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Towards Agriculture

Transformation and a New

Direction for Enhancing

Productivity in Agriculture

Functional and Expenditure Review ofAgricultural Commodity Boards and Agencies

Department of Agriculture and Livestock

April 2014


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CONTENTS

FOREWORD iii

EXECUTIVE OVERVIEW v

1. BACKGROUND 1

2. AGRICULTURAL POLICY ANALYSIS 9

3. AGRICULTURAL TAXATION AND INPUT SUBSIDIES 43

4.

AGRICULTURE SECTOR EXPENDITURE AND BUDGET ANALYSIS 60

5. ORGANISATIONAL ANALYSIS 91

6. LEGAL ISSUES AND IMPLICATIONS 109

7. THE WAY FORWARD FOR IMPLEMENTATION 128

Appendix 1: FER Consultants

Appendix 2: Acronyms

References

137

138

140


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[iii]

FOREWORD

The ONeill-Dion Government announced this Functional and Expenditure Review (FER) of the

Agriculture Commodity Boards and Agencies in March 2013 as an initial contribution to a

major overhaul of government agencies serving the agricultural sector in Papua New Guinea

(PNG). The Government recognized that a major overhaul is required because of the ongoing

policy implementation problem that has been a pervasive feature of the agriculture sector of

PNG over many years. Major reforms of government agencies in agriculture are needed to

enable them to contribute effectively to key development outcomes relating to growth of

production, exports, employment, household income, food security, and increased private

sector investment in the sector.

The Government recognized that rationalization of the commodity boards and agencies was

central to pave the way for the required overhaul over time. It decided that a FER of the

commodity boards and agencies, as recommended in the 2005 FER of the Agriculture Sector,

should proceed without further delay to enable appropriate rationalization to occur.

Soon after the Review was announced, I called for a meeting of all commodity boards and

agencies that was convened to discuss issues relating to the proposed FER. That meeting

produced a long list of major sector issues that needed to be addressed, which were outlined

in the form of a communiqu. The FER team has considered a range of different views on those

issues and has presented the Government with considered views on how it should pursue the

key outcomes for the agricultural sector.

As the responsible Minister, I have already set in train action to implement some of the

recommendations of this FER relating to rationalization of the commodity boards. However,

further follow up action will be required before the recommendations of this Review are

reflected in improved commodity board performance in encouraging innovation and higher

productivity, greater smallholder participation and increased private sector investment in the

agricultural sector. In order to be implemented, the central recommendations of the Review

relating to funding and governance of the commodity boards require substantial organisational

innovations to be embedded in legislation.

I will be moving quickly to initiate the preparatory work required to legislate for: (a) a National

Agricultural Administration Act to define the responsibilities of DAL, the commodity boards

and provincial agencies, and (b) establishment of an Agricultural Investment Corporation to

remedy deficiencies in funding and governance arrangements of the commodity boards and to

enable them to play a more positive role in encouraging investment in the agriculture sector,

and (c) establishment of a Registration of Agriculture Professionals Act to facilitate the

formation of a database for all professionals engaged in the agriculture sector in PNG and also

set minimum standards of qualifications for particular disciplines and a code of conduct .

I will also ensure that legislation of commodity boards and agencies will either be amended for

the ones that will merge or new bills drafted for the new entities approved by the NEC during

the transitional phase.


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There will be a transitional phase of twelve months in terms of merging the identified

commodity boards and agencies and also the corporatisation of the research and development

under the reorganised commodity boards and agencies. The purposes of these initiatives are to

improve organisational efficiency and effective service delivery to the farming communities in

the rural areas in Papua New Guinea.

I therefore call upon all government ministers, provincial governors, open members of

Parliament, government officers in national departments and the provinces to assist the

ministry of Agriculture and Livestock to implement the recommendations in the FER report to

make optimal use of our land resources for food production and income generation for the

betterment of our rural population. After all the non-renewable resources are extracted and

gone, I would like to see an upgraded agriculture sector that is able to sustain our rural people

and meet our food security needs for many years to come.

Hon. Assik Tommy Tomscoll, MP

Minister for Agriculture and Livestock


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EXECUTIVE OVERVIEW

The Rationale for the Functional and Expenditure Review

Although a Functional and Expenditure Review (FER) for the whole agriculture sector was

conducted in 2005, most of the recommendations have never been seriously followed up or

implemented. This FER on commodity boards and agencies was commissioned by the National

Executive Council (NEC) in 2013 to address the most important issues still outstanding. One of

the most difficult questions still to be answered is why the productivity and production levels

for the smallholder farmers producing the commodity crops and products continue to be low

and stagnant up to the present time. Accordingly, the central question raised by the terms of

reference of this Review is:

How could an overhaul of commodity boards and other agriculture sector agencies

contribute to greater investment and higher economic growth in the agricultural

sector of PNG, with better opportunities for men and women to participate incommercial activities?

This call for more rapid and widespread growth of economic opportunities in agriculture

should be seen against the background of:

the ongoing importance of agriculture as a source of livelihood for the vast majority of

people in PNG; and

the limited prospects the future holds for most of those people in the absence of a major

transformation of the agricultural sector.

Reform of the commodity boards and other agricultural sector agencies has potential to

contribute to the desired outcomes for the sector because those agencies have been intimately

involved in provision of important services such as research, extension, quality control,

marketing and regulation. There is also potential for the boards to contribute to the desired

outcomes by playing a facilitative role in commercialization of research outputs, encouraging

innovations likely to be of benefit to farmers and enabling greater investment to occur in small

to medium size agribusinesses. More rapid and widespread growth of economic opportunities

in agriculture depends on efficient provision of such services.

Commodity boards through the proposed Agriculture Investment Corporation (AIC) and/or a

transformed DAL may also play an important role in seeking cooperation from other arms of

government to better serve farming communities. For example, they can encourage responsible

government authorities to give higher priority to improving agricultural education, maintaining

and improving the roads and shipping facilities for transport of commodities and to preventing

theft in transport of commodities. These proposed governance and operational arrangement

may pave the way for recommendations to be made to relevant authorities how better use can

be made of District Service Improvement Program (DSIP) funds.

The commodity boards can also make a useful contribution by liaising with financial

institutions and other private sector input suppliers to enable them to tailor their products to

ensure better services are provided to farmers.


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Agricultural Policy Priorities

The current state of the agricultural sector of PNG is more a reflection of historical influences

than economic potential. Prior to Independence, government investment in extension, research

and agricultural education helped to establish a vibrant export-oriented agricultural sector,

based on oil and beverage crops. Some of that momentum has been lost over the last 40 years.

Most of the plantation sector has failed to flourish and there has been a decline in agriculturalextension services, in association with transfer of responsibility for those services to Provincial

Governments.

Some of the policy experiments in the post-Independence era have led to better outcomes than

might otherwise have occurred. For example, joint ventures with private investors helped to

establish the oil palm industry. The national government stake in these firms was eventually

sold, but this industry has become one of the few ongoing export revenue generation success

stories in the agricultural sector. The establishment of the National Agriculture Research

System (NARS) organisations such as the Coffee Research Institute in 1986, Cocoa & Coconut

Research Institute in 1986 (now CCI), and the National Agricultural Research Institute (NARI)in 1996 have led to developing technologies for productivity improvement and pest and

disease control in coffee, cocoa, coconut and food crops. These technological improvements

have been hailed as success stories, although outcomes in terms of impact of these improved

technologies on increased and sustained income generation, food supply and value chain

development have not been as good as might have been expected. Low level of technology

adoption has been one of the major reasons contributing to the sub-optimal outcomes.

The current state of much of the agricultural sector in PNG can best be described as languid.

Village agriculture, which supports over 80 per cent of the population, remains dominated by

subsistence food production. It generates little cash income and is characterised by low

productivity. Despite good intentions, governments and commodity boards and agencies have

provided village farmers with little help to raise their productivity in order to improve food and

nutrition security, and to enable them to participate more effectively in commercial activities.

Translation of new knowledge to business and commercial opportunities has been lacking for

many years.

A range of obstacles is holding back investment in the estate sector. While low commodity

prices and high production costs have deterred investment in some industries, problems in

obtaining secure land tenure, the potential for land disputes and problems associated with law

and order, have also contributed. Such factors have caused many plantations greater than 50-

200 ha to be abandoned; in the case of coffee, block holders of 10-20 ha are even declining.Without a major change in policy direction, it is likely that the estate sector will have a limited

future, confined largely to current plantations of tea and oil palm.

The Policy Implementation Problem

The FER team endorses the view that the existing arrangement of agricultural institutions is

uncoordinated, unaccountable and in many cases, ineffective in delivering improved

technologies, extension and other services to agriculture. That view has been previously

expressed in forums such as the National Development Forum hosted in 2009 by the

Consultative Implementation and Monitoring Council (INA, 2010).


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Over the last 15 years various efforts have been made to develop a new policy environment for

the agriculture sector that will be more conducive to new investment and growth of

employment in commercial agriculture. By 2007 those efforts had brought about a National

Agricultural Development Plan (NADP), which was directed toward sustainable

transformation of the countrys agriculture sector into a vibrant and productive economic

sector that contributes to economic growth, social wellbeing, national food security and

poverty alleviation.

The aims of the NADP are admirable but its implementation has been a debacle.

The achievement of agricultural policy objectives requires more than just formulation of plans.

It requires a robust policy development and monitoring system to implement those plans.

Policy development must be guided by a set of general guiding principles relating to

subsidisation and cost recovery for provision of government services to agriculture.

Appropriate administrative mechanisms are required to ensure that policies are implemented,

outcomes are monitored and corrective action is taken when required. And those

administrative mechanisms need to be embedded in a legislative framework to ensure

consistency in any government funding that is required. Unfortunately DAL had no plan to

coordinate, monitor and evaluate NADP and so it was left itself open to abuse and corruption.

Policy Development and Implementation

The Department of Agriculture and Livestock (DAL) has an important role to play in developing

and implementing policy, and monitoring of policy outcomes. But the Department currently

lacks the powers necessary to contribute effectively toward improving the performance of the

commodity boards and ensuring service delivery in the provinces. DAL should be given the

statutory powers required to enable it to undertake those tasks, and to initiate appropriate

action to rectify any chronic lapses in performance of commodity boards and provincial

agencies responsible for delivery of services to farmers.

The National Health Administration Act 1997 provides an appropriate model to use in creating

appropriate linkages between DAL, the commodity boards and the provinces. The National

Health Administration Act sets out the roles and responsibilities of each of the three layers of

administration national, provincial and district - and mechanisms for coordination of their

activities.

In order to regenerate agricultural extension services, there is a need to formulate a new

extension policy framework to promote a pluralistic, farmer driven, and market oriented

service that brings together all development partners down to the district level, including the

commodity boards and agencies. Implementation of policies to make the agricultural extension

system more farmer-driven and market oriented requires an organisational innovation

Agriculture Innovations Committees - to be established at District level to bring together all

development partners, including commodity boards, representatives of NGOs, farmer groups

and district agricultural officers. These Committees should be responsible for deciding, among

other things, which farmers or farmer groups would be eligible to obtain vouchers to access

agriculture inputs (as described below).

The most important longer-term issue for the agricultural sector in PNG is how best to

encourage people to see agriculture as a desirable career option. It seems to have become

difficult for the vast majority of young people to perceive that there is potential to earn a


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satisfactory income from agricultural pursuits. This attitudinal problem stems, in part, from an

education system that is geared to preparing young people for work unrelated to the

agricultural sector, leaving them ill-prepared to become commercial farmers or to pursue

careers in agribusiness.

It is also important to ensure that those students who choose to pursue tertiary studies relating

to agriculture obtain appropriate exposure to practical issues in the agricultural sector of PNG.The FER team considers that commodity boards and agencies have a crucial role to play in

supporting agricultural training and would like to see closer dialogue between the boards and

training institutions.

Another important issue for the agricultural sector is how to enhance the resilience of farmers

faced with inevitable fluctuations in commodity prices. Smallholders in PNG have tended to

protect themselves from the uncertainties of world markets by limiting their commercial

exposure. In other words, they maintain the capacity to return to subsistence farming and other

informal activities when there is a slump in world commodity prices. It is tempting to suggest

that government agencies should do more to even out fluctuations in returns to farmers, but

past experience indicates that this can provide a false sense of security. Governments do have

the borrowing capacity required to guarantee returns to farmers in the event of a prolonged

slump in commodity prices.

There are a variety of ways in which to improve the resilience of farmers faced with slumps in

commodity prices. For example, farmers can be helped to salvage some value from their

production through alternative local uses that avoid high transport costs (e.g. potential use of

copra for production of synthetic fuel) or they can be provided subsidies to help them plant

alternative crops.

Recommendations:

1. The functions of DAL have to be redefined so it can play an effective role as

the agricultural sector apex body responsible for (a) development of policy

and legislation, (b) coordination and monitoring of government policy

implementation by commodity boards and provincial agencies, and (c)

facilitation and linking of sector programs and resourcing requirements with

government central agencies and external donors.

2. Approval of Parliament should be sought for a National Agriculture

Administration Act to set out the responsibilities of DAL in relation to

commodity boards and provincial agenciesin relation to agriculture matters.

3. The Secretary of DAL should be given responsibility for scrutiny of

commodity boards and agencies. It is proposed that the Secretary be enabled

to do this as chairperson of the policy and funding entity to be called the

Agriculture Investment Corporation (described below).

4. DAL must address the issue of inadequate funding of various commodity

boards and agencies in agriculture. It is important in the long run that

effective funding mechanisms be determined and these be embedded in

legislation so that there is continuity and sustainability of these sources offunding to agriculture institutions.


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5. The National Agriculture Research Institute (NARI) should assume

responsibility beyond its current mandate where it can accept a greater

development role than in the past. The first step in this direction would be its

return to the fold of agriculture.

6. There is a need to formulate a new extension policy framework that

promotes a pluralistic, farmer driven, and market oriented extension servicethat (a) brings together all development partners and private sector service

providers down to the district level, including the commodity boards and

agencies; and (b) promotes public-private partnerships and resourcing.

7. Commodity boards should take charge in adopting and utilising policies that

encourage smallholder farmers to upscale and expand their commercial

activities, drawing upon the experience of the Bris Kanda and PPAP projects

in subsidisation of production inputs.

8. Commodity boards and agencies should identify strategic partners who are

best positioned and work in partnership to contribute to expansion of

domestic cash crops by encouraging productivity improvement by

smallholder participants.

9. Policies should be developed to revive the estate sector with a view to:

making better use of available land and promoting use of improved

technology; expanding processing and marketing opportunities; and

expanding employment opportunities in rural areas, including opportunities

for skilled employment.

10. The Government should encourage cooperation between relevant agriculturesector agencies (including commodity boards) and educational authorities

to: (a) ensure that school students obtain basic scientific knowledge about

agriculture and are provided accurate information about commercial

agriculture as a career option; and (b) improve agricultural training

provided at tertiary education institutions.

11. Policies should be developed to enhance the resilience of smallholder

farmers in the face of inevitable fluctuations in commodity prices.

12. A peak body needs to be established for registering agriculture professionals

in PNG which is part of the proposed rationalisation of the commodity boardsand agencies following similar legislative model of the Medical Registration

Act 1980 and the Lawyers Act 1986.

Achieving Balance between Subsidisation and Cost Recovery

To what extent should the costs incurred by government agencies in providing services to

agriculture be recovered from industry rather than subsidised by the general public? The

report argues that there is a strong economic rationale for some cost recovery via taxes and

charges. The benefits of these services flow mainly to existing farmers, and cost recovery

provides incentives for the industries concerned to contain costs and to curtail regulation thatdoes not provide value for money. A case can be made for subsidised provision of services to


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agriculture on the grounds that some benefits flow beyond farmers who currently pay levies,

for example by encouraging smallholders to expand commercial production.

The case for provision of input subsidies is strengthened by the policy imperative arising from

the PNGVision 2050 of fostering widespread opportunities for economic advancement among

the population of PNG. This objective is unlikely to be achieved without greater government

spending on extension services, and subsidisation of other inputs to promote greatercommercialisation and to help bring about a transformation of the agricultural sector. It is

appropriate for the pursuit of this important social objective to be funded from consolidated

government revenue.

For an input subsidy program to be successful, the structure of subsidies will need to be closely

related to the specific objectives that subsidies are intended to achieve. It is preferable for input

subsidies to be provided directly to farmers, rather than to input suppliers, particularly when

inputs are supplied in non-competitive environments.

A voucher scheme that would entitle eligible farmers to obtain designated goods or services at

reduced cost may be an efficient way to encourage greater use of purchased inputs in the

informal sector. The requirement to obtain vouchers from farmers before getting access to

public funds would give input suppliers greater incentives to meet farmers needs. An element

of competition could be introduced by giving farmers a range of choices in using vouchers for

example, for purchase of extension advice, seedlings or fertilizers.

In order to implement the proposed voucher system, government agencies would need to be

given responsibility for allocation of vouchers to farmers according to strict eligibility criteria

and for making payments to input suppliers when the vouchers are redeemed. Particular care

would be required in specifying eligibility conditions and implementation processes that would

ensure that funds go where they will do most good in terms of promoting more widespreadeconomic opportunities in rural areas.

When commodity boards are subsidised from consolidated government revenue, payments

should be made as far as possible according to a uniform set of rules that apply to all boards.

The arrangements should ensure greater stability over time in funding of individual boards. In

order to achieve that, arrangements for recurrent funding could require farmer contributions

through levies to be reduced when they have less ability to pay and for government payments

to be raised commensurately to make up any shortfall. Such a stabilization arrangement would

remedy the undesirable consequences of current cost recovery arrangements, which tend to

impose greatest burden on farmers when commodity prices are low. It would be far preferable

to current arrangements under which farmers have to rely on ad hoc payments by government

to help relieve the burden of levies. Predictable and consistent implementation of cost recovery

and input subsidy policies will require the principles involved to be clearly established and

reflected in enabling legislation.

Recommendations:

13. The pursuit of important social objectives, such as fostering widespread

opportunity for advancement of men and women through greater

participation in commercial agriculture, should be funded from funding

made available through the proposed AIC and the grant schemes rather thanthrough industry levies.


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14. Where possible, agricultural input subsidies should be provided directly to

farmers rather than to input suppliers. Consideration should be given to

provision of input subsidies to farmers through a voucher scheme that would

entitle eligible farmers to purchase inputs at reduced cost.

15. The funding principles for provision of services to agriculture should be

embodied in legislation which sets out rules for determining funding levelsand contributions by government and industry.

Towards Commodity Boards and Agencies Renewal

The commodity boards are sometimes viewed as a somewhat irrelevant and dysfunctional

legacy from a past era when governments were expected to be heavily involved in such

activities as industry regulation and price stabilization.

That view overlooks the important functions of the commodity boards in providing services

such as research, extension, quality control regulation and marketing services. It also overlooks

the important facilitative role the boards could play, in cooperation with other arms of

government, in ensuring better provision of services to agriculture and farming communities,

and facilitating innovation and investment that will expand demand for agricultural

commodities produced in PNG.

The commodity boards and agencies at present differ greatly in the extent to which they

provide research, extension, marketing and quality control services. However, the FER team is

of the view that a uniform corporatized model such as that of the CIC should be adopted by the

seven commodity boards. This approach will ensure that all functions that are currently

fragmented (e.g. cocoa, coconut, oil palm, rubber and spice) would be under one entity to

improve governance and management and set in place a uniform set of criteria to monitor andevaluate their performances.

The FER team considers that the current model of decentralized policy implementation via

commodity boards and other agencies is broadly appropriate as a way of providing

government services to agriculture. The model is capable of recognizing both the merits of

industry involvement in policy implementation and the nature of many board activities as

functions of government. Involvement of industry representatives provides a way to bring

relevant business knowledge to the board room, together with views on the question of

whether industry obtains value for money from services provided in exchange for levies and

license fees. The core functions of the boards are inherently functions of government becausethey involve compulsion (e.g. in raising revenue through levies and license fees and through

regulation to control quality of exports) and expenditure of public monies.

However, the current legal framework for the commodity boards and agencies is outdated and

in some respects an obstacle to more rapid and widespread growth of economic opportunities

in the agricultural sector. The boards generally have ample legal power including in most

instances powers than they do not currently use and should probably never use but the legal

framework has not even ensured that merit-based appointments of board members are made

in a timely manner. The FER team sees merit in having a majority of commodity board directors

drawn from a wide spectrum of PNG society, as provided under current legislation, but it is

strongly of the view that chairpersons of agencies that use public money and/or use the powers

of government to raise funds or perform regulatory functions should be appointed by the


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Government according to Regulatory Statutory Authority (RSA) procedures for merit-based

appointment. Since commodity boards exercise the powers of government and perform their

functional roles on behalf of the state, the state should accept responsibility for appointing

appropriate people to lead them.

Rules regarding representation on commodity boards should recognize that the commodity

boards are not just forums for exchange of views among industry stakeholders. Members ofthese executive boards have responsibility for making important decisions that have

implications for provision of crucial services to agricultural industries. Diminishing returns

tend to set in quickly as more people are added to decision-making boards. It is often

counterproductive to attempt to involve more than about 5 people directly in a decision-

making meeting. It is certainly difficult to justify incurring the substantial transport and

accommodation costs required to enable a large numbers of people to attend meetings if better

decisions can be made by a smaller group.

The responsibilities of effective board membership require representational skills and relevant

business experience or professional qualifications. It is important that the interests of

smallholders should be adequately represented on boards, along with those of other

stakeholders. Information presented to the FER team suggests, however, that being a

smallholder is neither a necessity, nor sufficient condition for effective representation of

smallholder interests. The election of smallholder representatives is unlikely to result in

effective representation of smallholder interests unless smallholder associations have the

technical competence to make useful inputs in the selection of suitable candidates.

Under current legislation the directors of most boards are appointed (or elected) for three

years. This means that a person cannot hold the position of board chairperson for a period of

more than three years without having his or her appointment renewed. Nevertheless, some

board members have been sitting on boards continuously for many terms and some board

chairmen have also held that office continuously for many terms.

It is certainly undesirable for organisations to have a high rate of turnover in top positions, but

if people hold such positions for more than a couple of consecutive terms there is a risk that the

process of merit-based appointment will be subverted. Place holders may be able to use the

influence that comes with their positions to entrench themselves for further terms and to

bestow favours on others.

There is potential to promote better performance of commodity boards by ensuring that board

positions are filled in a timely fashion. It has been proposed above that the Secretary of DAL

should have the powers and responsibilities of a board chairperson whenever such a position

becomes vacant. However, that applies only in respect of the chairpersons position and is a

stop-gap measure, to prevent the deterioration in organisational performance that might

otherwise occur. A course of action should be specified for appointments to board positions to

be made if time limits on standard approval processes are not met. For example, the process

could require automatic appointment of the candidate recommended by RSA Act procedures if

the responsible minister has not made an appointment within the specified time.


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Recommendations:

16. Chairpersons of commodity boards and agencies should be appointed by thegovernment according to RSA Act 2004 procedures.

17. The proposed National Agriculture Administration Act should specify that the

Secretary of DAL should be default chairperson (and responsible forexercising all the powers of chairperson) when the position of chairperson of

a commodity board is vacant for any reason.

18. There should be a maximum of five directors appointed to each commodityboard or agency, with three attendees constituting a quorum.

19. Processes for appointment or election of board members should be designedto ensure that the people selected have the skills required to make aneffective contribution to governance and leadership of a commodity board.

20. Board members, chairpersons and their deputies should not be permitted to

hold office for more than two consecutive terms.

21. To ensure commodity board positions are filled in a timely fashion, a courseof action should be specified for appointments to be made if time limits onstandard approval processes are not met.

Improving Organisational Capability

One of the key findings of the FER team is that some commodity boards are currently

performing their functions poorly, while others are performing much better. The observed

deficiencies in organisational capability seem to have less to do with inadequacies in technical

knowledge and skills than with dysfunctional attitudes, behaviours and cultural norms within

organisations. Although there are often fully developed corporate and operational plans,

implementation is minimal due to lack of clear direction and poor staff morale.

Information that has been presented to the FER team suggests that maintaining appropriate

standards of conduct is a major problem in some commodity boards and agencies. Misuse of

public funds and other conduct problems seem to have become entrenched in some

organisations. A major shift in organisational culture is likely to be required to remedy the

situation in those organisations.

The main source of the problem is deficient leadership, often associated with failure to appointa chairperson, to fill other board positions, or to appoint a competent chief executive. The

vacuum in responsibility and accountability at the top of the organisations has led to a situation

where performance management systems are either non-existent or implemented on an ad hoc

basis.Implementation of recommendations 16 and 20 will go some distance toward remedying

this situation, but additional mechanisms also need to be developed to require boards and chief

executives to give high priority to developing cultures of ethical conduct within their

organizations.

This Review has highlighted the poor performance in data collection, analysis and publication

in some commodity boards and agencies. The fact that the FER team has even had difficulty in

obtaining aggregate data on annual levy collections from one organisation (CIC) suggests a

deplorable lack of transparency in the current functioning of that organisation. More generally,


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assessments of the impact of government spending on performance have been hampered by

lack of relevant data. The FER team sees a need for remedial action to set in place processes to

collect data and to ensure that agencies are staffed with people who have the necessary

competence in data collection and analysis.

Attracting suitably qualified staff to work in the commodity boards is a major issue. As noted

earlier, the agriculture sector is perceived as an unattractive career option relative to othersectors, such as the financial services, mining and petroleum. As government agencies

established through acts of Parliament, remuneration decisions for the boards are subject to

the Salaries and Conditions Monitoring Committee (SCMC) Act and process, which take into

consideration a number of factors including relativities across all government agencies,

financial implication and funding sources.

If the boards and related agencies are to perform efficiently their role of providing services to

agriculture, they will need to meet the challenges of attracting, recruiting and retaining

qualified staff. This is likely to require remuneration levels comparable to those available in

alternative employment avenues that are available to staff with necessary skills. Provision for

performance based pay would help agencies to retain skilled staff as well as providing

incentives for improved performance.

Recommendations:

22. The agency responsible for funding and monitoring of boards should require

them to give high priority to developing cultures of ethical conduct within

their organizations, by holding chief executives to account for organizational

culture. Where entrenched problems exist, boards should appoint new chief

executives to remedy them.

23. High priority should be given to ensuring that commodity boards and

agencies collect and publish the information necessary to comply with the

basic standards of transparency and accountability expected of government

agencies, and that they collect and publish the data required for economic

analysis of their performance.

24. Processes for establishing remuneration levels for staff of commodity boards

and related agencies should be sufficiently flexible to enable higher

remuneration levels where this is necessary to attract, recruit and retain

suitably qualified staff.

25. The proposed 16 Point Grade Salary and Benefits Structures to be further

reviewed and benchmarked for adoption by commodity boards subject to

approval by SCMC and SRC.

Scope for Rationalisation

There is scope for rationalization of commodity boards through amalgamations to improve

performance in service delivery.

The terms of reference of the Review suggest consideration of the amalgamation of the Cocoa

Board and Kokonas Indastri Koporesen (KIK), the creation of an Oil Palm Board (to replace

OPIC), the creation of a Food and Grain Authority (to replace the Fresh Produce Development


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Authority), a Livestock Development Board (to replace the Livestock Development

Corporation) and a Minor Cash Crops Authority (to replace Rubber and Spice Boards and

include tea, cassava, cashew etc.).

The FER teams conclusions are as follows:

Even though cocoa and coconut are grown together in PNG, these industries differ inregulatory, marketing and research requirements and would be best left as separate

entities. The current cocoa and coconut research and development programs

undertaken by CCI to be transferred together with appropriate assets to the two mother

boards and CCI abolished.

Elevation of OPIC to board status would provide a formal consultative mechanism to

improve communication within the industry and between the industry and

government. The proposed board also has potential to facilitate improvements in R&D

functions, currently undertaken by OPRA. OPRA assets would be transferred to the new

board. (The FER team has been made aware of concerns in the estate sector that an oil

palm commodity board could impact adversely on future development of this

successful export industry. The proposed board should be structured to ensure that this

does not occur.)

A Food and Grains Board (FGB) should be established through the merger of FPDA with

NARI.

A Livestock Development Board (LDB) should be established and provided with a

broader mandate than that currently provided to LDC. LDB should be provided with

adequate resource support to fulfil its mandate. LDC should be abolished and its assets

transferred to LDB.

So called minor cash crops should be placed under FGB. The interests of tea producers

are unlikely to be enhanced by a commodity board. Spice crops, cassava and cashew

should become commodities for further development by the proposed FGB. The current

Spice Board should be abolished.

A new Rubber Development Board (RDB) should be established under a revised

legislative framework. The Cape Rodney Rubber Project should be transferred to the

new board.

The institutional framework of the Coffee Industry Corporation (CIC) should beretained as CIC framework will be used to corporatize research and development for

cocoa and coconuts boards.

Recommendations:

26. The Cocoa and KIK Boards should remain separate entities, and their R&D

functions currently carried out by CCI should also be separated and

subsumed into the two boards. CCI should be abolished.

27. An Oil Palm Commodity Board should be established to take over the

functions of OPIC and provide a formal consultative mechanism between the


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industry and government, with a view to facilitating further development of

both the estate and smallholder sectors of this industry.

28. A Food and Grains Board (FGB) should be established (through the merger of

FPDA and NARI).

29. Proposals for establishment of a Livestock Development Board (LDB) andRubber Development Board (RDB) should proceed as planned.

Achieving Greater Consistency in Government Funding

A substantial increase in government spending on the agricultural sector has been

foreshadowed in the most recent budget, but there is no mechanism in place to ensure that

higher funding levels will be sustained. Recurrent funding to commodity boards and agencies

remained low and fairly stable in the six years to 2012. Although there was a substantial

increase in development funding over that period, it was concentrated in NARI and NDB, and

seems unlikely to have had much impact at farm level.

The desired outcomes for the agricultural sector specified in the terms of reference depend

crucially on having a coherent public funding framework laid down in legislation, rather than

decided on an ad hoc basis, as the budgetary situation changes from year to year. A legislative

framework for provision of subsidies (Recommendation 14) would go some way toward

meeting the objective of ensuring that annual allocations of public funds for agriculture are

shielded from short term changes in the Governments fiscal position and the political

landscape, i.e. it would be less vulnerable to spending cuts than current ad hoc annual

allocations.

A new public funding mechanism is needed to ensure a consistently higher level of funding forprojects that will contribute to future wealth creation potential in agriculture, more

widespread growth of economic opportunities and greater resilience in farming communities.

The information available to the Review suggests that government spending on agriculture will

need to be sustained at a much higher level than in the past to enable transformation of the

agricultural sector to be achieved. Government spending on agriculture has averaged K115.6

million over the past seven years, which represents only 1.1% of total government spending.

That level of spending is equivalent to about 3.2% of agricultural GDP. A substantially higher

level of government spending in agriculture is likely to be required to raise total investment in

agriculture sufficiently to transform the traditional agricultural sector. International studies

have suggested that investment in agriculture has to be raised to the equivalent of about 10%of total agricultural GDP to enable a traditional agricultural sector to be transformed. However,

any increase in funding should be subject to a higher level of performance, accountability and

perceived development outcomes by DAL, commodity boards and agencies.

There is potential for the development fund of the PNG LNG Sovereign Wealth Fund (SWF) to

be used to fund investments by the commodity boards and agencies that qualify as critical

priority areas in the overall development plans of the government. Since use of funds under the

PNG LNG SWF framework is governed by a specific policy and legislative framework, it would

be advisable to ensure relevant provisions are in place to enable appropriate investments by

commodity boards to be funded.


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The FER team proposes the establishment of an Agriculture Investment Corporation (AIC) to

provide a funding and governance structure for the commodity boards. It is envisaged that the

proposed AIC would enable the boards to play a more positive role in encouraging investment

and innovation in the agriculture sector, including important agribusiness development. It

would also remedy deficiencies in existing funding and governance arrangements by

controlling allocation of government funds to the boards and making them more accountable

for their use of public resources. The latter will come in the form of developing and

implementing a practical and effective monitoring and evaluation framework that would

include measuring performance indicators such as: (a) return of investment of government

funding in each industry, (b) increasing productivity and production, (c) increasing new and

large private sector investment into the industry, (d) increase in household income, and (e)

food and nutrition security.

It is proposed that the AIC would be established under the Ministry of Agriculture and

Livestock. It would be chaired by the Secretary for DAL with the other board members having

appropriate qualifications for assessing investment proposals and monitoring organisational

performance. The policy and legislative framework under which the commodity boards and/orauthorities would obtain their resourcing needs from the AIC and be accountable to it for their

performance will be developed following National Executive Council (NEC) approval of this

FER proposal.

The AIC would have two funding components: a Capital Formation Fund (CFF), and a

Contestable Agribusiness Development and Innovations Grant Fund (ADIGF). The CFF would

be directed toward much-needed repair and upgrading of the physical infrastructure of the

commodity boards and agencies. It is envisaged that half of the funds devoted to this purpose

would be contributed by the commodity boards and research agencies from internal revenue,

with a matching grant being provided by the national government.

The ADIGF would involve contestable grants to be provided to fund innovative projects through

commodity boards and agencies in partnership with private sector service providers. It would

also help transform the traditional agriculture sector by promoting and enhancing appropriate

investment in smallholder agriculture.

It is proposed that the AIC should be capitalised initially from the current NADP appropriation

of K100 million, redirection and/or channelling of all current PIP funded projects funding

currently implemented by the commodity boards and agencies through the AIC, and new and

additional funding from the SWF proceeds. Funding of the AIC should also be accorded priority

status in subsequent Medium Term Development Plans.

Recommendations:

30. Specific provisions should be made to ensure that investments by the

commodity boards and agencies that qualify as critical priority areas in the

overall development plans of the government are eligible for funding under

the development fund of the PNG LNG Sovereign Wealth Fund.

31. An Agricultural Investment Corporation (AIC) should be established to

remedy deficiencies in policy development, existing funding and governance

arrangements that would then enable the commodity boards to play a more


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positive role in policy implementation, and prudent resource allocation and

utilisation in the agriculture sector development.

32. The proposed AIC should be structured to give priority to repair and

upgrading of physical infrastructure of commodity boards and agencies, and

establishing a contestable grants scheme to meet high priority development

needs in agriculture subsectors.

33. The AIC should be capitalised initially from NADP funds, proceeds from SWF

and projects currently funded under PIP that are being implemented by

commodity boards and agencies. Funding of the AIC should be accorded

priority status in subsequent Medium Term Development Plans.

FER Recommendations and Implementation Framework

An important point to emphasis is the effective implementation of the NEC approved FER

recommendations by DAL. It is obvious that people with experience and technical competencesto implement the approved recommendations are currently not available in DAL. It is,

therefore, so critical that a FER Implementation and Advisory Unit (FIAU) should be

established, consisting of at least two full time appropriately qualified consultants, with specific

terms of reference to assist the Minister for Agriculture & Livestock and the DAL Secretary take

appropriate steps in ensuring that the FER recommendations are implemented in a timely and

effective manner in the transitional period in 2014 and 2015.

The FIAU is to be funded by the National Government and located in KIK, which will continue to

provide secretariat services to FIAU. FIAU will be accountable to the Minister for Agriculture &

Livestock on implementing the approved FER recommendations.

The following persons have been identified and will be engaged as consultants in the FIAU:

Dr Eric Omuru (Agricultural Economist)

Mr Ted Sitapai (Agriculture Policy Specialist)

Mr Ricky Kumung (Advisor)

The FIAU will be required to identify and develop implementation time frame schedules for

such matters as negotiations between commodity boards that will be merged or abolished,

drafting of bills to merge, abolish and create new proposed boards, preparations of budgetestimates for the existing and new proposed boards for operations in 2015 in the national

budget, amending existing legislation of boards to incorporate new innovative marketing

arrangements for smallholders


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CHAPTER 1: BACKGROUND

1.1 Introduction

This Functional and Expenditure Review (FER) of Agricultural Commodity Boards and Agencies

was approved by the National Executive Council (NEC) in March 2013 (NEC Decision No. 99/2013).

The terms of reference for the FER require the Review team to consider how reform of commodity

boards and other agriculture sector agencies can contribute to greater investment and higher

economic growth in the agricultural sector, with better opportunities for men and women to

participate in commercial activities.

More specifically, the terms of reference state:

The agricultural sector needs a major overhaul and the exercise must include DAL and the

Commodity Boards and Agencies aimed at achieving the following three key outcomes:

(a)

Increased domestic and export production and revenue from agriculture activities andbusinesses;

(b) Increased numbers of indigenous men and women in small, medium and corporate

businesses in agriculture; and

(c) Increased number and volume of new investments in the agriculture sector.

The proposed rationalization of the agriculture sector agencies, including the Department of

Agriculture and Livestock (DAL) as well as the commodity boards, is in direct response tofive of

the seven priority areas identified under theAlotau Accordof the ONeill-Dion Government.1

The view that there are too many commodity boards, which are costly, inefficient and ineffective,

has been expressed many times over a long period by political leaders in PNG and many key

stakeholders in the agriculture sector.2As explained below, this FER of the commodity boards and

agencies was recommended in the FERof the Agriculture Sector conducted in 2005.

Analysis of recent recurrent and development budget components for DAL and the commodity

boards reveals that up to 80% percent of the governments annual appropriation goes to the

recurrent budget with bulk of it used for personnel emoluments. The terms of reference for this

FER suggest that figure is clearly unacceptable and must be addressed as a matter of high priority

if we are to improve the efficiency and effectiveness of delivering quality agriculture services to our

people and key stakeholders in the sector.

The terms of reference for the FER require that it will focus on but not necessarily be limited to

the following Agriculture Commodity Boards and Agencies:

1 The five priority areas are: (a) Capitalize the National Development Bank with the aim to increasing support to theexpansion of Agribusiness by Papua New Guineans; (b) Rehabilitate and support fresh food storage and distributioninfrastructure; (c) Support agriculture research and development; (d) Restructure Agriculture Commodity Boards; and(e) Undertake a promotional program to invite foreign investors to invest in the sector, in areas such as rice, corn, wheatproduction and downstream processing.

2For example, in 2013 the Honorable Ken Fairweather, Member for Sumkar, expressed the view that Rubber Board andSpice Industry Boards should be abolished, with the functions of the two boards to be administered by DAL.


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(a) Cocoa Board,

(b) Kokonas Indastri Koporesen,

(c) Oil Palm Industry Corporation,

(d) Rubber Board,

(e) Spice Industry Board,

(f) Livestock Development Corporation Ltd, and

(g)

Fresh Produce Development Agency.

Under the current determinations, the Minister for Agriculture and Livestock, is responsible for 12

commodity boards and agencies: Cocoa Board, Kokonas Indastri Koporesen, Livestock

Development Corporation Ltd, Cocoa Coconut Institute Ltd, Spice Industry Board, Rubber Board,

Fresh Produce Development Agency, Oil Palm Research Association, Oil Palm Industry Corporation,

Coffee Industry Corporation, National Agriculture Quarantine and Inspection Authority, and

National Development Bank.

1.2 History of Commodity Boards in Papua New Guinea

Prior to the 1980s, the Department of Agriculture and Livestock (then the Department of Primary

Industry) managed all export commodities. In the late 1980s, the Government became concerned

about the declining productivity of the export crops, plantations were phasing out and smallholder

farmers dominated the subsector. Moreover, the provincial extension system was unable to deliver

efficient extension services to the farmers. In order to address these concerns the Government

initiated the studies led by the World Bank and ISNAR in 1981.

The findings of the World Bank and ISNAR studies led to the establishment of the Oil Palm

Research Association (OPRA) (in 1981), Coffee Research Institute (CRI) (in 1986) and Cocoa and

Coconut Research Institute (CCRI) (in 1986) so that the industries would take an active role in

funding their own research needs. The International Monetary Fund (IMF) and World Bank

Structural Adjustment Program (SAP) provided the basis for the government to initiate reforms in

the sector leading to the corporatization and/or establishment of agencies like Coffee Industry

Corporation (in 1991), Oil Palm Industry Corporation (OPIC) (in 1992), National Agricultural

Research Institute (NARI) (in 1996) and National Agriculture and Quarantine Inspection Authority

(NAQIA) (in 1997). The reforms were aimed at improving the overall efficiency in production and

overall quality of cash crops. However, the results over the last 20 years has been disappointing

with most commodity organizations increasing greatly in size and cost, and not delivering effective

services to growers (upon whose levies the boards rely for much of their funding).

1.3 Genesis of the Current FER

In March 2005, the Central Agencies Coordinating Committee (CACC) directed that an Agriculture

Sector Functional and Expenditure Review (FER) be undertaken.3The purpose of that FER was to

provide a clear framework for short to medium term targeted government institutional refocus,

rationalization and, if necessary, restructuring, so that limited public resources could be used as

effectively and efficiently as possible.

3See: DPM & NEC, 2005.


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The 2005 FER noted that a number of sector assessments of agriculture identified key issues

relating to Governments role in the sector and their administration of agriculture services.4These

issues have direct implications for any effort to reform agriculture commodity boards and

agencies:

(a) Roles, functions and relationshipsof organizations are determined by legislation, but

there is evidence of duplication of roles and functions as well as clear examples ofinefficiency. The sector is typified by fragmented management, poor relationships and

a lack of coordination.

(b) Relationships between organizations are not based on a sector plan or shared vision.

Resource and management inputs between these agencies are un-coordinated,

expensive and service delivery to farmers is adversely affected.

(c) There is no sector voice and shared vision to influence the Government planning and

budget processes. Despite its contribution to the GDP there is inadequate and

inconsistent allocation of funds to core priority programs and activities.

In response to the above findings, the Department of Agriculture & Livestock (DAL) developed thefirst National Agriculture Development Plan (NADP) 2007-2016, but due to mismanagement of

funds it has failed to be an effective and efficient instrument for the National Government to use as

a funding conduit for developing the agriculture sector in PNG.

The key organizational recommendations of the 2005 FER were:

(a) Amalgamation of Kokonas Indastri Koporesen (KIK) and the Cocoa Board; and

(b) All other commodity organizations as well as NARI and NAQIA to be subject to an FER

or other corporate review to identify opportunities for efficiency and performance

improvement.

1.4 Legal Basis for Agriculture Commodity Boards and Agencies

The existing agriculture sector entities have been established under the following relevant laws:

Cocoa Act Ch. 388; Kokonas Indastri Koporesen (KIK) Act 2002; Coffee Industry Corporation

(Statutory Functions and Powers) (CIC) Act 1991; Oil Palm Industry Corporation (OPIC) Act 1992;

Rubber Act Ch. 222; Spice Industry Act 1989; National Agriculture Quarantine and Inspection

Authority (NAQIA) Act 1997; and National Agricultural Research Institute (NARI) Act 1996.

Related agriculture sector agencies established under other laws or administrative arrangements

include:

(a) Livestock Development Corporation (LDC): The LDC was established because

Department of Primary Industries (DPI, now DAL) had difficulties in managing the

livestock slaughtering and processing facilities. The National Government in 1982

directed that a commercial entity be established to take over the livestock functions

and facilities of DPI. Currently, LDC is incorporated, as a 100 percent National

Government owned State entity operating the DPI livestock facilities on a commercial

basis. LDC is operating under the Companies Act 1997 and is yet to be declared as a

4In particular: ADB, 2004; PNG Extension Summit proceedings, NADP concept paper, AusAID NDAL Corporate ScopingStudy, NEFC Responsibility Specification Exercise (RSE).


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Regulatory Statutory Authority under the Regulatory Statutory Authorities

(Appointment to Certain Offices) 2004.

(b) PNG Cocoa and Coconut Institute (CCI): The CCI came into existence in 2003 when the

Cocoa and Coconut Research Institute and Cocoa and Coconut Extension Agency were

amalgamated under the Companies Act 1997. CCI undertakes research, development

and extension for Cocoa Board and Kokonas Indastri Koporesen. It is now a declaredRegulatory Statutory Authority under the Regulatory Statutory Authorities


(c) Papua New Guinea Oil Palm Research Association Inc.(OPRA): This is the research arm

of the oil palm industry in PNG. It is an association of all the 6 companies and farmers

who grow oil palm in the country. OPRAs mission is to fulfill the research needs and

solve the technical problems of the Associations members. OPRA is a declared

Regulatory Statutory Authority under the Regulatory Statutory Authorities


(d)

The Fresh Produce Development Company (FPDC): This was established as an

autonomous body in 1989 with government and NZAID investment and aims at

increasing income and employment through the development of a competitive and

sustainable fruit and vegetable industry. It has since been renamed as Fresh Food

Development Authority (FPDA). It is now a declared Regulatory Statutory Authority

under the Regulatory Statutory Authorities (Appointment to Certain Offices) 2004.

The current body of legislation governing the management, development and regulation of the

Commodity Boards and Agencies in the agriculture sector falls into three categories:

(a)

Laws establishing bodies to carry out an essential agricultural function nationwide,which include the National Agricultural Research Institute Act and the National

Agriculture Quarantine and Inspection Authority Act. It should be noted that in

addition to NARI, commodity boards for Cocoa, Coconut, Coffee and Oil Palm also have

their own research institutions;

(b) Laws establishing bodies with, or giving existing bodies, a monopoly over the production,

processing, marketing, and/or exporting of particular commodities and these are the

Rubber Act, Cocoa Act, Spice Industry Act, Coffee Industry Corporation (Statutory

Functions and Powers) Act, Kokonas Indastri Koporesen Act; and

(c)

Laws establishing bodies to carry out particular agricultural functions for a particularcommodity boardand this is the Oil Palm Industry Corporation Act, which in this case is

the extension function of the oil palm industry.

1.5 Strategies for Rationalising Commodity Boards and Agencies

The terms of reference specify that the proposed rationalization of the agriculture commodity

boards and agencies is aimed at achieving the following key outputs:

(a) Improved performance;

(b) Improved governance and accountability; and

(c) Optimized management structures.


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In order to achieve the above outputs in the proposed rationalization, the following criteria were

proposed:

(a) Capacity to generate domestic and export revenue of K500 million or more per year

(applies to major export commodities: coffee, oil palm, cocoa and coconut);

(b)

Capacity and ability to improve and enhance income-earning opportunities andlivelihood of the population;

(c) Organizations are organized into units that are practical for purposes of governance

and accountability;

(d) Organizations are organized into units that are convenient and effective for the

purposes of drafting and implementing legislations;

(e) Organizations are organized into units that are sustainable and progressive; and

(f) Organizations are organized into units with functions that are complementary rather

than competitive.

The FER team was tasked to consider a particular rationalization proposal to establish the

following entities:

(a) Cocoa and Coconut Authority (Merges Cocoa Board & KIK);

(b) Oil Palm Board (Replaces OPIC);

(c) Food and Grain Authority (Replaces FPDA and include grains such as rice, corn, sorghum,

etc.);

(d) Minor Cash Crops Authority (Replaces Rubber and Spice Boards and include Tea,

Cassava, Cashew, etc.); and(e) Livestock Development Authority (Replaces LDC).

The terms of reference requires the following tasks to be undertaken:

(a) Review and analyse the alignment of legislations relating to agriculture in PNG;

(b) Review and analyse the alignment of policies relating to agriculture and rural

development in PNG;

(c) Review and analyse the alignment of Agriculture Commodity Boards and Agencies in

the sector (organisational structures) so they become efficient and effective in

provision of their services;

(d)

Conduct cost benefit analysis of the public expenditure trends in the PNG agriculture

sector against the annual national budget since 2006;

(e) Examine budget processes and coordination between the Government Central

Agencies, Department of Agriculture & Livestock and the Commodity Boards and

Agencies; and determine the efficiency and effectiveness on the provision of services to

farmers;

(f) Propose a funding mechanism to capitalise the Commodity Boards and Agencies from

the LNG Sovereign Wealth Fund (SWF) for establishing viable business models for the

agriculture commodity based industries for the benefit of farmers; and

(g) Review current agriculture tax regimes and input subsidy schemes and propose how

these can be improved and sustained.


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1.6 Conduct of the Review

The work of the FER team leading to production of this draft report has been concentrated over the

period from the end of October 2013 to the beginning of March 2014.

The FER team presented an overview of the approaches they proposed to take at a seminar

attended by members of the Technical Steering Committee on November 15, 2013.

Members of the team have held extensive consultation meetings with commodity boards and other

organisations as shown in Table 1.1. The FER team would like to put on record that every effort

was made to have meetings with the senior officers of the Central Government Agencies

(Departments of National Planning & Monitoring, Treasury and Finance) but on every occasion the

officers were not available due to work commitments.

Each of the five consultants engaged on the project have contributed to the report on the basis of

their expertise, with the individual contributions being drawn together by Winton Bates, as the

team leader. The principal authors of the following chapters are:

Chapter 2: Mr Ted Sitapai

Chapter 3: Mr Winton Bates

Chapter 4: Dr Eric Omuru

Chapter 5: Mr Gabriel Selibu

Chapter 6: Mr Joel Alu

In the final synthesis of the FER report, it was deemed necessary to include a way forwardin termsof the implementation of the FER recommendations. Consequently a Chapter 7 to the report waswritten by the Chairman of the FER Technical Steering Committee, Dr James Kaiulo.

Table 1.1: Consultation Meetings

Organisation Place of Meeting FER Team Members Present

Internal Revenue Commission(IRC)

IRC BuildingPort Moresby

Mr Bates, Dr Omuru, , Mr Alu,Mr Kakini (E.O.)

PNG Customs Customs OfficePort Moresby

Mr Bates, Dr Omuru, Mr Alu,Mr Kakini (E.O.)

National AgricultureQuarantine InspectionAuthority (NAQIA)

NAQIA BuildingPort Moresby

Mr Bates, Dr Omuru, Mr Alu,Mr Kakini (E.O)

Coconut Cocoa Institute (CCI) CCI OfficeTavilo Station, ENB

Mr Sitapai and Mr Alu,


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DAL Secretary KIK Head OfficePort Moresby

Mr Bates, Dr Omuru, Mr Alu,Mr Kakini (E.O.)

Cocoa Board Cocoa Board OfficeKokopo, ENB

Dr Omuru, Mr Sitapai, Mr Alu,

PNG Growers Association Growers HausKokopo, ENB

Dr Omuru, Mr Sitapai, Mr Alu

University of NaturalResources and Environment(UNRE)

Vudal campusKokopo, ENB

Mr Sitapai

Rubber Board L&A HausPort Moresby

Mr Bates, Dr Omuru, Mr Sitapai, MrSelibu, Mr Alu, Mr Kakini (E.O.)

Spice Industrial Board L&A HausPort Moresby

Mr Bates, Dr Omuru, Mr Sitapai, MrSelibu, Mr Alu, Mr Kakini (EO)

Institute of National Affairs IPA HausPort Moresby

Mr Bates, Dr Omuru, Mr Sitapai

Livestock DevelopmentCorporation (LDC)

L&A HausPort Moresby

Mr Bates, Dr Omuru, Mr Sitapai, MrSelibu, Mr Alu, Mr Kakini (E.O)

Ramu Agri Industries Ramu EstatesRamu

Dr Omuru, Mr Sitapai, Mr Selibu, MrAlu, Mr Kakini (E.O.)

Fresh Produce Development

Agency (FPDA)

FPDA Head Office

Goroka


Coffee Industry Corporation(CIC)

CIC Head OfficeGoroka Dr Omuru, Mr Sitapai, Mr Alu

Coffee Industry Stakeholders CIC Head OfficeGoroka


PNG UNITECH Unitech TarakaCampus

Dr Omuru, Mr Sitapai, Mr Selibu, MrAlu, and Mr Kakini (E.O.)

National Agriculture ResearchInstitute (NARI)

NARI Head OfficeBubia, Lae

Dr Omuru, Mr Sitapai, Mr Selibu, MrAlu, and Mr Kakini (E.O.)

Coconut Cocoa Institute (CCI) CCI Head OfficeTavilo Station

Mr Selibu and Mr Kakini (E.O.)

Cocoa Board Cocoa Board OfficeKokopo, ENB

Mr Selibu and Mr Kakini (E.O.)

Oil Palm Industry Corporation(OPIC)

OPIC Head OfficePort Moresby

Dr Omuru and Mr Alu


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National Development Bank(NDB)

NDB OfficePort Moresby

Dr Omuru

NARI Chairman and seniorexecutives

UPNGPort Moresby

Mr Sitapai and Mr Selibu

Department of ProvincialAffairs

Waigani Head OfficePort Moresby

Mr Sitapai


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CHAPTER 2: AGRICULTURE POLICY ANALYSIS

Author: Ted Sitapai

2.1 Introduction

This chapter provides:

(a) an overview of the agriculture sector;(b) a description of the current policy environment for agriculture and rural development;

and(c) an analysis of the extent of alignment of current agriculture policies to national

development plans and objectives in order to address effective delivery services toagriculture industry supply and value chain players.

The policy review extends back in time, with a particular focus on evolution of corporate functions

and responsibilities of commodity boards and agencies since Independence.

The organizations which are the main focus of this analysis are: Coffee Industry Corporation (CIC),

Cocoa Board (CB), Kokonas Indastri Koporesen (KIK), Rubber Board (RB), Spice Board (SB), Oil

Palm Industry Corporation (OPIC), Fresh Produce Development Agency (FPDA), and Livestock

Development Corporation (LDC).

The chapter draws several conclusions on policy implementation by these commodity boards and

agencies, and considers the most appropriate options for their rationalization.

Although the Department of Agriculture and Livestock (DAL), Provincial divisions of primary

industry (DPIs), and the National Agricultural Research Institute (NARI) were outside the bounds

of this FER, it was considered prudent to include an appraisal of their status quo, and their roles inenhancing the proposed rationalization of the commodity boards and agencies.

2.2 Overview of the Agricultural Sector

It is necessary to provide a brief overview of the agriculture sector and its contribution to the

national economy, as a backdrop to the review of agriculture policies in PNG. This background

includes the genesis of agriculture policies from the colonial era to the pre-independence period,

and policy reforms and implementation in the agriculture sector since Independence.

2.2.1 Plantation agricultureThe commencement of the formal agriculture system in PNG can be traced back to the 1880s5, with

the establishment of coconut plantations during the early German and British settlements in the

New Guinea Islands, and in Madang and Milne Bay areas on the mainland (Dennis, 1981). An early

5Origin of agricultural systems in PNG dates back several thousands of years. Archaeological research over 30 years hasshown that agriculture was invented in the PNG central highlands almost 10,000 years ago, at the about the same time asirrigation and use of the plough became a practice in the Fertile Crescent of the Middle East and the Yangtze and Yellowriver basins of central China. Source: Bourke, 2009.


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post-independence survey in 1977 of policy making in PNG, edited by J. A. Ballard (1981), gave an

account of the colonial legacy in agriculture. As outlined by McKillop (1981), the emphasis in the

earlier years promoted a dual policy that encouraged growth of a commercial plantation sector and

providing settlers with the full benefits of modern agricultural scientific knowledge on the one

hand, and promoting a smallholder peasant proprietorship on the other.

Globally, plantation agriculture has been one of the chief means by which numerous developingcountries have been brought into the tributaries of the modern world economy. The plantation was

an instrument of modernization in the sense that it served to open up previously underdeveloped

countries and regions (Beckford, 1972). In PNG, plantations brought roads, ports, water supplies,

communications, health facilities, etc, to rural areas. In regions of the country where plantation

agriculture was promoted, the rate of development was generally more rapid than elsewhere.

As the earlier plantations were established in the PNG lowlands, these suffered severe devastation

during the two World Wars. From the 1950s onwards, the Australian Administration vigorously

promoted the revitalization of plantation agriculture under its war veterans scheme (Dennis,

1981). Under this policy, previously declared Crown Land was converted to an alienated asset foragricultural lease to expatriate and local planters. Plantations were re-established throughout the

country during this period through the cultivation of coconuts, cocoa, coffee and rubber.

Further diversification of plantation agriculture commenced in the early 1960s, with the

introduction of tea, oil palm and sugarcane. 6 Since Independence, plantation crops have become

the priority focus in agricultural development. As a basis for pioneer industries, the crops also

became targets for public and private investment. In the ensuing years, smallholder participation

in plantation crops was vigorously promoted by government extension programmes. Today, large

farms and smallholdings of these crops occupy over 500,000 hectares of land.7

The emphasis by the Government on plantation crops was in line with a policy to establish anexport-oriented economy in PNG, based on oil and beverage crops that grew well under its lush

tropical environments (McKillop, 1981). This effort was supported by a vibrant group of research

stations specializing in the release of improved stock and plant material, and technological

information to farmers. The crop and livestock species introduced to PNG over the years were

relatively free from the major exotic pests and diseases found elsewhere in the world. Until

recently, the pest and disease free status of PNG has given agricultural producers a competitive

edge over those in neighbouring countries.

2.2.2 Livestock farming

Commercial livestock farming was promoted along with plantation crops. Cattle ranches were

established by expatriate family holdings in many grassland areas of the country. Cattle grazing

under coconut palms also became a common dual-production system in coastal areas. Smallholder

cattle production was first promoted in the early 1960s under a World Bank subvention (McKillop,

6PNG is the centre of genetic diversity for the Saccharum sp. The sugarcane varieties introduced to establish sugarcaneplantations in the Ramu Valley in late 1970s, were elite commercial clones from Australia. Until recently, the pioneersugar industry had import protection for over three decades.

7There are approximately 12 million hectares of cultivated land in PNG. Sources: Bellamy (1986:116); Allen & Bourke(2009).


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1976). This effort led to the expansion of pasture areas in Madang and Morobe, central Highlands

and the Papuan coasts.

The national herd reached a peak of 153,000 by the mid-1970s, but since then, the cattle

population has declined to less than 80,000, with the demise of many cattle ranches and small

cattle farms (LDC, 2009). The decline of the cattle industry is due primarily to poor services

delivery, particularly extension support to smallholders. Consequently, farmers poor skills inanimal husbandry and pasture management have resulted in the low productivity of the national

herd.

In contrast, a deliberate Government policy of import protection in the commercial pig and poultry

industries over 20 years has resulted in PNG almost achieving self-sufficiency in pig and poultry

products. However, the additional value to the economy from the efficiency gained in the two

industries is substantially reduced by an almost total reliance on imported feed grains, which are

free of tariff. As animal feeds constitute 70% of the total production costs in pigs and poultry,

greater economy could be realized by the industries if more local feed sources (maize, coconut-

meal and fish-meal) are formulated and used to substitute imported feed grains. Other commerciallivestock promoted in PNG are sheep, goats, honey-bees and rabbits.

2.2.3 Agricultural exports

PNGs export economy is presently dominated by minerals (gold and copper) and oil. In 2011, the

three commodities accounted for 70.6% of the total value of exports, which had reached

K16,376,100 million that year (BPNG, 2011). The contribution of agricultural exports in the

renewable resources sector is significant, at around 23.1%, followed by forestry (4.6%) and

fisheries resources (1.6%).

Presently, the livestock sub-sector contributes about 15% of the total domestic food production,and about 12% of the agricultural gross domestic product. This status has remained unchanged for

over three decades (LDC, 2008). There is no significant export of livestock products, and

commercial production, except for pigs and poultry, remains static or on the decline since the

1970s. Meat consumption in PNG on the other hand, has increased steadily over the last two

decades (Vincent and Low, 2000; Allen et. al., 2009), and is predicted to increase at a conservative

rate of 5% per annum. Increased demand for meat is met by meat imports, and is influenced by

population growth rate, urbanization, changes in disposable income of citizens, and changes in

peoples eating habits.

2.2.4 Village agricultureThe deliberate policy focus on plantation agriculture and commercial livestock in the pre- and

early post-independence eras has meant that village agriculture, which supports over 80 per cent

of the population, has continuously been deprived of adequate government attention. While

extension programmes have assisted smallholder participation in the tree crops sector over the

post-independence period, the food sector has been totally neglected by policy makers.

Overall, village agriculture is dominated by subsistence food production. It provides most of the

food consumed in the country, an estimated 83% of food energy and 76% of protein (Bourke et al.

2009). The remainder is imported. Rural villagers grow or harvest about 400 plant species for food

(Bourke and Vlassak, 2004), and keep pigs and poultry to supplement diets and income. Wild meat


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Robusta coffee 2,318,227 1.1 270,000 8.5 9

Pelts and plumes 959,931 0.5 160,000 5.0 6

Crocodiles 950,192 0.5 131,000 4.1 7

Pyrethrum 748,667 0.4 125,000 3.9 6

Rubber 619,833 0.3 64,000 2.0 10

Chillies 173,207 0.1 29,000 0.9 6

Cardamom 148,367 0.1 25,000 0.8 6

Rice 39,705 0.0 7,000 0.2 6

Total 203,307,762 100 14

Source: Allen et al (2009) with adaptation of Allen et al(2001)

In terms of personal income, sales of oil palm or Arabica coffee gave the highest returns per person

(K47/per person/year), followed by copra (K31), cocoa (K26), betel nut & betel pepper (K18), and

fresh food (K15). Although Kina returns per rural household are much higher now than in the

1990s, the overall trend has remained consistent since then (Allen, etal., 2009).

The diversification in the sources of village income in PNG will continue as farmers intensify theirmodes of rural livelihood. In general, however, smallholder farmer productivity (output per unit of

land and labour) is very low compared to that in neighbouring countries. As described elsewhere

in this review (see Chapter 4), smallholder farmers yields perhectare from established cash crops

are lower than the genetic potential of those commodities.10 There are several factors that limit

farm productivity in PNG, a key one being the low use o f purchased inputs. In most instances

farmers cannot access the desired inputs because they are beyond their financial reach. The

challenge remains for the mandated institutions of state, including the agriculture commodity

boards and agencies, to concertedly improve smallholders access to farm inputs. This will promote

growth of smallholder farming businesses. Further diversification of income will also require

identification of new alternative high value crops or by-products to be developed for domestic andlater for export markets.

2.3 Policy Environment for Agriculture and Rural Development

This section covers a review of the most relevant national and sector policies adopted in the post-

independence era, and their impact on agriculture and rural development. The way agriculture

commodity boards and agencies have carried out their roles under these policies are also explored.

2.3.1 Macro-economic policies

PNGs macro-economic policies since Independence were aimed at achieving economic stability,with citizens taking greater control over key economic activities and resources, and reducing their

dependence on imported goods and services (BPNG, 1995). Rural self-employment was promoted

as a means to improving the livelihoods of the majority of the population, and the natural resource-

based enclaves were developed to give the government the means to pursue its development

agenda and ensure equitable distribution of wealth. The key policy instruments to promote such

10 For instance, in cocoa, the expected yield from improved hybrid material is 3000 kg of dried beans per hectare.

Average smallholder yield from the same cocoa material is only 366 kg of cocoa beans/hectare. Source: Curry et al.(2007) cited by Omuru in Chapter 4 of this review.


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objectives included: (i) the hard currency policy, (ii) a consumer price indexed minimum wages

policy, and (iii) general and selected trade and tariff protection (Chand and Yala, 2009).

The impact of macro-economic policies on agriculture is not part of this analysis. However,

generally, the way these policies were pursued in the decades immediately following

Independence was detrimental to agriculture growth, as it weakened the international

competitiveness of PNGs exports and provided little incentive for domestic production (Duncan, etal., 1998).

Some of the macroeconomic policy biases against agricultural development have since been

removed by the governments reforms such as support of market-oriented wage determination,

devaluation and floating of the Kina since 1994, rationalization of the trade and tariff policies

affecting agriculture and some liberalization of domestic price controls (BPNG, 2004). These

measures, in addition to substantial increases in the world prices of PNGs major export crops s

towards agriculture transformation

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