities. 25. It would not be politically feasible to lower wages by a significant amount, but the Government should resist further increases in real wages and should investigate ways of weakening the link between the CPI and the growth of money wages. It could be argued, for example, that the urban-based CPI is not representative of rural areas and should not be used in determining the rural wage. The Government should also be prepared to take advantage of any fall in the CPI by modifying subsequent wage awards by ANNEX F Page 12 - 121 - an equivalent amount./l Another approach to this problem, one which has been tried on some plantations, would be to pay piece rates. Even if the rates were based on a minimum wage concept, they would encourage increased labor produtivity. 26. Aside from a firm stand on further wage increases, efforts to stimulate growth may have to concentrate on developing forms of production which are not dependent on wage labor. Community projects run on a self-help basis allow workers to donate labor, or work for low wages, in return for equity in the project. Thus the coffee project cited above was able to achieve a predicted 10% internal rate of return. Smallholders, of course, do not receive wages, and one very successful form of development has been the nucleus estate, notably in settlement schemes for oil palm. These schemes provide management and technology which would not otherwise be available to smallholders, but which do not involve wage employment. They need not involve the development of new land; the model could be used in developing existing smallholdings or where estates are being transferred to national ownership. Another model which might prove viable in Papua bew Guinea is that used by the Federal Land Development Authority (FELDA) in Malaysia, whereby poor farmers are given smallholdings on land settlement schemes which have been developed by the authority. They eventually pay for the land out of the production from their tree crops. This method also could be applied to the takeover of expatriate-owned estates for transfer to Papua N1ew Cuineans. 27. Despite the relatively high rural wage, a large gap still exists between urban and rural wages. The minimum urban wage is over US$43/week, nearly three times the rural minimum (see Table 7). This great disparity and the even greater difference between urban wages and rural non-wage income are probably among the major reasons for the high level of migration from rural to urban areas. The hope of obtaining highly paid urban employment constitutes competition for paid employment on plantations or for remaining a smallholder. Fowever, the legislated minimum wage may have tended both to reduce the level of demand for labor and to increase the supply, with the result that urban unemployment is one of the most serious economic and social problems in the country. Although the Government is constrained in its ability to reduce wages, it could allow greater scope for the development of the informal sector. Restricted in P?W by numerous regulations, informal activities would be exempt from the minimum wage altogether, thereby increasing employment opportunities and reducing the cost of some goods and services. Examples of such activities which are common in many developing countries are small food and repair establishments. /1 A fall in the CPI in the first half of 1978 was not carried over into wages. ANMIX F Page 13 - 122 - 28. An equally if not more serious effect of the high urban wage is to turn the domestic terms of trade against agriculture by raising the cost of domestically produced goods, including government services, the level of which may be reduced as a result. This result certainly runs counter to the Government's objective of increased rural welfare, which is allocated over 20% of expenditures under the National Public Fxpenditure Plan, second in importance only to promoting economic production. The Government has recognized this inconsistency and recently announced a policy of reducing the gap between urban and rural wages by allowing rural wages to rise more rapidly than the cost of living. However, this policy will further discourage investment in plantations, and it will do nothing to help the great majority of the rural population who do not work for wages at all. Subsidies for this group, whether for inputs or through improved transport and marketing facilities, and changes in the urban/rural price structure achieved through modifications to the system of import and export taxes could improve the relative prices received by smallholders. Subsidies 29. Prices. Although price subsidies are not often used explicitly in PNG as a means to promote agricultural production, a number do exist. A major subsidy to some producers is the marketing service provided by DPI, in which transport and handling charges are absorbed by the Government so that the producer receives a subsidized price (see Annex E). In one case, a decision was taken and funds allocated in the National Public Fxpenditure Plan to subsidize the price of pyrethrum using as justification the infant industry argument, but the free market price soon rose well above the government price, removing the need for a subsidy. 30. Inputs. The Village Economic Development Fund provides grants of up to 40% of total project costs to national groups developing business ventures. This fund is relatively small, however; it receives an allocation of about K 750,000 p.a. 31. Planting material is provided free or at a reduced price to interested smallholders in certain cases, notably that of coffee. 32. Fertilizer is subject to a lower than average import duty but is not otherwise subsidized or promoted. Given its great potential impact on production, the Government might consider providing fully or partially subsidized fertilizer to smallholders on a large scale. The immediate impact on both incomes and production might be small, since many small- holders use little fertilizer and even if they did, poor management might render it useless. In order to ensure its increased and proper use, expanded extension services would be needed as well. AtIIFX F - 123 - Page 14 33. Provision of Infrastructure. The Government will consider providing necessary infrastructure, including buildings, to investors for new projects in return for a negotiated annual user charge. The charge reflects the Government's risk exposure, the expected rate of return to the investor's equity and the opportunity cost of the Government's funds. The user charge is secured only by the project itself and its payment ranks behind senior project debt. The scheme is designed to lower the "front-end risk" to potential investors while providing an attractive return on any government funds used. Lower user charges can be negotiated for projects located outside the main urban areas of Port Iroresby, Lae and Arawa-Kieta-Panguna. 34. The Government also subsidizes infrastructure by charging users of transport services rates well below the actual value of these services. For example, in the country as a whole, road users pay only 50% of maintenance costs and 17% of the costs of maintenance and investment in the road system./l Unfortunately, producers do not capture all of the benefits of low user charges. The trucking industry in PNG is dominated by a limited number of truckers, and, on the nation's longest road, the Fighlands Highway, current tariffs are estimated to be twice the actual resource cost of the service. Tariffs are indexed in such a way that road improvements would simply provide windfall profits to the truckers. A first step toward improving this situation would be to deregulate the trucking industry, allowing free entry and competition./2 35. Feasibility Studies Contribution Scheme. The Government will finance 50% of the cost of feasibility studies to a maximum of K 10,0oon on projects which have high priority or on which it wants feasibility informa- tion. The main condition attached to the scheme is that should the firm undertaking the study decide not to proceed with the project, the Governnent would have access to all information gained from the study so as to attract another investor. Should the project proceed the Government may acquire equity in the company equal to its financial contribution to the study or the contribution could be regarded as a loan to be repaid at commercial rates. /1 The Government recently decided to increase user charges for roads to cover a higher proportion of costs. This could be done, however, in such a way as to retain a higher degree of subsidy in rural than in urban areas. /2 The Government recently agreed to take steps in this direction. ANFEX F - 124 - Page 15 36. The list of agricultural production industries eligible for the scheme is extremely limited, including only essential oils and spice growing, but it also includes the processing of coffee, cocoa and rubber, as well as fuel production from biomass. In addition, potential investors can request the Executive Director of the National Investment and Development Authority to have other products added to the list. Nnetheless, automatic inclusion of more agricultural production would probably be useful. 37. Other Subsidies. Subsidies are a potentially powerful instrument for promoting investment in agriculture. Given the need for rehabilitation and replanting of PNG's major export crops, the Government might consider subsidies to encourage these activities. One possibility is to subsidize the lending operations, for example interest rates on loans, of the PM Development Bank (see below). In addition, since smallholders often have no collateral and have difficulty obtaining loans, the Government could initiate a credit guarantee scheme for smallholders./l Mfanagement fees for smallholder blocs are another potential area for subsidies, if funds for this purpose are scarce. The subsidy would be self-limiting, since management consultants eventually train local people to take their place, and in any case could be limited to the development or replanting phase. Taxes, Duties and Levies 38. Taxes on Incomes and Profits. Smallholders are subject to the personal income tax, but the impact of this tax on both output and incomes is small, since it is imposed only at incomes greater than about K 1,000 p.a., and in any case is difficult to collect from smallholders. Planta- tions pay company income tax, in which there are three provisions to promote investment: (i) agricultural development costs can be written off entirely in the year in which they are incurred, (ii) as in any industry, investments can be depreciated and (iii) the export incentive scheme for manufactured goods exempts from tax 50% of the profits related to growth in export sales over previous years. Primary product processing ventures could qualify for this assistance, but not ventures which export only raw products. The list of eligible products does not include any traditional PIr, agricultural products, but potential investors could request the Mfinister for Finance to add new products to it. 39. Export Tax. An export tax of 2.5% applies to most agricultural exports. Although the tax represents more than 2.5% of the farmgate /1 The Government has sponsored a Credit Guarantee Scheme for loans by trading banks to PNC nationals for specified purposes. It could extend this to cover agricultural lending by the Development Bank. AFNlEX F Page 16 - 125 - price,/1 it is waived when prices fall below a certain level. Suspension of the tax must he approved by the National Executive Council in each case, and the system could be simplified by adopting a formula to determine the trigger price for automatic suspension and re-imposition of export taxes. 40. Industry Levies. One way to fund or subsidize investment in tree crops would be through the industries themselves. Three crops - copra, cocoa and coffee - already have the institutional setup to raise the funds. The industry boards for each of those crops collect stabilization and management levies, and it would be a simple matter to add levies for crop development on top of them. The funds could be used to finance research or to provide grants for replanting. Loans for this purpose, particularly to smaller growers, are not popular with the Development Bank because of poor repayment experience; a grant paid for out of forced savings would eliminate the need for a loan. Such schemes have been successful in other countries in the region. Alternatively, the funds could be used to guarantee and/or subsidize loans for replanting. DPI is investigating possible uses for Y 1 million which was returned to the Cocoa Industry Board upon the disbanding of the International Cocoa Stabilization Fund. Its decision would apply equally well to funds collected through crop development levies. 41. Levies collected for investment purposes would have to be based on the volume of production, or exports, in order to ensure a steady flow of funds. The size of the levy would depend upon what proportion of research and development costs would be covered by the grant, as well as on the ability of the industry to pay. The cost of research for each of the three crops is about K 200,000 p.a. Replanting of cocoa, at K 600/ha and 6,200 ha p.a. would cost K 3.7 million p.a.; copra would need K 3.1 million p.a. at K 400/ha and 7,800 ha. Only limited replanting of coffee is needed at pre- sent. Current annual levels of production are about 50,000 tons of coffee, 28,000 tons of cocoa, 90,000 tons of copra and 30,000 tons of copra oil. Thus to cover research costs, levies would be of the order of K 4/ton for coffee, K 7/ton for cocoa, and K 1.5/ton for copra. Replanting levies, if intended to cover full costs of replanting, would be higher, at K 130/ton for cocoa and K 22/ton for copra. In 1979, this level of research and replanting levies together would have amounted to about 6% of the export unit value for cocoa and copra, and a negligible proportion for coffee. In comparison, the stabilization levies in 1979 averaged about 15% of the export unit value for cocoa, and 10% for copra and coffee. These numbers are only indicative and could be reduced by covering less than full replanting costs or increased by adding a grant to cover subsistence during /1 N.V. Lam has estimated the export tax burden on smallholders to be 2.7 to 3.3% of net earnings, depending on the crop and level of earnings. ("The Burden of Agricultural Export Taxation in Papua 1Tw Guinea," IASER Discussion Paper No. 15, November 1977.) ANNEX F - 126 - Page 17 the period of immaturity of the new trees. They are far too low to the extent that given the present age profile of cocoa and copra plantings, much higher levels of replanting might be necessary in early years. Additional amounts of money could be provided by the Government as subsidies to research and replanting operations. 42. Import Duties and Restrictions. An import levy of 2.5% is applied to all imports but rice, sugar and tinned fish and meat, which are exempted. These items compete with domestically-produced staples, but they are all consumed heavily by the poor, including smallholder farmers, so the net impact of the exemptions on real smallholder incomes should be positive, especially since their availability enables more people to move out of subsistence into cash cropping. The 1980 budget provided for the first time for significantly higher duties on certain goods that compete with local production for the market. All vegetables, whether fresh, frozen or canned, were subject to a 30% import duty./l This measure, although offset by greater uncertainty in both quantity and quality, was intended to provide an incentive to major retailers to buy locally grown produce, and to raise the price being offered to farmers. If indeed the variability of supply is a consequence of too small a market, or of low prices, then a high duty could provide an important stimulus for the development of a reliable local market in fresh food. Experience has shown, however, that import duties on f.o.b. values can be ineffective against fruit and vegetables, since if there is a glut in the exporting country the f.o.b. value is negligible. A tariff of a fixed amount per unit, rather than on a percentage of the value, would circumvent the problem. 43. Recently concerns about the development of local food production led to the imposition of restrictions on some food imports, most importantly rice, imports of which were scheduled to fall by 8% over a period of one year. Domestic production did not fill the gap, however, and the resulting severe shortage of rice in rural areas led to a relaxation, though not an elimination, of the restrictions. Rice is not a traditional crop in Papua New Guinea and any large-scale production will probably be highly mechanized. Other crops, however, might benefit from temporary protection from import competition. Bans on imports have been proposed for other food items, including cabbage, lettuce, and tomatoes. These bans would not be intended as permanent protection for domestic food production. Rather the argument for restrictions on food imports is that with higher prices and a steady level of demand for domestic production supply will be forthcoming, and that the problems of irregular supply are a result of the competition from imports and a lack of commitment to a market where one cannot always sell. However, higher import duties, if effective, might be a more efficient means to the same end, and at the same time could contribute to government revenue if there was not a compensating fall in imports. Opponents of the bans also argue that existing policies which have established the Government as buyer of last resort have not elicited a /1 The 30% duty was removed in the 1981 budget. ANNEX F - 127 - Page 18 regular supply, that what is needed is more extension work to improve the quality of domestic production, and that without direct measures to increase supply the result will be shortages of the restricted items. In conjunction with the bans, or, preferably, with higher import duties, the Government should do all it can to encourage increased and better quality production, through the improvement of extension and marketing services and the provision of some inputs. Government as an Investor 44. The Government has been a substantial investor in primary industry ventures, notably all three oil palm development companies and several forestry companies. Its objectives are varied, but in the case of the oil palm companies, the need to protect the interests of smallholders whose fruit is processed through the central factory was a major consideration. The willingness of the Government to commit funds to projects was also generally welcomed by the foreign investor partners. 45. The Government has adopted a set of guidelines for the formation of government corporations. These include the following: (a) the formation of government companies should lead to an expansion of economic activity and should only occur where the private sector is not taking up opportunities or where extraordinarily profitable investments can be made; (b) government companies should operate under normal commercial law and should only be formed where clearly profitable opportunities have been identified; (c) they should have narrowly defined commercial objectives and should not be set up for social reasons; (d) they should not be given any special competitive advantages over privately owned companies; (e) control mechanisms should leave management free from government interference in day-to-day activities; and (f) they should be encouraged to dispose of their holdings to national investors at an appropriate time. These guidelines apply in cases where the Government has control of a company. Noncontrollng interests would generally be held by the Investment Corporation of PNG which is a statutory body wholly owned by the Government. ANNEX F Page 19 - 128 - Guidelines for Foreign Investment 46. Controls over foreign investment are embodied in the National Investment and Development Act of 1974. It establishes the National Investment and Development Authority (NIDA) as the main government agency responsible for the control and promotion of foreign investment. Government attitude towards foreign investment in particular industries is spelt out periodically in the National Investment Priorities Schedule (NIPS) which is published under the authority of the Act. The general attitude of the Government towards foreign investment is stated by the Minister for National Planning and Development in his introduction to the Fifth NIPS in August 1979. "We are deeply committed to economic justice to Papua New Guineans and to mobilizing the people to take a more active part in their development. TUe seek through our economic and other policies to create the basis for a free and democratic society genuinely con- trolled by and actively involving the people of PNG. There is no reason why foreign investment and this kind of development cannot go together. Indeed the one can scarcely be conceived without the other. For this reason we welcome responsible foreign investors who are prepared to respect our laws and people." The NIPS classifies industries according to priority and the Government's attitude to foreign investment in them. There are three classifications: (a) Priority Activities. These are the activities in which foreign investment is regarded as an essential part of PNG's development over the ensuing years. It implies a decision in principle to offer access to a particular resource or investment for develop- ment by a foreign enterprise. MIinerals, forestry and fishing developments feature prominently in this classification. The only agricultural industries so classified are the legume and grain industries such as soya beans, maize, sorghum, and rice. (b) Open Activities. These activiies are regarded as suitable for foreign investment but are not top government priority. In the agriculture and livestock sector, activities classified as open are: growing of food crops, growing of fruit trees, oil paln growing (selected nucleus estate development only), rubber growing (selective nucleus estate development only), cocoa growing (nucleus estate only), seed growing (nucleus estate only), spice growing, and the development of new export crops. (c) Reserved Activities. This classification specifies those activi- ties in which foreign investors will not, as a general rule, be allowed to establish new businesses or to take over existing ones. Agricultural and livestock activities so classified include coconut growing (other than new hybrids), coffee growing, poultry ANNEX F - 129 - Page 20 farming (broiler and egg production only), orchid growing, sericulture, and salting of cattle hides and their export. These classifications are probably unduly restrictive, with the likely result that they are discouraging needed foreign investment. In particular, some of the items now classified as "open" could be shifted to a "priority" classification, where they would be eligible for more government assistance or encouragement. 48. The measures by which foreign investment is controlled are spelt out in the National Investment and Development Act. Foreign enterprises (those in which 26% or more of the shares are owned by non-nationals) are required to register with NIDA. NIDA is controlled by a board consisting of 12 senior government officials. The Minister responsible, after receiving the advice of the NIDA Board, can then specify which, if any, activities each foreign enterprise is permitted to carry on. Foreign enterprises cannot engage in any new activities without obtainig the consent of NIDA. Takeovers or share purchases involving foreign enterprises are also subject to NIDA control in order to give citizens the opportunity to buy into businesses which would otherwise be sold to foreign interests. Summary and Recommendations 49. PNG is a country endowed with rich natural resources, soils suitable for a wide variety of crops and, except for a few heavily populated areas, a favorable land-man ratio. Despite this fortunate situation, agricultural output has barely kept pace with the rapidly expanding population. The reasons for the slow growth of agriculture and the means to accelerate its development are among the most important issues facing the Government today. 50. In the plantation sector, where expatriate owners are gradually being replaced by nationals, the major constraints to growth are high wages, uncertainty surrounding land tenure, and inadequate management. These factors have led to the neglect of existing assets and a lack of additional investment. Political considerations may prohibit the reduction of wages, but real increases should be contained as much as possible, while efforts are made to increase labor productivity through measures such as piece rates. The application of the minimum wage to agriculture has been reduced to a limited extent through self-help schemes or various forms of ownership by smallholders, and these offer a promising path for the rehabilitation and expansion of the plantation sector. The model selected for converting plantations to national ownership could be one which does not require wage employment, for example through ownership by groups of smallholders. The plantations taken over by nationals thus far under the plantation redistribution scheme have suffered from inadequate and inexperienced management, and assistance in this area is urgently required. In addition, steps are needed to prevent further deterioration of estates owned by ANNEX F - 130 - Page 21 expatriates who expect to be forced to sell and have therefore failed to maintain or improve their assets. Land tenure laws must be simplified in order to speed the transfer process, and measures taken to improve the system of calculating compensation to expatriate owners. 51. The smallholder sector has also been affected by a number of government policies. The hard currency policy, with its gradual appreciation of the kina against the currencies of major trading partners, has been successful in its goal of restraining domestic inflation, but this may have occurred at the expense of domestic production. Export producers receive lower prices than would otherwise be the case and may respond by producing less, and producers of import substitutes (mainly fruit and vegetables) experience great difficulties in competing with low-priced imports. High world prices for Papua New Guinea's exports in recent years have probably swamped the effect of kina appreciations, but future price movements are expected to be less favorable. The lack of information on this important issue indicates a need for further study of the linkages involved. If such studies suggest any adverse effects of the present exchange rate policy, then compensating adjustments through the tax system or through the provision of various subsidies and support services may be called for. 52. The impact of the hard currency policy on export producers may be overshadowed by that of the price stabilization funds for the three major agricultural exports. These funds impose levies during times of high prices and pay bounties to producers when prices are low. Because of recent high prices, only one of the funds has ever paid out money, however, and they have accumulated large reserves. The Government might consider devising a system for the funds to borrow from one another in order to reduce the total amounts which need to be collected or to permit the productive investment of that portion of the fund which is unlikely to be needed for short-term price fluctuations. It should also make sure that when bounties are eventually paid, the producers, and not the middlemen, will benefit. 53. Rehabilitation and replanting of tree crops are urgently needed. The Government might consider subsidizing these activities through low interest rates, government guaranteed loans, reduced management fees or replanting grants. Funding for the subsidies might come from the stabiliza- tion funds as described above, from separate replanting levies operated by the commodity boards, or from general government revenue. 54. The main taxes affecting agriculture are those on exports and imports. A tax of 2.5% is imposed on all exports, but it is suspended when the price of a particular commodity falls very low. Suspension of the tax requires a decision by the National Executive Council. The procedure could be safeguarded and simplified by adopting a formula to determine a trigger price for automatic suspension and re-imposition of export taxes. A system of industry levies added to the existing export tax and stabilization levies could be used to finance rehabilitation and replanting of the major tree crops. - 131 - ANNEX F Page 22 55. The Government has begun to attack the problem of competition from food imports by placing increased tariffs and bans on some of the major ones. If used as temporary measures to promote infant industries, these measures could be very effective, but care is needed to prevent permanent protection of inefficient production. They might also lead to a shift away from the production of export crops toward that of import substitutes. Other measures to promote the latter without harming export production could include subsidies for inputs, such as fertilizer, to encourage their use, and expanded marketing and extension services to teach proper techniques for cultivation and to make sure that the proper market signals get through to the farmers. Deregulation of transport services will help producers to capture higher prices, as well as to benefit from improvements in the transport network. 56. The Government is itself involved in a number of primary industries as an investor, and it also carefully controls investment by foreigners. While some regulation and surveillance are undoubtedly necessary, the controls could be loosened, especially by broadening the range of activities in which foreign investment would be encouraged. - 132 - ANNEX G PAPUA NEW GUINEA AGRICULTURAL SERVICES REVIEW LAND TENURE Table of Contents ANNEX Page No. Background . . . . . . . . . . . . . . . . . . . . 1 Land Legislation . . . . . . . . . . . . . . . . . . . . . . . . 1 Legislation before Self-Government . . . . . . . . . . . . . 2 The Land Act (1962) ... . . . . . . . .. . 2 The Land Titles Commission Act (1962) . . . . . . . . . 2 Land (Tenure Conversion) Act (1973) . . . . . . . . . . 2 Legislation after Self-Government . . . . . . . . . . . . . 3 The Plantation Redistribution Scheme Act (1974) . . . . 4 Land Dispute Settlement Act (1975) . . . . . . . . . . 5 National Land Registration Act (1977) . . . . . . . . . 5 Land Administration .... . . . . . . . . . . . . . . . . . . 5 The Divisions of Land and Surveys . . . . . . . . . . . . . 5 Chart 1: Department of Lands, Surveys & Environment Organization Chart . . . . . . . . . . . . . . . 6 Judicial Bodies .... . . . . . . . . . . . . . . . . . . 7 The Land Titles Commission (LTC) . . . . . . . . . . . 7 The National Lands Commissioner . . . . . . . . . . . . 7 The Land Courts .... . . . . . . . . .. . 7 Utilization of Land for Agriculture . . . . . . . . . . . . 8 Table 1: Land Used for Cash Crop Production, 1976 . . 8 Issues in Land Policy and Administration . . . . . . . . . . 9 Land Title and Credit ... . . . . . . . . . . . . . . 9 Registered Title for Development of Customary Land . . 11 The Plantation Redistribution Scheme (PRS) . . . . . . 11 Plantation Management ... . . . . . . ...... . . 13 Conclusions and Suggestions . . . . . . . . . . . . . . . . 13 Staffing and Organization of the Lands and Surveys Divisions 13 New Legislation.. ........... 14 Review of the Plantation Sector . . . . . . . . . . . . 14 Research . . . . . . . . . . . . . . . . . . . . . . . 15 - 133 - AFNEX C Page 1 PAPIJA NETW GUINEA AGRICULTURAL SERVICES REVIEU LAND TENURE Background 1. Almost all land in PNG is held under customary arrangements which provide for rights of usage rather than absolute ownership. These rights are vested in clans or groups rather than individuals. Subsistence agricultural production remains the main means of providing for the needs of most of the population and for this reason, issues involving land rights are among the most sensitive and controversial in PNG. 2. Since colonization, land has been alienated from the customary system, inter alia, to allow the growing of cash crops by foreign developers. The growing of cash crops on customary land by landowning groups has also complicated the traditional arrangerments. The alienation of land for develop- ment by foreigners was concentrated on areas with easy access and favorable growing conditions. Less favoured areas generally remain undeveloped. 3. After World Wlar I, parcels of land alienated were relatively small and generally designed to be developed by an owner/manager. !7hile policies required some attention to be paid the land needs of the customary owners, this requirement was not always given enough consideration. In addition, the continuing growth in the populations of landowning groups led to local land shortages in later years. 4. The settlement of Papua New Guineans on alienated land did not commence until 1953. This was based on individual blocks of 5-13 acres, designed to be operated by a single family. Further schemes were developed during the late 1950's in areas of land shortage and mostly in East New Britain Province. During the 1960's, land settlement schemes were developed at a rapid rate, with almost 5,000 blocks covering over 46,000 ha being leased between 1960 and 1970. This form of development lost favor and, with the exception of smallholder blocks associated with nucleus estate operations, had almost ceased by the mid-1970's. Land Legislation 5. There are 23 Acts and 5 parts of Acts relating to land which are administered by the Minister for Lands. In addition, several important Acts relating to land are administered by the Mtinister for Justice. - 134 - AFNEX r Page 2 6. Earlier legislation is based on western concepts of ownership of land and concentrates on alienated land. Considering the predominance of customary land in PNG (97% of the total area) surprisingly little attention is given to it in the legislation. (a) Legislation Before Self-Government 7. The Land Act (1962). The Land Act is the main piece of legisla- tion relating to land in PNG. It regulates the acquisition by Government of customary land and prescribes the procedures to be followed in disposing of Government land. It also lays down procedures for dealing in and transfers of land. Land can be acquired only for prescribed public purposes and only if the land is not likely to be required by the owning group for subsistence or commercial production. Compulsory acquisition must be preceded by notice to treat and attempts to negotiate a voluntary purchase. 8. The leasing of Government land is the responsibility of the Land Board which consists of a chairman plus two members appointed by the Governor- General. Land available for leasing must be advertised in the Government Gazette and allocations of land must also be published. The Land Board is required to investigate publicly all applications for leases. All transfers of and dealings in land require Government approval. 9. The Land Titles Commission Act (1962). This Act established "an independent judicial tribunal to be known as the Land Titles Commission for the determination and protection of rights to land and in particular to native land." Its functions are "to hear and determine all disputes concern- ing and claims of ownership by native custom of, or the right by native custom to use any land, water or reef, including a dispute as to whether any land is or is not native land." (Quoted from the Act.) It operates initially by mediation and if this fails, it adjudicates. The Act provides for appeals to more senior Commission officials and to the courts. It is administered by the Mlinister for Justice. 10. Land (Tenure Conversion) Act (1963). This Act provides for the conversion of the tenure of customary land to individualized freehold tenure. Conversion must be preceded by adjudication of the clan land boundaries by the Land Titles Commission. All members of the landowning group must be in agreement with the proposal and the Land Titles Commission must be satisfied that the land in question is not needed for food production. Procedures are designed to prevent unreasonable fragmentation of land. Hearings of conver- sion applications must be public and as close as practicable to the land in question. The Commission must give reasons for its decisions. 11. Converted land ceases to be customary land and can be registered under the Real Property Act or the Lands Registration Act. It can only be transferred to another Papua New Guinean or to the Government. Rights to - 135 - AnTX G Page 3 mortgage converted land are limited and the mortgagee is not entitled to foreclose or to remain in possession of the land for more than three years. There is currently very little conversion of land in progress. 12. Other legislation in force at the time of Self Government provided inter alia for: - the registration of titles to land, - the restoration of titles destroyed during the Second World W7ar, - the registration of surveyors and regulation of land surveying, - the development of underdeveloped freehold land, - the control of development in towns to fulfill planning require- ments, and - the valuation of land. (b) Land Legislation After Self Government 13. The deficiencies of the legislation were recognized bhythe colonial authorities before Self Government and a set of new laws was drafted in 1971. These bills were not enacted, however, and instead a Commission of Inquiry into Land Mfatters (CILGI) was established and reported in 1973. The terms of reference were very broad and covered disputes over land rights, the problems of alienated land, the effects of customary land tenure on land usage, obstacles to improved land utilization, ways of spreading the benefits of land development throughout the community, resettlement schemes, the existing legal and administrative franework and the attitude of the population towards various measures which could be used to bring about greater use of PNG's land resources. The Commission members were all Papua New Guinean and the Commission visited all main population centers in PNG over a period of six months and received 258 written submissions. It held 141 public hearings. The Inquiry represents the most comprehensive canvassing of public opinion on land matters in PNG and its findings have been generally well accepted by all major political organizations. 14. The findings of the CILlU are well summarized in the basic principles which it recommended should be adopted as a basis for land policy. These are: "(A) Land policy must be concerned with increasing production but even more concerned with the kind of society Papua New Guinea should become. "(B) It follows from the Eight Point Programme that land policy should be an evolution from a customary base not a sweeping agrarian revolution; collective and individualistic extremes should be avoided. "(C) Very unequal distribution of land rights must be avoided. - 136 - ANNEX G Page 4 "(D) Private landlordism must be checked. "(E) The law should favour those who need land most and use it well. "(F) Most land transfer should be through Government but some direct dealing in small lots allowed." (CILM Report) 15. In line with the CILM recommendations and spurred by the highly sensitive political issue of alienated land, the Government has enacted several important pieces of land legislation. 16. The Plantation Redistribution Scheme Act (1974). The Plantation Redistribution Scheme embodies four separate Acts - the Land Acquisition Act, the Land Redistribution Act, the Land Groups Act and the Land Trespass Act. This scheme was established to permit the acquisition of plantations and their redistribution to the traditional landowners. It was conceived in a potentially violent atmosphere in which people in land short areas were demanding access to expatriate owned plantations. The 1979 Committee of Review into the Plantation Redistribution Scheme notes that "Rather than amend and utilize existing laws for this purpose, the Government, in an atmosphere of haste and urgency, introduced four new pieces of legislation. At that time the Government's preoccupation was with getting plantations into the hands of nationals. Very little attention was devoted to the problem of maintaining production." 17. The Land Acquisition Act provides for government to acquire land after failure of attempts to negotiate a price. The acquired land is vested in the Government and treated as Government land. Leasing of the acquired land does not, however, have to follow the Land Board procedures laid down in the Land Act. In cases of compulsory acquisition, compensation is determined as the product of average net income from the property over the preceding three years and a factor which varies for different industries and locations. This factor is specified in regulations rather than legislation. The compen- sation paid can be adjusted by the Minister for Lands downwards if bad farming practices have been followed or upwards if the improvements are not yet reflected in production and income. Landowners can appeal to the Supreme Court against the level of compensation set, but only on the grounds of incorrect valuation of improvements, incorrect calculation of net income or the use of the wrong factor. 18. Payments for plantations and receipts of rents from and purchase moneys for them are accounted for through the Alienated Lands Trust Fund which is established under the Act. Plantations can only be redistributed to the descendants of the original owners of the land. Provision is made for the legal recognition of these landowning groups in the Land Groups Act. The Land Trespass Act is designed to prevent squatting on land designated for acquisition. - 137 - A N!TEX C Page 5 19. This legislation appears to have gone further than intended by the CILI. The CILI recommended the return of alienated land to land-short people, with first priority going to people short of land for subsistence production. Undeveloped freeholds and leaseholds were to be used as far as possible, and this was to be achieved by more vigorous enforcement of lease covenants in the case of leaseholds and a relatively simple amendment of the Land Act in the case of freeholds. 20. Mloreover, the CILN saw the program of redistribution, at least through compulsory acquisition, as being for a limited period. It recommends "Once the initial period of adjustment is over, legislation should make it clear that provided a lessee pays his rents and complies with his develop- ment conditions, his leasehold title is guaranteed and will be supported against illegal expropriation." The Acts in force are more open-ended than implied by this recommendation and make no explicit mention of the require- ment for acquisition to be carried out only in cases of land shortage. 21. Land Dispute Settlement Act (1975). The purpose of this Act is to encourage the settlement by disputants of their own disputes and to define the principles for traditional dispute settlement. It emphasizes mediation and local land custom. It is administered almost entirely at provincial level. 22. National Land Registration Act (1977). This Act enables the establishment of a final and unchallengeable ownership by the Government of its own land. Claims to ownership by the customary landowning groups are in fact converted to claims for compensation and these are heard by the National Lands Commissioner who is appointed under the Act. It deals only with land acquired prior to independence and claims can only be lodged where claims were previously lodged before independence and no other payment has been made. Maximum rates of compensation are specified in the Act. This Act is also in line with the recommendations of the CILM. Land Administration 23. The main organizations involved in land administration in PNC, are the Lands and Surveys Divisions of the Department of Lands, Surveys and Environment. Judicial matters are, however, the responsibility of the Mfinistry of Justice. (a) The Divisions of Land and Surveys. 24. The Divisions of Land and Surveys are responsible for: - the creation and servicing of Land Boards, ANNEX G - 138 - .Chart 1 z 'IC~~~~~~~~~~~~~~~~~~~~~~~~~~~~ I! a ~ a - 139 - ANNEX G Page 6 - the acquisition and reservation of land, - the granting and administration of leases and licenses, - the administration of customary land, - the inspection and acquisition of land needed for public purposes, - negotiation and payment of compensation for land, - surveying and mapping of land, - valuation of land, - extension work on land matters. 25. Their current staff strength is 480 out of an establishment of 570. Their organization and the number of established positions in each area are shown in Chart 1. The Surveys Division involves 315 established positions, or over half the staff strength of the Lands and Surveys Divisions. Only two established positions are available to the policy and research section which is responsible for processing National Executive Council submissions, assisting the Minister as requested and revising the PNG Land Act. Similarly, the National Projects Unit, which is responsible for liaison with other Departments, assisting with meeting the land requirements of major projects, preparation of lease conditions on major projects, advising the Land Board on land utilization, dealing with NPEP land requests and attending NIDA Board meetings, has only two established positions. 26. The Government has directed the Department of Lands to establish offices in all provinces and to establish Provincial Land Boards. It is, however, still evolving from a regional structure in which it had four regional offices. At present it has offices in 10 provinces headed by Provincial Natural Resources Officers, aided by a total of 10 supporting staff. 27. The CILM in 1973 was concerned with the inability of the Depart- ment of Lands to meet the demands being made of it. It noted (page 15 of the CILM report): "The past records of the Government in this regard (the transfer of land) is very poor and though we have stressed the need for a programme of land management training, we are not confident that the Government's ability to transfer land smoothly will improve rapidly enough to meet demands." Since that time the demands of land administrators have increased while the Department has lost many of its most experienced expatriate officers. In its submission to the Committee of Inquiry into Land Administration in March 1980, the Department of Lands, Surveys and Environment noted several problem areas which were lowering Departmental efficiency. The main areas noted are: (a) a deficiency of competent, experienced staff at Headquarters, resulting in part from directives to decentralize operations; (b) inability to recruit staff against funded positions, due in large part to the unavailability of accommodation in Port Moresby; - 140 - ANNEX G Page 7 (c) staff shortages make it impossible to free promising staff to attend training courses at the Admmnistrative College and University of Papua New Guinea; (d) inability to secure funding for the mechanization of data storage, retrieval and lease preparation; and (e) unweildy and time-consuming land allocation procedures. 28. The submission noted that the Department had a substantial backload of work (some 8,500 lease documents to be processed) and a number of other major tasks which it had been directed to undertake but which it had not commenced. (b) Judicial Bodies 29. The Land Titles Commission (LTC). The CILM recommended the aboli- tion of the LTC upon the enactment of new legislation and the creation of new administrative organizations to deal with customary land. The LTC retains some functions and exists in a very run-down condition. There is a backlog of appeals because there is currently no Chief Commissioner to hear them. If new legislation is not enacted quickly, some of the vacant positions within the LTC will need to be filled. 30. The National Lands Commissioner. A senior Papua New Guinean public servant has been appointed National Lands Commissioner and his work is reportedly proceeding smoothly. This function should reduce to a negligible workload following the hearing of all cases of dispute over the ownership of government land. 31. The Land Courts. The mediation and arbitration procedures laid down in the Land Disputes Settlement Act are in operation. Most action is taken at provincial level with support from the National Land Courts Secre- tariat. Magistrates report a shortage of support staff, especially of capable clerical staff required to report agreements. 32. The majority of cases are settled by mediation, but most decisions of local land courts on cases which are not settled by agreement are appealed against. Even following the hearing at the Provincial Land Court, the deci- sion is often not accepted and the dispute is not solved. Especially in the Highlands region, physical confrontation between the disputants often con- tinues. Magistrates report a need for codification of land customs within provinces to assist them in deciding questions of custom. (Information obtained from a report by the Highlands Region Land Court Magistrate.) ANNEX G - 141 - Page 8 Utilization of Land for Agriculture 33. No recent information is available on the usage of land for sub- sistence food production. Given the shifting pattern of subsistence produc- tion and the long bush fallow periods, interpretation would in any case be difficult. As an indication, however,/l if 0.1 ha of garden is required per person and a 20-year fallow is used, a total of 2 ha subsistence land per person would be needed. At the national level, this would involve a total of six million ha compared with a total land area of 47 million ha. 34. Surveys of the use of land for commercial agriculture are, however, carried out regularly. The last such survey of smallholdings was in 1976 and areas of land used for cash crop production are shown in Table 1. Table 1: LAND USED FOR CASH CROP PRODUCTION, 1976 Smallholdings Largeholdings Total (Ha) Copra 163,273 89,344 254,617 Cocoa 50,468 54,933 105,401 Coffee 39,767 7,142 46,909 Rubber 2,788 7,742 10,530 Oil palm 4,700/a 2,848 7,548 Pyrethrum 820/a - 820 Tea 403/a 3,169 3,572 Grains n.a. 1,088 1,088 Peanut n.a. 47 47 Vegetables n.a. 543 543 Total 264,219 166,856 431,075 /a 1974 figure; 1976 data unavailable. n.a. = not available. Source: Rural Industries 1978, Bureau of Statistics, Port Moresby. 35. As indicators of the usage of land for commercial agricultural production, these data have three main shortcomings: (1) They are out of date. For example, the oil palm industry has expanded rapidly since 1976, while the estate sector of the rubber industry has contracted. /1 Basic assumptions from J.M. Macewan, "Subsistence Agriculture" in Densley (ed.) Agriculture in the Economy, DPI, Port Moresby, 1978. - 142 - ANNEX G Page 9 (2) Much of the cocoa is planted under coconuts. (3) It does not include land used for livestock production which, at an average stocking rate of 1 beast : 1.5 ha would have amounted to about 200,000 ha in 1976. Of this approximately 120,000 ha would have been on ranches and 80,000 ha on small- holdings. Of the ranch component, a substantial part is on government stations which are on government land. 36. Despite the lack of precision in these data, it could be safely assumed that the area of alienated land which is being used by private commercial ranchers, planters and farmers is well under 300,000 ha. This compares with the total of 500,000 ha which has been made available to private interests as freeholds or leaseholds. It appears therefore that over 40% of privately held alienated agricultural land may be unused. 37. In addition, the Government itself holds about 900,000 ha of alienated land. Part of this has been used for resettlement schemes. A total of 5,759 blocks covering almost 75,000 ha have been developed to date. This suggests that there is probably over 800,000 ha of government- owned alienated land not developed, with less than 10% of it being used. 38. Overall, therefore, there is considerable scope to expand agri- cultural production by bringing presently unused alienated land into pro- duction. In addition, redevelopment of estates and smallholdings of presently low productivity could result in dramatic increases in production, especially in the copra, cocoa and rubber industries. These developments could occur without any additional interference with the pattern of customary landholdings and the National Land Registration Act should permit rapid resolution of challenges to title. The development of unused government land would, however, require a good deal of administrative action on the part of the Department of Lands. Issues in Land Policy and Administration 39. Several key issues in relation to land have emerged. Action is already in train to resolve some, but in all cases, additional action will be required to produce a complete solution. (a) Land Title and Credit 40. Lack of secure title is seen by many to be impeding the flow of loan funds into agricultural development. This applies both to foreign- owned estates on alienated land and to smallholder development on customary land. In the case of the estates, banks are unwilling to lend for long terms using the land as security. They fear that the Land Acquisition Act could be used to deprive them of their security, notwithstanding the facts - 143 - ANNEX G Page 10 that operations under the Act are presently suspended and that the Act itself contains safeguards for mortgagees. It should also be noted that the Act does not apply to leases issued after it came into effect. For develop- ments negotiated after that date, the Government can offer secure leasehold title. Corporations or individuals who are able to pledge other assets as security do not face these problems, but in any case, the unwillingness of owners to invest in redevelopment of estates in the existing investment climate is a more critical constraint. 41. In the case of smallholders, the lack of registered title which can be mortgaged poses difficulties for lenders. The PNG Development Bank is, however, willing to lend on the basis of Clan Land Usage Aareements which, though legally unenforceable, have proved effective. The recently developed lease-back arrangements also seem to be operating effectively so far, though they do involve substantial administrative work under current procedures. These involve the temporary alienation of customary land for leasing back to the traditional owners for development. The alienation provides the lender with more readily enforceable security. Commercial banks, however, do not lend for smallholder agricultural development. It is claimed by banks that the availability of registered mortgageable title to land would facilitate the provision of credit to smallholders. 42. In this regard, however, the following quotation from a submission to the CILM by Mr. W. Conroy, former Director of the Department of Agricul- ture, Stock and Fisheries, is relevant. "It is important not to get the feeling that without a lot of changes in land tenure, you will not get any progress... All (smallholder) coffee development has taken place on indige- nous owned land, land being exchanged by people under tribal systems. A greater part of the Tolai cocoa development went on in the same way." (Quoted in the CILM report). It could further be stated that these developments also occurred without any significant use of credit. 43. While it probably remains true that much smallholder expansion could proceed without credit, the situation is different in land-short areas where replanting of cash crops is required. In these cases, owners are faced not only with the cost of replanting but with loss of income until the new crop comes into production. 44. In considering this question, it is important that the Government should not ignore the possibility of assuming some of the risks associated with lending for development on unregistered land. This could be by way of guarantees or grants to its own institutions, the PNG Development Bank and the PNG Banking Corporation. This may be less costly than registering customary land. - 144 - ANNEX G Page 11 (b) Registered Title for Development of Customary Land 45. The CILM noted strong demand for registration of land to prevent disputes and to provide secure tenure for cash cropping. Demand was strongest in areas of high population density and more intensive land use. It recom- mended that "Registration should be used only where there is a clear demand and need for it and clear understanding of it among people concerned." It further noted that in most of PNG where there is plenty of land per head of population, few dealings and few disputes, registration was unnecessary. Its cautious approach to registration was based partly on the cost involved and the fact that it needed to be generally accepted by all interested parties if it was to be successful. 46. A form of registration is available under the Land Disputes Settle- ment Act and it is proposed to deal with the subject more generally under the land legislation which is presently being prepared. Given the shortage of skilled staff, however, a selective approach will be required. Fortunately, as noted in para. 42 above, smallholder development can proceed in most areas without registration and the areas where registration is most needed are likely to coincide with those areas where secure title is also required to facilitate the raising of loans. (c) The Plantation Redistribution Scheme (PRS) 47. The Government is well aware of deficiencies in the operation of the PRS and acquisitions have been suspended for some time. The scheme has been reviewed by a committee, including private sector representatives as well as government officials. Its report is being considered by Government. 48. Concern over the operation of the scheme arose from: - the failure of the scheme to redistribute plantations to traditional landowners; - low levels of maintenance and investment on plantations; and - stagnant or declining plantation production. 49. The Committee's recommendations embrace a range of questions including: - the repeal of the PRS Acts and their replacement by more simple amendments to the Land Act (along the lines recommended by the CILM); - the revision of the valuation formula for compensation for acquired estates; - the preparation of an inventory of plantations and the develop- ANNEX G - 145 - Page 12 ment of a systematic approach to their purchase; - more use of the free market in transferring plantations; - greater use of experienced management companies to provide competent management; and - the establishment of a government corporation to rehabilitate run-down plantations. 50. In a statement on March 31, 1980, the Minister for Lands emphasized that the PRS had not been abolished, but stated that the Government would adhere to the recommendations of the CILM. These provide for acquisition only where there are genuine land shortages caused by alienation and give emphasis to developing unused land. 51. These changes, if they are completely reflected in legislation and administrative structures, should improve the plantation investment climate significantly. Planters had complained that acquisitions were not confined to areas of land shortage and in fact seemed to be concentrated on the more productive properties. They indicated that official declarations as to whether and when particular plantations might be acquired would permit them to develop with confidence those not intended for acquisition. In his statement of March 31, the Minister met part of this requirement by listing the plantations intended for acquisition during the ensuing year and also those to be subjected to inspection for compliance with development covenants. One year's notice is not sufficient for those making such long-term investment decisions, but more forward looking statements would require comprehensive assessments of land pressures around plantations and the conditions of plantations. This appears to be well beyond the capacity of the Department of Lands in its present understaffed condition. The fact that there is at present no complete list of plantations in PNG indicates the severity of the administrative problem. 52. The sizes of existing plantations should also be considered in the formulation of policies for the future development of the sector. Probably as a result of the early emphasis on owner-operator scale estates, and given the high cost of management, many of the PNG plantations are far too small to be operated as viable operations. For example, 60% of copra states have planted areas of less than 200 ha, 69% of cocoa estates have less than 200 ha, and 83% of rubber estates have less than 200 ha planted. Clearly, many estates will need to be amalgamated with others if they are to continue as plantation operations or they will have to be worked by smallholders. The formulation of sound policies in this regard will require a great deal of work by skilled investigators. Again, the task seems beyond the Lands Depart- ment in its present situation. - 146 - ANNEX G Page 13 (d) Plantation Management 53. Following the acquisition by nationals, both under the Land Acquisition Act and privately, of expatriate-owned plantations, much of the previous management has left. In recognition of this, the Government established the National Plantation Management Agency (NPMA), primarily to manage estates which it had acquired but not redistributed, but also to manage other plantations acquired privately by nationals. In addition, a Plantation Management Training Program was established to train Papua New Guinean nationals to be plantation managers. 54. NPMA has a staff of 80, about half of whom are expatriates, and manages 48 plantations. Although there are about 14 private companies and individuals providing management services to plantations, the demand for NPMA services exceeds its present capabilities. Should redevelopment of run-down plantations commence in earnest, the demand for management services will increase further. If this demand is to be met, it will be necessary for the Government to: (1) clearly define the future role which the plantation sector is expected to play, and (2) either recruit the necessary management itself or guarantee continuity of work to encourage private companies to acquire the necessary management capability. Conclusions and Suggestions (a) Staffing and Organization of the Lands and Surveys Divisions 55. In 1973 the CILM was aware of the administrative shortcomings of the Department and recommended that higher status be accorded to careers in the Lands Department, that the Department carry out research into and reviews of policies and that more adequate training be provided to lands staff. Since that time the workload has increased while the Department has lost the services of many of its most experienced officers. 56. The position has already been correctly assessed by the Department and moves made to alleviate the problems by recruiting more staff and by reducing the workload. In regard to the latter, the introduction of simpler legislation should permit the streamlining of procedures and the mechaniza- tion of some routine operations has been proposed. A staff reorganization of the divisions has also been proposed. None of these proposals has yet come to fruition though the awareness of the need for them is long-standing and, in the case of the new legislation, dates from the CILM report in 1973. - 147 - ANNEX G Page 14 57. Ironically, the main reason for these proposals not being carried through is probably the staff shortage which they are intended to alleviate. Only two staff in the Department are devoted to "policy and research" and a further two to "national projects". Other staff are more than fully occupied with their line responsibilities. In fact, there is little capacity within the Department to plan and implement the type of initiatives necessary to break out of the vicious cycle. 58. The planning and development areas of the Department must be strengthened as a matter of urgency and this will almost certainly require the diversion of some line staff from their current important work and temporary reliance on consultants to supplement their efforts. A review of the salary structure of the Department may also be necessary if it is to attract and retain capable staff. (b) New Legislation 59. The changes in legislation proposed in the CILM report. have been accepted by successive governments as the basis for land policy in PNG. All national political organizations seem to have accepted the main recommenda- tions. However, seven years after the CILM report, the main legislative recommendations have yet to be implemented. Undoubtedly the staff shortages in the Department and particularly the lack of planning and policy formulat- ing capacity have contributed to this delay. 60. Drafting of legislation is continuing on the basis of consolidated drafting instructions prepared some time ago. These instructions do not, however, provide all the detail necessary to draft effective laws. If this legislation is to be completed quickly, the Department of Lands will have to commit staff of the highest level of competence and experience to work with the legal draftsmen. Apart from the general consolidation and simplification, the proposed modifications of the provisions of the Land Acquisition Act are urgently required. 61. In finalizing the legislation, account will need to be taken of its likely effect on the Department workload. Although the streamlining of pro- cedures will reduce the workload, the provisions for registration of customary land will increase it, albeit with an accompanying increase in the standard of land administration. Ways of further reducing the administrative burden should be sought. In particular, the limitations on direct dealing in custo- mary land as recommended by the CILM could be reviewed in order to reduce the need for Government involvement. (c) Review of the Plantation Sector 62. Formulation of any detailed policy on the future of the plantation sector is currently impossible because there is no comprehensive information on it. The policy should include a statement of what forms of plantation - 148 - ANNEX G Page 15 should be encouraged and what part private investment is to play in that development. A clear and firm statement of such a policy would do much to restore private investor confidence if that is desired. 63. Basic to the formulation of any policy is an understanding of the present status of the sector including the size, location, conditions and ownership of all plantations. A survey of other land which might be avail- able for plantation development would also be required. Such land would include undeveloped alienated land, either government or private, and other land of good potential in lightly populated areas and which could be pur- chased or leased. 64. A full survey would be required and would involve assessments of agricultural, organizational and economic factors. On-site inspections would be required. The Department of Finance has already attempted a mail ques- tionnaire survey and this should provide a useful starting point. Such a survey is beyond the present staff resources of any single government depart- ment in PNG and in any case a multi-disciplinary approach would be required. It is suggested that such a survey should be undertaken as a matter of urgency and that available staff could be drawn from the Departments of Lands and Primary Industry and the National Planning Office. This manpower should be supplemented by outside consultants as required and in view of the multi- departmental origin of the staff to be involved, overall responsibility for organizing the survey might also be given to a firm of consultants. (d) Research 65. Little action appears to have followed from the CILM recommenda- tions for continuing research into and review of land policies. The staff constraints have been discussed above. The need for research is perhaps greater now than it was in 1973 and the following areas merit immediate attention: - attitudes of landowners towards different forms of payment for the use of their land; - the feasibility of delegation of authority to provinces; - the codification of customary land law; - fragmentation of land on succession; - the cost and time involved in registration of customary land; - the effectiveness of dispute settlement procedures; - the extent to which customary land law is being modified to meet changing circumstances; ANNEX G - 149 - Page 16 - the desirability and feasibility of a land tax; and - alternative means of providing security for agricultural lending. In addition, following the introduction of new legislation, there will be a continuing need to monitor its effects. 66. Given the limited staff resources of the Department, and the need in some cases for more visibly objective research, the Department should try and mobilize other resources to do some of this work. IASER would seem to be a logical organization and consultants could be used to address the most pressing problems.