-AV/ 3 ti7 -§ 4-4 i-4-rDocument of

The World Bank

FOR OFFICIAL USE ONLY

MICRO1FICHE COPY

Report No. 8955-PNG Type: (SAR)BOYER, PHI/ X76229 / F-3053/ ASTAG

STAFF APPRAISAL REPORT

PAPUA NEW GUINEA

ORO SMALLHOLDER OIL PALM DEVELOPMENT PROJECT

MAY 7, 1992

Agriculture Operations DivisionCountry Department IIIEast Asia and Pacific Regional Office

7 his document has a resticted distibuoon and may be used by ripients only in the performance oftheir ofciji duties. Its contents may not otberwise be disclosed without World Bank authoriation.

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

CURRENCY EQUIVALENTS(January 1992)

Currency Unit = Kina (K)Kl - US$1.0493US$1 K 0.953

FISCAL YEARGOVERNMENT OF PAPUA NEW GUINEA

January 1 - December 31

WEIGHTS AND MEASURES

1 kilogram (kg) - 2.2 pounds1 metric ton (t) - 2,205 pounds1 kilometer (km) - 0.62 mile1 hectare (ha) 3 2.47 acres

ABBREVIATIONS

ABPNG - Agriculture Bank of Papua New GuineaADB - Asian Development BankCDC - Commonwealth Development CorporationDAL - Department of Agriculture and LivestockDEC - Department of Environment and ConservationDFP - Department of Finance and PlanningDOW - Department of WorksFAO/CP - Food and Agriculture Organization/Cooperative ProgramFFB - Fresh Fruit BunchesGOPNG - Government of Papua New GuineaHOPPL - Higaturu Oil Palms Pty LtdHTPL - Higaturu Transport Pty LtdNES - Nucleus Estate and SmallholderNFCAP - National Forestry Conservation Action PlanOIDA - Office of International Development AssistanceOPIC - Oil Palm Industry CorporationPCR - Project Completion ReportPNG - Papua New GuineaPNGOPRA - Papua New Guinea Oil Palm Research AssociationPPAR - Project Performance Audit ReportSA - Subsidiary AgreementSOE - Statement of ExpenditureSTABEX - Export Earnings Stabilization System

FOR OMCIL USE ONLY

rAPUA NEW GUIIEA

ORO SNALLEOLDER-OIL PAIN DEVELOPMENT PROJECT

STAFF APPRAISAL REPORT

Table of Contents

Pagg NumberLOAN AND PROJECT SUMMARY . . . . . . . . . . . . . . . . . . . . (ii)

T. AGICULTURE IN PAFUA NEW GUINEA . . . . . . . . . . . . . . 1Background . . . . . . . . . . . . . . . . . . . . . . . . 1The Agriculture Sector . . . . . . . . . . . . . . . . . . 2Tree Crop Sub-sector . . . . . . . . . . . . . . . . . . . 3Institutions . . . . . . . . . . . . . . . . . . . . . . . 5Government Strategy for Agriculture . . . . . . . . . . . . 6

II. LESSONS OF BANK EXPERIENCE . . . . . . . . . . . . . . . . 8World-Wide Experience in Tree Crops . . . . . . . . . . . . 8Papua Now Guinea Experience .... . . . . . . . . . . . . 9Lessons Learnt . . . . . . . . . . . . . . . . . . . . . . 10Bank Strategy and Rationale for Involvment . . . . . . . . 10Project Design... . . . . . . . . . . . . . . . . . . 11

-II. THE PROJECT AREAS . . . . . . . . . . . . . . . . . . . . . 12Climate ...... . .. . . .. . . .. . . .. . .. . . 12Topography and Soils . . . . . . . . . . . . . . . . . . . 12vegetation ..... . . . . . . . . . . . . . . . . . . . 12Current Land Use and Production . . . . . . . . . . . . . . 13Infrastructure . . . . . . . . . . . . . . . . . . . . . . 13Population . . . . . . . . . . . . . . . . . . . . . . . . 13

-v. kI.BJK.14IV. THE PROJECT ........................ 1

Project Identification and Preparation . . . . . . . . . . 14Project Objectives . . . . . . . . . . . . . . . . . . . . 14Project Description . . . . . . . . . . . . . . . . . . . . 14Smallbolder Development .... . . . . . . . . . . . . . . 15Main Road Improvement ..... . . .I. . . . . . . . . . . 17Ewvironmental Protection . . . . . . 1 . . . . . . . . . . i8Institutional Strengthening .19Technical Assistance .20Studies .20

V. PROJECT COSTS AND F1NCING .21Project Costs .21Financing .... 22Smallholder Credit Arrangement. . . . . . . . . . . . . . 23Funds Flow . . . . . . . . . . . . . . . . . . . . . . . . 24Procurement .25Disbursem_nts ..... . . . . . . . . . . . . . . . . . . 26Special Account ..... . . . . . . . . . . . . . . . . . 27Accounts and Audits ..... . . . . . . . . . . . . . . . 28

I/ This report is based on the findings of a re-appraisal mission to Papua NewGuinea in February 1992. The mission consisted of Messrs. Ph. Boyer (TreeCrop Specialist), 0. Tumusiime (Financial Analyst) and C. Darby (ConsultantEnvironmental Specialist). Peer reviewers were: Mss. C. Jarvis (credit), J.Mott (environment) and Mr. D. Meadows (tree crops). Mrs. M. Haug, Director,EA3, and Mr. A. Cole, Division Chief, EA3AG, have endorsed the project.

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

v ii -

VI. PROJECT IMPLEMENTATION AND MSNACYN . . . . . . . . . . . 28Project Management .... . . . . . . . . * ..... . 28Oil Palm Industry Corporation (OPIC) . . . . . . . . . . . 29The Department of Agriculture and Livestock . . . . . . . . 30The Department of Environment and Conservation . . . . . . 30Higaturu Transport Pty Ltd (HTPL) . . . . . . . . . . . . . 30Higaturu Oil Palms Pty Ltd (HOPPL) . . . . . . . . . . . . 31Other Implementing Agencies .... . . ...... . . . . 32Monitoring, Evaluation and Reporting . . . . . . . . . . . 33Project Implementation Schedule . . . . . . . . . . . . . . 33Status of Implementation .... . . ...... . . . . . 33

VII. PROJECT BENEFITS AND JUSTIFICATION . . . . . . . . . . . . 34Yields and Production . . . . . . . . . . . . . . 34Marketing and Pricing of Smallholder Produce . . . . . . . 34Benefits and Poverty Alleviation Impact . . . . . . . . . . 34Economic Analysis .... . . . . . . . .. ...... . . 35Sensitivity Analysis .... . . . . . . . . . . . . . . . 36Cost Recovery .... . . . . . . . . . ....... . . . 36Social and Environmental Impact . . . . . . . . . . . . . . 36Project Risks ..... . . . . . . . . ....... . . . 37

VIII. AREEMENTS REACHED AND RECOMMATION. . .. . . . . . 38Assurances ..... . . . . . . . . ........ . . . 38Conditions of Loan Effectiveness . . . . . . . . . . . . . 39Conditions of Disbursement .... .. . . . 39Recommendation . . . . . . . . . . . .40

TABLES IN MAIN REPORT

1.1 1991 PNG Tree Croo Data . . . . . . . . . . . ... . . 34.1 Oil Palm Planting Program . . . . . . . . . . . . . . 155.1 Project Cost Summary . ... . . . . . . . . . . . . . 215.2 Financing Plan .225.3 Procurement Arrangements .25

1. -Project Cost Tables .. .412. Financing Plan ... 473. Estimated Schedule of Disbursements . . .494. Organization Chart ... 505. Bank Supervision Mission Schedule . . . . . . . . . . 516. Project Implementation Schedule . . . . . . . . . . . 527. Oil Palm Farm Gate Price Structure . . . . . . . . . 538. Smallholder 2 ha Farm Model . . . . . . . . . . . . . 549. Smallholder Cash Flow Projections . . . . . . . . . . 5510. Economic Analysis .. . . . . . . 5611. HTPL Financial Statements . . . . . . . . . . . . . . 5812. HOPPL Financial Statements. . . . . . . . . . . . . 6113. Butterfly Conservation Program . . . . . . . . . . . 6414. Supporting Documents Available in Project File . . . 69

NHOW=C H Queen Alexandra Birdwing Butterfly . . . . . . . . . 71

MhZ IBRD No. 22171R ................. ... . 72

- iii -

PAPUA m GUINEA

ORO QMUOL ILi PAL DUWRONT PROJECT

Lopn and Project Summary

agrrOQWe : The Independent State of Papua New Guinea

A5foJLaries : The Oil Palm Industry Corporation (OPIC), and the Papua NewGuinea Oil Palm Research Association (PNGOPRA)

Amount : US$27 million equivalent

Terms : Repayable in 20 years, including 5 years of grace, at theBank's standard variable rate.

Terms toBeneficiaries : US$6.0 million would be passed to OPIC and US$0.6 million to

PNGOPRA on a grant basis.

DeseurLIton : The six-year project aims at increasing agriculturalproduction and exports, providing employment opportunitiesand generating incomes for poor farmers in Oro Province.The project would develop about 6,500 ha of smallholder oilpalm for about 3,250 poor families, with associated road andsocial infrastructure construction, and provide for theprotection of the endangered, world's largest butterflyspecies. The project would also provide for theinstitutional strengthening of the Department of Agricultureand Livestock, the Oil Palm Industry Corporation and thePapua New Guinea Oil Palm Research Association.

BesaefLksand Rlsks : The proposed project would benefit about 3,250 poor

smallholder families. Economic benefits would be derivedfrom increased agricultural production and exports.Environmental benefits are expected under the project fromthe protection of the world's most notable endangeredspecies of butterfly and its habitat, upgrading effluenttreatment, and rehabilitating degraded grasslands. ERR isestimated to be 12 percent on 76% of total project costs.

The proposed project has been designed to build on existinginfrastructure and services. No special agricultural riskshave been identified and effluent treatment would use anestablished technology and be regularly monitored by theDepartment of Environment and Conservation. The primaryfinancial risk is that declines in international commodityprices below projected levels would result in poor financial

- iv -

returns to smallholders, inhibiting harvesting, and to theestate company, jeopardizing its ability to process the cropprofitably. Related to the financial risk, is possibleslippage of offsetting macro policy implementation. Suchslippage is a significant possibility as regards wage policyand competitiveness, especially during the coming years ofrapid development of the country's mineral wealth. However,PNG has assembled a solid track record of macroeconomicstability since Independence, reinforced by its adjustmentperformance since 1989. Other potential risks would be: (i)poor field maintenance, low yields and even abandonment bythe nontraditional oil palm farmers. This risk would beminimized by selection of village farmers, technicalassistance and supervision by oil palm extension staffsupported under the project; (ii) farmers would continue topractice shifting cultivation on forest land identified asimportant for the conservation of the endangered butterflyand its ecosystem. This would be addressed by promoting theestablishment of permanent conservation areas that wouldremain under traditional land ownership, but be subject to aban on forest clearance; (iii) project implementation maysuffer from political difficulties and civil unrest, whichaffect various regions of the country from time to time.This risk would be alleviated by having provincialauthorities represented on the project's ProvincialCoordination Committee, and by the inclusion of asignificant social infrastructure component, designed afterconsultations with farmers during project preparation.

Estimated Costs:A/ Local Foreien Ita----.-US$ million-------

Smallholder Development

Oil Palm Development 4.7 1.4 6.1Extension Services 2.1 1.2 3.3Agricultural Roads 2.7 7.5 10.2Social Infrastructure 0.7 0.7 1.4

Subtotal 10.2 10.8 21.0

Main Road Improvement 0.5 1.0 1.5Institutional Strengthening 2.6 1.1 3.7Environamental Protection 1.2 0.8 2.0Technical Assistance 0.0 0.3 0.3Studies 0.0 0.2 0.2

Total Bass Costs 14.5 1A.2 28.7

Physical Contingencies 0.5 1.0 1.5Price Contingencies 3.8 2.3 6.1

Total troject Costs 18.8 ,17. 36.3

Interest During 0.0 0.5 0.5Construction

Total Pinancing Required ILi l.Q

LmneIng :

IBRD 10.4 16.6 27.0Farmers 3.4 0.0 3.4Govt. of PNG 5.0 1.4 6.4

Total 18.

Estimated Dishursements:

BankF 122k 199 1995 1996 1222 1998 1929 2000

Annual 0.3 3.2 5.4 5.1 5.6 4.5 2.5 0.4Cumulative 0.3 3.5 8.9 14.0 19.6 24.1 26.6 27.0

Economic Rate of Retun$: 12% on 76% of total project costs

MbR: IBRD No. 22171R

A/ including taxes and duties estimated at US$l.l million equivalent

PAPUA NEW GUINE&

ORO SM =IlLE OIL PAT DEELOMENT PRECT

1. AGRICULTURE IN PAPUA NEW GUINEA

Backgroud

1.1 With a land area of 462,000 kmi2, and a population of 3.5 million,Papua New Guinea (PNG) is the largest of the Pacific Island economies. It isendowed in minerals, oil and gas, has high quality agricultural land,extensive tropical forests, and a coastline abundant with marine resources.Its agro-ecological diversity supports the production of a wide range oftropical, semi-tropical and temperate crops.

1.2 PNG however faces quite extraordinary challenges for balancedeconomic development. The topography is rugged, arable lands are scatteredwidely, communications are difficult, and the population is generally quitewidely dispersed. Virtually all lands are vested in clans under complexcustomary land tenure systems that impede modernization and commercialdevelopment, particularly in rural areas. The rural communities suffer frominstitutions that lack depth, poor infrastructure, and health problems; andlag well behind most Asian lower and middle income countries in respect of thekey social indicators. Education levels are particularly low and skilledworkers scarce. Women make a substantial contribution to the rural economy,but their social and economic conditions are, in general, highlyunsatisfactory.

1.3 The PNG economy has undergone some severe shocks and changes duringrecent years, both from internal and external sources. Following an extendedperiod of slow growth during the early 1980s, the economy experienced markedrecovery during 1985-88 due to the development and exploitation of mineralresources as well as large increases in the prices of its major agriculturalexports. However, in 1989, unrest in the North Solomons Province led to theclosure of the Bougainville copper mine, which had contributed about 10percent of GDP and 35 percent of export earnings. The isolation of the islandfurther impacted on PNG's non-mineral exports, as the province produced 40percent of PNG's cocoa and coconuts. Worse still was the concurrent drop inall major export crop prices. The non-mineral terms of trade declined by 18percent in 1989, and by 23 percent in 1990. As a result of all these factors,GDP shrank by 1.4 percent in 1989 and 3.7 percent in 1990.

1.4 Supported by a sound macro-economic management response, economicrecovery from the Bougainville crisis is well underway, led by soaringexpansion of the mining sector. The overall GDP growth rate in 1991 isexpected to be around 9 percent with mining, construction and utilitiesenjoying the highest growth rates of 64 and 19 percent respectively. However,after experiencing many years of slow growth and a decline in output in 1990,the agriculture sector remains stagnant, with sector value added increasing byonly about 1 percent in 1991, in the face of declining commodity prices,adverse weather and disruptions stemming from the situation in Bougainville,to the production of coconuts and cocoa.

-2-

The 4riculture Sector

1.5 Agriculture accounted for about 27 percent of GDP in 1991, 71percent of non-mineral exports, and 13 percent of total exports. Much ofPNG's land area of 46 million hectares is not suitable for cultivation becauseof excessive slope, altitude, or drainage problems. Nevertheless, with onlyhalf of the suitable 14 million ha (30 percent) currently used foragriculture, there is considerable scope for expansion of the production area.Production is dominated by smallholders who farm in a mixed subsistence/cashcrop system. Smallholders constitute 95 percent of the agriculturalpopulation and account for virtually all the domestically produced food, whichadequately meets the needs of the majority of tt'e population. However,according to some recent studies, nutritional stress is emerging in the moreremote areas. There is also some evidence that land is coming underincreasing pressure from a growing population, particularly in the moredensely populated areas, thereby raising concerns about the long termsustainability of the traditional food production system.

1.6 Recent trends in the sector give cause for great concern. Duringthe 1980s, the sector grew by less than 2 percent per annum, below thepopulation growth rate. Since 1989, private sector agricultural investmenthas been insufficient even to cover depreciation of the capital stock.Maintenance and replanting in smallholder tree crops have ground to a halt,and plantations have shed nearly 20 percent of their labor supply. With thepressure on government expenditures generally, allocations for agriculture inthe five year Public Investment Programme were cut by about 32 percent in1991, compared to the plan prepared a year earlier.

1.7 Nearly 85 percent of the population, encompassing the poorestsegment of society, depends on agriculture for their livelihood. There islimited potential for employment expansion in the mining sector because of itscapital intensive nature, and thus agriculture's importance in providingemployment and income to the bulk of the population will remain undiminishedwell into the next century. Continued slow growth in agriculture wouldseriously impact on the welfare and living standards of the vast majority ofthe population. Effective policy action is required to revitalize theagriculture sector so that it is able to provide broad-based income andemployment, and a basis for sustained development over the long term.

1.8 The single most important cause of agriculture's poor performancein the 1980s was the sharp decline in world market prices for tree cropcommodities. In real terms, palm oil prices in 1991 were about 52 percent of1984-86 average world prices, coffee 38 percent, cocoa 36 percent, and copra33 percent. The impact of drastically reduced prices was only partly offsetby domestic policy actions, and therefore PNG's export crops have sufferedcontinuous erosion of their international competitiveness. Increasing yieldsand reducing costs will help achieve competitiveness and incentives to adegree. However, changes in parts of the macro-economic policy framework willbe essential for achieving competitiveness on a sustained basis. The framingof such measures to increase output prices, and to reduce input costs -particularly wage costs - will be the cornerstone of a successful package of

measures to redress the lack of competitiveness and ensure sustaineddevelopment.

Tree roM Sub-sector: recent trends and ky issues

1.9 Approximstel; 500,000 hectares in PNG, or 3.5 percent of the totalcultivable land, are planted to tree crops, mainly coconut (52 percent), cocoa(25 percent), oil palm (11 percent) and coffee (9 percent). In 1991, treecrop exports accounted for virtually all agricultural exports, and 13 percentof total export receipts of US$1,360 million. The main commodities aresummarized in Table 1.1. Smallholders produce 65 percent of cocoa, 75 percentof coffee, 65 percent of copra and 45 percent of oil palm. All remainingproduction is from a small commercial sector, which plays an important role inproviding employment and is a reliable source of modern technology. Exceptfor oil palm, production of all these crops has gone down in recent times.Quality and yields per hectare of coffee and cocoa have declined, whilesmallholder productivity of oil palm is stagnating. Copra production hasstopped in many areas due to low prices and costly domestic transportation.The decline of the tree crop sub-sector is adversely affecting the life of avast number of people because it is their major source of cash income.

=Tab]& 1-: 1991 PNG TREE CROP DATA

Total Area Volume Smallholder Estates ValueCrop (ha) ('000 tons) (%)b/ (%)b/ US$m t

Coffee 47,000 50.0 75 25 84.8 45.3

Palm Oil andkernels 58,000 165.0 45 55 40.3 21.5

Cocoa 128,000 34.0 65 35 34.2 18.2

Coconutproducts a/ 263,000 66.0 65 35 17.8 9.5

Tea 2,800 5.8 - 100 8.3 4.4

Rubber 18,000 2.4 40 60 2.0 1.1- -

Total 187.4 100.0

a/ Excludes copra cakeb/ Average 1985-90

Source: Data provided by PNG authorities and staff estimates

-4-

1.10 PNG is generally a high cost producer of its agricultural exportproducts. For example, the cost of producing one ton of coffee in PUG isseveral times the cost in Indonesia or Philippines. However for cocoa, PINGcosts are in line with those in Brazil and Malaysia, somewhat higher than inCameroon and C8te d'Ivoire, while substantially higber than in Indonesia andGhana. Cost of production of palm products are generally comparable toMalaysian costs, although substantially hlgher than in Indonesia. PNG's costsof production are adversely affected by high labor costs, high estatemanagement costs, and low smallbolder productivity. Cost levels also reflectthe effect of topography and location (scattered production areas withdifficult terrain), the small domestic market, long distances to exportdestinations for the major export crops, and the need for employment offoreign technical experts.

1.11 Smallholder yields for tree crops are well below those attained onestates, and generally below smallholder yields in other Asian countries, andthere has been a tendency for both the quantity and quality of sallholderproduction to fall. The technical potential exists to boost smallholderproductivity through the application of known techniques, already proven byresearch. For example, smallholder coffee production could be increasedsubstantially from a combination of quite minor improvements to management.However, this would require a marked improvement in extension and othersupport services to disseminate knowledge to smallholders, and sufficientincentives - in the form of higher prices and lower labor costs - to make itworth their while to adopt such practices.

1.12 Palm oil products are now the second most important agriculturalexport. Introduced only twenty years ago, oil palm cultivation grew rapidly,under PNG's very favorable ecological conditions. Estate yields are among thehighest in the world, averaging around 23 tons of fresh fruit bunches perhectare. In 1991, ING's palm oil and kernels exports were worth US$40million. PIG crude palm oil is of excellent quality and sells at a smallpremium. There are five major nucleus estate and smallholder (NES) oil palmschemes in production, covering about 58,000 ha: two in West New Britain, onein Oro Province (Popondetta), one in Milne Bay Province, and one in NewIreland. About 45 percent of the total NES project areas are cultivated bysmallholders.

1.13 Price declines since the mid-1980s have seriously eroded theprofitability of PlGNs oil palm industry. Oil palm estate companies, whichprocess the smallholder crop, are currently facing financial difficulties dueto the low world market prices, and have started implementing cost reductionmeasures. In some areas, they are also in effect receiving temporaryfinancial assistance from GOPNG via the commodity price stabilization schemes,to ensure that palm oil factories continue to operate and process smallholdercrop, while adjustments are made in cocts and the incentive structure.

1.14 Given the depressed long term palm oil price forecasts, it isimperative that measures are taken to improv smallholder yields, as well asto reduce production, processing and marketing costs so that the industryremains viable. For smallholders, although yields are lower than those of

- 5 -

estates, in many areas of PNG such as the Oro Province, oil palm offers muchhigher income and returns to labor than any other major cash crop. There isalso potential for considerable smallholder yield increases. Nearly 55percent of the smallholders now produce at 50 percent of yield potential;nearly half of these produce at less then 35 percent of potential.

Inatitutim

1.15 D"rirtment of Agrioulture and Livestocg (DAL). DAL has the overallresponsibility for planning, coordinating and implementing agriculturaldevelopment throughout the country. However primary responsibility forproviding support services for coffee, cocoa and coconuts, and oil palmdevelopment will in future be placed with industry corporations. Tree cr^-!sand related issues are handled by separate DAL divisions: Investment, Policyand Planning, Research, Protection, and Education and Training. The ExportCrops Branch, under the Investment Division, is responsible for thedevelopment of rubber and other minor tree crops such as cashew nuts andspices, while the Project Preparation Branch, under the Policy and PlanningDivision, is responsible for the preparation of all tree crop projects.

1.16 Extension. Since 1977, responsibility for agricultural extensionhas been mainly with the Provincial Departments of Primary Industries, underDAL's guidance. DAL retained extension responsibility for major investmentprojects, and in particular oil palm projects. In 1987, GOPNG established theCoffee Development Agency to implement extension activities aimed atoffsetting the effect of coffee leaf rust and increasing productivity.

1.17 For oil palm, extension will be undertaken by the Oil Palm IndustryCorporation (OPIC), which should be fully operational by mid-1992. OPIC hasbeen initially set up as a statutory corporation. Its structure consists of acentral board and five local planning committees, one for eack. ongoing oilpalm smallholder scheme. Project management and control will take place ineach area under the direct control of a field project manager appointed by thecentral board. OPIC's main objective will be to ensure increases insmallholder oil palm production and productivity throughout PNG, throughexpanding areas planted, increasing smallholder yields and maintaining highfruit quality. For new smallbolder oil palm development, project preparationand the finalization of funding arrangements (mainly through the nationalbudget in present circumstances) will remain under DAL's responsibility, whileOPIC will be responsible for project implementation.

1.18 ese=arh. Autonomous research institutes, including the CoffeeResearch Institute at Aiyura, Eastern Highlands, the PNG Cocoa and CoconutResearch Institute at Keravat, East New Britain, founded in 1986, and thePapua New Guinea Oil Palm Research Association at Dami, West New Britain,established in 1980, are responsible for research on the country's four majortree crops (coffee, oil palm, cocoa, and coconut). The research institutesare funded by the industries concerned and by grants from GOPNG. Through itsrepresentation on the institutes' boards and research advisory committees, DALensures that research objectives and programs are consistent with GOPNGdevelopment policies and smallholder lnterests. The tree crop research

- 6 -

programs concentrate on variety testing, breeding of disease resistant andhigher yielding varieties, spacing and farm management trials. Research onminor cash crops and food crops is carried out on GOPNG research stations setup by DAL.

1.19 Agricultural Credit. Lending for agriculture, fisheries andforestry activities accounts for about 16 percent of total lending by banks inPNG. The Agriculture Bank of Papua New Guinea (ABPNG), a wholly GOPNG-owneddevelopment finance institution, Is the largest lender to small farmers inPNG, although it accounts for only about 17 percent of all agriculturalcredit. While prices for palm oil were high, ABPNG was able to successfullylend long-term to oil palm smallholders, with recovery being assured throughthe sole marketing outlet in each area, the nucleus estate company. ABPNGdoes not accept deposits, depends on GOPNG for its reso:rces and has operatedat a loss for several years. It suffers from a large portfolio of low qualityassets. Loans made by commercial banks in the agriculture sector are largelyfor financing of agricultural exports. Commercial bank lending to agricultureis predominantly short-term with an average maturity of up to 12 months.

Government Stratege for Aericulture

1.20 Historically, overall Government strategy has been to continuallyexpand the production of the major export tree crops, particularly oil palm.This is reflected in the fact that the largest share of public investmentfunds for agriculture is allocated to tree crops and the bulk of the tree cropallocations are for oil palm. Stabilization of prices has been a key elementin GOPNG's tree crop development strategy, and towards that end, GOPNG hasimplemented well run price stabilization programs. GOPNG has also promotedsupporting services - research and extension through government and industryprograms, credit through private sector and government programs, and inputsupply by the private sector. More recently, GOPNG has been emphasizingimprovements in food crop production, by encouraging research on farmingsystems.

1.21 GOPNG recognizes that restoring profitability to the agriculturesector is an essential and pressing development priority. An issue currentlyunder discussion is how best to support agriculture, the major source ofemployment for the country's population, in an economic environmentcharacterized by a non-competitive wage and price structure supported byrevenues from mining and petroleum development.

1.22 GOPNG has initiated several measures aimed at increasingsmallholder productivity, through focussed industry support services. In1990, under an Asian Development Bank sector adjustment program, GOPNG beganto create autonomous corporations to provide more effective extension servicesto the major tree crop industries. The Coffee Industry Corporation and theOil Palm Industry Corporation (OPIC) were established in 1991 and early 1992respectively, as joint ventures between the public and private sectors topromote industry development. A Cocoa and Coconut Industry Corporation isalso at an advanced stage of preparation.

-7-

1.23 In March 1991, GOPNG established an agriculture credit scheme,supported by an explicit budget-financed subsidy, to ensure continuedavailability of credit to the sector and especially to small farmers. Underthe scheme all new loans for capital investments in produr' lve agriculturalactivities, excluding processing and normal working capiti.s financingrequirements, are provided at a rate of 8 percent per annum, which thoughbelow the market interest rate on agricultural loans, is about 3 percent abovethe domestic inflation rate.

1.24 However, most of these measures to lower costs and increaseproductivity have long gestation periods. In the meantime, to restoreincentives to agricultural production in the short term, GOPNG has: waivedexport taxes; granted a moratorium of interest payments on existingagricultural loans; exempted rural wage payments from minimum wagerequirements; and provided a budget-financed interest subsidy on newagricultural loans. A STABEX-backed loan has been provided to the wellmanaged commodity price stabilization funds, to enable them to continuesupporting producer prices. In addition, for oil palm smallholders, pricespaid for fruit under a standard pricing formula, were satisfactorily revisedupwards in 1991 ensuring that the interests of the smallholders and processorsare fairly balanced ln times of low prices.

1.25 Macro-economic management in recent years has responded to thesteep fall in external terms of trade and the drop in export income caused bythe closure of the Bougainville copper mine and isolation of the province.GOPNG devalued the kina by 10 percent in early 1990 and adopted restrictivefiscal, monetary and wage policies, together with a range of other measures.The adjustment program was supported by a Structural Adjustment Loan (No.3218-PNG). As indicated in the recent Country Economic Report (PNG:Competitiveness, Growth aud Structural Adjustment; Report No. 10319-PNG, March31, 1992), PNGea success in adjustment represents a substantial achievementgiven the magnitude of the problem. The report considers that with a

continuance of sound macro-economic management, the strong economic recoverythat began-in 1991 should continue in 1992 and 1993 as new mining projectscome on stream.

1.26 But the report also warns that the economy continues to sufferfundamental structural weaknesses, and that agriculture, the key employment-generating sector, remains depressed and in danger of further major declines.International uncompetitiveness, which is pervasive in the PNG economy, is nota simple phenomenon. The report suggests that a successful strategy togenerate strong sustained economic growth will entail a comprehensive packageof mutually supporting measures, including sufficiently bold initial steps.The objective of such a strategy should be to stimulate an early supplyresponse while laying the foundation for a competitive non-mineral economythat would attract increasing levels of investment and match productivityincreases of competitor countries. Such an approach should emphasize anaggressive labor absorbing growth strategy. Given the complexity of thesituation, adequate time will be required for a consensus to emerge among thepolicy makers on the timing, costs, and benefits of the additional measures tobe taken.

- 8 -

II. LESSONS OF LANK -EPERIEN

World-Wide &MRerience in Tree Crols

2.1 The Bank has financed some 114 projects mainly In Asia and Africa,that have directly or indirectly coutributed to the development of tree crops(mainly rubber, coconuts and oil palm). Of the 114 projects, 63 involvedsmallholders, 35 financed nucleus estates together with smallholder out-growers, and 16 financed large farmers and estates. Project completionreports (PCRs) or Project Performance Audit Reports (PPARs) are available for42 projects, of which 30 have been reviewed for findings which might beapplicable in the design of the proposed project.

2.2 The thirty projects introduced high-yielding varieties, anddeveloped infrastructure and processing facilities. Twenty-six of theprojects were successfully completed, although initial implementation delayswere encountered, and in some instances projects extended beyond theiroriginally anticipated closing dates. Yields expected at the time of thecompletion reports were in line with or within 20 percent of the yieldsanticipated at appraisal. Infrastructure development, though less effectivelycompleted than planting, was also substantially achieved. Most projects hadrevised economic rates of return above 10 percent. This generally favorableoutcome is in line with OED's review of PCRs for 1990. 1990 PCRs for seven ofeight tree crop projects judged them satisfactory and sustainable. The 88percent satisfactory rate compares with an average of 74 percent for 66 treecrop projects between 1974 and 1989. Major common lessons drawn from the pastprojects which were reviewed relate to institutional arrangements, financingand cost recovery, and smallholder response.

2.3 Institutional Arrangements and Management. The PCRs/PPARs indicatethat projects with few objectives and those managed by a single institutionhave performed best. Smallholder programs have generally not performed aswell as estate projects. For many smallholder programs a number ofspecialized agencies have been inmolved to supply inputs, extension, creditand marketing services, with a resulting demand for coordination. PCRs havenoted that where dependence on other agencies becomes necessary, the abilityof all agencies to deliver items critical to project success, should beevaluated carefully at appraisal. The PCRs/PPARs also emphasize that qualityof management has been a critical element in ensuring success.

2.4 Financina and Cost Recovery. Three local sources of financingsmallholder tree crop development have been tapped: (a) Government budgets;(b) cess for tree crop replanting grants; and (c) credit from institutions.Generally, the practice has been to finance new planting through credit fromGovernment or banks, or a combination of grant and credit; and replantingthrough a cess. In Malaysia, India, Kenya, Panama and elsewhe,e, new plantingcosts have been financed on credit. In the case of Malaysia, credit has benmade available from Government through specialized tree crop developmentagencies to encourage land development and rebabilitation. Participants inthe projects have also contributed to a replanting cess. A cess to finance a

- 9 -

grant for rubber planting has been applied in Thailand, Malaysia, and SriLanka. In the Philippines, similar arrangements have not functioned as well.

2.5 In general PCRs/PPARs are unable to indicate credit repaymentperformance, as at the time of their preparation, the credit life is at anearly stage. However, an impact evaluation report by the OperationsEvaluation Department shows differences in recovery performance between oilpalm, where central processing facilities are the only purchaser of the highlyperishable smallholder output, and rubber, where private traders compete aspurchasers of output. At the time of the impact evaluation report, some 10years after the PCR, recovery of oil palm loans was 99 percent of amounts due,while the recovery rate for rubber was much lower. The general conclusion tobe drawn is that credit schemes for tree crops such as oil palm, where thereis an automatic link to marketing, are likely to result in high recoveryrates. An impact evaluation report for a project in another country drewattention to the danger of increasing smallholder debt burden for nonproduction purposes. Loan repayment, which had been very good, fell sharplywhen borrowers were encouraged to take out short-term student and fertilizerloans, whose repayment was given priority over the longer term tree cropdevelopment loans.

2.6 Smallholder Partlci,atio. Given the long-term nature of tree cropinvestments, and the likelihood that smallholders forgo income when theyreplant their existing tree crop area or extend it, most projects haveincluded measures to maintain incomes during the immaturity period. Otherproblems have affected smallholder participation. For example, in oneproject, land was abandoned as tree ownership was not established undertraditional law, because the project rather than the farmers cleared the land.Land disputes have occurred in several countries. Inter-cropping food cropshas been prohibited in some projects, while others have had food cropcomponents during the development phase. Solutions to improve prospects formore effective farmer participation can be found through consultation withprospective beneficiaries during project design.

Pauua New Guinea Experience

2.7 The-World Bank Group has supported three oil palm developmentprojects in PNG: the New Britain Smallholder Development Project in 1969(Credits 137 and 175-PNG), the Popondetta Smallholder Oil Palm DevelopmentProject in 1976 (Ln. 1333-PNG), and the Nucleus Estate and SmalIholder (MilneBay) Project in 1985 (Ln. 2608-PNG). Oil palm was introduced into Papua NewGuinea at Cape Hoskins, New Britain, in 1967 with a nucleus estate companyestablished as a joint venture between GOPNG and the Commonwealth DevelopmentCorporation (United Kingdom), with the associated IDA-assisted projectsupporting smallholder development and construction of roads and harborinfrastructure. Four other projects on the nucleus estate and smallholdermodel, two with Bank support, have followed in Now Britain, New Ireland, Oroand Kilne Bay provinces. The nucleus estates for the Oro and Milne Bayprojects were implemented by joint ventures between GOPNG and the CommonwealthDevelopment Corporation: Higaturu Oil Palms Pty. Ltd. in Popondetta, OroProvince (which is the nucleus estate company providing support to the

- 10 -

proposed project), and Milne Bay Estates Pty. Ltd. Associated smallholder andinfrastructure development received Bank support under the PopondettaSmallholder project in Oro Province and the NES (Milne Bay) projectrespectively. The Milne Bay project also supported the nucleus estatedevelopment.

2.8 An Impact Evaluation Report (No. 3070, 1980) confirmed the findingsof the earlier Project Performance Audit Report (No. 1400, 1976) that the NewBritain project had been successful in achieving its major objectives. TheProject Performance Audit Report (No. 7001, 1987) for the Popondetta projectconsidered that project successful. The ongoing Milne Bay project has beensuccessful in its physical oil palm and infrastructure development, but withthe depressed international palm oil prices, the nucleus estate company isseeking a revision of its financial structure and debts. In all cases it isnotable that the tree crop projects have had a marked development impact onthe regions where they are located.

Lessons Learnt

2.9 Experience from projects world-wide has indicated that oil palm ina nucleus estate setting is well suited to smallholders, and with the need forfruit to be marketed through the nucleus estate, provides an ideal opportunityfor credit recovery. Projects with simple institutional arrangements havegenerally performed better than those with multiple institutions. Theexperience in Papua New Guinea confirms these lessons. PNG smallholders havedemonstrated their competence with the crop, and have received very goodincome and returns to labor while prices were high. Until recently creditrecovery has been excellent, and smallholders continue to enjoy betterfinancial returns than other tree crop farmers during the current time of lowprices.

2.10 Ongoing agricultural sector work, including a review of all Bank-financed agricultural projects in PNG, provides additional major lessons: (a)that maintaining an appropriate macro-economic policy environment andincentives framework will be essential for the sustainable development of treecrops and other tradeables; (b) that institutional (including land tenure),infrastructural and human resource constraints are the three most criticalimpediments to sector development; and (c) that ensuring entrepreneurial andcommereially oriented management would be fundamental to developing commercialproductlon systems. These points are recognized in the Bank's strategy forthe agriculture sector.

Bank Strategy and Rationale for Involvement

2.11 Clearly, agricultural development in PNG faces a complex set ofissues that will require sustained efforts over a long period of time. TheAsian Development Bank has been assisting GOPNG to address some of thesectoral development issues through a sector adjustment loan and otherinterventions. At the request of GOPNG, the Bank is undertaking anagriculture sector review which will highlight the key issues for futuredevelopment of the sector. The following are the current areas of emphasis

- 11 -

for Bank support to PNG in respect of agriculture, and the management of PNG'snatural resources, between which there are inseparable links.

* first, continued support to GOPNG in analysis of the agriculturesector constraints and formulation of measures to address them.These will be geared to restoring the competitiveness ofagriculture as the main source of growth in incomes and employmentfor the population, the majority of whom are very poor;

* second, specific investments in agriculture to increase output,particularly of poor farmers, together with investments in areasrelated to agriculture. These related areas include actions toaddress land management issues, the sustainable use of forestresources, and natural resource conservation; and

* third, support to GOPNG in creating conditions for long term growthof the economy through increased commercial sector activity, andthrough balanced interventions in all sectors, particularlyeducation, health, and infrastructure.

2.12 Improvements in land management to identify better property rightsand administer transactions, in response to the pressures of commercialagriculture and increasing population, are being supported by the LandMobilization Project (Loan 3051-PNG). Natural resource management is beingassisted by the Bank, as lead agency, in coordinating the support of a numberof donors for GOPNG's National Forests and Conservation Action Plan.

2.13 The proposed project supports the first and second objectives. Itprovides an immediate opportunity for a productive investment in theagriculture sector at this difficult time. It has a satisfactory rate ofreturn, and benefits from infrastructure built under earlier investments. Itwould directly generate income and employment for smallholders, most of whomare poor, and include measures to improve productivity and incentives toachieve profitability for oil palm in the area. The project would also helpregain the international competitiveness of oil palm, and would supportGOPNG's longer-term measures to increase productivity. In the field ofnatural resource conservation, it would assist a specific effort to safeguardthe endangered Queen Alexandra birdwing, the world's largest butterfly. Itshealth, education, and conservation extension components would directlyaddress areas related to women. Given its past involvement with oil palmdevelopment projects in PNG since the mid-1970s, the Bank is well placed tosupport GOPNG in the implementation of the proposed project.

Zjet Dail=

2.14 From the experience in PNG, an assessment of the institutionalneeds of the sub-sector, and taking into account the effects of the currentrecession on agriculture, the following points have been incorporated in thedesign of the proposed project: (a) continued strong extension for the newproject participants and the Popondetta mature phase smallholders, to ensuresatisfactory yields are achieved and maintained; (b) provision of credit

- 12 -

accompanied by grant support for the poor fanmer target group; and (c)strengthening of institutional capacity for sub-sector planning andmanagement. In addition, recognizing PNG's early stage in the developmentcycle, the project supervision plan (Annex 5) provides for regular banksupervision.

III. THE PROJECT AREAS

3.1 The project would be located in the Popondetta and Kokoda areas ofOro Province, in the eastern part of mainland PNG, at a latitude between 8 and9 degrees South. The total land area of Oro Province is about 22,200 km2,less than 5 percent of the national territory.

climate

3.2 The climate is tropical humid, with an average annual rainfallranging between 3,000 and 3,800 mm; precipitation being lower in the lowlandsnear the coast and higher in the mountains. Rainfall is well distributedthroughout the year and rarely drops below 100-150 mm in the driest months(June/July). Temperatures range from 21 to 350C and humidity is always highwith an average of about 84 percent. The climate is considered ideal for oilpalm.

ToDojraghy and Soils

3.3 The Popondetta project area consists mainly of alluvial plains ofvolcanic origin through which flow two main rivers, the Girua and the Samboga.There are two main groups of soils, unweathered sandy volcanic soils oftenwith black or loam topsoil, and alluvial soils without formation or withmottling due to impeded drainage.

3.4 The Kokoda project area lies mostly in the Yodda/Kokoda fault whichis a trough valley consisting of low hills with steep slopes. The basictopography is a series of generally flat to gently undulating upper and lowerterraces. Some sections of the terraces are heavily intersected by fast-flowing rivers and creeks. The soils are predominantly moderately to littleweathered brown ash volcanic soils, with dark-brown topsoil.

Vug2tati2n

3.5 Both project areas were originally mostly covered with primarytropical forest. Now most flat areas are covered with secondary regrowth as aresult of logging or clearing for agricultural purposes, mainly forsubsistence food production. However the larger surrounding mountainous areasstill remain under primary forest, but are threatened by logging nearPopondetta and subsistence gardening near Kokoda. Large areas near Popondettaare covered with a coarse grass, Imnerata cylidrica (Kunai). These degradedgrasslands are ancient in origin, but are maintained by frequent burning forhunting purposes. Special measures will be required to eradicate the grassfor oil palm establishment (para. 4.7).

* 13 -

Current LAnd Use and Production

3.6 The main agricultural activity in the project areas is subsistencefood crop production. Many smallholders are also involved in cash cropproduction, with approximately 1,500 farmers engaged in oil palm cultivationin the Popondetta area, and about 250 farmers cultivating cocoa or rubber inthe Kokoda area. Estimated troe crop production in Oro Province in 1990 was:210,000 tons FFB (about 32 percent of national production), 1,140 tons of drycocoa beans (3 percent), 275 tons of dry rubber (1 percent), and 263 tons ofgreen coffee beans (0.4 percent).

3.7 Practically all land in Oro Province is held under customarytenure. The remaining land is in estate and individual Land Settlement Scheme(LSS) blocks which are held on 99-year leases, and Land Title Conversion (LTC)blocks which are freehold. Oil palm blocks established under the previousPopondetta Smallholder Oil Palm Development Project.(Loan 1333-PNG) range from2 to 4 ha per farmer on customary land for area residents, to about 6.5 ha forsettlers, including 4 ha of oil palm and 2 ha of reserve land.

Infastructure

3.8 Oro Province can be reached from other parts of PN6 only by air andsea as there are no inter-provincial roads. The airstrip at Popondetta issealed and there are daily flights to Port Moresby and other major towns.There is a deep vater wharf at Oro Bay, 53 km from Popondetta. The total roadnetwork of the province is some 750 km consisting mainly of unsealedprovincial roads. A good sealed national highway links Popondetta and OroBay, but the main road from Popondetta to Kokoda, also a national highway, isunsealed and needs to be improved. Within the Popondetta area, there is awell developed road infrastructure, but there are many villages, throughoutthe project are"s, which lack adequate road access or are cut off by rivers orsteep terrain. Social infrastructure for education and health services, andrural police is extremely limited in the province.

Popuation

3.9 Oro Ptovince bas a population of about 185,000 persons representing2.5 percent of PNG total population, with a density of about 3.8 persons perkwu, one of the lowest in the country. Outside the towns of Popondetta andKokoda, the population is located in small and scattered villages. Noadditional Immigration of settlers is expected due to clan resistance andGOPNG's reluctance to establish new settlement schemes. Agriculture is themain source of income for the majority of Oro Province families as outsideemployment opportunities are rather limited. Higaturu Oil Palms Pty Ltd(HOPPL) is the largest employer with over 2,000 jobs in the Popondetta andKokoda areas. Most project area farmers are familiar with oil palm and haveexpressed interest in participating in oil palm development programs, as ameans of increasing their cash incomes, and improving social facilities andservices.

- 14 -

IV. L OECT

Project Identificatign and trenaration

4.1 Project identification and preparation were carried out on behalfof Government by joint FAO/CP and CDC missions which visited PNG in August1987 and July 1988 and submitted their reports in December 1987 and November1988 respectively.

Project Objectives

4.2 The project aims at increasing agricultural production and exports,providing employment opportunities, generating incomes for poor farmers,maintaining the incomes of existing smallholders established under theprevious Bank-assisted smallholder development project, and protecting thehabitat of the endangered, world's largest butterfly species.

Prolegt Descrintion

4.3 The proposed six-year project would be an expansion of thesmallholder component of the ongoing Popondetta oil palm NES scheme andinclude the following components:

(a) Smallhoer Developmejn: (i) establishing new oil palm blocks intwo areas of Oro Province, Popondetta (2,500 ha) and Kokoda (1,000ha); (ii) planting about 3,000 ha of oil palm on the reserve landof existing blocks in the Popondetta area; (iii) strengthening theoil palm extension services, including recruitment and training ofadditional staff, construction and maintenance of houses and officefacilities, and provision of vehicles and agricultural equipment;(iv) building and maintaining agricultural roads (80 km of accessroads and 370 km of harvesting roads); and (v) building andmaintaining social infrastructure, including schools, health postsand rural police stations;

(b) main Road Imnrvement: upgrading and maintaining sections of thenational road from Popondetta to Kokoda (59 km);

(c) Enviromental Pxgtecti : protecting an endangered species ofbutterfly in the Popondetta area;

(d) Institutig=1 Str9Mg&henLUg: (i) strengthening DAL capacity forpolicy formulation and project preparation in the tree crop sub-sector, through staff recruitment and training; (ii) strengtheningOPIC's management capacity; and (iii) supporting oil palm research;

(e) Technical Assistance to OPIC; and

(f) Studies in the tree crop sub-sector, including the identificationand preparation of future tree crop projects.

- 15 -

4.4 Oil Palm Deelonment. About 6,500 ha of oil palm, consisting of5,500 ha in the Popondetta area and 1,000 ha in the Kokoda area, would beplanted over six years by about 3,250 smallholder families (Table 4.1). Thetotal cost of the component would be about US$7.7 million.

Tabl 4.1: OIL PALM PLANTING PROG1W( (ha)

Project year 1 2 3 4 5 6 Total

Reserve land 0 0 600 900 900 60 3,000

New blocksPopondetta 500 800 500 400 200 100 2,500Kokoda 0 100 200 300 200 200 1,000

Total 500 900 1,300 1,600 1,300 900 6,500

4.5 Under the proposed project, 3,000 ha would be planted on thereserve land of about 1,500 existing 6 ha blocks established from 1978 in thePopondetta area, under the Bank-assisted Popondetta Smallholder Oil PalmDevelopment Project. The 2 ha reserve land on each block would be plantedwith palms, which could be inter-cropped with food crops during the first twoyears after planting. When these palms reach maturity, in the third year, thefirst 2 ha of the original plantings would be felled and replanted with oilpalm, and intercropped with food crops. The second 2 ha of the originalplantings would be felled tnree years later to provide land for permanent foodcrop cultivation. During the replanting cycle, farmers would maintain 4 ha ofmature oil palm. As the replanting cycle would start three years afterplanting the reserve land, it would only commence after completion of theproposed project, and is therefore not included under the current proposal.

4.6 New 2 ha oil palm blocks would also be established under theproposed project for village farmers, including 2,500 ha in the Popondettaarea and 1,000 ha in the Kokoda area. Sufficient suitable clan lands areavailable for these new blocks in both project areas. After groups of 10-15potential smallholders have reached agreement with clan leaders forcultivating oil palm on customary land, OPIC extension officers woulddetermine the suitability of the proposed land. Before processing the loan,OPIC would require the submission of the clan land usage agreement for thecultivation of oil palm. OPIC would also ensure that, should established foodcrop gardens be displaced by the proposed oil palm development, alternative,readily accessible land would be made available for food crop production. DECconservation officers would conduct a preliminary environmental survey to

- 16 -

determine whether the land proposed for oil palm cultivation could bedeveloped or should be kept for the conservation of the Alexandra birdwingbutterfly (para. 4.15). After approval from DEC, surveyors from OPIC and theDepartment of Lands and Physical Planning would survey the blocks anddemarcate boundaries. Blocks would be aggregated to the greatest extentpossible to facilitate land preparation and reduce road construction andtransport requirements. Farmer selection criteria used by OPIC would includeage, health, family size, and previous credit experience. Farmers could applyfor a loan after the survey, but the loan would not be granted until thefarmers have themselves cleared and prepared the land for planting.

4.7 Farmers would clear degraded bushland and secondary forestthemselves, either manually or with chainsaws to minimize soil disturbance.In the grasslands, trained OPIC workers would assist farmers to eradicate thenoxious grass weed (ImDerata cylindrica), using herbicides. HOPPL wouldprepare the planting material in its nursery from selected seeds obtained fromDM1I in West New Britain. HTPL would deliver twelve-month old seedlings tofarmers ready for planting after OPIC's approval of the individual loanapplications. About 120 palms would be planted per ha. The inter-rows wouldbe sown with a legume cover crop (Pueraria) to enhance soil nutrient status,control weeds and prevent soil erosion. However, OPIC would allow farmers toInter-crop the young palms with food crops, for about two years afterplanting. Fertilizers would be applied regularly to individual palmsfollowing the recommendations of the PNG Oil Palm Research Association (para.4.21). Farmers would control weeds in the inter-rows manually, by regularslashing. However, in the grasslands, herbicides would be used, by trainedOPIC workers, to control Imperata and ensure the rapid establishment of thelegume cover crop. Diseases in oil palm plantations are of little importanceand pesticide usage would be minimal. 1 1 The first fruit bunches should beready for harvesting late in the third year after planting. Production wouldextend over at least 17 years, until it would become too difficult to harvestbunches due to the height of the palms.

4.8 ExAtension. The existing oil palm extension team in Oro Provincewould be strengthened under the proposed project through: (i) the recruitmentof about 27 additional extension staff; and typists, surveyors, mechanics,drivers and laborers; (ii) the construction and maintenance of about 20 staffhouses and office facilities; (iii) the provision of about 17 motorcycles,4 four-wheel drive vehicles, 1 truck, 4 tractors with trailers and variousagricultural equipment such as rollers, water tank, grass slashers, chainsaws,etc.; and (iv) the training of new extension staff in tree crop production andextension techniques through training courses of 8 to 12 weeks duration, atagricultural colleges in PNG. As OPIC has taken over DAL's responsibility forthe implementation of smallholder oil palm development, funds for extensionactivities under the project would be passed from GOPNG to OPIC as a grant,

2/ None of the herbicides or pesticides would be in the Bank's Checklist ofPesticides Not Recommended for Use in Agriculture or Suitable for RestrictedUse (OPN 11.01.).

- 17

under a subsidiary agreement. Signature of the Subsidiary Agreement (SA),satisfactory to the Bank, would be a condition of loan effectiveness (para.8.2). The total cost of the component would be about US$4.1 million.

4.9 Agricultural Roads. The project would provide for the constructionand maintenance of an agricultural road network in the smallholder areasaround Popondetta and Kokoda, consisting of about 80 km of access roads and370 km of harvesting roads (70 km of two-way roads and 300 km of one-wayroads). Agricultural roads would be constructed according to thespecifications of the Department of Works (DOW), which are satisfactory. Costestimates are based on average DOW kilometer costs for different types ofagricultural roads in Oro Province: K30,000 to K35,000/km for access roads,K26,000 for two-way harvesting roads and 116,000 for one-way harvesting roads.The total cost of the component would be about US$13.3 million.

4.10 Social InfriNtruxM . The project would also provide for somecommunity services development, including the construction (or rehabilitation)and maintenance of classrooms, health posts and associated housing, furnitureand equipment, and the construction of an office for the Popondetta Oil PaluiGrowers Association. The project would also provide for the construction ofrural police stations comprising houses and office with associated furnitureon the new smallholder area subdivision centers, but the Bank would notdisburse against these facilities. The total cost of the component would beabout US$1.7 million, including US$1.5 million for classrooms and teachers'houses.

4.11 Maintenance of Existing SMaIlholder Blocks. To achievesatisfactory production levels, it is estimated that each of the existing1,500 smallholders requires about K120 a year to purchase fertilizers andtools for regular maintenance of their blocks. To ensure that smallholdershave sufficient funds for the maintenance of their blocks, assurances wereobtained during negotiations that HTPL would enter into agreements withexisting smallholders to deduct and maintain in individual escrow accounts,about K10 per month from their monthly FFB sales income until sufficient fundshave been accumulated to finance the smallholders, oil palm block maintenancefor the following year (para. 8.1).

Main Road Improvement

4.12 The proposed project would provide for the upgrading andmaintenance of the 59 km Isevene-Kokoda unsealed section of the main road fromPopondetta to Kokoda, which links both project areas, to meet the requirementsof the projected traffic of FFB transport trucks. The upgrading program wouldconsist of widening and sealing selected short sections of the road, includingsteep hills, bridge approaches, and through villages. As the Popondetta toKokoda road has been classified as a National highway, it would be maintainedby the National Department of Works. The total cost of the component would beabout US$1.9 million.

- 18 -

4.13 fte nageg;. Effluent from HOPPL palm oil factory, whichprocesses bo.h estate and smallholder crop, is at present partially treated intwo ponds and subsequently discharged into a watercourse leading into theAmbogo River, causing downstream organic pollution in the river for well overone kilometer. Under DEC's current policy regarding the treatment of palm oilfactory effluent, existing factories are assessed and regulated on a case-by-case basis, while all new factories are required to achieve final effluentstandards similar to those used by the oil palm industry in Malaysia. HOPPLstarted to upgrade its effluent treatment facilities in 1991 with the aim ofmeeting those standards by 1994. An assurance was obtained duringnegotiations that the upgrading would be completed not later than December 31,1994 (para. 8.1).

4.14 HOPPL's solid wastes consist of empty fruit bunches, most of whichare burnt in the factory's incinerators, and domestic rubbish and scrap metalwhich are dumped beside the watercourse leading into the Ambogo River. Inview of the potential hazard created by the scrap metal, an assurance wasobtained during negotiations that HOPPL would establish an adequate landfillfor the disposal of its non bio-degradable solid waste, away from watercourses, during the first year of project implementation, and not later thanDecember 31, 1993 (para. 8.1).

4.15 AaterUflX Conservatn. The world's largest butterfly, the QueenAlexandra Birdwing (Ornithopter alexa ndrae, see life-sized photograph on page71), occurs only within a radius of about 50 km from Popondetta. Thebutterfly and its natural food plants are species of the primary lowlandforest. Although the species has been protected in law since 1968, it is nowendangered through the continuing destruction of its forest habitat by loggingand agricultural activities, and is at the top of the international list ofendangered butterflies. A conservation program aimed at ensuring the survivalof the Alexandra birdwing has been prepared in collaboration withInternational and national NGOs concerned with biodiversity conservation,including Worldwide Fund for Nature, Conservation International, and WauEcology Institute, and after consultations with landowners. The program isalso aimed at providing a replicable model for integrating conservation withdevelopment in PNG. The project's conservation component provides forcritical short term conservation activities to ensure that new smallholder oilpalm development does not further endanger the butterfly and its associatedecosystem. It would consist of mapping the distribution of the Alexandrabirdwing, advislng oil palm extension staff on the selection of land for oilpalm development, promoting the establishment of permanent conservation areaswhich would remain under traditional land ownership but be subject to a ban onforest clearance, and training DEC field personnel. An Alexandra BirdwingConservation Committee, consisting of NGOs, external donors, landownerrepresentatives and Government agencies, would be established to monitorimplementation of the conservation program, and inform GOPNG and donors onprogress in achieving conservation objectives.

- 19 -

4.16 Funding would be provided under the project for: (i) a nationalbiologist/entomologist as Conservation Project Manager; (ii) a PrincipalResearch Officer (entomologist) for three years to study the butterfly and itshabitat, propose reserve areas, design research programs, and train thenational counterpart; (iii) about four staff, including an extension officerwith special focus on women activities (Annex 13, para. 9); driver andlaborers; and (iv) houses, offices and demonstration facilities, furniture,vehicles, equipment and training. The total cost of the conservationcomponent would be about US$2.0 million. Condltion of disbursement for thesefunds would be the employment of the Conservation Project Manager and thePrincipal Research Officer, with qualifications, experience and terms ofreference acceptable to the Bank (para. 8.3). GOPNO would seek financialassistance from donor agencies in the form of grant funds to share in the costof conserving this internationally significant butterfly and thereby reducethe amount of the Bank loan required.

4.17 The conservation program would also include other activities suchas research, to improve knowledge of the butterfly and its ecologicalrequirements; development of income generating alternatives to plantationcrops for landowners; and education to raise public awareness of the butterflyand its conservation needs. These other activities, which are important forthe long term survival of the butterfly, would be closely coordinated with theproject's conservation activities described above. However, they would not beincluded under the Bank-assisted project, as their timing does not have to besynchronized with the oil palm development program, and grant funds would besought by GOPNG to finance their cost, estimated at about US$1.2 million.

4.18 Tree CroD DeveloM_ent. Tree cover would be provided through theestablishment of oil palm over large, degraded grassland areas (para. 3.5),and would prevent burning, restore soil fertility and control erosion.

MstLtttLonal Strfngl1DSR

4.19 DeS=rtment of Azriculture and Livestock. Tree crop related issuesare handled by separate DAL units: Investment, Pollcy and Planning, Research,Protection, and Education and Trainit. Effective management of the expandingtree crop sub-sector is necessary Cs.- the successful implementation of GOPNGstrategy of putting primary emphasis ani agricultural growth through theexpansion of major export cash crops. To achieve this objective, the proposedproject would strengthen DAL capacity for policy formulation and projectpreparation in the tree crop sub-sector, through the recruitment and trainingof about nine additional staff, and provision of furniture and equipment. Thetotal cost of the component would be about US$2.4 million. The followingthree units under the Policy and Planning Division would be strengthened:

(a) the Project Preparation Branch, which is responsible for thepreparation of all National and Provincial tree crop projects.Three additional positions would be established for a projectplanner, an economist and a financlal analyst;

- 20 -

(b) the FPam Management Unit, which was created in 1990 to set up aregular and continuous monitoring system for the estate andsmallholder tree crop sub-sector to provide the basic data requiredfor policy analysis and formulation. Four addLtional posltionswould be established for three farm management specialists and onesupport staff; and

(c) the Project Evaluation Unit, which would be created to evaluateexternally assisted tree crop projects. Two Monitoring andEvaluation Specialist positions would be established.

4.20 Oil Palm Industry Corporation. OPIC's structure provides for thecreation of two senior positions (General Secretary and Project Accountant) atits headquarters in Port Moresby for the coordination of smallholder oil palmproject implementation, which was formerly under DAL's responsibility (para.1.17). These two positions are temporarily filled by DAL staff in an actingcapacity. Funds would be provided under the project for: (i) theinternational recruitment of two experienced specialists for the positions ofGeneral Secretary and Project Accountant; and (ii) office furniture, equipmentand operational expenses for OPIC's headquarters. The total cost of thecomponent would be about US$1.6 million.

4.21 Support to Oil Palm Research. Additional inputs from the Papua NewGuinea Oil Palm Research Association (PNGOPRA), an independent researchorganization, would be required for the implementation of the proposedexpansion of smallholder oil palm in Oro Province, particularly to addressmineral nutrition needs in new areas for oil palm development on grasslandsnear Popondetta and around Kokoda. PNGOPRA, which is financed by a cess onboth estate and smallholder FF3 and a grant from GOPNG, would not be able toexpand its research activities within its current budget structure withoutadditional funds. Funds would be passed under the proposed project as anadditional GOPNG grant to PNGOPRA for incromental adaptive research in theproject areas, under a subsidiary agreement, on terms and conditionsacceptable to the Bank. About US$0.6 million would be provided for equipment,vehicles, training, incremental salaries and operational expenses. CgndLtionsof diabursenM for these funds would be: (a) signature of the SubsidiaryAgreement (SA); and (b) that HOPPL be current (not more than two monthspayments outstanding) with the payments of all research cess to PNGOPRA (para.8.3).

Technical Assistance

4.22 The proposed project would provide about US$0.3 million fortechnical assistance to OPIC consisting of regular visits by oil palmspecialists, wlth international experience, to asslst OPIC in monitoring theimplementation of ongoing smallholder oil palm development schemes.

4.23 The proposed project would provide for consultants (about 20months, or US$0.2 million) to carry out studies in the tree crop sub-sector,

- 21 -

which would include the identification and preparation of future tree cropprojects, and would be determined after start of project implementation.

V. POQ= COSTS AmD FINANCING

PrWoiect Csts&

5.1 Quantities and costs are based on the November 1988 FAO/CPpreparation report and were revised in January 1992. Total project costsincluding the expected contribution by smallholders in form of *sweat equity",but excluding interest during construction, are estimated at US$36.3 million(K34.5 million), of which US$17.5 million (48 percent) would be in foreignexchange and US$1.1 million in duties and taxes. Base costs are expressed inearly 1992 values. Recurrent costs represent about 28.9 percent of basecosts. Physical contingencies are estimated at 5 percent for buildings,vehicles, equipment and maintenance and 10 percent for roads and trainingactivities. Price contingencies are based on estimated annual local inflationof 5.5 percent in 1992 and thereafter; and an estimated annual foreigninflation of 3.7 percent from 1992. Total physical contingencies amount to5.2 percent of base costs and expected price increases amount to 21.3 percent.Project costs are presented in Annex 1 and summarized in Table 5.1. Detailedcost breakdowns of project components are available in the Project File.

Tobte A: PROECT COST s5uNN

Kinm UStNI tt_ llionIlIifni _ foreign I Xoe

Local foreign Tottl Local Foteign Total Exchange Cost

A. Sultholdwr DevelopmentOfl Palo Dcvelt unt 4.5 1.3 5.8 4.7 1.4 6.1 22.6 21.3Extension Services 2.0 1.1 3.1 2.1 1.2 3.3 36.5 11.3Agricultural Roads 2.6 7.2 9.8 2.7 7.5 10.2 73.5 35.6Social Infr structuroe J0 L6 0.7 J .r 1

9.r 1W.3 20t.0 10.2 -10.8 21.0

S. Nafn good lopovament 0.5 0.9 1.4 0.5 1.0 1.5 62.8 5.4

C. Institutiontl Streath 2.5 1.0 3.5 2.6 1.1 3.7 29.8 12.9

0. Enwironomntet Protect. 1.2 0.7 1.9 1.2 0.8 2.0 39.2 6.9

E. Technical Assistance 0.0 0.3 0.3 0.0 0.3 0.3 100.0 1.1

F. studes _JQ 0.2 -.2 .J0. 0.2 100. iMAfl

Total Resoling Costs 13.9 13.4 27.3 14.5 14.2 28.7 49.1 100.0Physfcal Contiun. O.S 0.9 1.4 0.5 1.0 1.5 65.2 5.2Price Continr. , A AI LA M LI .1 -id 21

Total Project Costs 18.0 16.5 34.5 18.8 17.5 36.3 47.9 126.5

Interest dwrin Constr. 0.0 0.5 0.5 0.0 O.S 0.5 100.0 1.7

Total Financing Reuired 18.0 17.0 35.0 18.8 18.0 36.8 48.9 128.2

- 22 -

5.2 The proposed IBRD loan of US$27.0 million would finance 100 percentof foreign exchange requirements and about 55 percent of local costs (net ofduties and taxes) or 73.0 percent of the total financing requirementsIncluding interest durlng constructlon (IDC) of US$0.5 million. IDC is basedon interest that would be paid by GOPNG on amounts disbursed in respect of thesmllholder credit component over the 3 year grace period during whichinterest on funds on-lent to smallholders would be capitalized (para. 5.3).GOPNG would finance 17.4 percent of total costs (US$6.4 million). Thesmallholders' contribution in form of "sweat equity' (providing own labor forfield establishment) would account for 9.2 percent of total project costs(US$3.4 million). The proposed loan would be made to GOPNG at. the Bank'sstandard variable rate for 20 years with a 5 year grace period. GOPNG wouldbear the foreign exchange risk on the Bank loan. The financing plan ispresented in Annex 2 and summarized in Table 5.2.

Table 5m2: FINANCING PLAN(USM million)

IBRD GOPNG Farmers Total

A. Smallholder DevelopmentOil Palm Development 4.1 0.2 3.4 7.7Extension Services 3.1 1.0 - 4.1Agricultural Roads 11.7 1.6 - 13.3Social Infrastructure 1.3 0.4 1.7

Subtotal 20.2 3.2 3.4 26.8

B. Main Road Improvement 1.5 0.4 - 1.9

C. Institutional Strengthening 3.3 1.3 4.6

D. Environmental Protection 1.7 0.8 2.5

E. Technical Assistance 0.3 - 0.3

F. Studies - 0.2 0.2

¢. Interest During Construction -05 - 0.5

Total 27.0 6.4 3.4 36.8

- 23 -

Smallholder Credit Arrangements

5.3 Credit to smallbolders participating in the project would be inform of planting materials and other agricultural inputs (fertilizers,herbicides and tools). In line with measures being implemented to improveagricultural incentives (para. 1.24), GOPNG would provide smallholders withhalf the required oil palm planting materials, equivalent to about K240 persmallholder (about 30 percent of total first year input requirements) as agrant. Funds for the remaining inputs estimated at US$3.2 million (K3.0million) would be lent by GOPNG to smallholders with Higaturu Transport PtyLtd (HTPL) administering the loan accounts on behalf of Government. OPICwould select the project participants, determine the inputs to be providedunder the project, and sign credit agreements with participating smallholderson behalf of GOPNG. OPIC would assist smallholders with land preparation ingrassland areas and would advise HTPL of the cost incurred to be charged tosmallholders. OPIC would provide HOPPL with a program detailing requirementsfor oil palm planting materials twelve months in advance. GOPNG would payHOPPL in full for the planting materials to be supplied to the smallholders.The smallholders loan accounts would be charged with half the cost of theplanting materials at the time of delivery. HTPL would purchase anddistribute the inputs to eligible smallholders, and charge individual loanaccounts for the cost of the inputs distributed. Upon maturity of oil palmplantings, HTPL would purchase and sell the smallholders' FF to HOPPL (para.6.8) and deduct and pass on to GOPNG for repayment of outstanding credit, 30percent of smallholders' monthly sales income until smallholder loans are paidoff. HTPL would maintain on behalf of GOPNG appropriate records forindividual smallholders showing cost of inputs purchased and distributed,quantity and value of monthly FFB purchases and sales, loan repaymentdeductions and loan balance outstanding. It is estimated that individualsmallholder loans averaging Kl,OOO (US$1,050) would be repaid over a 10 yearperiod. An assurance was obtained during negotiations that GOPNG wouldprovide half the required oil palm planting materials to smallholders on agrant basis (para. 8.1).

5.4 GOPNG would lend funds (about US$3.2 million) to smallholders inKina at a fixed interest rate of 8 percent per annum for 10 years including agrace period of 3 years during which interest would be capitalized. To coversub-loan administration costs, GOPNG would pay to HTPL an annual managementfee, to be determined between GOPNG and HTPL, until smallholder loans arerepaid. GOPNG would bear'the full credit, foreign exchange and variableinterest rate risks and would pay the commitment fee on the Bank loan.Assumption of the foreign exchange risk by GOPNG is justified in view of thefollowing considerations: (a) sub-loans to the 3,250 smallholders would bevery small (about US$1,050 each) and denominating these small loans in foreignexchange to allow passing on the risk to the sub-borrowers would beinappropriate for small farmers and administratively cumbersome; and, (b)except for small quantities of fertilizers and herbicides, the bulk of sub-borrowers' expenditures would be in local currency. Signature of a financialmanagement agreement between GOPNG and HTPL, satisfactory to the Bank, wouldbe a condition of loan effectiveness (para. 8.2).

- 24 -

5.5 GOPNG's proposed new arrangements have four major advantages: (a)subsidies would be explicit and financed through the budget; (b) distortionaryeffects on the operation of the financial sector and rural commercial creditmechanisms would be minimized; (c) poverty reduction is one of the majorpurposes underlying the arrangements; and (d) GOPNG would achieve a high levelof cost recovery (para. 7.10). The cost recovery targets would ensureadequate returns to the farmers and achieve recovery at levels comparable toother countries.

Fuds FlogR

5.6 The flow of funds to project implementing agencies would be inconformity with the current GOPNG budgeting system and procedures forfinancing foreign assisted development projects: (i) a trust account would beestablished for the Bank (with the Bank of Papua New Guinea) for its imprestaccount; (ii) under Section 209 of the Constitution, financial proposals forany given fiscal year must be presented to the National Parliament in the formof a National Budget (revenue estimates and proposed expenditures). The finalappropriation approved by the National Executive Council is presented to theNational Parliament for endorsement in November. Under the Public Finance(Management) Act, the Department of Finance and Planning (DFP) is responsiblefor compilation of the National Budget and will allocate funds to individualprojects. In July of each year, a budget submission is made to DFP by thoseagencies responsible for project execution; (iii) based on the approved annualbudget appropriation for the project, OPIC, DAL, DEC, DOW and PNGOPRA would,at start of GOPNG fiscal year, prepare and submit to the Planning andBudgeting Division of DFP, monthly cash flow statements (cash flowrequirements to meet expenditures on planned project activities). ThePlanning and Budgeting Division would review the cash flow statement and checkfunding requirements against the physical implementation schedule. Based onthe cash flow, warrant authority's would be raised on a quarterly basis. Acopy of the cash flow would be forwarded to the Office of InternationalDevelopment Assistance (OIDA) in DFP. Copies of DAL, DEC, DOW and PNGOPRAcash flow statements would be sent to the Project Accountant in OPIC (para.6.3). OIDA would submit a withdrawal application (cash advance requirements)to the Bank for the initial deposit of funds for three months into the SpecialAccount, to finance the Bank portion of project expenditures; (iv) DAL, DEC,DOW and PNGOPRA would furnish to OPIC on a monthly basis, revised cash flowstatements and statements of actual expenditures incurred and paid for.OPIC's Project Accountant would consolidate those statements with OPIC's andsubmit these to OIDA on a monthly basis; (v) OIDA would then arrange for thetransfer of funds from the Special Account to reimburse GOPNG for the Bank'sshare of actual expenditures incurred. Claims would be submitted by OIDA tothe Loans and Debt Management Division of DFP for on forwarding to the Bank toensure that expenditures conform with guidelines established by the Bank.Based on the second quarter cashflow and surplus funds (if any) in the imprestaccount, the Bank would replenish the Special Account; (vi) funds reimbursedto GOPNG from the Special Account would go directly into the ConsolidatedRevenue fund, and then could be used to pre-finance expenditures forsubsequent quarters; and (vii) applications for expenditures above US$250,000could be submitted to the Bank directly without using Special Account funds.

25 -

5.7 With respect to the smallholder credit component, funds for credititems -- planting materials and other agricultural inputs, which would beprocured through HTPL, and the cost of land preparation by OPIC -- would bebudgeted under DFP's Commercial Investment Division. Once a month afterexpenditures on credit items have been incurred, HTPL would furnish to OPIC,which would then submit to OIDA, a detailed expenditures report showing thelist and cost of items charged to individual participating smaliholders. OPICwould be responsible for preparing quarterly cash flow statements of plannedsmallholder project activities to allow COPNG to relesse funds to pre-financethese activities prior to withdrawal of funds from the proceeds of the Bankloan.

Proumaz=

5.8 Procurement arrangements are summarized in Table 5.3 and describedbelow:

TAble l3 PRCU_NIT 4U8h08 (OS mlttL.) 4l A

____ ~Pwouagt mehdPwoJeat Mm1nt LCB Otherk VA Total

Co0t

CIvL Mothk 16.4 16.4(14.7) (14.7)

VehIle.. Furlture 0.8 0.2 1.0* Equpann (0.8) (0.2) (1.0)

3;1t (Vem"., E _Ipment, 3.2 3.2BuiJga, m Rod.) (1.8) (1.$)

FrtaLsers 0.7 0.5 1.0(0.6) (0.3) (0.9)

PI amu* Wt*sul. 2.2 2.2(2.2) (2.2)

5e.bLolde, TOS 1.1 1.1(1.0) (1.0)

8elawta of Zne.euAl 5-5 5.5Staff (5.9) (5.9)

4ew1t_sL Eqoae 1.8 1.8(1.1) (1.1)

Teebaloa AsLena 0.5 0.5a TzSalns (0.4) (0.4)

Studi8 0.2 0.2(0.0) (0.0)

Srlboe ova Labor e.s 3.4(0.0) (0.0)

Iateeat DuC CtaeatIon LS 0.5 0.5(0.0) (0.0)

Sa IL ILL MA(16.1) (5.9) (3.0) (27.0)

, Costa Ae" llusavo of oontaeaVo, dutis ad tame an fig"u" a Isp_1ntheIndLoste insa to be flua"d bythse lank.

Lk Oher includ. pVVent aheppiutna for".Oct d dieot contuos.Lb Cap.tala.d latez..t an amaloleg Leons iwIa the I Yan suC4 P"Ao.

- 26 -

5.9 Civil Works (USS16.4 million). As contract values for buildings(US$2.9 million) and upgrading of Popondetta-Kokoda road (US$1.0 million)would be small, and for construction of access and harvestlng roads (US$12.5million) works would be widely spread geographically and over time, theproposed civil works are unlikely to attract international firms. In view ofthis, all civil works would be procured by local competitive biddingprocedures (LCB) acceptable to the Bank.

5.10. Vehicles. Furniture. & Equipment (USSl.O million). Due to theirsmall size and the fact that they are not all needed at the same time,contracts for the supply of vehicles (US$0.6 million), furniture and equipment(US$0.4 million) are unlikely to be of interest to international suppliers.All vehicles and most furniture and equipment would be procured through LCBprocedures acceptable to the Bank. Some small house and office furniture andworkshop equipment (up to an aggregate of US$0.2 million) would be procuredthrough prudent shopping after having received at least three price quotes,subject to a limit of US$50,000 for each purchase.

5.11 Maintenance (USS3.2 million). DOW would use force account for themaintenance of buildings (US$0.4 million), and roads (US$1.8 million) due tothe nature of the work in remote locations, which is unlikely to be ofinterest to contractors. Vehicles would also be maintained by DOW on forceaccount (US$1.0 milllon).

5.12 Planting Haterials. Fertilizers. Herbicides & Tools (USS4.3dllfLn). Oil palm seedlings would be produced and supplied by HOPPL. Asannual requirements would be small (below US$300,000), fertilizers would beprocured through LCB procedures acceptable to the Bank for purchases aboveUS$50,000 and by prudent shopping for purchases below this amount. Tools andsmall quantities of herbicides would be procured through prudent shoppingafter havlng received at least three price quotes, subject to a limit ofUS$50,000 per purchase.

5.13 Technical Assistance & Training (USSO.5 million). Technicalassistance and training, which would be financed by the Bank, would beprocured following the Bank Guidelines for the Use of Consultants.

5.14 Contrat . After an initial review of standard biddingdocuments for LCB contracts, the Bank would only review, prior to tendering,bidding documents for contracts estimated to exceed US$200,000 with theexception of technical assistance, training and consultant contracts. Theremaining contracts would be reviewed, subsequent to their award, by the Bankon a sample basis. All proposed short lists, terms of reference, evaluationreports and final draft contracts for consultants would be subject to priorreview by the Bank.

sbu ments

5.15 Disbursements under the Bank loan are expected to be completed byDecember 31, 1999, about seven years after Loan signing, in line with thedisbursement profile for agricultural projects in Papua New Guinea (Annex 3).

t-

- 27 -

5.16 Disbursements from the Bank loan would be made for:

(a) 100 percent of foreign expenditures and 90 percent of localexpenditures for civil works;

(b) 100 percent of foreign expenditures and 90 percent of localexpenditures for vehicles, furniture, equipment and relatedtransport services;

(c) 100 percent of expenditures for planting materials and agriculturalinputs (fertilizers, herbicides, and tools);

(d) 90 percent of expenditures for salaries and travel expenses of DAL,OPIC, DEC and PNGOPRA incremental staff in FY93 and FY94, 75percent in FY95, FY96 and FY97, and 25 percent thereafter;

(e) 100 percent of expenditures for house rentals for DAL and DECincremental staff;

(f) 90 percent of expenditures for road, vehicle and equipmentmaintenance in FY93 and FY94, 75 percent in FY95, FY96 and FY97,and 25percent thereafter; and

(g) 100 percent of expenditures for consultants' services, andtraining.

5.17 Disbursements for all smallholder development activities includingplanting materials, fertilizers, herbicides and tools; incremental OPIC staffexpenditures; incremental DAL, DEC and PNGOPRA staff expenditures; and allcontracts costing less than US$200,000 for civil works, vehicles, equipmentand furniture, would be made against itemized Statements of Expenditures(SOEs). OPIC would prepare the SOEs for expenditures related to smallholderdevelopment and research, while DAL would prepare those related to DALinstitutional strengthening; DEC would prepare those related to butterflyconservation; and DOW those related to upgrading and maintenance of thePopondetta-Kokoda road. OPIC, DAL, DEC and DOW would keep the detaileddocumentation supporting the SOEs. DAL, DEC and DOW have the capacity toprepare SOEs and maintain records as they currently prepare SOE-typeaccountability reports to comply with GOPNG budgeting procedures. Assuranceswere obtained during negotiations that the SOEs would be audited and SOEdocumentation made available to the Bank for inspection during supervision(para. 8.1). Disbursements for all other project activities would be based onfully documented withdrawal applications. OIDA would review and process thewithdrawal applications and furnish them to the Bank for replenishment of theSpecial Account or reimbursement.

Snecial Account

5.18 A Special Account (Trust Account) has been established in thecentral bank (Bank of Papua New Guinea) to facilitate disbursements underWorld Bank loans. The account would be maintained in Kina with an authorized

- 28 -

allocation of Kina equivalent of US$1.0 million, representing an estimatedaverage of four months expenditures and would cover all expenditures, bothlocal and foreign, of less than US$250,000 eligible for Bank financing. Onlyexpenditures above US$250,000 equivalent would be submitted directly to theBank for payment.

Accounts and Audits

5.19 DAL, DEC, and DOW maintain their accounts in accordance wlthstandard GOPNG procedures. DAL, DEC and DOW would provide details of projectexpenditures, including separate schedules of expenditures claimed under SO0procedures to OPIC which would be responsible for preparing annual projectaccounts for all project components, for submission to the Bank through OIDA.HOPPL and HTPL, the two coumercial institutions which would be involved in theimplementation of the smallholder component, and PNGOPRA maintain theiraccounts and records in accordance with generally accepted accounting standardprocedures, and their accounts are audited each year by independent auditors.Assurances were obtained during negotiations that: (a) DAL, DEC, DOW, OPIC,and PNGOPRA would maintain separate project accounts; (b) OIDA would furnishto the Bank, within six months of the end of GOPNG's fiscal year: (i) auditedproject accounts covering DAL, DEC, DOW, OPIC and PNGOPRA project expendituresincluding separate schedules of expenditures claimed under SO procedures, and(ii) audit reports of the Special Account, audited by independent auditorsacceptable to the Bank; and (c) OPIC and PNGOPRA would furnish to the Bank,within six months of the end of their respective fiscal years, their financialstatements audited by independent auditors acceptable to the Bank (para. 8.1).

VI. PROJECT IHPLEMENTATION AND MNAGOMENT

Project Management

6.1 The following institutions would have primary responsibility forimplementing the project: (i) the Oil Palm Industry Corporation (OPIC) wouldbe responsible for overall project coordination and implementing fielddevelopment activities, assisted by the Department of Works (DOW), and by theDivisions of Education and Health of Oro Province; (ii) the Department ofAgriculture and Livestock (DAL) for DAL institutional strengthening; (iii) theDepartment of Environment and Conservation (DEC) for environmental protection;(iv) Higaturu Oil Palms Pty Ltd (HOPPL) for producing oil palm seedlings,processing smallholder crop and marketing oil palm products; (v) HigaturuTransport Pty Ltd (HTPL) for purchasing and transporting smallholder crop,administering smallholder loan accounts on behalf of GOPNG, procuringagricultural inputs for smallholders and collecting smallholder loanrepayments; and (vi) PNGOPRA for oil palm research. The project'sOrganization Chart is shown in Annex 4.

6.2 To ensure full cooperation among all agencies involved with projectimplementation, two committees would be established before the start of

- 29 -

project implementation, one at the national level, and one at the provinciallevel to coordinate the planning and implementation of the project:

(a) the National Oro Project Managent Committee (PMC) would beestablished under DAL, and would have overall responsibility forthe coordination of planning, management and implementation of theproposed project. The RIC would comprise the Secretary of DAL(Chairman), the Secretaries of the Departments of Finance andPlanning, Works, Lands and Physical Planning, Environment andConservation, Education, and Health, or their nominees, theProvincial Secretary of Oro Province, and representatives of HOPPL,HTPL and PNOOPRA. The PMC would meet once every six months.OPIC's General Secretary would be appointed the executive officerof the PMC, and be responsible for day to day headquarters projectadministration;

(b) the Provincial Oro Project Coordination Committee (PCC) would beresponsible for coordinating the activities of the proposed projectat the provincial level. The PCC would consist of the FieldProject Manager (Chairman), the Provincial Secretary of OroProvince, and representatives of HOPPL, HTPL and PNGOPRA, theNational Departments of Works, Lands and Physical Planming,Environment and Conservation, the provincial divisions of PriaryIndustries, Education and Health. The PCC would meet at least onceevery three months, with operational meetings as required;

(c) establishment of the National Oro Project Management Committee andthe Provincial Oro Project Coordination Committee and holding oftheir first meetings would be a condition of loan effectiveness(para. 8.2).

il &Palm Industry Corloration (OPIC}

6.3 OPIC, which was created in early 1992 to take over DAL'sresponsibilities for sallholder oil palm development' (para. 1.17), would bedirectly responsible for field development activlties in Oro Province. Itwould also be responsible for coordinating the implementation of all projectcomponents. Based at headquarters, in Port Moresby, OPIC's General Secretarywould be the Project Manager of the proposed project, assisted in his dutiesby a Project Accountant, who would be responsible, among other tasks, for thepreparation of consolidated quarterly project accounts. At Popondetta, OPIC'sField Project Manager (FPM) would be rosponsible for the coordination ofImplementation of all components at the provincial level, and would report tothe General Secretary/Project Manager. The FPS would also be directlyresponsible for the overall supervision of oil palm field developmentactivities in both project areas, for which he would be assisted by threeField Supervisors, including a Developmuent Field Supervisor to supervise theintroduction of oil palm to farmers in new areas. OPIC would recruitexpsrienced specialists internationally for the duration of the project, forthe positions of General Secretary, Project Accountant, Field Project Managerand Development Field Supervisor.

e 30 -

6.4 In view of the importance of OPIC's coordination role to ensuresuccessful project implementation, OPIC's General Secretary, ProjectAccountant and Field Project Manager should be appointed before start ofproject implementation. The appointment of the three above staff, withqualifications, experience and terms of reference acceptable to the Bank,would be a condition of loan effectiveness (para. 8.2). Assurances wereobtained during negotiations that OPIC would: (a) appoint the DevelopmentField Supervisor during the first year of project implementation; and (b)maintain staff with the appropriate qualifications for management and/ortechnical expertise, which should be acceptable to the Bank, for the positionsof General Secretary, Project Accountant, Field Project Manager andDevelopment Field Supervisor, during the entire project implementation period(para. 8.1).

The Department of Agriculture and Livestock (DAL)

6.5 The Director of the Policy and Planning Division would beresponsible for coordinating the implementation of DAL's institutionalstrengthening component, and liaising with OPIC's General Secretary.

The Degartment of Environment and Conservation (DEC)

6.6 DEC would be responsible for implementing the environmentalprotection component. The Secretary, DEC, would appoint a ConservationProject Manager (national entomologist) at Popondetta who would be responsiblefor coordinating the implementation of the butterfly conservation componentand liaising with OPIC's Field Project Manager. The Conservation ProjectManager would report to the First Assistant Secretary at DEC Headquarters, whowould liaise with OPIC's General Secretary. The employment of theConservation Project Manager and the Principal Research Officer (para. 4.16),with qualifications, experience and terms of reference acceptable to the Bank,would be a condition of disbursement for the butterfly conservation component(para. 8.3).

6.7 The Bureau of Water Resources, which is responsible for theissuance of water use permits in PNG, would monitor HOPPL palm oil factoryeffluent treatment, to be upgraded under the project (para. 4.13).

Higaturu Transport Ptv Limited (HTPL)

6.8 HTPL, a wholly GOPNG-owned company was incorporated in 1980 with anauthorized share capital of K1.0 million, of which K600,000 is paid up. Thecompany was established for the purpose of transporting smallholder .FFB toHOPPL's oil palm factory under the existing oil palm scheme which started in1977. HTPL's operations are overseen by a Board of Directors consisting oftwo senior GOPNG officials (the Secretaries of DAL and DFP) and the ManagingDirector of HOPPL. The company is managed by HOPPL under a managementagreement with GOPNG and has a staff of 57, the majority of whom are driverswho operate the company's fleet of FFB haulage trucks and tractors. Under theexisting oil palm scheme, HTPL purchases, transports and sells smallholder FF3to HOPPL and assists in the recovery of smallholder credit under the scheme by

- 31 -

deducting and passing on to ABPNG, 30S of smallholders' monthly FFB salesincome for loan repayment. To carry out these responsibilities, HTPL has setup an elaborate computerized system for the maintenance of up-to-date andaccurate records of individual smallholder FFB sales and loan repaymentdeductions.

6.9 HTPL's income is derived from a transport charge (currently Kil perton of FFB transported) which is deducted from the price paid to smallholders.The transport charge is based on the amount of revenue required to guaranteeGOPN¢ an annual return of at least 5 percent on its investment. HTPL made aprofit and paid an annual dividend to GOPNG every year up to 1990. For thefirst time in 1991, however, HTPL made a net loss of K87,000 (US$91,000)following a reduction in the transport charge (to K9.0/ton of FFB) during theyear to mitigate the impact of low oil palm prices on smallholders incomes.In the five years, prior to 1991, HTPL made an average annual profit ofK83,000 (US$87,000) representing an average return of 8 percent return ontotal assets and of 10 percent on equity. HTPL has maintained a soundliquidity position with an average current ratio of 3.3 over the past fouryears. With reserves totaling K121,000 and no outstanding debt as of December31, 1991, HTPL is in excellent financial condition. HTPL's detailed actualand projected financial statements for the period 1989-2005 are presented inAnnex 11. The projections show continued strong liquidity and financialperformance with an average current ratio of 2.4, regular payment of dividendsto GOPNG and an average return on equity of 8 percent.

6.10 Under the proposed project, HTPL would be responsible for thepurchase, collection and transport of smallholder crop, procurement ofagricultural inputs required for the establishment of smallholder blocks andsmallholder input distribution, maintenance of smallholder loan accounts, andfor the collection of smallholder loan repayments. UTPL would keep detailedrecords of all expenditures and would submit these to OPIC at the end of eachmonth. Upon maturity of oil palm plantings, HTPL would ddduct 30 percent ofsmallholders' income from FFB sales to HOPPL and remit the funds to Governmentfor repayment of smallholder loans. Assurances were obtained duringnegotiations regarding HTPL's responsibilities (para. 8.1).

Higaturu Oil Palms Ptv Ltd (H0PPL=

6.11 HOPPL, a joint venture company between GOPNG and the CommonwealthDevelopment Corporation (CDC), was incorporated in 1976 and is owned equallyby GOPNG and CDC which provides management and technical services for a fee.The company owns plantations totalling 6,100 ha in Oro province consisting of5,000 ha oil palm in the Popondetta area and 1,100 ha of cocoa in the Kokodaarea and operates a palm oil factory for processing crop produced on its ownestates as well as crop produced by about 1,500 smallholders in the Popondettaarea. The capacity of the factory is adequate to process the additionalsmallholder crop which would be produced under the project. HOPPL would beresponsible for processing smallholder crop, marketing the oil palm produce,and supplying oil palm seedl.ngs to farmers through HTPL in collaboration withOPIC. A Smallholder Production Manager would provide coordination betweenHOPPL, HTPL and the OPIC extension team. HOPPL would also be responsible for

- 32 -

upgrading the effluent treatment plant of its palm oil factory (para. 4.13).

6.12 Except for 1989 and 1990 when it made losses of R1.0 million and K4,6 million respectively due to depressed world oil palm prices, HOPPL hadoperated profitably in the previous years. However, its profits have beenmodest as shown by a low average return on sales of only 9.9 percent over thefive year period ended December 1989. HOPPL's overall low profitability overthe years is attributable to declines in palm oil prices notably in 1986 and1989, drought conditions in 1987 which led to low FFB production and areduction in the factory throughput, foreign exchange losses, high interestexpenses on foreign currency borrowing raised to finance the palm oil factory,and high administrative costs due to a large complement of CDC secondedexpatriate management and technical staff. In order to ensure HOPPL'scontinued financial viability in the light of depressed palm oil prices, GOPNGand CDC have each agreed to provide HOPPL with additional equity of K2.5million. GOPNG's additional equity contribution will be released in twotranche of K1.0 million in 1992 and K1.5 million in 1993. To match GOPNG'scontribution, CDC has agreed to convert K2.5 million of its loans to HOPPLinto equity.

6.13 The additional equity will enhance HOPPL's financial condition. Itsdebt-equity ratio is projected to improve from 30:70 as of Dscember 31, 1991to well below 10:90 in 1996 when most of existing debt is expected to be paidoff. To reduce its administrative costs, which have averaged a high 18percent of average total assets over the past 3 years, HOPPL is progressivelyreplacing expatriate management and technical staff with local staff. As aresult, its administrative costs are projected to decline to an average ofabout 11 percent of average total assets over the next 14 years. After asmall loss of K125,000 projected in 1993 due to the low palm oil pricesforecast for the year, HOPPL's financial performance is expected to improvewith pre-tax profits increasing steadily from K2.3 million in 1994 to aroundK8.3 million in 2005, at a nominal average growth rate of 14 percent per annumrepresenting an average return of about 8.5 percent on average total assetsover the period. HOPPL's actual and projected financial statements (1989-2005) are presented in Annex 12.

6.14 The proposed project, which would provide additional crop from newsmallholder plantings and increased productivity from existing blocks, wouldcontribute to HOPPL's financial returns by increasing the factory throughput,thereby reducing per unit processing, overhead and marketing costs.

Other Implementing Baencles

6.15 The Department of Works (DOW) would be responsible for theconstruction of roads, bridges, DAL, OPIC and DEC offices and houses, andsocial infrastructure. DOW in Port Moresby would assist in the planning,design and preparation of tender documents. The provincial branch of DOWwould supervise the construction work. The Papua New Guinea Oil Palm ResearchAssociation (PNGOPRA) would be responsible for the implementation of theadaptive oil palm research program. The Division of Education and Division of

- 33 -

Health of Oro Province would provide staff to the social services facilitiesto be constructed or rehabilitated under the project.

monitorina. &Autiot and _tuxlLig

6.16 OPIC would be responsible for the overall monitoring and evaluationof project implementation, with DEC's assistance for the environmentalprotection component. Physical and financial progress of all projectcomponents would be measured on the basis of a detailed implementation planand quarterly progress reports prepared by OPIC's Field Project Manager withthe assistance of DEC Conservation Project Manager and DOW at Popondetta, andsubmitted to OPIC's General Secretary. Progress reports would also addressissues of quality and other performance indicators. Aggregated progressreports on all project components would be prepared by the OPIC's GeneralSecretary and submitted semi-annually to the Bank. For monitoring progress inbutterfly conservation activities, DEC would also prepare and submit to theBank annual detailed reports on the implementation of the conservationprogram. A Project Completion Report would be furnished to the Bank withinsix months of the loan closing date. The Bank's Supervision Plan is shown atAnnex 5.

Project Imleinentstion Schedule

6.17 The project would be implemented over a six year period, withdisbursements over seven years. Smallholder field development activities,DAL's institutional strengthening and butterfly conservatior. would startimmediately. Upgrading of the main road from Popondetta to Kokoda would becarried out in the second and third years. Some iumature plantings wouldcontinue to be maintained after completion of the project, and theirmaintenance to maturity would require additional 7inancing, estimated atUS$0.3 million. An assurance was obtained during negotiations that GOPNGwould make the required funds available to smallholders under the same termsand conditions as those applicable during the project implementation period.Armex 6 shows the implementation schedule for the project.

Status of Imnlementation

6.18 The oil palm extension team at Popondetta has started screening thelarge number of village farmers' applications for oil palm development. HOPPLhas begun to upgrade its palm oil factory effluent treatment plant. In 1991,DEC started butterfly conservation activities in Oro province. A preliminaryfield survey (financed by Conservation International) was carried out in mid-1991 to identify areas of potential importance for the conservation of thebutterfly, before the detailed mapping of the butterfly's habitat iscompleted. GOPNG introduced the revised smallholder FFB pricing formula onOctober 1, 1991 (para. 7.2). HOPPL has ordered oil palm seeds for the firstyear plantings.

- 34 -

VII. PROJECT BENEFITS AND JUSTIFICATION

Yields and Production

7.1 Average FFB yields from smallholders are expected to rise fromS tons/ha in year 3 to a peak of 19 tons/ha in year 7, thereafter declining to18 tons/ha in year 9, and 15 tons in year 13, down to 13 tons in year 20(Annex 8). It is expected that the palms would only be harvested for about17 years until they reach 20 years of age, when their height would makeharvesting difficult. Incremental smallholder FFB production is estimated topeak at about 118,000 tons in year 11, with an expected output of about 25,000tons of crude palm oil and about 6,000 tons of palm kernels.

Marketing and Pricing of Smallholder Produce

7.2 HOPPL would continue to make direct arrangements for the marketingof palm oil and palm kernels produced by its estates and smallholders.Smallholder FFB would be collected by HTPL in both project areas. GOPNGreviewed the smallholder pricing formula in 1991, with expert assistance andin consultation with oil palm estate companies which process smallholder crop,to ensure in particular that the interests of the smallholders and processorsare fairly balanced in times of low prices. The revised formula has beenapplied since October 1, 1991. An assurance was obtained during negotiationsthat DAL would regularly monitor the application of the formula (para. 8.1).Oil palm prices have been supported by stabilization funds in each projectarea, which aim at ensuring that smallholders receive a reasonable income whenpalm oil prices are low. These funds have operated well since theirinception, but because world prices are currently depressed, some of the fundsare currently exhausted. GOPNG is providing loans to the funds, derived fromthe European Community's STABEX scheme. The project's farm models use theWorld Bank's commodity price projections and the current FFB pricing formulaand do not assume the operation of a stabilization scheme.

Benefits and Poverty Alleviation lmpact

7.3 Smallholder Incomes. The main beneficiaries of the project wouldbe the 3,250 targeted smallholders in the Popondetta - Kokoda areas of OroProvince. Each participant would have a 2 ha oil palm block which would reacha peak production of about 38 tons of FFB for the 2 ha within 7 years ofplanting.

7.4 An analysis of financial costs and benefits indicates that theproposed investment in the development of new oil palm blocks would befinancially attractive to the beneficiaries. A typical smallholder wouldreceive a gross income at peak production (year 7) of about 1754/year (US$790)in 1992 constant terms. The annual outlay on fertilizers, agro-chemicals, andother production inputs would average K150, about 17 percent of revenue. Evenif the imputed cost of farmer's labor is included, total oper-sting costs wouldbe about 38 percent of oil palm revenue. The net cash family incomesestimated at an average of K380/year (US$400) in 1992 constant terms would be

- 35 -

above the level of rural incomes in Oro Province, estimated around K250/year.Based on these incomes and operating costs, the financial rate of return for a2 ha block is estimated at 20 percent (Annex 8).

7.5 Total credit requirements per family for the development of new 2ha blocks would amount to about K1,000 in current terms, including capitalizedinterest (at 8 percent p.a.) during the proposed 3 year grace period. Amaximum of 30 percent of the farmer's income from FFB sales would be deductedfor debt service. Smallholder repayments would average about K230 a year.Smallholder loans would be repaid over six years (year 4 through 9 of theproject). Cash flow projections indicate that family annual income and returnper man-day of family labor after debt service payments would average K615(US$645) and K12 (US$13) in current terms respectively over the seventeen yearproductive life of the oil palm plantings (Annex 9).

7.6 Incremental Production and Eiworts. The project would increasepalm oil and palm kernel production and exports by an average of 16,300 tonsand 3,800 tons respectively per annum and would generate about K75 million(US$78 million) in total incremental export revenues over the projectimplementation period.

7.7 Other Proiect Benefits. Other project benefits would include: (i)now health and education facilities, servicing communities of about 20,000people; (ii) improved access in the project area, through the upgrading of themain Popondetta to Kokoda road and construction of village roads; and (iii)the protection from extinction of the largest butterfly in the world and itsassociated ecosystem.

Economic Ana is

7.8 A combined economic rate of return (ERR) has been calculated forthe smallholder development, main road improvement, research components. Thebutterfly conservation and DAL institutional strengthening components havebeen excluded. The ERR is estimated at 12.4 percent, based on the followingassumptions:

(a) Conversion Factors: All economic costs are net of taxes and duties.International prices have been converted to Kina at the currentexchange rate. A standard conversion factor of 0.9 has been usedto convert local costs to border Kina as PNG has a relatively openeconomy and except for labor wages, it has few price distortions.Labor costs, however, are distorted. The current rural minimumwage rate of K3.75 per day is very high in relation to laborproductivity. It is estimated that the minimum wage rate is 30-40percent higher than the market wage rate. Accordingly, a factor of0.65 has been used to convert labor costs into economic prices.

(b) rojSct Period. The economic analysis covers a 20 year periodwhich is the estimated economic life of oil palm plantings thatwould be established under the project. The existing HOPPL palm

- 36 -

oil factory, which would process smallholders's production has beentreated as a sunk cost.

(c) Social Infrastructure and Main Road Imorovement. As the socialinfrastructure and Popondetta - Kokoda main road improvement areexpected to benefit project and non-project areas equally, only 50and 25 percent of the respective estimated costs have beenallocated to the project in calculating the ERR.

(d) IC St. As OPIC is responsible for the coordination ofthe country's four smallholder oil palm schemes, only 25 percent ofthe costs of OPIC strengthening have been allocated to the project.

Sensitivity Analysis

7.9 Sensitivity analysis was used to determine the project'ssensitivity to cost overruns, benefit reductions, and lags in benefit flows.Analysis of switching values based on a 10 percent discount rate, theopportunity cost of capital in PNG, shows that costs could increase up to 10percent without reducing the ERR below 10 percent. Sensitivity to changes inoil palm revenue is high. The ERR would fall to 10 percent if oil palmrevenues declined by 10 percent, or were delayed by one year (Annex 10).

Cost Recoegrv

7.10 Financing to be provided by GOPNG from its own funds and from theproceeds of the Bank loan amounts to US$33.4 million or 91 percent of theproject's total financing requirements. Smallholder oil palm establishmentcosts would amount to K4.3 million (US$4.5 million) of which Kl.l millionwould represent half of the planting materials provided to smallholders as agrant (para. 5.3). Only US$3.2 million -- representing the smallholdercredit package would be recovered directly. With the deduction of smallholderloan repayments at source (from sales of smallholder FFB to one processor),and based on experience with similar smallholder oil palm schemes in Asia, itis expected that GOPNG would recover about 70 percent of on-farm costs (bothgrant and credit). Recovery of smallholder oil palm establishment costs hasalso been estimated on the basis of a cost recovery index which measures thenet present value (assuming an opportunity cost of capital of 10 percent) offorecast recoveries in constant terms, as a percentage of the net presentvalue of on-farm costs (both grant and credit). The key assumption incalculating the index is the repayment rate for the credit component of on-farm costs. Experience shows that for oil palm schemes, a repayment rate ofup to 90 percent is achievable. Based on these assumptions, the cost recoverylndex for on-farm costs (both grant and credit) would be about 60 percent andabout 90 percent for the credit component.

Social and Environmental Impact

7.11 Povertv Orientation of the Prolect. The proposed project wouldbenefit about 3,250 poor smallholder families.

- 37 -

7.12 Datole ogl Women. Women are lnvolved in oil palm cultivation asan integral part of the family unit, and are responslble for food cropproduction in Oro Province. Women in the project area generally have somecontrol on how the family income is spent, and therefore would benefit fromthe lncreased family income brought by additional dll palm. Afterconsultations with women in the project area during preparation, specificprovisions have been made under the project for: (i) onsuring that land wouldremain available and readily accessible for food production (par"s. 4.5-4.7);(ii) improved rural health and education facilities (para. 4.10); and (iii)under the conservation program, staff and facilities to identify and developfurther economic opportunities for women (Annex 13).

7.13 ItL z.gn J ..L_ugJ Mt. The project is expected to have an overallpositive environmental impact. Present high water pollution levels would bereduced in the densely populated area around Popondetta through the upgradingof the effluent treatment plant of the HOPPL palm oil factory. The world'smost notable endangered species of butterfly, the Queen Alexandra birdwing,vould be protected from possible extinction through the promotion ofconservation areas. Tree cover would be provided through the establishment ofoil palm over large, degraded grassland areas, formerly covered with forest,and would prevent burning, restore soil fertility and control erosion. Theclearing of degraded bushland and secondary forest would be done using chainsaws to minimize soil disturbance and prevent soil erosion. Finally,herbicides would be used in small quantities in the grassland areas by trainedpersonnel and would have no signiflcant adverse environmental effects.

7.14 The proposed project has been designed to build on existinginfrastructure and services and no special agricultural risks have beenidentified. Effluent treatment would use an established technology and wouldbe regularly monitored by DEC. The primary financial risk is that declines ininternational commodity prices below projected levels would result in poorfinancial returns to smallholders, inhibiting harvesting, and to the estatecompany, jeopardizing its ability to process the crop profitably. Related tothe financial risk, is possible slippage of offsetting macro policyimplementation. Such slippage is a significant possibility as regards wagepolicy and competitiveness, especially during the coming years of rapiddevelopment of the country's mineral wealth. However, PNG has assembled asolid track record of macroeconomic stability since Independence, reinforcedby its adjustment performance slnce 1989. Other potential risks would be:(a) poor field maintenance, low yields and even abandonment by the non-traditional oil palm farmers. This risk would be minimized by selection ofvillage farmers, technical assistance and supervision by OPIC extension teamsupported under the project; (b) the farmers would continue to practiceshifting cultivation on forest land identified as important for theconservation of the endangered species of butterfly and its associatedecosystem. This would be addressed by promoting permanent conservation areasthat would remain under traditional land ownership, but be subject to a ban onforest clearance; and (c) project implementation may suffer from politicaldifficulties and civil unrest, which affect various regions of the country

* 38 -

from time to time. This risk would be mitigated by having the provincialauthorities represented on the projoct's Provincial Coordination Committee,and by the inclusion of a significant social infrastructure component,deslgned after consultations with the farmers during project preparation.

VIII. ARRE 2SM REACHE AND R 2MMEDATi

hAurances

8.1 The following assurances were obtained from GOPN6 duringnegotiations and incorporated into the Loan Agreement:

(a) HTPL would enter into agreements with existing smallholders todeduct and maintain in individual escrow accounts, about K10 fromtheir monthly FFB sales income until sufficient funds have beenaccumulated to finance the oil palm block maintenance for thefollowing year (para. 4.11);

(b) HOPPL would: (i) upgrade its effluent treatment facilities at itspalm oil factory not later than December 31, 1994 (para. 4.13); and(ii) establish an environmentally adequate landfill for thedisposal of its non-biodegradable solid waste in a location awayfrom water courses not later than December 31, 1993 (para. 4.14);

(c) GOPNG would provide half the required oil palm planting materialsto smallholders on a grant basis (para. 5.3);

(d) DAL, DEC, DOW, OPIC and PNGOPRA would maintain separate projectaccounts; OIDA would submit to the Bank, within six months of theend of GOPNG's fiscal year: (i) audit reports of project accountscovering DAL, DEC, DOW, OPIC and PNGOPRA project expenditures andincluding separate schedules of expenditures claimed under SOEprocedures, and (ii) audit reports of the Special Account; theproject accounts would be audited by independent auditorsacceptable to the Bank; OPIC and PNGOPRA would submit to the Bank,within six months ,of the end of their respective fiscal years,their financial statements audited by independent auditorsacceptable to the Bank (para. 5.19);

(e) the positions of OPIC's General Secretary, Project Accountant,Field Project Manager and Development Field Supervisor would remainfilled until completion of the project by staff with qualificationsexperience and terms of reference acceptable to the Bank; and OPICwould appoint a Development Field Supervisor not later thanDecember 31, 1993 (para. 6.4);

- 39 -

(f) HTPL would purchase and transport smallholder crop, procureagricultural inputs required for the establisbment of smallholderblocks, and collect smallholder loan repayments (para. 6.10);

(g) GOPNG would make funds (US$0.3 million equivalent) available tosmallholders for the maintenance of plantings after completion ofthe project until they reach maturity; the funds would be lent tosmallholders under the same terms and conditions as thoseapplicable during the project implementation period (para. 6.17);and

(h) DAL would regularly monitor the application of the smallholder mFBpricing formula (para. 7.2).

Conditions of Loan Effectiveness

8.2 The following would be conditions of loan effectiveness:

(a) signature of the Subsidiary Agreement between GOPNG and OPIC,satisfactory to the Bank, regarding the financing of OPIC's projectrelated activities (para. 4.8);

(b) signature of the Financial Management Agreement between GOPNG andHTPL, satisfactory to the Bank, regarding smallholder creditarrangements (para. 5.4);

(c) establishment of the National Oro Project Nanagement Committee andProvincial Oro Project Coordination Committee and holding of theirinitial meetings (para. 6.2); and

(d) appointment of OPIC's General Secretary, Project Accountant andField Project Manager, with qualifications, experience and terms ofreference acceptable to the Bank (para. 6.4).

Conditions of Disbursement

8.3 The following would be conditions of disbursement:

(a) for the butterfly conservation component, employment of theConservation Project Manager and the Principal Research Officer,with qualifications, experience and terms of reference acceptableto the Bank (para. 4.16); and

(b) for the research support component: (a) signature of the SubsidiaryAgreement between GOPN¢ and PN¢OPRA, satisfactory to the Bank,regarding the financing of PEGOPRA's project related activities ;and, (b) HOPPL should be current with payments (with not more thantwo months outstanding) of all research cess to PNGOPRA (para.4.21).

- 40 -

8.4 Wlth the above assurances and conditions, the project would besuitable for a Bank loan of US$27 million equivalent for a term of 20 years,including a 5 year grace period, at the Bank's standard variable interestrate. The Borrower would be the Independent State of Papua New Guinea.

PAPUA KU E UINEAORO SNALLUOLDER OIL PALN DEVELOPHENT PROJECT

Project Cost SuIary a/KINA USt X Total............................. ...........................- X Foreton Base

Local Foreign Total Local foreign Total Exchange Costs

A. So ofl Palm Dewltpt 4S13.4 t316.2 5829.6 4736.0 1381.1 6117.1 22.6 21.3B. Extensmon Service.

1. Extension Staff 1223.1 0.0 1223.1 1283.4 0.0 1283.4 0.0 4.52. Extensmin Infrastructure 500.2 U81.3 981.4 524.8 S05.0 1029.8 49.0 3.63. Ext Veh./Eqifp./Trafnfng 248.7 653.8 902.5 261.0 6t6.0 947.0 72.4 3.3.............................. ............................................. ...................... ........................0..........

SUb-Totat 1972.0 1135.0 3107.0 2069.2 1191.0 3260.3 36.5 11.3C. Asricultural Roads1. Access Roads 755.2 2017.7 2773.0 792.5 2117.3 2909.8 72.8 10.12. Harvesting Roads 1828.6 5136.1 6964.7 1918.8 5389.4 7308.2 73.7 25.4~~~~~~~~~~~~~~~... . _............................... .. ..............

Sub-Totat 2583.9 7153.9 9737.7 2711.3 70.7 10218.0 73.5 35.60. Social Infrastructure1. Education 606.0 623.0 1229.0 635.9 653.7 1289.6 50.7 4.52. Nealth & Security 50.7 47.3 98.0 53.2 49.6 102.8 48.3 0.4

80b-Totat 656.7 670.3 1327.0 689.1 703.4 1392.4 50.5 4.8E. Main Road lqxo nnnen 5147.5 922.5 1470.0 574.5 968.0 1542.5 62.8 5.4F. Institutionat Strength.1. DAL Strengthening 1481.1 335.0 1816.1 1554.2 351.5 1905.7 18.4 6.62. Research Support 326.4 161.1 487.5 342.5 169.1 511.5 33.1 1.83. OPIC Strengthening 665.0 555.O 1220.0 697.8 582.4 1280.2 45.5 4.5

................. ....................................... ........................... ....................

Sub-Total 2472.5 1051.1 3523.6 2594.5 1103.0 3697.4 29.8 12.9G. Envilromntat Protection1. Butterfly Conservation 1157.1 744.8 1901.8 1214.1 781.5 1995.6 39.2 6.9R. Technicat Assistance 30.0 270.0 300.0 31.5 283.3 314.8 90.0 1.11. Studies 0.0 193.4 193.4 0.0 202.9 202.9 100.0 0.7

................... .................................... ........................... ....................

Totat BASELINE COSTS 13933.0 13457.2 27390.2 14620.2 14120.8 28741.0 49.1 100.0Physical Contingencies 488.9 916.6. 1405.5 513.0 961.8 1474.9 65.2 5.1Price Contingencies 3579.7 2192.1 57m.7 3756.2 2300.2 6056.4 38.0 21.1

Total PROJECTS COSTS 18001.6 16565.9 34567.5 18889.4 17382.9 36272.3 47.9 126.2

Values Sealed by 1000.0 - 4/25/1992 8:48

a/ excluding interest during construction

I.

PAM M GUINEAMDO SALLNOLSER OIL PALK EVELOPUENT PROJECT

KIMA

Project ceqxwments by Year a/

Base costs Total..........................................................................

1993 1994 199f 1996 199? 1990 9INA US$A. SH Olt Pats Devetcpt 295.2 626.3 1040.3 1374.8 1353.? 1139.2 529.6 6117.1B. Extension services1. Extension Staff 66.4 152.0 196.7 248.1 280.0 280.0 1223.1 1283.42. Extensfon Infratructure 116.5 346.0 236.4 237.8 24.8 t9.8 981.4 1029.83. Ext Veh./Equfp./Training 134.5 271.5 86.5 151.7 166.3 91.9 902.5 947.0

Sdbrtotat 317.4 769.6 519.6 7.6 471.1 391.7 3107.0 3260.3C. Agriculturat Roads1. Access Roads 150.0 627.7 638.9 675.2 387.4 293.7 2M.0 2909.82. Narvestftn Roads 495.0 917.5 1347.1 1684.7 1397.8 1122.7 6964.7 738.2

........... ;:............................................................

Sub total 645.0 1545.2 1986.0 2359.9 1785.2 1416.4 9737.7 10218.00. Sociat Infrastructure1. Education 484.0 426.0 32.0 227.0 30.0 30.0 1229.0 1289.62. Heatth & Security 60.0 8.0 8.0 9.0 6.5 6.5 98.0 102.8

........................................................................

S.b totat 544.0 434.0 40.0 236.0 36.5 36.5 1327.0 1392.4E. Hain Road luprovement 120.0 570.0 420.0 120.0 120.0 120.0 1470.0 1542.5F. Institutfonmt Strength.1. DAL Strengthening 466.7 426.8 431.8 163.6 163.6 163.6 1816.1 1905.72. Reserch Sdqzport 146.5 63.0 63.0 89.0 63.0 63.0 487.5 511.53. OPIC Strenathening 220.0 200.0 200.0 200.0 200.0 200.0 1220.0 1280.2

Sibtotal 833.2 689.8 694.8 452.6 426.6 426.6 3523.6 3697.4G. E,vircomuetal Protectien1. Butterfly Conservation 554.9 382.4 277.0 229.4 230.9 227.0 1901.8 1995.6

H. Technical Assistance 50.0 50.0 50.0 50.0 50.0 50.0 300.0 314.81. Studies 0.0 0.0 0.0 193.4 0.0 0.0 193.4 202.9Total BASELINE COSTS 3359.8 5067.3 5027.7 5653.8 4474.0 3807.5 27390.2 28741.0

Physical Contingencfes 161.1 294.1 282.1 294.7 212.3 161.2 1405.5 1474.9Price Contingencies 243.8 623.7 896.7 1281.9 1332.4 1393.3 5m.7 6056.4

..........................................................................

Total PROJECT COST# 3764.7 5985.2 6206.6 7230.3 6018.7 5362.0 34567.5 36272.3

Taxes 127.8 194.3 182.9 221.2 167.7 144.3 1038.4 1089.6Foreign Exchange 1893.0 3184.5 3090.6 3627.3 2656.2 2114.3 16565.9 17382.9......... .................. .... ..... ................ ....... ,_

Vatues scated by 1000.0 4/2511992 8:43

a/ excluding Interest during construction

&14

PAPUA NEW GUINEAMR0 SWALLUIOER OIL PALN DEVELOPMENT PROJECT

Projects CoMponents by Yeer a/

totals Including Contingencies Totals Includtig ContingenciesKINA USS

1993 1994. 1995 1996 1997 1998 Total 1993 1994 l995 1996 1997 1998 Total

A. SN Oil Palm Dvelept 317.8 708.6 1237.2 1718.8 1780.8 1577.4 7340.5 333.5 743.5 1298.2 1803.6 1868.7 1655.2 7702.6

B. Extensmin Services1. Extension Staff 72.5 174.9 238.4 316.9 376.6 397.3 1t76.7 76.0 183.6 250.2 332.6 395.2 416.9 1654.5

2. Extension tnfrastructure 130.8 406.3 290.5 305.7 33.7 28.2 1195.3 137.3 426.4 304.8 320.8 35.4 29.6 1254.3

3. Ext Veb./Equlip./Training 150.4 31s.2 106.8 192.3 218.7 128.7 1112.1 157.8 330.7 112.1 201.8 229.5 135.1 1167.0

Suk-total 353.7 896.5 655.7 815.0 429.0 554.3 3884.2 371. 940.7 667.1 855.2 660.0 58l.6 4075.7

C. Agricultural Roads1. Access Roads 175.3 763.4 808.6 889.4 530.0 416.4 3583.2 183.9 801.1 848.5 933.2 556.1 437.0 375s.9

2. Marvestin9 Roads 578.4 1115.7 1705.0 2219.7 1916.7 1600.1 9135.5 606.9 1170.? 1789.1 2329.1 2011.2 1679.0 9S86.0

Sib-Total 753.7 1879.1 2513.6 3109.1 2446.6 2016.5 12718.6 790.9 1971.8 2637.6 3262.4 2567.3 2116.0 13345.9

D. Social Infrastructure1. EdLaction S543.2 499.8 39.3 291.4 40.7 42.7 1457.1 s70.0 524.5 41.2 385.8 42.7 44.8 1529.0

2. mealtb a Security 67.4 9.4 9.8 11.7 8.8 9.2 116.3 70.7 9.9 10.3 12.2 9.3 9.7 122.0

Sub-Total 610.6 s09.2 49.1 303.1 49.5 51.9 S573.4 640.7 534.3 51.5 318.0 52.0 54.5 101.0 £

E. Main Road lpqveobnt 134.8 688.3 527.3 154.1 161.2 168.7 1834.4 141.4 722.3 553.3 161.7 169.2 177.0 1924.9

f. Institutional Strength.1. MIt Strengthening 521.9 501.2 532.7 218.1 230.0 242.5 2246.5 547.7 525.9 559.0 228.9 241.4 254.5 2357.3

2. Research Suqport 161.3 73.9 77.7 113.9 86.0 90.5 603.4 169.3 77.5 81.6 119.5 90.3 95.0 633.2

3. ePlc stremgthenirng 239.2 227.2 237.9 249.2 261.0 273.3 1487.8 251.0 238.4 249.7 261.5 273.8 286.8 1561.2

Sutrtotal 922.5 802.3 848.3 581.2 577.0 606.4 4337.8 968.0 841.9 890.2 609.9 605.5 636.3 4551.7

6. Envsrom ental Protection1. utterfly Conservation 618.9 446.4 338.5 296.7 313.3 323.6 2337.5 649.4 468.4 355.2 311.4 328.8 339.6 2152.8

S. technicat Assistance 52.8 54.8 56.8 58.9 61.1 63.3 347.7 55.4 St.S 59.6 61.8 64.1 66.5 364.8

1. Studies 0.0 0.0 0.0 193.4 0.0 0.0 193.4 0.0 0.0 0.0 202.9 0.0 0.0 202.9

Total PRWECTS COSTS 3764.7 596.2 6206.6 7230.3 6018.7 5362.0 34567.5 3950.4 80.3 012.7 758.9 615.5 5626.4 362723

Values Scaled by 1000.0 4/25/1992 8:42

8/ excluding interest during construction

I.1

- 44 -AN '1

PAPUA NEW GUINEA Table 4ORO SMALLHODER OIL PALM DEVELOPHENT PROJECT

Sumcary Accounts Cost Sumiary aI

KINA U.............................. .............................................................

Local Foreign Total Local Foreign Total,............... ...........................

1. INVESTMENT COSTS................... ....................

A. Civil Works1. Bultdings 1164.5 1164.5 2329.0 1221.9 1221.9 2443.92. Roads 2472.5 7417.5 9890.0 2594.4 7783.3 10377.8

.............. ;.. . .... ...................................... ...........................

Sub-Total 3637.0 8582.0 12219.0 3816.4 9005.2 12821.6B. Equipment

1. Vehicles 0.0 481.3 481.3 0.0 505.0 505.02. Equipment 103.8 267.4 371.2 108.9 280.6 389.5

.................... ........ :. ....... .............................. ...............

Sub-Total 103.8 748.7 852.5 108.9 785.6 894.5C. SH Fleld Development

1. SH Own Labour 2539.1 0.0 2539.1 2664.3 0.0 2664.32. SH Credit 1974.3 1316.2 3290.4 2071.6 1381.1 3452.7

...... .................. ................. ...........................

Sub-Total 4513.4 1316.2 5829.6 4736.0 1381.1 6117.10. Technical Assistance 30.0 270.0 300.0 31.5 283.3 314.8E. Training , 44.8 30.0 74.8 47.0 31.5 78.5F. Studies 0.0 193.4 193.4 0.0 202.9 202.9

................... ........................................... ...........................

Total INVESTMENT COSTS 8329.0 11140.2 19469.3 8739.8 11689.7 20429.4.............................. .............................................................

11. RECURRENT COSTS

A. Staffing1. Extension Staff 1223.1 0.0 1223.1 1283.4 0.0 1283.42. Other staff 1262.6 0.0 1262.6 1324.9 0.0 1324.93. Other staff (ols) 882.3 882.3 1764.5 925.8 925.8 1851.5

....................... .... .......................................... ...................

Sub-Total 3368.0 882.3 4250.3 3534.1 925.8 4459.9S. ON

1. ON Vehicles 267.0 511.9 778.9 280.1 537.2 817.32. ON Equipment 10.5 10.5 21.0 11.0 11.0 22.03. ON Civil Works 144.7 103.4 248.0 151.8 108.5 260.34. an Roads 658.9 658.9 1317.7 691.4 691.4 1382.7

Sub-Total 1081.0 1284.7 2365.7 1134.3 1348.0 2482.3C. Operational Expenses

1. Office consunables 477.0 150.0 627.0 500.5 157.4 657.92. Travel expenses 678.0 0.0 678.0 711.4 0.0 711.4

.............................. .............................................................

Sub-Total 1155.0 150.0 1305.0 1212.0 157.4 1369.4.............................. .............................................................

Total RECURRENT COSTS 5604.0 2316.9 7920.9 5880.4 2431.2 8311.6.... i;;. ............. ... ............................... Zi ........ ...............

Total BASELINE COSTS 13933.0 13457.2 27390.2 14620.2 14120.8 28741.0Physical Contingencies 488.9 916.6 1405.5 513.0 961.8 1474.9Price Contingencies 3579.7 2192.1 5771.7 3756.2 2300.2 6056.4

.............................. .............................................................

Total PROJECTS COSTS 18001.6 16565.9 34567.5 18889.4 17382.9 36272.3

.............. _., .. _............. ............. ..... ......... __

Values Scaled by 1000.0 - 4/25/199 8:51

a/ excluding during construction

- 45- ~ANNEX 1Table 5

PAPUA NEW GUINEA Page 1 of 2CRO SKALLNOWER OIL PAL DEVRLOPHENT ROJECT

Suamary Accounts by Year a/

Totals Including ContingenciesKINA

1993 1994 199 1996 1997 1998 TotaluuuuuEaumsuauuuuasuwarau-auinuuaaauuuan=uauuuug-uuuua:

1. INVESTMENT COSTS

A. .Civl Works.....I. Bultdings 926.S 992.3 315.6 516.4 0.0 0.0 2750.82. Roads 753.7 2413.4 2846.8 3016.7 2262.3 1539.4 12832.3

_Wawa==*= ansU Uw WaaSU a wuUua

Sub-Total 1680.2 3405.7 3162.5 3533.0 2262.3 1539.4 15583.2

S. Equipment1. Vehictes 110.9 162.4 14.3 91.0 110.3 19.2 568.12. Equipment 218.7 118.0 8.2 61.7 15.2 6.7 428.4

suuuuuuuuuuauu wausu U= uu 8Sub-Total 389.6 280.4 22.5 152.7 125.5 25.9 996.5

C. SH Fteld Development1. SN Oun Labour 109.8 277.0 520.3 748.S 836.5 784.2 3276.22. SN Credit 208.0 431.5 716.9 970.3 944.4 793.2 4064.3

Sub-Total 317.8 708.6 1237.2 1718.8 1780.8 1577.4 7340.5

0. Technical Assistance 52.8 54.8 56.8 58.9 61.1 63.3 347.7E. Trainfng 41.0 12.8 13.5 9.2 7.4 7.8 91.8F. Studies 0.0 0.0 0.0 193.4 0.0 0.0 193.4

................ i:.......i........................................

Total INVESTMENT COSTS 2481.3 4462.3 4492.5 5666.1 4237.1 3213.8 24553.0

31. RECURRENT COSTS;......'I...g.........A. Staffing1. ExtensIon Staff 72.s 174.9 238.4 316.9 376.6 397.3 1576.72. Other staff 221.6 242.0 255.4 269.4 284.2 299.9 1572.53. Other staff (of1) 436.8 462.5 489.8 214.4 224.4 234.8 2062.7

- wagmuU u .i uUlainau-21sUu naa

Sub-Total 730.8 879.5 983.6 800.8 885.2 932.0 5211.9

B. ON1. ON Vehicles 103.5 146.6 162.7 177.5 190.6 198.9 979.92. ON Equipment 3.9 4.1 4.3 4.5 4.7 4.9 26.53. ON Civil Uorks 7.1 19.2 33.0 85.6 93.1 90.5 328.64. ON Roads 134.8 154.1 194.1 246.5 345.6 645.7 1720.7

____ w _~~~~aua_-muuuauaa= amuaauaamuu

Sub-Total 249.3 324.0 394.1 514.2 634.0 940.0 3055.6

C. Operational Expenses1. Office consxmbles 168.5 177.2 186.4 91.1 95.5 100.1 818.92. Trael expenses 134.7 142.2 150.0 158.2 166.9 176.1 928.1

Sub-Total 303.3 319.4 336.4 249.3 262.4 276.2 1747.0

.. .,,,,..................................

Total RECURRENT COSTS 1283.4 1522.9 1714.1 1564.3 1781.6 2148.2 10014.5_ _n_ ua =UauuufumuuuumuSSSU

Total PROJECT COSTS 3764.7 5985.2 6206.6 7230.3 6018.7 5362.0 34567.5

..................... ............................................... _.............

Values Scated by 1000.0 4/25/1992 8:54

a/ excluding interest during construction

- 46 - ANNEX 1

Table 5PAPUA NEW GUINEA Page 2 of 2

ORO SMALLNOLDER OIL PALM DEVELOPMENT PROJECTSumary Accounts by Year a /

Totals Including ContingenciesUS$

................................................................1993 1994 1995 1996 1997 1998 Total

uuu----fn=uuuuau*-nuaa--uuauu-nw-----usf----na-muu---------u-

1. INVESTMENT COSTS....................

A. Civil Porks1. Uultdings 972.2 1041.3 331.2 541.9 0.0 0.0 2886.52. Roads r90.9 2532.4 2987.2 3165.4 2373.9 1615.4 13465.2

Sub-Totat 1763.0 3573.7 3318.5 3707.3 2373.9 1615.4 16351.7

8. Equipment1. Vehicles 179.3 170.4 15.0 95.5 115.7 20.1 596.12. Equipment 229.5 123.8 8.6 64.7 15.9 7.1 449.6

UU33UUuUuUUUu3umuuuuUU3=UgUZCUCSWUuuuUuuXSguuuuuuuuuu-g

Sub-Total 408.8 294.2 23.6 160.2 131.7 27.2 1045.6

C. SH Field Development1. SH Own Labour 115.2 290.7 546.0 785.4 877.7 822.9 3437.82. SO Credit 218.3 452.8 752.2 1018.2 991.0 832.3 4264.8

Sub-Total 333.5 743.5 1298.2 1803.6 1868.7 1655.2 7702.6

0. Technical Assistance 55.4 57.5 59.6 61.8 64.1 66.5 364.8E. Training 43.0 13.5 14.2 9.7 7.8 8.2 96.3F. Studies 0.0 0.0 0.0 202.9 0.0 0.0 202.9

=i;;iT***i; ^*K . ..............................................

Total INVESTMENT COSTS 2603.7 482.3 4714.0 5945.5 4446.1 3372.3 25763.9

11. RECURRENT COSTS.......... n,g,.........A. Staffing

1. Extension Staff 76.0 183.6 250.2 332.6 395.2 416.9 1654.52. Other staff 232.5 254.0 268.0 282.7 298.2 314.6 1650.03. other staff (o/s) 458.3 485.3 513.9 225.0 235.4 246.4 2164.4

=--=w=E- 'u-m" As =sUa-- US 3*-gg:uuUUUUUUUUzuUuuUuUUSub-Total 766.8 922.9 1032.1 840.3 928.9 977.9 5468.9

S. ON1. ON Vehicles 108.6 153.8 170.8 186.3 200.0 208.7 1028.22. ON Equipment 4.1 4.3 4.5 4.7 4.9 5.2 27.83. ON Civil Works 7.5 20.2 34.6 89.9 97.7 94.9 344.84. ON Roads 141.4 161.7 203.6 258.7 362.6 677.6 1805.5

a#aJa"waaasWesau= Mu= wammu zw=

Sub-Total 261.6 340.0 413.5 539.5 665.2 986.4 3206.3

C. Operational Expenses1. Office cansmumbtes 176.8 186.0 195.6 95.6 100.2 105.1 859.32. Travel expenses 141.4 149.2 157.4 166.0 175.2 184.8 973.9

Sub-Total 318.2 335.2 353.0 261.6 275.4 289.8 1833.2

....... Y.........................i..........;......................

Total RECURRENT COSTS 1346.7 1598.0 1798.6 1641.4 1869.4 2254.1 10508.3=I St UUZ UUUU U U U U = U U U U U U

Total PROJECT COSTS 3950.4 6280.3 6512.7 7586.9 6315.5 5626.4 36272.3

................................................................................................

Values Scaled by 1000.0 4/25/1992 8655

a/ excluding interest during construction

PAPUA NEW WIU#ACRO SIALLHOLOER OIL PALK DEVELOtPEUT PROECT

Finwncing Plan by Project Ca4vnents ausS

Iorid a" Cwoerrent Farsi Totat LocalF........ for. (Exct. Outies

Amoust X buoaa~t X AnSmt X Ainoumt X Exch. Taxes) & Tax.

A. SR Ol P.ati evelopt 4094.2 53.2 170.6 2.2 3437.8 44.6 7702.6 21.2 1627.9 5904.1 170.6S. Extension Staff 1071.3 64.8 583.1 35.2 0.0 0.0 1654.5 4.6 0.0 1654.5 0.0C. Extensfon Infrastructure 1011.9 80.7 242.4 19.3 0.0 0.0 7254.3 3.5 597.0 607.2 50.20. Ext Veh./Equip./Trainlng 957.9 82.1 209.1 17.9 0.0 0.0 1167.0 3.2 823.5 290.4 53.0E. Access Roads 3233.2 86.0 526.7 14.0 0.0 0.0 3759.9 10.4 2684.1 92S.3 1S0.4f. Iarvesting Roads 8442.2 88.1 1143.8 11.9 0.0 0.0 9586.0 26.4 6938.1 2264.5 383.4S. Edkcatfon 1256.4 82.2 272.5 17.8 0.0 0.0 1529.0 4.2 756.0 702.4 70.5H. leatth & Security 65.0 S3.3 57.0 46.7 0.0 0.0 122.0 0.3 57.1 59.8 5.1I. Main toad Improvement 1544.5 80.2 380.4 19.8 0.0 0.0 1924.9 5.3 1181.3 666.6 77.0J. DAL StretntheinsA 1786.1 75.8 571.2 24.2 0.0 0.0 2357.3 6.5 391.3 1929.9 36.1K. Research Sqport 407.5 64.4 225.7 35.6 0.0 0.0 633.2 1.7 198.1 424.2 10.9L. OPIC Strandwonfgq 1070.6 68.6 490.6 31.4 0.0 0.0 1561.2 4.3 675.9 873.2 12.1M. Butterfty Conservatfon 1729.0 70.5 723.8 29.5 0.0 * 0.0 2452.8 6.8 921.2 1497.7 33.8M. Technical Assistance 328.3 90.0 36.S 10.0 0.0 0.0 364.8 1.0 325.3 0.0 36.S0. Studies 0.0 0.0 202.9 100.0 0.0 0.0 202.9 0.6 202.9 0.0 0.0 I

.................... ; ..... ............................................................................. _. ..... ... ... .XTotal Dlsbursement 26998.1 74.4 5836.4 16.1 3437.8 9.5 36272.3 100.0 17S82.9 177M9.9 1089.6 '4_ _ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~IVaues Secaled by 1000.0 4/2511992 dn46

a/ excluding interest durlng construction

IF.

PAPUA EVWUINUR00 SlULLtR OIL PALN OVLOPHT PROJECT

Flimacing Plan by ODsldrment Category a/USt

World B3nk Govenmnt Fsrmrs Total LocalFor. (ExSc. Outies

Macmt X Anawit I bAmowt X Amount X Exch. Taus) & Tax.

A. SN OW Labour 0.0 0.0 0.0 0.0 3437.8 100.0 3437.8 9.5 0.0 3437.8 0.0B. SN Credit 4094.2 96.0 170.6 4.0 0.0 0.0 4264.8 11.8 1627.9 2466.3 170.6C. Vehicles 596.1 100.0 0.0 0.0 0.0 0.0 596.1 1.6 596. 0.0 0.00. Eqai- 382.1 85.0 67.4 15.0 0.0 0.0 449.6 1.2 322.3 59.8 67.4E. Cll sufldings 2581.2 90.0 286.8 10.0 0.0 0.0 2868.0 7.9 1402.5 1350.8 114.7f. D_t1c Training 96.3 100.0 0.0 0.0 0.0 0.0 96.3 0.3 33.2 63.1 0.0C. Tednical Assistance 328.3 90.0 36.5 10.0 0.0 0.0 364.8 1.0 328.3 0.0 36.SH. Of Vehles/Equpimt 725.6 68.7 330.3 31.3 0.0 0.0 1056.0 2.9 670.6 366.6 18.71. ON Civfl Works 0.0 0.0 336.3 100.0 0.0 0.0 336.3 0.9 133.3 189.6 13.5J. 0811 C Security 0.0 0.0 26.9 100.0 0.0 0.0 26.9 0.1 12.3 13.6 1.1K. ON Roads 1101.2 61.0 701.3 39.0 0.0 0.0 1805.5 5.0 866.0 867.3 72.2L. cm Roads 12118.7 90.0 1346.S 10.0 0.0 0.0 13465.2 37.1 9937.5 2989.1 538.6N. Stff Salaries 3866.2 70.7 1602.7 29.3 0.0 0.0 5468.9 15.1 1049.4 4419.5 0.0N. Office Comables 0.0 0.0 432.7 100.0 0.0 0.0 432.7 1.2 200.6 214.8 17.30. Treal Expses 681.6 70.0 292.3 30.0 0.0 0.0 973.9 2.7 0.0 934.9 39.0P. Mouse Rentats 426.6 100.0 0.0 0.0 0.0 0.0 426.6 1.2 0.0 426.6 0.00. Studles 0.0 0.0 202.9 100.0 0.0 0.0 202.9 0.6 202.9 0.0 0.0.,,,, , * .... ...... . ................. .. . .... ..... . ......................

Total Disbursent 26996.1 74.4 516.4 16.t 347.8 9.5 36272.3 100.0 17382.9 17799.9 1089.6.......................... ....................................................... ..... ........ ............. ...................... ... ................. ............. Valtm Sealed by 1000.0 4/25/1992 8:46

aI excludlg Interest during construction

SlE

- 49 -

PAPUA ME GUINEA010 SIIALIODER OIL PhI DVEYLO?NKNT PROJECT

EstLmate Schedule of Disbursements(US$ million)

Projected Disburseaents Profile (%)lank Fiscal ------------------------------ ----------------

Year Semester Incremental Cumulative % PIG 1/ Region 2/

FY93 Second 0.3 0.5 1 1 0

Y94 First 1.5 1.8 7 3 3Second 1.7 3.5 13 7 6

FY95 First 2.7 6.2 23 12 10Second 2.7 8.9 33 21 18

FY96 First 2.5 11.4 42 30 26Second 2.6 14.0 52 39 34

FY97 First 2.8 16.8 62 47 42Second 2.8 19.6 73 57 50

FY98 First 2.3 21.9 81 67 58Second 2.2 24.1 89 77 66

FY99 First 1.5 25.6 95 86 78Second 1.0 26.6 99 94 86

FY2000 First 0.4 27.0 100 98 94

....... .. ...... .... ................... ...... ................ .............................. .....

1/ Agricultural projects La PFG2/ Agricultural projects In Asia

PAPUA NEW GUINEAORO SMALLHOLDER OIL PALM DEVELOPMENT PROJECT

Organizatlon Chart

R & IM PL E L D iDA

General Secretary(Project Manager)

I I 1/~~~~~~

Director General MaagrDirector Senior SenorDlrector MnManager Pi Offier asaerl ger

1/ 1 ~~~~~~~~Dpfvts~ I / Oficr ffce

Field Project

Manager 2_ - r 1--a

S ~~~ ___ __ I I

Research HopPL H Provincial ConservationStaff 2/r StaftTaP Manager Project~~~~2/ 2tar 2/ 2/ manager 2/

Oil Palm Process SH Purchase& Fleld Development DAL Roads & ButterflyResearch crop. transport SH 8& Project Institutional Infrastructure ConservationMarket palm crop. Coordination Strengtheningoil products Process Inputs.

Administer SHloan accounts

I/ Members of the Natlonal Oro Project Management Committee I2/ Members of the Provinclal Oro Project Coordination Committee

- 51 - AANh 5

1992 Otiloomm offoaiets, pwcr_mst Srz Crop 6.0

Mt ioweemuu uvranamas uac

btaft Ueamt,mouts W** p-strad budget for 195

199 WaoApril Plnting program, Butterfly Tre Crops 10.0Consealon, toads, Audltia F_ina l

EnviroamentCivl Engineer

1993 0otIoil Work prorm and budget for Tree CropS 10.0994, MIS, DL str.ngths4ug Finacia

Institution---------------------------------- __---__-----------------,_-_--__------------___------------------------

1994 KarohlApnil Plantin progrm. proour..snts Tre Crop 10.0dibursemnt, envirament, Fino&aI199 Accouns Inviroomnt

_____________.____________._________.__________________.______________________________________.__._________

1994 O otlEn Work program an budget for Tree CopS 6.0195, lufxra rtur FSinani

Civil ngieer

1995 NA April Plantin pro8rm, 1994 Aonts Tre Crops 8.0

1995 actiNov Wor program an buget for Tr" Crops 12.01996 - i TaoS ROieV F4inan1l

M:Civil1 hine

1996 arcbhlApril Planting program, 195 Accounts Tre Crp 6.0Financial

_______ _______ ___..._______ _______ ______ _______ _______ ______ _______ ___-___ ___.__ ___.___ ______

1996 ct/Nov Work program and budget for 197 Tree Crops 6.0financial

199I"? NAMWApril Planting program, 1996 Acooguta TSre Crop. 8.0

tavironmant

19" OctGoIv Work program and budget for 1998, Tr Crops 8.0Infrastructure FLna iol

Civil Engineer

1996 NrmoAlhpril Planting program, 1997 Aocuants Tree Crop 6.0pinanclal

1996 oet/Now DLburasments Tree Crops 6.0Financial

1999 Mareb/April PB Tree Crops 10.0FinAncLalEnvironmentCivil Bn8ginr

PAPUA NEW GUINEAORO SMALLHOLDER OIL PALM DEVELOPMENT PROJECT

Project Implementation Schedule

1993 1994 1995 1996 1997 19984 1 2 3 4 1 2 1 3 4 1 2t314 1 2 314 11 2 31 4 1 2 31 4-

SN Oil Palm Development

New Blocks Popondetta area

New Blocks Kokoda area

Reserve Land

Harvesting/Processing

Construction Agricultural Roads

Access Roads Popondetta Area

Access Roads Kokoda Area

Harvesting Roads Popondetta Area 11_1_1_111_111!111_

Harvesting Roads Kokoda Area

Construction Social Infrastructure _ _Upgrading Main Road

Environmental Protection

HOPPL's Solid Waste Relocation

HOPPUs Effluent Treatment Upgrading

Butterfly Conservation _ _ ___Instituginal Strnthe__ning

. _- _ _.. . . ____ __ ___ __ __ ___ __ _ i 1 iI LJ1. I 0'rCrr

PDL%NCL%L FARM OAKM FR9ZS

199 am9 399 299 199 to9 999 999 mm0 2001 202 2003 204 2 202001 2 202008 209 2019 2011 Zf12

I capt o9s5at89ms 239.00 220.0 22A8 MM.0 2WAS 224.20 238.80 A M. 211.40 oo [N. 198.00 m. asuc MOD m 1s m.o MAO 1ms W83O MAO mi

20CU (VA 1910118) NO W65.1 351.8 51.5 13.22 15.9 142.71 21.4 MU.2 317.95 110.1 302.4 29S.02 287.8 239.711 23.73 279.73 239.73 239.71 239.71 273.71 22.73

I AftAMII b=(4%) 14A69 14.06 14.06 14.1 14.04 1M.7 113.1 13.05 12.12 12.41 12.91 11.8 9140 91.19 19.391 11.19 91.39 11.99 99.99 9149 1IU9

4 011.1940W(2.) 379.98 365.44 U65A 17.59 M6A8 356.42 347.84 3S XW 12L.5 13.? 2.2 314.7? 100.82 298.8 29092 290.92 290.92 290.2 290.9 290.9 20.9 2MA9

9-S 1u9g% s0 40.8 60.0 M0A8 I0.00 O0.0 I0S00 "0a0 a0. 0 450.0 a0.m G0.A 60 60 6000 4000 MA0 6.00 W0.A GOA 4.0 00

6 fz~~~~~ 0.91 0.m 0.n 0.A 0.m am8 0.8 0.8 Om 0c78 0.76 0.74 0.72 8.70 0.78 0.70 0.10 0.a 0.70 0.70 0.70

7 8s48mp 1.90 3.8 9.81 Is? 1.8) 9.70 3.74 1.78 1.45 3.69 9.37 1.5 1A0 1.45 9.45 9.45 9.45 9.A5 53 1A5 3.45

8 Coua.i I.90 3.85 3.A1 9.8 18 .78 9.74 1.70 US6 3.6 I? I.5 9.49 3.45 9.4A 94 1.45 3A .45 14 IA5 lAS

9 same 11b 947 9.7 3.5 o.52 L.57 .57 am3 157 1.5 9.57 942 I.3 gm5 3.5 3.7 I.7 .5 9.47 1.5 3.? .57

l0~~~pghs~~~~ 9.05IA 9.05 3.0S 305 9.05 3.05 .05 .05 1.05 .05 3.05 Am0 9.05 .04 9.05 3.85 1.05 3OA 55 1OAS.0

47.14 67.36 SO.34 61.26 67.9S 47.05 66.94 648 48L73 46.6 6463 66.41 664 66.2 462 4.23 66.21 "M.2 46.2 646.3 NW.2

liI OSoh7 (188 312.61 218.48 MA.4 30.3 297.8 289.11 200.90 272.4 261.94 2564 248.24 2401 n21.4 224.4 224.4 224.4 224.6 224.4 2144 224.II 224.6

l2 FM an ft3 a* 297.92 284.4 34.4 291.91 283.8 273.7? 267.69 259.9 51.514 244.0 2364.5 22940 221AI 214.331 214.11 214.913 214.31 214.91 214.13 294.913 214.9

Ilbuag- am'00 0.00 8.0 0.0 0.00 0.00 0.00 0.3 0.00 0.00 0.0 0.00 0.3 0.4 8.00 Gm .60 0.00 0.3 0.0 0.0 0.0

14Vbdapaaes 2.40 2.40 2.40 2.40 2.40 2.40 2.40 2.40 2.40 2.40 2.40 2.40 2.40 2.40 2.40 2.40 2.A0 2.40 2.40 2.40 2.40

as5aw"P&Ha SAS.4 0.48 .4 0.46 0.46 0.46 0.46 0.48,.4 0.46 A 0.46 0.46 0.4 8 0.46 0.48 0.4 8 0.46 0.46 0.AS 0m 0.4

t61.36mwp71a. 2.24 2.24 2.24 2.24 2.24 2.24 2.24 2.26 2.24 2.24 2.24 2.24 2.24 2.24 2.24 2.24 2.2 2.24 2.24 2.2 2.24

97GnjIqUa~~~~~~~~ 7.73 7.18 7.18 7.581 7.3 7.16 6.95 6.74 6.51 3 6.14 6.94?S S.1 5.95 5.75 56 5456 546 16 546 546 56 5.56

12.8 92.4 12.48 12A68 12.4 192.216 OM0 19.84 1341 33E.44 33.24 119.0 90.8 WAS 1046 90.66 WAS8 10.66 90.66 90.6 10.66

98Ngk.a~~~~~~w~ 295.08 271.97 219.97 23.25 271.8 26343 255.44 247.27 2193 239 2.42 225.3) 2138.04 210.76 20.47 202.47 203.47 2011.47 201.47 29147 201.47 201.47

I907(9M2MM0 I"89, 100 49.00 960.0 178. 804 1 8040 A 180.28 967A0 167400 144.4 M624 160.40 3.2 956.00 956.60 93.3 ISSAS0 136.00 956.00 356 936.0

2S01(4141932 96Sfj 229.29 227.76 244.38 259.8 258.94 238.05 257.99 236.99 255.28 251.93 2484 245.19, 241.82 2184 228.48 238.4 228.48 228.46 2284 238.48 2M.4

21 FMi* lb 90.0 0.0 90.00m 90.00 90.0 900 90.0 8.A00 90.0 90.00 9040 90.00 90.00 90.00 90.0 040 9040OD 9040 90.A00 9000 98.00

322 u 0.55 0.55 0.19 0.63 0.62 0.62 0.62 0.62 0.61 0.69 0.4 0490 0.581 0.57 0.57 0.5 0471 0.57 0.57 0.3 0.57 L

238.Sa.p 9.13 3.14 8.22 9130 1.29 l.9 a.2 I.25 9.8 .26 9.24 13.2 9.29 9.31 3.99 9.99 U.9 3.99 39 .9 3.9 ti .19 1.

24cam 1. 2.29 2.2 2.45 2.40 2.591 2.38 2.57 2.58 2.55 2.52 2.A9 2.45 2.42 2.18 24811 2.8 248 248 2.18 248 2.28

258433a.Ezm 0.32 0.52 0.3 0.32 042 0.m 0.512 0.52 Gm5 0.5 0.m 04S2 0.32 0.52 0.5 0.5 0.3 0.52 0.52 0.32 0.5

94.52 94.4 94.7 95.0 95.A 9302 95.00) 94.981 94.9 9MI9 94 94.79 94.7) 9Ka6 94A6 94A6 9448 944 94.68 94.48A 94A8

26 391S0i.8irt(158 134.7? A".2 140.70 344.8 345.9 961.09 94.I9 949.21 960.32 157.00 953.70 950491 347.09 143.79 143.79, 943.79 941.79 143.73 143.3 141.79 94179

27 VOS&.by0~~~~~) 928.44 927.01942.75 357.0 9S6.23 135.15 954.4 15.6 932.77 149.62 146.4 941.25 140.98 937.0 917.0 937.01337.0 117.03 337.0 9374 MA.0

2$3ap-L-w 0.3 0.0 0.0 .40 0.00" 0.00 A0 0.0 040 0.0 0.00 0.40 0.3 8.A 0.00 0.0 0.0 0.3 8.0 0.00 0.0

29Wbafagommi 2.3 .0 2 .00O 240 2.0O 24 2.00 2.00 2.08I 2.0 2.00 2.00 240 2.00 2.00 2.00 2.00 2.00 240 2.0 2.0

10SIMAHg.*e 90.21 10.21 90.2 98.29 30.29 30.29 90.29 90.29 10.2 90.21 30.21 30.23 30.23 98.2 90.2 90.22 90.2 90.29 90.2 30.29 90.2

31 IME.&mpOFs. 90am 3049 90.2 10 304 1.59 3049 10.59 90.5 3049 3049 904 3049 .9049 30.59 90.59 90.38 905 0459 904 304 304

12c"uOft"* 13i 3.10 1.79 440 4.06 4.03 4.01 2.99 3*07 1* 3.80 3.72 3.641 236 3456 1456 SAS14 346 1154 53

2- 6.33 2-- V0 26.5 2 26 26.a8 2681 26.8 26.7 26.7 x64 26.60 26.52 26.44 264 2646 2RE 264 264 264 2mm 286

31ft4g "in 103.20 900.93 116.2 920.9 129.35 921842 32748 126.*4 926.0 12.914 19396 336.49 991.74 930.67 990.67 110.6 390.67 990.4 99.6 990.6 930.6

347548Ad 61.29 3.47 381.47 4004 53.5 56.4 54.96 51.2 51IA 30.0 4845 46.8 45.11 41. 41.75 431.5 41.15 41.75 41.75 41.75 41.75

3151G~IMO .93 SA0S 3.8I 6.33 6c4 6.10 64 6434 640 SA35 3.99 5.84 5SA9 5.53 5.3 S.S31 3S51 542 5.3 54 5

36 c *wwou 66.43 am4 642 66.35 448 43.0 614 39.61 37.481 56.16 54.44 52.72 59.00 448 40.28 49.29 49.28 49.28 0.3 49.28 49.31

37?Tsmf 9400 9.00 940 940 9.00 940 9.0 9.00 9OA 940 9.00) 9.00 9.00 90.01 9.00 9.00 9PA 9.0 9.8 940 940

38G0,.m 14aOt 940 94 9. 00 940 9.00 9.00 9.00#D O 9.08 940 9.00 9OA 9.00 9.00. 9.0 9.00 9.0 9.0 9.00 940 9.0 9.00 9.0

39mm I4 fcm46 a 8.00 840 8.00 8.3 8.00 8.00 8.3 8.0 8.00 8.3 8.0 8.00 8.00 8.3 8.00 8.00 8.00 SA00 8.3 8.00 8.3

40Dqod3aa 4.25 4.13 4.25 4.25 4.25 4.25 4.25 4.23 4.25 445 4.1 4.23 4.25 4.25 445 4.25 4.2 4.25 4.2 445 4.2

49 boom iaphd 6.6 6*0 640 4.8 6.A 6.0 6.0 6.4 6.0 6.0 6.3 6.8 6.8 6.80 6.8 6.31 6480 6.80 6.3 8.80 6.80

0.m 0.88 OA8 0.8 0.88 0.6 0.3 OA 0.8 0.3 Om8 0.80 MU 0.8 0.8 0.A 0m 0.8 08 08 040

37.9 37.95 3 37. 379 79 7 37,79 93 3 37.93 3.9) 37.9) 317.93 37.93 17.9 17.9) 31.93 37.93 OM.9 37.93 37.931 7.9"-

431weh9abd 3.4 24 264 28.6 26.89 25.9 23.42 21A 19.03 98.2 14.53 14.79 31.07 9946 99465 It." 9143 9946 3.35 1145s 13.5

d48mdB .h22* 94.24 92.79 11.3 14U1 ISM4 1249 11.71 O08 .97 9.11 8a2 749 642S. 5.6 3.67 5.6 1.87 5.6 5.6 5.6 5A

45facn 25 3.26 21.79 22.98 23.3 22.S 23.58 20.71 19U8 38.97 98.99 97.25 1448 15 4.6? 14.4 14.6 14.67 34.67 34.6 94.4 9W

46bcwwft 25.2 22.9 24.8 17. 27.90 28.20 28.53 28.8 29.12 29.33 29.47 29.35 2942 29.41 59.05 22.76 1446 .16.4 18.4 404 41.8

of Smm ftse S. 99992 W.3M k49doinI9

VC.u,6iU.461 21.0. a0.3d hl.d.audamai.~.Sol.5

Jis ~aMi9im.6M1

COIA AJIIBUULPAI2NV3.OMWIGOM

rsJsgYen 1 2 S 4 S 6 7 S 9 to I 12 is 14 is 1U 1? is 19 3ry.. IM 1951 199I 19 19 198 IM 2S 21 202 250 20 2 259 20? 200 20 256 31 31

1!_FfW 0 a s la 16 Is 19 19 to 1 U n 16 u. Is as u 14 u4 u tr"6o3 m 2b) 0 0 to 26 22 14 38 34 1 24 24 32 2 20 IS 2 I 28 2 2693t?w1mm7 287 1S 2. 23 12.44 2340 20_ *8 IL" 1f2.3 1?S I6* I. 4 4? 34 846 I"? 1Ka 146 K46?_m 00.) 0m OA 22810 .A 6*A 74.5 MO 7L26 63.4 6. 5AS 40.12 4640 4482 4. 400 MA OM MO .S

0omew_ok 61humlt8 0 10 to

_im 20S 54 54 46 34 as n n n 2 n n2 32 2 1 2 n 1 3 2a 'a O @ S tD ZD X 0 0 0 86 30 23 IS IS IS IS IS IS IS 0 s IS 30 Is 24 30

TlW I_fpmwl) 80 64 64 62 64 n n2 a2 n 12 2 n n2 # n a 52 a StL1woom 24 265 8S.16 6. 51.X 1J.6 2"4 12 30 2A 3 SUM M 12648 1 I 122 32M MA 1326 J 2 1264 8i1

on_) UN

0 . Cs0 24F_ 6.0 9040 900 90 130 120A 1 A 12SM INA 120 12MO I2M 12 1204A 1240 A2"0 M0 0 IM MN a IQI to U NMB lOADC_.(80S) 46.54 32.27 3I.20 10.90 120 1640 1324 3 86.50 124 16.00 16.3 1248 164 16.3 12.0 64 16.3 324 NM

Su10^_*pf3 311.94 39.70 U7.2D 319.90 122 I388. 1M2.00 180 I88D 21 1784 183I I2.D 17640 ISJ.0 *22.0 3640 63840 32.0 3LeLbcom 2M 2 161 856A 1.28 3.L16 34.26 11 26.4 1264 1268 1268 t 1264 26 lS 1264 36 12648 I2 34 1264 A I

T1u 75.6 286 2.6 278.10 28.16 313.70 2 207.8 S2 23S4 3IS 31*J 2384S 20A4 31.2 284 2S0 * M234 S2

so n -17 -28546 -9 26.4 406 442 4.33 42 2.6 27.7 2343S 18.74 20.71 W." M IS 7 3l2n.0 1M0 52 12.6 8M6?

1I11.b-dftgumdNgb 20.31

IX

?AI'UA1 EEOUKIamsLtLt LoR am FA- ovLwar D-ojrno

UIALLMOL8U3 CASH FLOW 1PIDJfl005 IC w80Kbt

osjSdYt - 2 3 4 - S 7 i S 9 10 11 12 13 W4 IS 16 Wi 1i s -abadYe I__ a, IM 199 t90S 1am Ing ace a01 2a 200a 20as 2as 2006 ass a0W ass at0 2D an

0 0 5 13 46 to It9 £0 Is 1£ t 14 to 15 tS 4 14 t U 83To h O O 10 a £0 24 a x6 3 38 1 4 34 3 311 20 21 23 26 26

_~~~~~~~~s ono m.n a ms s. :.mo '1) 8.106* *.oss.ss7 8,002.8 8.00453 ss.ia 94.9 .3.5 9617 8,02. 90 1,1.13 .552 s8.18n

eIdw O o*A 23.7£ 4.2X 9216 17.9M 8." 1006. .106. I.,15A 0.£LII 0.5 945.12 2.90 "SAO MA2 967.7 ." 1.M5 .05 5.1m

452.35 3* 67.17 182* 0A am U0 3*t sk.1 0A 19.2 94t. 0am 9.S 1A 0* 19 2.l2 0A9 t"

nses 1224 12.17 I £M1 .0 1MA.0 32 22.2 2A 37s 2 25.4 42 2 * 29S4 S 379 34." 0WS MA 3.4

Uwmae~~~ SOLpM S @5340)00 I13 586.1 129 MM X034.0 90.2 i. WAS* 3M7.1 s.s* 4nj4 sin2AS ms9 .i mN.3 4Mi sMO m-. ~~~~~~~~~~~~~~~~~~~ emkk4m_ "t e 1 WI OUA# OtA SIL# 2O MM MMJ0 tNL MA ?X 3 X17.14 00.21 $7 7J4.#X4 MA L SU7 O2 M6S *L

_ IA

I__ ni SI Iaca%ad"ban 2la n7IS 124

3_* £5*.0 396*

=~~~~~~~~~~~~t 44 a 6i a a a- 5i --- S 51 it a 52 St -$ 2 5 SI it 52 St

__~~~~~~~~~~~G Oam OAD fJI iis MO 12; 117 _ . ISM IIA 13 WS 11l.11 OA S1| 7I Ltu O

U_Zlf ~ ~ ~ ~~~401 905.20 34.92

.~~~~~1 514 99

,~~~~~1 7.6£29

~~ 368.3 39.15 8*4.60~~~~~~~~~~~

I..

PAPtIA NEW GOWNUA

080 MLLUWER OIL PAIN OELaFPNET PRWECT............................................

Economic Analysis.... *.............

..........................................................................................................................................................................

1993 1994 19" 1996 199 1998 1999 20 201 2 2 2004 2005 2eo6 2007 2008 2009 201..........................................................................................................................................................................

turn cmr................

Sa I1 al-s ometIt 22S.2 466.8 73.7 1058.2 115.5 1100.8Extmns Slees 304.4 737.2 488.3 S99.1 442.3 360.3Arlicltural 1e 511.3 947.3 1390.2 178.0 1440.3 1150.4 - - - - - - -Socil Infrtru tu 259.8 207.2 19.2 112.5 17.3 17.3 - - - - - -lain Road Upgraing 28.8 145.0 106.3 28.6 28.8 28.8 - - - - - - - -Resch $npot 140.4 58.9 58.9 86.2 56.9 58.9 - . -- - - . -oPEC Strentheing 52.0 47.6 47.6 47.6 47.6 47.6

....... ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... ............... ....... ....... ....... ......Total I,westuent costs 1521.9 2610.0 2874.2 3670.3 3220.7 2764.2 - - -. -. . -WEIUTI COST............... ...............

SNlOIl Pal - - ? % - 794.1 790.5 786.S 787.1 191.3 790.1 7M.5 793.5 793.S 79.s 79.s M9. snEIxtmIIn 5,lov - - . 169.6 169.6 169.6 169.6 113.1 113.1 113.1 113.1 113.1 113.1 113.1 113. ̂Afritural oads - - - - 110.6 110.6 110.6 110.6 110.6 110.6 110.6 110.6 110.6 110.6 110.6 110. ISocial Infrstructuro . - . . - - 17.3 17.3 17.3 17.3 17.3 17.3 17.3 17.3 17.3 17.3 17.3 17.Hlon Road Upgrding - - - . - . 28.8 28.8 28.8 28.8 28.8 28.8 28.S 28.8 28.8 28.8 28.8 28.Resec Supt 1 - * - - 14.7 14.7 14.7 14.7 14.7 14.7 14.7 14.7 14.7 14.7 14.7 14.OPIC Strengtniong 2 2 - 23 23. 2.8 23.8 2.8 23.8 23.8 23.8 23.8 23.8 23.~~~~~~~~~~~~~~~~~~~~~~~~~~~~....... ......... ....... ................... .......... ..Total 4eratiwe Costs - - . . - - 1158.9 1155.4 1151.3 1151.9 1099.6 1098.4 1101.8 1101.8 1101.8 1101.8 1101.8 110t.TOTAL COStS

Total Costs 1S21.9 t610.0 2874.2 3670.3 3220.7 2764.2 1158.9 155.4 1151.3 1151.9 1099.6 1098.4 1101.8 1101.8 1101.8 1101.8 1101.8 1101.NEMFITS

Sallholder Oil Pol Prod 128.4 S20.8 1209.8 2163.9 3195.6 4065.3 4528.1 4580.S 4405.8 4108.7 3m.s 3640.9 3526.5 3422.2 3307.8 3220.Total Benfits I - 128.4 520.8 1209.8 2163.9 3195.6 4065.3 4528.1 4S80.S 440S.8 4108.7 3775.5 3640.9 3526.5 3422.2 3307.8 3220.

NET UEFkTS............ ...........

Net genefits -152.9 -2610.0 -2745.7 -3149.5 -2010.8 -600.3 2036.7 2910.0 3376.7 3428.6 3306.2 3010.3 2613.7 2539.1 2424.7 2320.4 2206.0 2118......................................... ...............................................................................................................

3/20/1998 15:17IRR - 12.4%

0

Prosent Values of Not Strem at a Dlec&A%t ae of 10.0X

BMWTO UP 1m UP 20X UP 5X DOW 10X am11 20X OWII 5NWCtOt 189744S.6 3731314.6 5565183.61106670.7 "576.6-1770292.4- 9.SUP 10t 253321.1 2087190.2 3921059.2 9422666.2-158047.9-3414416.9-8916023.9

UP 203-13900"3 44305.7 2276934.7 ?784.8-322672.3-5058541.4-105S0148.4UP St4-62176.T-489307.T-265543B.7 2846168.4-81S7045.7-99914.7-154S21.8

NWa 103 3541570. 537539. 720938.12710915.1 170771.0 -126168.0-562777.0SOM 203 S169.5 7019543.5 8853432.614355S39.6 3351825.5 I51756.5-390.6WAi 5031011806.91951936."13M860.919287413.0 828196.9 6450329.9 94872.83170 LSI 18 62 16 3

CITO 189744S.6 230291.9-125302.3-263115.2UP 1X 2521.1.1413832.5-2929426.7-430 3.7UP 20-139083.3-305M7.0-457351 .2-5951364.1UP -m4316.7-790330.3-9505924.6-106837.5

DOWI10 IOX 3541570.1 14416.4 352.2-101890.OaM 20X 5185 J. 3518540.9 2002946.6 625W.?OaM 5010911807.9 450914.2 69350.0 55507.1

LA - 1724950.5 2093.3-1168456.6LA6 2 - 1568136.9 1902.9LAO 3 . - 1425S79.0

Intral Rates of Returm of Not Streom

1MW UP 103 UP 20 UP 503 OSM 103 NW111 20X WA 50XCelow 12.428 14.572 6.561 21.8" 10.085 7.479 -3.676UP 103 10.308 12.428 14.3B5 19.551 7.976 5.358 -6.458UP 20X 8.382 10.492 12.428 1T.506 6.04S 3.392 -9.453UP 5OX 3.392 5.543 7.479 12.428 0.940 -1.96 NWWU 10X 14.800 16.984 19.019 24.457 12.428 9.810 -0.931SoW 20 1r.506 19.749 21.846 27.482 15.065 12.428 1.903OM SOX 29.192 31.788 34.239 40.908 26.421 23.435 12.428

3Moos0 LAS 1 12 LAO 3CTT01 12.428 10.257 8.718 7.572

w 10X 10.308 8.502 7.221 6.268UP 203 8.382 6.904 5.656 5.078UP 50X 3.392 2.766 2.332 2.013

OM 10X 14.800 12.209 10.379 9.01?DMW 203 17.506 14.417 12.250 10.642SOM 50U 29.192 23.697 19.992 17.302

LAG I - 12.428 10.257 t8is8LA 2 *12.420 10.257

1863. - 12.428

PIAUANEWGUWAOESKAUOLDMOLPAIM D1VMCWWW1RWF

A _m=SWJWdmmw_

4__~~~~~~~~~~~~~~2

*sAt& 2198 589 4998 130 2t= 30.3 30os 3905 21J8 9 m7 9 A0 3 M mJUN006aM* hP~ 2$.03 33.460 350.93 23.26 2*600 200.600 2*00. 2*0 200600 2*0 MM 20*600 MM 30.60 30.60 20M6 20k0 300kp~Ssmwt 33.60 Mtw 30*3 3463 *403 *0600 *0 *000 3600 *6w 300 *60 *6n *06001 *60M *0 *0 AG60 *06em&a" sho $KM S20 32. 44 6.66 48U8 451.12 595.0 465.2 3 W.45 134145U 14. 439,965 43.40? 321.638 '3.16 0.52 9S".33 u 342 2 33.6

3.60.6 =.S3? ,.5 MM4 14.2 849 73S.293 40A5 4W 4096 3MDAO63 48 322 3324 30532 355.33 40= 5A6

222.3 30.107 23A4 1339.30 343.0 1.,2 216.312 4.4 565.14 0.47 43.08 653.852 4. MGM6, MS Uk.3S7 3200 M9.D8.985 MM42 33.38 24.7 26.23 27.60 127.50 3$.30 3.00 39.60 . 30.0 *60 *00 41 .9 40.273 503 29.30 X.50

233.00 321.323 MM440 343,92 30.38 1206 33.42 4340.40 W6.S34 4M.M 46U3,8 463.85 3.88 36.522 U%7.24 85AIS 72388 623.3

Tau3As 32.6 10.4a 8 3.6232 .00.1 162.411 916.39 1.3 1. 3.04I. 5l" 3.GM21 3.028.7 1.04350 1.107.49 1.19" 1.11.26 .02 8.20.05 I.3.07 3.0.9 ILA

P_ -w4m l .83m 23n2 M.6 34.0) 37.838 3390 27.68 28.43? 4336 32.33 16.39 333 39.34? 35.5? 25.64 34.343 10.W 393Cmua *ACM SISA8 4.502 22.M9 23.3) L3.0 5. 3600 Is3*6 150.0 Is3. 3*60 l30.6 130.60 506 3*60 He.0 3AM 3*005574 t39.6t4 25 28.13 380.0IS 2089 307.968 2*6l1 386.836 19.176 398509 213.t64 199.14 MM57 2.695 M4. 393 3.2

1aco "%M okee 68DoD M.ON 6eob 6^0D,ZO ooo 6Meo 6Z,EOD 60^II eslom a%=e 6a%lO 6mll 6^"D atop, doomho42s 1awA " 3 3 23.96 08.434 12012 2. 13%M 168.190 23.450 S358 223.463 213.S40 2WM14 243.,6 20 4.719 4.M 39.12 JS M 46.4

4.4?7 3.0 S88.414 *82 "32.30" 3 90 80.430 3.3 8A6 633,40 84 4 83.485 g32 9*4.39n 944ns 9.735 MM. 14 60.ThIhUMWS *V 3.323.386 t.W65 1.6422 3.06.510 932.413 91.49 1.3,48 3,042.315 .0O8. 13.60216 I,04.0 .MG.4S9 1.107.519 1.11O.t6 t.150.2W 1.9.Q6 3.3.02n .021

F'P

APfUAN"rUolto SUULD811 OIFL P1gD TVLniNP

IWnWTRAWu m T 1umD

mpbwAc>_ra 7302 70n11 72.223 74.20 79>6 OV4 OX7 8Sn0 SSU , .24 11#,2 ,0. 2. llt, 1. tSX0 1S 1 107A7 1050mis^<roo 73.G 0.111 am 71.70 n77.70 so s2,eo s,50 ".00 S30> zTdk 121.408 1271e0D 12.300 12U10 llbl4D ttAtD "mmO"Sdggil_ 740 7SQ74 64S.430 *IIM 821,9" 841.90 On 9241t 9M,9 1,140.O 11WS"8 1",190 IJK6 Iffr.US _4tn6 tJ4fM9 ID7.611 1.%

Cdb ut_Cw 4K221 4fl,74S 4G9,4G1 4,440 47S,S 424,917 4307S4 fD4t47 M,95 677,677 t4tJS7 939,2n I.43lt= 1,ES7A9 tm40,4 1,t46 1,7,16f LGDI E_bo Cu Am, 23.M <4046 61,77U 013 67,6S 66i441 7Q.2 74,S 79,132 sabso SB913 too 9f,190 9.-<4 97,t0 *$n WASSSOWWCO 34,112 33,26t 41.0" 4"4DD 21,7#4 23.lZ 214.< 2bSfJ 27.4 29.1" AN$s 32.7 34.n6 35.04 JS4Af S.f 3O7ss Am4Ad* wo_ 2We67 219S,fl WAS,9 2ftf 267,XSS WU?26 2P.731 MIbSS 3346D M,3n ns,s 4D4 4121A 43S.S 432.04 4M,6$ t3s.659 est7s6304 72S,47S 6".Mn 7XX a5 &6S32 704.$61 us9,411 91%381 90.012 1.13*,371. 3.X9n 1.4&s,%s 1.58B.S 1.619.713 1,6G60SS# #,J6G%62 1.M3014 I.VAQm

o _ rt MW4 t36,G Will6 (WSWi tt6437) KOO34 6,5S 4a46 kW3 (47.022) 4702 30Qlt4 57, Io 6,142 R7.4B7 (1336 X567 tOS,M (M3% tR b0Nlto"l 4kG> 42X073 63,265 Aso ^36.2 ftots 0.,w 30s,ls 2S,7S2 154SAZI jtSD U4DA 13,54S Un 6.331 7.02 mo,es amS

Rt% Sw 14,160 2DX*e3 5^m IS,Go 22,DDD 24.200 t5.620 29JS82 16.1e5 D 19,4G7 21AX3 4XIN 10.7m stJ4 57.061 okistsaatbo is f4Q46 not6 6Q.36s 417x6 4s^DDD 4s^DD 34,643 34,911 55,179 57.018 59,412t X6S " 6X6t6 62Un 21.112l 20A96 ItS, ULMeV tWG,")ot* 3s,641 137.236 7X122 tS7.6D0 S4,4D 123^s9s 113.227S Ik72S 62x71 n.,2s3 lot.sfl ts3.s46 Sol"7 91.927 Ws27 11e4.6 57" 6-1432Low " 30qb 1S5,56 3897 a.6n 17.0) 37.1SS 33,9 32X61S t84t16 29,176 30,sss 46,es< Ul.1n 27"7 25s,s Xu.l 10,3D tso.Ps"O04AT" 23.075 94539 543$ t t.601) 76.se eU,7 79,7ss 76,10S 41,9D4 SG77n 71.374 IW,.4t2 72676 663 59.#9 SD,12S 24csD 4,1C2Ia DWM I S.=D 3Q0O 45.DD 30600 31e,0D 1xeDD 3QeXo Q0,00 3D,DDD ADX 30.40 tQC8D 30.Z0) 30.Z0 3XCOD 9QOOD 3kDomdnwoAw s,e75 61I5X9 S.4"t t 7.6Dt 46bXs 56.7s7 49.2s9 4W109 l3,904 3S,W7 41.4 7n,4s2 42X676 XW> 7st6 5D,ilS OAs M5tQ2

Fd ^ nw 15 e I6364 164,43S 23xn 23844t7 MMesl 197.39 254.1n 301,452 349,56D 163,464 401.$41 449JS 5203s 5f3.X 5s7.4t9 6zt7ss 6n7.416 67t.-AbmPSoa lIK4,4 2#,s7 231k4ltls l m3g66 2S4,195t 303,4$2 349,560 363,4S 401.$41 4MX1S 5x397 s6w3" 5.419 nal.2 6n.416 671,4ft 610a0

U abiai h mo n _dc ftsdm_wbilo sotoii

PPNE#aURiORD iiLOL OMLPIL NELPIOI ROT

HOTrUTRANatnyam

YmmaDomaus t tin lg - g tff / 1990 19tt" 29 4 1995 1996 1tJ1 i9 19b9 20 2en202 200 -g14 -- 7JZ

PJ~A wwa 3d x1IS l"Xt Wn 01 .vIt.4 mm, Ox n n .tu ,.2 *1, 1125 51 m A" S.V 114s 3 6n_moS4dl _^N5 1^t"S 14ik0 132,S34 MMle 0ll45f 72515 130617 lnX a0K7 2&72 VnS30 3K MMJe 3MAD 3146W Nk4f 3M674

OPWIOW ~~20k1,2 209> 216L651 14.11 39&5DI ttS, kS 1msn t5m 14, 267S0 415D 3D.5 J006 WA 4X0L7 47U SK7 28

ftAeW4WvI_1* 15%4n >29o 78. 21,5S 159,9o 2B, 2S9,2 t.= V.417 269.601 207g$§ 2l6l SU 5 ID 29,m 209 lt" ,7.Tinh/_Ak 1 6,611 2"0 A7JS St"85 OURS 11M 2LIS A 26.9 617 5AI 17,176 MW W64 19,147 IS7 25f so K

_ bih 30bX11 U.Wl, 7UNe JO, AMZ AM,IID 30 .000OfO 30614 AW AM 3 200,l X,0D s Sttltl A

lult" n 'AMM 65AS 1160IX (71s) 74317 (4320

152,194 361., 0" S 93 220l 406112 Jl,709 t98 1.04 3MM 36417 W749 wio " 4KN7 M 419=0 2ou 269.44

O _- A""76 f66,92 f2Z,oo 4#,f6 4K7$ 457,12 7039" ([k2 (IfM (4470 (1a IlX,S (4L 6D725 IUS7 61 9

opt" bmS3 MD69t $fl AkSo O1,fSA S7,2 O f V769 4 Afi 347495 IS77U 140140l,Sf lit US mm1, IA7 6 76 69 .1 9 5 in"Z

aadma6hm SKN $20 4WAS AIMSOD 457.17 SK70 4K73 WAS SiLM 4km um tam rXw 6XNS3 O$ Km "" IK

CR0 mAUuMIamWL?AIMUBUVEACUSaITIUoUO

mmlRon.AIFnImT

Ta*EKMUDmgaU3l uww two urn uwz iw i4 w Mw Iwi 190 10 mmW mu5 mu0 29 mu-3~~~~m

emb ~~~~430 wig1) an58 (3.91 me"09 4.535) 87 1.741 %SU0 5SAO 8.451 It#"1 13.63 16.83 19.46 21.129 27.9

Nr 03mg 5X4 512 267 5.W1 349 3.944 4A21 4. 5.461 6lSl 619 79S 7Sff t 9 9 190224 17ID

Tia I iAam 3.714 ON' 2.1 1.33 Us 1.409 4.501 f,67 8.32 31.59 38 3N4 280 25,510 28.88 33.354 39

HdmDsv*pmsaf 204 22.046 25.03 2S.1D 24.622 253S6 2563S 25.62 255 25,657 26 25.68 258 25.1 25.61 25.61 2S.6

1sd A34.148 34.,31 35.4 369 38.111 39.404 49.9ft 42.328 44.677 46321 47.814 49.865 51.86 537 ss.7m8 57.704 59.72

La DspduiI t S1.= 18.217 20.72 2990 25.389 7.6 2,4 31.7S7 335 35,311 36.94 38.5s 40A4 41 485 42.834 44117 45.35

Nt Fd ARSO 38299 16,t14 34.02 3.539 12722 11.786 11.14 10.S7 11a0i4 l.8 109 11.26 11.71 12. 194 132 14.5

Tat AMi 42.429 39.46 4059 38,739 38239 58.53 41.3 42.86 4549 48.189 5161 55,219 59. MAN 67G6 72.62 79.09

DOM 2.72 2.721 1*,791 1.194 612Dl 2 647 0S7 418 279 145as 1 4,111 4,060 2.31 I,209812 1.739 1,701 1.175 735 261CDCA .669 2.99 2.447 1.780 I6 96 419CDC 3 3,869 4,591 3.681 2.832 2.34 1.787 1,222 627liIG3Cpuil3q 389 55 167 56nc 0sw 695 9 6M 60s

Tld lem 1624 16.80 10 $84 "14 32 2.7 67

-GON to,5eo 11.599 15.009 16.00 17.5W0 17.50 7 17.599 17.50 17.509 7.50 1750 17.509 17.50 17.50 17.509 17.50 17.50

_sC t -CDC t4,511 14.509 1609 . t7.50 17.50 , 17,l l 17,05 17,50 1750 iso 1o to I7S 1 17.o 17.5 nI Kbm"aonGn 44 44 44 44 44 44 44 44 44 44 44 44 44 44 44 44 44

Pi& ALuACWiA 1 t.3 ,428) O55 (.99 1ll9 168 5 3.96 7.205 IO.S 13.136 t6.574 2.US 24.146 28.426 32.424 37.589 4006

TUilN 2018 & R.w 26.182 22.24 284 9A5 32.905 35.S22 39.013 42. 45.09 481118, 51,618 52 59.190 634 67.468 72.24 79

tOALU.L1 AND QUI 42A429 346 49.519 5873 38.229 AS* 41.320 42.8M7 451049 48.180 St161 SS 59190 43^ 67468 72.63 7909

o__f Rd S qslinM MMO& 19. =Wia 1M. K46.N I 1991 nd K16,1 la IM

'WI

PANANPUA NUDOROEALLUOLDMROIL PALM IIV..o9UMWR 130CrXOAT O -00L PALMS DEY UU lN

AdPrad actALMc_m

YeaT bud DhM _ 31 1969 1990 1991 1992 1993 1994 1995 1996 1997 1996 1999 2000 2001 2002 2003 2804 2005

sald 12,479 0,913 13,675 14,310 i4,072 16.61 18.738 t9.122 19960 21.083 22.282 23.246 24,229 24.986 24.668 26.291 2SS93DietCg . Sda 6,09S 6405 7,020 7,516 8.004 6526 9.310 9.943 10.647 11,837 12,626 13.677 14,256 14,433 14,452 U,342 U.6610psal3at hue. 6,361 4,306 6,655 6,794 6.68 623 9,426 9,179 9.133 9,246 9.454 9,573 9.973 10,553 10,216 11.949 t33,42lnI.uahAM

19 35 S5 6I 103 127 IS1 m n 212Smidy hum. _ 65 160 360 273 258 167 214 234 41S 623 922 1.237 1,237 1t237 1,237 1.237 1,37Tai hbu. 6,446 4.66 7,01S 7,067 6,326 S,4S0 9,642 9,413 9,547 9,504 10,434 IO,89 11,313 I1,917 11.604 t3,3t3 15,291

EXPESMB

A _3aasaI1w CNN 2,721 3.262 ,3.2t6 3.195 3.100 3,176 3,35S 3,654 3,973 4,130 4,376 4.685 4.672 S,067 5,270 5,481 S,700Dq _imi 272 2,250 2,195 2.437 2,254 2,142 2,034 1,933 1,636 1,744 1,657 1574 1,49S 1,421 1,350 1,22 1,216 8A1 d Pgats 30 30 30 30 16 3law hue _ (Coauw 1,190 1,278 1,076 S02 562 33? 202 117 39BDutkwLml.u 10 220 251 42 313 367 197 34lab=P ltgoan 1.310 2,166 O0 (t) 206 122 69 44 16

Teo El 753 9.226 6,IS0 6,505 6,451 6,44 5,86 5,782 5,864 5S.74 6,033 6,259 6367 6,48S 6,620 6.763 6,916

PteAt(L) sfs. Taz (1,O67) (4,55) 6 S62 (125) 2,306 3,712 3,631 3.683 4.030 4,401 4,630 4.946 5,429 4,9S4 6,CD S373Ta_

395 683 898 963 g96 3,034 1149 967 1,444 1.946PsaIW(La)AUwTu (I,) (4,5 865 S62 (325) 2,306 3.782 3,236 2,800 3,132 3,438 3,661 3,912 4,260 3,997 S.156 6,427Balm.bfowad 2,225 1,138 (3,423 A,5M) (3,993) (2,119) 186 3,969 7,205 10,O05 13,136 16,S74 2D,23S 24,146 2S,426 32424 37,8l1a=_clfoawad 1,138 (3,420) 0,555) (3,993) 2,119 IS 3,969 7,205 0,C00S 13,136 16,574 2D235 24.146 26,426 32,424 37,5SD 44,0D7U -km= km cocoa ad 0 eat ac p-' ea

F?AW&NIGUWUIORD BMAZLUOLDM OIL PFALM DIYJOMAFUNTflOM=C

WTUNEU GM PAUAS nlr laMD

Ytrl_301 Deembetl 36 no 119 m 13 1994 19 1996 1W4 1on 119 20 =1 20 20* D I l

OII PAIts 11,.26 30?W 12,739 13.155 32,06 1506 16673 1696 37644 18.00 t9.602 20,9 21,19 21.19, 21.3 2236 24667

pika mlb 1.3 6966 1.U36 1,155 14A6 1.74 2065 2.16 2316 2.483 2.680 2,85 3S.0 3193 3.206 .415 336

Totdl Edge Rmb 12.479 10.913 13.675 14.33 3402 16,811 18.738 19.122 19960 21.063 22.22 23,24 24.22 24,96 24.60 26.2 25

1PB Pnu s 1AS7 1.525 2,102 2.3 2.493 2.749 3.2 3.143 3.67 4.256 4,783 5.108 54 5.165 4.813 4.317 4.36

4mw IUw Ao 939 789 608 613 .I0tS 1.145 1.249 1.423 5S7 1.717 1.189 2052 234 2.219 2.S 2.401 2

Hlu_a 1231 1.445 1.351 1,497 1.608 1,699 1.810 1.841 I U17 1.780 1.756 I.10 1.,1 1.9 2.0 2.112 2.196

M_a 4fe A 4 Iob_Sg I,81 1,961 1.9 1853 2.3 1.96 2.135 2.261 2.430 2.635 2.156 3.069 3.102 3,319 3.452 3.5 3.734

Nos SmS mab 5 591 725 748 692 939 3.069 1.2tS 1,336 3.449 1.544 1643 1.7 1,7 .88 1.922 19t

ft*A@es.oom0 94 (15)

6.096 6.40S 7.00 ?.S16 . S.28 9,310 9.943 10,647 11.837 12.828 13.67s 14.256 1432 14.51 14.342 14.662

Qds3stIm Pus all Pau 6,381 4506 6.5 6794 6.08 0283 9428 9.179 9.113 9.246 9.454 9.sn 9.93 10.54 10.217 11.99 13.841

couuIktIm eo 6" SO 1379 171 200 100 I10 100 250 433 712 1.012 1.012 1.032 1,012 1.012 1.012

Oe _ 40 (44) 48 102 5s 67 114 134 165 190 210 22S 225 22S 225 22S 225

Toal Ca3e 6.385 4,614 7.082 7,067 6.326 6.450 9.642 9.413 9.5 9,869 10.376 1 11.210 11.791 11.454 13.186 15078

L_:Ad lu Eqeam 2,7U1 3=21 3,266 1195 31S0 3.176 3,356S SA64 3.973 4,t30 4,376 4.665 4,t72 5.067 5.271 5.481 5.10

la., hoep ) 1.190 1.278 1.078 62 562 337 202 117 39hiangs hdOmoeelv 10 22D 251 42 271 325 ISS () 09) ( (56 (81 (13 (27 (11) (707) (

ulsl _ J Iiesa' 42 42 42 42

P=6 e PaM OPGo 2.464 (166 2467 3.02 2.5 459 5,665 5.4 S.S35 5.774 6.058 6.204 6441 6.851 6.335 7.882 9.5

New gIy 1JI00 5000 l.0 $ 3.000Now ouowq 605

Todl s. 2.464 834 7,467 4.633 5351 4519 S. SAM 5,60S S.535 S.774 6.058 6.204 6.441 6,61S 6.33S 7.882 9.590

Find Asls 1.70D 769 635 IS.1S 152 1.73 1.S14 1.330 2.3t 1,64S 1,573 9t1.971 971 1,93 .971 .971 1.971

Now Dewiag_ 1,79S 1.437 1.127 462 675 S76 181Not Omat Asss hem (5 (111) 442) 400 424 449 476 SOS S3S 567 6D1 638 676 716 7S9 80S 8 3

R11Wmdo .8t lA= 2,517 1.538 4.196 3.949 3,579 2,106 1,091 1.119 643Rep ua_o Ntfw 60STaM 39S aS3 898 963 969 1.034 1.149 987 1.444 1,946

Tol Ankatl ,5S S,633 5.506 S.966 6.260 4,504 3.262 3,ff4 4,409 3.110 3.137 3,57S 3.681 3.136 3.717 4.220 4.770 U

Rdt _orpbW%Ddd (3394) 2.799) 1.961 (.333) 009) 66 2.623 1.654 1,126 2.664 2.921 2.626 2.760 S.015 2.618 3.662 4.,Q

C°uuiqCai&3a3.cd(Defld0 3.114 410 (2,3139) (358 0.691) (2.60) (2.535) *7 3,741 2,#6 s.sao S,451 13.07 13.837 16.850 19.470 23.130 %

Quba CubSe- sDI) 480 (319) (3m (0.691) (2,6 55) 7 1.741 2.866 S,S30 8.451 11.077 13,837 16.630 19,470 23.130 27,950

- 64 -

ANEXE 13Page 1 of 5

PAPUA NEr GUINEA

ORO SNALLEOLDEB OIL PALM DEVELOPMENT PROJECT

CONSERVATION OF TUE QUEEN ALEXANDRA BUTTERPLY (QAB)

1. This butterfly, the largest in the world, has only ever been foundabout 50 km of Popondetta. Never common, it is now threatened with extinctionthrough habitat destruction by large-scale logging throughout its habitatrange, and subsequent conversion of some logged areas to oil palm. The QAB isnot the only special natural feature of the area. Indeed the PopondettaPlains with their rich volcanic soils are one of the five lowland centres ofendemism in PNC, and other species also are known only from this same region.However, the QAB is the one feature of Oro Province that is known worldwide,as well as being a wsymbol" of PNG along with the birds of paradise.

Status of OAB Conservation

2. The Butterfly is listed in Appendix 1 of the CITES Convention, andIs protected in PNG law. The laws are ineffective, however, in that allstages of the butterfly are destroyed along with their habitat when it islogged or cleared for agriculture, no penalties are imposed for so doing, andno secure reserves have been established to protect the butterfly. Recentpreliminary surveys have confirmed the existence of QAB in several locations,rarely by sighting adult butterflies, usually by finding larvae or pupae.Minor habitat areas remain relatively secure. A few local landowners have, sofar, deliberately conserved small areas of QAB habitat in the face of pressurefrom logging interests, and HOPPL manages an active rehabilitation program inits small proposed wildlife Management Area, in association with theProvincial Wildlife Officer. In 1991 GOPNG commenced QAB project funding inanticipation of continuing work through the Oil Palm Project. Nevertheless,the decline of QAB has continued to accelerate, and areas of known QAB habitathave recently been destroyed by logging.

The OAB and the Smallholder OI Palm Project

3. Despite the fact that oil palm plantations occupy potential QABhabitat, the proposed project is the only present-time opportunity tointegrate a QAB survival program with the conservation and agriculturaldevelopment priorities of GOPNG. There are no practicable alternatives.The project has been designed in consultation with DEC, international NGOsincluding Worldwide Fund for (WF), Conservation International, and local NGOsincluding the Wau Ecology Institute (WEI) and Oro Provincial Women's Council.

A workshop convened in Popondetta in 1991 brought together representatives oflocal landowners, NGOs, HOPPL, DEC, DAL, NFCAP, the Provincial Government,Universities and radio stations. Priorities for action were identified inregard to infrastructure, policy, legislation, research, resource management,economic opportunity and education/awareness. Subsequently, WEI prepared aManagement Actlon Plan on behalf of DEC. An Alexandra Birdwing ConservationCommittee (ABCC) is proposed to be formed with representation including

- 65 -

ASME 13Page 2 of 5

landowners, DEC, DAL, OPIC, HOPPL, NGOs, Universities and ProvincialGovernment. It would monitor implementatlon of the program and report onprogress to donors, review proposals for grant-funded work, and administer asmll fund for local conservation work. The proposed smallholder oil palmproject provides the means of developing a model, replicable elsewhere throughthe NFCAP process, that demonstrates conservation of a threatened species andits habitat, coupled directly with both small scale and large scale economicopportunity for local people.

O*B Conservation Proaram Obiective

4. The fundamental objective is to ensure that viable populations ofthe QAB can be expected to survive in perpetuity in their natural habitat byproviding opportunities for local people to benefit in both cultural andeconomic terms from conservation of QAB and its forest habitat.

OAB Conservation ProSram Outline

5. The QAB Conservation program would be based upon existing GOPNGconservation and agriculture agencies, and would link directly with the NFCAP.It would provide core components to field infrastructure, lacking in the past,upon which to base conservation work. In particular, it would provide fundingfor national staff, housing, office space, demonstration and working areas,transport, and equipment.

6. National staff would include a qualified entomologist (or biologistwith special interest and knowledge in entomology) as conservation projectmanager; a conservation officer to undertake field work coupled with theresearch and resource management programs; an extension officer to identifyand coordinate economic opportunity projects with special focus on mattersrelated to women; an ecologist to lead the habitat rehabilitation team; aregistered surveyor to take responsibility for survey and procedural mattersrelated to establishment of conservation areas, and administrative and non-technical support staff. An internationally recognized specialist in theconservation of birdwing butterflies would be recrulted for three years asprincipal research officer to study the butterfly and its habitat, proposereserve areas, design research programs, and train the national counterpart.

OAM Conservation Prouram Activitie

7. The principal activities would include basic research on thedistribution, population density and ecology of QAB throughout its range;research on its food plants; habitat enrichment and rehabilitation; appraisalof economic opportunities; liaison with commercial interests, NGOs andgovernment agencies; involvement of local people, with special attention toissues of interest to women in conservation and development; continuingeducation, awareness and extension services; and the development of resourcemanagement strategies based upon economic opportunity coupled with theestablishment of Wildlife Nanagement Areas or similar conservation areasdesigned for survival of the butterfly in perpetuity. Grant funds obtainedthrough the project would be used to enhance the productivity of the core teamby widening the scope and extent of research programs, conservation activities

- 66 -

Page 3 of 5

and economic development work which can be undertaken by them and, inparticular, by a range of appropriately experienced local NGOs.

8. Small scale economic opportunities which have been triedsuccessfully in PNG and may be appropriate here include ranching ofbutterflies and other insects (possibly including the QAB); farming ofcassowaries, crocodiles and freshwater fish; aquarium fish trading;ecotourism; hardwood agro-forestry; making tapa cloth (from trees found onlyin Oro); orchid culture for the cut-flowers market; rattan harvesting andenrichment, and harvest of edible soft fruits and nuts, natural dyestuffs andresins. While the income from such projects may be small in Kina terms, it iscommonly highly significant in terms of the small rural villages and familygroups which normally do not take part in the cash economy, but nonethelessnow require cash for school fees, transport etc.

9. Discussion with representatives of women's groups in Oro revealed apriority requirement for an area where women can meet to discuss economic andcultural development. Therefore a suitable area, which can also be used as ademonstration area (with associated preparation and storage rooms), would beincorporated into the new Conservation Offices. The women's program would becoordinated by the DEC extension officer and in some cases undertaken by NOOsspecializing in issues of interest to women. Work planned under the programincludes the direct involvement of women in promoting conservation at thevillage level, since they traditionally have prime responsibility forharvesting forest products, and restoration of women's traditional role indecision-making, which tends to be eroded where the cash economy supplants thenon-cash economy.

10. Grant funds would also be sought to support the active,participation of local landowner groups, which would be essential to theultimate success of the project. Participation is intended both to raiserural conservation awareness and to generate conservation - coupled income.NGOs, some of which have expertise in village-level economic development andin issues related to women in development, and others which have scientificand technical interests appropriate to conservation, will be an integral partof this part of the work, and will be coordinated by the DEC extensionofficer.

OAS Conserwatio ProrM Desion Basis

11. The QAB Conservation Program has been designed and must beimplemented on the clear understanding that local Orokaiva people willdetermine, ultimately, whether or not the QAB survives. In PNG, landownershave virtually total authority over their land and the resources on it,irrespective of the wishes of local and central governments. Only if thelandowners perceive that their own wishes for economic development continue tobe served by conservation of the QAB and its habitat will the program succeedin the long term. Thus, the program has been set up in such a manner thatcommunication with landowners is facilitated in order to identify theirconcerns and priorities, and address them through activities that are seen tobe directly linked with butterfly conservation. In rural PNG, development isusually translated as "making money", hence to be successful conservation of

- 67 -

muE 13Page 4 of 5

the butterfly, as one form of development, must be implemented in such a wayas to 'make money' for people taking part. This is particularly so in thePopondetta area, where compared with many other areas of PN6, there is goodaccess to roads, schools, shops and medical facilities, and people have acontinuing requirement for cash.

InteractI wiEt Oil Palm DetlnUmeSt

12. Potential oil palm blocks are located in degraded, fire-maintainedgrasslands or secondary forest. The latter are used by QAB, although adultbutterflies apparently also require primary forest species as food sources.No primary forest would be accepted for conversion to oil palm, and indeednone is known to remain in the area of oil palm interest. The possibilitythat settlers attracted to the oil palm scheme at Kokoda may extend theirsubsistence gardening activities into primary forest areas would be addressedby offering stable alternatives through the project extension officers andNGOs which have specialized in stabilizing shifting agriculture. A screeningprocess based on the density of the larval food plant has been designed toassess the potential QAB habitat value of proposed oil palm blocks. Ifhabitats were assessed as "potentially useful', or as "prime habitat"landowners would be encouraged to allow oil palm development elsewhere. Ifthey declined, they would be asked to allow removal of vines and butterfliesto alternative sites. If negotiation fails, OPIC would decline to assist thelandowners with oil palm development. This would be used as a last resortwhere 60% of the blocks were assessed as prime sites. It is a high-riskoption as, in the "payback" society of PNG, landowners could retaliatedirectly against both vines and butterflies. To further assist QABconservation, DAL/ORIC has agreed to restrict oil palm development to areas ofdegraded grasslands for the first couple of years, thus allowing time toobtain research data on the use of secondary forest areas by QAB in order toimrove the management of such areas. Finally, it is relevant to note thatthe most effective butterfly field work, habitat rehabilitation and resourcemanagement program initiated to date is being carried out by HOPPL at its lejoreserve.

OAB Conservation Proaram Imolementation Stat"u

13. From the PMG viewpoint, planning of the conservation program is welladvanced in anticipation of full-scale operations from the beginning of 1993,and field staff are already based in Popondetta. The principal remainingrequirement is for an international sponsor NGO to "adopt" the entire program,and to provide the international continuity and continued presence which is sodifficult for field works in PNG to achieve.

- 68 -

AM=E 13Page 5 of 5

TECUNIcAL PERSONNEL: SUMNARY OF OUALIFICATIONS AND DUTIES

A. Principal Research Offier

Internationally recognized specialist in the conservation ofbirdwing butterflies. Responsible for the design of research programs on allaspects of the butterfly, its food plants, its distribution and its habitatrequirements. Responsible for technology transfer of research planning andimplementation skills to national staff. Position tenable for 18 months, withrenewal or replacement funded for further 18 months.

B. ational Staff

Conservation Project Manager

Graduate entomologist (or biologist with special interest orknowledge in entomology), and with proven skills in communications and inmanaging research projects. Responsible for both administrative and technicalmanagement of the project, liaison with other agencies, and supervision ofproject staff.

Conservation Officer

Provincial wildlife/ecology-oriented person, with proven abilitiesin butterfly field work and in liaison with local landowner groups.Responsible for implementing the butterfly program, promoting with landownersthe concepts of butterfly conservation, and promoting the establishment ofWildlife Management Areas.

Extension Officer

Specialist in sustainable utilization of non-timber forestresources, small business opportunity and village-level economic development.Responsible for identifying and evaluating options, and discussing them withinterested landowners. Responsible, in association with NGOs and others, forimplementing selected options. Responsible for addressing the implications ofdevelopment for women, the role of women in promoting conservation, and theeconomic opportunities available in relation to butterfly conservation.

Ecologist

Leader of the habitat enrichment team. Responsible for propagatingand planting-out the butterfly's food plants, and for advising landowners onhabitat rehabilitation and management in accordance with objectives defined bythe research program.

Registered Surveyor

Registered surveyor to carry out boundary surveys of proposedconservation areas, prepare maps and other documentation, and takeresponsibility for liaison with the Department of Lands concerning the timelyestablishment of conservation areas.

- 69 -

AM=E 14

PAPUA VW GUINEA

0O0 SNILLFOLDER oI AIRU DEVELOPMENT PROJECT

Supporting Documents Available in Project File

Agriculture Bank of Papua New Guinea: Annual Report and Financial Statements,1990.

Papua New Guinea Banking Corporation: Annual Reports, 1989, 1990.

Bank of Papua New Guinea: Report and Financial Statements December 31, 1990.

Higaturu Oil Palms Pty Ltd (HOPPL): Annual Accounts, 1988, 1989, 1990 and1991.

Higaturu Transport Pty Ltd (HTPL): Annual Accounts, 1989, 1990, and 1991.

FAO/CP - CDC December 1987 Identification Report.

FAO/CP - CDC November 1988 Preparation Report.

Cons"ltant's Report on Environment Management and Alexand-a Birdwing ButterflyConservation, May 1990.

Consultant's Report on Alexandra Birdwing Conservation, July 1990.

Results of the Preliminary Survey of Alexandra Birdwing, July 1991.

Consultant's Report on Women in Papua New Guinea's Tree Crop Sub-sector,December 1991.

GOPNG's Procedures for Special Accounts for Foreign Assisted Projects.

Appraisal Mission's Working Papers:

(a) detailed cost tables by component;(b) economic analysis;(c) smallholder farm model;(d) crop projections.

C~~~~~~~

A- Is- 4=

9w~~f4~~~~~~~~

4-s

Z

(Onthpes:W alexandrae

f :~Acul Xsiz:

*""vi- fA

* '.,,t''p'.,'' /' .'' ', , -S As. "', ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

, .7-fASE .V- ,,s,r,, ' ' <p' S ah ,, , e~~~~~~~~~~~~~

;'j''-"S X '' '". .'",'-~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~'

( ||| QUEEN bLOCANDRA BIRDWING BlJrrERFLY 9 ; -~~~~

- ~ ~~~~~~~ POntotr lxnre

i Actual size o . . *~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

_E~~~~~~~~~~~~~ " -- S~~~~~~~~~~~~~~~~~~~~~P

148 -OE R.4UA ANd GL

ORO SMALLHOLDER OIL PALMfJI pAP . < DEVLOPMEN PRW.-Cr* ' NEW \:SMAU.OWEROILPALMOLOCKS-

GUINEA _\__Sc~~on,on ,~C'( OSrENG A*EA

~~~~~~~~~~~~~~~~~~R. MOP b9 _E ;\S y t * /a e. tHo,. t4 a.EUO eSTATES.MarmbyhY ~80 30S MAMBAESTATE ~S-S

A OWWCESAM0 PACTOPSIE

MAIN OtAD

f 5 X X J SECliONt tO S

- .INTERHATiONAL SOUNDASES

AX

S045.8'PAS.S

~~J~~6 ESTATE SVN

9RISOTA Oro

MT. LAMINGTON

i4d~~~~~~~~~~~~~~~OO6~~~~~14W1