PAPUA NEW GUINEA Selected Development Issues The economic mission responsible fol this report visited Papua New Guinea in February/hlarch 1981. Its members were: Abee Galemon. chief of mission Friedrich Kahnert Glenn Lehmann. consultant Linda Likar Mudiayi Ngandu Kenneth Woodward, consoltant Edward Hawkins joined the m k k m for discussions in the field. The report takes account of discussions with Governmsnt offirials on an earlier draft in October 1981. This report constitutes part of a continuing dialogue between the World Fia~~kand the Govern- ment of Papua New Guinea on a aide range of economic and sector issues. Its coverage \vas determir .Iin consultation with the Government and focuses on a few specific areas that were agreed to be among the most impPrtant for Papua New Guinea's development during the 1980s. It is not intended to be exhaustive in its scope and excludes important topics in the social and economic field which both the Covemment and the Bank considered to be dea:+with adequately in other documents. Earlier World Bank reports covered additional topics and can be referred to for a fuller description of the mumtryand its economy. The report of the fin. post-independence World Bank economic mission was the basis of a published report on the country, i:s major problems and its prospects.(See Gorge B. Baldw:~.,et. al. Papua New Guinea: Its Economic Situation and Prospects for LieoPloyment. Washilagton. D.C.: World Bank, 1978.) Zast Asia and PaciFic Regional Office T h e World Bank M'ashington, D.C., U.S.A. The Wbrld Bank issues coudry -mic skdies in twoseries This report is a working document and is, as such. part of an i n f o n d series based wholly on materials originally prepared for restricted use within the BvltThe text is not meant to be definitive, but isoffered soas to make some results of internal r e d widely available to scholars and practitioners throughout the world. A m n d , more f d series entitled World Bank Country Economic Reports is pub- lished for the Bank by The Johns Hopkins University Press. Baltimore and London. Titles of these and all other bank +tiom may be found in the Catalog of PuMicath, which is available free of charge from World Bank. Publications Unil 1818 H Street. N.W., Washington, D.C. 20433, U.S.A. The views and interpretatims in this report are the authors' and should not be athibuted to the World Bank, to its affiliated mganktions, or to any individual acting in their behalf. Copyright 0 1982 The International Bank for Reconstruction and Ikvebpmzntflhe World Bank The World Bank enjoys cop)right under Protocol 2 of tbe Universal Copyright Convention. Nevertheless. permission fmr reproduction of any part of this report is hereby granttd provided that full citation is made PAPUA NE!J G U I E A SELECTED DEVELOPMENT ISSUES Table of Contents . . . . . . . . . . . . . . . . . . . . . AND CONCLUSIONS . I- xi . . . . . . . . . . . . . . . . . ......... D BACKGROUND 1 . . . . . . . . . . . . . . . . . < . . . . . . . . . . .................................... A The Setting 1 B Development Objecti7es 3 C.... Progress Toward National Goals 6 D Maior Issues i n Economic Development 10 A .. Population and Labor Force . . .......................... 15 B Employment Trends and Prospects . . . . . . . . . . . . . . . . . . . . . . . . . . 16 C .. Wages . . . . . . . . . . . . . . . . . . . 19 D S k i l l s and Traininn 23 . . . . . . . . . . . . . 1 FISHERIES 27 A . . Projections of Output 27 B P o t e n t i a l f o r Development . . ... ....................... . . 29 1 Expansion of Production .. .. .. .. .. .. .. .. .. .. .. ;.......... 29 2.. Resources f o r Development . 34 C Government Policies .. . . . . . . . . . . . . . . . . . . 38 1. Forms of Growth . . . . . . . . . . . . . . . . . . 38 2. EnallholderGrowth . . . . . . . . . . . . . . . . . 39 I 3. Large-Scale Growth . . . . . . . . . . . . . . . . . 40 A Structure and Recent Growth 43 B.. National Goals and P o l i c i e s .............................. 43 3. Financial Assistance t o National Finns . . . . . . . 48 I 49 5. . . . . . . . . . . a . . . . . . . . . . . . . . . . . . Regulation and Related Obstacles 50 1 . P a g e No STI.TISTICAL APPENDIX . . . . . . . . . . . . . . . . . . . . . . . 5 1 ANNEX A .RECENT DEVELOPPIENTS . . . . . . . . . . . . . . . . . . 95 ANNEX B. EMPLOYMENT. WAGES AND MANPOWER . . . . . . . . . . . . . 119 ANNEX C.AGRICULTURE. FORESTRY AND FISHERIES: INDUSTRY PROFILES 190 A N N E X D - I N D U S T R Y . . . . .. . . . . . . . . . . . . . . . . . . 2 5 3 MAPS Page 2 of 2 COUNTRY DATA - PAPUA NEW GUINEA March March MDNEY, CREDIT AND PRICES - - - - - - (Ydllion K outstanding at end of period) Money and Quasi Money 428.5 449.0 571.7 553.2 611.6 545.7 Bank Credit t o Public Sector, net Bank Credit t o Private Sector, n e t 137.7 194.5 228.9 301.9 (Percentages o r Index Numbers) Money and Quasi Money a s X of CDP Consumer Price Index (1977 = 100) 100.0 105.8 111.9 125.4 121.0 134.3 Annual P e r c e n t ~ g eChanges in: Consumer Price Index Bank Credit t o Private Sector BALANCE OF PAYMENTS EERCHANDISE EX3'SPnR.TS (AVZiGE 1978-1980) - 1978 1979 1980 / a (US$ ~ m z t n ) --- Million X nxporte of Goods, NFS 764.8 1,057.4 1,034.1 Coffee Imports of Goods, NFS -1,028.5 878.7 1,287.3 Cocoa Resource Gap (Deficit = -) -113.9 30.1 -253.2 Copra & Copra Products Timber & Timber ?roducts Factor Services (net) -64.6 -109.8 -170.6 Copper Transfers (net) 184.6 157.9 162.9 Gold 212.1 23.7 Balance on Current Account 6.1 76.8 -260.9 A l l Other Commodities Private Capital (net) -28.3 15.7 44.9 Total -- 894.2 100.0 Public KLT Loans (net) -7.8 37.5 66.3 Errors and Omissions /b Increase i n Reserves -2.5 109.4 -73.R Imports of f u e l and related P ~ b l i cDebt, incl. Guaranteed materials 72.9 107.2 189.8 Nonguaranteed Private Debt Total Outstanding & Disbursed RATE OF EXCHANGE PUBLIC DEBT SERVICE RATIO FOR 1980 / c - 1980 Public Debt, incl. Guaranteed Nonguaranteed P r i v a t e Debt US$1.00 = K 0.79 US$1.OO = K 0.67 K 1.00 = USS1.26 K 1.00 = US$1.50 Total Outstanding & Disbursed IBRD/IDA LENDING (AS OF 12/31/80) 1978-79 , 1981, Jan.-May -- US$ Million US$1.00 = K 0.71 US$l.OO = K 0.67 Outstanding & Disbursed K 1.00 = USS2.41 K 1.00 = US$1.50 Undisbursed 25.1 27.7 Outstanding incl. Undisbursed -- 79.6 82.7 .. not available November 1981 .. CURRENCY EQUIVALENTS Currency Unit - Kina (K) ABBREVIATIONS BDO - Business Development Officer BOS - Bureau of S t a t i s t i c s (now NSO) CPI Consumer P r i c e Index DOL Department of Labor and Industry DOWS ---Department of Works and Supply . DPI Department of Primary Industry IASER I n s t i t u t e of Applied Social and Economic Research MRSF ---Mineral Resources S t a b i l i z a t i o n Fund MWB - Minimum Wage Board NIDA National Investment and Development Authority NIPS -- National Investment P r i o r i t i e s Schedule NMA - National Manpower Assessment NOTA - National Occupational and Training Authority NPEP - National Public Expenditure Plan NPO - National Planning Off i c e NSO - National S t a t i s t i c a l Of Ģice PDC - Provincial Development Corporation PETT - Pre-Employment Technical Training PNG Papua New Guinea PNGDB -- Papua New Guinea Development Bank PRS Plantation Redistribution Scheme PSC Public Services Commission VEDF ---Village Economic Development Fund GOVERNMENT OF PAPUA NEW GUINEA FISCAL YEAR J u l y 1 June 30 through 1977 ( r e f e r r e d t o a s FY January 1 -- ) December 31 beginning 1978 ( r e f e r r e d t o a s 19 -) TABLES .-.. = zero o r negligible = not applicable n.a.= not a v a i l a b l e SUMMARY AND CONCLUSIONS The major goal facing Papua New Guinea (PNG) i n the 1980s w i l l be to provide r i s i n g incomes f o r its people and productive livelihood f o r its growing labor force. Although it has an expanding urban i n d u s t r i a l s e c t o r , as well as a large enclave mining s e c t o r , PNG's economy w i l l renisin predominantly r u r a l and a g r i c u l t u r a l for many years t o come, and the agri- c u l t u r a l s e c t o r w i l l have to absorb the great bulk of the additions to the labor force during the decade. The country's productive p o t e n t i a l is great; not only does it have rich veins of gold and copper and possibly s i g n i f i c a n t reserves of o i l , it also has abundant rich a g r i c u l t u r a l land, l a r g e expanses of f o r e s t , and s u b s t a n t i a l fishery resources, as well as a -1entiful suppljr of labor. The mineral and o i l resources a r e being explorec a ' exploited a t a rate intended to supply the Government with a steady st r e a ~of revenue to support its development program, but a number of factors have delayed the r e a l i z a t i o n of the country's a & r i c u l t u r a l p o t e n t i a l , slowing the absorption of labor. The key constraints a r e inadequate support services f o r small- holders, a Pack of land s e c u r i t y on e s t a t e s, and a shortage of s k i l l e d and technical manpower that pervades the economy, i n t e r f ering with e f f o r t s t o overcome other cons t ~ a i n t .s lhis report begins with a statement of the Government's development objectives and an assessment of its major achievements. It then outlines some areas that a r e causing ccncern and i d e n t i f i e s the key problems. The bulk of the report focuses on these major problem areas. Beginning with human resources, the report highlights the need to c r e a t e more income earning opportunities and sugges ts changes i n the wage policies t h a t have cons trained the demand f o r labor. It then turns to trained manpower constraints, with some recommendations f o r overcoming s k i l l shortages i n the economy. Continuing with the country's productive c a p a b i l i t y , the report explores PNG's a g r i c u l t u r a l potential and suggests policies and programs to promote growth i n that sector. Industry, h i l e not a major source of employment a t present, w i l l become increasingly important, p a r t i c u l a r l y i n urban areas. l h e report examines policies i n the i n d u s t r i a l s e c t o r and suggests vays to ensure that its development follows a r a t i o n a l economic path, without excessive r e l i a n c e on protection or a d i s t o r t i o n of incentives i n the econony . Economic Policies and Trends The Government has played a leading r o l e i n Papua New Guinea's development, and both its policies and its expenditures have a major influence on the d i r e c t i o n taken by the economy. Since self- government i n 1973 and independence i n 1975 t h e Government has concentrated on establishing pol i c i e s to promote economic t a b i l i t y, as a p r e r e q u i s i t e to inves tment and growth. A s e r i e s of large nz.tural resource- based projects was expected to - ii - provide the Government with resources needed t o carry out a program ajimed a t a m r e equal d i s t r i b u t i o n of economic benefits and s e l f - r e l i a n c e , h i l l e t h e goal of economic growth was t o be pursued anly i n s o f a r as it would support t h i s s t r a t e g y . Although the general policy framework is p e r f e c t l y cons is t e n t with economic growth, c e r t a i n policies have tended t o cons t r a i n key elements i n the growth process, and o t h e r corn t r a i n t s have not been adequately attacked. As t h e country's economic performance weakened i n recent years, the Government began t o recognize t h a t more rapid growth would be necessary, p a r t i c u l a r l y i n the a g r i c u l t u r a l s e c t o r , to provide the benefits to be distributed. 'Ihe d e s i r e f o r mie rapid growth is beginning t o i;e reflected i n public p l i c y , although some c o n f l i c t s remain with o t h e r national objectives. This report points out some of t h e incons is tencies , recommends a more open recognition of dle trade- offs involved and suggests some possible measures t o promote growth i n ways t h a t would b e n e f i t a broad range of people. m e Government's program of economic s t a b i l i z a t i o n has achieved some outs tanding successes. A number of measures have reduced considerably the impact of fluctuating world prices and other u n c e r t a i n t i e s on producers and on t h e Government's budget. P r i c e s t a b i l i z a t i o n f ~ i d sf o r the t h r e e major a g r i c u l t u r a l exports dampen the impact of low prices on producers, and a Mineral Resources S t a b i l i z a t i o n Fund smooths out t h e fluctuations i n ithe flow of mineral- related revenue to the Government, enabling it t o e s t a b l i s h nedium- t e r m plannitlg f o r public expenditvres. Multi- year agreements with Australia over t h e l e v e l of aid from t h a t country and with public servants over t h e growth of wages also contribute to the Government's a b i l i t y t o plan its expeliditures and i n general t o a more s t a b l e economy. PNG's sound economic management has contributed t o its good c r e d i t r a t i n g and a b i l i t y t o borrow i n i n t e r n a t i o n a l markets and t o its a t t r a c t i v e n e s s t o foreign invesment f o r l a r g e n a t u r a l resource projects. Monetary and exchange r a t e policies have a l s o been aimed a t main- t a i n i n g economic s t a b i l i t y , p a r t i c u l a r l y i n the face bf high internat:lonal i n f l a t i o n and rapid fluctuaticns i n t h e terms of trade. Among other r e s u l t s , these policies have held t h e domes t i c r a t e of i n f l a t i o n well below inter- national l e v e l s . Commercial banks tend toward conservatism, and there is a continuing need to o r i e n t the banking system t o the needs of a developing country. Some groups i n need of c r e d i t , particul.arly small farmers and small estates, are not adequately served. A major task i n the future w i l l be to raise additional resources and t o channel them t o new types of borrowers, p a r t i c u l a r l y i n the a g r i c u l t u r a l sectc.7.. 6. 'Ihe promotion of large natural resource based projects has 'been s u c c e s s f u l i n raising the revenue needed t o reduce dependence o n Australian a i d , h i c h now provides under 30%o f t o t a l expenditures compa-ed t o 50% i n FY70. 'Ihe Ok Tedi gold and copper mine under construction w i l l f u r t h e r increase the l e v e l of self- reliance, a t t h e same time allowing the Government t~ r a i s e t1.e l e v e l of its expenditures f o r development purpos es . Its develo7ment and operation will follow the principles s e t by the - iii - renegotiated agreement reached with the Bougainville copper company followiog self- government. Established gov, rnment policies to deal with these projects a r e considered both f a i r to the investors and beneficial to the country. Other gold and copper mines a r e expected t o follow, as well as smaller projects i n f o r e s t r y and f i s h e r i e s . The f a c t t h a t many such projects happen to be located i n some of the poorest provinces means t h a t i n t h i s case t h e i r development serves both growth and d i s tributq.-.n goals . An important s t e p taken s i n c e independence is the establishment of development planning, concentrating r e a l i s t i c a l l y on government spending, which accounts f o r about one quarter of all spending i n the country. 'Ihe National Public Expendi~urePlan (NPEP), operated on a r o l l i n g f - ~ r - y e a r b a s i s , is being phased i n gradually, covering at present about one quarter of the budget, and the d i s c i p l i n e It has imposed over expenditures probably contributed to the rise of the s h a r e of c a p i t a l expenditures i n the budget t o about 20%. Ihe Plan allocates funds by s t r a t e g i c objective r a t h e r than by department and, although t h i s helps to focus atcention on' national p r i o r i t i e s and avoids the automatic perpetuation of e x i s t i n g patterns of expenditures, It has not give:: departments the c l e a r guidelines they need to dcvelop t h e i r own plans. Mrjre attentic:l needs to be directed within departmer~tst o policy formu:!&tion. A s h i f t towards a system of allocation by s e c t o r and then by department would h e l p t h e departments t o concentrate t h e i r resources on al1ocatir.q known levels of funding and eliminate the preparation of projects that f a i l :o be funded. S e c t t r a l programs, intro- duced to channel funds t o the provinces, were a s t e p i n t h i s d i r e c t i o n , but t h e i r use f o r p o l l t i c a l purposes is threatening t h e i r effectiveness. Performarlce of t h e NPEP could a l s o be improved by reducing t h e documentation requirements f o r project preparation and monitoring, thus freei7g s c a r c e manpower t o prepare additional projects and extend the planning horizon beyond its present one year. Some decentralization of administrative, f i n a n c i a l and l e g a l powers was one of the new Government's s t a t e d aims and was a l s o a p o l i t i c a l neces- s i t y . Decentralization can h e l p ensure t h a t government meets the needs of the people, but it has increased the need for planning, budgeting and i ~ p l e - menting c a p a b i l i t i e s i n a country already s h o r t of these resources. Pro- vinces need assistance from the center, h i c h might best be organized province by province on a phased basis. In the face of acute shortages of trained manpower, pressures f o r further decentraldzation should be r e s i s t e d , and public (including provincial) enployment should be allowed t o grow only under the well-def ined NPEP procedures. 9. Although s t a b i l i z a t i o n policies have been r e l a t i v e l y successful, and mechanisms f o r planning and implementing economic programs have been firmly established, recent economic pe..formance gives some cause f o r :Qn- cern. Natil n a l accounts data do indicate t h a t a f t e r s e v e r a l years of very slow growth, real. GDP rose a t over 5% p.a. during 1978 and 1979,/1 but it is - -/1 GNP and gross domes t i c income rose a t about the same rate. - i v - d i f f i c u l t co discern a trend, and preliminary figures indicate no r e a l increase i n 1980. Slow growth would not necessarily be a problem i f it r e f l e c t e d stagnation i n sectors of minor importance t o the bulk of the peo- ple. However, although part of the slowdowr~comes from the enclave mining s e c t o r , the a g r i c u l t u r a l s e c t o r has a l s o f a i l e d t o expand over t\e l a s t few years. Although f i e evidence is not c l e a r , smallholder production appears t o have been increasi.-g, but this has been o f f s e t by a f a l l i n production f r o z the a t a t e scstor (excluding palm o i l ) . Tnves tment appear? t o have picked up i n the economy i n general, but not i n a g r i c u l t c r e . Needed expenditures for replanting and r e h a b i l i t a t i o n of aging stands of t r e e crops a r e not taking place, and very l i t t l e PZW planting is occurring. Since agricultuc. is the major source of livelihood for the bulk of PNG s e population, its f a i l u r e to invest f o r f u t u r e growth implies thet the 1980s w i l l be a period of declining incomes and l i v i n g standards for many people. PNG has an open economy, h i g h l y vulnerable t o fluctuations i n world markets, and low prices for PNG s exports, coupled with higher prices e f o r some imports, notably o i l , tihich has r i s e n rapidly t o command over 20% of ~ x p e n d i t u r e son imports, contributed i n 1980 t~ J l e l a r g e s t current account d e f i c i t s i n c e t h e country s t a r t e d exporting copper i n 1973./1 The d e f l c i t , tihich averaged 11%of GDP i n t h e l a s t h a l f of the 1970s a n L s covered by the budgetary grant from Australia, jumped t o almost K 350 m i l l i o n i r l 1980 (excluding Australian a i d ) , o r about 20% of GDP. 4id from A u s t r a l i a covered only half of the amount. Howcver, Australian a i d is given a s a g r a n t to support PNG's budget, and through government expenditures it has a major impact on the balance of payments. I f the aid were rl.ct forthcoming, public spending, and therefore imports as well, would be lower, and the c u r r e n t account d e f i c i t would not reach the l e v e l s discussed here. Foreign reserves i n e a r l y 1981 were still adequate, but i f the above trends continue over the next few years, the s i t l ~ a t i o ncould kcome more serious. PNG cannot control the prices of e i t h e r its exports o r its imports, but it can influence t h e i r volumes. 'Ihe new gold and copper mine schedcled to s t a r t production i n 1984 w i l l help the balance of payments, and other l a r g e n a t u r a l resource based projects w i l l follow. F i s c a l policies have s t e a d i l y reduced r e l i a n c e on Australian bud- get;.r;- s u p p o r t over t h e y e a r s , b u t t h e budge' d e f i c i t h a s grown s l l a r p l y , more than t r i p l l n g i n r e a l terms over the period 1978-80. The present l e v e l , equivalent t o 4.5% of GDP, is manageable, and the Governmeqt has taken a number of s t e p s to develop the i n s t i t u t i o n s necessary for iricreased domestic borrowing. It has, for example, begun to issue treasury bills. -/1 S t a b i l i z a t i o n funds accentuate the swings i n the b l a n c e of 2ayrents by taking money out of c i r c u l a t i o n h e n export earnings a r e high and i n j e c t i n g illcome into the economy when they a r e low. . AS 2 Continued e f f o r t s are iiz. fed however, to expand domes t i c revenue, &ich is constrained by the small s i z e of the industri.;l and commercial sectors and by the declining number of ex.q t r t a t e s , i4-10 contribute much of the income tax revenues, in order to compz~l;ate f o r the drop i n the l e v e l of aid from Australia. Steady economic growth would tnsure growing reve~lues. ?ressrlres f o r increased e x p e d i t u r e s from both provincial governments and some c e n t r a l departme .cs hzve bee11 compounded by a shortage of s t a f f with experience i n plannlng, budgeting and imp1eme:ltat ion. Continued vigilance is required t o contain the expansion of recnrrc:nt costs i n the public s e c t c r , and the need f o r experienced nanpower, b e t t e r a g r i c u l t u r a l s l p p o r t services and increased i n v e s t m e ~ ti n the a g r i c u l t u r a l cector underlines the impcrtance of ensuring t h z t limited public resources go only to the areas of highest p r i o r i t y . -Issue; - and Prospects for Development i n the 1980s 12. PNG has plentiftll natural resources and its development is limited only by the extent to thich it can exploit them. One major l i m i t a t i o n on t h e i r exploitation is the shortage of trained manpower i n the country. The other main limitation is the c a p i t a l t o invest i n development. Mineral resources a r e . r i n g exploited a t a pace designed t o bring i n a steady stream of goverpment revenue, and t h i s s e c t o r enploys expatriates - and uses foreign c a p i t a l - t o the extent necessary. However, it does not c r e a t e employment on the s c a l e t h a t is needed. The a g r i c u l t u r a l s e c t o r , on t h e other hand, t h e r e the bulk of labor absorption w i l l have to take place i n the 1980s. is hindered by lack of investment f o r r e h a b i l i t a t i o n and people with the s k i l l s t o &inage its development. Employment is also res t r i c t e d by r e l a t i v e l y high wages th ich reduce PNG's competi'civeness i n plantation agriculture as well as i n other s e c t o r s of the economy. 'Ihe i n d u s t r i a l s e c t o r is g r o w i ~ gr e l a t i v e l y rapidly, and although PNG has few of the market- distorting r e s t r i c t i o n s ar?d incentives that a r e found i n many other countries, it w ~ u l dbe possible to f a c i l i t a t e I n d u s t r i a l growth i n a nunber of other ways. 'Ihe following sections e s t a b l i s h the magnitude of the problem and highlight the main conclusions of the report concerning the s t e p s that ran be takec to r a i s e the r a t e of economic growth in PNG, particular'-y i n the a g r i c u l t u r a l s e c t o r , which can spread its benefits to the g r e a t e s t number of people. Enployment and Manpower 13. Employment and unemployment a r e not cas i l y defined. concepts i n PNG and data a r e incomplete, hut soae broad conclus tons a r e n o n e t 5 e l ~ s swar- ranted. Only about 15% of the economically a c t i v e population of 1.1 ml.lllon a r e formally employed. The public s e c t o r is the l a r g e s t formal employer, wit11 employment on plantatifins a close second. ' ~ l t o g e t h e rthe l e v e l of fornal emplo-ment has grown ac only about 2% p.a. s i n c e the mid-1970s and has only just regained the level it reached i n 1971 during the construction of t h e Bougainville copper mine. Unemployment and underemployment appear t o have grown i n urban areas., Ghile the slow growth i n the a g r i c u l t u r a l s e c t o r implies a worsening of the s i t u a t l o n i n r u r a l areas as well. I n the 19803, formal job c r e a t i o n could a k o r b up to 20% of the a d d i t i o m t o labor force, r a i s i n g somevhat t h e proportion of formal employment, but still leaving some 230,000 people t o earn incomes i n smallholder and subsi., tence a g r i c u l t u r e o r i n the presently small informal s e c t o r . 14. bhile the magnitude of the anployment problem is serious, some s t e p s could be taken t o improve the outlook. Most important would 'be t o improve the capacity of t h e smallholder s e c t o r t o generate incomes. I n the a r e a of formal employment, r e l a t i v e l y high minimum wages have undoubtedly discouraged investment and encouraged t. -- s u b s t i t u t i o n of c a p i t a l f o r labor. They a l s o have inplicaL+:ils f o r i n t e r n a l ?quity, s i n c e the g r e a t majority of t h e work force does not vork f o r wages. Short of dismantling the minimum wage sys tern, a p o l i t i c a l impossibility, a number of s t e p s could be taken t o s o f t e n its impact on employment, reglonal development and d i s t r i b u t i o n a l equity. Such possible m a s u r e s inc' lde continued ins is tence on only p a r t i a l indexation of a g e s tc increases i n the cos t-of-1ising; a continued emphasis on keeping r u r a l wages in l i n e with a l t e r n a t i v e p o t e n t i a l earnings tn r u r a l areas; a n end t o t h e p r a c t i c e of unifying urban minimum wages and extending them t o new centers; t h e introduction of piece r a t e s ; and a r e d e f i n i t i o n of casual workers. ?he construction of O k Tedi w i l l r e q u i r e a l a r g e workforce and may e x e r t scme upward pressure on wages i n PNG. ?he Government should be f l e x i b l e i n allowing t h e temporary use of e x p a t r i a t e s t o ease t h e pressure i n such cases and should do its b e s t t o prevent the spread of higher wages t o &e rest af the economy. 15. ?he other s i d e of the human resources problem in PNG is the s k i l l shortages t h a t exist a t p r a c t i c a l l y a l l levels and i n all s e c t o r s , c r e a t i n g a serious obstacle t o development. The shortage of trained manpower reduces both the level and q u a i i t y of government s e r v i c e s , weakens the manaeement of e n t e r p r i s e s , l i m i t sthe expansion of production i n many a r e s , and accounts f o r the need t o use expensive e x p a t r i a t e manpower on a l a r g e scale. More work is needed on t h e caases and s o l u t i o n s to the problem, but a number of s t e p s could be taken r i g h t away. The prevailing r a t i o of s k i l l e d to unskilled workers is v e l l below the national average i n primary industry, manufacturing and building and construction, and deployment of s c a r c e educated manpower i n these areas would have ,maximum impact on the creation of employment f o r unskilled workers. I n general, l e s s skill- intensi v e patterns of development should be sought. Use of expatriates i n key areas should not be r u l d out, d e s p i t e the short- term implications f o r the goal of l o c a l i z i n g emplo) .ent. m attempt to complete localization by the early 1 ~ 9 would r e s u l t i n severe shortages of skills necessary f o r the ~ s development of the country, k i c h would a l s o l i m i t employment and t r a i n i n g opportunities f o r Papua Ne-r Guineans. - v i i- 'Ihe educational systesa is not presently providing a6 .Jate numbers of graduates capable of f i l l i n g all of the positions held by expatriates. Primary school enrollment grew rapidly iollowing World War 11, but has stagnated a t under 60% f o r the last decade. The Government has announced a target of universal primary enrollment by the end of this century, and will allow expenditures in this subsector to grow more rapidly than the average to meet the target. Enrollment a t the secondary level is only 12%, and many secondary school graduates a r e apparently unqualified f o r the positions they should be f i l l i n g . Costs of secondary education are high, because of a high proportion (nearly one third) OL expatriate teachers and ttte large number of boarding students. PNG's expenditures on education as a proportion of GNP are similar to those of other countries i n the same per capita income range, but given the high costs of teaching s t a f f , a relatively high concentration of spending on higher (postsecondary) education, and the great need for trainitg, a review of the efficiency of the educational sys :em i n meeting tke needs of the country is warranted. Finally, technical and vocational training should be improved by expanded public sponsorship of apprentices (already under consideration), imp-ovement of vocational schools, and increased training by *he private sector. Agriculture 'Ihe agricultural sector, including forestry and fisheries, con- tributes about one third of t o t a l output i n PNG, employs over four f i f t h s of the population, and contributes about 50%of export earnings. Inves tment and government intervention i n this sector can have the greatest impact on the largest number of people. Performance has been very weak i n the l a s t few years; output of some m j o r crops has stagnated and, barring a revival of investment, w i l l continue to do so. % i s s i t u a t i o n implies a lack of growth in the average incomes of many people, and its continuation would represent a f a i l u r e af the national objective of bringing widespread benefits to a l l 'Ae people of PNG. Based on a continuation of existing policies and levels of inves t- ment, the market component of the agricultural sector w i l l grow a t just under 3.5I p.a. i n real terms during the 1980s, more rapidly i n the f i r s t half of the decade than i n the second. Subsistence output, dIich i s now about 40%of the total, w i l l probably continue to grow very slowly, as people mcve to urban areas and as those l e f t i n rural areas move more heavily into cash cropping, so aoerall agricultutal growth w i l l probably nrt exceed the growth of population at 2.3% p.a. Smallholder production of many crops is expected to grov slowly, yet this is the area *ere most of the additions to the labor force w i l l be absorbed. The key constraint is the lack of bowledge and capital needed to replant aging trees and to care properly for the rest. Another cause for concern i s the decline i n estate production of cocoa and copra d i c h will continue, given present levels of replanting. Over the past five years, the share of estates in the output of these two crops has fallen frola about 60% t o less than half of the total. - v i i i- f i e major constraints a r e uncertainty of land tenure, a l a r g e proportion of holdings too small f o r econmic redevelopqent, and a shortage of managerial t a l e n t . Pores t r y expansion has great p o t e n t i a l , but would require s u b s t a n t i a l r e f o r e s t a t i o n t o avoid depletfon of the resource Import s u b s t i t u t i o n i n food crops w i l l proceed s ~ o w l y ,with experimental r i c e product ion blocked by Land disputes and e f f o r t s t o encourage product ion of f r u i t and vegetables concentrate2 on smalllholders A o a r e unlikely t o produce the necessary volume. 19. The prospects f o r growth a r e brightened by the g r e a t p o t e n t i a l t h a t e x i s t s i n PNG. Given existing land and unskilled labor resources , but with cfianges i n public policy to encourage rapid increases i n investment, and assuming adequate trained manpower t o carry it out, the annual growth r a t e of market a g r i c u l t u r e could m r e t!ad double by the l a t e 1980s. 'Ihe required levels of on-farm investment (tiround K 30 m i l l i o n p.a.) would amount t o somerJhat under 5%of t o t a l gov?rnment expenditures i n 1981 and would imply roughly a doubling of existing levels of government expenditure on a g r t c u l t u r e , forestry, and fisheries i f a l l were done by the public sec- tor. It is also equivalent to roughly twice the level of private investment i n t h e sector. About another K 20-25 m i l l i o n p.a. would be needed f o r crop and input c r e S i t s , and a t o t a l of K 15-20 m i l l i o n t o improve support ser- vices. The new a c t i v i t y would c r e a t e formal employment f o r up t o 25,000 people, 20-30% o f them i n forestry, but more importantly it would r a i s e t h e growth of income generated by the smallholder s e c t o r , A i c h w i l l continue t o support t h e bulk of t h e population. 20. ' h e above l e v e l of fnves tment id an upper bound on t h a t is possible. Actual l e v e l s would probably be lower, given the competitioti f o r s c a r c e skills and funding. Public funds w i l l be severely constrained f o r t h e next few years, b u t the Government w i l l have t o provide the bulk of services t o smallholders, p a r t i c u l a r l y i n t h e area of extension, and improvement of these services should be its top p r i o r i t y . Recommendations f o r t h e reorganization a d improvement of extension, c r e d i t and marketing services were made i n an e a r l i e r Bank r e p g r t , and the Government is pursuing them; the h i g h s t p r i o r i t y should be attakhed to expediting t h i s work, even i f it requires the Ise of expatriate s t a f f or consultants. Financing is needed f o r replanting of seae crops, and tfiis could be provided e i t h e r through expanded c r e d i t f a c i l i t i e s or through a system cf levies and subsidies such as t h a t used i n Melaysia f o r replanting rubber. 'Ihe m i n problem i n extending c r e d i t t o snallholders is the small s i z e of typical loans and the high costs of Development Bank operations i n r u r a l areas with a s c a t t e r e d population. X countrywide s ytem of levies, returned to ~ growers as subsidies t o support replanting, would eliminate some of these . COS t S 21. The Government carnot, nor should it, supply a'.l--of the funds needed t o r e h a b i l i t a t e the s t a t e s e c t o r . Althoug I increased foreign p a r t i c i p a t i o n i n the Pap= New Guinean ecQnomy runs counter t o the national Government intervention i n the i n d u s t r i a l s e c t o r is limited and generally serves a useful purpose f o r the economy as a whole, but it does tend t o discourage new operations, p a c t i c u l a r l y by foreign inres t o r s . Relatively few inceiltives a r e offered to foreign investors, r e f l e c t i n g the Government's d e s i r e t o l i m i t subsidization of foreign invblvement i n t h e economy, but o t h e r measures could be taken t o remove some constraints. Better coordination and s i m p l i f i c a t i o n of approval procedures, such as a "one-stop" s e r v i c e f o r foreign investors, would reduce the b a r r i e r s t o entry. I n the absence of comprehensive land l e g i s l a t i o n , the establishment of i n d u s t ~ i a le s t a t e s would remove the d i f f i c u l t i e s i n acquiring land for plants and housing. Government assistance i n identifying and developing small- scale i n d u s t r i a l projects , mainly f o r nationals, would also b e n e f i t from b e t t e r cc~ordination t h a t could be achieved by combining some of the departmental branches now responsible for policv formation and assista~nce, and by e;r:a:lding and s trengthening bus iness extension services. Government inaust r i a l financing schemes could be consolidated, and the r o l e of provincial governments i n financing and regulating i n d u s t r i a l a c t i v i t y should be c l o s e l y examined. I Trade policy is commendably open, y i t h f w distortions. of incen- t i v e s . There is no e x p l i c i t palicy for t h e use of trade measures to promote i n d u s t r i a l i z a t i o n ; protective t a r i f f s a r e grpnted on an ad hoc b a s i s , and -- t h e Governmeat should establish standard pro~cedures f o r handling requests before an inconsistent and i n e f f i c i e n t s y s t e h of t a r i f f s is allowed to develop. Generally, government policies and actions i n both trade pollicy and regulation a r e d i f f u s e and uncoordinated. 4 single department of industry, combining functions now located i n s e v e r a l d i f f e r e n t places, could provide a c o n s i s t e n t and r a t i o n a l set of policies for i n d u s t r i a l development, as long a s its establishment is not seen as a mandatle t o promote i n d u s t r i a l i z a t i o n a t a l l costs. Prospects I f the constraints to investment a r e n:t relieved, growth i n the Papua New Guinean economy w i l l continue t o be below its potential. GDP can be expected t o grow a t an average annual ratle of around 4% during the decade, n o r e s l o w l y i n t h e second h a l f than i n t h e first . With population growing a t 2.3% p.a., per c a p i t a incomes wi.111improve very l i t t l e . Further- more, t h e slow o v e r a l l growth w i l l r e f l e c t 3ven slower growth i n the agri- c u l t u r a l s e c t o r , indicating t h a t broad segmelnts of the population may experience a decline i n t h e i r living standarks. Industry w i l l grow f a s t e r than the economy as a *ole, and the mining s e c t o r , including the construction of the new mine, w i l l average 4 7% p.a. r e a l growth r a t e during t h e 1980s. Absorptiot~of the growing labor force w i l l be the most important of new entrants to the labor force mu1 c z p i t a would probably be f a l l i n g . h e ons t r a i n t s to economic growth and increased o ~ p o r t u n i t i e sf o r productive employment i n a g r i c u l t u r e a r e inadequate support s e r v i c e s f o r smallholders, shortages of c a p i t a l and s k i l l e d manpower, lack of land a v a i l a b i l i t y on secure terms, and t h e r e l a t i v e l y high unskilled wages i n PNG. This r e p o r t o u t l i n e s measures t o ameliorate t h e s e problems, including, a s noted above, reorganization of support services, acceptance of a d d i t i o n a l p r i v a t e , p a r t i c u l a r l y foreign, c a p i t a l and manpower, revisions t o PNG's land laws, ana various s t e p s t o s o f t e n the impact of minimum wage laws. The current account d e f i c i t o f t h e balance of payments w i l l grow i n t h e f i r s t h a l f o f t h e decade due t o a continuation of present trends i n osltput and p r i c e s , a s w e l l a s t o t h e heavv import requirements f o r Ok Tedi. Financing o f Ok Tedi w i l l not r e s t r i c t investment i n o t h e r a r e a s , however, s i n c e i t w i l l be obtained through d i r e c t foreign investment and overseas borrowing by t h e mining company. Net t r a n s f e r s w i l l f a l l a s t h e Australian g r a n t is c u t i n r e a l terms. The Government has responded'to t h i s s i t u a t i o n , by recognizing t h e need f o r a n adjustment and proposes t o - c u t public expenditure t o t h e lower l e v e l of resources a v a i l a b l e and t o t a k e s t e p s t o i n c r e a s e long- term economic growth. This s t r a t e g y w i l l reduce imports and thereby help t o contain t h e c u r r e n t account d e f i c i t of the balance of payments. Borrowing needs and debt servicing requirements w i l l t h e r e f o r e remain a t manageable levels. An important aspect of t h e budget c u t t i n g exercise is t h a t it w i l l be r e s t r i c t e d t o items of t h e lowes: p r i o r i t y and w i l l not a f f e c t expenditures i n t h e a r e a s c r u c i a l t o t h e achievement of more rapid economic growth, such a s a g r i c u l t ~ l r e ,i n f r a s t r u c t u r e and education. I n p a r t i c u l a r , t h e a g r t r u l t u r a l s e c t o r is given t h e highest p r i o r i t y , and t h e Prime Minister has announced a s e r i e s of measures t o r a i s e t h e l e v e l s of investment and production i n t h i s key sector. Increased investment i n t h e a g r i c u l t u r a l s e c t o r could improve t h e economic outlook considerably. The proposals o u t l i n e d i n t h i s r e p o r t , which should he viewed a s a n upper bound t o what is possible, could r a i s e t h e average growth r a t e of GDP t o w e l l over 54 p.a. Market a g r i c u l t u r e , one of t h e key determinants o f general economic growth and welfare, could groz, a s r a p i d l y a s 6.5X during t h e decade, r i s i n g t o 8% p.a. i n t h e l a t e 1980:; a s the new investl,--.nt bears f r u i t . The a d d i t i o n a l formal employment created would absorb about 20% o f t h e a d d i t i o n s t o t h e l a b o r f o r c e during t h e 1980s, and the more rapid growth of output from smallholdings would provide growing incomes f o r t h e rt-.st. The a t t a i n a b l e rat'? of growth w i l l probably be lower than t h e l e v e l suggested here, but t h e im->ortant point is t h a t opportunities a r e a v a i l a b l e now t o take s t e p s t h a t will. g r e a t l y enhance PNG's longer term prospects. I. INTRODUCTION AND BACKGROUND A. The Setting Papua New Guinea (PNG) h a s an unusual h i s t o r y f o r a developing country, nnd its recent development should be viewed i n the l i g h t of t h i s history. The island of New Guinea was the l a s t inhabited land a r e a of any s i z e t o be explored systematically by the western powers. Unlike most developing countries t h a t have had a four o r f i v e hundred year h i s t o r y of contact with outsiders, many areas of PNG have had less than a hundred, and, i n the highlands, prolorged contact did not occur u n t i l a f t e r Worid War 11. The isolated population of PNG did not develop independently the technology o r s o c i a l forms of the old c i v i l i z a t i o n s of the Near and Far East and retnins t o t h i s day many of the s o c i a l , c u l t u r a l and economic forms of the l a t e n e o l i t h i c period which, among other characteris t i c s , include a s m a l l clan- based s o c i a l u n i t with men serving as warriors, hunters, gatherers and leaders of r i t u a l and women performing the s h i f t i n g gardening, food p r e p a r a t ~ o n ,and c h i l d rearing functions. The Melanesians of PNG evolved s e p a r a t e l y from the inhabitants of neighboring Indonesia and Polynesia. .Of the 1,400 indigenous languages i n the world, between seven and e i g h t hundrmd a r e spoken by the inhabitants 05 New Guinea. Thus PNG has an indigemus population t h a t is r a c i a l l y homogenous . but l i n g u i s t i c a l l y extremely heterogenous Furthermore PNG was bypassed by the great h i s t o r i c a l forces of i n d u s t r i a l i z a t i o n , urbanization, nationalism, and the s t r u g g l e f o r independence. As a r e s u l t , it f i t s no well- defined development model and some of its problems of modernization nay take decades, i f not generations, to solve. For example, c o n f l i c t s a r e still c o m ~ namong t h e large number of small t r i b e s , many of whom a r e t r a d i t i o n a l r i v a l s , and t h i s fighting i n t e r f e r e s with national unity and causes serious economic problems. Modernization is well under way i n PNG, and cannot be stopped, nor do the indigenous leaders wish to stop it. h e basic i s s u e is a t what pace m d e r n i z a t i o n can proceed without placing too many s t r a i n s on the t r a d i t i o n a l s y s t e n and which, i f any, of the l i t a n y of ills t h a t have accompan!.ed modernization i n other countries can be avoided. PNG received its independence from A u s t r a l i a i n 1975, but continues t o have a c l o s e relationship with t h a t cauntry. 'Ihe links d t h Australia have fostered a number of i n s t i t u t i o n s and policies t h a t sir uneasily on the indigenous b e e and produce anomolies d ~ i c ha r e nct necessarlly harmful, but which do requ!re some understanding. A Parliamentary form of national government was created, yet without a unifying n a t i o n a l i s t , idewlugy there is l i t t l e substantive difference between c o a l i t i o n s , and members r o u t i n e l y cross the a i s l e to vote for b i l l s t h a t s u i t t h e i r constitutuencies. h i n i s t e r s i n the r u l i n g c o a l i t i o n disagree openly on matters of substance. On the o t h e r hand, t h e Parl-iament has successfully provided a forum f o r forgins a concensus i n 5 number of c r i t i c a l a r e a s , helping to preserve national unity. The c a p i t a l and l a r g e s t c i t y , Port Moresby, is an urban enclave t h a t has b e t t e r access t o Australia than it does t o the r e s t of PNG. It has a limited a g r i c u l t u r a l hinterland and is accessible t o the rest of the country only by sea or a i r . There a r e no road l i n k s to the hig5lands o r the c i t i e s on the north coast due to the rugged mountain range dividing the main i s l a n d . PNG a l s o has numerozs s c a t t e n d i s l a n d s , linked to each other and t h e main island by expensive a i r services and by slower, and sometimes i n f r e q u e n t , water transport. The public s e c t o r is the l a r g e s t formal employer i n PNG, accounting f o r almost 30%of the i d e n t i f i a b l e employment other than smallholder a g r i c u l t u r e . In 1979 i t is estimated t h a t of the 1.1 m i l l i o n economically a c t i v e people almost 50,000 were c i v i l servants and teachers. The r e l a t i v e s t r e n g t h and s o p h i s t i c a t i o n of the c e n t r a l Government now c o n t r a s t s g r e a t l y with d e c e n t r a l i z a t i o n of some powers t o t h e provinces i n response t o demands f o r more l o c a l p a r t i c i p a t i o n i n decision making and administration. Australian l e g a l concepts were adopted f o r the new nation a s were Australian labor practices. Some of them, such a s the minimum wage f o r urban and r u r a l workers, have been accepted e n t h u s i a s t i c a l l y to the point where 1979 nonagricultural wages i n PNG were about four times those of the Philippines. Others, such a s government land acquisition through the r i g h t of eminent domain, were completely rejected by the general population because of t h e c u l t u r a l l y determined emotional value given t o access to land i n a subsis- tence farming society. Disputes over land ownership, i n a nation with n e i t h e r t h e machinery nor the p o l i t i c a l w i l l t o deal with them, have been a major c o n s t r a i n t t o development. Throughout the report t h a t follows, the topics of smallholder a g r i c u l t u r e , a g r i c u l t u r a l incentives, employment and manpower t r a i n i n g a r e developed a s p a r t of the discussion of economic development. It is vital to bear i n mind the l ~ i s t o r i c a land c u l t u r a l milieu within which they a r e r a i s e d./ 1 - - /1 Additional background on PNG can be found in George B,. Baldwin, et. al., -- Papua New Guinea: Its Economic Situation and Prospects for Development, Washington, D. C. : World Bank, 1978. ' h e major t ~ s kfollowing s e l f government i n 1973 and independence i n 1975 has been the establishment of a s e t of policies for managing the economy and maintaining economic s t a b i l i t y and a s e t of objectives f o r a l l o c a t i n g public expenditures so as to promote the development of the country i n a way t h a t benefits a l l citizens. Econ3mic management has been sound, and r e l a t i v e s t a b i l i t y has prevailed d e s p i t e a number of p o t e n t i a l l y disr-lptive events, both i n t e r n a l and external t o Pl'i, such as the opening of a l a r g e copper mine, uncertainty over levels of foreign assistance, high r a t e s of i n t e r n a t i o n a l i n f l a t i o n and wide fluctuations i n prices of both export commodities and some major imports. IIowever, growth has not been e trong during t h i s period. I n part t h i s is due t o i n t e r n a t i o n a l economic conditions beyond the control of any one nation, but although government policy has generally been conducive to growth, some individual policies have n o t , and some positive actions a r e needed. During the 1980s, t h e Government's aim w i l l be t o promote m r e rapid grcrwth on t h e basis of the framework f o r s t a b i l i z a t ion now i n place. *fie rest of this chapter sets out the Government's development objectives and its major accomplishments s i n c e independence, followed by am analysis of areas h e r e progress has been l e s s s a t i s f a c t o r y and an introduc- t i o n to the major issues i n t h e c.ountry's development. The following three chapters examine these issues i n g r e a t e r d e t a i l , covering a number of areas not previously investigated by the Bank. Absorption of the g r ~ w i n glabor f o r c e and provision of adequate incomes t o t h e growing population a r e the g r e a t e s t tasks facing PNG today. Chapter I1 analyzes the magnitude of t h i s problem, ;IS well as that of the c r i t i c a l shortage of s k i l l e d manpower, and suggests s t e p s that could be taken now t o tackle them. 'Ihe a g r i c u l t u r a l s e c t o r is of major importance i n ensuring t h a t a l l Papua New Guineans be3efit from development, and its recent performance has been disappointing. Chapter I11 analyzes the prospects and potential for agricultural development and the ways i n d ~ i c hthe Government can help the s e c t o r t o reach t h a t p o t e n t i a l . The i n d u s t r i a l s e c t o r , h i l e l e s s important than a g r i c u l t u r e i n c r e a t i n g incomes, is still a s i g n i f i c a n t employer and producer, p a r t i c u l a r l y i n urban areas. Chapter I V examines the s e c t o r and suggests ways i n h i c h its growth could be facilitated without d i s t o r t i n g prices and incentives i n the economy as a whole. B. Development Objectives Economic growth i t s e l f is not an e x p l i c i t primacy ,goal i n PNG. The f i r s t statement of national objectives, i n 1972, put forward the following e i g h t aims h i c h a r e the basis f o r a l l subsequent. statements of development policy: (i) a rapid increase in the proportion of the economy under the control of Papua New Guineans; ( i i ) a more equal d i s t r i b u t i o n of economic b e n e f i t s ; ( i i i ) d e c e n t r a l i z a t i o n of economic a c t i v i t y , planning and government spending; I ( i v ) an emphasis on small- scale a r t i s a n , s e r v i c e and husiness a c t i v i t y ; I I ( v ) a more s e l f - r e l i a n t economv. l e s s dependent f o r its needs on I ( v i ) an i n c r e a s i n g c a p a c i t y t o meet government spending needs from l o c a l l y r a i s e d revenue; I ( v i i ) a rapid i n c r e a s e i n t h e equal and a c t i v e p a r t i c i p a t i o n of women i n a l l forms of economic and s o c i a l a c t i v i t y ; and . ( v i i i ) government c o n t r o l and involvement i n those s e c t o r s of t h e economy where c o n t r o l is necessary t o achieve t h e d e s i r e d k i n d of develop- rnent. 1.11 A t the time t h e e i g h t aims were formulated, t h e economy was experi- ti encing s u b s t a n t i a l economic r,,ot:tl~, due i n l a r g e p a r t t o t h e development of a l a r g e enclave copper mine, ar.i the Government was p a r t i c u l a r l y eager t o e n s u r e t h a t a l l Papua New Guineans would b e n e f i t f r o = t h i s growth. Rapid " the National nevelopment Strategy is% a plan f o r maximum growth r e g a r d l e s s of t h e way t h e b e n e f i t s of grodth a r e shared. It does n o t c o n c e n t r a t e on increasing t h e income of some groups i n t h e population i n t h e hope t h a t b e n e f i t s w i l l l a t e r ' t r i c k l e down' t o t h e renai-nder. "/l - Rural s e l f - e m p l o p e n t w a s believed t o be t h e main income e a r n i n g opportunity f o r the majority of t h e vorlc forre., while t h e development on all enclave b a s i s o f a few l a r g e n a t u r a l resource based p r o j e c t s would provide t h e Government w i t h t h e resources necessary t o c a r r y o u t t h e development program and a t t h e - s a m e t i m e reduce t h e i e v e l of dependence on A u s t r a l i a n a i d . Economic p o l i c y would c o n c e n t r a t e on providing a s t a b l e environment conducive t o investment and growth. I n recent y e a r s , however, t h e performance of t h e a g r i c u l t u r a l s e c t o r h a s been disappointing, and t h e Government h a s r e a l i z e d t h a t more r a p i d economic growth could be pursued i n a manner c o n s i s t e n t with most o f a change i n the emphasis i n a g r i c u l t u r a l policy from the promotion of v i l l a g e development t o the improvement of productivity and increased output. He has s i n c e announced a s e r i e s of measures t o bring t h i s about./l - 1.12 Some of the r crnment's objectives a r e , however, inconsistent with achieving f a s t e r ract - of growth. For exbmple, the f i r s t of the eight aims, c a l l i n g f o r a rapid xcrease i n Papua Neb Guinean c o n t r o l of the econ- omy, has limited the use ( a . expatriate expertibe and overseas c a p i t a l , both o f which could help p r o m ~ t egrowth. Decectralbzation, while not inconsiseent with growth, tends t o increase the s i z e of the public service, thus reducing t h e funds a v a i l a b l e f o r public investment , and possibly increasing the amount of red tape and uncertainty which investors must fa:.-.. However, once these problems have boen d e a l t with, t h e impact of decentralization may be positive, given its p o t e n t i a l f o r increasing gpvernmental responsiveness t o shortages and bottlenecks. The l a s t of the e i p h t a i m s-government control and involvement i n t h e economy when necessary + may have led the Government t o assume functions, such as a g r i c u l t u r a l markbting, t h a t could be performed more e f f i c i e n t l y by the p r i v a t e sector. ~ r e a t k rreliance on t h e market and on the p r i v a t e sector, including foreign c a p i t g l and expertise, is p a r t i c u l a r l y important given t h e limited technicel and managerial capacity of the public sector. 1.13 Although the Government may not always wish t o choose the path of highest growth, it is important that it make it[, choices e x p l i c i t and recognize t h e trade- offs and the costs imposed by c e r t a i n choices. I n some cases it may be possible t o move t o a higher gifowth path without seriously s a c r i f i c i n g the other objectives. For examplei g r e a t e r use of foreign c a p i t a l could be encouraged i n ways t h a t would not Ssnh Papua New Guinean i n t e r e s t s and t h a t could, i n f a c t , prnmote them. Bxampl$s a r e the establishment of nucleus estates where p r i v a t e owners provide sCrvices f o r surrounding small- holders and of business enterprises that proviee both jobs and t r a i n i n g o p p o r t t n i t i e s . I n other cases, the Government may decide t h a t the negative impact of slow growth on c e r t a i n segments of tge population outweighs the importance of s t r i c t adherence t o some of its bbjectives. The suspension of t h e Plantation Redistribution Scheme is such a case./2 Furthermore, the attainment of higher growtt can, in i t s e l f , enhance t h e country's prospects f o r achieving some of its other goals, such a s self- reliance and greater b e n e f i t s t o its people, i n the longer term. - /l Sir Julius Chan, "State of the Nation Address to the National Parlia- ment," June 24, 1980, and "Statement on Operations of the National Agriculture Commit tee, " delivered t o National Parliament, September 1981. I - /2 See Chapter 3. - 6 - C. Prvgress Toward Nqtional Goals /1 Government p o 1 i c i . e ~have achieved outstanding success i n some areas. Three of t h e e i g h t aims c a l l f o r s e l f - r e l i a n c e-i n c o n t r o l of t h e economy, i n production of goods and s e r v i c e s , and i n generating govlernment revenue - and progress towards them has been s u b s t a n t i a l . Dependence on Australian a i d , though still high ( a t n e a r l y US$90 per c a p i t a i n 1980), h a s declined from 60% of t o t a l public revenue i n FY70 t o one t h i r d i n 1930 / 2 ( s e e S t a t i s t i c a l Appendix Tables 5,. 1 and 5.4), and exports, though f l u c t u a t - ing, have r i s e n r e l a t i v e t o imports, with t h e production of coyper and a few a g r i c u l t u r a l goods ( s e e S t a t i s t i c a l Appendix Tables 3.1 and 3.2). PNG has been deemed creditworthy i n i n t e r n a t i o n a l markets, and increased borrowing has helped t o cover growing public d e f i c i c s while contributing t o reduced dependence on Australia. Some progress h a s a l s o been made i n t h e c o n t r o l and ownership of t h e economy by Papua New Guineans, although heavy r e l i a n c e on e x p a t r i a t e s k i l l s remains i n both t h e public and t h e p r i v a t e sectors. PNG is r i c h i n n a t u r a l resources, and they play a l a r g e p a r t i n her development strategy. The development of l a r g e n a t d r d l resource based projects on a n enclave b a s i s is expected t o provide t h e Government with t h e resources needed t o c a r r y out its development program. The Bougainville copper mine has f u l f i l l e d t h i s r o l e admirably, providing up t o 27% of i n t e r n a l public revenue and c c n t r i b u t i n g t o growth r a t e s of GDP t h a t averaged over 8% p.a. i n r e a l terms i n t h e e a r l y 1970s, having a t t h e same time only minimal d t r e c t impact on t h e d i s t r i b u t i o n of income i n PNG. The mine has not led t o t h e extreme economic dualism t h a t can be found i n o t h e r countries with siinilar enclave sectors. Its major danestic impact is on government revenue, and although i t does pay dividends abroad, t h e lcesulting divergence between gross domes t i c and n a t i o n a l product is s u r p r i s i n g l y small ( s e e S t a t i s t i c a l Appendix Table 2.1). Agreement has been reached f o r the construction of a new mine a t Ok Tedi, beginning i n 1981, which w i l l have a n impact s i m i l a r t o t h a t of t h e Bouqainville mine. Its i n i t i a l impact on t h e economy w i l l be through heavy expenditures on construction ana a large demand f o r labor, but once production begins, of gold i n 1984 and copper a few years l a t e r , t h e major impact w i l l be through i t s contribution t o self- reliance i n government revenue and t h e balance of payments. Arrangements f o r t a x a t i o n and r o y a l t i e s are based on t h e p r i n c i p l e s determined i n the agreement renegotiated t h Bougaimrille Copper Ltd. following self- government and a r e widely r'ecognized a s being both b e n e f i c i a l t o t h e country and f a i r t o t h e company. - /1 A d e t a i l e d discussion of t h e recent ddvelopments surlmarized i n !Sections I C and D can be found i n Annex A. . 1 - /2 Until 1977 PNG had a July- June f i s c a l year, r e f e r r e d to h e r e , a s FY.. . . Beginning i n 1978, the f i s c a l year wad changed t o coincide w i t h t h e calendar year, r e f e r r e d t o a s 19.. 1 I " - - 7 A number of o t h e r major n a t u r a l resource- based projects a r e expec- ted i n the f u t u r e , and t h e i r i n i t i a t i o n w i l l be c r u c i a l t o t h e Government's a b i l i t y t o carry out a n expanding development program, p a r t i c u l a r l y a s Australian a i d continues t o f a l l . F e a s i b i l i t y s t u d i e s w i l l soon be s t a r t e d f o r a l a r g e gold mine and, i n a couple of years, f o r another copper mine. Petroleum exploration has been proceeding f o r several years. PNG a l s o has enormous p o t e n t i a l f o r t h e generation of hydroelectric power, but so f a r no use f o r power on a large- scale has emerged. Construction of hydroelectric f a c i l i t i e s t o meet domes tic demand f o r power is becoming increasingly urgent, however, a s the p r i c e of imported f u e l r i s e s and e x i s t i n g f a c i l i t i e s f a l l f u r t h e r behind i n t h e i r a b i l i t y to m ~ o t h e growing demand. Finally, a number of projects based on PNG's tinbe; acd fishing resources a r e planned. One of the Government's g r e a t e s t accomplishments has been t o dampen the d e s t a b i l i z i g influence of a number of egternal forces acting on t h e economy. Two types of s t a b i l i z a t i o n funds have been established t o deial with the impact of fluctuating commodity prices. One, t h e Mineral Resources S t a b i l i z a t i o n Fund (MRSF), receives a l l government revenues from t h e Bougainville copper mine and r e l e a s e s them i n t o t h e budget following a form- ula designed to eliminate t h e enormous f l u c t u a t i o n s t h a t would orhsrwise occur. It success is evident: i n 1978, when mineral r e l a t e d r e c e i p t s dropped by 60%, flows out of the MRSF i n t o t h e budget f e l l by 1e:s than nalf t h a t amount and still contributed 12% of domestic revenue ( s e e S t a t i s t i c a l Appendix Table 5.3). P r i c e s t a b i l i z a t i o n funds f o r t h e t h r e e major export crops s t a b i l i z e prices along a moving long-term average export price; a t the end of 1980 they held K 160 million and were preparing t o pay out bounties t o producers t o canpensate f o r f a l l i n g commodity prices. The funds a r e operated by commodity boards which a r e s t a t u t o r y a u t h - r i t i e s with complete autonomy. Monetary policy requires t h a t a t l e a s t 60% of t h e funds be held i n the c e n t r a l bank where they cannot be used t o expand t h e money supply. Another influence on econsmic s t a b i l i t y i s t h e l e v e l of Australian a i d , which i n 1980 equalled about 10% of GDP. Originally determined on a year t o year b a s i s , making the planning of government expenditures extremely d i f f i c u l t , the l e v e l of a i d is now s e t i n five- year agreements, which specify the method of calculating, annual grants t h a t w i l l reduce PNG's dependence on Australia a t a steady r a t e . The zgreement f o r t h e period 1981-86 s e t t h e annual r a t e of decline of aid a t 5% i n r e a l terms. Although t h i s r a t e of decllne is more rap id than t h a t of t h e previous agreement, i t s p r e d i c t a b i l i t y contributes g r e a t l y t o t h e Government's a b i l i k y t o plan i t s expenditures. A s e r i e s of wage agreements i n both public and p r i v a t e s e c t o r s has ended the inflationary s p i r a l of r e a l wages t h a t occurred i n t h e mid 19iOs, - 8 - when minimum urban wages r o s e by nearly 50% i n r e a l terms over a five- year period (see Annex 3, Table 13). Although wages a r e still high r e l a t i v e t c those i n o t h e r developing countries ( s e e Table 4 i n Chapter I I ) , snd ilay be a s e r i o u s d i s i n c e n t i v e t o invescrnent i n PNG, t h e present system precludes any r e a l i n f r e a s e i n minimum wazes through 19R3 and contributes t o t h e s t a h i ~ i t yof public finances and of t h e econony i n general. 1.20 I n a period of rapid i n t e r n a t i o n a l i n f l a t t o n , the Papua NEW Guinean Government has followed a n exchange r a t e policy designed LO h e l p c o n t r o l imported i n f l a t i o n . Because of t h e very high import content of most consumer goods and intermediate goods and t h e general absence of t r a d e r e s t r i c t i o n s , t h e r e l a t i v e p r i c e s of goods and s e r v i c e s within t h e domestic economy a r e determined t o a l a r g e extent by the correspondir-g r e l a t i v e p r i c e s s e t i n i n t e r n a t i o n a l markets. Allowing t h e s e r z l a t i v e p r i c e s t o determine a n e f f i c i e n t a l l o c a t i o n of resources, t h e Government uses the.exchange r a t e t o influence t h e absolute l e v e l of domestic prices. U n t i l 1980 currency appreciations, coupled with measures t o prevent r e a l increase t n wages and p r o f i t s , r e s u l t e d i n a r a t e of i n f l a t i o n of domestic p r i c e s lower than t h e i n f l a t i o n experienced by PNG's t r a d i n g partners.fi 1.21 Monetary policy i n PNG h a s a l s o been geared toward pursuing s t a b i l i t y and h a s l z e n determined more by changes i n t h e balance of payments than by the developmental need; of t h e country. Although t h e r e h a s heen no o v e r a l l shortage of c r e d i t , c e r t a i n groups of p o t e n t i a l borrowers, mainly i n t h e a g r i c u l t u r a l s e c t o r , have been neglorted, and e f f o r t s t o reach thsm would probatly place g r e a t s t r a i n s on the c r e d i t system. E f f o r t s s t e needed t o mohilize a d d f t i o n a l resources and t o d i r e c t them i n t o areas t h a t a r e not now adequately served. For example, funds generated by l e v i e s on some export crops could be use6 :3 finance t h e i r r e h a b i l i t a t i o n . 1.22 Another s u b s t a n t i a l accoaplishment of t h e l a s t f i v e years h a s been t h e establishment of a framework f o r a i l o c a t i n g government resources i n a d i s c i p l i n e d manner, consistent with o v e r a l l macr3economic policy an2 with n a t i o n a l p r i o r i t i e s . This i s p a r t i c u l a r l y importagt i n PNG, w h e ~ zpublic expenditures a r e about one q u a r t e r of GDP. The key t o t h e system :s tt..? National Public Expenditure Pian (KPEP) which a l l o c a t e s funds on a r o l l i n g four- year b a s i s and c o v e r s a g r a d u a l l y e x p a n d i ~ gp r o p o r t i o n of government expenditures. Tl-_: 1981-84 NPEP encompassed nearly one q u a r t e r 02 t h e 1981 budget. 'Chis growing wedge of c a r e f u l l y c o r t r o l l e d expenditures contributad t o t h e recent increase i n t h e share of c a p i t a l expenditures i n t h e budget co nearly 20%. The a i n of the kPEP process is t o ensure t h a t go-ernment -11 There has been some concarn over the net impsct of this strategy on both t h e export s e c t o r and on import rleplacement. The Government is c u r r e n t l y studying t h e l i n k s between t h e exchange r a t e , domestic i n f l a t i o n and competitiveness and t h e possible need t o counteract any . negative impact on agricultural o u t p u t and incomes. I i I - 9 - expenditures r e f l e c t government p o l i c i e s rather! than p a s t expenditures o r t h e r e l a t i v e a b i l i t y of various departments t3 spend money, and i t begins by a l l o c a t i n g funds among nine s t r a t e g i c objectivds, such a s production, welfars, and administration (see S t a t i s t i c a l Appendix Table 5.10). Projects drawn c p by the departments a r e assigned t o one of t h e o b j e c t i v e s and s e l e c t i o n crnong them is made by a committee of senior public servants on advice f :om t h e ?rational Planning Office. The NPEP provides a s e r i e s of checks and balances over go-rernment spending, but some oE t h e procedures a r e hreakQng down, a s some ministers take t h e i r proposals d i r e c t l y t o Cabinet, bypasising t h e usual channels. Likewise, t h e s e c t o r a l programs, s e t up a l o n g s h e the s t r a t e g i c objectives a s a way of channeling funds t o the provinces, k r e i n some cases being used f o r p o l i t i c a l purposes. Another drawback of the system h a s been the lack: of :eilings by department, with the r e s u l t t h a t thp f the areas described above, other a s ~ c t sof the economy's performance have been less successful. I n particular, progress toward the goal of a more equal d i s t r i - bution of econonic benefits, *ile d i f f i c u l t to measure, has probably been slow as large numbers of people remain unemployed o r dependent for their livelihood on a sector that is growing more slowly than the population it supports. Efforts to raise the growth rate of the agricultural sector are constrained by shortages of skilled manpoweir and by insecurity of land tenure which reduces the rate of private investment. Gavernment spending, kh ich could compensate i n part for a lack of privbte investment, has become increasingly limited by slow growth of revehue, and repercussions of a slowdown i n production can also be found i n the balance of payments, where a number of influences have acted to create gTowing deficits. The industrial sector w i l l be an increasing source of emplbyment i n the future, but a t present the most important task is to f a c i l i t a t e its development, with continued reliance on market forces rather khan on protected markets. I k 1.27 Agricultural growth has been disa pointing i n rctcent years, par- t i c u l a r l y considering its rich potential. lthough certain crops have done q u i t e well, notably o i l palm, others have nbt (see Annex C). In particular, the production of cocoa and copra by estates has actually declined, due t o a shortage of management skills, a lack of inTes tment s tenmsng r 6 r ~ muncecta.iaty over land tenure, and high c o s t s a r i s i n g from wages t h a t a r e high r a l a t i v e t o those i n countries competing with PNG f o r markets. Smallholder production has grown more slowly than it could, given improved c r e d i t and extension services. Export figures show t h a t oytput of two of the three major crops, copra and cocoa, grew very l i t t l e during the 1970s and that even coffee production appears to have slowed ($ee S t a t i s t i c a l Appendix Table 3.2). This lack of growth i n t h e a g r i c u l t u r a l sector implies a stagnation of incomes f o r a large segment of the population. 1.28 The impact of slow a g r i c u l t u r a l growth on t h e r e s t of the econolmy is not obvious. Overall economic growth did pick up i n 1978 and 1979, following a period of apparent stagnation ( s e e Annex A and S t a t i s t i c a l Appendix Table 2.4)./1 The mo: :rapid g r w t h of GDP w a s recorded i n 1978 (7.4% i n real terms)Twhile the growth i n 1979 q e l l t o 3.3%, and preliminary estimates f o r 1980 show l i t t l e increase i n real 'GDP i n t h a t year. This is due i n large part to a decline i n output from tve mining sector, the r e s u l t of a decline i n the o r e content of the copper cancentrate produced by the Bougainville mine, but a g r i c u l t u r e must have played a part. 1.29 More rapis economic growth can not be expected i f s t e p s a r e not taken t o remove c e r ~ a i nkey constraints. Two mqjor influences on the econ- omy, t h e a g r i c u l t u r a l sector, which provides incomes f o r around 85% of the population, and the public sector, which account's f o r about one quarter of a l l spending,/2 w i l l not provide much stimulatioln i n the near future. Agri- c u l t u r e w i l lnot grow rapidly given the present l e v e l of support services f o r smallholders and the uncertainty t h a t has dabpened investment on estates. The s e c t o r w i l l be discussed a t greatelr length i n Chapter 111. Gov- ernment spending w i l l be r e s t r i c t e d during the next few years by the declin- ing real l e v e l of Australian a i d , the r e l a t i v e l y small t a x base, and the declining copper prices and output from the Bougbinville mine, which sup- plies a substantial proport i o n of government revknue ./3 Already d e f i c i t s i n the Government's budget have grown rapidly over t h e past few years to 4.5X of GDP (see Table 1 and Annex A). The t a r g e t rake of gro#th f o r public expenditures has been 3% p-a. i n real terms, basbd on declining Australian aid and growing internal revenue, but the l a t e s t agreement with Australia - /1 The most rapid growth in expenditures occurrpd in investment, which grew at an average of over 10% p.a. i n real terms during 1978 and 1979, with p a r t i c u l a r l y high l e v e l s i n constructiop, manufacturing, trade and services (see S t a t i s t i c a l Appendix Tablel2.8) -i 2 This l e v e l is high compared to an average 13$ i n a l l developing countries. It results i n part from the presence of large numbers of e::patriates who provide necessary s k i l l s and also from the r & l a t i v e lack of development of the private sector. I - I /3 The r e s t r i c t i v e impact of t h i s l a s t f a c t o r wguld be f a r more severe had not the Mineral Resources S t a b i l i z a t i o n tund been established during ' a time of higher output. I - 12 - reduced aid at a more rapid r a t e , while i n t e r n a l revenue h a s g r o w mare slowly than anticipated Actual expenditures exceeded t h e i r 3% t a r g e t growth ; r a t e i n 1980, due i n p a r t t o inadequate c o n t r o l over r e c u r r e n t expenditures by both c e n t r a l departments and provincial governments, r e f l e c t i n g t h e shortage of trained and experienced s t a f f , but strong s t e p s have been approved by the Goverment t o prevent a recurrence. PNG has a relatl-vely anall tax base, and d i r e c t taxes a r e already high, so t h e mair potential source f o r increased i n t e r n a l revenue is i n d i r e c t taxes, where additional measures have been introduced each )-ear. U n t i l taxes and dividends begin t o flow 'a from the new Ok Tedi mine, o r a recovery of growth i n c g r i c u l i u r e spurs economic a c t i v i t y and r a i s e s i n d i r e c t tax r e c e i p t s , t h e growth of government expenditures w i l l have t o be reduced. Because of t h e d e t e r i o r a t i o n i n t h e economic s i t u a t i o n i n 1981, t h e Government h a s decided t o plan f o r a real reduction i n expenditures i n t h e 1982 b Jget. Since t h e Government i t s e l f has a major impact on t h e l e v e l of econanic a c t i v i t y , a reduction i n its spending w i l l f u r t h e r restrict t h e rate of economic growth. The Gover~rmenthas so f a r had no d i f f i c u l t y managing its debt, with domestic borrowing accounting f o r over half of t o t a l n e t financing since 1979. Overseas comrwrcial borrowing has grown rapidly, however, and debt s e r v i c e payments, p a r t i c u l a r l y a t today's high and floating i n t e r e s t r a t e s , w i l l rise a s a r e s u l t , though still remaining a t manageable levels. Table 1: FINANCIAL OPERATIONS OF THE CENTRAL GOVERNMENT, FY77-81 (K million) Total Revenue and Grants 398.4 -445.4 Domestic revenue 223.6 273.5/b 283.4 Foreign grants 174.8 171.9~- Current expenditures 362.7 384.6 440.8 474.1 528.6 Current surplus 35.7 60.8 18.8 45.0 51.6 Capital expenditures 46.7 76.7 83 .O 123.2 126.2 Overall d e f i c i t 11.0 15 -9 64.2 78.2 74.6 - /a Budget. - /b This f i g u r e includes 18 months' worth of tax r e c e i p t s due t o t h e change i n t h e f i s c a l year. Source: S t a t i s t i c a l Appendix Table 5.1, 1.30 Declining volumes of copper output and of some major agricctltural exports, a s well a s f a l l i n g commodity prices, contributed t o a large d e f i c i t i n t h e c u r r e n t account of t h e balance of payments i n 1980 f o r t h e f i r s t time since copper production began ( s e e Table 2 gnd Annex A). Without t h e barge Table 2: BALANCE OF PAYMENTS, CURRENT ACCOUNT. SELECTED YEARS. Fv71-80 Exports, f.0.b. 77.4 236.0 469.0 371.5 485.2 518.9 720.3 660.9 1 r n ~ o r t s . f . o . b . 294.1 214.7 224.7 354.8 390.1 469.7 557.5 671.1 Transfers ( n e t ) 124.3 145.9 151.4 138.4 145.2 130.9 112.0 108.6 Balance on cur- r e n t a c c o u n t -167.4 42.5 160.4 -6.9 88.8 4.3 54.5 -173.8 Balance on cur- r e n t account excluding Australian a i d -286.4 -95.6 -2.6 -151.C -86.0 -167.7 -120.3 -348.6 Australian budgetary grant, which is included i n t h e t a b l e s a s a t r a n s f e r i n t h e current account, t h e d e f i c i t was a c t u a l l y twice as high a s t h a t recorded, f a c t be s o large. However, taking t h e grant out of t h e c u r r e n t account does h e l p t o show the trend9 t h a t have resulted from internal- and e x t e r n a l shocks. H i s t o r i c a l l y , s i n c e t h e opening of zhe Baugainville capper mine, t h e grant from Australia has generally been s u f f i c i e n t t o cover t h e current account dropped t o nearly zero i n the- f i r s t f u l l year of production' (FY74), and then averaged about K 175 m i l l i o n ( 1 1 X of GDP) f o r t h e next f i v e years'. TI-% 1980 . d e f i c i t thus represents a doubling over t h a t of previous j e a t s , and t h i s l e v e l appears t o be continuing i n 1981. I. 31 PNG's balance of uavments is extremelv vulnerable t o fluctuations I I exports f e l l precipitously i n 1980, and some a r e expected t o remaiq'at low l e v e l s throughout the present decade. I n a d d i t i o n , PNC. was h u r t by ris'ing % o i l prices. The value ~f petroleum imports r o s e from 11%of export earnings i n 1978 t o 19% i n 1980 s t , s i n c e they must have support t o s t a y a l i v e . T'lis support, i n PNG, is ?till a v a i l a b l e from t h e wantok, o r c l a n , system, which a l l o w s ~ e o p l et o s u b s i s t g h i l e a w a i t i n g a job. As a r e s u l t , t h e a v a i l a b l e d a t a suggest ths.; open unemployment r a t e s i n urban a r e a s a r e r e l a t i v e l y high and t h a t t h e informal 11 This number probahly significantly underestimates the number of people d e r i v i n g incomes From t h e smallholder subsector. It covers only four c r o p s - copra, c o f f e e , cocoa and rubber -and does not i n c l u d e the l h b o r i n p u t s f o r land p r e p a r a t i o n , new planting, and maintenance of immature p l a n t i n g s ( s e e Annex R). 12 T h i s slow growth r e s u l t s i n p a r t from a d e c l i n e i n employment o f n o n c i t i z e n s which was e q u i v a l e n t t o n e a r l y 704 o f t h e i n c r e a s . i n c i t i z e n employment between 1971 and 1371. Yowever, t h i s d e c l i n e h a s h a l t e d o r been reversed i n r e c e n t y e a r s , and cannot be counted upon t o provide a s many employment onportrinities f o r n a t i o n a l s i n t h e Euture as i n t h e p a s t . s e c t o r is l e s s developed than elsewhere. It is th's so-called "informal" s e c t o r t h a t usually develops because t h e very poor have t o find ways and means of subsisting. Casual empiricism svggests t h a t the wantok system is now beginning t o weaken and informal s e c t o r a c t i v i t i e s a r e gathering more importance. For the moment, t h i s is l a r g e l y corljecture s i n c e no hard s t a t i s t i c a l o r sociological evidence is a v a i l a b l e t o support t h i s view. The s t a t i s t i c a l evidence a v a i l a b l e on urban unemployment i n t h e country suggests a worsening of the s i t u a t i o n . h study has been done t h a t mixes employment and income c r i t e r i a , defining the unemployed a s those who have had no work a t a l l a t t h e time of interview and during the preceding period (normally up t o four weeks) and those who earn a wage o r an income which is below t h e e x i s t i n g minimum wage and a r e interesced i n having more work./l The main body of evidence reviewed was based on data generated by t h e ~ x a Population Survey i n 1977 and 1975. n They show s i g n i f i c a n t amounts of voluntary and involuntary open unemployment a s well as s u b s t a n t i a l underemployment. On average, about one q u a r t e r of t h e labor force was e i t h e r gut of work o r held jobs paying l e d s than K 40 a week. The two c a t e g o r i e s were ahor:t equal i n importance. A comparison of these d a t a with r a t e s recorded i n :he 1971 census shows s i g n i f i c a n t increases i n the proportion of unemployed and -lnderemPloyed i n t h e urban labor force, but t h e exact r a t e s of increase a r e open t o debate because of t h e poor q u a l i t y of t h e 1971 data. Prospects f o r formal job e r e c t i o n i n t h e f u t u r e do not look b r i g h t , i f compared t o t h e expected growth i n t h e econosically a c t i v e population. Formal employment is determined most strodgly by t h e o v e r a l i growth of t h e economy. Growth impulses can be expected t o come mostly from mining and from primary production f o r exports. Mining production does not c r e a t e inany d i r e c t jobs but helps i n d i r e c t l y by boosting p u b l i c revenue-. Prospects f o r increased primary production f o r export ace clouded both by t h e need t o make heavy investments even t o maintain t h e l e v e l of present output and p r o f i t - a b i l i t y i n the plantation s e c t o r and by t h e short- term p r i c e f l u c t u a t i o n s and weak longer- term trends, which a r e both l i k e l y t o moderate the impact of t h i s s e c t o r on employment generation. Most o t h e r s e c t o r s , including the bulk of manufacturing, w i l l e s s e n t ' a l l y be determined by the o v e r a l l growth of the economy. Recognizing t h e u n c e r t a i n t i e s t h a t surround these estimates, t h e National Manpower Asressment (NMA. s e e below) uses t h r e e v a r i a n t s of growth r a t e s (hetween 2.5 and 4% p.a.) i n i ~ fsu t u r e s k i l l e d manpower demand assessment. 2.10 When linkinq growth i n value added t o growth i n employment, we must a l s o keep i n mind t h e r e l a t i v e l y high wage l e v e l i n PNG and its l i k e l y persis- tence i n t h e forthcoming years. This w i l l continue t o encourage t h e search t o r opportunities t o s u b s t i t u t e c a p i t a l f o r labor and w i l l influence t h e *. P w., , -/1 'ruc T. Nguyen, "Em~loyment/~nemploynenti n Papua New Guinea - Summaries dnd Trends, " Waigani Seminar, September 1979, mimeograph. - 19 - choice of new investments towards capital intensity. In the absence of historical series on capital/labor ratios, we are reduced to speculating on what might possibly happen. I f , as a f i r s t step, we assume that there w i l l be no growth i n productivity i n the economy other than that realized economywide by the changing sector mix, we find that under this maximum assumption on employment creation, less than 17% o f the averaqe additiom to the citizen labor force during the 1980s can expect to find employment i n the formal sector under the medium growth projection used dy the NMA ( s e e Annex B , Table 12). This percentage would rise marginally if a l l expatriates now working i n the country were replaced during thedecade by citizens, which i s not l i k e l y to occur. The changing sector mix i n the economy 'keeps the annual growth of employment somewhat below the growth of the ecorlomy as a whole. In the N1% case, for example, the medium growth assumes a 8.9% p.a. growth o f value added economy-wide, but the resulting employment growth i s only 2.5% p.a. I f we assume that there w i l l be an additional increase i n productivity throughout the economy through more e f f i c i e n t operations, increased availability of s k i l l s , substitution o f capital for labor i n existing operations, etc., formal job creation w i l l absorb less than 10%o f the additional citizen labor force. Neither the known deficiencies of the data used t o make this projec- tion nor any amount o f realistic changes i n assumptions would significantly alter t h i s picture. For example, we know that ehe employment i n primary production used by the NMA and i n these projections may be understated by about 11,000 persons. I f our projections were npde taking t h i s higher level into account, t h i s would add some 4,000 persons to the expected employment t o t a l i n 1990, and would therefore raise the abqve percentage only slightly. Also, if we assumed that a l l the identified plantation and forestry develop- ment potential, as laid out below i n Chapter IIS, were f u l l y realized by the end o f the 1980s, formal employment i n t h i s secdor might be higher by 20,000 persons. This would aga:n nct strongly modify qhe basic conclusion, which i s that somewhere around 80%o f the roughly 250,1000 additions to the labor force during the l980s w i i l have to find income opportunities either i n smallholder and subsistence agriculture or i n tde informal sector i n urban arcas. The Government i s well aware o f the growing problem and has ~espondedwith policies directed chiefly at the generation of income earning oppcrtunities i n raral areas. This emphasis wi41 continue i n the future, and Chapter I11 o f this report w i l l suggest some areas where it could be further strengthened. C . Wages Among the governmental interventions qn the labor market, minimum wages, f i r s t set i n 1945, have no doubt had the 'most profound impact. Essentially, the structure now i n place was detdrmined between 1972 and 1975. I t posed a number o f problems, some o f wqich the Goveknment has attempted t o alleviate through i t s submissions qo the Minimum Wage Boards since 1976. , I 2.14 Tne f i r s t problem is the high l e v e l of both r u r a l and urban mini- mum wages i n PNG compared to other developing countries (see Table 4). This ;or techniques that s u b s t i t u t e c a p i t a l f o r labor. There is scattered but ample evidence t h s t the level of wages, though not the s o l e c u l p r i t , I depresses the legel of employment and the pace of employment creation. The s i t u a t i o n became c r i t i c a l *en r e a l urban wages increased by nearly 50X ending t h i s inflationary wage s p i r a l with the i n s t i t u t i o n of a temporary wage freeze i n 1976. Since then, wages have been indexed a t or s l i g h t l y below the growth r a t e of the urban-based consumer price index. The r e s u l t of these events has been a reduction of some 2-5% i n the r e a l value of urban minimum wages of unskilled laborers between 1976 and 1980. Rural wages a r e now a t l e a s t 2-3% above t h e i r l e v e l of 1972 i n r e a l terms. and the a c t u a l I increase is probably s i g n i f i c a n t l y highet, since indexation is based on an and it takes no account of rural/urban differences i n average consumption patterns. The indexation method adopted f o r the perioz 1980 t o 1982 w i l l produce small reductions i n r e a l wages, but only i f price increases r i s e Table 4: MINIMUM KAGE RATES I N SELECTED COUNTRIES, 1978 CUS$/day) Agriculture Manufacturing Indones i a n.a. 0.60-1.75/a Malays i a 1.88-3.27 3.86-5.91- Papua New Guinea 2.58 6.99/b Philippines 1.55-1.74 1.853.03 I Sri Lanka 0.65- 0.84 O . ? O / c Thailand 1.23-1.38 1 . 7 2 n Wes tern Samoa 2.72 3.40- I / a Unskilled construction workers, urban and rural. - Urban minimum wage. -/ c Public s e c t o r minimum wage. I Source: Data provided by the national authorities. I 2.15 A . i n t e r n a l equity problem is raised by both the level of wages and t h e i r indexation. Rural minima a r e above incomes t h a t can be obtained i n r u r a l subsistence production and probably a l s o above the irlcomes of smallholder producers of m g s t cash crops. Both of these gaps have widened over the years, i n some cases dramatically. Indexation of income is, of course, a p r i v i l e g e given only t o wage earners i n formal jobs, a t the very most some 15% of the labor force. The much poorer bulk of the population has no such protection against i n f l a t i o n ; t h e i r main cash incomes a r e a t the mercy of i n t e r n a t i o n a l commodity price fluctuations. 2.16 Urban minima a r e some 2-3 times the l e v e l of r u r a l minima for unskilled workers, a difference t h a t is l a r g e by i n t e r n a t i o n a l standards (see Annex B, Appendix Table 1). While the s i z e of the gap is subject t o debate, it is clear th.-.t it exists and that it had widened very starply to a peak in 1975. Since then it has declined only moderately. Under the 1980 Minimum Wage Board determinations, the gap w i l l remain unchanged i n r e l a t i v e terms u n t i l the end of 1982, and it w i l l continue tg widen i n cash terms above t h e present K 21 per week. 2 -17 This vast nominal wage gap between r u r a l and urban wage earners was established by the Minimum Wage Boards' adoption of two d i f f e r e n t c r i t e r i a f o r s e t t i n g minimum wage l e v e l s during the 1972-75 pe-,od. For r u r a l i n d u s t r i e s , the " capacity t o pay" of primary i n d u s t r i e s was the dominating argument, while f o r urban wages, the basic needs of a family were t h e main c r i t e r i a . The capacity t o pay argument risks misjudging the s e c u l a r trends of commodity prices and pitchiqg the wage a t a l e v e l t h a t impairs reinvestment capacity and endangers the long-term viabj-lity of plantation agriculture. The basic needs argument, besides providing great room f o r disputes over how much of what and f o r how many a r e needs to be provided, r i s k s separating the minimum wage t a t a l l y from the econamic r e a l i t y of the country and from a l t e r n a t i v e income opportunities./l Lower t o t a l employment and higher urban migration and urban unemploymenFare the p u t a t i v e r e s u l t s of such a separation. 2.18 Since 1976 t h e Government has argued that wages should not be based on a "capacity t o pay" c r i t e r i a , should be maintained a t a s u s t ~ i n a b l e l e v e l through comm3dity p r i c e f l u c t u a t i o n s , and ( i n t h e urban case) shoul; n o t be i n c r e a s e d on " b a s i c needs' grounds. M i n i m u m Wage Boards have accepted the argument that wage determinations shoul6 be restrained t o encourage growth of income earning opporturlities 2nd to allow the Government t o increase the share of new development spending i n the budget. This resulted i n the achievement of the s l i g h t decl$ne it urban wages since 1976,/2 although r u r a l wages have r i s e n s l i g h t l y . - - /1 The International Labor Organization convention on minimum wages recognizes the importance of considering these f a c t o r s when determining minimum wages. - /2 If productivity of wage earners has increased, t h i s may even represent a f a l l i n real labor costs per unit of output, although they remain high r e l a t i v e t o other developing countries. < , - 22 - Another problem is t h e countrywide a p p l i c a t i o n of minimum wage levels. This was always the case f o r r u r a l minima and has been a c l e a r tendency f o r urban minimum wages. u n t i l 1972-most urban a r e s had minimum wages t h a t were negotiated by employer$ and employees, snd o f t e n they were only marginally h i ~ h e rthan t h e r u r a l rWnimum i n force, By 1980, however, a l l 25 urban a r e a s of consequence uere cov4red by determinations of the Minimum Wages Board. Ignorlng regional differences i n favor of t h e p r i n c i p l e of equal pay f o r equal work may be philosdphically laudable, but i t discriminates a g a i n s t towns handicapped by i s o l a t i o n , small markets, o r low q u a l i t y of support services. Offering l o w e r wage r a t e s may be t h e i r only way t c o f f e r some compensation f o r thege handicaps and a t t r a c t mcre investment . 2.20 A comparison of minimum wageg and a c t u a l earnings r e v e a l s t h a t r u r a l primary wages a r e almost t o t a l l y 'epenqent on t h e m i c l ~ u mwage determinations ( s e e Annex B, Table 16). Earnings and minima a r e very close i n both l e v e l and movement. Retpect of t h e minima a s a $loor is f a i r l y good, though probably not t o t a l . I n urban areas, respect of t h e minima is probably q u i t e general. Secondary industry earnings of f a c t o r y :workers a r e c o n s i s t e n t l y above t h e minima ( s e e Annex B, Table 17). Loopholes t h a t may have existed previously t o g e t around minimum wage l e v e l s by h i r i d g temporary employees o r o f f e r i n g piece work were e f f e c t i v e l y closed o r f a t a l l y narrowed by t h e Employment Act of 1978 which made casual workers subject t o 41 t h e employment conditions of t h e Act i f these workers worked more than 6 da$s i n any month f o r t h e same employer. The A c t a l s o r e s t r i c t e d piece work t o g g r i c u l t u r e and horticulture. Any loosening of these provisions now requ4res a change i n l e g i s l a t i o n . The foregoing a n a l y s i s l e a d s t o a number of rrroposals, some of which t h e Government is already studying: ( i ) Work should be i n i t i a t e d now a n d completed i n t i n e f o r consideration by t h e 1983 Miqimum Wage Board on t h e a c t u a l s i z e of the r e a l income gap between Subsistence a g r i c u l t u r e , smallholder cash crop productioil, and indomes of r u r a l and urban minimum wage earners t o determine policied on a n e q u i t a b l e s t r u c t u r e of mini- mum wages and on the rural/urban wage gap. ( i i ) High p r i o r i t y should be attaahed t o developing c o s t of l i v i n g i n d i c a t o r s f o r r u r a l a r e a s zqd secondary cowns; i d e a l l y , such i n d i c a t o r s shou?:! be availabqe on a regional basis. Such i c d i c e s a r e needed t o provide appropqiate y a r d s t i c k s f o r cost- cf- living increases and to prevent unidtended divergence between real minimum wage levels. I ( i i i ) P a r t i a l indexation is one of t h e best means ava* s to c o r r e c t over t i m e any anomalies t h a t tare demonstrated bj t n e above work. The other is strong edcouragement of and support f o r r c r a r development. pressure on waEes. ... .. , . . - 24 - these should not detract from the value o f such an ongoing assessment f o r sensitizing political decisionmakers t o prbblem areas and possible solutions. The s t a t i s t i c a l base for the NMA was developed i n 1979. Despite some data shortcomi?.qs, mainly the exclusibn o f substantial numbers o f - generally low skilleri - publicly eqloyed laborers and uniformed o f f i c e r s , the following salient features emerge. F i r s t , there are substantial sectoral differences i n the oroportion o f jobs t h a t require s k i l l s (defined as formal education at grade 7 o r above). Mining, pvblic u t i l i t i e s , finance and pro- perty, central Covernrsent and education hare high sicill intensities ( s e e Annex B , Table 19). S k i l l intensities well belop average e x i s t i n primary industry, manufacturing, building and construction, and local autherities; deployment o f scarce educated manoaver i n these sectors bould produce the, largest gain i n overall employment. Second, close t o 17% b f jobs requiring a t least some secondary education are held by expatriate~s. The percentage i s substantially lower i n government, education and public h t i l i t i e s , a l l o f which have been more strongly pressured t o localize jobs ahd more successful because o f bctter working conditions and better knowledge o f the output o f the educational system; together, these sectors o f f e r h a l f the formal skilled jobs i n the economy. Third, some 40-504: o f t h e citizens holding jobs requiring a t least some secondary schooling are l e s s edhcated than employers f e e l i s neceqsary; the proportion o f expatriates ib that position was 10% i n 1979. Among other things, t h i s may indicate t h a t on-the-job experience and in- service training may substitute for formal educational qualifications. The NMA also presents findings oln the age composition o f the work force, i t s occupational structure and eardings by s k i l l level, occupation, experience, sector and age. I t then projelcts demand f o r s k i l l s forward t o 1990 ( s e e Annex R, Table 21). These projdctions, made for 13 sectors, 285 occupations and 8 s k i l l levels are basled on a complex set o f assumptions, most o f which are potential sources o f div~ergencebetween projected and actual s k % l l demand. Supply projections alre also made on the basis o f existing capacity o f education and trainidjg i n s t i t u t i o n s , existing policies and estimated financing capahili-ties. C o parison oE the two sets o f 7 projections indicates that the present shartage o f people trith secondary schooling below grade 12 w i l l turn i n t o a surplus and their unemploymecL w i l l emerge as a major problem by the end )of the 1980s, and that f u l l localization a t grade 12 w i l l be possible b y the early 1990s. In th? light o f these surprising findings, the N?IA suFqests that the ccrrent emphasis on secondary education night need revision 1111 favor o f more primary education, and that wage d i f f e r e n t i a l s between the l+est paid and the highest paid are l i k e l y t o contract. In addition, more stquctured post-school training w i l l be needed t o promote localization. I 2.25 O fnecessity, the N?lA makes cercain assumptions which must be borne i n mind when using it for planning purposds. The de nand projections have a number o f limitations, including ass-mptiqns o f s k i l l and factor mix and an absence o f explicit assumptions about charlges i n prod~lctivityO F skilled l i I workers. On the supply s i d e , s i g n i f i c a n t uncertainties surround the assumptions on drop-out, repeater and post-grafluation wastage r a t e s , and the assumption that all graduates dto p a r t i c i p a t e Yn the labor force are qualified f o r jobs a t t h e i r level of education. In addition, it is d i f f i c u l t t o u t c h detailed projections of demand by occupation xdth equally detailed projections of supply. Finally, there is no comprehensive attempt t o evaluate the possible output of informal a d in- service training schemes by private employers, often a s u b s t a n t i d source of s k i l l s . The recent i n i t i a t i v e of the Department of Labor and Industry requiring detailed five- year training and l o c a l i z a i i o n programs from all private employers using non- citizens, i f properly exploited, could providc a f i r s t overall view t o f i l l t h i s gap. 2.26 It is clear that there is scope for further improvement in the MIA. Some aspects w i l l be improved through more data work, but a s u b s t a n t i a l amount of judgement w i l l be required. To make t h i s judgement a s well-rounded as possible, t h e National Planning Off i c e plans t o give the NMA a f u l l a i r i n g with other parts of the public s e c t o r and with the private s e c t o r . 2.27 It is doubtful that localization can realist i c a l l y be expected to be complete by the e a r l y 1990s. Localization is aiready slowing i n many s e c t o r s , and increased demand by the private s q c t o r f o r trained Papua New Guineans may produce progress i n one area and d e t r e a t elsewhere. I n addition s k i l l supplies may be lower than projdcted by the NMA, and there w i l l be an influx of foreigners for Ok Tedi an4 other projects i n the pipeline. I n this context it is important t o give e x p l i c i t consideration t o the trade- off between using s k i l l e d c i t i z e n s to increase l o c a l i z a t i o n o r usirrg them to increase the pace of development. A s long as s k i l l s c a r c i t i e s e x i s t , one can be achieved only a t the expense ;of the other. Overzealous. res t r i c t i o n s on the importation of foreign manpbwer could a l s o adversely a f f e c t Papua New Guineans i n a number of o t h e r b y s . As owners of a bus iness they could s u f f e r from inexperienced Tzagement; a s employees they could l o s e i f t h e i r supervisors vere unable t o provide sound on-the-job t r a i n i n g ; a s consumers they could s u f f e r a reduktion i n services through the failure or deterioration of businesses. ~ r a c e d b r e sdesigned t o enhance the employment opportunities of a few Papua New ~ u l b e a n smay therefore be to the h cos t of many. A review of policies with a view to stimulating stronger economic growth and easing controls d ~ i c ha r e o questionable value to Papua New Guineans therefore seems timely. 2.28 Among the various issues t h a t could 5k picked f o r f u r t h e r debate, t h e technical and vocational training area is the one h e r e the most s i g n i f i - cant shortages continue to plague PNG. The two basic problems i n t h i s area a r e the small numbers coming out of the apprenticeship sys tern and the gap between the quality of the formal apprentic+ship output ,and-,that of vocational schools. 'Ihe small number of people completing apprentices hi?^ o r i g i n a t e s from the general shortage of grade 19 schaol ieavers and the cost of the systern t o employers . Only the large and, forward-looking employers a r e willing and able to send people through t h e four- year apprenticeships. Others t r y t o f i l l t h e i r needs by h i r i n g t h e graduates away a f t e r completion, i l l u s t r a t i n g the shortage b u i l t i n t o t h e system. Remedy could be sought by shortening t h e courses, but t h i s is opposed hv t h e l a r g e employers. It could also be sought by public sponsorship of more apprentices than needed by t h e public s e c t o r and expansion of the f a c i l i t i e s t o accommodate t h i s e x t r a number, a s o l u t i o n now being financed by t h e Asian Development Bank. 2.29 Graduates 3f t h e 90 o r s o provincially run vocational schools usually undergo only one year o f training, and t h e r e a r e no o v e r a l l s t a t i s t i c s a v a i l a b l e on t h e s k i l l s being taught, no fixed s y l l a b i and no s k i l l t e s t s a t t h e end. While these araduates have no access t o t h e formal apprenticeship system, many of them, p a r t i c u l a r l y those trained i n urban areas, do f i n d jobs. There a r e a number of ways i n which t h e gap between them artd t h e graduates of t h e apprentice system could he bridged. One is t o s e e i f t h e vocational schools could be upgraded on a s e l e c t i v e b a s i s t o impart an improved and recognized ski71 level. Another way would be t o involve p r i v a t e s e c t o r t r a i n i n g of t h e type being proposed f o r a National Occupational Training Authority. The idea is, a t l e a s t i n p a r t , t o i d e n t i f y promising persons already employed f o r f u r t h e r in-service o r modular t r a i n i n g , leading eventually t o c e r t i f i c a t e s of coQpeteccy i n very s p e c i f i c s k i l l s . The idea hzis been a i r e d before i n t h e Apprenticeship Board and proposed i n a consultant's report f o r t h e huilding t r a d e s i n preparing f o r t h e Ok Tedi project. Considering t h e s u b s t a n t i a l d r a i n t h i s project is l i k e l y t o exert on s k i l l s i n t h e economy and i n i t i a l l y p a r t i c u l a r l y i n t h e construction s e c t o r , a c t i o n is urgently required. - - 27 111. AGRICULTURE, FORESTRY WD FISHERIES The a g r i c u l t u r a l s e c t o r i n PNG produdes about one- third of t o t a l output i n PNG. It can be divided into three svbsectors: t h e e s t a t e s which h i r e labor and produce mainly t r e e crops f o r eqport; smallholders growing c a s 5 crops, l a r g e l y f o r export; and subsistence f a q e r s growing s t a p l e root crops and some vegetables f o r t h e i r own consumption. The e s t a t e s e c t o r is e a s i l y distinguished fr.-m t h e others i n theory, i f noU always i n practice, but t h e smallholder cash and subsistence s e c t o r s overlqp considerably, with probably project ions made. Table 5 presents projections of produdtion and exports through 1990. These project ions assume a- continuation of existing p o l i c i e s and patterns of resource allocation. Most i n d u s t r i e s a r e expected t o i n c r e a s e product ion over the period unaer review, although cocoa is a n important exception. I n several cases, however, growth w i l l be negligible. Copra i s t h e most Loe, e x p o r t s 640 650 660 680 880 970 1,020 6.3 Sawn t i m b e r p r o d u c t i o n 105 113 125 138 146 163 182 6.4 Sawn t i m b e r e x p o r t s 30 40 59 69 74 85 95 12.7 Woodchip e x p o r t s (-000 bone d r y m) 120 120 li Plywood p r o d u c t i o n 17 19 i Plywood e x p o r t s 7 8 9 10 10 10 10 ... 3.5 Veneer e x p o r t s 2 2 2 2 2 2 2 C h o p s t i c k s e x p o r t s 6 6 6 6 6 . 6 6 ... Canned t u n a p r o d u c t i o n (raw f i s h i n p u t ) ... ... ... .... 3.75 8.25 15.00 31 .l/b Prawns ( t a i l s ) 1.02 1.04 1.06 1.08 1-10 1.14 1.20 1.8- L o b s t e r s ( t a i l s ) 0.10 0.10 0.1 Barramundi 0.15 0.16 0.1 Reef 6 c a a s tal f i s h e r i e s 0.20 0.20 0.2 Rubber Palm o i l Palm k e r n e i T e a I d C h i l l i e s Cardamom P o u l t r y P i g s ~ o o d - c r o p s('000 ?IT) S u g a r ... 8.0 32.7 36.1 36.6 37.4 40.7 14.0la Molasses 3.3 12.8 13.3 13.2 13.7 14.0 11.9x R i c e 1.5 1.6 1.7 1.8 1.9 2.1 2.4 5.3- C o a r s e g r a i n s 4.0 4.1 4.2 4.4 4.5 4.8 5.2 3 .O F r u i t 6 v e g r t a b l e s 60.0 61.8 53.7 65.6 67.5 71.6 7R.3 3.0 - - / c E x p o r t s may v a r y from t h e s e f i g u r e s due to q u o t a s e s t a b l i s h e d under t h e I n t e r n a t i o n a l C o f f e e Agreement. - /d Of which 400 XT is consumed d o m e s t i c a l l y . Source: H i s s i o n e s t i m a t e s . - 29 - important example of t h i s category, with production projected t o increase by a t o t a l of only 11%over the t e n years, 1981-90. Overall growth i n the s e c t o r w i l l average urtder 3.5% p.a. during the 1980s, but w i l l gradually decline t o near 2% p.a. towards the end of tke decade, o r l e s s than the growth of population. A number of factors a r e responsible f o r the r e l a t i v e l y slow growth of such an important sector. One of the major areas of concern is the l o s s of production on largeholdings, p a r ~ i c u l a r l ycocoa and copra, where levels of replanting and maintenance a r e inadequate. The provisions of the Plantation Redistribution Scheme l e g i s l a t i o n , designed t o t r a n s f e r ownership t o Papua New Guineans, have been 2 serious disincentive t o reinvestment by foreigners, since they did not provide adequate compensation f o r investment and they created substantial uncertainty among foreign plantation owners. I n a d d i tion, many holdings a r e too small t o j u s t i f y commercial redevelopment; tney lack cash flow t o finance redevelopment; and they do not have access t o loan finance. Another problem is the shortage of government funds and s k i l l e d manpower i n areas where these a r e c r i t i c a l t o the success of the industry, p a r t i c u l a r l y given the sectorwide need f o r more and b e t t e r support s e r v i c e s from the Department of Primary Industry (DPI). Markets w i l l be a c o n s t r a i n t i n only a few cases, notably tea, among t h e exports, where prices a r e too low to provide s a t i s f a c t o r y returns. I n the case of f i s h , l o c a l production of high q u a l i t y canned tuna, reef f i s h and barramundi w i l l be unable t o compete i n the domescic market with imports of canned mackerel which a r e n u t r i t i o u s , cheap and iaportant i n the d i e t s of low-income people. However, the tuna cannery w i l l a l s o produce a canned product designed t o compete with imported mackerel. The new sugar industry w i l i supply the local market from 1983 onward, but: growth i n production of o t h e r f o c l :raps is l i k e l y to be less s a t i s f a c t o r y , and imports of rice, wheat, coarse grains and some f r u i t and vegetables w i l l continue. I n the case of r i c e , f r u i t and vegetables, s i g n i f i c a n t irqport s u b s t i t u t i o n could probably take place only with large- scale producrion u n i t s . B. P o t e n t i a l f s r Development 1. Expansion of Production Given the a v a i l a b i l i t y of resources and the adoption of p o l i c i e s t o s t i a u l a t e growth, a s outlined below, there is considerable scope f o r expansion beyond t h e l e v e l s projected above. The main constraints i n the s e c t o r a r e of a s t r u c t u r a l , physical, p o l i t i c a l and administrative nature, and most a r e amenable t o change by appropriate government policies. While pricing i s always important, PNG has few price distortions that would affect inputs and outputs, and the potential p r o f i t a b i l i t y of most primary industries is s u f f i c i e n t t o encourage growth i f other obstacles can be removed. I n PMG, industry s t r u c t u r e s a r e strongly influenced and i n some cases completely ' controll.-6 L;. government p o l i c i e s and regulations, and these i d turn have an important bearing on the capacity of industries to grow. The qdCstion of industry s t r u c t u r e is therefore of considerable i n t e r e s t t o plicymakers. The i n d u s t r i e s i n which e-:pansion is l i k e l y t o be the most a t t r ~ cive t commercially and t h e most e a s i l y organized a r e t h e t r e e crops, e s p e c i a l l y cocoa, o i l palm and rubber. Their v i a b i l i t y is e s t a b l i s h e d , and land a c q u i s i t i o n problems could be minimized by concentrating development on existing e s t a t e s and a l i e n a t e d land. The following paragraphs review t h e potential f o r expansion of t h e a g r i c u l t u r a l i n d u s t r i e s . Forestry. Growth w i l l be strong i n t h e f o r e s t i n d u s t r i e s following a review of policies i n 1379 which should enable established companies t o consolidate t h e i r positions. Log exports w i l l i n c r e a s e as a r e s u l t of publicly formed export corporations and more l i b e r a l export allowances f o r existing p r i v a t e operators. However, J ?ss than half of t h e timber r i g h t s already purchased are being exploited. A f u r t h e r 1.1 m i l l i o n h a of f o r e s t have been i d e n t i f i e d as having good p o t e n t i a l f o r development, and plans t o purchase the timber r i g h t s t o it a r e being made. On t h i s basis, t h e r a t e of log c u t could be doubled, reaching perhaps 2 m i l l i o n cubic meters p.i8., and the industry would have a resource base s u f f i c i e n t f o r more than 25 years' operation. Foreign l o g export operations could be taxed f a i r l y heavily, s o t h i s s t r a t e g y could y i e l d s i g n i f i c a n t increases i n revenue. However, t h e low q u a l i t y of t h e resource i n terms of y i e l d s per h e c t a r e and t h e very large number of s p e c i e s a r c problems which may make it d i f f i c u l t t o attract high- quality investors and t o maintain commercial v i a b i l i t y of operations. In any case, rapid expansion would be unwisk i n t h e absence of increased r e f o r e s t a t i o n a c t i v i t y . Naturzl regeneratibn of f o r e s t on logged a r e a s is poor, and no followup development is c u r r e d t l y occurring on most areas. Annuai plantings of 10,000-15,000 ha would Ensure t h a t t h e industry had s u f f i c i e n t log s u p p l i e s t o continue i n d e f i n i t e l y a t about t h e present scale of a c t i v i t y . This would r e q u i r e investments of K 6-9 m i l l i o n p.a. and would employ 6,000-9,000 people. Fisheries. Like the f o r e s t i n d u s t r i e s , most f i s h e r i e s a c t i v i t y is =ontrolled by licensing , t h e exception being t h e e x p l o i t a t i o n of t r a d i t i o n a l f i s h e r i e s by t h e i r customary owners. There a r e now only two companies working the tuna resource and these c m p a n i e s should have t h e necessary resources, : o t h managerial and f i n a n c i a l , t o double tqe tuna catch, but s u b s t a n t i a l i ~ v e s t m e n twould be r e q u i r e d . A t u n a c a n n e r y i s e x p e c t e d t o b e e s t a b l i s h e d over t h e next few years and x i 1 1 c o n t r i b u t e t o both domestic employment and foreign exchange earnings. There is little scope t o expand t h e prawn o r l o b s t e r catch due t o resource l i m i t a t i o n s . The inshore and barramunrli f i s h e r i e s are exploited by t h e people who Nave custDmary r i g h t s t o u s e them, and i t would be extremely d i f f i c u l t t o negoltiate access f o r outsiders t o exploit them. Large- scale commercial e x p l o i t a t i o n is u n l i k e l y without f a r g r e a t e r provision of s e r v i c e s t o fishermen, probably requiring foreign management and ownership t o reach t h e maximiurn s u s t a i n a b l e catch. Strong growth of t h e commercial c o a s t a l and reef f ~ i s h e r i e shas been f o r e c a s t on t h e premise of high l e v e l s of government support. This f i s h e r y is not l i k e l y t o - a t t r a c t commercial i n t e r e s t , and expansion beyond t h e f o r e c a s t l e v e l s w ~ u l d be extremely d i f f i c u l t t o achieve. Tree Crops. The s t r u c t u r e of t hJe i n d u s t r i e s is determined by access t o land. Smallholder production occprs mostly on customary land, t h e usage of which is r e s t r i c t e d t o owners, and t h e major c o n s t r a i n t ta more"rapid - 31 - growth of production is inadequate support s e m i c e s . While the majority of P a p a &ew Guineans could g e t access t o land on which t o grow cash crops, the endowment of land is very unevenly distributed. I n order t o provide opportu- n i t i e s f o r the minority of people who did not have access t o s u i t a b l e land, land settlement schemes were introduced i n t h e 1950s. These comprised areas of alienated land subdivided i n t o smallholdings designed t o be operated by s i n g l e families. Almost 50,000 ha of land was developed i n t h i s way. However, f o r various reasons, there was a v i r t u a l cessation of development other than blocks associated with o i l palm e s t a t + s during the 1970s. As a r e s u l t , Papua New Guineans without t r a d i t i o n a l r i g h t s t o s u i t a b l e land have l i t t l e opportunity t o e n t e r cash cropping. The s t r u c t u r e of t h e e s t a t e s e c t o r is determined by the s i z e d i s t r i - bution of parcels of alienated land, t i t l e t o which was issued i n most cases e a r l y t h i s century. There a r e serious s t r u c t u r a l problems i n the e s t a t e sectors of the cocoa, coconut and rubber i n d u s t r i e s , with some holdings too small f o r economic redevelopment. The provisions of the P l a n t a t i o n Redistribution Scheme (PRS) have prevented dealing i n land between foreigners and thereby prevent the desirable s t r u c t u r a l adjustment which would otherwise occur i n a f r e e market s i t u a t i o n . ihey have a l s o resulted i n inadequate replant.l.lg and r e h a b i l i t a t i o n of e s t a t e s , since t h e formula f o r compensation of e x p a t r i a t e owners i n t h e event of a takeover by the Government does not adequately provide f o r such expenditures. The coffee, o i l palm and t e a i n d u s t r i e s do not s u f f e r t h e same s t r u c t u r a l problems, and the e x i s t i n g corporate e n t i t i e s appear i n most cases t o be of a s u i t a b l e size t o operate commercially. - Cocoa replanting t a r g e t s of 5,000 ha p.a. on smallholdings and about 3,500 ha on plantations a r e feasible. I n a d d i t i o b plantings on new e s t a t e s could amount t o about 2,000 h a p.a. Such a program co,uld ultimately increase t o t a l production t o about 90,000 XT p.a., o r t r i p l e t h e present l e v e l , although most of the increase i n production wouldnot occur u n t i l t h e 1990s. Investment of about K 120 m i l l i o n over ten years would be required and about 14,000 workers would be needed f o r the plantation developments. More rapid growth i n coffee production i s constrained by the general problem 02 inadequate extension services f o r smallholder producers an6 slow land processing and incorporation proceddres. Removal of these c o n s t r a i n t s could increase t h e r a t e of growth of Qroduction from 3% p.a. t o about 7.5% p.a., r e s u l t i n g i n 1990 production of Bbout 105,000 MT compared t o the 70,000 MT forecast. Expansion of coconut plantings would have t o be delayed u n t i l adequate supplies of hybrid o r other high- quality seed nuts were available. Hybrid seed production capacity would need t o be frebled and private plantation companies would probably be best placed t o da tp:-. A target planting r a t e of 10,000 ha p.a. i s feasible, divided approximately evenly between e s t a t e s and smallholdings. Such a program would invol+e possible - 32 - e s t a t e c r e d i t requirements of around K 4 m i l l i o n p.a. and smallholder c r e d i t of somewhat l e s s . It could result i n annual increases i n production of t h e order of 15,000-20,000 MT, o r a b w t 12% of present production. Given t h e delay which would be involved i n increasing seed productio,, however, a program of t h i s magnitude could not be commenced u n t i l t h e l a t e 1980s with p r o d ~ * c t i o ncoming onstream i n t h e mid-1990s. Increases i n rubber production could be stimulated i n both small- holder and e s t a t e s e c t o r s . The provision of marketing and processing f a c i l i - t i e s f o r cup lump from smallholders would increase r e t u r n s per man-day, and smallholder production could more than double by 1985 from e x i s t i n g mature t r e e s . S u b s t a n t i a l expansion of e s t a t e production, on t h e o t h e r hand, would r e q u i r e replanting, and production from replantings would not commence u n t i l t h e l a t e 1980s. Up to f o u r new o i l palm nucleus e s t a t e developments could be i n i t i a t e d during t h e 1980a, involving 2,000-3,000 smallholder families. A t f u l l production, t h e s e plantings wou1.d increase production by over 50%. Based on previous experience, smallholder c r e d i t and i n r r a s t r u c t u r e requirements would be of t h e order of K 30 m i l l i o n and t h e Government would need t o contribute 50% o f the equity f o r t h e nucleus e s t a t e companies i f precedents were followed, o r l e s s i f t h e p r i v a t e s e c t o r were allowed g r e a t e r control. Returns on t e a investment a r e u n s a t i s f a c t o r y and no expansion %s - l i k e l y regardless of any policy o r o t h e r changes. Output w i l l increase during t h e 1980s a s e x i s t i n g plantings reach peak production. The production of pyrethrum, c h i l l i e s and cardamom is mostly on customary land and i n t h e hands o f smallholders. There appears t o be l i t t l e scope f o r commercial production on a l a r g e r s c a l e , with t h e exception o f cardamom, although t h e r a t e of expansion i n production might be a s much a s doubled by higher p r i c e s and improved marketing services. Livestock. Smallholder c a t t l e , p i g and poultry p r o j e c t s have encountered s e r i o u s problems, l a r g e l y r e l a t e d t o inadequate support services. 3 e surviving p i g and poultry p r o j e c t s a r e concentrated near large- scale cperations from which such services a r e available. This seems a n e f f i c i e n t arrangement. The scope f o r comparable arrangements i n the beef industry i s l e s s , since beef production has high land requirements, n e c e s s i t a t i n g a g r e a t e r geographical spread of projects. Commercial beef ranches a r e of s u f f i c i e n t s i z e t o permit e f f i c i e n t - production, but t h e i r recent performance has been disappointing. The competi- t i o n from low-priced imports may have contributed t o t h i s poor performance, a s domestic p r i c e s were probably inadequate t o encourage maintenance o r expansion during t h e period of low prices. Self- sufficiency is c u r r e n t l y a t only about h a l f t h e l e v e l s achieved i n the e a r l y 1970s. Government policy has not encouraged new f o r e i g n investment i n ranching, and expansion is coming almost @ e n t i r e l y from p r o j e c t s promoted by t h e Government and t h e PNG Development I t 1 i I - 33 - Bank (PNGDB). A continuation of these p o l i c i e s would ultimately r e s u l t i n a ranch s e c t o r dominated by t h e Government and its agencies. More encouragement t o foreign investment i n beef ranches could r e s u l t i n renewed growth of t h e ranch s e c t o r and a possible 50% increase i n the number of c a t t l e , a t a c a p i t a l cosr f around K 6 m i l l i o n over ten years. There seems l i t t l e likelihood of grow,.. i n the smallholder sector d e s p i t e any l i k e l y policy changes, although improved extension services could maintain smallholder production a t present levels. Commercial pig and poultry production is dominated by large u n i t s near the main towns. A l a r g e proportion of these u n i t s is dependent on government (including PNGDB) ownership, finance or organization. The poul1:ry industry depends on protection from imports f o r its survival, and commercfal competitors t o serve a s yardsticks f o r the assessment of the .leed f o r cont:i- nued protection would be very valuable. Foreign investors a r e presently prevented from providing such yardsticks by t h e inclusion of poultry produc- t i o n i n t h e "reserved" list of the National Investment P r i o r i t i e s Schedule (NIPS). T5e poultry and pig industries a r e projected t o grow almost t o the l i m i t s of the domestic market, and there is no scope f o r expansion beyond t h i s . Feedstuffs a r e imported, a t a c o s t of about half the value of the finished product. Food Crops. There is l i t t l e szope f o r s i g n i f i c a n t expansion of the sugar industry beyond t h a t forecast. Should the i r r i g a t e d r i c e p i l o t project proceed and produce favorable r e s u l t s , large- scale commercial development could commence i n 1987 a t a r a t e of 1,000 ha ?.a. involving annual investments of about K 10 m i l l i o n and annual increases i n production of milled r i c e of 7,000 MT, compared t o imports of 92,000 MT i n 1980. Policy appears t c r e s t r i c t f r u i t and vegetable production t o smallholders and t o r e l y heavily on marginal expansion of subsistence a c t i v i t i e s t o produce a surplus f o r sale. This policy w i l l r e s u l t i n highly fragmented production and consequent high c o s t s of necessary technical support and marketing services. Transportati.on and i r r e g u l a r supply have been serious obstacle- t o import s u b s t i t u t i o n by smaliholder production and w i l l continue t o be for some time. Commercial f r u i t and vegetable production could, however, be increased rapidly with l a r g e - s c a l e o p e r a t i o n s , r e p l a c i n g imports of f r e s h products within a few years. Production of coarse g r a i n is l i k e l y t o be c l o s e l y t i e d t o expansion of the beef industry ,and with the investment suggested above, production c:ould b e expected t o increase by about 50%. I n summary, implementation of a l l of the investments suggested above -.,would c a l l f o r on-farm investments of roughly K 30 m i l l i o n p.a. ( i n 1981 p r i c e s ) , plus a possible K 20-25 million p.a. worth of c r e d i t and K 15-20 m i l l i o n f o r improvement of support services (of which a considerable portion should be recoverable from the beneficiaries). h e various investments w i l l compete with one another f o r scarce f i n a n c i a l and human resources, and it is unlikely t h a t a l l of them could be realized i n t h i s decade. If they were, the growth r a t e of t h e market a g r i c u l t u r a l s e c t o r could be nearly doubled, from under 3.5% p.a. t o about 6.51 p.a. d u r i t g t h e 1980s. The improvement would Se even more s t r i k i n g i n t h e l a t t e r p a r t of t h e decade, when most of t h e investments would have begun t o have a n impact on production. Between 1985 and 1990, average growth of market a g r i c u l t u r e could reach nearly 8% p.a., compared t o 2.5% without the a d d i t i o n a l investments. Perforrnancc would c s s t i n u e t o i m ~ r o v ea f t e r 1990. as some investments would not bear f r u i t f o r and 6,000-9,000 people i n r e f o r e s t a t i o n . 3.20 Land Resources. Reconnaissance land c a p a b i l i t y surveys i n PNG have been used t o c l a s s i f y land i n t o "very high," "high" and "moderate" s u i t a b i l i t y c a t e ~ o r i e sf o r a r a b l e crops, t r e e crops, improved pastures and 1-ooded rice. The r e s u l t s of t h i s c l a s s i f i c a t i o n a r e presented i n Table 6, which shows t h a t a v a i l a b l e land is abundant compared t o t h e present c u l t i v a t i o n of roughly 700,000 ha under cash crops o r pasture and 250,000-500,000 ha under subsis- tence production. The c l a s s i f i c a t i o n did not take account of economic consi- d e r a t i o n s such as a c c e s s i b i l i t y o r t h e s i z of contiguous areas of land with ~ p o t e n t i a l , and t h e s o i l s i n v e s t i g a t i o n was not d e t a i l e d . However, even allowing f o r t h e f a c t s t h a t t h e c l a s s i f i c a t i o n o f much of t h e land would be downgraded by more d e t a i l e d commercial i n v e s t i g a t i o n s and t h a t some would be required f o r subsistence production, i t can be s a f e l y concluded t h a t t h e r e i s adequate s u i t a b l e land f o r a l l new commercial developments l i k e l y t o be under- taken over t h e next 20 years. The mobilization of t h e s e land resources would, however, require major changes i n land administration and l e g i s l a t i o n . Table 6: LAND WITH POTENTIAL FOR DEVELOPMENT ('000 ha) S u i t a b i l i t y Very high High Moderate Tree crops 779 767 4; 049 Improved p a s t u r e 1,471 1,530 3,755 Flooded rice 1,189 2,609 2,338 Source: P. Bleelcer, "Explanatory Notes t o t h e Land Limitation , and Aszricultural Land Use P o t e n t i a l M ~ Dof PNG." Land 3 . 2 1 I n the t r e e crop sector, t h e land alrsady i n use (around 470,000 ha) c o n s t i t u t e s an important resource a v a i l a b l e f o r industry expansion. With t h e exception of t h e o i l palm, t e a and t o a l e s s e r extent coffee i n d u s t r i e s , t r e e crop y i e l d s a r e low and coul2 be doubled o r b e t t e r by replanting. 3 . 2 2 Man~owerResources. For many years t o come i n PNG there w i l l be a tremendous need t o expand employment and opportunities t o earn cash i n t h e a g r i c u l t u r a l s e c t 0 r . h There w i l l be adequate labor f o r any l i k e l y expansion of t h e primary i n d u s t r i e s , hut immobility of labor may r e s u l t i n l o c a l shortages. Some provincial governments a r e seeking t o r e s t r i c t t h e flow o f labor i n t o and out of t h e i r provinces, and i f these e f f o r t s a r e successful, labor a v a i l a b i l i t y could be f u r t h e r r e s t r i c t e d . I n addition, it w i l l ble necessary t o pay c l o s e a t t e n t i o n t o conditions of employment t o continue t o a t t r a c t labor. 3 . 2 3 Most of the a g r i c u l t u r a l s e c t o r is highly labor- intensive, and r e l a t i v e l y high wages p r e v a i l (see Table 4 above). Moreover, r u r a l wages a r e wel; below urban wages, and upward pressure on r u r a l wages may r e s u l t . This pros:Bect must have a dampening e f f e c t on investment i n t h e more labor- i n t e n s i v e industries. .High wagos appear t o have already r e s u l t e d i n reduced l a b o r usage per u n i t o f output i n t h e major t r e e crop industries. Cabor- saving devices and management methods a r e being increasingly adopted, and i n some i n d u s t r i e s +here is scope f o r considerably more such s u b s t i t u t i o n . Given r u r t h e r increases i n wages, it is therefore l i k e l y t h a t t h e contribu- tion which these industri 2s make t o employment -ill be reduced, even i f they remain commercially viable. Such an eventuality is p a r t i c u l a r l y disturbing given t h e enormous need f o r labor absorption i n t h e a g r i c u l t u r a l s e c t o r during t h e next decade and beyond. 3 . 2 4 Some i n d u s t r i e s use contracting and piece r a t e s t o increase labor productivity, although these p r a c t i c e s appear t o be of doubtful l e g a l i t y . There is, however, no reason why such p r a c t i c e s cannot work t o t>e advantage of both employee and employer, and o f f i c i a l recognition of them within t h e l e g i s l a t i o n would be desirable. 3 . 2 5 A l l primary i n d u s t r i e s remain heavily dependent on e x p a t r i a t e management d e s p i t e e f f o r t s t o t r a i n more l o c a l managers. Expansion would, i n t?: short term a t least, result i n the need t o bring i n more foreign managers, co!t.ary t o t h e objective of increased Papua New Guinean control of t h e economy. Similarly, within t h e public sector, t h e shortagf .F experienced -/1 See Chapter 11, Section B for a discussion of the magnitude of the problem. a g r i c u l t u r a l extension s t a f f is a major c o n s t r a i n t t o expansion of t h e small- holder cash crop industries. Greater e f f o r t s i n t h i s a r e a would r e q u i r e thle diversion of trained s t a f f from o t h e r work o r increased r e l i a n c e on f o r e i g n manpower. 3.26 A v a i l a b i l i t y of Capital. Enterprises o ~ e r a t i ni n~ t h e a g r i c u l t u r a l smallholder blocks using family labor involves few cash c o s t s and most have been established without c r e d i t . A t the o t h e r end of t h e s c a l e , large - scale developments require millions of kina i n loans and o b t a i n these from t h e i n t e r n a t i o n a l money markets. 3.27 Most business c r e d i t i n PNG is provided by t h e four t r a d i n g banks, one of which is owned by t h e Government, which operate a. network of brar-ches: i n a l l main towns and business cen'srs. They a r e a c t i v e i n providing seasonal marketing finance and some deve1oprr.-zt c r e d i t . However, t h e i r r o l e i n fundfng I ; a l i d i t y of land a s s e c u r i t y following t h e introduction of t h e P l a n t a t i o n Redistribution Scheme is a f u r t h e r d i s i n c e n t i v t o l o n g - t e n lending. The I lack of long-term loan finance could, i n tte cases o f bigger i n v e s t o r s , be have had di-fficulty borrowing overseas, although monetary a u t h o r i t i e s a r e currently encouraging them t o do so. I is important i n financing rural investment, especially for Papua New - c l a n land usage agreements a s secclrity. While chey have l i t t l e legal- - . l o a n s f o r the development of l a r g e r a r e a s of land by the custoaary owners. l- o p ~ o r t u n i t yt o acclmulate cash equity has be n acconmodated by the PNGDB accepting other forms -2 e q u i t y , mainly ir. tllo form of "sueat equity" or unpaid labor by the owner o r owners of the project. 3.29 The FNLJD provides s u b s t a n t i z l amoants of smallholder c r e d i t and, k given the high p r i o r i t y of smallholder devel pment, zdequate funds w i l l projably be a v a i l a b l e f o r t h i s type of l e n d i g . 'I3e najor obstacle is the 'ypica; s i z e of smallholder loans coupled with the lrf-gh c o s t of rrperat.i,lg i n r u r a l a r e a s . I t h a s c a t t e r e d population. FO\ very small l u a n s , it is unlikely 4 t h a t PNGGE could cover c o s t s even i f a l l s e r i c i n g payments re made on time. Therc is an urgent need t o devise less expea i v e ways of d i s t r i b u t i n g redevel- o p e n t finance and c o l l e c t i n g repayments. e method t h a t has proven saccessful i n other countries is t o co? .ect general levy on export crops and r e t u r n t h e funds t o t h e growers through $uhsidies f o r replanting. The Eank has proposed t h a t t h i s p o s s i b i l i t y , aloqg with tist of providing other i z c e n t i v e s f o r reinvestment, be canvassed. I 3.30 In additio? t o its involvement tllr u h the two government-owned 9 " banks, t h e Goverilmer~thas intervened d i r e c t l y i n the c r e d i t system. The Village Econosic Development Fund makes banks t o Y:-pua ?Sew C-uineans under the Credit Scheme. More recently scheme f c r firms 1.-kich can i d e n t i f y i n the e a r l y years of a new project. B e l a t t e r scheme p a r t i a l financing on leniemt costs exceeding be used f o r f e a s i b i l i t y srttdies, with the grant t o be repaid proceeds. 1.31 Despite these additions t o the c r e d ~ i tsystem, two important needs a r e not adequately catered f o r urder the exislting system. Smallholders with small a r z a s of crop i n need of replanting ac )rial: f i t r e a d i l y to any of thc e x i s t i fie c r e d i t schemes. However, they need (financial assistance t o r e p l a n t , s i n c e many have no unused iand t o develop and( must remove old t r e e s before planting . They ha;*.! become more dependent r n ca sl; than t r a d i t i o n a l subsis- tence farmers aud a r e r e l u c t a n t t o forego the) small iccome from tk;.ir s e n i l e k trees i n the absence of an alternative source of cash. The owners of smaller e s t a t e s i n need of redevelopment art-.-s i m i l a t l neglected under exisridg c r e d i t arrangements. Foreign owners do not 1:ave acc ss to PNGDB loans and t h e comuercial banks do not provide lozns with l o g enosgh terms for t r e e crop development. - 38 - Tnfrastructure. Lack of i n f r a s t r u c t u r e is a major impediment t o cmmercial development i n p a r t s of PNG. The road system is fragmented and does not extend t o many p a r t s of t h e country, although i t has expanded rapidly over the past 20 ycars. A i r t r a n s p o r t has been used extensively, but i s expensive, and t h e p r i c e of most primary products is too low t o j u s t i f y a i r Sreighting. ?he main c o a s t a l towns are served 'J overseas wharves, but l a r g e areas of lowland v i t h development p o t e n t i a l have nc access t o a plort. I n a d d i t i o n t o its ongoing progrm oF . L L ' a s t r u c t u r e construction, the Government has i n i t i a t e d a study of t h e .,eLdb and appropriate standards f o r r u r a l transport. The Government w i l l 915- consider providing i n f r a struc- ture, including buildings, f o r new p r o j e c t s i n r e t u r n f o r a negotiated annual user charge. The charge would r e f l e c t the Government's exposure t o r i s k and the opportunity c o s t of government funds, so t h i s provision does not involve any subsjdy element. It may be attractive to potential large-scale investors, however, i n t h a t it reduces t h e i r "front-end" r i s k . C. Government P o l i c i e s The national objectives of Papua New Guinean control and involve- ment i n t h e economy and of s e l f r e l i a n c e have been pursued i n t h e a g r i c u l t u r a l sector through controls on foreign investment, t h e use of foreign manpcwer and foreign o ~ e r s h i pof land. The a r c h i t e c t s of t h e s e objectives recognized t h a t they would only be achieved at t h e expense of some econanic growth. During the l a t t e r half of the 1970s growth was s a c r i f i c e d i n a number of ways. Large amounts of government, PNGDB and trading bank funds were used t o finance the takeover of fo reign-oined businesses by Papua New Guineans. The 2 l a n t a tion kedistribntion Scheme, which has been l a ~ r g e l yresponsible f o r t h e l o c a l i z a t i o n of :he plantation industries, has a l s o been a f a c t o r contributing t o t h e mslaise of t h e rubber, cocoa and coconut pla 'ation s e c t o r s , and its effectiveness i n providing b e n e f i t s t o P?pua New Guineans is questionable, since many acquired plantations were i n poor condition. A more open-door policy touards foreign investment would no doubt have resulted i n f a s t e r growth of e s t a t e a g r i c u l t u r e , f i s h i n g and f o r e s t r y . 1. - Forms of Growth While a maximum-growth s t r a t e g y may not he appropriate f o r P W - t h e achievement of some goals requires economic grovth. Different forms of growtt contribute i n d i f f e r e n t ways t o t h e achiievement of government objectives. In general terms, decentralized development of small- scale production u n i t s is most e f f e c t i v e i n achieving t h e objectives of e q u a l i t y of incanes and geographical spreading of the b e n e f i t s ok growth. Larger- scale investment i n areas most favored f o r development can contribute t o government revenue and t o economic s e l f reliance. The employment generated on large projects a l s o contributes t o wider d i s t r i b u t i o n of cash incomes. I 3.36 These d i f f e r e n t forms of growth a l s o make d i f f e r i n g demands on public resources. Small- scale developments a r e generally heavily dependent on the Government f o r extension, c r e d i t , markdting and o t h e r services. Larger projects should be largely independent of government services, although i n cases where the Coverwent e l e c t s t o take qquity and provide infra- s t r u c t u r e , a s u b s t a n t i a l f i n a n c t a l c o s t is inuolved. Large projects a l s o make heavy demands on government s t a f f durinp, t h e planning and negotiat Lon phases and smaller continuing demands t o ensuqe t h a t corllmitments by investors a r e m e t . 3.37 Small- and large- scale growth should not be seen a s competitive; i n many cases they can be corn~lementaryand i n an(y case t h e resources they use a r e drawn from d i f f e r e n t sources. The e ~ t a b l ~ s h enucleus e s t a t e s provide t h e d best-known example of complementary e s t a t e and smallholder development. There a r e , however, o t h e r ways i n which e s t a t e s and smallholdings can collaborate and a s s i s t one another. Large f i s h i n g and f o r e s t r y operations could process and market logs and f i s h produced by smaller vbntures i n nearby areas; t h e demonstration e f f e c t and employment of Papua ~ k Guineans on e s t a t e s h a*, been w important i n promoting acceptance of cash cropb by smallholders; e s t a t e s could provide high- quality planting material t o s m a l ~ h o l d e r s ;e s t a t e management could oversee nearby smaller- scale developmentp and provide some contract s e r v i c e s ; smallholdings could supply produce t~ e s t a t e s and increase u t i l i z a - t i o n of t h e i r processing and marketing f a c i l i t f e s . To t h e extent t h a t e s t a t e s provide s e r v i c e s required by smallholders, t h e Government is relieved of t h a t obligation. Given proper encouragement, a f l o b r i s h i n g e s t a t e s e c t o r could provide a strong stimulus to smallholder develbpment and f r e e government resources f o r other junctions. 2. Smallholder Growth 3.38 The development of smallholder r u r a l e n t e r p r i s e s has highest prior- i t y within the Government, and there a r e no policy obstacles t o expansion. Most smallholdings are developed on customary land by t h e landowners, and land l e s i s l a t i o n does not constrain development- Rdgistration of t i t l e might a s s i s t i n obtaining credic, but would be extre+ely expensive, and the c o s t s of r e g i s t r a t i o n would probably outweigh the benefits. Papua New Guineans who belong t o clans which do n o t own land s u i t a b l e f o r commercial development a r c disadvantaged under the e x i s t i n g patterns of 14nd ownership and use, but a r e v i v a l of land settlement schemes seems unjusqified o t h e r than i n nucleus e s t a t e type arrangements where services can be Iprovided e f f i c i e n t l y and p a r t of the c o s t s recouped from t h e beneficiaries. 1 I 3.39 Extension, c;edit and marketing services a r e t h e c r i t i c a l con- s t r a i n t s t o the expansion of smallholder produ tion. The Department of Primary Industry (DPI) has t h e main responsibiQfty f o r extension and marketing, while the PNGDB is responsible f o r above. DPI extension s e r v i c e s a r e most import agricul- t u r a l a l ~ dsmall- scale f i s h i n g development. DP providing a n e f f e c t i v e extension service, r e l a services and inexperience of extension s t a f f . ( m e l a c k of ,-lear program and 40 - achievement t a r g e t s is seen a s a f u r t h e r d i f f i c u l t y f o r f i e l d s t a f f . The Bank proposed t h a t a plan t o improve extension s e r v i c e s a s well a s a five- year a g r i c u l t u r a l development plan be prepared. The Government is developing a support s e r v i c e s project and has funded a research project t o examine smallholder coffee development i n the context of subsistence farming and t h e implications f o r extension servic4s. These a c t i o n s should c o n t r i b u t e t o t h e remcval of what is presently a s e r i o u s constraint t o smallholder deveiopment, Progress i n ovehcoming these problems w i l l be slow, and planning should proceed on t h e 8ssumption t h a t the capacity of DPI . t o provide extension s e r v i c e s w i l l continqe t o be a constraint. Similar considerations apply to DPI's marketing s e r v i c e s which a r e operated at f i e l d l e v e l by extension s t a f f . The adverse e f f e c t s of these c o n s t r a i n t s can be reduced i n two ways. Nongovernmental organizaEions could provide extknsion and marketing s e r v i c e s t o supplement those provided by PPI. This has already occurred t o some extent and g r e a t e r progress would b e p o s s i b l e i f a major program of e s t a t e s e c t o r r e h a b i l i t a t i o n were mounted. The Government is taking s t e p s i n t h i s direction. In addition, consideration could be given to the extension and markettug requirements of i d d u s t r i e s before encouraging smallholder participation. I n t h i s regard, t h e technology of the t r a d i t i o n a l t r e e crops is reasonably well understood by smallholders, and e f f i c i e n t p r i v a t e marketing s e r v i c e s existi i n most areas. On the other hand, commercial vegetable production, e s q e c i a l l y of exotic v a r i e t i e s , is l e s s well understood and requires h i g h - q q l i t y extension. Moreover, perishable products such as vegetables an4 f i s h r e q u i r e e f f i c i e n t marketing s e r v i c e s t o avoid unreasonably high c o s t s and l o s s e s through wastage. Given a limited amount of extension and marketidg resources, more economic a c t i v i t y could be promoted i n t h e t r a d i t i d n a l export trze crops i n d u s t r i e s than i n domestic food production. 3. Large- scale Growth No s i n g l e policy could be s a i d t o be responsible f o r the poor performance of p a r t s of the s e c t o r s under review; likewise no s i n g l e policy change will remedy the s i t u a t i o n . In the f i s h e r i e s and f o r e s t r y i n d u s t r i e s , che present l e v e l of e x p l o i t a t i o n is appropriate t o t h e resource base. Forest a c t i v i t y could be expanded by a package of p o l i c i e s involving a more l i b e r a l approach t o foreign investment i n log expsrting, coupled with heavier taxation of t h a t a c t i v i t y and g r e a t e r encouragemen6 o r compulsion of foreign investors t o engage i n r e f o r e s t a t i o n . / l The latter would a l s o require improvements in land administration. In t h e t r e e crop industries, the copra, cocoa and rubber estate sectors a r e i n urgent need of redeqelopment and t h i s is the area i n which r e t u r n s t o investment should be higvest. Redevelopment would r e q u i r e l a r g e amounts of c a p i t a l , expert management and high- quality planting material. Suitably q u a l i f i e d investors, dirh access t o large enough a r e a s of land could provide a l l of these inputs. -11 A recent government policy paper did call for liberalized log exports but lower foreign p a r t i c i p a t i o n , given thq r e l a t i v e l y low c a p i t a l i n t e n s i t y of log zxporting (see Annex C). I Inadequate plantation manage~enth a s been a problem f o r some years. It has recently been demonstrated by the Natiohal Plantation Management Agency and by private companies t h a t e f f e c t i v e manageinent can be provided on an agency basis. Costs a r e high, however, and the use of such management is only f e a s i b l e on commercially sound developments. bn e s t a t e s purchased from expa- t r i a t e s , the former owners could be retained ot! contract a s managers, with remuneration based i n part on performance. Land l e g i s l a t i o n andlor administratiOn a r e serious constraints t o development of large- scale reforestation, a g r i q u l t u r a l and livestock projects. I f more rapid growth i n these a c t i v i t i e s is de$ired, highest p r i o r i t y w i l l need t o be given t o reform of land policy. Whjle the Plantation Redistribu- tion Scheme legislation is by no means the on13 cbstacle to estate redevelop- ment, redevelopment w i l l not occur while it remaim i n force. Policies r e l a t e d t o t h e e s t a t e s e c t o r were reviewed i n 1979 by the Committee of Review i n t o t h e Plantation Redistributioa Scheme. It recommended that the Scheme be repealed and replaced by a r e l a t i v e l y simple aqendment t o the Land Act. It a l s o recommended that t h e market f o r plantatior?s should be opened up i n a way t h a t would permit the type of s t r u c t u r a l adjusqment which is a necessary precursor t o commercial redevelopment. The Barlk has endorsed the recommendations of the Committee of Review and proposed terms of reference f o r a review of the e s t a t e sector. The implene(ntation of those recommendations, together with r e l a t i v e l y simple amendments t o the National Investment P r i o r i t i e s Schedule, would set the .stage for the redevelopment. of plantations. I n 1980 t h e Government suspended the PRS and it l a t e r reversed two policy decisions t h a t had prevented l e a s e s ldated p r i o r t o 1974 from being reissued and had forbidden the t r a n s f e r df leases among noncitizens. A s only l e a s e s issued p r i o r t o 1974 a r e subject, t o the PRS, t h e reversals mean t h a t plantation owners w i l l be able t o obtpin s e c u r i t y of tenure and t h a t f r e e market trading is plantations w i l l b e allowed to f a c i l i t a t e the a g r i c u l t u r e , its primary conLerns a r e r e h a b i l i t k t i o n and increased local involvement. Therefore the reissue and transfer of leases will still be s u b j e c t t o three conditions: t h a t there is no demonstrable land shortage i n t h e area; t h a t the owners give firm commitments t o redevelop the land; and t h a t every e f f o r t w i l l be made t o involve Papua New Guineans i n the enterprises. I I* I - 42 - t h e demands on the domestic c r e d i t system. While i n t h e s h o r t run, t h i s s t r a t e g y would involve l o s s e s i n terms of t h e o b j e c t i v e of increased Papua New Guinean ownership and c o n t r c l , it would permit g a i n s e i t h e r i n increased government funding of smallholder development ( o r o t h e r p r i o r i t y a c t i v i t i e s ) o r slower growth i n government spending and consequently increased progress i n reducing dependence on aid. Procedures could be e s t a b l i s h e d f o r eventual divestment t o Papua New Guinean ownership, but with g r e a t c a r e t o compensate owners adequately f o r investment they have made i n improving t h e plantations. I n the beef ranch s e c t o r , access t o land and t h e lack of p r i v a t e investment a r e t h e main c o n s t r a i n t s t o growth. Expansion would r e q u i r e strengthening of land administration, e s p e c i a l l y i n regard t o t h e c a p a c i t y t o inform and negotiate with landowners t o gatn access t o t h e necessary a r e a s of land. Given t h e a v a i l a b i l i t y of land, g r e g t e r r e l i a n c e on p r i v a t e foreign i n v e s t o r s (possihly i n j o i n t venture arrangements) would permit t h e governmrnt and PNGDB resources presently being used f b r ra1:ch development t o be used i n o t h e r ways. Similarly, promotion of foreikn investment through changes ir- c l a s s i f i c a t i o n i n t h e Vational Investment P r i o r i t i e s Schedule, could reduce t h e dependence of t h e p i g and poultry i n d u s t r i e s on government e n t e r p r i s e s . I n t h e import replacement i n d u s t t i e s , a decision t o accept large- s c a l e development has resulted i n t h e establishment of what appears t o be a v i a b l e sugar industry. A s i m i l a r decision i n r e l a t i o n t o r i c e is presently i n e f f e c t i v e a s a r e s u l t of a land dispute. Large- scale vegetable production is discouraged, while irregular supply and high transportation costs have prevented t h e development of import s u b s t i t u t i o n t o any g r e a t e x t e n t by small- holders. Self- sufficiency i n food would probably be increased more e a s i l y and cheaply by large- scale production u n i t s . t h i s need not necessarily involve f o r e i g n investors, an3 l a r g e n n i t s could a s s i s t smallholder producers by providing i n p u t s , t e c h n i c a l advice and marketing services. I - 43 - IV.. INDUSTRY 11 - A. S t r u c t u r e and Xecent Growth The i n d u s t r i a l s e c t o r i n PNG accounts f o r about 14% of G~p.12 Manufacturing accounts f o r about 10% of GDP, comparable t o Indonesia and Burma. Typically f o r a country i n t h e e a r l y s t a g e s of i n d u s t r i a l i z a t i o n , two t h i r d s of t h e manufacturing value added is contributed by food, beverages, and wood products. Employment i n manufacturing accounts f o r about 10% of t o t a l formal employment, and, somewhat a t y p i c a l l y f o r a developing country, PNG has a very small informal s e c t o r , confined l a r g e l y t o handicrafts and t o an unknovn number of small groups working i n construction. Industry is concentrated i n the two l a r g e s t c i t i e s , Port Moresby and Lae, and a few o t h e r locations. Growth i n manufacturing appears t o have been-on t h e order of 10% p.a. i n r e a l terms during t h e period FY73-1978, with t h e strongest growth occurring i n beverages and i n processing of t e a , coffee, and cocoa. Srowth of e l e c t r i c i t y generation has fluctuated widely, but averaged close t o 10% p.a. i n 1978 and 1979, while construction f e l l as a proportion of GDP from 4.7% t o 4% over the f i v e year period. Real value added per employee . apparently grew a t around 7% p.a. i n real terms during FY73-1978, and i n d u s t r i a l employment increased at 3.8% p.a. I n 1979, n e t foreign private investment was close t o one f i f t h of t o t a l p r i v a t e investment i n PNG, but i f e a r l i e r patterns prevailed, t h i s was concentrated i n mining, a g r i c u l t u r e , f o r e s t r y and fishing. B. National Goals and P o l i c i e s I n simplified terms, PNG's i n d u s t r i a l development p o l i c i e s can be characterized as emphasizing o v e r a l l economic and s o c i a l goals, r a t h e r than pure growth, and as favoring primary r e l i a n c e on market forces. The Government has no general i n d u s t r i a l development plan, b u t f a i r l y elaborate general goals and p o l i c i e s with regard t o industry were s e t f o r t h i n the f (September 1975) and repeated i n more general terms i n t h e National Development Strategy (October 1976)./3 Both documents a r e based on t h e "eight\aimsWdescribed above. 11 Annex D presents a more detailed account of the industrial sector. The i n d u s t r i a l s e c t o r includes man~facturing",u t i l i t i e s and construction. It excludes the large mining sector. 13 These statements a r e described i n G.B. Baldwin, e t . a l . , Papua New Guinia: - - Its Economic Situation and Prospects for Development, The World Bank, Washington, D.C., 1978, pp. 64-68, 144-147 and Appendix C; r e l i a n c e on foreign aid; promote r u r a l development and provide inputs t o a g r i c u l t u r e ; c r e a t e productive employment, w i t h s p e c i a l a t t e n t i o n t o problems of rural- urban migration and unemployed scljool-leavers; develop national - p;ivate- s e c t o r a c t i v i t y , small- scale and v i l l a g e i n d u s t r i e s and l o c a l i z a t i o n of employment and ownership. Foreign investment is encouraged, but only w i t h i n s p e c i f i c guidelines. t i o n should minimize environmental damage and "take place only a t a r a t e necessary t o augment t h e Government's revehue base and foreign exchange requirements, and t o promote its regional development plans." The main emphqsis i n manufacturing should be on lab+-intensive, agro-based i n d u s t r i e s . Urban industry proposals should be consideied on a case-by-case, net b e n e f i t basis. Tourism can be developed so long a& it f o s t e r s and preserves tradi- tional customs and culture. 4.06 These general principles guide l e g i s l a t i o n and regulation of industry, government a s s i s t a n c e programs apd t h e screening of all foreign investment applications. The latter is undertaken by t h e National Investment and Development Authority (NIDA) i n accord with its annual National Investment P r i o r i t i e s Schedule (NIPS). New p r o j e c t s by foreign e n t e r p r i s e s 11 i n a: - s e c t o r s a r e eit. 2: welcomed a s " p r i o r i t y " a c t i v i t i e s o r excluded, a s a general r u l e , as "reserved" a c t i v i t i e s . Examples of high p r i o r i t y i n d u s t r i a l a c t i v i - t i e s i n t h e latest NIPS fire integrated f o r e s t and f i s h i n g industries, ship- s u b s t i t u t i o n goods which have been i d e n t i f i e d by t h e Government a s having p o t e n t i a l f o r development, many on a joint venture basis with local partners. Reserved i n d u s t r i a l a c t i v i t i e s a r e limited t o the f i r s t - s t a g e processing of copra, coffee and peanuts, s i l k s c r e e n prir.ting, h a n d i c r a f t s and commercial reproduction of a r t i f a c t s . 4.07 I n addition, the NIPS contains d n e r a l and s p e c i f i c s e c t o r guide- l i n e s and criteria f o r new foreign investmknt. General c r i t e r i a inciude t h e o b j e c t i v e s of t h e Framework f o r I n d u s t r i a l D e v e l o ~ m e n t~ l u tsh a t of establish- - I1 An enterprise that is 26% o r nmre ownek by foreigners is regarded as a foreign enterprise. I I -- 1 2 NIPS, a i x t h Edition. New p r o j e c t s i n ininerals and petroleum, which a r e not here considered part of industry, gre a l s o considered t o be of t h e h i g h e s t p r i o r i t y . I I I - 45 - limited i n f a n t industry import protection. No s e c t o r a i guidelines a r e given f o r manufacturing, but cons t ~ cion proposals should emphasize use of local t materials and labor, and f o s t e r development of national s k i l l s and ownership. C. Prospects While i n d c s t r i a l development i n PNG w i l l obviously remain limited by its small market, its shortage of indigenous s k i l l s and its relatively high wages, f u t u r e growth, p a r t i c u l a r l y i n manufacturing, should b e n e f i t from t h e construction of Ok Tedi over the next few years, some increases i n domes- t i c demand a r i s i n g from improved i n t e r n a l transport and f u r t h e r monetization, and a normal expansion i n t h e share of manufactured consumer goods i n p r i v a t e market consumption./l Some small degree of import s u b s t i t u t i o n can also be expected t o continue. Constraints on the supply side should ease a s labor s k i l l s and entrepreneurial a b i l i t i e s g r a d -a l l y improve. An important policy variable here w i l l be the degree t o which foreigners a r e used t o a l l e v i a t e general and s p e c i f i c s k i l l shortages i n industry and supporting services. Overall, demand and supply f a c t o r s would seem t o point t o a p o t e n t i a l f o r somewhat more rapid i n d u s t r i a l growth than i n thd 1970s. Further development i n manufacturing w i l l take place l a r g e l y i n processing of primary products f o r export and production of a few consumer and i n d u s t r i a l goods i n which PNG has a comparative qdvantage r e l a t i v e t o imports. 12 The former component contributes about 30% of manufacturing value a d x d and should grow somewhat f a s t e r than the market portion of the a g r i c u l t u r e , f o r e s t r y and f i s h i n g s e c t o r , a s already i d e n t i f i e d sugar, tuna processing, and timber p r o j e c t s a r e established on a r e l a t i v e l y small manu- facturing base. The l a t t e r component should grow somewhat f a s t e r than the economy i n general; its e l a s t i c i t y with respect 70 p r i v a t e consumption has been roughly 1.2, and the c o r s t r u c t i o n of the Ok Tedi mine w i l l have important i n d i r e c t e f f e c t s . U t i l i t i e s should grow a t a r a t e well above t h a t of the economy i n general, based on expected demdnd growth of around 7% p.a. 11 Nonfood, nontransport, manufactured goods accounted for about 37X :.i urban consumption expenditures i n FY76 (Bureau of S t a L i s t i c s , Household Expenditure Survey). I2 Examples of import s u b s t i t u t i o n a r e heverages~, sugar, ceramics, l e a t h e r goods, and furniture. Products i d e n t i f i e d b$ the Government a s having p o t e n t i a l f o r development a r e bandages, nuts pnd b o l t s , d r y c e l l bat- t e r i e s , f i s h i n g nets, l i n e and rope, p l a s t i c 'and rubber m o d s , and hand I I i i I I I i d - 47 - l a r g e l y de'-ermine .the value of the kina i n t h e foreseeable future, b the longer-term effelcts on i n d u s t r i a l employment should a l s o be considered i n foreign exchange policy delibera- tions. ( i v ) Shortage of Available Land. The t r a d i t i o n a l system of land tenure i n PNG, discussed above i n the context of a g r i c u l t u r a l cievelopment, also poses problems f o r acquiring s i t e s for f a c t o r i e s and f o r building the necessary housing for employees. E. Specific I n d u s t r i a l P o l i c i e s and Programs Although PNt;'s i n d u s t r i a l p o l i c i e s can be characterized generally a s embracing f r e e market forces and an open economy, the Government does inter- vene i n a number of ways. A t l e a s t seven derartments /1and several other i n s t i t u t i o n s have r e s p o n s i b i l i t y f o r some aspects of i n d u s t r i a l policy and programs- Most interventions serve a useful purpose f o r the economy a s a whole, but some tend t o c r e a t e obstacles t o new operations and, i n general, they would gain from some consolidation. I n some cases, new government i n i t i a t i v e s would be appropriate. 1. Project I d e n t i f i c a t i o n and Extension Four departments and two other ir.stitutions have programs f o r identifying i n d u s t r i a l p r o j e c t s and sometimes f o r developing them on a p i l o t basis. They concentrate on small- scale p r o j e c t s intended f o r development by n a t i o n a l s o r by joint ventures./2 The f>ur departments a l s o provide information and extension t o i n G r e s t e d investors. These services s u f f e r from a lack of coordination. Responsibilities a r e not well defined, and some information never becomes available t o the business development o f f i c e r s who work f o r proviacial governments and a r e best placed f o r disseminating it widely. These services would be strengthened by cmbining t h e Department of Commerce and t h e I n d u s t r i a l Development Divisicah of the Department of Labor and Industry i n t o one department of industry responsible f o r general policy and coordination of a l l government i n i t i a t i v e s . The business extension service merits expansion and increases i n responsibilities to encourage good o f f i c e r s t o remain i n the service r a t h e r than moving t o the p r i v a t e sector. Creation of a national pool of s p e c i a l i s t business development o f f i c e r s would help the provinces and would provide promotion opportunities f o r the best o f f i c e r s . Provincial e f f o r t s a l s o need beyter coordination. 2. Foreign Investment The i n i t i a t i v e f o r foreign investment g e n e r a l l y comes from the investor, except i n the case of some large proj4cts of p a r t i c u l a r i n t e r e s t t o I I - 48- t h e Government. Proposals a r e screened by the relevant departments and provinces and must be approved by the l a r g e interdepartmental board of the National Investment and Development Authority (NIDA). Expansion of e x i s t i n g f o r e i g n operations is generally approved, but proposals f o r new a c t i v i t i e s may encounter delays o r r e j e c t i a n s , due i n part to the lengthy and complicated approval process. Decentrailzation has created another l a y e r of government with which t o deal and a d d i t i o n a l uncertainty. An integrated s e r v i c e f o r investors uould f a c i l i t a t e foreign investment, and f o r smaller p r o j e c t s , the NIDA board could delegate approval a u t h o r i t y to a small executive committee. PNG o f f e r s f e u f i n a n c i a l incentives compared t o many other coun- t r i e s . The main incentives a r e f r c e e x p a t r i a t i o n of p r o f i t s , accelerated depreciation, writing forward of l o s s e s f o r seven years, a 200% t a x deduction f o r wages of apprentices ( t o encourage t r a i n i n g ) , provision of i n f r a s t r u c t u r e i n return f o r user charges, and a contribution of up to K 100,001 f o r feasi- b i l i t y studies i n certain industries. The limited nature of i-lcentives t o foreign investment r e f l e c t s the Government's d e s i r e to l i m i t subsidization of foreign involvement i n the economy and t o encourage national participation. In any case, the major c o n s t r a i n t s t o investment would not be a l l e v i a t e d by f u r t h e r incontives. Instead it would be preferable to reduce b a r r i e r s t o e n t r y and encourage wider investor i n t e r e s t by streamlining NIDA approval procedures, improving the a v a i l a b i l i t y of land f o r both housing and industry, and allowing g r e a t e r use of e x p a t r i a t e s when necessary. The Government could s t i l l determine the level and nature of foreign investment, but would have a l a r g e r array from which t o choose. 3. Financial Assistance t o National Firms Four programs have been established to assist national investors - t h e Credit Guarantee Scheme, the Village Economic Deveiopment Fund, the National Investors Scheme, and the PNG Development Bank.11 Of these four sources of finance, t h e Development Bank is by f a r the m o s t importar,t; its lending totaled K 21.4 m i l l i o n i n 1980, but the bulk went to agriculture and - commerce, with only 10% going to industry. Agricultursl f i e l d agerlts a s s i s t i n v e s t o r s i n developii~gand monitoring loan proposals, but business develop- ment o f f i c e r s have proven inadequate t o provide s i m i l a r assistance f o r indus- t r i a l and c~mmercialloans. The Development Bank plans to expand its own s t a f f f o r t h i s purpose. Indalstrial p r o j e c t s ::ave received 9% of the K 3 m i l - l i o n s o f a r extended by the Credit Guarantcr Scheme. No information j.s a v a i l a b l e a s to the uses of the unreported and unmc~~itoredVillage Economic Development Fund g r a n t s made by the provinces. The Xational Investors Scheme began lending i n 1980; t h e f i v e projects approved through March 1981 were i n a g r i c u l t u r e and commerce. -I 1 See Chapter I11 and Annex D f o r more d e t a i l s on these programs. 4.18 The Investment Corporation of PNG was established i n 1972 t o h e l p mobilize n a t i o n a l savings hnd increase Papua New Guinean p a r t i c i p a t i o n i n foreign firms by purchasing shares and s e l l i n g them t o nationals. A s of the end of 1980, the Corporation held K 27.6 million i n n e t a s s e t s , of which s l i g h t l y over one t h i r d was held by n a t i o n a l s through a mutual fund repre- s e n t i n g 10,000 shareholders. Small savings a r e held mainly by about 150 savings and loan s o c i e t i e s , which had t o t a l a s s e t s of K 32 million a t t h e end of 1980. Over half of t o t a l loans by these s o c i e t i e s a r e t o purchase vehicles o r housing. 4.19 During 1977-79, the Government d i s t r i b u t e d a n average of K 200,000 i n grant and loan funds t o each province f o r t h e establishment of P r o v i ~ . c i a l Development Corporations (PDCs). No guidelines were s e t out f o r use of t h e funds, and the r e s u l t s have varied widely. Some PDCs have gone bankrupt o r squandered l a r g e s ~ m so f a d d i t i o n a l money obtained from provincial govern- ments, but some have proved imaginative and successful i n promoting invest- ment. I n view of the emphasis on decentralization, t h e PDC experiqent war- r a n t s c a r e f u l examination i n term.; of l o c a l government c a p a b i l i t i e s , pol.'tical influence, and a l t e r n a t i v e means of using scarce resources t o qromote develop- ment. It would seem best t o rely on the private sector t o create viable e n t e r p r i s e s with help from established channels of a s s i s t a n c e (especially t h e Development Rank and t h e Credit Guarantee Scheme). I n PNG, with its limited i n d u s t r i a l p o t e n t i a l , problems of unemployment and poverty can be attacked more e f f e c t i v e l y through d i r e c t measures such a s a g r i c u l t u r a l developnent o r r u r a l works, than through the creation of unprofitable e n t e r p r i s e s . 4. Trade P o l i c i e s 4.20 PNG maintains a generally open t r a d e regime, with primary r e l i a n c e on market forces t o promote i n d u s t r i a l i z a t i o n . Such a policy is extremely b e n e f i c i a l f o r t h e development of t \ e econom:T zlong e f f i c i e n t l i n e s and should be maintained. Interventions have been made, but a c l e a r ~ o l i c yis lacking, r e f l e c t i n g t h e vagueness and d i f f u s i o n of government p o l i c i e s toward i n d u s t r i a l i z a t i o n . Although import quotas a r e generally shunned, exceptions have been made on an ad hoc bas's t o p r o t e c t c e r t a i n i n f a n t i n d u s t r l e s , i . e . f l o u r , poultry, animal feed and, i n t h e f u t u r e , sugar. The impact of these measures on t h e economy is not clear. A basic levy of 2.5% is imposed an most imported goods except b a s i c foods and medicine, but t a r i f f s range up t o 50% f o r luxury goods and a r e waived f o r c a p i t a l goods and raw materials. Duties os most other manufactured goods range from 10-17.52, and s f f e c t i v e t a r i f f r a t e s a r e prcbably below 25%. Decisions on r e q u e s t s f o r p r o t e c t i v e t a r i f f s a r e m?de on an ad hoc b a s i s i n response t o requests by manufacturers. Such requests a r e l i k e l y t o multiply i n t h e future,.and, remembering t h a t t h e c o s t s of protection a r e borne by exporters, dnd t o avoid t h e development of an inconsistent and i n e f f i c i e n t profusion qf t a r i f f s , t h e Government should reaffirm its po1f:cy of reliance-on market- p r i c e s and shoclld e s t a b l i s h b e t t e r procedures f o r hanrl1ir.g tequests. 4.21 Export taxes on primary products a r e s e t at 2.54 t o min~imizet h e impact on r u r a l producers. ( E s t a t e s a l s o pay t h e company income tax.) Some attempt has been made t o encourage processing, p a r t i c u l a r l y of timber pro- d u c t s , by r e l a t i n g t h e t a x inversely t o t h e degree of processing, up t o a 10% tax. An export i n c e n t i v e scheme and t a r i f f drawback system a r e a v a i l a b l e f o r manufactured exports, but a r e little used due t o t h o s c a r c i t y of such exports. PNG has gaincd duty f r e e access f o r most of its expor'a t o A u s t r a l i a and New Zealand, and its primary exports t o t h e EEC a r e f r e e of duty under t h e Lome Convention. Regulation and Related Obstacles 4.22 Although established firms experience l i t t l e interference by t h Government, a numher of regulations and procedures provide serious b a r r i e r s t o e n t r y f o r new e n t e r p r i s e s . Attainvent of approvals from c e n t r a l and provin- cial governments f o r securing lard, establishing an enterprise and s e l l i n g products can involve long delays and compliance with excessively high standards. Land a c q u i s i t i o n is a s e r i o u s problem f o r i n d u s t r i a l s i t e s , including r e l a t e d housing, a s w e l l a s f o r a g r i c u l t u r a l development, d e s p i t e t h e small a r e a s needed f o r t h e former, and n a t i o n a l entrepreneurs a r e a s s u s c e p t i b l e t o t h i s problem &sa r e overseas investors. I n d u s t r i a l e s t a t e s could ease t h i s constraint. I n some cases, p a r t f c u l a r l y i n t h e t r a n s p o r t s e c t o r , government regulations c o n t r o l e n t r y , thereby limiting competition and maintainiqg p r i c e s above t h e l e v e l s t h a t would otherwise prevail. Lower t r a n s p o r t coscs could help t o widen t h e limited domestic market f o r i n d u s t r i a l products. On t h e p o s i t i v e s i d e , t h e Government is changing its procurement s p e c i f i c a t i o n s t o favor domestic production when possible, e.g., f o r o f f i c e and r e s i d e n t i a l furnitnre. A s i n t h e a r e a of trade policy, government p o l i c i e s and a c t i o n s i n t h e a r e a of r e g u l a t i o n a r e d i f f u s e and uncoordi1,ated. A department of i n d u s t r y respor.z!'.le f o r a l l i n d u s t r i a l policy could provide a c l e a r , d e l i b e r a t e and r a t i o n a l s e t of p o l i c i e s f o r i n d u s t r i a l development, as long as its establishpent were not seen a s a mandate t o promote i n d u s t r i a l i z a t i o n at a l l costs. 1 Table No. T i t l e 1.2 Popuiation Characteristics, Nationals, 1976 1.3 Population, Area and Population Density by Province, 1983 1980 i . 2 Gross National Product by Type of Expenditure a t FY69 Cc.-stant P r i c e s , FY68-73 2.3 Gross Dnmestic Product by Type of Expenditure a t FY73 Conscant P r i c e s , FY73-76 2.4 Gross Domestic Product by Type of Expenditure a t 1977 Constant P r i c e s , FY77-1979 2.5 National Income a t Current P r i c e s , FFi0-1980 2.6 Gross Domesi i c Product by Kind of Economic Activity at Current P r i c e s , FY70-77 2.7 Inves tnent and Savings, FY70-1980 2.8 Private Capital Expenditure by Industry Group. EY75-1979 and Planned 2.9 Private Capital Expenditure by Type of Asset, FY75-1979 and PXagned f o r i980 2.10 D i s rribution of Incomes, 1971 2.11 Average Weekly Incomes , 1971 3.2 Volume of Exports of Major Commodities, FY70-1980 3 -3 Value of Exports of b j o r Comrnodi'.ies, R70-1980 3.4 Export Lrnit Value Indices, Major Commodities, Fi70-198Q 3.5 Exports by Country of Des t i n a t i o ~ l ,FY71-1980 3.6 Value of Imports by End Use, FY7C-1980 3.7 Value of Imports by Country of Origin, FY71-1980 3.8 Trade Indices, FY71-76 3.9 Trade Indices, 1974-30 3.10 Ex~.langeRates, m71-1980 ". r -11 Annex B presents more detailed information on populati . ., and employment. - 54 - Table 1.2: POPULATION CHARACTERISTICS, NATIONALS, 1976 Rural Urban T o t a l - .- Age group Male Female T o t a l Male Feaale T o t a l Male Female T o t a l 400 387 787 54 49 103 454 436 890 10-19 248 254 52 65 40 105 313 294 607 20-29 169 176 345 55 30 85 224 206 430 30-5 j 138 133 271 25 13 38 163 146 309 40-49 107 101 208 11 5 16 118 106 224 155 150 305 11 8 19 166 158 324 T o t a l 1 217 1,201 2,418 221 145 366 1,438 1,346 2,784 -L - - - (X) ................................... -----me---------- 33 25 34 28 32 32 32 10-19 20 21 21 29 28 29 22 22 22 20-29 14 15 14 25 21 23 16 15 15 30-39 11 11 11 11 9 11 11 :I 11 40-49 9 9 9 5 3 4 8 8 8 T o t a l - - -- - - - - - 100 100 100 100 100 100 100 100 100 Source: National S t a t i s t i c a l Office. -55- -- Tab Le 1.3: POPULATION, AREA AND POPULAT~ONDENSITY BY PROVINCE, 1980 Province Western National Capical District Eastern Highl3nds Western Highlands Southern Highlands West New Britain East New Britain New Ireland North Solomons Source: Natioazl Sta t i s t i c a l Off ice. 2.9 of 404.5 986.1 722.4 263.7 395.2 rn 61.1 11.7. 62.2 751.6 1980p 886.0 266.5 - 1 418.4 1,738.1 1,471.6 1,675.9 recent 6 balance 2.7 54.8 22.2 39.6 220 852.9 629.2 223.: 318.7 5iK5 7613 744.3 226.4 1979 - most 1 367.7 the 1,614.5 1,388.1 1,574.9 1 the in .8 2.6 8.5 43.9 19.4 1978 125 771 - are 562.2 209.6 268.5 76T3 519.1 627.2 212.3 - 1 35?.3 those 1,381.0 1,168.7 1,361.6 8 from 1977 030 * 2.5 4.0 41.2 figures 26.7 693.1 508.3 184.8 239.3 129.5 584.0 600-8 187.3 - basis. 1 1,298.5 1,111.2 1,271.8 1980 - differ flow 1.3 7.8 9.6 a 15.1 1977 545.5 171.6 374.1 269.8 - 104.3 130.8 - 225.1 341.6 325.3 699.9 1977 594.4 105.5 690.3 data- Jul-Dec on The 2.2 6.3 Trade done EXPENDITURE 34.0 FY77 993.8 227.3 - 38.0 TKT 648.4 454.2 194.0 En 54.9 528.8 196.2 - OF 1,262.9 1,066.5 are 1,224.9 years. 2.4. .3 5 -1980 TYPE 2.0 29.9 13.0 38.9 FY76 958.5 367.2 591 415.7 BY 175.7 163.5 is5.1 400.4 470.9 - 068 177.7 - Table earlier accounts 1 890.0 1,029.6 in FY70 for 1.4 9.2 PRODUCT FYI5 35.4 849.1 328.1 521.0 352.4 - 71.7 168.6 i!Ki 485.8 million) 186.5 428.1 004.0 170.0 - 932.3 series national 1 834.0 those PRICES, (K 1.2 3.7 NATIONAL 11.4 with FY74 716.1 270.1 446.0 287.6 158.4 130.5 r!?mi 78.5 530.5 328.7 - 881.1 159.5 - 962.1 whereas constant CURRENT 1,040.6 GROSS AT the 3.? PY,J 1.8 basis, : 37.2 655.3 228.0 427.9 265.9 19.0 161.9 129.8 230.4 308.2 788.8 623.c 165.2 - 751.6 comparable with 2.1 be FY72 1.4 8,5 7.3 6T4.5 207.1 407.4 258.3 149.1 241.7 157.2 383.8 645.4 494.9 150.5 35.4- 610.0 not payments Table a my FY71 0.1 15,s 0.5 consistent on 570.2 183.7 387.: 248.7 138.4 276.1 113.6 354.2 621.7 483.1 138.6 26.6- 595.1 be done Office. beyond 2.3 5.5 FY70 1.2 8.6 not 510.2 163.t 346.5 215.2 131.3 182.4 - 99.4 180.1~~116.6 267.5 - 531.0 397.4 133.6 522.4 are and may FY77 and latter NFS) Statistical 6 Product Product for the Capital series income abroad in_st:>cks (goodr, National ion values t Fixed Domestic National - Market Nonmarket rke factor preliminary. The revised payments; Government Private Market Nonmarket - Format Ma Nonmarket payments Consumption Cross Increase Exports Imports(goods6NFS) Statisticaldiscrepancy Cross Net Cross p /a Source: -- - 58 - I I Table 2.3: GROSS DOMESTIC PROD~CTBY TYPE OF EXPENDITURE AT FY73 CONSTANT ?#ICES, FY73-76 i (K millibn) ! 1 Market Component Consumption Government Private Gross fixed capital formation Increase i n stocks Exports (goods & NFS) lmports (goods & NFS) Market Gross Domestic Product Nonmarket craponent Total Gross Domestic Product Terms of trade e f f e c t Purchasing power of r e a l gross domestic product Source: Bureau of S t a t i s t i c s , National ~ c # o u n t sS t a t i s t i c s , Bulletin No. 7 and others. I I I I 1980p 121.4 1,556.7 1,678.1 124.2 1979 1,469.3 1,593.5 1978 137.4 1,263.5 1,400.9 1977 142.0 1,187.1 1,329.2 1977 70.1 644.4 714.5 Jul-Dec FY70-1980 3.4 38.0 74.6 FY77 531.8 - 153.5 1,097.5 1,130.7 1,284.2 PRICES, 2.5 38.9 ~Y76 60.4 505.8 932.8 - 951.8 164.0 1,115.8 CURRENT AT 1.5 71.7 FY75 53.6 466.0 881.6 million) - 862.0 145.5 1,007.5 (K INCOME 2.8 FY74 78.5 42,4 406.2 934.1 - 895.3 129.3 1,024.6 MTIOML FY73 2.7 37.2 36.2 317.4 698.3 - 694.5 121.3 815.8 2.5: FY72 3.2 35.4 34.7 311.5 578.1 Table - 574.1 118.2 692.3 FY71 1.8 26.6 296.9 32.0 562.7 - 566.4 103.5 669.9 Office. 8.6 2.6 FY70 240.7 - 24.9 94.6 486.C 499.7 594.3 from abroad Statistical income at from income current factor taxes income prices salaries disposable Netionai 6 net - its factor preliminary. Market Nonmarket abroad market transfers income Wages Prof Domestic Net Indirect Subsidies National Other National p Source: A g r i c u l t u r e , Hunting, F o r e s t r y & F i s h i n g Market Nonmarket Mining 6 quarrying Manufacturing E l e c t r i c i t y , gas, w a t e r 6 s a n i t a r y s e r v l c e s Cona t r u c t i o n Imputed contribution of f r e e 6 p a r t i a l l y paid l a b o r O t h e r Wholesale 6 r e t a i l t r a d e T r a n s p o r t , s t o r a g e h communication Financing, Insurance 6 R e a l E s t a t e -23 -25 -.28 - - 49 49 S e r v i c e s of Owner-Occupied n w e l l i n g s Market Nonmarke t - - -- - -- L e s s imputed bank s e r v i c e charge Community, s o c i a l , Business 6 P e r s o n a l S e r v i c e s - - 5G 61 - - 88 67 7 0 - Imputed c o n t r i b u t i o n o f f r e e 6 p a r t i a l l y p a i d l a b o r 7 6 6 5 4 O t h e r 50 54 62 65 84 P u b l i c a u t h o r i t y , n.e.i. 6 defense 53 64 70 78 8 3 GDP e x c l u d i n g import d u t i e s 514 599 621 766 1 , 0 1 8 Import d u t i e s 1 7 23 24 23 23 Gross Domestic Product - - - - - - - - - 531 622 645 789 1,041 - p = preliminary. - /a S t a t i s t i c a l d i s c r e p a n c y = -5 Source: National S t a t i s t i c a l O f f i c e . Source: /a Other Construction Manufacturing Mining Agriculture, forestry community, and Wholesale industries and communications; tures National quarrying and Table hunting, and by social fishing - /a 2.8 Private Statistical retail : and PRIVATE financing, trade FY7S-1979 Businesses personal - 78.3 19.7 15.2 29.0 10.8 FY75 3.6 Office, and CAPITAL services. insurance, restaurants - (K AND " 81.2 22.9 20.7 23.1 11.4 FY76 - , 3.1 Statistical million) April PLANNED EXPENDIluRE 63 -110.1 - 36.6 19.2 39.1 FY7f 6, 5.4 9.8 real and FOR 1981. Bulletin, Jul-Dec estate hotels; ---- 1980 BY 60.2 19.4 11.6 18.7 1977 3.1 7.4 INDUSTRY and transport, 143.3 " 65.1 26.3 32.5 11.4 1978 Capital 8.0 business GROUP 161.1 59.3 21.1 28.5 34.6 17.5 1979 Expendi storage services; 204.7 - 77.7 24.2 30.6 56.1 16.1 1980 I Source: Machinery Other Vehicles Land Other Buildings Type plantation Non Residential improvement of transport construction- residential Asset tures National and Table development equipment by equipment and 2.9: Private Statistical PRIVATE FY75-1979 Businesses . 18.1 18.8 13.4 21.8 FY75 7.8 8.9 2.9 8.4 Office, CAPITAL (K AND " , Statistical million) April FLANNED EXPENDITURE 6, FOR 1981. Bulletin, 1980 BY TYPE OF " Capital ASSET, Expendi - Source: All Nonwage Expatriate Papua Wage Farmers recipients New earners incomes Ta PAII~IR Dudley Guineans hle ernpluyecs 2.1 ?Jew Jackson, 1: Guinea, Average AVER4C:E The 153.1 111.2 (K/weck) NPO, 7.4 5.2 4.7 Distribut incomes ;.IRRKLY February INCOMES, :on 1981, inc~me Percentage aĢ Incomes 1971 p. 100.0 15.0 83.1 recipients 0.3 1.6 145. o: in all : BALANCE OF PKiM!iXTS: CONSOLSDATED ACCOU. , irY7l- 1980 ~i (K r i l l i o n ) Tru4c balance Exports, t .o. h. Imports, f .o.b. Nnnfacrt-+rucrvlces /b -75.0 -78.1 -i?4.7 -226.3 -162.0 -131.0 -151.5 -117.1 -130-0-142.0 -158.5 Rece:pts 41.0 4 1 . 7 60.0 71.4 56.8 80.0 66.0 27.0 23.5 29.6 28.5 .'-~yme~ts 116.0 125.8 184.7 297.7 2 . . 211.0 215.5 144.1 153.5 171.6 167.L L F a c t o t s e r v i c e s 3.a. a . n.a. n.a. ..., n.a. n.a. -40.0 -45.8 -77.9 -113.7 Rerelpt3 11.a. n.a. n.a. n.a. n.a. n.a. 3 23.9 27.2 35.2 41.2 Payments n.-1. a n.e. n.a. n.a. 11.a. n.a. 63.9 73.0 113.1 154.8 Transfbre (net) 124.3 128.8 145.9 151.4 138.4 108.3 145.2 248.2 130.9 l l ~ . O 1.08.6 P r i v a t ? 5.5 4.1 4.8 -11.6 -6.4 -59.7 -37.1 -32.4 -49.3 -68.2 -70.2 , 163.G 144.8 168.0 L82.1 lBa6 1 R 4 2 l8L1 178.8- rn Balance on c\l:re:lt account -167.4 -740.2 42.5 1 6 - 9 a\ . .-18.2 88.8. 84.0 4.3 54.5 -173.R I ,,- .. Private capitbl (net) 192.6 169.8 29.1 84.4 53.9 41.8 74.5 31.5 -20.1 11.1 29.9 Cnm.erclal loans a . n.a. a . n.a. n.a. n.a. n.a. 17.5 -44.1 -1e.0 -16.9 3 i ~ e c tinvestment n.a. n.a. n.8. n.a. n.o. n . ~ . n . 8 . i4.0 24.0 29.1 46.8 Er r o r c ant1 omiseions /c -64.3 -96.2 -73.5 -125.2 - , 1 l R . 1 -41.8 -44.8 -25.7 19.5 -14.6 50.6 Change 'In re$,*rvec (- = Increase) -- !r P r h r t ; ' 3 5 PNC w a ~under ti), A u s t r a l i a n t r a d e system and had no separaze c a p i t ~ account o r r e s e r v e s ; f i g u r e s l up u n t i l ~ \ a tyear a r e only entimatan provided f o r t h e sake of cclparieon. 71-7i: t h e s e f i g u r e s i n c l.udeboth f a c t o r and norfact02 s e r v i c e s . ing c;?i:al, n.e.i. Table 3.3: VALE C ' EXPORTS OF MAJOR COMMODITIES, FY70-1980 (K '000, f.0.b.) Commodi ty FY70 FY71 N72 FY73 PY74 M75 FY76 N77 1977 1378 1979 1980 -- Copper concentrates ... ... 22,284 125,625 311,909 236,660 199,461 192,149 186,410 231,907 359,066 372,441 Copra 13,340 10 ?07 9,392 8,083 23,672 28,841 11,633 19,187 23,219 24,999 43,649 24,737 Copra o i l C o i l pellets /a 6,408 8,698 6,468 5,932 14,773 15,495 8,491 13,451 13,785 13,503 23,445 14,846 Coffee beans 20,182 20,572 20,454 23,395 28,847 33,554 42,226 132,619 143,441 107,250 125,004 118,681 Cocoa beans 15,549 13,643 11,021 11,175 23,338 40,C67 28,645 55,131 86,349 62,955 58,444 46,424 Timber C products 6,309 8,874 8,984 10,702 20,308 13,576 12,790 26,445 23,695 24,677 35,903 47,687 Tuna, crayfish, prawns C o t l ~ e rf i s h 659 2,292 5,175 4,661 14,176 10,374 9,077 18,666 20,199 25,033 20,852 32,762 Palm o i l ... ... 515 1,148 2,685 6.786 6,617 8,535 8,582 10,483 . 14,441 13,305 w- -Tea a45 1,094 1 LO48 ,.k& f,978 8,881 9,365 7,833 7,982 8,499 - Rubber 2,798 2,297 ?,995 1,998 3,563 2,585 2,653 3,128 2,896 2,630 3,497 3,752 Alluvial gold 798 696 792 953 1,622 3,474 1,963 2 354 n.a. n.a. n.a. n.8. Other 4,745 5,074 4,459 4,822 11,794 7,282 2,542 9,701 7,244 8,287 9,587 8,681 --- Total .omestic ey.ports 71,443 4 93,039 200,542 --459,300 402,560 330,47E 484,507 523,419 517,735 701,870 641,895 ~e-exports 22,117 24,485 34,142 29,072 24,431 20,945 33,274 32,902 31,562 45,860 56,906 62,276 - ----483,731 Total 93,560 101 ,i32 127,181 229,614 423,505 363,750 517,408 554,981 563,595 758.776 704,171 - /a Covers copra o i l only f o r 1979 and 1980. -/b Covers a revallration of copper exports. Source: National S t a t i s t i c a l Office, Bank of Papua New Guinea. Source: 69 67 55 54 7 3 8 1 0 As !4iscellaneous Essential Medicinal, Beverages Food Vational Imports, Capital Other Mineral Other Total BOP Imports, Imports, Unrecorded Machinery Manufacture Iron Other HineralFuels,Lub.,etc. Other Siscellaneous X , of pci adjustment 6 c int. consumer Total BOP Int. Consumer steel goods fuels, fied live Statistfcal inrl. excl. 1x1. Imports C oils. C C imports C etc. transport of tobacco animals raw Rev not mfg. unrecorded lub., ~oods unrecorded unrecorded metals Goods perfume. eaterials materials Materials elsevhere Office. etc. equip. Table etc. 3.6: 213.052 100,850 80,376 12,255 VALUE R.219 6,376 5,315 !,123 55,823 22,580 19.36s 37,37? FY70 9,212 2,483 2,179 5,510 26.2 20.1 3.3 n.a. (K OF 294,098 175.889 101,417 - 49.700 15,930 64,661 12,851 25.427 21.015 41.474 FY71 -000, IMPORTS 8,842 7,315 6,049 8,655 3,104 2,264 6.304 21.3 15.7 71 2.R - F.0.b.) * BY 288,6!6 162 48,8b0 93,d66 13,1117 7,190 R,q83 12,443 19,*53 23,859 20.676 45,k12 FY72 6,q80 3.t09 2,P05 5.b73 DKD 2219 16r8 42 7b3 I USE, 214.716 k9,3~6 73,533 11,102 67,620 16,876 9.596 6,177 8,029 21.791 23.441 47,734 FY73 6,923 3.082 2,430 5.025 FY70-1980 29.6 23.1 4.8 n.a. 224,663 P0,320 61.666 19,642 60,813 22,202 22,810 57,404 FY74 2.50~ 9,124 7,030 8,906 7.666 9.843 3.654 2,304 4,289 26.3 26.7 8.5 354,844 141,971 112,151 15,888 10,932 16,624 14,573 38,292 86,546 13,252 30,117 34,811 71,364 FY75 3,001-1 5.082 3,284 5,597 10.6 24.0 21.4 340,502 133,441 190,192 12,581 13,081 11.126 47,220 77,398 14,145 27,992 27.442 73,088 FY76 3,640 8.028 5,,134 2,685 5,810 13.5 22.1 22.5 510,971 177,888 148,793 106,866 16,770 12.325 18,895 16,218 90,979 24,530 36,619 35,856 95,909 6,652 3,209 6.621 18.3 21.5 20.6 n.a. Source: - /b --/a 1980 1979 1978 1977 FY7 FY76 FY75 FY74 FY73 FY72 FY71 7 As Calendar of IMF, end year. International of calendar year. 1.50 1.41 1.41 1.26 1.26 1.26 1.37 1.47 1.29 1.18 1.12 Financial 1.54 1.44 1.44 1.26/ 1.26 1.26 1.31 1.44 1.42 1.20 Statistics. I 1.24 1.27 1.23 1.14 1.10 1.00 1.00 1.00 1.00 1 1.00 .OO 337 309 297 339 339 374 389 420 386 363 398 2.70 2.58 2.83 2,92 2.92 3.18 3.22 3.73 3.79 3.83 1.16 1.10 1.12 1.09 1.09 1.06 1.07 1.C8 1.23 1.17 1.10 - 75 - Table 4.1 : EXTERNAL PUBLIC DEBT OUTSTANDING AS OF DECEMBER 31, 1980 (US $ '000 ) Type of c r e d i t o r / Debt o u t s t a n q i n g I n a r r e a r s c r e d i t o r country Disbursed Undisbursed T o t a l P r i n c i p a l I n t e r e s t S u p p l i e r s C r e d i t s 1,048 - - c 1,048 T o t a l S u p p l i e r s Cred its 1,733 -- 1,733 -- -- F i n a n c i a l I n s t i t u t i o n s A u s t r a l i a 78,233 - A 78,233 Hong Kong 130,667 .. 130,667 - -- United Kingdom 2,000 - 2,000 T o t a l F i n a n c i a l - - -- I n s t i t u t i o n s 210,900 -- 210,900 - Bonds Germany, Fed. Rep of 19,838 19,838 - - - 19,704 -- 19,704 - - Switzerland 28,109 28,109 - - M u l t i p l e l e n d e r s 17,000 - 17,000 - - T o t a l Bonds 84 651 - A 84,651 -- -- European I n v e s t . Bank - ' 55,056 27,661 82,717 - IHF T r u s t Fund 24,831 24,831 -- - T o t a l Multi- l a t e r a l Loans 177,015 96 541 273,516 -- 4 -- Germany, Fed. Rep. of 956 16,2851 17,241 - - 2,632 1,054 3,686 - - United Kingdom T o t a l B i l a t e r a l I Loans 36,045 22,3301 5 8 375 -- -- TOTAL EXTERNAL PUBLIC DEBT 510,344 118,831 629,175 -- -- 1 Only debts w i t h an o r i g i n a l o r extended p t u r i t y of over one year a r e included i n t h i s Table. 2. Debt outstanding i n c l u d e s p r i n c i p a l i n a t r e a r s but excludes i n t e r e s t i n a r r e a r s . I Source: IBRD. I Debt outstanding a t beginning - bursed undis- Commit- burse- Prin- I only bursed ments ments c i p a l I n t e r e s t Total l a t i o n s ment /a Year (1 ) (2) (3) (4 (6) (7) (8) (9)- The following figures are projected: 1981 510,344 629,175 - 29,425 28,214 43,148 71,362 - - 1982 511,555 600,961 - 27,341 36,439 41,480 77,919 -3 1983 502,456 564,519 23,679 41,778 38,967 80,745 -3 i984 484,353 522,738 -- 18,268 40,087 35,863 75,950 --- -1 I 1985 462,533 482,650 - 9,645 63,533 31,582 95,115 - -2 1986 408,643 419,115 - 5,568' 53,877 24,908 78,785 - -5 1987 360,329 365,233 - 2,977 I45,826 19,419 65,245 -2 1988 317,478 319,405 - 1,412 47,234 14,580 61,784 1 1989 271,686 272,202 - 414 18,951 10,751 29,702 -4 1990 253,145 253,247 - 84 17,278 9,749 27,027 ---- 3 1991 235,954 235,972 - 18 18,151 8,876 27,G27 -1 1992 217,820 217,820 - 22,809 7,626 30,435 -4 1993 195,007 195,007 - 17,531 6,382 13,913 --- 2 1994 177,478 177,478 - --- 15.206 5,391 20,597 - -2 1995 162,270 162,270 - - 13,018 4,525 17,543 - - 1996 149,252 149,252 - - 13,048 3,773 16,821 -1 1997 136,203 136,203 - 9,416 3,080 12,496 -1 1398 126,786 126,786 - -- 7,645 2,680 10,325 --- 1 1999 119,142 119,142 - - 7,926 2,368 10,294 - -1 2099 111,215 111,215 - - 8,200 2,027 10,227 - - - / a This column shows the amount of arithmetic imbalance i n the amount outstanding - including undisbursed from one gear t o the next. The most cmmon ca s e s of imbalances a r e changes In exchange ratek and t r a n s f e r of debts from one category t o another i n the table. Source: I B R D . 1981k in of 1980 Incanes of 1079 Department 5.3). the 1978 by Fund. Table Distributiorl 1976. Dec 1977 - hej (see 30. Jul Sinking provided FY70-1981 June FY77 Debt data revenue Jacksson, and until FY76 National Dudley GOVERNME:;T, the issues); FY75 see conoolidnted Government of to CENTRAL FY74 years, (various THE MRSF assets OF the Australian later million) FY73 A6. the (K the foreign from by in Table of Expenditure FY72 and OPERATIONS and paid FY71 FY76) Appendix holdings to in Revenue FINANCIAL expendit"res and contribution. allouance FY70 of : 83 (prior 5.1 and p. & changes capital budget Ltd. and Table Fund 1981, Estimates - Fund salaries compttte Copper and to February Australia Sinking Finance, used of - Stabilization Guinea NPO, from Debt & & organizations (net) -- (net) Grants New Bougalnville repayments (net) and (net) from loan Guinea, Resource advances National Department revenue revenue Papua assumptiins sources sourc.es grants If estimate. New revenue expenditure surplus/deficit of PNG expenditure deficit Finance. the Revenue Financing Australia International Commercial Tax Nontax Borrowing Bank Other Budget Payments Includes For Papub Includes Includes Domestic - - -Mineral Foreign External - - - =Ttm--r-- Domestic - Tocal Current Current Capital Overall Total /a Ti;: Th - /e - - /f Sources: T a h l e 5.2: CENTRAL f X J E W . N T D m S T I C ILS.VENUE, FY70- 1981 a/ (K m i l l i o n ) 1977 FY70 FY71 FY72 FY73 FY74 FY75 FY76 FY77 Jul-nec 197R/b1979 1980 19Rl/r Tax Revenue Taxes on Income 6 P r o i i t s Companies 8.7 11.0 15.6 14.1 8.0 25.4 43.9 45.8 13.0 44.2 40.a 47.5 50.0 Ind l v l d t t a l s 12.4 22.1 15.0 19.9 27.5 26.0 13.9 67.1 61.6 75.9 91.0 Divldend wlthholdinp. . . .18.4. . .20.5. . . 2.0 1.7 1.0 1.7 1.4 1.2 3.5 3 . 5 5 . 1 L.0 S u h t o t a l -------- 21.2 29.4 36.1 38.3 24.7 46.3 73.1 73.2 28.1 :19.8 1C6.2 128.5 145.0 Taxes on Goods 6 S e r v l c e s F x c l s e d u t l e s 6.7 R.0 9.0 11.4 17.1 20.3 25.7 32.6 18.5 3 6 . 3 41.0 46.5 51.1 ~ I o t o rv e h i c l e regLstratLon t a w e s 6 d r i v e r s ~ l i c e n s e f e e s 0.9 0.8 1.2 1.2 1.3 1.4 l.R 1.8 0.9 1 . 8 1.8 2.4 1.7 Ruzlness and o t h e r l i c e n s e s ...... 0.1 0 . 4 0.6 0.8 1.4 Domest lc a l r p o r t d e p a r t u r e t a x ..... . .0.2. . .0.3. . .0.3. . . . . . .0.3. . .0.3. . .0.4. 0.3 0.3 0.6 0.7 Stamp d i ~ t i e f i . . . . . . . . . . . . . . . . . . . . . . . . ... 1.7 2.3 1.8 3.7 S n h t o t a l - 7.5 9.C 10.5 12.9 18.7 22.0 27.8 34.R i 9 . 5 % 45.0 52.3 z9.0 Taxes on l n t e r n a t l o n a l Trade h T r a l s a c t i o n s Import dut l e s 17.0 24.0 29.7 29.6 35.3 20.8 41.7 48.0 55.6 64.6 C ~ p ~ tra xt e r 1.1 2.1 6.5 5.2 6.1 5.3 9.6 11.9 i l r p o r t d e p a r t u r e t a x .. .. ..22.7............22.5.....22.9... .. . . 0.2 0.1 0.1 0.1 0.2 5 . 4 0.4 1.2 S u b t o t a l --------- --56.7-64.9- 17.0 22.7 24.0 22.5 23.0 31.0 3i.R 41.9 26.1 48.0 77.7 O t h e r Taxe- 0.9 0.7 1.0 0.8 C.7 0.8 1.1 1.6 fi.8 0.2 C.1 0.2 0.3 T o t a l Tax Revenue ---------74.5---- 46.6 61.8 71.6 74.5 67.1 100.1 133.8 151.5 208.2 209.2 245.9 2R2.0 AonLnx Revenue . . . .3.3. . .3.6. S a l e s of p.oods and s e r v l c e s 8.1 3.7 3.9 4.4 5.1 4.1 1.9 4 . 0 4.0 6.1 5.2 P ~ n l n qroyalties . 1.7 3.4 3.1 2.3 2.3 0.8 2 . 1 4.2 ...... J icome f;om L n v e s t m n t s& 1.5 1.9 2.2 4.3 18.4 16.7 8.6 9.3 5.3 10.4 14.3 23.5 13.9 F6.e~ and f l n ~ s 1.8 4.0 4.4 4.8 5.R 5.9 5.7 6.1 3.0 6.8 5.4 7.3 7.3 0.8 0.7 0.7 0.9 1.0 1.5 1.6 1.7 1.0 3 . 5 4.1 5.1 6.4 O t t ~ e r 4.0 2.5 2.6 3.4 9.1 13.1 18.2 13.6 2.4 9 , 3 3.3 3.2 2.5 T o t a l Crntax Revenue -------- -36.135.545.313.3 16.2 12.4 13.5 1 . 8 41.6 44.7 41.5 37.1 14.4 Mineral Resourcer Stabilization Fund & . . . . . . . . . . . . 2R.0 34.7 45.0 35.0 17.0 32.0 38.5 56.6 R1.4 ---- T o t a l I n t e r n a l Revenue ----------- -62.R- - -74.2- - -85.1- 93.3 136.7 179.5 220.2 223.6 105.9 276.3 2R3.2 347.8 396.7 Hcmorandum J tern T o t a l r e v e x e x c l u d i n g RCL- related revenue 62.8 74.2 R5.1 93.3 108.7 114.8 175.2 18q.6 88.9 264.3 244.7 201.2 315.3 . . = IC-0. - l a ToLals f o r :he y e a r s 197R-ill d o not match t h o s e i n T a b l e 5.1, a s the l a t t e r has k e n revised and Lhe d e t a i l s I n t h i s t a b l e have not. - / h As o f January 1 . 197R. PNC chanReA I t s f i s c a l y e a r from J u l y I- June 30, t o .lanuery ;-December 31. Aecause of t h e chanpe. t a x r e c e l p t s shown f o r 1978 r e p r t s e n t 1R months of c o l l e c t i o n s . I c Rudget estimate. Excludes a l l regenue from R o u g a i n v i l l e and payments I n t o t h e H l n e r a l Resourcs S t a h i l l r a t i o n Fund from FYJI onward. - Tncludes i n t e r e s t Income r e c r l v c d hy t h e N a t l o n a l Deht S l n k l n g Fund. I f Land. mining arni timber l e a s e s ; r e n t of b u i l d i n g s ; r e n t f o r defense personnel. The %SF was e s t a b l i s h e d i n 1975. The f l e u r e s e?ovn h e r e f o r FY74 end FY7S were flows 6 L r e c t l y Lnlto t h e hudget. Sources: PNT; Department ~f Finsnce, Fctlmates of Per.rn.:? and Expenditure ( v a r i o c s i s s u e s ) ; Report of t h e Auditor- General for FV(, f o r t h e Year Ended 3 0 t h June. 1977: and d a t a provided by t h e Department of Finance. 1981 n.a. not cf 1980 n.a. Docs 1979 r.a. PNG. Del~artment in ............ ............ ............ 1978 n.a. iest Cuinea Nei. n.a. ... ... ... Jul-Dec Papun ... ... ... infitn?mentali FY77 n.a. 1976. 1973; and 30, 1981 FY76 0.2 4.0 - 11.0 49.0 .June Fehmary FY70 6.7 FY75 0.7 70.3 29.5 departments until service. FY74 1.7 9.1 GUINEA, 34.R 14.1 Statistlcs, service gra~~ts. puhlfc NEW Government as 2.3 FY73 4.4 0.4 17.1 PNC puhlic Finanre PAPUA the TO million) FY72 0.0 0.0 0.0 PNG 16.6 in Australian (K Covernment Puhllc AID the 0.0 70.0 33.0 37.0 31.8 0.0 0.0 0.0 in PNC 49.7 17.2 worked 101.8 various the Cufn~.? Issues). ... i 3.0 ... ... ... ... ... Hho t> 97.0 New AIISTRA1,IAN 100.0 -- n.a. 100.0 offlcers /p_ (various Papua 5.4: officers t- total operations overseas transferred Tahle of offfrerfi depa~ former its & & to finance its Kxpenditirres Territories, & to to ov-rueas and ircrs aid percentage /II Government (;overnment of hudget Covernment. off S I. PNC hudget hud~et External dgrect expenses) In /r Revonue of grants he~lrffts of tures.i Austrdlian overseas other Australian Australian AustralIan toward 6 assets the of (Z) by of .Aclstralian Australinn the cx,pnd of nepartmcnt 111s budgetary out hy the stirnates (grant retlren~ent grants snlaries physical 6 from instr~~mcntallties assets from 6 defense Cranta grants construction 6 expenditures experuilti~res directly provided Ira1 Australia Finance, Total - Australian rect ments Paid Data Payments incllrrii. I'l~ys I'nymrnts Cranes-in-ald Development Special budget ?.:rport I)! Transferrsd Tenlnatlon l%uRge.tary Alloranres Total - /r /d - /f Source: L - 81 - Table 5.5 : NON-AUSTRALIAN DEVELOPMENT ASSISTANCE TO PAPUA NEX GUINEA, FY76-1981 (K n i l l i o n ) 1.1 4.3 5.0 4.3 18.2 17.0 European Investment Bank Kuwait Fund f o r Arab Economic Levelopment Federal Republic of Germany ... ... ... ... . 1.8 European Economic Community Subtotal - - - 9.9 - 12.3 10.2 15.; 32.9 New Zealand Subtotal - - - - - 14.0 19.1 15.4 21.0 37.8 38.5 Source: NPO, NPEP 1981-84, p. 34. - 83 - Table 5.7: CENTRAL GOVERNMENT EXPENDITURES BY FUNCTION, F'f73-1980 (Z shsre) Policy and Administration - - -18.6 - - 19.9 - 22.0 23.3 25.6 - -23.5-- 25.6 - 26.5 26.3 G e n e r a l d d m i n i s t r a t i o n k 12.3 12.1 13.1 12.2 13.9 13.8 12.7 14.4 15.1 Public order and s a f e t y 7.6 ... ...6.5 7.2 7.0 7.5 7.4 7.1 6.8 5.8 1.7 4.1 4.2 4.4 3.7 3.0 4.0 Provincial NPEP p r o j e c t s and National F i s c a l Commission ... ... ... ... ... ... ... 1.4 1.3 Social Services --------- 26.3 23.8 24.3 25.6 '8.3 32.5 24.8 23.4 24.1 15.1 14.4 14.3 14.5 17.8 17.9 15.0 13.7 13.2 7.8 6.9 6.8 7.4 8.4 8.7 7.6 8.1 8.7 ... 3.4 2.1 2.5 1.3 1.4 1.7 1.8 1.0 1.4 0.4 0.7 2.3 0.7 4.2 0.4 0.6 0.8 Economic A c t i v i t i e s ----- ---- 30.8 29.5 33.5 31.9 32.5 35.2 33.1 30.5 30.2 Primary industry / c 4.7 4.1 5.0 4.9 6.4 8.2 6.1 5.7 5.4 L a n d s , w i n e r a l s a x e n e r g y 1.8 1.9 2.4 2.8 1.7 2.3 2.2 2.1 2.0 Labor, industry and 1.5 1.6 2.2 2.2 1.1 1.1 1.1. 1.1 1.1 Transportation 11.9 13.6 17.5 15.7 13.5 15.6 12.1 9.8 9.8 Works and supply I d n.a. n.a. n.a. n.a. n.a. n.a. 2.4 2.6 1.7 PublCc u t i l i t i e s 7.3 4.6 4.9 3.7 2.4 0.4 2.3 2.6 3.6 Conmunications 1.9 1.0 0.6 0.7 2.2 1.3 1.1 1.4 1.0 1.7 2.7 1.2 1.9 5.2 6.3 5.8 5.2 5.6 ----- - --- 23.0 28.1 19.9 19.2 13.6 6.7 1 8 . 19.6 19.4 --------- 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 /a Estimates. ~f Includes allowances and s a l a r i e s of overseas o f f i c e r s ( p r i o r to FY77), i n t e r e s t on the public debt, and s p e c i a l appropriations, including financing of provincial govcrnnents ia 1373 and 1353. Source: LYepart~~el~tof F i n a ~ ~ c r . - 86 - Table 5.BO: 1980 NPEP PROJECT ALLOCATIONS BY STRATEGIC OBJECTIVES (K million) Project expenditure Sector61 Ongoing New program Total total NPEP targets Rural welfare 6.0 1.9 10.7 Helping, less developed areas 8.7 ... 2.5 ... General welfare 7.0 4.2 ... Economic production 24.4 7.4 31.8/a - 27.0 Food, production & nutrition 0.8 0.8 1.0 Training and part: cipation 3.3 1.6 0.9 ... Urban management 6.3 1.5 Effective ldministration 12.2 7.4 0.5/b - 20.1 ... Environmental management 1.4 0.3 ... ... Fiscal commission 7.0 --- 70.1 32.1 15.6 Source: NPO, NPEP 1980-83, p. 10. I - 90 - Table 6.3: ASSETS ANG LIABILITIES OF COMMERCIAL BANKS, 1973-80 ( K m i l l i o n .-: yiar end) 1973 1974 1975 i976 1977 1978 1979 2980 Claims on p r i v a t e sector 91.9 100.8 1l0.7 109.4 131.5 180.6 223.8 299.4 Claims on Government 22.7 35.3 28.3 32.5 44.8 37.8 59.2 90.1 Reserves /a 6.3 5.1 55.0 116.8 141.& 127.3 160.3 26.1 Foreign a s s e t s 48.4 122.6 0.2 8.2 60.. '4.7 14.6 10.3 -------- 169.3 263.8 194.2 266.9 378.6 370.1 457.9 425.9 L i a b i l i t i e s 41.5 63.2 62-6 83.9 107.4 111.9 119.9 128.2 Saving and cimn deposits 96.2 179.6 94.7 142.8 209.4 201.7 280.9 243.3 Foreign l i a b i l i t i e s - 1.2 16.3 1 . 6 34.9 36.0 15.8 6.4 Other l i a b i l i t i e s 31.4 19.8 19.6 21.7 27.0 20.5 41.1 42.0 /a Includes other assets. ANNEX A - 96 - ANNEX A I RECENT DEVELOPPE~TS ~ 1. THE ECONOPPI I National Accounts I National accounts d a t a i n Papua New Guinea have a number of weak- they a l s o l a c k comparability. 'he break i n c d p t i n u i t ~of the estimates is accounts s t a t i s t i c s . I I A census of business e n t e r p r i s e s cakried out i n 1979 revealed t h a t t h e sample previously used t o estimate capitaB expenditures was r a d i c a l l y out of d a t e and t h a t nearly one quarter of gross fixed c a p i t a l formation had been inadvertently omitted from the estimates. Based on these findings, a new series of national accounts was estimated f o r the years EY77 through 1979. A constant p r i c e s e r i e s has a l s o been Estimated, based on 1977, and can be used with caution t o examine recent trpnds i n the economy. Data on production by s e c t o r a r e estimated i n d i r e c t l y ) from income tax data, and although they a r e available on a preliminary b a s i s i n current terms through 1979, they too a r e of uncertain quality. I I s e l e c t i v e basis. I I - 97 - I I ANNEX A I X of GDP (current prices) Consumption Government Private Gross fixed capital formation Increase in stocks Exports (goods & NFS) Imports (goods & NFS) Market gross domestic product Market gross domestic income not recorded here. Source: Statistical Appendix Tables 2.1 and 2.4: - 98 - ANNEX A I I I I The major new element is the growth of investment, by 10% i n 1978 and over 11%i n 1979, while e a r l i e r estimates1 showed a v i r t u a l stagnation. It is difficult to pinpoint the source of thq investment, although it does appear that the push same mainly from the prqvate sector. Preliminary current price data suggest higher than averade growth of investment i n construction, manufacturing, and other indusqries, comprising trade, transport and services (see S t a t i s t i c a l ~ p p e q i x ,Table 2.8). Agricultural Import data a r e regrettably inadeq&tte t o the ;ilk of identifying sources of growth. Data on imports by end u$e a r e not available f o r 1977-79 and are only p a r t i a l l y available for 1980. As ca- be seen i n Table 2, the composition of imports changed very l i t t l e b4tweel. lT76 and i n the f i r s t nine months of 1980, aside from an increase i n imports that resulted I I FY76 1980 1-111 I I Food, beverages and tobacco Other consumer goods Mineral fuels, lubricants, etc. Capital goods Tot a1 imports I 100.0 100.0 I Source: S t a t i s t i c a l Appendix Table 13.6. - - 99 ANNEX A I i n f l a t i o n , but construction stagnated, contrary t o t h e evidence c i t e d above. I n d u s t r i a l census d a t a tend t o confirm these resultls./l - I I n summary, it is d i f f i c u l t t o reach def;bite conclusions about I 1 . J ~ c k s o nconcluded from his investiga tion9 t h a t t h e d i s t r i b u t i o n of lncome i n PNG In 1971 was very skewed, but not grebtly unequal (see S t a t i s t i c a l Appendix Table 2 .lo). Over 90% of a l l income r e c i p i e n t s I 1 I I -lop- I Balance of Payments t I Table 3: BALANCE OF PAYMENTS SWW~ 1977-80 (K million) I ! I 1977 1978 1979 1980 Exports Tmaorts Services (net) -157.1 -175.8 r219.9 -272.2 Transfers (net) 148.2 130.9 112.0 108.6 Private -32.4 -49.3 -68.2 -70.2 Pub1i c 180.6 180.2 i 180.1 178.8 I I Private c a p i t a l (net) 31.5 -20.1 11.1 29.9 I Official c a p i t a l (net) 20.4 -5.5 26.6 44.2 Errors h omissions /a -25.7 19.5 -14.6 50.6 Changs in reserves -110.2 1.8 -77.6 49.1 I (- = increase) Source: Bank of Pabua New Guinea. I 1.11 Net inflows of private and o f f i c i a l capitdl increased i n 1979 and 1980 a f t e r a decline i n 1978. A large part of PNG'q capital goods :mports is the counterpart of borrowing abroad or direct prqvate investmest. The l a t t e r category increased from K 14 million i n 1977 t o K 47 million i n 1980 (see S t a t i s t i c a l Appendix Table 3.1). Private comm r c i a l borrowing and 4 private investment a r e both expected to increase in t h e f i r s t half of the 1980s due to the construction of the Ok Tedi copper s i n e which w i l l account f o r over K 100 million p.a. i n inflows during 1981-43. 1.12 The international reserve position improvdd sharply i n 1979 I of imports. PNG's balance or payments remains vulndrable to exogenous ele- 1 ments, the most v o l a t i l e being the world prices of ts major export comodi- t i e s . Although Australian aid accounts for a very arge portion of its foreign exchange receipts (K 175 million i n 1980), t is declining in real terms a t a steady r a t e which has been negotiated and should not cause any unanticipated constraints on the balance of payments. - 102 - Exporcs. Copper concentrates (which c ~ n t a i ngold) represent the l a r g e s t s i n g l e share i n t o t a l export earnings dt 50% i n 1980. When copper f i r s t came i n t o production with completion of 4hr Bougainville mine, it earned 68% of PNG's t o t a l export receipts. Taqle 4 shows t h a t tne same f i v e export commodities contributed a s l i g h t l y declining share of export earnings i n a given year. I Table 4: TREND I N WkESTIC EXPORT L I N G S , FY74-1980 (XI Copper concentr a t e s Coffee Cocoa Copra and products Timber products Total shares covered by these commodities I Source: Eank of Papua New Guinea. I I of output i n 1978 and 1979 but f e l l s u b s t a n t i a l l y i n 1980 ( s e e S t a t i s t i c a l Appendix Table 3.2). Other exports, s ~ c ha s f i s h , palm o i l , rubber ar.d t e a a r e growing s t e a d i l y , but t h e i r impact on expbrt earnings is still small. I I - 103 - ANNEX A pNG has also faced adverse international price changes for its major agricultural products i n recent years. World coffee prices decreased by 55% i n r e a l terms from 1977 t o 1980; cocoa was dc-n 50% and copra was down 24%. The generally unfavorable outlook f o r export earnings is not expected t o change significantly u n t i l the Ok Tedi mine s t a r t s producing gold i n 1984 and major improvements take place i n the agricultural sector. Imports. PNG's terms of trade were adversely affected not only by f a l l i n g commodity prices f o r its exports i n 1980 but also by the o i l price increases which hurt many non-oil producing countries. I n 1978 petroleum costs a c c c ~ n t e df o r 11%of PNG's import b i l l and by 1980 that share had increased to 19%. Between 1979 and 1980 the vslume of petroleum imports increased by gpproximately 15% while the value increased by 67%. I n EY76 consumer goods accounted f o r close to half of t o t a l imports, with 25% f o r food i t e n s and an equal amount f o r other consumer goods. Capital goods had the next highest share a t 38%. Preliminary figures f o r the f i r s t quarter of 1980 indicate that these three categories have more o r l e s s maintained t h e i r Although Australia's share of PNG's imports has declined somewhat since the early 1970s, it still remains PNG's = j o t trading partner, provid- ing 40-502 of PNG's imports. However, since PNG began producing copper, the proportion of its exports t o Australia has declined from 42% i n the earl) 1970s t o 9% i n 1980. Japan and Germany account f o r 38% and 27% respectively of exports i n 1980 (see S t a t i s t i c a l Appendix, Table 3.7). Although imports w i l l most likely continue t o originate i n large part from Australia, attempts a r e being made to increase trade with other countries, particularly Japan and China. The a b i l i t y of the Government t o raise additional internal revenue t o compensate f o r the continuing decline i n Australian aid and to channel it into productive expenditures w i l l be c r i t i c a l factors i n its a b i l i t y to stimulate and influence the pace of economic development i n PNG. Between FY77 and 1980,/1 t o t a l revenues and grants grew a t an average annual r a t e of. 7.5%, r e f l e c t i n g a growth of 12.5% p.a, i n internal revenue and no growth i n aid from Australia.jP Expenditures grew by about 11.5% o r 4.5% i n r e a l terms, compared t o the?% target, and the overall d e f i c i t increased from K 11 million i n FY77 t o K 78 million i n 1980 (see Table 5), when it reached, 4.5% of GDP. This level is high by recent standards, b-jz it was-exceeded e a r l i e r i n the decade. /1 FY77 is used as the base year f o r a discussion of public finance, because the 1978 revenue figures a r e distorted by the change i n f i s c a l . year which resulted i n 18 months' worth of tax collections being recorded i n one calendar year. /2 Inflation averagt? 7% p.a. dul l~;gthe period. Table 5: FTNANCI. )PERATIONS OF THE CENTRAL GOVERNMENT, . FY71-1961 I.. 9 . . \ Total revenue and grants Domestic revenue 223.6 273.5 283.4 343.7 396.1 Tax revenue 151.5 205.8/b 206.2 Nontax revenue 37.1 36.5- 38.7 47.5 37.7 Mineral Resources S t a b i l i z a t i o n Fund Contribution t o Budget 35.0 31.2 38.5 .56.6 81.4 Foreign g r a n t s 174.8 171.9 176.2 175.4 184.1 Current expendi t u r e s k 362.7 384.6 440.8 474.1 528.6 Current surplus Capital expenditureslc - Overall d e f i c i t I n t e r n a t i o n a l organizations 10 .O 8.5 I Commercial borrowing Domestic sources 2.1 13.4 37.3 30.8 -11.5 Banking system -1.3 11.1 29.2 22.8 n. a. Other 3.4 2.3 8.1 8.0 n.a. - - /a Budget estimate. - /c Breakdown between current and c a p i t a l expenditures may not be accurate. Source: S t a t i s t i c a l Appendix Table 5.1. . ANNEX A Revefiue. f i e Government's f i s c a l e f f o r t iqproved during the 1970s, with domestic revenue as a percentage of GDP r i s i n g t o 20% i n 1980 from 12% i n FY70. Every budget s i n c e independence has included new revenue measures, and dependence on Australian budgetary support has declined cons iderably. Domes t i c revenue accourted for on1y about 40% of t o t a l revenues and grants i n FY70, but f o r 66% of the t o t a l i n 1980. The Bougainville copper mine has been a major source of i n t e r n a l revenue, reaching a peak of 26% of the t o t a l i n FY76, but it is a l s o the source of p o t e n t i a l l y disruptive fluctuations i n revenue. ;'?eref ore, t h e Government established the Mineral Resources S t a b i l i z a t i o n Fund (MRSF) i n 1974 t o smooth out the impact of mineral revenues on t h e budget. Its success is evident: i n FY77, h e n Bougainville relate.3 r e c e i p t s dropped by 602, flows out of the MRSF t n t o the budget f e l l by only 22%./1 Between 1978 and 1980, due t:, high copper and gold prices and past accumulations, revenue flows froia t h e MRSF s t e a d i l y tncreased a t all average annual. r a t e of 31% i n real terms. Domestic revenue grew i n r e a l terms i n 1979 and increased by n e a r l y 10% i n 1 9 8 0 . 0 Company tax r a t e s increased from 33.3% t o 36.5% i n 1979. Except for the 1979 increase i n the comparly tax r a t e , new revenue measures during 1978-80 consisted mainly of revi: !ons of r a t e s f o r selected i n d i r e c t taxes. Following the recommendations of :he 1976 IMF mission and of the Neild and Mathews reports,/3 which found that C i r e c t income taxes were already a t high levels, the Government raised the r a t e s on a number of i n d i r e c t taxes, i.e., fees on services provided by t h e Government and excise taxes bn gasoline and beer and on a number of luxury imports. In addition, t h e p r o f i t s of s t a t u t o r y corporations were made subject t o taxation. The a d d i t i o n a l revenue collectad i n each year during this period amounted t o about 2-3% of domest i c revenue. New revenue aeasures i n t h e 1981 budget included a f u r t h e r incrcascz i n the excise taxes on f u e l and beer, plans to change these duties f r o a a s p e c i f i c t o an ad valorem basis, and plans t o introduce automatic adjust- nents of taxes on other i t e r s to compensate for i n f l a t i o n . Revenue couid he increased further by h p r o v i n g the c o s t recovery machinery f o r services provided by the Government, i.e., water, e l e c t r i c i t y , sewerage and roads, and t h e efficiency of the d i r e c t income tax collecting administration. ?he I /1 See Statistical Appendix, Table 5.3. . , 1 2 The apparent r e a l decline i n tax revenues shown i n Table 5 r e s u l t s from the fact that the 1978 f i g u r e represents 18 months' worth of collections due to the h a n g e i n the f i s c a l year. 13 Russel R. Mathews, Problems of Tax Reforms, I n s t i t u t e OF National A f f a i r s , Port Moresby, 1981; and R. R. Neild, Tax Policy i n Paqua New , -' Guinea I n s t i t u t e of National A f f a i r s , Port Moresby, f379. i ANNEX A l a t t e r could be achieved by increasing che nuinber and q u a l i t y of tax assessors and by a s t r i c t e r enforcement of the e x i s t i n g tax laws. The need is particularly strong i n t1.e case of the small manufacturing firms whose expansion i n the l a s t few years has been q u i t e rapid. Expenditures. Central governrent expenditures grew 50% f a s t e r than revenue between FY /7 and 1980. Cay;.:al expenditures r o s e more quickly than did current e x ~ e n dtures, reaching i c.... L-20% of the t o t a l i n 1980. This l e v e l is, however, still bc'ow the average of 62 developing countries, estimated a t 26%, and i n f a c t it could be argued t h a t PNG, with its rela- t i v e l y undeveloy.sd i n f r a s t r u c t u r e , should spend even more than the average. /l he improved project implesentati o n capacity of the various nationalTepartment s under t h e National Public Expenditure Plan (NPEP) , higher c a p i t a l expenditures i n the provincial budgets since 1979, and the g r e a t e r and timely a v a i l a b i l i t y of qualified e x p a t r i a t e s t a f f reduced the extent of underexpendi tures and delays i n project implementation accounting f o r t h e higher share of c a p i t a l expenditures i n t o t a l expenditurcz Financing the Deficit. The o v e r a l l d e f i c i t increased L; a peak of K 78 million i n 1980 from K 11 million i n FY77. The Government has had nc d i f f i c u l t y managing the d e f i c i t , with domestic borrowing accounting f o r over half of t o t a l net financing since 1979. Banks a r e by f a r t h e l a r g e s t holders of public debt i n PNG, accounting f o r c l o s e t o three quarters of outstanding domestic debt a t the end of 1980. Commodity s t a b i l i z a t i o n funds held about 5%, s t a t u t o r y a u t h o r i t i e s 4%, and the r e s t was spread among other c r e d i t o r s ( s e e S t a t i s t i c a l Appendix Table 5.8). Over half of t h e domestic debt is i n the form of long- tern s e c u r i t i e s and loans, 36% i n Treasury b i l l s and the r e s t i n special lo: 1sfrom the Bank of PNG. Overseas commercial borrowing has grovn rapidly i n recent years, overtaking i n t e r n a t i o n a l organizations as a source of net inflows. Loans from the l a t t e r accounted f o r 38%of external public debt outstanding a t the end of 1980, with debt contracted on commercial terms accounting f o r the r e s t (see S t a t i s t i c a l Appendix Table 4 .I). The Government has taken several s t e p s recently t o develop an i n s t i t u t i o n a l flamework f o r increased domestic borrowing. It introduced a system of monthly Treasury b i l l auctions, reduced c e n t r a l bank deposit f a c i l i t i e s t o encourage commercial banks t o manage more a c t i v e l y t h e i r l i q u i d a s s e t s and promote the development of a short- term money market and of feted an i s s u e of t r a n s f e r r a b l e government- inscribed stock at a low 11 Dudley Jackson, The Distribution of Incomes in Papua New Guinea, National Planning Office, February 1981, p. 83. -- Page 12 minimum subscription r a t e to broaden par!:icipat$on i n the gcverment s e c u r i t i e s inarket. I h e newly established Natioflal Provident Fund w i l l be another source of f ~ m d s ,and there w i l l undoubt4dly be further scope f o r tapping domes t i c savings as the economy grows. : 1.26 Pravincial Financing./l Between 1978 and 1981, transfers to pro- vinces accounted for about 20.-25% of t o t a l c e n t r a l government expenditures. I n 1980, the Department of Finance i ~ p r o v e dits monitoring of provincial expendituro,~ and the Ministry of Finance, i n cbnjunction witn the Public , Service Commission, has now imposed precise bud e t a r y ceilir,gs i n terms of 7 the number of s t a f f to be hired by function and g r d e . Total transfers i n 1980 decreased by about 1%i n r e a l terms a f t e r rapid increases i n 1979. Unconditional grants, the l a r g e s t category of grants, averaging nearly 85% of tl.2 t c t a l during 1978-80, increased by about140%i n r e a l terms i n 1979 and by less thaa 3% i n 1980 ( s e e S t a t i st i c a l ~ p h e n d i xTable 5.11). k e formula according to h i c h t o t a l unconditional Frants a r e computed is based on the smaller of the change i n t h e consumer pr$ce index a r the growth i n comolidated revenue. However, the actual growth i n the unconditional graDts has exceeded the growtk prescribed by thb formula. 1.27 Ihn formula cfiosen t o determine the b s e l e v e l of unconditional grants was the level of a c t i v i t i e s prevailing ig F Y T i n each province. This f o m l a , as anticipated, has raised seriou$ equity concerns, as the provinces already endowed w i th qualified manpower and physical and s o c i a l i n f r a s t r u c t u r e have been b e t t e r able to put forih good quality development f projects to the NPEP and thus increase t h e i r ed e over weaker provinces. To counterbalance t h e unevenness i n planning an project implementation capacities among prolinces, s e c t o r a l programs targeted t o less developed areas were i n i t i a t e d . National F i s c a l omm miss i j n compensatory grants, I&I ich 9 are targeted to the lzss developed provinces, h ve had only a minor equal- i z i n g e f f e c t because of t h e i r small s i z e , altho gh t h e Goverrment's e f f o r t s i n increasing the tozal from K 1.4 million i n lq78 t o K 7 million by 1980 a r e noteworthy ( s e e S t a t i st i c a l Appendix Table 9.11). I n the medicm and long t c m , the greatest eqcalizlng effect among provinces l i e s i n the I s e c t o r a l program, but recent m l i t i c i z a t i o n of some of them poses a re21 t h r e a t to the achievement of chis purpose. 1.28 The share of provincially-hsed revenoe i n total provincial revenue '.as increased s l i g h t l y from 5.3% i n 197d t o an estimated 8.5% i n th= 1981 budget. Increases i n t h e derivation grant4 baced 09 exports and i n mining royalties account for the increase. Howdvqr, provinces with no major export k 2 , ~ e n e r a l l ythe poorest ones, do not b e n e f i t ffom such grants. 1.29 l h e central Government and the provin es have agreed on h i c h 4 taxes a r e to be collected a t each level of goveqnment and how the lierived revenue is to be shared. Tnere has been mch lqss agreemenp on !low and d ~ e n I 1 I -11 See Section 4 below for an explanaticn of pdovincia! grants. I - 108 - I ANNEX A I ceed t o be established. Natural Resources go as- . igh as 700,000 ounces p.a. copper pr(oduction w i i l begin a few years i later. After the i n i t i a l direct and indirec impact of construction, how- ever, t a major impact of the mine w i l l be t rough its contribution t o governme .t revenues. Arrangements f o r taxation and royalties were s e t t l e d i c the Ok Tedi Agreement of 1976, which prov des f o r an additional p r o f i t s tax t o be paid on a l l p r o f i t s above a c e r t a i level. This arrangement, based on the Frinciples established i n the r,enegotiated agreement; with Bougainville Copper Ltd. f o r the country's other mine, is widely recognized a s being both beneficial to the country and f a i r t o the company. 1.32 The new mine comes a t a time when t h e cutput of copper from the Bougainville mine is dropping and, beginnin the new revenues w i l l enable the Government to expand rapid1 from the. Mineral Resources Stabilization Fund and to continu dqpendence on Acstralian aid. The income from Bougainvil equivalent t o 20% of government expenditures and Ok Tedi can t o make a similar contribution. I a 1.33 A number of other me.jor natural r source- based projects m y naterializ-. i n the future. Feasibility s t u , i e s w i l l soon be started f o r a large gold mine i n Enga province and, i n a 4ouple of years, f o r the Frieda , I - 109 - AhTWEX A River copper mine, which Ls expected to be sim4lar i n magnitude t o Ok Tedi. Petroleum exploration has been going on for a Ournber cf years, but no commer- c i a l finds have yet been made. Recent agreements c a l l for 15 wells t o be 2. POLICIES FOR ECONOMIC ~NAGEMENT Australian Aid Although i n its sixth year of indepehdence, PNG is still heavily annual decisions by Australia, which had sometimes resulted i n serious dis- p a r i t i e s between expectsd and actual assistanch. Because of the importance of Australian aid t o the budget, uncertainty o ' e r its level made annual budgeting, l e t alone longer-term planning, exteemely d i f f i c u l t. The 1976 agreement opened the way for the development ot the National Public Expend- I - 110 - I ANNEX A exceeds lo%, only half QĢ the excess w i l l lbe applied, so t h a t PNG w i l l share the burden of any high i n f l a t i o n with Australia. Because gold is an import- ant product of the copper mines and its pSice is therefore a key factor i n PNG's minerals earnings, t h e agreement al$o allows f o r renegotiation of the level of aid i f the price of gold f a l l s b$low US$350 per ounce o r r i s e s over US$500 per ounce f o r a significant p e r i o d ( i n nid-1980 prices). I Monetary Policy I - ! l L - 111- ANNE)( A I I I also distributes qualitative credit guidelines dhich have given prefereqce to exporters and export producers, nationally-owned businesses, 2nd enterprises engaged in import substitution. Exchange Rate Policy I I I I - 112 - I I I I ,I 1979 t o 1980 alone the k i a a appreciated agAins t the US d o l l a r , the German mark, the yen and the 531, and f e l l mdes tty against only the Australian d o l l a r . Table 6: EXCHKGGE RATES A N D IhTLATION, 1976-80 I Percentage change i n average value pf Kl vs Zapanes e German I 11.8 -9.4 1978 11.9 7.9 -12.4 6.4 -2.4 I I Source: IMF, I n t e r n a t i o n a l Financial S t a tis t i c s . I 'Ihis policy h a contributed to keeping domes t i c i n f l a t i o n below world l e v e l s ( s e e Table 6). S t i l l , it is d i f f i c u l t t o draw d e f i n i t e con- S t a b i l i z a t i o n of low prices. I h e l i n e r a l Zesources ~ t n b i l i z a ~ t i oFund (HRSF) was discussed n above. It receives ail mineral related qovernment revenues (taxes and dividends) and releases t!en i n t o the bud~geti n a steady flow. P r i c e - 113 - ANNEX A Determination of Priorities - 114 - I I s t r a t e g i c objectives encompassing p r o d u c t i ~ n ,welfare, administrative and t r a i n i n g goals.11 I n addition, s e c t o r a l ptograms were introduced t o enable provinces t o a l x c a t e t h e i r own spending wfthin t h e general p r i o r i t i e s and l i m i t s s e t by t h e c e n t r a l Government. The departments each draw up a s k t of p r o j e c t s , rank them by pri- o r i t y , r e l a t i n g each of them t o one of t h e l s t r a t e g i c o b j e c t i v e s , and submit t h e list t o NPO. NPO evaluates t h e projeck submissions and, together with t h a t emerge from t h e planning system descdibed above a r e observed. One drawback of t h e system a s pdesently formulated has been t h e lack of c e i l i n g s f o r departments, which dd not know t h e i r eventual alloca- t i o n and may waste resources preparing to4 many p r o j e c t s . This occurs because t h e correspondence between ohj e c t 4ves and departments is not one-to-one. I n f a c t , many p r o j e c t s w i l l qeet s e v e r a l o b j e c t i v e s , and i f t h e assignment of p r o j e c t s t o t h e objectives +an he a r b i t r a r y , t h e r e is qo guarantee that the process will result i n t h e attainment of specific goals projocts.13 - I I I - 115 - ANNEX A I The emphasis on preparation of projects fo'r thf: NPEP has tended t o lead t o the neglect of some important factors. The focus is on new, r a t h e r than recurrent, expenditures, and although it is intiended t h a t the continuing need f o r the l a t t e r w i l l be met by additional NPEP ? ~ r o j e c t s , the effective- ness of t h i s procedure remains t o be seen. Policy dormulation by departments and the placing of p r o j e c t s within an o v e r a l l framedork f o r development a l s o tend t o be neglected i n the rush t o prepare projects, but the policy hearings planned f o r each department should remedy dhis s i t u a t i o n . However, s c a r c e manpower w i l l probably continue t o be concenqrated i n the most urgent a r e a of preparing p r o j e c t s for immediate funding, add a s i m p l i f i c a t i o n of pr j e c t documentation would help t o ease the constrdint . J Knowledge of probable c e i l i n g s on a l l o c a t i o n s to departments w i l 4 a l s o encourage an o r d e r l y planning process. A d i s t u r b i n g development occurred i n the i a s t year with the increased control by p o l i t i c i a n s over allocations uqder the s e c t o r a l programs. S e t up t o allow provinces more f l e x i b i l i C y i n determining t h e i r own slloca?ions u i t h i n national s e c t o r a l p r i o r i t i e s s u c h as a g r i c u l t u r e , r u r a l t r a x 2 o r t and primary education, these progra&s a r e administered by n a t i o n a l departments, which review provincial propo$als f o r funding and monitor the r e s u l t s . Allocations among provinces afe supposed t o be based on socioeconomic i n d i c a t o r s , while the provincial gOvernments themselves d i s t r i b u t e the funds within the province$. Some of the programs have, however, come under the control of nations1 p & l i t i c i a n s , r e s u l t i n g i n Experience with the NPEP The Government monitors the physical and f i n a n c ~ a lperformance of NPEP p r o j e c t s on a q u a r t e r l y basis. Monitoring reqbirements alone thus c r e a t e a s u b s t a n t i a l burden of work and, i n f a c t , lkke the o r i g i n a l project reviews and i n the paper work f o r each review, i; -justified. Implementation of NPEP p r o j e c t s is gradudlly improving. Cmly about h a l f of the expenditsres proposed i n the 1978 NPEP Jwere a c t u a l l y implemented, . . . .. -. + - . b u t by 1979 the f i g u r e had improved t o 70%, and i n '1980 t h e ,implementation r a t e is judged t o have been 80-90X. This improverr$nt r e f l e a t s the on-the- job training t h a t has led t o an increased a b i l i t y do anticipaQe c o s t s and o t h e r needs f o r projects. I I - 116 - The impact of t h e NPEP was very limited a t f i r s t , since it included only expenditures on pew a c t i v i t i e s . ,The f i r s t NPEP (1978-1981 ) AS t h e NPEP expands its coverage of budgetary expenditures, it is a l s o expected t o expanri its planning horizon. The f i r s t NPEPs covered only new p r o j e c t s beginning i n the f i r s t year of thk respective Plans, but eventually t h e NPEP is intended t o lnclude probeet s t a r t s f o r each of the four years of t h e Plan. L i t t l e headway has been make i n this. direction. The I 19 provincial governments was a c t u a l l y establjshed i n int2rirn form i n 1974, but the necessary l e g a l s t e p s were taken only t h r e e years l a t e r when t h e Organic Law on Provincial Government was dromulgated. Decentralization 4 is taking place gradually, with f u l l administ ative, financial and legal powers being devolved only a s the provinces m e t c e r t a i n conditions. Only four ha-re f u l l autonomy within the prescribed , a r e a s . I n a country of three i million people, the average population of z p ovince is 150,000, while the a c t u a l range is between 26,000 and 310,000 ( s e S t a t i s t i c a l Appendix Table 1.3). Meanwhile, pressures z r e m u n t i n i n a number of provinces t o divide them even f u r t h e r , both by s p l i t t i n g s m e provinces i n t o two and by e s t a b l i s h i n g a d d i t i o n a l formal governmental its within the provinces. - - - , - - I 4.02 Decentralization has changed tha a d h i n i ~ t r a t i v estructure;.in-thg , ., ~ duntry, with many public servants now repatd$ng t o p r o v i n c i a l , yathgt thap I national departments. It has complicated the budgeting pt~(qs,s-,+n4,~hqs, weakened the control o' the c e n t r a l ~overnmekkover planning3 aqd !irpplemen-*- : , . $ 1 t a t i o n of eupenditures. The c r e a t i o n of 19 d 4 d i t i o n a l u n i t s : a l l f n -. I I :~ - 117 - ANNEX A need of planning, budgeting and .implementation c a p a b i l i t i e s has added t o the demand f o r r e l a t i v e l y scarce trained manpower. A s i g n i f i c a n t f e a t u r e of t h e decentralizdtion process was t o have been t i g h t control over the expansion of the publiq service. Provincial s t a f f would remain part of the national public service, although reporting t o provincial a u t h o r i t i e s , and provinces would be 4llowed t o h i r e only s i x additional s t a f f outside t h i s source. This l i m i t has proven d i f f i c u l t t o enforce, but i f PNG wishes t o follow a policy of r d t i o n a l planning f o r the use of its resources, i t is important t o prevent tHe uncontrolied growth of the public service and to allow increases i n s t a f f c e i l i n g s only through the well- defined NPEP process. A national planning sys tem was still evolving -.lhen the provincial governments were established, and some decentralizdtion of planning had to be b u i l t i n t o it. 4 t p r e s ~ n tabout one quarter of c e n t r a l government expenditures go d i r e c t l y t o provincial governments. Of the t o t a l provincial revenue, about four- fifths is an unconditional gradt, r e c e i p t of which is automatic and does not r e q u i r e the preparation o r Qubmission of projects./l - Another 10% of provincial revenue is provincially based; the c e n t r a l royalty payments, and provinces may levy r e t a i l s a l e s and land taxes. The . r e s t , about 10% a t present, comes through the NPEP, and only t h i s portion is t i e d t o s p e c i f i c projects. Thus over one- fifth o f t o t a l government expendi- tures is automatically outside of t h e c e n t r a l govehunent's planning process and cannot be used to promote national policies. Provincial governments may be b e t t e r abl+ than the c e n t r a l governLent t o i d e n t i f y the needs of the provinces bnd t o determine t h e i r p r i o r i t i e s , and t h i s is i n part the r a t i o n a l e behihd decentralization. In 1 practice, however, many provincial pvernments do o t yet have the necessary expertise and r e l y on the c e n t r a l government, o r o e x p a t r i a t e consultants, ! f o r support both i n preparing projects f o r the NPE and i n preparing provincial plans. A number of national department have s e t up u n i t s t o a s s i s t provincial planning. Each province has a pkovincial planner, and NPO has four regional planners, but many of the people f i l l i n g :hese positions have no previous planning experience. Some provinkes have hired consultants k and some have obtained the services of a regional lanner o r economist (e.g. from NPO c r the Department of Primary Industry), b t t h e needs a r e tremendous. While f u l l y s t a f f e d planning u n i t s i n each province may be a
    .L - /I D. Gwyther, "~ommercialand Blological Aspects of the.Culf of Papua Prawn Fishery," Research Bulletin No. 21, DPI, Port Moresbg, 1980. - 202 - ANNEX 2 the prawning industry i s encouraged with regard t o shore-based prucessing, marketing and servicing f a c i l i t i e s , but not t o additional fishing effort. Modest expansion co*:'.? occur from the opening up of small new prawning grounds and the fuS . exploitation of inshore areas i n t!le Gulf of Papua by smaller locally owne: :qats. Product!.on is projected t o increase from a base of 1,000 MT of pr-#us i n 1981 by 20 MT p.a. t o 19Q0. Annual variations i n the catch w i l l , hot-.ver, continue to be large. 2.14 The prospects for expansion of the lobster industry a r e similar t o those for the prawn industry. Moreover, a large part of' the lobster catch is made by trawlers which spend most of their t i m e i n search of prawns. The resource is limited t o the extent that restrictions on iishing e f f o r t have already been imposed. No other lobster grounds with potential comparable t o those already being exploited have been identified, though lobsters . sufficient f o r subsistence and local market needs exist on reefs throughout PNG. On these grounds alone, it could be conclcded that therc a r e no prospects for substantial expansion of the catch on a sustained basis. The lobster catch is projected to average about 100 MT of t a i l s p.a. with wide variations from year t o year. 2.15 Although there is evidence that the catch r a t e i n sone areas has reached the maximum sustainable yield, DPI s c i e n t i s t s have estimated that the barramundi fishery is capable of producing 550 MT p.a. on a sustained basis. The realization of this,potential would require the distribution throughout the fishery of freezer and processing f a c i l i t i e s as well as mater- ials and expertise to maintain motors, fishing gear and freezers. Capable management would also be required. The operation of freezer boats i n the barramundi fishery is not listed e i t h e r as a priority or open activity in the NIPS, so it must be assumed that foreign investors w i l l not provide the service. Services i n some areas could be provided under government auspices a s part of a general program of development of coastal fisheries, but these a r e un1ike:y t o be sufficient t o realize the f u l l potential of the fishery. Therefore, it is projected that the catch w i l l increase from the present annual level of 150 MT by 10 MT p.a., with wide annual variations. A higher r a t e of growth could be achieved i f foreign investors with capable management could be induced t o provide mobile f i s h buying end maintenance services i n areas not presently serviced. The high cost of expatriate management i s , however, likely to rnake such investment commercially unattractive. 2.16 Coastal fisheries are in the NIPS reserved a c t i v i t i e s list, indi- cating that foreign investment would not he welcomed i n that field. This fishery is, i n any case, subject t o customary ownership .and its cdmatercial exploitation by outsiders would require the agreement of the owners. The Government's strategy is to provide the services necessary to allow ths customary owners i n the most a t t r a c t i v e areas to f i s h commeccialIy. The resource is capable of producing about ten times the present estimated catch on a sustained basis. Moderate exploitation could yield L38,000 MT p.a. and heavy exploitation 388,000. While the coastal fisheries have great poten- t i a l , catching and sarketing the f i s h a t competitive prices presents a great .- ANNEX C Page 12 management challenge. Several projects a r e already i n operation assisting village people t o f i s h commercially by providing a buying service, spares and supplies service, laintenawe and gear hire. These require high level and expensive manageroent support t o continue operating. The Government and the International Fund for Agricultural Development are considering cooperating i n the expansion of the network of projects by the development o r expansion of s i x projects over a four year program. Preliminary cost estimates a r e of the order of K 10 million for t h i s program, including operating costs over the deveiopme2t phase. The effectiveness of these projects w i l l depend on the responsiveness of village people t o the oppor- tunity t o f i s h commercially, although the projects would incorporate some fishing capacity of their own. With good management, catches of 1CO MT of f i s h p.a. per project could be expected, producing a return of about K 110,000 per project a t current wholesale prices of about K l.lO/kg. On the basis of experience with existing projects, operating costs a r e likely to greatly exceed returns. The projects a e therefore unlikely to be justifiable i n terms of short-run economic benefits. Rather, their justification would depenci on their contribation to training and the provision of basic i~frastrucLure. 2.17 No estimates of ths t o t a l aaount of reef and coastal f i s h currently being marketed a r e available. However, fish production from government-sponsored projects is projected t o increase from the present level of about 2C0 MT t o zbout 700 MT by 1990. The expected build-up i n volume and value terms is sh;-a i n Table 5 below. -- Table 5: REEF AND COASTAL FISHERY PROJEGTS, 1981-90 1981 1982 1983 1984 1985 1986 1987 1989 1990 Catch (MT) 200 200 240 283 380 480 580 680 700 Value(K0003) 200 220 264 308 418 528 638 748 770 Source: Mission estimates. 3. COCOA Industry Structure and Production 3.01 Cocoa is grown i n almost a l l coastal provinces of PNG by small- holders and on plantations. In 1978 the plantation area under cocoa was estimated a t 55,000 ha of which 48,000 ha were i n production (See Table 6). A t o t a l of 451 holdings were involvedp The smallholder area was estimated i n F ~ 7 6a t a t o t a l of 73,000 ha of which 41,000 ha were i n production. New -- ANNEX C Page 14 Table 7: SIZE DISTRIBUTIGN OF COCOA PLANTATIONS Size Class (ha) 1-99 100-199 200-299 300-399 400-999 1000+ Total No. of holdings 149 77 58 23 22 3 339 % of holdings 44 23 17 7 6 1 100 Area (ha) 7,065 10,492 13;779 7,637 12,324 3,252 54,549 % of area 13 19 25 14 23 6 100 Average area (ha) 47 136 238 332 560 1,084 161 3.04 It has been e~timatedthat i n 1974. 15.000 national workers were employed on cocoa plar.rzcions. The current l e v e l of employment is probably substantially l e s s thaa chis i n l i n e with the general decline i n agricultural employment and the decline i n e s t a t e cocoa production i n particular. Assuming the same l e v e l of employment per u n i t of production, employment would have f a l l e n t o 8,OCO - 9,000. It is known, however that standards of maintenance on nany e s t a t e s have slipped and t h a t those maintaining t h e i r stands a r e using chemicals, sprayers and t r a c t o r s where possible t o reduce labor requirements. It is therefore likely that employment on cocba plantatiocs is less than 8,000. I 3.05 h e industry commenced i n the early 1950's and by FY66 production had reached 15,600 MT, almost a l l of it from plantatims. Production increased t o 26.100 MT i n FY71 and a peak of 35.000 MT i n FY75. The I proportion of smallholder production increased steadily to over half of t r :a1 production during 1978-80. Plantation production dropped from the FY75 peak of 22,400 MT t o 13,000 - 14,000 MT i n recent years. The extent of t h i s f a l l may be exaggerated due t o t h e s t a t i s t i c a l treatment of plantat.ions taken over by Papua New Guineans, but the estimated decline As. s o sharp that it is clear that a serious decline has occurred. Production figures a r e presented i n Table 8. 3.06 A major concern within t h e industry is the increasing age of trees. A FY74 survey of plantations found t h a t 14% of plantings were over 30 years old./l A further 14% were 20-29 years old and 41% were 10-19 *yearsold. A l l of t c s e trees, D r almost 70%of the planted area i n 1973-74, would be a t o r nearing the end of t h e i r economic l i f e . To replace these trees, new - I /1 D.L. Godyn,"An Economic Survey of Cocoa i n Papua New Guinea." Department of Agriculture, Stock and Fisheries, Port Moresby, June 1974. " Central/Gulf 74 36 41 43 39 Milne Bay 29 29 27 9 26 Oro 490 162 125 146 264 Horobe 130 131 Madang 1,716 1,418 ... ... ... ... 2. Sepik 124 ... ... W .Sepik 46 29 29 Manus 21 21 New Ireland 2,318 1,212 1,577 1,-44 1,336 East N.Britain 10,034 5,196 5,061 4,956 4,613 West N.Britain 1,018 505 733 715 674 North Solomons 6,396 4,912 6,015 4,657 5,690 Central/Gulf Milne Bay Oro Norobs Madang E. Sepik W. Sepik Manus New Ireland East N.Britain West N.Britain North Solomons I Source: 1974/75-M.A. Wh I -208 - ANNEX C Page 17 plantings since FY74 would have needed t o be about 40,000 ha. Limited s t a t i s t i c s suggest that new plantings have been f a r l e s s than that. From June 1975 t o December 1980, surveys by the National S t a t i s t i c a l Office indicate t h a t a t o t a l of 6,800 ha of cocoa was planted on estates. It must be concluded t h a t much of t h e s e n i l e area is e i t h e r i n production a t very low levels of productivity o r has been abandoned. This conclusion is consistent with the impressions of experienced industry observers and plantation production performance. 3.07 The smallhoLder industry is younger than t h e plantation industry and the problem of s e n i l i t y is not a s acute. In some areas, however, notably the highly developed areas of the Gazelle Peninsula i n East New Britain, s e n i l i t y is a serious problem, compounded there and elsewhere by increasing pest and disease problems. The smallholder industry, l i k e t h e e s t a t e sector, w i l l need extensive replanting i n the next decade i f it ,is t o maintain productivity. 3.08 Average yields a r e very low, probably because of t h e increasing problems of age, pests and diseases i n the plantings. Total production and area s t a t i s t i c s imply average yields i n 1978 of around 0.32 MT/ha of bearing trees on plantations and 0.3 MT/ha i n FY76 on smallholdings. This compares with Godyn's FY74 findings of plantation yields of 0.44 MT/ha and srdallholder yields of 0.33 MT/ha. Resources f o r Expansion 3.09 The Department of Primary Industry (DPI) has mapped areas of land suitable f o r cocoa development. Most coastal provinces have land with "very high" s u i t a b i l i t y a s well as additional areas of "high" and "moderate" suitability. The classification is based on broad reconnaissance surveys and does not take account of economic factors, but it can be safely concluded t h a t PNG has large areas of land suitable f o r expansion of cocoa plantings. I n the case of smallholder development by t r a d i t i o n a l owners, such land could be brought i n t o production quickly and easily. Ia other cases, problems of land tenure and administration could cause long delays. 3.10 Although there is scope f o r planting new areas, the greatest re- source available f o r industry expansion is the existing industry. Present yields from both smallholder and e s t a t e plantings a r e extremely low, and reasonably managed commercial plantings of high quality planting material could yield four times current levels. These areas a r e cheap t o redevelop r e l a t i v e t o t h e costs of developing virgin land, since enly cocoa t r e e s nee6 t o be removed and such items a s road access, housing, processing and marketir,g f a c i l i t i e s a r e already there. ~ * - -- ANNEX C Page 18 Commercial Aspects of Development 3.11 A sound technical package e x i s t s f o r cocoa development. Its success is, however, c r i t i c a l l y dependent on the l e v e l of management. The smallholder cocoa industry was established a t very little cash cost by the use of ur.)aid hou:;ehold labor. Subsistence a c t i v i t i e s continaxed and provided basic food needs. Much of the smallholder industry is now f o r the f i r s t t i m e faced with the need t o replant. I n some areas, notably t h e Gazelle Peninsula, land shortages require t h a t old plantings be cleared and replanted since t h e r e is no new land available f o r planting. L i t t l e replanting has occurred, since smallholders have grown dependent on cash incomes and a r e unwilling to cut down existing stands and l o s e the small , cash incomes which they are still producing. 3.12 Credit is therefore needed t o provide f o r cash costs r e l a t e d both t o t h e cocoa development and t o t h e household. The PNG Development Bank (PNGDB) has l e n t a t o t a l of K2.4 million f o r cocoa development. A breakdown between small and l a r g e developments is not available, but PNGDB is financing t h e redevelopment of a number of plantations. Lending t o smallholders would have been within t h e bank's "4-112: 1 policy" which states t h a t loans can be made t o a smallholder s u f f i c i e n t t o develop 4-112 ha of cocoa f o r each ha of bezring cocoa he owns. While t h i s would a s s i s t smallholders operating on a l a r g e r scale, the majority of smallholders with only about 1 ha of cocoa would find it hard t o qualify f o r help under t h i s policy. 3.13 Smallholder development a l s o requires suppor', services, notably i n t h e provision of high quality planting material and i n extension s e r v k e s t o ensure t h a t smallholders can manage t h e i r plantings so as t o control pests and diseases. Traditionally, these services have been provided by DPI, but the s t a f f and f i n a n c i a l c o n s t r a i n t s on DPI have resulted i n the s e r v i c e s being inadequate t o meet smallholder requirements. Other organizations including t h e Cocoa Industry Board, a cocoa exporting company and s p e c i a l i s t management agencies are attempting to supplement DPI e f f o r t s , but inade- quacies of support services a r e l i k e l y t o constrain smallholder development and redevelopment. 3.14 Substantial economies of s c a l e a r e found on plantations, with small producers having a cost of production more than 70% above t h a t of l a r g e r estates. A s i g n i f i c a n t reason f o r these economies is t h e high overhead cost of management on small plantations. For these reasons, the smaller, owner- managed plantations which have formed an important p a r t of the cocoa estate industry a r e at a serious disadvantage. Amalgamation of many of the smaller estates under the control of larger- scale corporate managemew is therefore a prerequisite t o full- scale redevelopment. 3.15 The c o s t of redeveloping s e c i l e plantings is l i k e l y t o be i n the * * range K1,500 - 2,500 per ha. Investors could expect no cash income from t h e i r investment f o r a t l e a s t f i v e years and then only i f there were a high proportion of equity finance. Therefore, investment i n cocoa deve1opment.i~. ' l i k e l y t o prove a t t r a c t i v e t o those interested i n a s s e t growth income r a t h e r than those interested i n e a r l y cash returns. - 210 - ANNEX C Development Policies and P r i o r i t i e s 3.16 The developeat of r u r a l industries and particularly agricultural industries has very high p r i o r i t y within the Government. In t h e case of the cocoa industry t h i s objective i s pursued mostly through providing support services f o r smallholder development. In addition, cocoa research carried out by DPI is applicable t o the e s t a t e sector as w e l l a s smallholders. Expenditure which is explicitly directed a t t h e e s t a t e sector includes the plantation management a c t i v i t i e s of the National Plantation Management Agency (which is wholly owned by the Government) and plantation management training by the Department of Commerce. The agricultural extension services of provincial governments a s s i s t smallholders i n t h e management and development of t h e i r agricultural businesses. The National Cocoa Development Programme conducts training courses on cocoa technology, processing and t h e propagation of planting material. 3.17 Although the a c t i v i t i e s described above a r e probably extremely cost- effective, t h e Government's flnancial commitment and e f f o r t i n cocoa redevelopment are, r e l a t i v e t o the importance of t h e industry and the potential payoff, very satall. The general agricultural extension services a r e operating under many d i f f i c u l t i e s , including inexperience and inadequate supervision of s t a f f , s t a f f shortages and administrative d i f f i c u l t i e s i n gaining access t o key support services such a s transport. As presently organized they could not be expected t o play a major r o l e i n an ambitious redevelopment program. Inadequacies i n t h e s p e c i a l i s t cocoa a c t i v i t i e s a r e a l s o appearing, notably i n regard t o planting material, t h e demand f o r which greatly exceeds supply. 3.18 Probably a s a r e s u l t of the d i f f i c u l t i e s faced by the Government i n providing the services required by smallholders, other agencies a r e - - entering the fiezd. The Cocoa Industry Board has bought a plantation which w i l l be used, i n t e r a l i a , f o r the propagation of planting material. The PNGDB is running its own extension program on a settlement scheme on East New Britain. Angco, the leading cocoa exporting company, is runaifig small- holder extension/developent programs i n the main producing provinces. 3.19 The lack of a suitable source of I wlanting c r e d i t f o r smallholders with plantings of only a hectare o r l e s s continues t o impede replanting. The Cocoa Industry Board has considered t h i s requirement, but no system f o r didtributing and administering c r e d i t t o t 1 . l ~sector has yet been developed and accepted by the concerned parties. 3.20 The most important e f f e c t of the Government on t h e plantation sector is via land legislation and i n particular the Plantation Redistribution Scheme (PRS). The PRS was established by legislation enacted i n 1974 t o f a c i l i t a t e t h e acquisition of f oreign-owned e s t a t e s and t h e i r transfer t o descendants of the customary landowners. A t that time, v i r t u a l l y the whole plantation sector was foreign-owned, and the PRS was enacted i n respbnse t o a p o l i t i c a l situation that threatened forcible takeovers i n t h e absence of l e g a l means - 211 - ANNEX C Pagb 30 of increasing national ownership. The PRS has not been effective i n trans- ferring ownership t o customary landowners, and since it was enacted, produc- tion performance of the plantation sector has been poor. Because of concern arising from these factors, policies relating t o the e s t a t e sector were reviewed i n 1979 and a number of recommendati~nswere made. These recanmen- dations were generally endorsed by t h e Bank. 3.21 In 1980 t h e Government suspended the PRS, although the l e g i s l a t i o n i t s e l f is still on the books. However, i n recognition of the c r i t i c a l need f o r security i n plantation agriculture, t h e Government recently reversed two policy decisions t h a t had prevented leases dated prior t o 1974 frun being reissued, and had forbidden t h e transfer of leases among non-citizens. As only those leases issued prior t o 1974 a r e subject t o t h e PRS, t h e reversal of these two policies means that plantation owners w i l l be able t o obtain security of tenure and that f r e e market trading i n plantations w i l l be permitted, thus f a c i l i t a t i n g the takeover of smaller, uneconanic u n i t s f o r redevelopment by larger and stronger organizations. While the Government accepts the need f o r security i n plantation agriculture, its prime concern is that rehabilitation take place, while a t the same t h e local involvement i n the sector is increased. Therefore, the reissue and transfer of leases w i l l be effected on a case by case basis t o ensure t h a t three conditions a r e met: f i r s t , t h a t there is no demonstrable land shortage i n t h e area; second, that the owners give finn commitments t o redevelop the land; and third, that every e f f o r t be made t o involve Papua New Guineans i n t h e enterprises. This approach t o the question of security of land tenure is considered to be more r e a l i s t i c than repeal of the e n t i r e legislation. Projections 3-22 Despite a somewhat pessimistic price outlook, cocoa planting$ still represent a profitable investment i n PNG. If account is taken of the effect which inflation has on the the r e a l cost of debt servicing, cocoa investment is even more attractive. PNG is a l s o fortunate i n having t h e Cocoa Stabilization Fund which w i l l provide producers with some r e i i e f from depressed prices. Godyn, i n h i s 1973 survey, found smallholders responsive t o prices. A t "low" prices ( a t t h a t stage K 340/E dry bean) they would only harvest enough t o meet minimum cash requirements. More cauplete harvesting occurs a s prices rise. On t h i s basis, the low prices expected i n the. 1980s could he expected t o have a negative effect on smallholder willingness . to harvest t+.e crop, but the Stabilization Fund supplement t o producer prices should reduce t h i s effect 3.23 The high level of new plantings which occurred during the e a r l y and mid-1970s seems t o have been responsible f o r good smallholder product ion performance. The growth i n smallholder prodccr ion i n North Solmons was the highlight of the industry i n the l a t e 1970s. Without it, t o t a l smallholber , % * - production would have declined. Most of the new plantings there have now ' ' a t- - , commenced bearing and the e a r l i e r smallholder plantings a r e now reaching the end of t h e i r economic l i f e . It must therefore be expected that growth in production w i l l be much more modest during the 1980s. I 3.24 Of greatest concern to the future of smallholder production is the inadequacy of government support services. The agricultural extension service is affected by serious and f a i r l y intractable problems. Specialist cocoa support services seem soundly based, but t h e i r scope is inadequate given t h e magnitude of the task. 3.25 me outlook for the existing plantation sector is even less opcimistic. Apart from the corporation-owned plantations, most of the smaller holdtnes a r e not worth r e ~ l a n t i n e . There is little incentive to dc s o anyway, given the provisions of the PRS. They have no cash flow t o I impossible t o finance it. Under these circumstances, further f a l l s i n plantation production must be expected. 3.26 This effect may be partially offset by the production of new larger projects and by the continuing replanting programs on some of the company-owned plantations. However, it is unlikely that any new project would be commenced before 1953, with f i r s t production i n 1987. Recent performance i n attracting agricultural investors would suggest that one such project might be started each 2-3 years. Some of the plantation investors already established i n PNG a r e interested and suitably qualified and that should expedite negotiations. Such projects would, however, have l i t t l e impact on production before 1990. Forecast t o t a l cocoa production is shown i n Table 9. Table 9: PNG COCOA PRODUCTION FORECAST, 1981-90 ('000 MT) 1981 1982 1983 1984 1935 1986 1987 1988 1989 1990 " Production 26.0 25.0 25.0 26.0 28.0 28.0 28.0 28.0 29.0 29.0 Eoarce: Mission estimates. I 3.27 Expansion of the industry beyond t h a t forecast would -.' * substantial expansion of the e f f o r t on support services aridldr :::~RbiiHes,~in~: ' y 8 4 , . . policies and greater efforts t o a t t r a c t investors to the & s ~ ~ ~ ~ ~ ~ e ~ ~ 6,rr , ~ - . . : : . . I.! :2:'i: - 213 - ANNEX C Page 22 While it is appreciated that the Government is making strenuocs e f f o r t s to restrain expenditure, there may be a case for greater expenditure on cocoa development. Part of the case for additional spending would be the f a c t that properly organized programs could produce signleicant short-term economic benefits. In addition, the beneficiaries could pay a large p ~ r tof the cost. For example, funds generated by levies on the industry could finance such a c t i v i t i e s as research, the production of planting material and development/extension teams. The Cocoa Industry Board has already expressed i n t e r e s t i n such a c t i v i t i e s . Smallholder credit, which is sorely needed i n some areas, should also be self- financing. 3.28 Given the estimated t o t a l smallholder cocoa plantings of over 70,000 ha, i f t h e industry is to continue t o grow, replantings and plantings should be greater than 5,000 ha p.a. I n i t i a l l y , a more ambitious program would be necessary t o remedy the very serious situation i n East New Britain. Based on previous experience, a ten year program of 50,000 ha would requirc credit of the order of K 58 million a t 1981 costs. A t peak production, t h i s area would produce 40,000 KT p.a. of cocoa with a value of about K 60 milion. A major expansion of support services would be required t o i m , 'ement such a program. 3.29 Within the plantation sector, policy and legislative changes to permit restructuring could see the redevelopment of one third of the existing e s t a t e area. Other areas w u l d be unsuitable for restructuring and redevelopment and could be used for smallholder cash o r subsistence production. This would involve a t o t a l of about 18,000 ha. Capital cost a t 1981 prices would be about K 40 million and peak production would be 28,800 KT p.a., valued a t about K 43 million.. Abcut 9,000 workers would be required. New projects could involve a further 2,000 ha p.a., based on existing areas of unused government-owned land, follow-up development of logged areas and other lightly populated areas where the landowners have expressed interest i n the development of their land. 3.30. Should t h e changes outlined above be made immediately, there would be l i t t l e impact on production u n t i l the l a t e 1980s. The increase i n employ- ment would, however, occur as soon a s f u l l scale plantation development commenced. 4. COFFEE Industry Structure 4.01 The coffee industry has grown bince its beginning i n the 1950s t n t o PNG's most important rural export industry. From 1976 onwards it has earned over K 100 million p.a. in foreign exchange. Exports have increased steadily t o over 50,000 KT i n 1980. Early development of the industry was by expatriate-owned plantations, but smallholder production eclipsed that'-of - " - *" " "- the plantations i n the early 1960s and has since maintained its domitiant - 214 - ANNEX C positioa a t about 70%02 t o t a l production. Arabica coffee comprises about 90% of the crop and is grown i n the Highlands Provinces and i n the elevated parts of Morobe Province. Robusta coffee is grown i n coastal areao, the most important being East Sepik and Oro Provinces. 4.02 Tables 10-12 presen: s t a t i s t i c s on 'he distribution of the coffee .industry and production i n recent years. The plantation coffee industries are concentrated i n Western Highlands, Eastern Highlands and Morobe Provinces which account for 99% of the plantation coffee area. Western and Eastern Highlands contain 96%of the plantation area, and are also responsible for over half of t o t a l smallholder prcduction. The coffee plantation area, based on a 1978 survey was 6,570 ha, v i r t u a l l y a l l arabica, of which about two thirds was i n production. Smallholder areas, based on DPI's 1976/76 survey, were 32,174 ha and 8,431 ha for arabica and robusta respectively. 4.03 Year t o year v a r i a t i a u ~in coffee production are substantial, often exceeding 2C%, making interpretations based on short-term data relatively hazardous. It appears, however, that the coffee estate sector has been alone among the e s t a t e sectors of the longer- established tree crop industries i n maintaining production since the introduction of the Plantation Redistribution Scheme (PRS) i n 1975. The coffee industry is youn&=rthar the cocoa and copra industries, with a lower proportion of senile trees, and i r i c e s have been high for most of the time since the PRS was introduced. F~rthermore,most of the transfers of coffee estates t o Papua New Guinean ownership were negoti- rted directly between willing buyers and s e l l e r s without using the acquisi- tion provisions of the PRS. Under these circumstancc~s, the new owners had a si-tong incentive t o maintain prof i t a b i l i ty t o finance the transaction. The estates were also sufficiently profitable t o support the retention of capable management. 4.04 Different management practices are followed by smallholders and ' plantations. Smallholders generally have shaded stands which do not require f e r t i l i z e r s . Most plantations have no shade and use f e r t i l i z e r to maintain the health of the stand. Crude division of production by the bearing areas suggests that plantation yields a r e more than double the smallholder yields. 4.05 Over t h e past two years, the development of coffes plantings owned by groups of customary landowners has proved popular. These range i n size from 5-20 ha, with the larger projects being managed by professional management agencies on contract. The owwrs are expected t o provide some equity e i t h e r a s cash or labor and the ?NGDB provides loan finance. Security for the loan is provided by the temporary alienation of the land on the understanding that it be leased back t o the customary owners. n e r d is presently a long queue of groups wishing t o establish such ,rejects,' and the aain constraint seems to be the a b i l i t y of the Government to complete the land investigations and procedures and t o incorporate busi'ness groups. I f t h i s level of interest is maintained, the structure of the coffee industry- - -,- = -- could significantly change during the next decade. i -, I k Table 10: AREA PLANTED TO COFFEE BY PROVINCE AND TYPE OF HOLDING Smallholders Plantations Bearing- Not No.of Not I I Province area bearing Total holdings Bearing bearing Total Eastern Highlands 8,259 2,204 10,463 Simbu 3,575 1,106 4,681 Western Highlands 5,474 1,567 7,041 Enga 1,435 252 1,687 Southern Highlands 1,405 493 1,898 W. Se2ik 924 190 1,114 ) E. Sepik 2,376 272 3,248 ) Madang 911 443 1,354 ) Morobe 2,833 1,439 4,272 Oro 2,840 623 3,463 ) Milne Ray 692 18 7,101 ) Central 155 137 292 ) Others 78 11 89 2 11 . 1 12 I Source: Smallholders- bdsed on 1975-6 DPI survey; plantations- Bureau of I - 217 - 4.06 The l a t e s t s t a t i s t i c s on employment i n the coffee industry are for 1977 a t ~..lich time an estimated workforce of 7,115 was employed. Labor productivity on plantations appears t o have increased over the l a s t decade. In 1970 and 1971, e s t a t e pioduction per worker was 1.07 and 1.2 MT respec- tively. I n 1976 and 1977, t h i s had increased t o 1.76 and 1.56 MT. Industry observers suggest that t h i s is a response t o r i s i n g minimum wages, and that chemical sprays are being used t o reduce the permanent plantation workforce. Piece rates a r e a l s o reported t o be i n increasing use for the same reason, especially f o r harvesting. 4.07 PNG is a member of the International Coffee Agreement. Its quota f o r the 1980181 coffee year was 700,000 bags, while its quota i n 1981182 was 610,000 bags and could be reduced a s low a s 540,000 bags i n t h e following year. Production has exceeded t h i s quota f o r each of the past three years, and the Coffee Industry Board has b u i l t storage f a c i l i t i e s f o r the substantial stocks it expects t o hold. 4.08 In addition t o controlling coffee marketing, the Coffee Board has recently involved i t s e l f i n wider aspects of t h e development of the industry It is financing the employment of a coffee specialist researcher a t a DPI research s t a t i o n and it has financed coffee nurseries which produce planting material f o r distribution t o smallholders. 4.09 An estimated 200 MT of coffee is roasted for domestic consumption, but there i s no manufacture of insta3t coffee I n PNG. Annual imports of instant coffee a r e equivalent t o about 450 MT of green bean. Although rhere has been i n t e r e s t i n establishing an instant coffee plant, doubts @bout the possibility of making export s a l e s together with the small s i z e of the domestic market have so f a r made i t unattractive. A further complication Is the fact that the lower quality robusta would probably be used, and this comprises only about LOX of t o t a l production. Resources f o r Expansion 4.10 The Highlands region which is the center of the arabica industry is, relative t o the rest of PNG, relatively densely populated. ~ ~ v e r t h e l e s s , there appears t o be ample suitable land available for expansion. I n some cases development costs can be minimized by planting coffee on land being r e t i r e d from food production i n the subsistence production cycle. This land is already cleared and drained, and the fact that it has been used.for a Eood crop appears t o have l i t t l e effect on subsequent coffee growth. In addition t o garden land there a r e large areas of land suitable f o r robusta coffee. In these areas, the main limiting factor is likely t o be competition from other crops, such a s cocoa, rubber and o i l palm. In t h i s respect the lower price of robusta coffee compared t o arabica Is likely t o be a r t t i c a l . ANNEX C 4.11 The pro~lcrnsi h i c h apply nationwide t o getting r i g h t s to use of land for people othcr than the customary owners apply equally t:, the coffee ind- ustry. Even i n cases of development by customary owners which require credit, relatively ccmplicated and time consuming procedures must be foll~wed. Credit f o r projects on such land is secured by the alienation of the land under an arrangement t o lease the land back t o traditional owners. The need t o complete these procedures is currently a factor limiting the development of intersediate scale projects, shce key departments are understaffed and processing is being delayed. 4.12 In scme areas, it is reported t o be increasingly d i f f i c u l t t o h i r e labor. This development was not reported f o r the coastal p l l r ~ t a t i o n industries, and it is l i k e l y that the seasocal veriations ir. coffee employment have contributed t o this. Permansnt labor forces on coffte estates have been reduced substantially, and p1an:ers rely on casual labor t.o harvest the crop flushes. Shortages are emerging only i n the Eastem and Western Highlands provinces where there a r e extensive smallholder a s well a& e s t a t e plantings. I n other provinces, notably the Southern Highlancls, the pttople seem eager f o r wage employmect. 4.13 While it is probably true that f o r PNG ais a whole, shortages of labor a r e unlikely t o l2mit e s t a t e development, local shoztages have implications f o r the location of future development. L a b ~ ri n PNG is not particularly mobile,and it muld be desirable a s f a r a s c~mmerciallyfeas- i S l e t o take development t o the existing r p u l a t i o n centers rather than bring lahor into the areas h i c h are wore favored for developent. This . strategy has apparently been s%ccessful i n the Southern BCghlallds Integratedl Rural Development Project The disadvsctages i n terms of higher transport costs o r lower yields could w e l l be offeet by reduced coats (certainly reduced opportunity cost) of h b 3 r . In addition, this strategy would largely avoid the removal of high proportions of young men from village populations which can have adverse e f f e c t s on subsistence production. 4.14 Coffee development, other than by smallholders usiag unpaid labor,, is relatively expeneive. Eatablisbent and maintenance t o f i r s t harvest requires about three mati years per ha. Peak debte on estate scale develop- ments a r e over K 4,000 per ha. Large scale coffee development would therefore make heavy dzmands on PNG's credit system. 4.15 Lack of extension and supervision services is l i k e l y to be a key canstraint t o smallholder developme.~t. The agricultural extension services of provincial governments a r e understatfed both qucl3.itatively and quantitatively. In addition they lack e f f i c i e n t support services. Even i n the Eastern Kighlands, where the provincial government has established a special coffee development and extension team, it has been esti~ndtedthac it w i l l be possible f o r the team t o v i s i t each coffee growicg village only once per year. This is inadequate t o ensure sound developdent and management, and other provinces are much worse off. - 219 - . ANNEX C - Commercial Aspects of Development Large-scale developents of about 100 ha and the intermediate 20 ha developments a r e both economically ~ t t r a c t i v e ,havihg estimated internal r a t e s of return of 15% a n t 12% respectively. Ad&itional plantings on existing estates a r e even more a t t r a c t i v e , having internal rates of return i n excess of 30% and a repayment period of 7 years. Although intermediate scale clan-owned plantings a r e currently extremely popular and developments so f z r commenced have been very successful, they have not yet stood the t e s t of time. Some industry observers f e ~ that r disputes could azise between clan members when ptodwction commences a1.d there a r e profits t o distribute. More formal i n c o r p o r a t i ~ nrather than simple registration as business groups ar is the present practice might reduce t h i s problem. Traditional small- scale . lantings a r e expect~ltt o continue to be the backbone of the ineustty, however. New plantings should continue to expand with tho road network. It may pay to reduce labor usage by strategies that w,uld reduce yield and/or quality, but would still be commercially rational z,i~ena sufficient increase i n the labor-coffee price ratio* Thus, while the coffee estates a r e likely t o continue t o be viable, they cduld change management practices with the effect that their contributions to foreign exchange earnings and employment would be significantly reduced. Policies and P r i o r i t i e s f o r Development The NIPS lists arabica coffee growing a s a " r e ~ e m e d "activity i n which new foreign investment would not i n general be permitted. Robusta coffee on a selective nucleus e s t a t e basis is, howeqer, l i s t e d amcng the "open" activities for which fcreign investment proposals are welcomed. The coffee e s t a t e industry, already substantially owned by Papua New Guineans, is operating prof itably, and could no doubt continue to grow without further foreign investment. The Government has given priority to the provision of support services for smallholder and intermediate scale coffee development. The national coffee develc-pent plan is funded i n the current NPEP a t over K 300,000 p.a. u n t i l the snd of 1983, wLth a target for coffee production of 60,000 MT p.a. by 1986. To achieve this, expansion of the coffee area by 13,500 ha by 1982 is proposed. Of this, 9,100 ha would be on smallholdfi.~gs, 2,900 ha on intermediate scale plantings and 1,500 ha on estatks. A t t h i s stage it appears that new plantings w i l l fair well short of these targets. The intermediate planting target fmpliss the dbvelopment of about 150 new projects. The capacity of departments t o process land registration and leases, business group registrations and loan applications appears t o be only about two per month, so t h i s program is l i k e l y to continuo t o lag behind expectations. It should also be borne in mind that planting on the scale proposed woald require about K 12 million i n credit. 4.22 While no s t a t i s t i c s zre available on estate expansion, the target area of 1,500 ha would require up to K 6 million in credit to the extent that Some estates w i l l be .I: elopment could not be financed from cash flow. able t o finance new p1antir.g: from cash flow, but it is doubtful that the target area w i l l be achieve;. 4.23 The implementation of the coffee development plan has been delayed the 1980 ssallholc!er crop survey suggest that smallholder expansion was a c h slower be2veen FY76 and 1980 than i n the early 1970s. F a i l u ~ rto organize more effective implementati i n eventual stegnation of the smallholder sectcr. shortfalls i n planting refarred to above w i l l not sigcqficantly affect 1386 production, but w i l l affect 2roduction i n the l a t e 1980i. The DPI fore- casts to l! The estate sector should con; inue to expand steadily, i d the intermediate 1 scale blocks alone would increase production by about 1,O the reduced rate cf establishment. Forecast production is shown in Table 13. 1 - Producticn 55.0 55.0 57.5 60.0 61.6 63.2 64.8 66.5 68.2 70.0 tource: Hission estiamtes. P r o s ~ e c t sfor Further Exoansion - - above is the maximum achievable under ideal conditions. In Fhe sector, the main requirements to achceve t h i s rate are mote efficient processing of land znd incorporatioil transactions and readiky available crcrlit. S - increased processing capacity i n regard to land matters aridic.Enca~#orzrtii h n n u ~ lcredit requirements would amount to about K 6 millPa.nu,:I ;. :+,!:. S= :- - ANNEX C 221 -- Page 30 4.26 Improved support services would be required t o achieve the annual increase i n smallholder area of about 7%, as implied by the targets. Given the vide-ranging d i f f i c u l t i e s facing the extension service it is unlikely that this objective w i l l be achieved. In any case, ir may be more productive to concentrate extension e f f o r t on existing plantings . These a r e reportedly producing well below capacity due t o lack of pruning and general maintenance. A 10% increase i n average yields on smallholder plantings would r e s u l t i n an increase i n production of over 3,000 MT p.a. Relatively simple management measures which could be promoted by a well staffed and supported extension service could achieve such an increase. Given the adoption of these measures, t o t a l industry production could increase a t about 7.5% p.a. as compared to the 3% forecast. 5. COCONUTS Industry Structure 5 -01 Copra is PNG's longest established export industr:. I n the early 190Gs it c o ~ p r i s e daboat 90% of the t o t a l value of exports t l d a s l a t e as 1950 st111 accounted for nearly 702 of exports. More recently it has been eclipsed by the cocoa and coffee industries and since 1972 by copper exports. Coconuts remain an important crop i n a l l coastal areas and are grown i n almost a l l villages. They a r e an important i t e m i n the subsistence d i e t a s well a s being processed into copra f o r milling o r export. It has been estimated that well over 202 of coconuts are consumed domestically.& 5.02 Coconuts are grown on plantations as well as smallholdings. The proportion of smallholder production has increased from about 20% i n the mid-1950s t o almost 50% i n recent years. I n FY76 there were over 100,000 ha of bearing trees and a further 60,000 ha not bearing. A t o t a l area of 95,000 ha of coconuts a r e grown on 451 largeholdings. The area not bearing is only 6%of the total. About 60% of the smallholding area and 70%of the plastation area is in the island provinces. The average copra plantation area is only 210 ha, and 41% of holdings are less than 100 ha.