Towards Agriculture

Transformation and a New

Direction for Enhancing
Productivity in Agriculture

Functional and Expenditure Review of

Agricultural Commodity Boards and Agencies
Department of Agriculture and Livestock
April 2014

CONTENTS
FOREWORD

iii

1. BACKGROUND

EXECUTIVE OVERVIEW

2. AGRICULTURAL POLICY ANALYSIS

3. AGRICULTURAL TAXATION AND INPUT SUBSIDIES

43

5. ORGANISATIONAL ANALYSIS

91

4. AGRICULTURE SECTOR EXPENDITURE AND BUDGET ANALYSIS

60

6. LEGAL ISSUES AND IMPLICATIONS

109

Appendix 1: FER Consultants

137

7. THE WAY FORWARD FOR IMPLEMENTATION

Appendix 2: Acronyms

128
138

References

140

[ii]

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.

[iii]

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

[iv]

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 in
commercial 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.

[v]

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 agricultural
extension 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 50200 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).

[vi]

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

[vii]

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 agencies in 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 of
funding to agriculture institutions.

[viii]

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 service
that (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 agriculture

sector 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 boards
and 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 that
does not provide value for money. A case can be made for subsidised provision of services to

[ix]

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 PNG Vision 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 greater
commercialisation 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 widespread
economic 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 than
through industry levies.

[x]

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 levels
and 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 and
evaluate 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 because
they 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

[xi]

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 of
these 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 decisionmaking 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.

[xii]

Recommendations:
16.

Chairpersons of commodity boards and agencies should be appointed by the

government 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 for
exercising 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 commodity

board or agency, with three attendees constituting a quorum.

19.

Processes for appointment or election of board members should be designed

to ensure that the people selected have the skills required to make an
effective 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 course

of action should be specified for appointments to be made if time limits on
standard 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 appoint
a 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,

[xiii]

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 other
sectors, 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

[xiv]

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 in
regulatory, 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 be

retained 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

[xv]

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) and

Rubber 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 for
projects 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.

[xvi]

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/or
authorities 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

[xvii]

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 competences
to 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 budget
estimates 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

[xviii]

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)

(b)

(c)

Increased domestic and export production and revenue from agriculture activities and
businesses;
Increased numbers of indigenous men and women in small, medium and corporate
businesses in agriculture; and
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 to five of
the seven priority areas identified under the Alotau Accord of 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. 2 As explained below, this FER of the commodity boards and
agencies was recommended in the FER of 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:

The five priority areas are: (a) Capitalize the National Development Bank with the aim to increasing support to the
expansion of Agribusiness by Papua New Guineans; (b) Rehabilitate and support fresh food storage and distribution
infrastructure; (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, wheat
production and downstream processing.

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

[1]

(a)
(b)
(c)
(d)
(e)
(f)
(g)

Cocoa Board,
Kokonas Indastri Koporesen,
Oil Palm Industry Corporation,
Rubber Board,
Spice Industry Board,
Livestock Development Corporation Ltd, and
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. 3 The 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.

See: DPM & NEC, 2005.

[2]

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. 4 These
issues have direct implications for any effort to reform agriculture commodity boards and
agencies:

Roles, functions and relationships of organizations are determined by legislation, but

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

(a)

(b)
(c)

In response to the above findings, the Department of Agriculture & Livestock (DAL) developed the
first 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)

(b)

1.4

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

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

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

[3]

Regulatory Statutory Authority under

(Appointment to Certain Offices) 2004.

the

Regulatory Statutory Authorities

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

(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
(Appointment to Certain Offices) 2004.

(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)

(b)

(c)

1.5

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;

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
Laws establishing bodies to carry out particular agricultural functions for a particular
commodity board and this is the Oil Palm Industry Corporation Act, which in this case is
the extension function of the oil palm industry.

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)
(b)
(c)

Improved performance;
Improved governance and accountability; and
Optimized management structures.

[4]

In order to achieve the above outputs in the proposed rationalization, the following criteria were
proposed:
(a)

(b)
(c)
(d)
(e)
(f)

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);

Capacity and ability to improve and enhance income-earning opportunities and

livelihood of the population;

Organizations are organized into units that are practical for purposes of governance
and accountability;
Organizations are organized into units that are convenient and effective for the
purposes of drafting and implementing legislations;
Organizations are organized into units that are sustainable and progressive; and

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)
(b)
(c)

(d)
(e)

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

Oil Palm Board (Replaces OPIC);
Food and Grain Authority (Replaces FPDA and include grains such as rice, corn, sorghum,
etc.);
Minor Cash Crops Authority (Replaces Rubber and Spice Boards and include Tea,
Cassava, Cashew, etc.); and
Livestock Development Authority (Replaces LDC).

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

(a)
(b)

(c)

(d)

(e)
(f)
(g)

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

Review and analyse the alignment of policies relating to agriculture and rural
development in PNG;
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;
Conduct cost benefit analysis of the public expenditure trends in the PNG agriculture
sector against the annual national budget since 2006;
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;
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
Review current agriculture tax regimes and input subsidy schemes and propose how
these can be improved and sustained.

[5]

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 forward in terms
of the implementation of the FER recommendations. Consequently a Chapter 7 to the report was
written 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 Building
Port Moresby

Mr Bates, Dr Omuru, , Mr Alu,

Mr Kakini (E.O.)

National Agriculture
Quarantine Inspection
Authority (NAQIA)

NAQIA Building
Port Moresby

Mr Bates, Dr Omuru, Mr Alu,

Mr Kakini (E.O)

PNG Customs

Coconut Cocoa Institute (CCI)

Customs Office
Port Moresby

CCI Office
Tavilo Station, ENB

[6]

Mr Bates, Dr Omuru, Mr Alu,

Mr Kakini (E.O.)

Mr Sitapai and Mr Alu,

DAL Secretary
Cocoa Board
PNG Growers Association
University of Natural
Resources and Environment
(UNRE)
Rubber Board

Spice Industrial Board

Institute of National Affairs
Livestock Development
Corporation (LDC)
Ramu Agri Industries

Fresh Produce Development

Agency (FPDA)
Coffee Industry Corporation
(CIC)

Coffee Industry Stakeholders

PNG UNITECH
National Agriculture Research
Institute (NARI)
Coconut Cocoa Institute (CCI)
Cocoa Board
Oil Palm Industry Corporation
(OPIC)

KIK Head Office

Port Moresby

Mr Bates, Dr Omuru, Mr Alu,

Mr Kakini (E.O.)

Growers Haus
Kokopo, ENB

Dr Omuru, Mr Sitapai, Mr Alu

Vudal campus
Kokopo, ENB

Mr Sitapai

L&A Haus
Port Moresby

Mr Bates, Dr Omuru, Mr Sitapai, Mr

Selibu, Mr Alu, Mr Kakini (E.O.)

IPA Haus
Port Moresby

Mr Bates, Dr Omuru, Mr Sitapai

Cocoa Board Office

Kokopo, ENB

L&A Haus
Port Moresby

Dr Omuru, Mr Sitapai, Mr Alu,

Mr Bates, Dr Omuru, Mr Sitapai, Mr

Selibu, Mr Alu, Mr Kakini (EO)

L&A Haus
Port Moresby

Mr Bates, Dr Omuru, Mr Sitapai, Mr

Selibu, Mr Alu, Mr Kakini (E.O)

FPDA Head Office

Goroka

Dr Omuru, Mr Sitapai, Mr Alu

Ramu Estates
Ramu

CIC Head Office

Goroka

Dr Omuru, Mr Sitapai, Mr Selibu, Mr

Alu, Mr Kakini (E.O.)

Dr Omuru, Mr Sitapai, Mr Alu

CIC Head Office

Goroka

Dr Omuru, Mr Sitapai, Mr Alu

NARI Head Office

Bubia, Lae

Dr Omuru, Mr Sitapai, Mr Selibu, Mr

Alu, and Mr Kakini (E.O.)

Unitech Taraka
Campus

Dr Omuru, Mr Sitapai, Mr Selibu, Mr

Alu, and Mr Kakini (E.O.)

CCI Head Office

Tavilo Station

Mr Selibu and Mr Kakini (E.O.)

Cocoa Board Office

Kokopo, ENB
OPIC Head Office
Port Moresby

[7]

Mr Selibu and Mr Kakini (E.O.)

Dr Omuru and Mr Alu

National Development Bank

(NDB)

NDB Office
Port Moresby

Dr Omuru

Department of Provincial
Affairs

Waigani Head Office

Port Moresby

Mr Sitapai

NARI Chairman and senior

executives

UPNG
Port Moresby

Mr Sitapai and Mr Selibu

[8]

CHAPTER 2: AGRICULTURE POLICY ANALYSIS

2.1

Introduction

Author: Ted Sitapai

This chapter provides:

(a)
(b)

(c)

an overview of the agriculture sector;

a description of the current policy environment for agriculture and rural development;
and
an analysis of the extent of alignment of current agriculture policies to national
development plans and objectives in order to address effective delivery services to
agriculture 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 in
enhancing 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 agriculture

The commencement of the formal agriculture system in PNG can be traced back to the 1880s 5, 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
Origin of agricultural systems in PNG dates back several thousands of years. Archaeological research over 30 years has
shown that agriculture was invented in the PNG central highlands almost 10,000 years ago, at the about the same time as
irrigation and use of the plough became a practice in the Fertile Crescent of the Middle East and the Yangtze and Yellow
river basins of central China. Source: Bourke, 2009.

[9]

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 developing
countries 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 for
agricultural 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 an
export-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,
PNG is the centre of genetic diversity for the Saccharum sp. The sugarcane varieties introduced to establish sugarcane
plantations in the Ramu Valley in late 1970s, were elite commercial clones from Australia. Until recently, the pioneer
sugar industry had import protection for over three decades.

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

[10]

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 in
animal 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, coconutmeal and fish-meal) are formulated and used to substitute imported feed grains. Other commercial
livestock 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 agriculture

The 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

[11]

and fish also constitute part of the village diet. Sweet potato is the most important staple food crop
in PNG. It provides two-thirds of the food energy from locally grown food crops and is an important
food source for 65% of the rural population (Bourke et al., 1998). Other important staples include:
banana, sago, yam, taro and Chinese taro. Domestic rice production is negligible compared with
that of root crops, sago and banana, and is less than 1% of the quantity of imported rice (Bourke,
2005). Annual staple crop production is estimated as 4.5 million tonnes (Bourke and Vlassak,
2004).

The last formal survey of subsistence agriculture in PNG was carried out in 1961-1962. The
statistics from subsequent National Census since Independence do not reflect a complete picture of
village agriculture. Hence, accurate data on the value of village agricultural output is rarely
available. The most recent estimate of cash income of rural villagers from the sale of agricultural
produce is by Allen, et al. (2009) for period 1990-1995. Total income of the rural population from
different agricultural activities over this period was about K200 million per year (see Table 2.1).
Arabica coffee generated the highest income, providing 33% of all income from agricultural
activities, followed by fresh food sales (22%), cocoa (11%), betel nut/betel pepper (10%), copra
(8%) and oil palm (3%). Sale of fresh food provided cash income to more households than any
other activity. More than 90% of rural villagers derived their income from this source. This was
followed by Arabica and Robusta coffee (53% of rural villagers), betel nut and betel pepper (35%),
cocoa (27%), firewood (23%), tobacco (19%), copra (17%), fish and shellfish (13%), and cattle
(11%).
Table 2.1:

Estimated Annual Cash Income of the Rural Population from Agriculture, 1990
1995

Product
Arabica coffee
Fresh food
Cocoa
Betel nut & pepper
Copra
Oil palm
Firewood
Fish and shellfish
Irish potato
Tobacco
All other products 9
Cattle
8

Income
(Kina/year)
8

66,937,782
44,137,734
22,237,432
20,216,030
16,460,230
6,147,153
5,029,200
3,029,200
3,547,451
3,547,451
2,814,518
2,417,596

Proportion
of total
income
(%)
32.9
21.7
10.9
9.9
8.1
3.0
2.5
1.9
1.8
1.7
1.4
1.2

Kina was about 1US$ over the 1990-1995 period.

Rural
population
(1990
Census)
1,416,000
2,991,000
850,000
1,121,000
527,000
130,000
741,000
421,000
536,000
591,000
409,000
403,000

Proportion
of rural
population
(%)
44.5
94.0
26.7
35.2
16.6
4.1
23.3
13.0
16.8
18.6
12.9
12.7

Average cash
income
(Kina/pers/year)
47
15
26
18
31
47
7
9
7
6
7
6

These included copal gum (Agathis sp.), massoi bark (Massoia aromatica), tigasso oil (Campnosperma sp.), salt extracted
from plants or natural springs and deposits, mineral oil, bche-de-mer, insects and butterflies, live birds and marsupials,
house-building material including thatching and sheets of woven cane, string bags and carvings and traditional artifacts.
Source: Allen et al. (2001).

[12]

Robusta coffee
Pelts and plumes
Crocodiles
Pyrethrum
Rubber
Chillies
Cardamom
Rice
Total

2,318,227
959,931
950,192
748,667
619,833
173,207
148,367
39,705
203,307,762

1.1
0.5
0.5
0.4
0.3
0.1
0.1
0.0
100

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

270,000
160,000
131,000
125,000
64,000
29,000
25,000
7,000

8.5
5.0
4.1
3.9
2.0
0.9
0.8
0.2

9
6
7
6
10
6
6
6
14

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, et al., 2009).

The diversification in the sources of village income in PNG will continue as farmers intensify their
modes 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 per hectare 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 of 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 and
later 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 postindependence 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 resourcebased 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
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.

10

[13]

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, et
al., 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 since
the late 1990s, have improved the incentive regimes and international competitiveness for
production of most agricultural tradable commodities.

2.3.2

Government policies of direct relevance to agriculture commodity

boards and agencies

McKillop, et al. (2009) provided the most recent account of policy making and implementation in
the agriculture sector over the pre- and post-independence periods. The focus of the current
review is on the policies of the post-independence era that are relevant to the functions of
agriculture commodity boards and agencies.

These are: decentralization policy, privatization (state enterprises) policy, corporatization policy,
agriculture training policy, food security policy and agriculture investment policy. From this
analysis, several conclusions are drawn on the role of the commodity boards and agencies in four
key areas: agriculture research, extension, marketing, and the financing of agricultural
development.
2.3.2.1

Decentralization policy

The decentralization policy, adopted at Independence in 1975 resulted in the passage of the
Organic Law on Provincial Governments (OLPG) in 1976. The OLPG did pave the way for the
establishment of provincial governments (PGs), with the transfer of development functions and
financial powers from the National Government to the provinces (GOPNG, 1977).

The main rationale of decentralization was to empower PGs to decide on development priorities in
individual provinces, and to manage their own expenditure budgets. The key agricultural function
decentralized under this policy was agriculture extension. Within the Provincial administration
structure, a division of primary industry (DPI) was established as the main vehicle to drive
agriculture extension services in provinces. However, since then, extension has been executed as a
concurrent function of PGs and national agricultural agencies. Agriculture research on the other
hand, has remained a function of the national agricultural research system (NARS).
In 1995, OLPG was amended by the Organic Law on Provincial and Local Level Governments
(OLPLLG), to give recognition to the districts as the focal point for local development planning and
services delivery. The mechanism for mobilizing development support to local level governments
(LLGs) is through the joint district planning and budget priorities committee (JDP&BPC), headed

[14]

by the local Member of Parliament. The National Government budgetary support for LLGs is made
annually through the district support improvement programme (DSIP).

The DSIP funding covers several sectors, including agriculture extension. The funds are managed
by the Department of Implementation and Rural Development (DI&RD) 11, which deals directly
with district administration, often by-passing provincial coordinators of extension programs based
at Provincial headquarters. DI&RD is also responsible for monitoring and evaluation, and impact
assessment of the DSIP interventions. This agency has limited capacity (Paul Saii, pers. comm.), and
as impact assessments are costly to undertake, they are rarely done. The annual DSIP acquittals by
Members are often about matching expenditures to budgets, not outcomes.
The National Economic Fiscal Commission (NEFC) is an independent statutory body established
under the OLPLLG to monitor usage of grants to PGs, and undertake provincial expenditure
reviews (PER) of their support for services delivery each year. Like the DSIP, the provincial grants
cover several sectors: education, health, primary industry (agriculture and fisheries), and law and
justice administration. The Commissions PER in 2012 indicated that agriculture spending
increased significantly in 2011 (to K28.2 million) but dipped slightly to K27.4 million in 2012.
Although all provinces allocated funding for agriculture that year, only one province, East New
Britain, made a fair allocation to its agriculture program (NEFC, 2013).

The FER team heard varying opinions of stakeholders about the impact of the decentralization
policy and the OLPLLG on agriculture development. Many commentators felt that the
decentralization process had greatly weakened extension and services delivery in PNG. Further, it
has isolated provincial and district agriculture services from the attention and support of national
agencies, in particular, by the NARS.
2.3.2.2

State enterprise policy

In its short history as an independent state, PNG has experienced a rapid evolution of its state
enterprises, and as well as its enabling policy (Curtin, 2009). At Independence, the public
enterprise sector was quite small, and broadly limited to public utilities of electricity, water and
sewerage, transport (airways and harbours), posts and telecommunications, copra marketing, and
central banking. During the early-post Independence period, the government established a stateowned commercial bank (PNGBC) and ventured into joint or direct ownership and management of
industrial and agricultural enterprises. It established a Fresh Food Marketing company, Garaina
Tea, and Kagamuga Natural Products in the mid-1970s (McKillop, 1981), and the Livestock
Development Corporation (LDC) in 1983 (LDC, 2009). Apart from LDC, all the above public
companies were written off, because they suffered from poor management and near bankruptcy
(McKillop, et al. 2009). LDC was also forced to sell much of its assets under the privatisation policy,
but has managed to continue its operations to this point in time. 12
11

Formerly Office of Rural Development.

LDC was originally categorized as a commercial statutory authority (CSA). In 1983, Cabinet in its decision NEC
163/1983 defined the governments future relations with the CSAs that they can undertake new investments if they
earned at least the rate of return to be laid down from time to time by the Treasury in the annual budget. If a CSA wished
to undertake a non-commercial investment for socio-political reasons, it should seek a subsidy through the budget to
cover any losses incurred by the investment. In 1984, the Minister for Finance advised the CSAs that an appropriate rate
of return would be in the range of 16-22 percent already permitted to the private sector on price-controlled goods
(Whitworth, 1993).
12

[15]

Under the state enterprise policy, the government also established from mid-1970s, agricultural
joint ventures (JVs) involving the three pioneer oil palm projects (New Britain Palm Oil with
Harrison & Crosfield, Hargy Oil Palm with SIPEF, and Higaturu/Milne Bay/Poliamba Oil Palm
Estates with the Commonwealth Development Corporation), and the fledgling Ramu Sugar Ltd
(with Bookers & Tate). The state equity in the agricultural JVs was set between 45-49 per cent,
with two government directorships on their boards held by Secretaries of DAL and Finance
Department.

In 1987, the Government commenced the privatisation of wholly-owned state entities and joint
ventures, including those in agriculture (Millet, 1993). However, this proposal did not proceed
until 1992, when the Government established the PNG Holdings Corporation. The corporation
became the statutory owner of all governments non-mining enterprises, with full powers to
proceed with privatization and retain all proceeds for its own purposes (Millet, ibid).

The first notable privatisation in the agriculture sector took place in 1996, when the government
sold its 46 per cent holding in New Britain Palm Oil Limited (NBPOL) to the Malaysian corporation,
Kulim. The government sold its shares for a net receipt of K68.04 million, minus a 10 per cent
holding retained in trust for landowners and the West New Britain PG. A further condition imposed
by the government was that Kulim would in due course arrange a flotation of NBPOL into which it
would invest part of its holdings. 13 By 2000, all state equity in the other oil palm JVs and Ramu
Sugar had been privatized. The proceeds of sale from these transactions were not deposited in the
PNG Holdings as it had been dismantled by then (Curtin, 2009). All proceeds from the privatization
of agricultural JVs were mishandled and not used to promote new investments. This should be an
important lesson for the National Government to always ensure that viable agriculture investment
strategies and instruments are established before proceeding with sale of state equity in
agriculture JVs.
The engagement of state in the active supply of utilities, transportation, copra marketing and
banking services, and manufacturing is consistent with sub-paragraph 4 of the third national goal
and directive principle in the PNG Constitution that calls for citizens and governmental bodies to
have control of the bulk of economic enterprise and production. This strategy was not sustainable,
however, given the poor profitability of many state enterprises that were funded by debt, and the
widespread abuse of the proceeds from state enterprises.

This FER will make recommendations concerning the future of LDC as a public company. The
options to be considered include transferring its programme activities and assets to a statutory
board, under a new livestock development policy and legislative framework.
2.3.2.3

Corporatization policy

The corporatisation policy adopted in the agriculture sector emerged from the experiences of
privatization of state enterprises in the late 1980s. By 1990, the concept of corporatization before
privatization was accepted by the government as a better alternative, in light of the impending
World Bank Structural Adjustment Program (World Bank, 1992; Millet, 1993). Hence, statutory
enterprises, each with its own legislation, became registered as companies under the Companies
Act. They were exempted from the provisions of the 1983 NEC decision relating to terms and
13

This has since taken place on the PNG Stock Exchange. NBPOL shares are also listed on the London Stock Exchange.

[16]

conditions of staff, and were free of the governments rate of return targets and minimum dividend
payments.

In 1991, the Coffee Industry Corporation (CIC) became the first agricultural entity to be established
under this policy framework. Its powers and functions are defined by the CIC Act, but the process
of selecting its board of directors are guided by its constitution which comes from its status as a
company. The apparent early success of the coffee industry model led to other key agriculture
industries to corporatize in order to establish a new work ethos for enhanced efficiency and
service orientation (McKillop, et al. 2009).

Apart from the Rubber and Cocoa boards which were already established, other agricultural
commodity boards and agencies were subsequently created as statutory authorities with their
powers and functions stipulated under their own Act. The Kokonas Indastri Koporesen (KIK) was
established in 2002 to replace the Copra Marketing Board, which was a state marketing agency
created in 1947. KIKs establishment deregulated the marketing of copra and all other coconut
products. Only KIK and Cocoa boards created a separate technical subsidiary, PNG Cocoa Coconut
Institute (CCI) under the Companies Act to carry out their research and extension functions.

The 1989 White Paper on Agriculture also provided the policy basis and impetus for the
corporatization of key agencies in agriculture (GOPNG, 1989). 14 The period of implementation of
the White Paper initiatives coincided with further devolution of key functions of DAL. The rationale
was that the functions would be better performed under a corporate setting, where more skilled
personnel and resources (from industry levies) are consolidated. Through corporatization, the
industries are able to give full attention to their own development needs, and define commodity
program priorities that enhance the status of the industries and their contribution to the national
economy.

An agricultural development strategy, Horizon 2002-2012, launched by DAL in late 2001 (GOPNG,
2001) also put forward a number of policy interventions for enhancing the role of the private
sector as the key force in revitalizing agriculture. In particular, the strategy paper called for the
privatization of copra marketing, and the deregulation of the coconut industry. But the strategy
paper also recommended the continuation of the role of DAL in marketing of produce such as
rubber and other minor crops where there are no established private service providers.

Table 2.2 lists the organizations that were corporatized over this period, including the
establishment of an autonomous national agricultural research institute for food crops and
livestock (NARI), and the national quarantine and inspection authority (NAQIA).
The
corporatization of the latter two completed the transfers of technical functions from DAL. However,
under the new structure of the Department, it continues to house a technical information
component of land use and its database, the PNG resource information system (PNGRIS). 15 Such a
The White Paper was the first sector policy document of the government since Independence. It called for increase
production, and improved productivity and sustainability through appropriate and cost-effective technologies, and
improved extension and development approaches. It also stressed the importance of sector reform in removing the key
impediments that were inhibiting investment and growth of the sector.

14

PNGRIS provides 1:500,000 scale data on environmental attributes such as altitude, landform, bedrock, slope gradient,
rainfall, vegetation and soils. The data is organized into mapping units known as resource mapping units (RMU). Each
RMU is a unique combination of altitude, landform, bedrock and rainfall, resulting in approximately 4600 RMUs covering
the whole country. Source: Bellamy and McAlpine, (1995)

15

[17]

database has wide application to many users in the agriculture sector, so it constitutes a function
that is better performed by the lead agency in agriculture.

The organisational review under this FER (Chapter 5) provides further comparative analysis of the
CIC model against other structures; in particular, the KIK/Cocoa model with their separate
technical subsidiary, CCI, for research and development functions.
Table 2.2:

Current Status of Commodity Boards and Agencies under the Corporatization

Policy
Agency

1. Coffee Industry Corporation

2. Oil Palm Industry Corporation

3. Spice Board
4. National Agricultural Research
Institute
5. National Agriculture Quarantine &
Inspection Authority
6. Fresh Produce Development
Agency16
7. Kokonas Indastri Koporesen
8. PNG Cocoa Coconut Institute

2.3.2.4

Agriculture training policy

Status
Corporation with own Act and public
company
Corporation under its own Act
Board under its own Act

Technical institution under its own Act

Technical institution under its own Act
Public company under Companies Act
Corporation under its own Act
Public company under Companies Act

History
1991
1992
1994
1996
1997
2000
2002
2003

Over the years a perception seems to have developed among an increasing number of young
people in PNG that it is not possible to earn a satisfactory income from agricultural pursuits. The
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.
There is evidence that similar attitudinal problems are also discouraging young people from
seeking careers in agriculture in many other countries, including Australia. 17 However, the social
implications of large numbers of people drifting to urban areas in search of income are particularly
profound in PNG. It is vital for more to be done to encourage the younger generation to
contemplate farming as an income-earning option.
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.

From the mid-1960s until late 1990s, the training policy in agriculture was aimed at preparing
school leavers for the work place, through a two-year certificate or a three-year diploma pre-

16

FPDA was established in 1989 as Fresh Produce Development Company.

For example, in his recent report on agricultural education and training in New South Wales, Jim Pratley notes: The
perceptions of agriculture, the educational experience about food and fibre, the career advice to students and the
workforce issues in the industry as a whole are not conducive to enticing people into agriculture, even though there are
many and varied employment opportunities at competitive salaries (Pratley, 2013: 6).

17

[18]

service training in tropical agriculture. This programme commenced in 1965, at the Popondetta
and Vudal Agricultural Colleges, under the then Department of Agriculture, Stock and Fisheries
(DASF). 18

In the late 1980s, an in-service training college was also established in Mt. Hagen, to offer short
courses to field officers on various aspects of agriculture and farming technologies. The college also
offered a one year upgrading programme for certificate holders to attain a post-certificate diploma
in tropical agriculture.
In 1999, a major policy shift in agriculture training occurred, when the National Executive Council
(NEC Dec. 1999/4) decided that all pre-service training in agriculture should be taken over by
Office of Higher Education. Initially, Vudal Agricultural College was transferred to PNG University
of Technology and operated as Vudal University College until a few years later the national
government decided to upgrade the college into a university. 19

The University now is the custodian of Vudal (East New Britain) and Popondetta (Oro), and Sepik
Central (East Sepik) Campuses. All DAL staff and assets at these locations were also transferred to
the university. The National Fisheries College in Kavieng, New Ireland Province is an affiliated
campus of the University.

The in-service training college in Mt. Hagen has remained a DAL facility, but has ceased its postcertificate diploma program in tropical agriculture. It continues to suffer from essential resources,
as the Training Branch of DAL no longer has the capacity to manage it well since 2000. The
University of Goroka has shown interest in amalgamating the college in its university program, and
this opportunity should be further pursued by the department.

The roles of commodity boards and agencies are crucial in supporting agriculture training and staff
development programme in the sector. The proven crop and livestock technologies from their
research can be incorporated into formal curricula and short training programs for students and
farmers alike. PNG University of Technology in Lae offers two first degree courses in agriculture as
well as post-graduate programmes. It also has an outreach program linking farming communities
in several provinces. Similarly, Vudal has established an integrated agricultural training centre for
training of farmers using formal and informal methods. These establishments are described briefly
below:
(a)

Vudal Integrated Agricultural Training Program (IATP) IATP is the University

community outreach extension program. It commenced in 2002 as an Australian
government funded project, and aims to improve livelihoods of people using training
to deliver information and agriculture extension services. It takes a holistic approach
and uses field-based problem solving to define livelihoods training subjects as the
medium for delivery. These are packaged into a number of training manuals.
Currently, IATP operates in five provinces, 20 and with increased resources it plans to
be established in the four regions of the country by 2016.

DASF has its beginning in the 1950s, and was changed to the Department of Primary Industry in 1982, and eventually
became the Department of Agriculture and Livestock in 1986.

18
19
20

Vudal was subsequently changed to PNG University of Natural Resources and Environment.

IATP has extension programs in East New Britain, New Ireland, Bougainville, West New Britain and East Sepik.

[19]

(b)

PNG University of Technology South Pacific Institute for Sustainable Agriculture and
Rural Development (SPISARD) SPISARD is the University centre for the promotion of
rural development (UNITECH, 2009). The institute is tasked to develop location and
farming system specific extension methods and approaches, and provide training and
transfer of sustainable agricultural technologies related to food and cash crops, and
livestock. The aim is to improve and attain sustainable integrated farming system
practices suitable for subsistence and semi-subsistence farming communities. It
promotes a model village concept, where chosen rural locations become focal points
for on-farm research, training and extension with active farmer participation.
This approach is unique in PNG, because the development process takes place in the
farmers environment with immediate real time feedback based on the farmers
perspective and satisfaction. Presently, SPISARD is working in model villages in four
provinces, 21 and will expand its program country-wide as resources permit.

The important aspect of this mode of extension is that it is institutionally driven, and promotes
participatory approaches, with active farmer participation in all aspects of extension delivery.
While the specific modus operandi may vary between IATP and SPISARD, both organizations have
established a sound institutional base to continue playing the role of empowering farmers to
become more efficient, productive and self-reliant in their own environments. Conceptually, the
approach aims to develop a people-centred knowledge management process that is built on an
understanding of farmers needs, and shapes the existing technical information to respond to
farmers requirements, and delivers knowledge in a form they can understand. Both institutions
require external funding to expand their work. They have already commenced forging partnerships
with provincial authorities, and other development partners such as commodity boards and
mining companies to plan and executive new community programs.

The FER teams discussions with senior academics at both universities indicated that closer
dialogue with the agriculture sector, through DAL and commodity boards and agencies would
assist both institutions to effectively contribute to the sectors manpower development needs. Both
universities are also developing in-country post-graduate programs which could be tailored to suit
particular needs of each industry.
2.3.2.5

Food security policy

PNG is a signatory to the Rome Declaration on World Food Security and has pledged together with
all member states of the Food and Agriculture Organization of the United Nations (FAO), to support
implementation of the 1996 World Food Summit (WFS) Plan of Action. A major requirement of the
Action Plan is for member countries to set out clear national food security policies and objectives
that would achieve food security at the national and household level by 2015.

In accordance with the Rome Declaration, the PNG Government approved the adoption of a
National Food Security Policy (NFSP) in 1997 (GOPNG, 2000), with a primary objective of:
ensuring that all people of PNG at all times have access to safe and nutritious food in adequate
SPISARD currently has model villages in Morobe, Milne Bay, Eastern Highlands and East Sepik. It is desirable that it
continues to maintain its presence in these rural locations over several years. Only then can SPISARD have an impact on
the peoples livelihoods.

21

[20]

quality and quantity to maintain a healthy and active life. The six underlying strategies are to: (i)
increase food production and to improve access to food at the household level as a means to
eradicate food insecurity and rural poverty; (ii) improve the nutritional status and standards of
living of the people of PNG; (iii) improve production, downstream processing, marketing and
utilization of food; (iv) strengthen institutional linkages to ensure that cross-sectoral policies
compliment the NFSP; (v) ensure the integrated management and sustainable use of land, water,
fisheries and forest and genetic resources; and (vi) ensure maximum participation of women in all
aspects of agricultural development, including policy planning and implementation, education and
training.
The national food security programme was estimated to cost over K500 million over ten years
(GOPNG, 2008). Sadly, implementation of the NFSP and program has been poor, due to the erratic
allocation of budgetary resources to DAL over the last five years. A major problem with the NFSP is
that it does not capture the varying food security needs of provinces and regions. Most provinces
and regions differ from each other in staple food resources base, and it is critical that the national
strategy fully account for this variation. Achievement of national household food security is only
possible when constraints of local food sources and their distribution are fully addressed.

There are other pressing food security issues that are not highlighted in the current policy. One of
these is the urgency to address the impact of climate change on food production and food
availability. There are indications that rising sea levels are having a negative impact on very small
islands and other coastal locations because of coastal erosion. Many of these areas depend on taro,
cassava, sago and bananas as staples, and yields from these crops have been on a decline.
Commodity boards and agencies, through a renewed and comprehensive food security strategy,
should accept a role in promoting sustainable food production in these harsh environments.

Another glaring food security issue is the emphasis by the government in promoting a domestic
rice industry, towards achieving self-reliance in this commodity. Over the last three decades, rice
has become an important staple food item in urban areas of the country, with almost 100 per cent
of rice consumed is imported (Bourke, 2005). Although, the current food security policy only
promotes small scale rice production for subsistence, DAL is currently promoting a larger
commercial rice program in the Central Province with support of an Asian investment group.

Studies in PNG by Gibson (1982) and Sloan et al. (1993) have shown that commercial rice
production was not a viable proposition in the country over a decade ago. Any future investment
drive by the government in promoting a commercial rice industry should be led by further
feasibility studies into the economics of rice production, and a clear policy framework that
promotes commercial nucleus estate enterprises, supporting an organized network of local outgrowers. It is also critically important that the socio-cultural aspects of rice cultivation in the PNG
context need to be fully understood in order to establish whether smallholder rice cultivation is
feasible as is the case in South East Asian countries.
This FER has established that several sector agencies are currently involved in a rice program. This
includes DAL, NARI, and several provincial divisions of primary industry. As rice is national issue,
the implementation of future government-led programmes should become more streamlined and
driven collectively, but with a single lead agency.

[21]

2.3.2.6

Agriculture investment policy

Following the demise of the agriculture JVs in oil palm and sugarcane in the early 1990s, there was
a policy vacuum on agricultural investments until the review of the White Paper on Agriculture by
DAL in 1999. This led to the launching in 2001 of the paper: Strategy for National Agricultural
Development: Horizon 2002-2012 (GOPNG, 2001), which recommended:
(a)

(b)

That a new agriculture sector plan be accepted as a high government priority to

address the lack of investment in agriculture since 1980s; and
That an immediate review of the role of DAL in the sector be undertaken, to improve
its performance as lead agency in: policy setting, monitoring and evaluation, and
financing of agricultural investments.

In 2005, the Public Sector Reform Management Unit (PSRMU) of the Department of the Prime
Minister and NEC undertook an FER of DAL and provincial DPIs, as well as commodity boards and
agencies (PSRMU, 2005). The report of that FER identified that further sector reforms are required,
and to institute an apex body called a National Agricultural Council (NAC), under which the whole
sector will sit. This would require major institutional and legislative reforms underpinned by a
National Agricultural Development Plan (NADP). The PSRMU report forms the basis of the current
FER; an effort that comes eight years after its recommendations were made.
The NADP was formulated with technical support from FAO in 2005, and approved by the
government for adoption in 2007, with a resource framework of K1 billion over 10 years (GOPNG,
2007). Originally there were five major NADP activities: (i) Development of an effective national
agricultural research system; (ii) Packaging of technology; (iii) Developing a national agricultural
research and extension system; (iv) Strengthening research-extension communication and sector
linkages; and (v) Human resources and capacity-building. The NADP assessment of expected
benefits from this investment was high, with an estimated effective internal rate of return (EIRR) of
32% (GOPNG, 2007).

In 2011, DAL reviewed the NADP policy framework using the AR4D concept, and aligned the
agriculture sector plans to higher national development plans (DAL, 2012). The new strategy
refocuses the NADP into the following thematic programme areas: (i) Enhanced productivity and
scale of production; (ii) Research and extension for development; (iii) Natural resources and
energy management; (iv) Food safety, quality and nutrition; (v) Human capacity development and
entrepreneurship; (vi) Agro-processing and marketing; (vii) Information management and
communication; (viii) Policy analysis, advocacy and enabling policies; (ix) Institutional capacity
strengthening; and (x) Resourcing, management and coordination.
The implementation of NADP has not progressed smoothly. In 2008, K68 million was allocated
with a further K100 million in 2009. After two years, NADP management shifted from sectoral
control (by DAL) to central agency management (by the Department of National Planning and
Monitoring).

It is important that the NADP policy framework be re-visited, and its mode of implementation be
strengthened by bringing it back under a revitalized DAL. 22 It may require a legislative framework
22

A review of the NADP by DAL is currently under consideration, and its findings would be relevant to this FER.

[22]

to cushion it from being misused, and developed as a viable vehicle for sector investment as
proposed in Chapter 4 of this review.

2.4

Policy Implementation by Agriculture Sector Agencies

2.4.1

Commodity boards

A recent survey of policy making in PNG edited by Ron May (May, 2009) concluded that the record
of policy making and implementation since Independence varies significantly between sectors and
over time, but generally is not good. The analyses of the six policies relevant to this FER clearly
show that the proponents of the policies and the manner in which they have been implemented
have greatly influenced the performances of the agriculture sector agencies. It is also obvious that
while the content of these public policies has been sound, their context (the design of
administrative action to effect implementation) have been poorly defined.

For example, the decentralization policy requires a high level of coordination between government
agencies, both horizontally amongst DAL and agricultural agencies, and vertically between DAL
and agricultural agencies, and the provinces, district and local-level governments, in effecting the
delivery of extension services. But the overall implementation is poor because program priorities
at sub-national level are not the same as priorities at the national level. This is further accentuated
in the implementation of the food security policy, where only four provinces (Manus, Madang,
Eastern Highlands and Simbu) have adopted a provincial food security program that is linked to
the NFSP (Konabe, pers. comm.).

Mays review of the state enterprise (privatisation) policy also indicates a saga of discontinuity,
which taken against a background of some spectacular private sector failures in developed
Western countries 23, points to the limitations of privatisation in small countries with poorly
developed capital markets and weak regulatory regimes (May, 2009). Similarly, attempts to
corporatize government operations in selected areas, which were driven largely by donors 24, have
at best mixed results in achieving more efficient use of resources and accountability.
The corporatization of agriculture agencies from the 1990s is not uniform. This is expected, as the
agencies vary greatly in the extent to which they provide services through their key functions of
regulations, research, extension, quality control and marketing. They also differ in their powers
and functions. The current status of the commodity boards and agencies under this FER is
summarized in Table 2.3.

Apart from Cocoa Board and KIK, the commodity boards and agencies have a weak research
capability. The Cocoa Board, KIK, FPDA and OPIC support extension services, but there is currently
In Australia - Bond Corporation in 1988, and HIH, OneTel, and Ansett in 2001; and in USA Waste Management,
Sunbeam, and Enron. The latter was a one-time major shareholder in the PNG upcoming oil refinery. Enrons debts of
K300 billion were 66 times larger than PNGs total external debt in 2001. Those bankruptcies demonstrate the condign
punishment by the market of fraud and mismanagement, and in the last analysis it was only the protection of the explicit
guarantees by the government that protected PNGs public enterprise sector (particularly the superannuation funds)
from a similar fate. However, recent events in Europe, in the wake of the so called Global Financial Crisis, illustrate that
government guarantees are no panacea. Such guarantees offer no protection when governments are unable to meet their
own debt obligations. Source: Curtin (2009).

23

The first government entity to be corporatized beginning in 1991 was the Papua New Guinea Forest Authority, a move
which had more to do with World Banks attempts to curb corruption in that sector than to promote efficiency.

24

[23]

an absence of a strong extension program under the Rubber, Spice and LDC Boards. The 2014
budget appropriations included some support for Rubber and LDC programs, but both entities
suffer from a lack of staff capable of delivering these programs.

The agriculture research in export tree crops is more advanced than for other crops. Today, cocoa,
coffee, coconut and oil palm research are well organized as the programs are linked directly to
meet the industries interests. Rubber and Spice, on the other hand, have depended on DAL to
source technologies from overseas (rubber) or from past research programmes (spice).
The establishment of NARI in 1996 was a key milestone in the development of technologies
directly relevant to food crops, emerging cash crops, livestock (excluding cattle) and resource
management issues. Today, NARI operates six research facilities 25 located in different agroecological zones (NARI, 2009).

In extension, the wide proliferation of public and private-sector entities engaged in extension and
advisory services have become more apparent in the last ten years. Although, accurate data is not
available on the number of non-governmental organizations involved, their role has become more
prominent in recent years because of the break-down in the government extension services.
However, private sector participants vary in their resource levels, organizational capacities, and
relationship with government funded extension programmes.

An ADB funded study of agricultural research and extension in 1992 estimated that extension
services in all provinces of PNG would cost K30 million annually, with 90 per cent of the funding
going to salaries of officials and only K3 million (or K170,000 per province) available for good and
services (ANZDEC, 1993). This was insufficient to meet recurrent costs, and initiate any new longterm extension activity. Since 2000, funding for rural services has improved considerably with
increased government support to districts under the DSIP and other development grants. The total
budget appropriations to the agriculture sector have increased on average by 20 per cent since
2009 (DAL, 2012). In 2012, the total budget appropriation to agriculture was over K229 million,
which is 47 per cent higher than in 2011.

The role of marketing and quality control is performed differently, with OPIC being an exception.
Only three boards: Cocoa, KIK and OPIC collect levies for their management costs and research and
extension. The commodity boards under review also have contrasting legislations. The Rubber
Board Act of 1953 is the oldest of the legislations and is to be replaced by a new Rubber Industry
Board Act. The Minister has advised that draft legislation will be considered by the NEC subject to
the findings of the FER. The papers sighted by the FER team indicate that this process is in order,
and should proceed once the FER recommendations are approved by the NEC.

Three key sector organisations are appraised below in terms of their potential role in the changes
that are to occur in the rationalization of the above commodity boards and agencies.

Apart from its Head Office based in, Lae, NARI operates its Momase Regional Centre at Bubia, Morobe; Islands Regional
Centre at Keravat, East New Britain; Southern Regional Centre at Laloki, Port Moresby; Highland Regional Centre at
Aiyura, Eastern Highlands; Higher Altitude Regional Centre at Tambul, Western Highlands. NARI also operates a livestock
research program (for small animals) at Labu near Bubia, Morobe.

25

[24]

Table 2.3:
Function

The Key Functions of Commodity Boards and Agencies under FER

Cocoa Board

KIK Board

FPDA Board

Research

Research
programs are well
performed by its
joint subsidiary
CCI.

Research
programs are well
performed by its
joint subsidiary
CCI.

Carries out limited

adaptive research
with NARI.

Limited capacity
for adaptive
research with
OPRA 26.

Nil

Nil

Nil

Extension

Extension
programs are well
performed by its
joint subsidiary
CCI

Extension
programs are well
performed by its
joint subsidiary
CCI.

Provides
extension service
involving village
extension
workers.

Supports
smallholder oil
palm producers in
all major project
areas.

Provided support
in the past to
smallholder
growers. Current
capacity low.

Has provided
support in the
past to
smallholder
growers. Current
capacity nil.

Has provided
limited support to
livestock
producers.

Marketing
and quality
control

Issues permits &

licences

Issues permits
and licences. It
also can provide a
marketing service
in remote
locations.

Provides
marketing
information, but
has no regulatory
powers.

Nil

Issue permits and

licences.

Issue permits and

licenses.

Operates abattoirs
in three locations
but has no
regulating powers.

Financing

Collects levy for

its functions and
administration.

Collects levy for

its functions and
administration.

Limited capacity
to raise own
revenue.

Collects levy for

its extension
program.

Nil

Nil

Limited capacity
to raise own
revenue.

26

OPIC Board

Rubber Board

Spice Board

Oil Palm Research Association is an industry supported research organization in oil palm. It has received public support through the annual budgets in the past.

[25]

LDC Board

2.4.2

National Department of Agriculture and Livestock

DAL is responsible for strategic planning of the sector, and coordination of national government
support for extension services throughout the country. The Department currently provides funding
and advisory support for developments in rubber, spice and essential crops, bee-farming, and food
crops including rice. It also supports smallholder livestock development at the village level. It
implements these activities through four regional branches consisting of multi-disciplinary teams of
experts, working in concert with other agencies, and provincial authorities. It also promotes the
participation of private sector organizations, in the delivery of goods and services. Until recently, DAL
was responsible for the national coordination and management of the NADP.
DAL has promoted a contracting-out extension system in two provinces (refer to section 2.5.2 of this
Chapter for details), through a pilot project (Smallholder Support Services Pilot Project), with the
support of ADB. This project (SSSPP) was implemented over 8 years (2000-2007) and is now being
out-scaled as Smallholder Support Services Expansion Project (SSSEP) in three other provinces (refer
to section 2.5.2 of this Chapter for details) with New Zealand Government assistance.

DAL is presently undergoing a review of its roles and responsibilities. The proposals for further
devolution of its current functions will make it a much more leaner, vibrant, and responsive
organization that can perform an effective leadership role for a growing sector. Of the eight policy
objectives of its current Strategic and Corporate Plan 2013-2017, DAL will promote the efficiency and
competitiveness of PNGs agriculture industries and institutions (DAL, 2012). It is critical that DAL
maintain a closer link with the commodity boards, as they are valued instruments in generating rural
employment and enhancing income-generating capacity of rural communities.

The key consideration here is that, statutory commodity boards are performing functional roles on
behalf of the state. These roles were once the responsibility of DAL. Hence, it can therefore be argued
that the Department has the highest of interests, on behalf of the state, in knowing what the
commodity boards do, and how they are translating public policies to programs and activities, and
their responsibilities to report on their own performances. The Department and its administrative
head serve as the main conduit for policy advice to the government, through the Minister. It is
therefore paramount, that the Secretary of DAL should play a pivotal role over the management of all
agriculture commodity boards.
The FER proposes that the Secretary of DAL should not hold a directorship on any commodity or
agency board, as he or she will be the Chair of the Agriculture Investment Corporation (AIC) as
proposed in Chapter 4 of this review. The AIC will oversee operations of all commodity boards and
agencies. However, it is also proposed that the Secretary of DAL should automatically assume the
position of default chairman or chairperson of a board when a chairman or chairperson of that board
or agency is unable to provide oversight of its affairs.

2.4.3 Provincial divisions of primary industry

Extension programs undertaken by provincial administrations are directed at smallholders at village

level. The program activities range from commercial tree crops, food crops and village livestock. At
district level, extension staff report to district managers for their activities, and are supported by the

[26]

agricultural adviser at provincial headquarters. At the national level, several key agencies also provide
extension support to different provinces under their mandate. 27

The general extension programs at provincial and district level normally operate independently of
national agencies. The present scenario is that officials of national agencies are isolated from
provincial extension services and from district programs. A disjointed line of authority, reporting and
responsibility exists throughout the extension service. Performance is further impaired by confusion
over financial responsibility, inadequate funding support and long delays in funds reaching districts.
Regulations that specify how funding can be channelled and programs implemented are not often
followed, and roles and responsibilities remain unclear. There is also confusion on the use of DSIP
funds provided under the OLPLLG arrangements. In many districts DSIP only fund new projects and
there is no provision for recurrent costs of extension. Consequently, most district agricultural services
barely function and staff moral remains low throughout the country.
It is proposed that there be a comprehensive review of policies and legislations that govern the
manner in which agricultural extension services are managed and provided nationally. The current
strategic and corporate plan of DAL seeks to strengthen agricultural extension by promoting multisectoral integration and supporting strategic partnerships (DAL, 2012). A new agricultural extension
policy, when adopted, must promote participatory approaches to extension, and be farmer-driven and
market oriented. It must promote pluralism in the service, and promote greater involvement of the
private sector providers to reduce costs and enhance efficiency.

2.4.4

National Agricultural Research Institute

NARI has been a well-managed organization since its inception, and is well supported by the
Government and donor agencies. It has released thirty eight new technologies for farmers, which
include proven varieties of food crops and tree fruits (banana, rice, taro, sweet potato, potato,
rambutan, durian, and pepper); biological control of pests and weeds (Chromolaena sp., and
diamondback moth, fruit flies), local feeds for livestock (Muscovy ducks and rabbits), drought coping
technologies, and pathogen tested material of selected potato and sweet potato varieties (NARI, 2004;
NARI, 2010).
It should be pointed out that NARIs packaged technologies are not reaching the farming communities
in the rural areas. NARI needs to be more extension oriented and develop strategies to transfer these
technologies to the farmers in collaboration with commodity boards and the provinces.

Although NARI is currently outside of the Ministry of Agriculture and Livestock 28, it is considered part
of the National Agricultural Research System (PNG NARS) and was a major participant in a recent
initiative, the Agricultural Research and Development Support Facility 29 project (Mbabu and Hall,
DAL Regional program; Commodity boards and agencies; National Development Bank; Donor supported
programs (ADB/JICA/NZAID); PNG University of Natural Resources and Environment; PNG University of
Technology; and NGOs.
27

A Prime Ministerial Determination in 2007 included NARI to report to the Ministry of Higher Education,
Resercah , Science and Technology.
28
29

The project was funded by AUSAID from 2007 to 2012.

[27]

2012). The project led the way in making agricultural research for development (AR4D) 30 paradigm
becoming a reality in the national research system.

NARI has also established effective links with the international research community, and is the nodal
point in PNG for many external and reputed research and development organizations. It has developed
a cadre of highly competent and skilled staff in all research disciplines. NARI also has institutional
capacity to assist other Pacific NARS in strengthening their research and technology development
capabilities. It is presently implementing a regional research capacity development in PNG and the
Western Pacific countries of Solomon Islands and Vanuatu, under the auspices of the European Union
(EU) regional programme.

In discussions with the FER team, the NARI senior executives expressed support for reform of
government agencies responsible for crops and livestock. NARI have proposed that the FER should
explore the potential of NARI being merged with FPDA and for NARI to be transformed from a purely
research organization to a research and development (R&D) entity for the food and livestock sector,
and the emerging cash crops such spices and essential oils. They also proposed that any regulatory
requirements of these crops could be met by a reformed NARI and any other agency (such as DAL)
approved by the government.

The FER team discussions with the Executive Officer of the Spice Board indicated that the Board is
dysfunctional and should be disbanded. Its programme and assets could be transferred to a reformed
FPDA or NARI. The teams earlier discussion with the FPDA did indicate some resistance to FPDA
reform. However, in its current form as a public company, FPDA has limited scope of operations and
the amalgamation with NARI provides the best option for the way forward. The NARI team were
positive about taking on-board rice and grain, as well as undertaking livestock research on behalf of a
livestock development authority. It is the leading research institution in the country, with the proven
capacity to lead further reforms in agriculture research for development in PNG. The modified NARI
should be allowed to take lead in a food and alternative cash crops research and development
program.

2.5

Alignment of Agricultural Policies to National Development Goals

and Objectives

2.5.1

Promoting agriculture growth in the economy

The PNG Vision 2050 promises a PNG society of Smart, Wise, Fair, Healthy and Happy communities in
40 years. Of its seven pillars, Wealth Creation, calls for a dynamic agriculture sector with sound
strategies to bring about a five-fold increase in agricultural production between 2010 and 2030. This
will create an estimated 267,400 additional jobs and K7.2 billion in additional national income by
2030.

AR4D denotes Agriculture Research for Development, derived from the Agricultural Innovation System (AIS) paradigm.
The AR4D perspective puts farmers and other actors along the value chain first, providing a framework for holistic approach
to livelihood needs. The concept focuses on outcomes that positively impact farmers and other value chain actors.

30

[28]

The PNG Development Strategic Plan 2010-2130 (DSP), which translates the seven pillars of Vision
2050 to policy directions and strategic actions, aims to achieve this growth over four rolling medium
term development plans (MTDPs). Based on an input/output model, the DSP has set production
targets for the agriculture sector to achieve by 2030, as shown in Table 2.4.
Table 2.4:

DSP Targets for Agriculture & Livestock over 2010-2030

Indicators

Baseline

2030 Target/Objective

Meat production

407,000 tonnes in 2007

4 million tonnes

Oil Palm

556,000 tonnes in 2007

1.5 million tonnes

Coffee
Cocoa

63,000 tonnes in 2008

500,000 tonnes

56,000 tonnes in 2008

Copra

Horticultural crops
Rice

310,000 tonnes

110,000 tonnes in 2007

440,000 tonnes

No data

Domestic markets dominated

by foreign imports

Sago
banana)

Subsistence agriculture

Strengthening the viability of local

producers and processors

Establish two large scale sago

No data

Staples (root & tuber,

Increase by 5 fold

plantations for commercialisation

Increase production to meet domestic

No data

demand and supply processing

industries

70% of subsistence farmers graduate to

All villagers depend on

small and medium scale agricultural

subsistence

entrepreneurs

Can the agriculture sector fulfil these ambitious expectations? The proposed outcomes of this FER will
assist the sector to move in this direction, with the rationalization of the commodity boards and
agencies as a key objective. Obviously, further reforms are required throughout the sector, to ensure
that there is a common policy direction from the national level to the provinces in enhancing growth
and productivity in agriculture. Adequate public funding for the sector is also critical for the key
agencies in reaching their targets.
The ability of the agriculture commodity boards and agencies in contributing to the growth of the
agricultural economy will also depend on their R&D efforts. The following are examples of
technologies in coffee, cocoa and coconuts, oil palm, food crops and livestock industries, which can be
exploited through improved and well-resourced extension and development efforts:
(a)

Coffee CIC has developed improved coffee varieties (both Arabica and Robusta),
agronomic and processing techniques, and extension approaches for disseminating
proven technology packages. In particular, CIC has developed improved processing
techniques to up-skill farmers in producing high quality coffee beans. If adopted, the
techniques can allow smallholder producers of Y Grade coffee (60% of current annual

[29]

(b)

(c)

(d)

(e)

output) to produce Premium Grade coffee and thereby earning higher returns for their
effort. This would greatly impact smallholder farmers income and livelihoods.

Cocoa and Coconuts CCI has released several cocoa and coconut technologies to farmers.
The prime cocoa technology package is the hybrid cocoa clones which can yield nearly
3000 kg of cocoa beans per ha. Presently, smallholder yields average only 366 kg of beans
per ha. By adopting better farm management practices (including cocoa pod borer
control), farmers can achieve 50-75% increase in cocoa bean yield. There are also
opportunities in producing and marketing high value coconut products and by-products,
other than copra and coconut oil.
Oil Palm The oil palm industry currently enjoys the benefit of a high yielding seed
developed from 40 years of oil palm breeding in PNG. At estate level, palms from this seed
can produce 25 MT of fresh fruit bunches (FFB) per ha. However, smallholders can only
produce 8-10 MT of FFB per ha from the same seed source. With support of an innovative
extension system, smallholders can increase their yields by 50% or more if they diligently
applied fertilizer to their palms.
Food Crops NARI has released several farmer impact crop/livestock technologies,
including pathogen-tested (PT) planting material of potato and sweet potato varieties
(NARI, 2010). The use of PT material will immediately increase farm yields by over 80%.
The tubers are of quality shape, and free from pest and diseases. Farmers using PT
material will definitely enhance their income, and improve their household food security
status.

Livestock LDC has indicated that presently, meat consumption rate in PNG is increasing
by 5% annually. There is great potential for livestock farmers and farming groups to raise
their productivity and output to match future demand for meat. There are huge areas of
grasslands in PNG (>100,000 ha) for pastures, as well as providing opportunity for crop
and livestock integrated farming. By improving pastures and increasing stocking rates,
smallholders can quadruple local beef production from current 2500 MT to 8000 MT. With
village poultry, chickens reared per hen through reduced predation and good husbandry
practices can produce 8-10 village birds (from 3-5 presently).

The above are examples of what can be achieved by semi-commercial farmers based on high value
crops and products, and employing an innovative extension system. However, financing commercial
agricultural development will continue to be a major challenge for the smallholder sector in
contributing to the national economy. It is therefore essential that appropriate funding mechanisms be
explored to
empower rural dwellers and to enable their wider participation in commercial
agricultural economy. The requirements for secured funding for the sector are addressed in Chapters
3 and 4 of this Review,

2.5.2

Promoting public-private sector partnership in agriculture

Several project initiatives in agriculture since 2000 have focused on how agriculture development
could be promoted using the public private partnership policy. The experiences with these projects

[30]

are important to the current FER, as productive partnerships depend largely on viable agricultural
institutions that can play their role effectively under these working arrangements. Often, it is the
agriculture commodity boards and agencies that have the technological know-how to make such
partnerships worthwhile. Four of such interventions are described briefly below:
(a)

Smallholder Support Services Pilot Project (SSSPP) - contracting out extension The SSSPP
project was funded jointly by Asian Development Bank (ADB) and the Government of
Papua New Guinea and commenced in 1999 and ended in 2007. Its aim was to strengthen
provincial extension in Morobe and Eastern Highlands provinces, using a mixed model of
public funded-private delivery and contracting-out of extension services to smallholders
(Lahis, 2008). The key aspects of SSSPP are as follows:
Target communities are assisted to identify their priority needs and formulate
action plans through participatory rural appraisal and planning (PRAP);
A dedicated trust fund and management unit is established per province;
A pool of interested service providers are contracted to deliver services in response
to community action plans;
Farmers participate in the monitoring and evaluation of implementation, supported
by external evaluation of contract outputs and outcomes;
Promote public private partnerships and joint ventures in service delivery; and
Ensures adequate backstopping and capacity building of service providers.

The business management skill of service providers is a necessary prerequisite for success
in this mode of extension. Two trends are worth noting: firstly, service providers skills
become more specialized as farmers demands become more specific; and secondly,
community groups may contract their own Village Extension Workers (VEWs) as they
develop user-pay capacity.

(b)

Reviews of SSSPP have indicated that there is wide scope for adoption of the contracted
mode of extension in all provinces. The commodity boards have potential in supporting
this mode of contracting of extension. However, its success is dependent on continuing
commitment by the government in providing adequate counterpart funding. Currently,
NZAID is continuing the support of this program in three other provinces of Simbu,
Madang, and Central.

Bris Kanda bringing the markets closer to the farmer - Bris Kanda is a rural enterprise
development organization, established in 2006 under a 10 year program assistance of the
New Zealand Government in the Huon District of Morobe Province. The organizations
overall goal is to reduce poverty and vulnerability amongst target rural communities
through improved and sustained income generation. It uses a private sector driven
approach to identify weaknesses in smallholders production and supply chains, find
appropriate solutions, and connect them to relevant services and market outlets. It is the

[31]

first project intervention in PNG that promotes market-oriented agricultural extension

and advisory services. 31

(c)

A mid-term review of the program in 2010 rated the approach as the most innovative and
timely, given the deficiencies in the Government efforts to promote rural development in
recent years (Mohamed and Sitapai, 2010). The review concluded that strategic partners
(who may be private service providers or quasi-governmental) are the pillars
underpinning the approach to service delivery. The concept of engaging strategic partners
who have a mandate to serve rural communities, will strengthen this approach, and fulfils
the expectation of the Governments public private community partnership policy.
Unfortunately, the New Zealand Government terminated its funding for Bris Kanda
prematurely in March 2013, but its successes can be seen in the established farmer
cooperatives in the Wampar LLG of the Huon District, that are producing cocoa, taro and
cut-flowers for markets. 32

Agricultural Innovations Grant Scheme (AIGS) bridging farmers with strategic partners
The AIGS was a funding mechanism that supported private-sector assisted delivery in
agriculture. It was established in 2007 with funding from the Australian Government as
part its engagement in supporting rural development in PNG (ARDSF, 2010). The project
aimed to sponsor creative and innovative projects that add value to national development.
Projects were commissioned on a competitive basis, and targeted impact-oriented
projects that aim to deliver measurable results in support of sectoral and national
objectives.

The key aspect of the project is that it promoted a more demand-driven approach to
increasing agricultural production, by encouraging the development of institutional and
organizational partnerships between public, private sector, and civil society organizations.
Successful applicants for AIGS grants were selected through a bidding process of
transparent competition, to a fixed schedule with applications conforming to agreed
formats, criteria and priorities.
Funding for AIGS projects were limited, and mostly supported projects worth K50
250,000, implemented by the NARS and their partner organizations, including private
sector service providers. The assessment of AIGS over five years indicated that the scheme
has potential for expansion, under a national agricultural innovation grant scheme
(NAIGS). Such a scheme could enhance the adoption of agricultural innovations on a
national scale. The application of the AIGS concept to the proposed funding mechanism of
the agriculture sector is further discussed in Chapter 4 (section 4.6.2.2) of this review.

The key aspects of Bris Kanda are: (a) it is incorporated as an association under the Associations Incorporations Act; (b) it is
supported by a long term (originally for 10 years) donor aid; (b) it is managed by Governing Board consisting of government
and private sector representatives; and (c) it promotes cooperatives as the basis for SMEs at the village level.

31

NZAID was the sole financier of the Bris Kanda project, with zero counter-part funding from the Huon District
Administration since inception. As a result, what turned out to be an exciting project model for rural development could not
be sustained beyond half of the project ten-year term, because of lack of local ownership, and personal conflicts between
project personnel and district managers.

32

[32]

(d)

Productive Partnerships in Agriculture Project (PPAP) promoting productive partnerships

PPAP is a World Bank funded project that commenced in 2012, to support the
development of coffee and cocoa industries. Its coffee programmes are in Eastern
Highlands, Simbu, Jiwaka, and Western Highlands. The cocoa programme covers activities
in East New Britain and Bougainville, focusing on reducing the effects of cocoa pod borer
(CPB) and the diversification of cocoa farming.
The funding levels for projects are between the range of K 1-2 million, and the selection of
projects is through a bidding process similar to AIGS. The PPAP seeks to enhance
capabilities of lead partners and its associates, with the main focus on strengthening
smallholder producers in raising their level of productivity. The project provides 80 per
cent of the funding of selected projects, and this support is largely for production inputs
(tools, fertilizers, insecticides, fungicides). PPAP is therefore subsidizing the costs of
production of coffee and cocoa producers.

The initial project funding was equivalent to K100 million, but the depreciation of the Kina
since the project formulation has allowed only two bids to be processed. There may be a
third bid with additional support from the EU funds. PPAP project was recently subjected
to a mid-term review, but the findings were not available for this analysis.

The four project interventions summarized above are in support of an innovative agriculture
extension system that recognizes the role of all value chain actors. The pilot studies clearly show the
need for a central financing mechanism that has a wider mandate to support smallholder agriculture,
as well as to provide assistance to large scale initiatives. This central funding mechanism is explored
further in Chapter 4 of this review, and should be managed by a reformed lead agency of agriculture,
which cannot be DAL in its current form. This organisation must be vibrant, with the capacity to
manage policy reforms, and provide leadership over institutional development across the agriculture
sector.

2.6

Framework for the Rationalisation of Agriculture Commodity

Boards and Agencies

2.6.1

The policy framework

The policies guiding agriculture sector reforms since Independence were aimed at transferring
powers and functional responsibilities from DAL to commodity boards, as industries became better
established to manage their own affairs. The expectation was that the sustainability of a commodity
board would be guaranteed by the growth of that industry through increased public and private
investments. In general, it is accepted that commodity boards serve the needs and interests of industry
better than a government department. However, three struggling industries of rubber, spices and
essential oils, and livestock 33 continue to be supported by DAL. Although, the former two industries
are governed by their own legislations, 34 their general operations have been supported by DAL for
Livestock industry in general is not governed by a board, although LDC performs limited livestock
development functions.

33
34

LDC is a public company incorporated under the Companies Act.

[33]

over two decades. The activities of these boards have been constrained because levels of production
in the industries concerned are insufficient to provide the boards with a capital base through industry
levies.
As can be seen in Table 2.3, the commodity boards and agencies under this FER differ in structures,
scope of legislative functions and powers in enhancing service delivery. While some commodity
boards have a research function, this role can be shared, or become dependent on technologies
developed elsewhere. 35

In terms of the extension function, commodity boards should all be engaged in the process of
technology transfer right down to the district level. As agricultural extension is a process that
transcends several institutions (national to sub-nationals) it involves a more diverse set of activities
that embrace pluralistic and participatory approaches. The experiences described in Section 2.5.2
indicated an increasing number of private sector agencies and non-government organizations (NGOs);
including women groups are becoming involved in the delivery of extension services in PNG. The
farmers themselves are taking the lead in defining the development agenda in some areas, but much of
this effort is being undertaken on an ad hoc basis. In the cases covered by this review, the enthusiasm
and commitment shown by groups engaged are greater when farmers themselves have demonstrated
innovativeness and passion for the technologies promoted. Such farmers will remain committed to the
new farming practices after donor support has ended. It is therefore desirable that all agencies be
guided by a new extension policy framework that recognizes the role of all the value chain actors in
rural development. This policy framework should be consistent with the governments effort in raising
the profile of districts under its new District Authorities Act. 36 More importantly, future policy setting
in agriculture must account for the socio-economic circumstances of the smallholder farmers. Today,
smallholders production accounts for over 80 per cent of all our export crops, and produce nearly all
the food that feeds the nation. Yet, the average productivity level of smallholders remains low, and this
remains the biggest challenge for the agriculture sector over the medium and long-term.

The opportunities for enhancing smallholders contribution to agriculture GDP highlighted earlier in
Section 2.5.1 are very real, but the productive gains will only be realized if farmers are provided with
the necessary inputs to raise their level of production. The various options of farmer support outlined
in Chapter 3 of this review must be incorporated in a coherent policy framework that puts farmers
first in the nations development agenda.
A similar proposal was advanced earlier by DAL in its Strategy for National Agricultural Development:
Horizon 2002-2012 (GOPNG, 2001). The strategy proposed an umbrella legislation to empower a
National Agricultural Council (NAC), as an apex body to control and manage the sector through a

Livestock research can be undertaken by a new livestock development agency as per this FER, or the
universities, or by NARI. PNG may not be able to develop research capability in rubber research. The new entity
that replaces the current Rubber Board should forge linkages with the Rubber Research Institute of Malaysia
(RRIM) for technology transfer between two Commonwealth countries.
35

36 District Authorities Act resulted from an amendment to the OLPLLG through a private Members Bill by Hon
Peter ONeill in 2006. However, the Act has not been implemented until further change was made to it by the
current Government, and is now before Parliament.

[34]

central funding mechanism and its implementation. 37 DAL would provide the policy advice and
secretariat for the NAC. This proposal was perceived by some stakeholders (see Allen, 2009; McKillop
et al 2009), as an attempt by a weak and ineffective department to regain control over all aspects of
agricultural policy and production in PNG, including the export tree crop sector. However, the failure
to implement this proposal prevented DAL from undertaking further reforms of itself, and sustainably
managing the NADP when it was approved by the Government for implementation in 2007.

The recent restructuring of the health sector, under a unified health system and empowered by an
umbrella legislation (National Health Administration Act, 1997) provide similar opportunities for the
management of the agriculture sector. Under such a legislative framework, the Secretary of DAL can
assume oversight of all national development initiatives in agriculture nation-wide, just like the
Secretary of Health being responsible for the national health system that extends down to each
provincial hospital and health clinic throughout the country.
It is also important to recognise the role of DAL in the sector. The sector reforms to the end of the
1990s have left the Department marginalised, with no capacity for policy making or ability to monitor
sector performances. The overall view of the FER team is that the sector must be driven by an enabling
legislation (proposed National Agriculture Administration Act) that will give the Ministry and DAL the
oversight of agricultural development throughout the country. This legislative framework should also
dictate to commodity boards and agencies, and provide for a national funding mechanism for the
sector, as outlined in Chapter 4.

2.6.2

Proposed restructuring of commodity boards and agencies

The merger proposal by NEC to amalgamate Cocoa Board with KIK is not in the interest of both
industries as they have established overseas markets that are different (one is a beverage and the
other an oil crop), and their technical challenges (pest and diseases, and market opportunities) differ
markedly. Hence, the corporate and management culture required by the industries are not the same,
and this would affect the manner in which their interests (crops and industries) can be served by a
single organization. Accordingly, it is proposed that their joint venture in CCI, be dissolved, and the
staff and assets be shared by both. Table 2.5 provides the recommendations from this analysis.

The assessment of institutional capacities in the food sector by the FER team indicate that all crops
suggested in the NEC directive rice and other grains, sago, cashew, spices and essential oils - would
be better handled by NARI. Recent discussions held with members of the NARI Council confirmed that
NARI would evolve from a purely research establishment to a fully-fledged National Agricultural
Research and Development Institute (NARDI). This reform process has been officially approved for
implementation in 2014. The Council has invited views and suggestions on the functions of NARDI,
and submitted a separate NARI/NARDI position paper to the FER team. However, the FER team
believes strongly that NARI should become part of the Food and Grains Board for PNG, covering all
food crops, including alternative minor cash crops such as spices and essential oils, grains, and nuts
(ground nuts, tree nuts, etc.), sago, rice, tea and sugar.

37

Based on this strategy DAL formulated the NADP, but without a legislative framework to prevent its misuse.

[35]

Tea is an important commodity in PNG, and the industry is based on early government research which
had developed the material (clones) now in use by growers. Presently, the industry is well catered for
by two growers operating on four major estates. A pilot project in the 1970s in Garaina, Morobe
Province, was abandoned some years later. Its remote location made it difficult to bring the estate to
full commercialisation.

The transformation of the Rubber Board to a new Rubber Development Board has met all the statutory
requirements, and can also proceed to NEC for its consideration and approval, after this FER.
Spice Industry Board is still managed by DAL and should be abolished and the responsibility for spice
and essential oils to come under the Food and Grains Board.

Table 2.5: Proposals for Restructuring of Commodity Boards and Agencies

Commodity board and
agencies

NEC directive

FER recommendation

Cocoa Board

Merge with KIK

Kokonas Indastri
Koporesen (KIK)

Merge with Cocoa Board

Fresh Produce
Development Agency
(FPDA)

Merge with NARI

Rubber Board

Merged with Spice and other

Alternative Cash Crops

Spice Board

Merged with Rubber and other

Alternative Cash Crops

Livestock Development
Corporation (LDC)

Convert
to
a
Livestock
Development Authority

[36]

To remain separate, but a new revised Act that

assumes the cocoa research and extension
function and assets minus liabilities from its
subsidiary, CCI.

To remain separate, but a new revised Act for

a Coconut Development Board that assumes
the coconut research and extension function
and assets minus liabilities from its subsidiary,
CCI.

FPDA dissolved and NARI to return under

Ministry of Agriculture & Livestock, and its Act
revised to take on all food and grains research
and extension matters under a Food and
Grains Board. However, if it proves difficult for
NARI to return to the sector than FPDA will be
dissolved and its assets to and current
functions to be transferred to the Food and
Grains Board under a Food and Grains Board
with a new Act.
Remain separate, but a new Act to create a
Rubber Development Board. Cape Rodney
Rubber Project to be transferred from DAL as
its prime asset.

Dissolve the Spice Board, and spice and

essential oils will be taken over by a Food and
Grains Board.

LDC be dissolved and a new Livestock

Development Board be created to assume its
assets but not liabilities. DAL to transfer land
to the new Board for its operational needs.

Oil Palm Industry

Corporation (OIPC)

OPIC merged under a new Oil

Palm Industry Board

Coffee Industry
Corporation (CIC)

Repeal OPIC Act and amalgamate function

under a new Oil Palm Industry Board. Oil palm
research by OPRA would be subsumed by the
new entity.

CIC model of having research and

development functions under the direct
control of the board will be used to restructure
Cocoa Board and KIK. Therefore it is critical to
take urgent remedial actions to address recent
administration issues at CIC. Under the
proposed reforms, CIC Act will be amended to
have CIC changed to Coffee Industry Board
(CIB).

The livestock industry can only grow bigger, as the current rate of meat consumption in PNG is 5 per
cent annually, and growing. The ground work done by the LDC Board on its corporate evolution has
ensured that the establishment of a Livestock Development Authority can now proceed to NECs for its
consideration and approval, after this FER. There is a draft Bill to establish the authority, including the
approved organizational and salary structures. However, a change needs to be made in the name from
Authority to Board in the draft Bill.

The proposals to establish an Oil Palm Industry was accepted by the FER team as the way forward for
the industry. The oil palm industry is the biggest of all agricultural industries in terms of revenue
generation, but involves only 10 per cent of the population. This industry can only expand with further
government support. It is highly unlikely that any large investor would be willing to enter the PNG
industry without some form of government partnership. The established projects in the New Guinea
Islands, Oro and Milne Bay were established with direct state participation through provision of land
and capital. The new SABLE related projects must also be monitored, and the expansion of logging
areas for agriculture requires statutory authorities to be created and to be diligent in oversight of
these developments. Hence, the establishment of an Oil Palm Industry Board to assume such national
responsibilities is overdue in PNG.

Although CIC was not a subject of scrutiny by the FER team, the discussions with stakeholders in
Goroka did indicate that the organisation should be considered for review. As the first of commodity
boards to be reformed under the original version of the corporatization model, the legislation under
which it functions differs from that of other organisations. That difference may be a source of strength,
as it is able to conduct its business with some relative freedom under the Companies Act. But, by and
large, its operations suffer from the same problems as other commodity boards. 38

38 CIC suffers from lack of development funding and now covers 300 farmers per extension officer today, as opposed to 1500
farmers per officer in 1990. Its Board structure is unique to all other Boards; it is empowered by its Act, but its Board
members are selected through its constitution as a public company. This appointment process is often criticised because
some same individuals have held directorships on the board continuously beyond three years,

[37]

2.6.3

Linkages of commodity boards to provinces and districts

The FER team did discuss at some length as to how commodity boards and agencies can use existing
mechanisms to link with the provinces, districts and the farming communities. The main issue was of
delivering services (technologies, high value seeds and crops, improved stock) to farmers through
extension. The common approach to extension in the pre- and immediate post-independence period
followed the Training and Visit (T&V) system. This approach entailed visits by government extension
agents to deliver specific recommendations to farmers about the practices they should adopt. Often
these technology prescriptions may not be relevant to the farmers situation.

Today, extension has become more pluralistic, and more and more non-governmental organizations
are becoming involved directly with farmers. Hence, public extension cannot continue alone without
engaging the support of other service providers. Commodity boards and agencies must be engaged
directly with farmers and other value chain actors. However, it is also important for them to avoid
being too thinly spread in their coverage that they risk making minimal impact at the farm level.

The OLPLLG governs the way government agencies implement service delivery at sub-national levels
and in rural communities. The FER has therefore proposed that the enabling legislation, the National
Agriculture Administration Act, should recognise agriculture extension as a decentralized function. By
doing so, this umbrella legislation will be harmonious with the Organic Law. Further, the legislation
will guarantee that extension is also a co-function of national agencies, through a new innovative
extension policy. The policy framework will define the linkages between R&D organizations
(commodity boards and agencies), NGOs, value chain actors, and farmers. The commodity boards and
agencies would be responsible for developing the required high-value crops and products, and these
are disseminated to innovative farmers through a pluralistic, farmer driven, and market-oriented
extension process. Commodity Boards would promote desired public-private partnerships to
implement the new extension approach in advancing rural development.

The Chart 2.1 below illustrates how an innovative extension system could be adopted to effect the new
bottom-up approach to extension delivery. As extension is a process rather than an institutional
mechanism, everyone along the value chain is responsible for the effective extension delivery in PNG.

The configurations on the right side of Chart 2.1 (new pluralistic extension) below indicate how
development efforts of national and provincial agencies, including NGO initiatives are to be channelled
down to the district level through a Provincial Agricultural Technology Management Committee,
which can constitute a side-arm of the existing Provincial Coordinating and Monitoring Committee
with the Provincial Administrator as the chairperson.

The critical body at the district level is an Agricultural Innovations Committee of a District Agriculture
Information and Advisory Centre. This Committee should be established under the National
Agriculture Administration Act, and be empowered to decide on the programs and funding of
extension activities in a district, including the disbursement of vouchers to access agriculture inputs,
as described in Chapter 3. The Committee would consist of representatives of commodity boards,
NGOs, farmers groups and district agriculture officers. The District Agriculture Innovations Committee
should have no more than seven members (two must be women), and can be chaired by the District
Administrator.

[38]

Chart 2.1:

Moving towards a new framework for an innovative agriculture extension system

Levels of
Government

National

Provincial

District

LLGa/Ward

Village

Present Approach
Training & Visit

New Approach
Pluralist Extension

DAL Commodity
Boards NARSb

Provincial Agriculture Technology

Management Committee

Division of Primary
Industry

Private
Service
Providers

Commodity
Boards,
R&D

PSIPc
DSIPd

District Agriculture
Officers
Agriculture Innovations Committee
District Information & Advisory Center

Extension Officers

Farming Communities
Farming Communities

Notes: (a) LLG denotes Local Level Government; (b) NARS denotes National Agriculture Research System; (c)
PSIP denotes Provincial Service Improvement Program; and (d) DSIP denotes District Service Improvement
Program.

2.6.4

Registration of agricultural professionals for rural development

One of the key issues that have surfaced from the FER Team / Stakeholders consultations on the
selected commodity boards and agencies is the lack of accurate information on the identity, and
number of agricultural professionals being engaged in, and outside of the agriculture sector today.
Even accessing the desired information of professionals employed by the targeted agencies was
difficult, and in the end, the review report in Chapter 5 was devoid of any information about the
number of scientific and technical staff employed by these organizations.

From the discussions held on this issue, and from references to other similar entities in and outside of
PNG, it is recommended that as part of the rationalization of the commodity boards and agencies, that
a peak industry body be established by legislation, for the registration of agricultural and natural
resource management professionals in the country. The organization can be led by a Registration
Board or a professional Institute, with the following objectives:

[39]

(a)
(b)
(c)
(d)

It is committed to advancing the agricultural profession, and the application of science and
technology, for the sustainable development of agriculture and natural resource
management in PNG.

Its members would be engaged in a wide range of activities including research, education,
government, agribusiness and private consulting.

It will take lead in the maintenance of professional standards, ethical responsibilities and
the recognition in professional work of the broader environmental, social and industry
context in which its members work.

It will take lead in promoting the importance of research and development in agri-industry,
and in improved training of the agri-industry workforce to ensure that PNG agri-industry
remains globally competitive.

Unlike the currently established organizations in PNG, the proposed peak industry body will not only
register qualified professionals in agriculture, but will be totally engaged in promoting development of
the sector through its membership as well as the utilizing its technical clout in exerting authority in
science and technology in the country.

The membership of the peak industry body is open to any person who: (i) holds an appropriate
graduate qualification in agriculture and natural resources management, or (ii) has achieved
professional status and a position of professional responsibility through combination of postsecondary education and practical experience in agriculture and/or natural resource management.

It is proposed that the legislative framework that establishes the peak industry body should be similar
to the Medical Registration Act 1980 or the Lawyers Act 1986. In agriculture, there is a Veterinary
Surgeons Act 1966, which allows for a registration board to account for, and manage veterinary
officers employed in the livestock subsector of agriculture. This Act is out-dated and requires revision
under the present rationalization of the commodity boards and agencies. The revision of this Act is
necessary as it has implication for the development of a new Livestock Development Board, as well as
the proposed peak industry body for agricultural professionals.

Once established, the peak industry body of agricultural professionals should develop a business plan
as basis of sustaining its future development, and to take on a lead role in promoting sound policy and
farmer advocacy in agriculture. The organization will also be a source of sound minded professionals
who could serve as directors of commodity boards and agencies. Also, from its membership, it will
establish agricultural consultants register, as source of advisers in agri-industry and allied natural
resources areas. Its consultants will be professionals who will provide high standard of advice and
abide by a code of ethics.

The establishment of such a peak industry body at this juncture is highly appropriate, as its creation
will allow scientific and technical officers currently employed in the sector to have a sense of
belonging to an organization that promotes their professional interest beyond their current job. This is
a positive move which will certainly advance the agriculture sector in PNG.

[40]

2.7

Conclusions

The policy analysis under this FER covered six major policies that have influenced the development of
the commodity boards and agencies, and the sector as a whole since Independence. The review has
recommended a set of reforms for the commodity boards and agencies analysed. It is anticipated that
these reforms will also yield better and enabling policy and legislative frameworks that would allow
the reformed industry organizations to improve the productivity of their sub-sector, and their
contribution to the national economy.
In conclusion, several policy issues as highlighted below must be addressed in the process of
rationalisation of the targeted boards and agencies:
(a)

(b)
(c)

(d)

(e)

DAL must be reformed to be able to assume greater control of agricultural policy

formulation and implementation. DAL must also address the issue of inadequate funding of
various institutions of State in agriculture.

The Secretary of DAL must be given responsibility for scrutiny of commodity boards and
agencies. It is proposed that the Secretary be enabled to this as chairperson of the policy
and funding mechanism to be called the Agriculture Investment Corporation.

After its evolution over 15 years, it is now considered essential for NARI to assume
corporate responsibility beyond in its original mandate. It must now be subject to urgent
reform, to enable it to accept a greater development role than in the past. The first step in
this direction would be its return to the fold of the Agriculture and Livestock Ministry, by a
Prime Ministerial Determination.

It is important in the long run that effective funding mechanisms be determined and these
be tied down in legislation so that there is continuity and sustainability of these sources of
funding. The lack of credit means lack of access to inputs. The experiences with the Bris
Kanda and PPAP projects indicate that subsidizing production inputs will immediately
result in farmers increased interest in expanding their farming businesses. The
establishment of the Agriculture Investment Corporation as described in Chapter 4 would
require commodity boards and agencies to be directly engaged in mobilizing investments
in agriculture.

The expansion of the domestic cash crop economy, particularly in the marketing of fresh
produce, will continue into the future. This growth is being driven in part by the
devaluation of the Kina, which has seen a significant increase in the prices of imported
food. Consumers in both urban and rural areas have responded by purchasing less
imported food and more local produce (Allen, et. al. 2009). The challenge to commodity
boards and agencies is to contribute to the lifting of the level of productivity of smallholder
participants in the agricultural economy.

[41]

(f)

(g)

(h)

The need to produce food in sufficient quantity and quality must remain an important
policy priority. The contribution by commodity boards in generating income opportunities
for the rural population will assist the country in achieving real household food security by
2015.

There is a need to formulate a new extension policy framework that promotes a

participatory, pluralistic, and market oriented extension service that brings all
development partners down to the district level, including the commodity boards and
agencies. The policy should dictate how extension services operate and to ensure that
farmers receive good advice. However, it should reduce governments direct engagement
in providing services or inputs to farmers. This should be left to other service providers,
such as private companies and non-government organizations. It is obvious this change
cannot be achieved overnight, and should be a gradual process, as guided by appropriate
legislative and institutional reforms.

The agriculture sector requires a peak industry body to be established for registering
agricultural professionals in PNG. This is a priority undertaking that must go hand in hand
with the rationalization of the commodity boards and agencies. The model legislation to
follow are: the Medical Registration Act 1980 and the Lawyers Act 1986. It is also
proposed that the Veterinary Surgeons Act 1966 be revised in its entirety to make it
relevant to current needs of the livestock industry in PNG.

The final point worth making is that the future of PNG agriculture will be on the shoulders of
smallholder farmers who currently cultivate no more than a hectare of crops or livestock. The
smallholder farmers lack inputs to maintain their production, and cannot sustain their level of
productivity without external assistance. The project interventions, such as the Bris Kanda and PPAP,
have demonstrated that smallholder farmers, when mobilised as cooperative groups, and provided
with subsidized inputs, can be most innovative in adopting technologies and production systems.
Smallholders now produce nearly all the food for the nation, and nearly 80 per cent of all export tree
crops. They will be the driving force in achieving real and sustained agricultural growth in the future.
Hence, the smallholder farmer must be central to the future policy settings in the agriculture sector.

[42]

CHAPTER 3: AGRICULTURAL TAXATION AND INPUT SUBSIDIES

3.1

Introduction

Author: Winton Bates

There is a lack of policy framework on agricultural taxation and input subsidies in relation to service
delivery to the farmers along the supply and value chain of the various agriculture based commodity
industries. Three broad questions are addressed in this chapter:

3.2

(a)
(b)
(c)

Are appropriate taxes being used to fund services to agriculture?

To what extent should agricultural inputs be subsidized?
How should agricultural inputs be subsidized?

Are Appropriate Taxes Being Used to Fund Services to Agriculture?

The question of whether appropriate taxes are being used to fund services to agriculture is considered
in this section in terms of a standard economic framework, with a focus on economic benefits and
costs. The analysis is broadened to consider other government objectives in the following section.

3.2.1

The economic rationale for cost recovery

Should the cost of services provided by government agencies, such as agricultural research, extension
and regulation, be recovered from farmers? There are two main reasons why that may be appropriate:
(a)

(b)

First, benefits generated by services to agriculture are mainly internal to particular

industries within the agricultural sector. Most of the benefits of agricultural research and
extension activities could be expected to accrue to farmers through higher productivity
and profitability. Similarly, regulatory services, such as inspections to maintain minimum
quality standards, could be expected to result in higher prices than otherwise attainable
and would thus be primarily of benefit to farmers.
As discussed later, the benefits of some services to agriculture may spread beyond farmers
currently in an industry, for example by inducing entry to commercial agriculture or
inducing farmers to plant different crops. As a result of such spill-over effects, it is possible
that subsidization of some services from general revenue may generate additional benefits
that exceed the costs involved.
Second, cost recovery may encourage greater efficiency by encouraging the users of
services to consider whether they obtain value for money from the services provided. This
discipline could be expected to be more powerful when cost recovery is via a fee for a
specific service than when cost recovery occurs via taxes at an industry level. 39

For further discussion of the economic rationale for cost recovery, see the Australian Productivity Commissions report on
that subject (Productivity Commission, 2001: 12-18).

39

[43]

3.2.2

Forms of cost recovery

The main forms of cost recovery from users of services provided to PNG agriculture are export levies,
license fees and charges for specific services.
3.2.2.1

Export levies

Export levies are a major source of revenue for the Kokonas Indastri Koporesen (KIK) and Cocoa
Board. Export levies accounted for between 50 and 88 percent of the revenue of KIK over the period
since 2005 and between 29 and 48 percent of the revenue of the Cocoa Board over the same period.
Activities funded include export inspection and certification, and research and extension.

Over the period since 2005, export levies have varied between 4.1 and 1.3 percent of the value of
export shipments of coconut products. Over the same period export levies have amounted to less than
1 percent of the value of exports of cocoa.

The Coffee Industry Corporation (CIC) has provided the FER team with limited information on levies
for the coffee industry. However, information for 2008 from the Coffee Industry Strategic Plan,
suggests that levies have been a less important source of funding for CIC (than for KIK) accounting for
around 11 percent of total revenue (CIC, 2008: 27). 40
The current levy rate of K0.10 per kilogram would translate to about 2% of the price typically received
by coffee growers in June 2012. Levies were around 1.3 percent of the value of exports in 2008 (CIC,
2008:27).
The Oil Palm Industry Corporation (OPIC) has been supported by a levy of K4.00 per tonne (fresh fruit
bunch FFB) since 1997 when government funding ceased. Another major source of funding for OPIC
is a voluntary contribution by millers of K4.00 per tonne.
3.2.2.2

Licence fees

The importance of license fees as a source of revenue varies substantially between Boards. Such fees
have accounted for from 1.5 to 3.6 percent of the revenue of KIK in recent years, but from 14 to 45
percent of the revenue of the Cocoa Board.
3.2.2.3

Charges for specific services

Charges for specific services accounted for 81 per cent of the revenue of NAQIA in 2012. In principle,
such charges should reflect the costs associated with individual inspections, but there has been some
cross-subsidization within NAQIA. This occurs because of the difficulty in recovering costs for
inspections relating to goods produced in PNG for sale in the domestic market.

The Cocoa Coconut Institute (CCI), which is responsible for research, development and extension for
the cocoa and coconut industries, owns plantations and seed gardens that generate revenue to help
fund research. In recent years the CCI has derived about one-quarter of its funding from sale of copra,
cocoa beans and cocoa planting materials.
40

Total levy receipts for CIC were almost double those of KIK in 2008 (K6.6 million compared with K3.6 million).

[44]

3.2.3

The impact of export levies

In terms of text book economics, the best tax to recover the costs of compulsory regulatory services
designed to generate benefits such as higher export prices, is one which beneficiaries pay in
proportion to the benefits they obtain. The rationale is that beneficiaries would have an incentive to
press for excessive regulation if they were able to impose disproportionate costs on others, or too little
regulation if they were required to make a disproportionately high contribution to costs. 41

An ad valorem levy on exports may come as close to the text book ideal as might be possible in those
industries where a high proportion of domestic production is exported and the impact of regulatory
services, such as quality inspections, can be assumed to raise export returns proportionately for both
high and low value produce. While the cost of export inspections is more closely related to the volume
of exports than to the value of exports, a volume based tax would tend to discourage low-value exports
to an excessive extent and encourage exporters of high-value produce to press for excessive
regulation.
A report by USAID on the legal, institutional and social environment for doing business in the PNG
agricultural sector, the AgCLIR report, noted that while agribusiness resent paying the fees to
industry boards when they feel that they do not obtain any valuable services in return, industry
levies are generally not considered a burden by agribusiness (AgCLIR, 2012).

However, it is likely that the views of agribusiness firms on this matter are influenced by their ability
to pass back most of the levies to farmers. While the export margin (e.g. difference between the
millgate and FOB price) fluctuates from year to year, over the longer term it could be expected to cover
the export levy as well as costs of services provided by agribusiness firms.

Levies are a substantially higher percentage of farm gate prices than of export prices. For copra,
current levy rates equal to about 4% of the value of exports and about 6% of the estimated millgate
value. (The corresponding percentages for 2013 are likely to be substantially higher, given a 42% fall
in the millgate copra price). 42

It seems likely that levies have a substantial impact on net returns to farmers from commercial
production, since export supplies of coconut products are highly sensitive to changes in export prices.
The sensitivity of market supplies (and presumably net returns) to changes in export prices is
consistent with the existence of high transport costs. It has been noted that the cost of transporting
bulk copra to market outlets from remote coastal and island communities is particularly high (Kaiulo
and Manoka, 2010).
Such evidence suggests that, over the longer term, unless the services funded by levies generate
substantial benefits, there is potential for levies to have a significant negative impact on returns to
investment in agriculture.

41 The Australian Productivity Commission has a useful discussion of the beneficiary pays principle in its report on cost
recovery by government agencies (Productivity Commission, 2001: 15).
42 In recent years, levy rates on copra have been maintained at K27 per tonne to encourage downstream processing, while
levy rates on crude coconut oil and copra meal have been reduced substantially. Further information is provided in Chapter
4.

[45]

The impact of export levies varies substantially from year to year, with fluctuations in export prices
and export revenues. This is illustrated in Figure 3.1, with reference to the operations of KIK. The chart
shows that while expenditure has grown, subject to relatively minor fluctuations from year to year, the
revenue from levies has fluctuated to a greater extent with changes in the value of exports.
Nevertheless, revenue from levies has changed less than proportionately as the value of exports has
fluctuated. 43 This means that, as a percentage of export value, the rate of levy has tended to be highest
in those years when the value of exports has been relatively low (4.1% in 2005 and 3.8% in 2006) and
lowest when the value of exports has been relatively high (1.3% in 2008 and 2011). The current
arrangements for funding of regulatory services have therefore tended to aggravate the instability of
farm incomes.
Figure 3.1:

K million

Fluctuations in Administrative Levy and Expenditure for

KIK, compared with Value of Exports
6

300

250

200

150

100

50

K million

2005

2006

2007

2008

2009

2010

2011

2012

Administrati
on Levy K
million
Administrati
ve Levy plus
Licenses K
million
Expenditure
K million

Export
Value K
million (R.H.
scale)

43 Export levies are currently set in terms of Kina per unit of weight, with the rate of levy tending to be adjusted downwards
when prices are relatively low. It should also be noted that boards have some capacity to borrow in order to even out
fluctuations in levy receipts.

[46]

Such adverse impacts could be avoided by applying a formal stabilization arrangement to the funding
of the regulatory services of commodity boards. One way stabilization could be achieved would be
through a government guarantee of a particular amount of funding each year, with boards being
required to set levies at a specified rate as a percentage of export revenues (or total revenue including
revenues from domestic sales where that would be more appropriate). When levy revenue exceeds the
guaranteed funding level, the surplus would flow to general government revenue; when the levy
revenue is less than the guaranteed funding level, the Boards would be subsidized from government
revenue. (This proposal is developed further later in the chapter to incorporate ongoing input
subsidies)

3.2.4 Should there be more reliance on fee for service and commercialisation?

There may be scope for some quality control functions currently funded by license fees and export
levies to be funded by explicit user charges. This would focus more attention on obtaining value for
money and could lead to greater questioning of whether a useful service is being provided, as well as
creating pressure to keep costs down.

There may also be scope for greater commercialization of research and extension activities. This could
occur, for example, through more emphasis on sale of improved plant varieties or technical advice. An
obvious problem is that many of the people who have potential to benefit from such goods may not
have the capacity to pay for them. It has also been suggested that increased reliance on commercial
sales may induce research organisations to focus to a greater extent on research outputs (e.g. planting
materials) that have private good characteristics (making it easy to exclude people who do not pay)
rather than those which provide broader public benefits (Omuru and Kingwell, 2005: 7). As discussed
later, however, there may be efficiency gains in dealing with the capacity to pay issue directly, e.g.
through a voucher system, as a means of fostering more widespread opportunities for economic
advancement.

3.3

To What Extent Should Agricultural Inputs be Subsidised?

It is appropriate to consider the extent to which agricultural inputs should be subsidized against the
background of the current tax-subsidy regime applying throughout the PNG economy. If a tax-subsidy
regime tends to favour one sector relative to others, the net economic benefits from additional
investment in the favoured sector are usually lower than elsewhere in the economy because industries
that make efficient use of resources from a national viewpoint normally require little or no
government assistance. 44 Such reasoning suggests that there are more likely to be net economic
benefits from reducing government subsidies to favoured industries than from increasing them. The
exception to this general rule, discussed subsequently, arises where activities are favoured because
they generate important positive spill-overs.

44 The idea that high levels of industry assistance imply inefficient resource use was the basis for efforts to measure effective
rates of protection (or industry assistance) which contributed to industry assistance reforms in many countries, particularly
during the 1980s and 90s. The Australian Productivity Commission has outlined the experience of its predecessor
organisations in the use of such concepts (Productivity Commission, 2003).

[47]

3.3.1

Is the agricultural sector favoured by the current tax-subsidy regime?

The extent that the structure of taxes and industry assistance in PNG favours some industries relative
to others is now much more moderate than it has been in the past. 45 Nevertheless, there is some
remaining potential for the structure of tax concessions and industry assistance in PNG to favour some
industries relative to others.
The main policy measures in PNG that have potential to advantage or disadvantage some industries or
sectors relative to others are: import tariffs and export taxes, incentives provided under the income
tax legislation, GST and budgetary assistance to industry.

3.3.1.1

Structure of import tariffs and export taxes

PNG tariffs are generally fairly low and most are projected to fall further over the next four years.
Agricultural products grown for the domestic market constitute an important exception to the low
tariff regime. A duty rate of 40% applies to potatoes, tomatoes, onions, pumpkins, carrots, peas, beans,
sweet potatoes etc. and is projected to remain at that level over the next four years. The fact that this
high duty rate does not exclude all imports of the commodities concerned seems to be attributable, in
part, to the costs of verifying compliance with minimum quality standards required by high end local
consumers, rather than high agricultural production and transport costs. 46 If the quality control
problems could be resolved satisfactorily at low cost, the import-replacement sector could possibly
thrive with lower tariff levels. Nevertheless, that does not alter the fact that many import replacement
activities in the agricultural sector are currently relatively high cost activities and that current high
tariff levels are indicative of a bias in favour of high cost import replacement activities at the expense
of low cost export activities.
The agricultural sector is not disadvantaged by tariffs on inputs that are used solely in agriculture.
Agricultural equipment, fertilizers and pesticides enter free of duty.

Project-specific concessions apply to the tariff (as well as to GST and income tax). Goods imported in
relation to the Ramu Nickel Project and the LNG Gas Project are subject to a blanket exemption from
import duties.
Export taxes apply to logs from native forests, some timber products, and articles of gold or silver
jewellery. There are no export taxes on agricultural commodities apart from the export levies
administered by the commodity boards.

PNG has a history of attempting to encourage the development of industry, particularly manufacturing industry, through
provision of high levels of industry assistance, via import bans and quotas. Such assistance was replaced by high tariffs,
mainly by the early 1990s. Prior to the introduction of the tariff reduction program at the beginning of 1999, average import
tariff levels were high and tariff rates were disparate; applied MFN tariffs averaged 20% (on an unweighted basis), but
ranged from free to 125% (Anderson and Bosworth, 2000: 22).
46 NAQIA drew the attention of the FER team to the existence of quality control problems in respect of domestic sales of
agricultural products.

45

[48]

3.3.1.2

Incentives provided under the income tax system

Industry-specific tax incentives are provided to mining, agriculture, tourism and manufacturing
industries. The prevalence of project-specific concessions provided in association with mining
development contracts (MDCs) is likely to favour the mining sector relative to other sectors. 47

Income tax incentives for mining and petroleum include MDCs which:
(a)
(b)
(c)

guarantee the fiscal stability of projects in respect of tax rates applied;

apply a concessional 30% tax rate to non-resident mining and petroleum companies
whose exploration program is acceptable to the Department of Petroleum and Energy; and
apply a concessional tax rate of 30% to certain petroleum operations for which leases
were granted between 2003 and 2007.

Mining exploration spending is eligible for double deduction if it is ultimately transferred to a

production license.

The tax advantages obtained by the mining sector are offset to some extent by an income tax
exemption that applies to new businesses engaged in many sectors of the economy other than mining
and forestry in specifically designated under-developed areas.

Some income tax concessions for agriculture are also project-specific. For example, a concessional tax
rate of 20% applies to certain new primary production projects with capital costs of at least K1
million. Provision has also been made for a 150% deduction to be applied to expenditure on
agricultural extension services, under plans approved by DAL.

Other income tax concessions applying to agriculture include:

(a)

(b)

allowing 100% deduction of capital expenditure on acquiring property used directly for
agricultural production as well as for capital spending on land clearing etc. ; and
allowing tax deductions available to agriculture companies for development spending and
depreciation to be passed through to shareholders for deduction at shareholders marginal
rates.

47 Preliminary findings by the IMF suggest that the average effective tax take in the resource sector corresponds to the low
side of fiscal regimes in the world (IMF, 2012: 10). Low effective tax rates are generally viewed as positive from an economic
growth perspective, but the situation in the mining and petroleum sector is complicated by the possible existence of
substantial resource rents that could normally be expected to accrue to the resource owners (i.e. the PNG government on
behalf of the people). Project-specific tax concessions may involve the sacrifice of resource rents in order to obtain more
rapid resource development than would be optimal from the perspective of maximizing returns to resource owners.

The situation is further complicated, however, by investor concerns about sovereign risk e.g. the possibility that royalties
might be raised in future or, perhaps, traditional landowners in mining areas might be able to claim ownership of mineral
resources. In that context, incentives that reduce the after-tax cost of investment would help to ensure that worthwhile
projects are not deferred indefinitely.
Yet another complicating factor, only too evident in PNG, is the potential for some mining projects to generate negative
environmental externalities.

Despite all those complications, it seems reasonable to presume that the negotiation of tax incentives on a project-by-project
basis results in greater investment in projects that are only marginally viable, than would occur under a non-negotiable
system of tax incentives with similar implications for total government revenue.

[49]

Tax incentives for manufacturing and tourism include:

(a)

(b)
(c)

(d)

a wage subsidy for new manufactured products that begins at 40% of the relevant
minimum wage for each employee and is phased out over five years;
exemption for the first three years of income from export sales of qualifying goods;
double deduction of spending on developing export markets for manufactured products
and attracting overseas tourism; and
a concessional tax rate of 20% for the first 10 years of new, or substantially improved,
large scale tourist accommodation facilities.

3.3.1.3 The incidence of GST

The most obvious departure from industry neutrality under the GST is the zero rating on goods and
services, other than cars, supplied to resource companies for use in resource operations.

As is common in GST systems in other countries, exports are zero rated. Where imports are subject to
GST, zero rating of exports is necessary to avoid imposing excessive taxes on industries engaged in
international trade.

Most farmers do not have to pay GST on their sales since firms are required to register only if their
sales amount to more than K250,000. Farmers have to pay GST on purchased inputs, but smallholders
are able to claim a credit for GST paid on their sales under an arrangement in which they are
permitted to add 1 per cent to their prices, which can then be claimed by buyers as an input tax credit.
3.3.1.4 Budgetary assistance to industry

Substantial budgetary assistance has been provided to oil and gas industries in recent years, with
payments of K170 million made to local communities in 2012 to facilitate development in affected
areas.
Development expenditure for agriculture of K88.5 million was allocated in the 2013 budget,
accounting for 1.5% of the total development budget for 2013. Almost half of development spending
for agriculture (K40.8 million) was by way of loans.

A substantial increase in budgetary assistance to the agricultural sector has been proposed in the 2014
budget, with allocation of K40 million to the Agriculture Commercialization Equity Fund - a pilot
program providing subsidies to landowners for land survey and registration and seeking investors for
the development of agricultural commodities. In addition, allocations to commodity boards and
research agencies are to increase substantially from K67.8 million in 2013 to K132.5 million in 2014.
3.3.1.5 Summing up

The answer to the question of whether the current tax-subsidy regime favours agriculture relative to
other industries differs between the import replacement and export sectors. The current import tariff
structure provides farmers with an incentive to produce goods for the domestic market even though
costs of production and marketing of those goods in PNG are relatively high by international
standards. This high cost production occurs to some extent by shifting agricultural resources away
from export market production, where use of those resources is internationally competitive and
therefore likely to generate higher returns for the people of PNG.

[50]

Available evidence certainly does not suggest that the current tax-subsidy regime has favoured
agricultural export activities relative to other export activities such as mining and petroleum. If
anything, agricultural export activities have been disadvantaged by the tax-subsidy regime as
incentives to investment provided to mining and petroleum industries have resulted in a higher
exchange rate than would otherwise have prevailed.
However, the foregoing consideration of the extent to which the structure of tax concessions and
industry assistance in PNG favour some industries relative to others does not provide strong grounds
to consider increasing agricultural input subsidies as a means of remedying any current bias in the
current tax-subsidy regime in PNG. The case for provision of agricultural input subsidies should be
considered on its own merits.

3.3.2

What are the relevant policy objectives in provision of input subsidies?

It has often been observed that the agricultural sector in PNG generates levels of production and
income well below its potential. For example, a report by the Asian Development Bank provided
evidence in 2004 that in many industries the productivity of smallholder farmers is far below best
practice (ADB, 2004: 11).

However, evidence of potential for growth of productivity and income in a particular sector of any
economy does not necessarily imply that provision of input subsidies would encourage more efficient
use of resources. It is possible for the cost of achieving sectoral gains in productivity and income to be
too high, after taking into account opportunities foregone elsewhere in the economy.
The standard economic argument for input subsidies rests on externality/ public good considerations.
As already noted, there is a case for the provision on some input subsidies on the grounds that the
benefits of some services to agriculture may spread beyond farmers currently in an industry, for
example by inducing entry to commercial agriculture or inducing farmers to plant different crops.

A case can also be made for input subsidies on the grounds that subsistence farmers and smallholders
may be constrained in their ability to undertake commercial ventures using purchased inputs, such as
fertiliser and improved plant varieties, for example because of difficulty of offering sufficient security
to obtain credit when land is held under customary ownership. Many subsistence farmers and
smallholders may also be unwilling to take the risks involved in commercial ventures because failure
of those ventures, for example due to poor seasons or a market slump, would threaten their future
livelihoods. Such factors make it problematic for private sector input suppliers to invest in the
research and supply-chain development required to facilitate commercialization of agriculture. Market
failure may thus help to explain why there is a large gap between best practice productivity and the
productivity of many small holders in the agricultural sector.
Unfortunately, the ability of economists to identify potential for market failure does not guarantee that
the benefits of action to correct it will exceed the associated costs. Even when there is strong evidence
of market failure, potential implementation problems can often tilt the scales against intervention.

There are often greater grounds for confidence that benefits will exceed costs if underlying problems
are dealt with directly, for example by dealing with credit market problems through appropriate credit
market interventions. The likelihood that intervention will succeed is also enhanced if there is private

[51]

sector involvement, for example through joint ventures with commodity boards to explore or
demonstrate the commercial feasibility of technological innovations.

The case for departure from cost recovery and user pays principles in order to promote
commercialization of agriculture is strengthened by policy imperatives arising from Vision 2050, which
emerged from an extensive consultation process and has been endorsed by successive governments.
Vision 2050 presents an ambitious vision for the future of PNG in the following terms:
We will be ranked in the top 50 countries in the United Nations Human Development
Index by 2050, creating opportunities for personal and national advancement through
economic growth, smart innovative ideas, quality service and ensuring a fair and equitable
distribution of benefits in a safe and secure environment for all citizens (NSPT, 2009: 31).

The strong implication of that statement is that policies should be directed toward fostering
widespread opportunities for economic advancement among the population of PNG.
It is often reasonable to assume that best way to ensure that economic opportunities are widespread is
to pursue policies directed toward raising average income levels, including application of strict benefit
cost criteria to provision of government subsidies. That approach is supported by the observation that
countries with high average incomes - those which have experienced greatest economic growth in the
past - generally provide much more widespread economic opportunities to members of their
populations than do low-income countries. 48

However, there are notable exceptions. For example, some oil-rich countries including Qatar, United
Arab Emirates and Kuwait have high average incomes, but do not provide widespread opportunities to
members of their populations. 49
It is doubtful whether policies directed toward raising average income levels in PNG would be
sufficient of themselves to achieve widespread economic opportunities by 2050. There are two
reasons for this:
(a)

(b)

The oil and mineral sector, which seems likely to remain a major driver of economic
growth in PNG for some years to come, tends to provide highly uneven economic
opportunities. 50
In the absence of a policy framework specifically directed toward ensuring widespread
opportunity, redistribution through political processes tends to benefit individuals and
groups with greatest political influence. Previous experience in PNG (as in other
countries) suggests that individuals and groups which are able to exert greatest political
influence are likely to benefit at the expense of the rest of the community. 51

48 Countries with high average incomes tend also to have relatively high scores on more general well-being indexes such as
the UNDPs Human Development Index (UNDP, 2013).
49

This is reflected in HDI scores that are much lower than might be expected given their average income levels (UNDP, 3013).

50 The current dominance of the mining sector is recognized in Vision 2050, which argues for a broad-based development
strategy that will both raise disposable household incomes and enhance socioeconomic performance (NSTP, 2009: 3).

This experience has been documented extensively, including by contributors to a book, published by the Asian
Development Bank, on the political economy of reform in the Pacific (Duncan, 2011).

51

[52]

The objective of promoting widespread opportunity in PNG has important implications for agricultural
policy. Given that two-thirds of the population live in rural areas and a high proportion of those rely on
agriculture for survival, transformation of the agricultural sector is necessary to achieve widespread
opportunities. 52

More rapid growth of the agricultural production would also provide benefits in terms of risk
diversification, reducing the dependence of the PNG economy on future export prices of a few major
commodities in the petroleum and mining sector.

The importance of agriculture is recognized in the Medium Term Development Plan 2011-2015
(MTDP) in statements such as the following:
The agricultural sector in PNG continues to be the backbone of the economy (DNPM,
2010: 67).

The document actually envisages transformation of the agricultural sector:

The impact of the current and future MTDPs on the agricultural sector will be a five-fold
increase in the level of production by 2030, worth K7.2 billion and contributing 267,000
additional jobs (DNPM, 2010: 68).

However, the MTDP document seems to imply that the policy measures needed to approach such
ambitious goals will not be implemented until subsequent MTDPs:
Subsequent MTDPs will focus on the transformation of the subsistence rural agricultural
sector into semi-commercial and commercial farming. Priority will be given to extension
services to continue improving and maximizing output of all agriculture and livestock
enterprises (DNPM, 2010: 67).

Since the current MTDP has a focus on addressing supply-side constraints, the view that
transformation of the subsistence sector should wait for subsequent MTDPs seems to assume
implicitly that agricultural extension services are less growth-enabling than increased spending on
health and education, which has been given higher priority. That assumption is not warranted. Health
and education are clearly important to human well-being, but giving priority to public spending on
health and education services would seem to put the cart before the horse. An expansion in health and
education services would be more likely to contribute in a sustainable way to improvement in the
well-being of people in rural areas if it was driven by improvements in their ability to purchase such
services on behalf of their own families in other words, by further commercialisation of agriculture rather than by increases in public spending that depend on high levels of revenue from mining and
petroleum sector being maintained into the future.
The increased emphasis on agriculture in the 2014 Budget may reflect recognition that overcoming
supply-side constraints in the agricultural sector deserves higher priority. Nevertheless, government

The figure of two-thirds of the population living in rural areas is from the 2014 Budget papers (Treasury, 2013: 53). In the
2013 Budget papers it is estimated that agriculture sustains the livelihoods of around 85% of the population residing in rural
areas (Treasury, 2013: 137). A substantial proportion of people living in urban areas are also dependent on agriculture
through employment in related industries.

52

[53]

spending to promote more widespread economic opportunity among subsistence farmers and small
holders still seems to be given lower priority than will be required to achieve the national objectives in
Vision 2050.

3.3.3

Why input subsidies?

The proposed transformation of the agricultural sector is unlikely to occur within the timeframe
envisaged in government planning documents without some involvement by governments to ensure
that greater economic opportunities become available to smallholders and subsistence farmers.

Input subsidies have an advantage as a policy instrument to use in providing greater economic
opportunities in that they can be directly related to positive spill-over benefits associated with the use
of particular inputs by particular groups of farmers. For example, subsidised extension services may
enhance the opportunities available for subsistence farmers to enter commercial production.

Input subsidies also avoid problems associated with alternative approaches such as price guarantees.
While price guarantees can be effective in inducing farmers to invest in commercial activities, they
tend to provide the wrong prices signals when prices collapse. They encourage farmers to continue
production for export markets rather than to salvage some value from their crops in other ways e.g. by
feeding them to pigs. Furthermore, price and income support arrangements tend to become
unsustainable in the event of a prolonged decline in commodity prices. 53

3.4

How Should Agricultural Inputs be Subsidized?

3.4.1

Requirements for subsidies to be successful

One important requirement for successful subsidization is for the subsidy rate to be set at a level that
ensures individual farmers still have strong incentives to use resources efficiently and industry
representatives have strong incentives to press for regulatory services to be provided at lower cost.

Another important requirement for an input subsidy program to be successful is for the structure of
subsidies to be closely related to the specific objectives that they are intended to achieve. If the
primary objective is to ensure that greater economic opportunities become available to smallholders
and subsistence farmers, an input subsidy program is likely to be most successful if it focuses on
encouraging input use where the spill-over benefits are likely to be greatest i.e. where subsidies are
likely to have greatest impact in terms of encouraging greater commercialization. Such considerations
are obviously relevant to research and extension, but could also justify provision of subsidies to
particular inputs (e.g. fertiliser and pesticides) to help introduce new farming practices and
subsidisation of regulatory services designed to improve quality or reputation of exports.
As a corollary, an input subsidy program is unlikely to make a useful contribution to national economic
objectives if subsidies are provided on spurious grounds. For example, there is no case for provision of

PNG experience shows that it is possible for price stabilization schemes to collapse even under arrangements in which
threshold prices are determined by a moving average of past market prices. Such a scheme was successful in moderating the
effects of price fluctuations in the 1980s, but collapsed in 1991 following a sharp and prolonged decline in world prices of
export commodities (Kamit, 2007: 174-175). The price stabilization scheme was replaced by a price support scheme which
no longer exists.
53

[54]

subsidies to compensate for increases in import prices of fertiliser or other chemicals. From the
perspective of making best use of resources throughout the economy, the best response to an increase
in fertiliser prices is likely to be to use them more sparingly.
Similarly, attempting to compensate for the input assistance provided by other countries does not
make sense from the perspective of making efficient use of PNG resources. All countries would benefit
from a reduction in distortions in world prices, but for domestic policy purposes in PNG, current world
prices have to be accepted as given. Proposals to adopt industry assistance packages similar to those
provided in other countries often amount to copying the mistakes made by others - which is a recipe
for impoverishment rather than wealth-creation.

It is worth noting in this context that international evidence supports the view that input subsidies
have to be used judiciously if they are to make a worthwhile contribution to rural prosperity. In its
2008 World Development Report, the World Bank recognized the market failure arguments for
provision of input subsidies, but noted that payments from government budgets for essentially
private goods such as agricultural inputs are usually economically inefficient and often promote
wasteful use of resources at a high cost to farmers in terms of foregone growth and incomes (World
Bank, 2007: 114-115). Elsewhere in the same report the World Bank advocated market smart
subsidies targeted to poor farmers to encourage incremental use of fertilizers by those who would
otherwise not use it (World Bank, 2007: 151). A subsequent evaluation of smart subsidy programs
in Sub-Saharan Africa undertaken by Kenneth Balzer and Henrik Hansen suggested that while such
programs have raised agricultural productivity substantially, they have still been plagued by many of
the same problems associated with the earlier generation of universal input subsidies (Balzer and
Hansen, 2011).

3.4.2

Should subsidies be provided directly to farmers?

There may be potential for input subsidies to end up subsidising the suppliers of services, for example
by encouraging inefficient work practices, rather than reducing the cost of inputs to users. This could
be expected to be a problem mainly where the subsidised input is supplied in a non-competitive
environment e.g. when supplied by government agencies (as in the case of extension services).

Provision of input subsidies directly to farmers would reduce the risk that suppliers will capture
subsidies. One option would be to make a direct payment or tax credit to eligible farmers who apply
for subsidies following input purchases. An alternative option, which would be likely to encourage
greater use of purchased inputs in the informal sector, is the issuing of vouchers that would entitle
eligible farmers to obtain designated goods or services at reduced cost. 54 If the suppliers of the service
have to obtain vouchers from farmers before they have access to the subsidy, this will encourage them
to give greater attention to meeting the needs of clients.

In order to ensure vouchers meet the requirements of individual farmers and to expose input
suppliers to greater competition, a further option would be to give farmers a degree of choice over
how vouchers will be used. For example, there might be potential for farmers to choose to use
Use of vouchers has been proposed by the World Bank for implementation of market smart input subsidies (World Bank,
2008: 33).

54

[55]

vouchers to assist with purchase of fertiliser, pesticides, seedlings or advice by extension workers,
depending on which option better suits their particular needs.

In order to implement the voucher option, a government department or agency would need to be
given responsibility for allocation of vouchers to farmers according to strict eligibility criteria laid
down in legislation. Payments would be made to input suppliers when the vouchers were redeemed. If
the input supplier is a government agency, it is envisaged that the voucher proposal would
supplement existing funding and be used for purposes to be determined by the agency concerned e.g.
to hire more staff, purchase better equipment, or provide incentives for staff to improve their
performance.

3.4.3

What principles should apply to subsidisation of commodity boards?

The payment of input subsidies directly to farmers is not an option in the case of compulsory
regulatory services aimed at improving the quality or reputation of commodities and other services
paid for collectively. The best way to provide such subsidies is probably via subsidisation of the
commodity boards. Despite the current shortcomings in the operations of the boards, discussed
elsewhere in this report, it is likely that there would be greater problems if relevant services were
provided as a line responsibility of a government department. For example, there would be less
incentive for industry representatives to argue against uneconomic regulation, or to press for costs of
regulation to be reduced, if the services were provided by the Department of Agriculture and Livestock
(DAL).
Several general principles seem relevant to subsidization of commodity boards:
(a)

(b)
(c)

Uniformity in treatment of different commodity boards is desirable on efficiency as well as

equity grounds. As discussed earlier in this chapter, some of the commodity boards have
previously been funded mainly from export levies and license fees. Other boards, such as
the Fresh Produce Development Agency, have been funded wholly by government. Greater
uniformity of treatment would avoid any unwarranted inference that the government sees
greater benefits flowing from subsidies to favoured agricultural activities. 55

The total flow of funding to individual boards should allow a stable commitment of
resources to be made over several years ahead in order to avoid disruption of service
provision.

Farmer contributions should be greatest when they have greatest ability to pay (i.e. when
their market returns are relatively high) and smallest when they have least ability to pay
(i.e. when their market returns are relatively low). As well as avoiding additional hardship,
this is desirable on efficiency grounds to avoid excessive discouragement of export
supplies during periods of low prices.

Some departures from uniformity are likely to be necessary on practical grounds e.g. where sales of fresh produce via the
informal sector make it very difficult to collect industry levies.
55

[56]

(d)

Funding arrangements should encourage an efficient allocation of resources and efficient

provision of services.

Greater uniformity of treatment of commodity boards could be viewed in different ways. One option
would be to seek uniformity in terms of government contribution per kina of industry value added.
Another option is to seek uniformity by specifying similar proportionate industry and government
contributions for each board. Requiring industry to fund a substantial percentage of board costs would
leave industry groups with an incentive to consider carefully whether the benefits of existing services
outweigh the costs involved.

It would be possible to even out the total recurrent funding over time, while alleviating the burden on
farmers during periods of low prices, if greater government contributions were made during such
periods of low prices. One option to achieve that outcome would be specify an industry contribution as
a percentage of market returns (e.g. a levy of x per cent of export value) that would achieve
proportionate industry and government contributions on the basis of projected returns over, say the
next five years. If actual industry contributions fell short of projected industry contributions, the
difference would be made up by the government and if actual industry contributions exceeded
projected industry contributions, government contributions would be correspondingly reduced. This
proposal could be introduced in conjunction with the proposal in Chapter 4 to maintain current levy
rates over the next five years.
As a further measure to encourage efficient provision of services, provision could be made to modify
government contributions where boards are assessed to have scope to perform their functions at
lower cost.

Funding commitments by government could be subject to periodic review under a rolling program
that provides security of funding in the short term and incentives for efficiency gains over the longer
term. Such reviews would provide an opportunity to take account of changes in projected market
returns and changes in the potential for efficiency improvement within board activities.

3.4.4

How can predictable and consistent implementation be achieved?

Consistent and predictable implementation is particularly important for the activities to be

encouraged by agricultural input subsidies because of the long term nature of the investments
involved. For example, the benefits of investment in agricultural research projects are not easily
recovered if they are disrupted by funding cuts. Similar considerations may apply in respect of
extension and improving the quality and reputation of commodity exports.
The first requirement for predictable and consistent implementation is that the principles for cost
recovery for services provided (agriculture taxation) and subsidisation to be clearly established and
reflected in enabling legislation. This is necessary to establish accountability for allocation of public
funds and to shield implementation from day-to-day political pressures.

The second requirement is that responsibility for allocation of funds should be independent of input
providers to ensure that the subsidies do not encourage inefficiency in service provision. This raises
the question of which agency (or agencies) should be responsible for issuing of vouchers and
subsidising the regulatory activities of commodity boards. Given their industry knowledge, commodity
boards may the most appropriate organisations to issue vouchers, provided this task is not

[57]

undertaken by staff involved directly in provision of extension services to farmers. The issue of what
organisational arrangements are most appropriate for channelling government funds to commodity
boards is taken up in Chapter 4.

The third requirement is that funding of input subsidies would need to be shielded from short term
changes in the governments fiscal position. This poses a particular problem because greater public
funding of agricultural extension, research etc. could make such activities more vulnerable to future
budget cuts resulting from pressures to meet demands that seem more urgent, or perhaps more
important from a political perspective. The issues involved are considered in Chapter 4.

3.5

Conclusions

The first question addressed in this chapter was whether appropriate taxes were being used to fund
services to agriculture. The key points that emerged are as follows:
(a)

(b)

(c)
(d)

There is a strong economic rationale for some cost recovery via taxes and charges.

Existing forms of cost recovery have some undesirable consequences: they do not
generate a stable flow of funding over time; and tend to impose greatest burden on
farmers when they can least afford to pay i.e. when commodity prices are low.

Such undesirable consequences could be remedied by introducing a stabilisation

arrangement to guarantee a specified amount of funding each year, with levy shortfalls
being met by government and levy surpluses flowing to general government revenue.
There may be scope for efficiency gains by using explicit user charges to fund provision of
some regulatory services and through greater commercialization of research and
extension activities.

The second question addressed was to what extent agricultural inputs should be subsidized. The
following points emerged:
(a)

(b)
(c)

The case for provision of agricultural input subsidies should be considered on its own
merits. The structure of tax concessions and industry assistance in PNG favours some
industries relative to others, but bias in the current structure of incentives is not sufficient
to provide strong grounds to consider increasing or reducing agricultural input subsidies
as a means of remedying it.
A case can be made for the provision of some input subsidies on the grounds that the
benefits of some services spreads beyond farmers currently in an industry, for example by
encouraging subsistence farmers to enter commercial production.

The case for provision of input subsidies is strengthened by the policy imperative arising
from Vision 2050 of fostering widespread opportunities for economic advancement among
the population of PNG. This objective is unlikely to be achieved without transformation of
the agricultural sector, brought about by subsidising extension services and other inputs
to promote greater commercialisation.

[58]

(d)

An advantage of using input subsidies, rather than other policy instruments, such as price
guarantees, is that they can be directly related to positive spill-over benefits associated
with use of particular inputs by particular groups of farmers.

The third question addressed was how agricultural inputs should be subsidized. The key points to
emerge were as follows:
(a)

(b)

(c)

(d)

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.

Provision of input subsidies directly to farmers, rather than to input suppliers, may be
desirable, particularly where 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 following general principles could be usefully applied to subsidization of commodity

boards: uniform treatment of different commodity boards; more stability over time in
funding of individual boards; farmer contributions should vary over time with fluctuations
in their ability to pay; and funding arrangements should encourage more efficient
resource use.
Policy options consistent with those general principles could involve:
(i)

(ii)
(iii)
(iv)

(e)

proportionate industry and government contributions on the basis of projected

returns over, say, the next three years;
provision for increased government contributions if actual industry contributions
fall short of projected industry contributions as a result of a decline in market
returns, and lower government contributions if actual industry contributions are
greater than projected;
provision to modify government contributions where boards are assessed to have
scope to perform their functions at lower cost; and
a rolling program that provides security of funding in the short term and
incentives for efficiency gains over the longer term.

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. Such a legislative framework would ensure that responsibility for allocation of
government funds is independent of input suppliers and would also be less vulnerable to
spending cuts than current ad hoc annual allocations.

[59]

Chapter 4: AGRICULTURE SECTOR EXPENDITURE AND BUDGET

ANALYSIS
4.1

Introduction

Author: Dr. Eric E Omuru

The Papua New Guinea (PNG) agriculture sector covered in this expenditure and budget analysis
includes the major commodity and livestock boards and/or authorities, namely: Coffee Industry
Corporation (CIC), Cocoa Board (CB), Kokonas Indastri Koporesen (KIK), and Livestock Development
Corporation (LDC); national agricultural research system (NARS) organisations such as Cocoa
Coconut Institute (CCI), National Agriculture Research Institute (NARI), Fresh Produce Development
Agency (FPDA), Oil Palm Industry Corporation (OPIC) and Oil Palm Research Association (OPRA),
National Agriculture Quarantine and Inspection Authority (NAQIA) and National Development Bank
(NDB). Agricultural educational institutions are not included in this expenditure and budget review.
This chapter has the following objectives:
(a)

(b)
(c)

(d)

4.2

to assess the magnitude and composition of public expenditure in the existing commodity
boards and agencies against the annual budget since 2006 and identifies the indicators for
measuring outputs and/or outcomes of spending;
to examine budget processes and coordination between the governments central agencies,
Department of Agriculture & Livestock (DAL) and the commodity boards and agencies, and
determine the efficiency and effectiveness on provision of services to farmers;
to outline a funding mechanism to capitalise the commodity boards and agencies from the
PNG LNG linked Sovereign Wealth Fund (SWF); and
to assess the comparative advantage of proposed structures versus the current structures
in terms of expenditure and budget analysis.

Magnitude and Composition of Government Expenditure in the

Agriculture Sector

The National Governments provision of public funding for the agriculture sector is through two
funding components, namely: (i) Recurrent funding, which funds personnel emoluments and goods
and services; and (ii) Public Investment Programs (PIP) funding that funds various development
programs and/or projects. To understand the magnitude and composition of public expenditure for
the agriculture sector, the trends in funding to the sector and individual sector agencies were analysed
for the period 2006 to 2012. A selected set of macroeconomic indicators was then analysed to
compare the share of public expenditure to the sector against total expenditure over the same time
period. Indicators for measuring outputs and/or outcomes of funds expended by commodity boards
and agencies and/or industries were then identified.

4.2.1

Trends in recurrent versus development funding

Figure 4.1 depicts the trends in the provision of government expenditure on the agriculture sector for
the past seven years from 2006 to 2012. The recurrent funding has been stagnant for the seven years,
whereas development funding to the sector has experienced significant growth since 2009. However,

[60]

this increase has been mostly from increased funding to NARI and NDB and in 2012 from OPIC. 56 The
average share of development funding to NARI and NDB was 61.3% of the total development funding
to the agriculture sector. In 2012 alone, the appropriation for NDB was K80 million, 57 however, this
funds were for the small and medium enterprises (SME). The NDB revealed that only 35% or K28
million of the K80 million was spent on agriculture-based SMEs. 58

Figure 4.1: Total government expenditure on agriculture

200000
180000
Kina, miion

160000
140000
120000
100000

PIP

Recurrent

80000

Total

60000
40000
20000
0

2006

2007

2008

2009
Year

2010

2011

2012

4.2.2.1 Recurrent funding

The total recurrent funding for the agriculture sector was about K42 million in 2006, which is 73.4 %
of the total agriculture sector funding. The recurrent funding to the sector increased to K60.3 million
in 2012, an increase of 43.6% but the share had decreased to 18.7% mainly because of the increase in
the magnitude of development funding. For the past seven years, recurrent funding averaged K48.7
million per year in real terms. This is despite the fact that the number of sector agencies receiving
recurrent funding had increased to seven in addition to DAL, meaning that on average, the
appropriation per agency could be lower or stagnant.
The trends in recurrent funding by each sector agency are depicted in Figure 4.2. Apart from DAL, only
CCI, FPDA, NARI and NAQIA received recurrent funding support from the National Government in
2006. CIC started receiving recurrent funding support in 2009 and KIK followed in 2011. DAL has
received the highest proportion of recurrent funding to the sector, averaging K15 million per annum,
The increase in development funding to OPIC is due to the counterpart funding by the national government for the World
Bank funded Smallholder Agriculture Development Project (SADP), which concluded on 31st December 2013.
56

From a total of K130 million budgeted for NDB which was made up of K100 for NADP and K30 million for SME, the bank
only received K80 million. This was fully utilized to fund SMEs. Of this sum, 35% was expended on agriculture based SMEs
(Moses Liu, Acting Managing Director, NDB: personal communication). This translates to K28 million.

57

58

Acting Managing Director, NDB, personal communication, 23 January 2014.

[61]

whilst the rest of the sector agencies received variable sums ranging between K1 million and K10
million.

The recurrent funding is comprised of personnel emoluments and goods and services. Examination of
each of the sector agencies that have received recurrent funding showed that, on average, between
60% and 80% of the recurrent funds have been for personnel emoluments and the balance is used for
goods and services. The only exception is NAQIA where 100% of the recurrent appropriation is for
personnel emoluments and is administered by Department of Personnel Management (DPM). By
comparison, the Department of Health and Department of Education expend 29.4% and 52.2%,
respectively to personal emoluments 59. Some of the regulatory commodity boards and research
organisations that receive recurrent funding also collect management and research (extension) levies
from export of crops. These include: CIC, KIK and CCI. There are others that do not receive recurrent
funding but collect management and/or research/extension levies. These include: Cocoa Board, Oil
Palm Industry Corporation (OPIC) 60 and Oil Palm Research Association (OPRA). 61

Figure 4.2: Recurrent funding to agriculture sector agencies:

2006 - 2012
20,000
18,000
16,000
14,000

DAL

12,000

CIC

Kina,
10,000
million

KIK

FPDA

8,000

CCI

6,000

NARI

4,000
2,000
-

59

NAQIA

2006

2007

2008

2009

Year

2010

2011

2012

The Functional & Expenditure Review (FER) Final Report, 2005.

Government funded OPIC when it was initially established from 1992 to 1997 but that support ceased and OPIC was left to
fund its operations from a K4 per tonne (fresh fruit bunch FFB) levy from growers since 1997. From this, K3.50 per tonne is
retained by the three oil palm project sites, namely: Hoskins, Bialla and Popondetta and K0.50 per tonne is used to fund the
operations of the OPIC head office. Additional support came from the milling companies providing a K4 per tonne FFB
voluntary contribution. The split also followed the smallholder FFB levy. Therefore, project sites received a total of K7 per
tonne and OPIC received K1 per tonne.

60

61

OPRA is funded by membership subscriptions, grants and donations and levy collected from FFB.

[62]

Following requests by members of Parliament to reduce management levies, KIK made a submission
to the National Executive Council (NEC) for recurrent budget support to offset shortfalls created by a
reduction in management levies in 2009. The government responded favourably and included KIK in
the recurrent budget appropriations starting in 2011 62. In the spirit of the sentiments expressed by
leaders, KIK reduced the crude coconut oil (CNO) levy by K10 per tonne from K40 per tonne to K30
per tonne, and the copra meal levy by K0.80 per tonne to K10.00 per tonne, whilst maintaining the
copra levy at K27 per tonne to discourage the export of copra and promote downstream processing. 63
Between 2006 and 2012, the proportion of levies collected by KIK decreased from 79% to 50% and
government funding accounted for 28% in 2012, reflecting the recovery of income from reduction in
coconut products levies.

The CIC has been receiving recurrent funding since 2009, but has maintained the management levy at
K0.10 per kilogram. This sum is supposed to be divided between operations and regulation receiving
K0.04 per kilogram and research and grower services (extension) receiving K0.06 per kilogram. 64
However, in practice this designated funding split has not been occurring because most of the funds
have been retained for operations and regulations. As a result, research programs have not functioned
as intended to produce improved or new research-induced coffee technologies, which are critical for
the industrys progress and advancement. Essential peer review processes such as the Coffee Research
and Extension Advisory Committee meetings have not been conducted since 2006 due to lack of funds.
This is a serious issue that needs urgent attention and can be addressed either by an independent
review of CIC or review conducted as part of the institutional capacity strengthening component of the
World Bank funded PPAP for coffee.

There is a need for the government to ensure consistency and uniformity in providing recurrent
funding support to all commodity boards and agencies, and collection of commodity levies by
regulatory commodity boards and agencies. Furthermore, the government could consider
appropriating recurrent budget support to commodity boards and agencies that do not currently
receive such support and maintain the current commodity levy rates for a five-year period, with a midterm review after two and half years. This proposal could easily be modified to make it consistent with
the stabilisation proposal for recurrent funding discussed in Chapter 3.
An important reason for maintaining the levies is that they provide the best test available of whether
regulation for quality control of exports is worth having from both a sectoral and national economic
perspective. Current regulation seems to pass that test. If quality regulation was all paid for by
government that test would no longer exist and the case for retention of this regulation would be
weakened.

62

See NEC Decision No.(s): 179/2009.

In 2002 when the KIK was established to replace the Copra Marketing Board, the management levies were: CNO K80 per
tonne, copra K60 per tonne and copra meal K30 per tonne. These were reduced in 2004 to CNO K60 per tonne; copra
K45 per tonne and copra meal K10.80 per tonne. In 2007, the CNO levy rate was reduced to K40 per tonne while copra and
meal remained. These mean that in sum, between 2002 and 2011, the levies for CNO has been reduced by 62.5%, copra by
55% and meal by 66.7%.

63

64

This rate comprise of K0.03 per kg for research and K0.03 per kg for extension.

[63]

4.2.2.2 Development funding

Total development funding to the agriculture sector was about K15 million in 2006, 37.7% of total
sector funding. In 2012, the development funding to the agriculture sector increased significantly to
over K84 million, an increase of 460%, and accounted for 66% of total sector funding. This rise in
government development funding is mostly reflected by growth in appropriations for NARI and NDB,
especially between 2009 and 2011. However, in 2012 appropriations for NARI decreased, those for
NDB slowed, and an increase was registered for OPIC due to counterpart funding for the World Bank
funded Smallholder Agriculture Development Project (SADP). Apart from DAL, seven other sector
agencies received development funding.

For the past seven years, the average development funding was K52.4 million per year. The recent
increase in development funding is a welcome sign, but the issue is whether this increased funding has
translated to specific development outcomes and impacts as envisaged.
Figure 4.3 depicts the trend in development funds received by respective sector agencies since 2006.
As noted earlier, NARI and NDB have received greater shares of the development funding to the sector,
whilst the development funding for the rest of the sector has been stagnant.

Without proper and consistent monitoring and evaluation of the projects by DNPM, it is difficult to
hold organisations accountable for the outcomes and impacts of the projects funded by government.
For example, for the past four years, a quarterly monitoring and evaluation review was undertaken by
DNPM only in 2013, when a review was conducted during the third quarter for organisations that
were implementing projects under the development budget funding. These shortcomings erode the
role of central agencies and government in ensuring that the resources used contribute to the desired
economic outcomes.

Kina, million

Figure 4.3: Development funding to agriculture sector

commodity boards and agencies: 2006 - 2012

100,000
90,000
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
-

CIC

LDC

OPIC

FPDA
CCI

NARI

2006

2007

2008

2009
Year

2010

2011

2012

NAQIA
NDB

TOTAL

The need to improve the monitoring and evaluation of the development funding to assess the likely
impact of the projects funded is crucial to account for public funds expended for such purposes. This
means that every project that is funded by the government under the development budget should
include a post project evaluation component, amongst other things. This can be conducted prior to

[64]

project conclusion. The current monitoring and evaluation process carried out through DNPM
endorsed project steering committees should have their terms of reference expanded to include the
post project evaluation as part and parcel of this process. This will ensure (a) accountability for funds
expended and (b) accountability for impact at the ward and/or local level government levels.

In addition, consideration should be given for development funding to be appropriated to sector

thematic program areas, identified by priorities, that comprise a portfolio of projects, as opposed to
individual projects which are not connected to higher level objectives of organisations and the
government. For example, the PNG Vision 2050 strategic policy directions and expected outcomes as
outlined in the Pillar 2 Directional Statements, Strategic Policy Directions and Expected Outcomes
(PNG Vision 2050 Development Centre, 2011: pp. 29-41) for agriculture from which sector agencies
are supposed to craft their development programs and/or projects. This will prevent the disconnect
that exists at present in many of the projects funded by government and implemented by agriculture
commodity boards and research organisations in PNG.

4.2.2

Indicators for measuring outputs and outcomes of spending

Measuring the effectiveness of government expenditure on sector outputs and/or outcomes requires
sophisticated quantitative methods because there are several channels through which different
agriculture expenditures can have impacts. These include, but not limited to:
(a)
(b)
(c)

allowing for time lags before effects of investments can occur or be seen,
accounting for effects of factors outside the control of the implementing agency, and
allowing for direct and indirect impacts that can be assessed at different levels (e.g.
households, ward, LLG etc.).

Conventional indicators for measuring impact include changes in production, exports, employment
and incomes. The time available is not adequate to research and assess some of these in detail for this
FER. Consequently, attention has focused on (a) the effect of expenditure on the attainment (or nonattainment) of stated goals and objectives in the projects that have been funded by the national
Government, and/or (b) trends in industry productivity and production levels, household agriculture
income levels, and food and nutrition security amongst agriculture households in general.
To facilitate examination of the effect of expenditure on attainment (or non-attainment) of stated goals
and objectives, these should be clearly specified and effects monitored over the duration of the project
or program. Reporting at project steering committee should be structured to capture these outputs
and/or outcomes from project implementers. Since such information is not readily available, analysis
has focused on the industry trends for major commodities, in terms of productivity and production
levels, household agriculture income levels, and food and nutrition security amongst agriculture
households in general.

4.2.2.1 Productivity and production levels

Few up to date socioeconomic studies exist that estimate the productivity trends for major commodity
industries in PNG. The surveyed data and genetic potential yields of the latest planting material
available can produce are summarized in Table 4.1.

[65]

Table 4.1: Smallholder Productivity Trends

Crop
Coffee

Cocoa 2007
2011
Copra 1999
Oil Palm
Rubber

Current yield
(Kg/ha)
600 (a)

Genetic potential
yield (kg/ha)
2,000

900 (d)
17,000 (e)

1,200
20,000 25, 000 65

500 (f)

3,000

366 (b)
281 (c)

3,000

Type of material
Omuru 1 Robusta
variety
Hybrid clones (including
Cocoa Pod Borer (CPB)
tolerant clones released
in 2013)
Local talls and hybrids
Dami hybrids
Hybrid clones

CIC

Source of
materials

CCI
Villages and CCI
NBPOL (Dami Oil
Palm Research
Station)
North Fly Rubber

Sources: (a) Omuru and Anis (2012), (b) Curry et al (2007), (c) Uniquest (2013), (d) Omuru (2001), (e) Koczberski et al. (2013)
and (f) Dr M Komolong (personal communication) 66.

The average crop yield and the genetic potential yield of the improved planting materials indicate that
productivity by smallholder farms is significantly below the genetic potential yield levels. For example:

Coffee current average yield is 600 kilograms (kg) per hectare (ha), which is 1,400kg per ha
or 70% below the genetic potential yield.
Cocoa current average yield is 366kg per ha, which is 2,634kg per ha or 87.8% below the
genetic potential yield. 67
Copra current average yield is 900kg per ha, which is 300kg per ha or 32% below genetic
potential yield.
Oil Palm current average yield is 17,000kg, which is 3,000 8,000kg per ha or 17.6% 47.1%
below genetic potential yield currently obtained by large estates.

The challenge is to determine how the productivity levels can be increased to narrow the huge
divergence between the current average yield and the genetic potential yield levels. An increase of
50% from the current levels will increase the gross returns of farmers by a similar magnitude. It is
interesting to note that despite no new plantings of coconuts with improved hybrid varieties for
several decades, the local tall stands still perform very well at near optimal levels.

The problem of how to raise production levels has been highlighted in various industries reports (e.g.
OPRA Draft Strategic Plan (2011), CCI Strategic Plan (2010), Kaiulo and Manoka (2010), Galgal and
Kara (2010)). However, the lack of adequate and consistent funding faced by commodity boards and

65
66

This is the current average range of productivity by the large oil palm estates/millers in PNG (OPRA, 2011).
Chief Program Officer, OK Tedi Development Foundation.

The cocoa yield in East New Britain and Bougainville were below 200kg per ha due to CPB. Therefore, opted to use the preCPB yield data.

67

[66]

agencies over number of years has meant that underlying issues could not be addressed to improve
performance.

The production trends for the major commodities for the past 10 years are shown in Figure 4.4 and
Figure 4.5. 68 Although these may not provide a direct and accurate link to the contribution of direct
funding by government, it gives a crude measure of the changes in production in the major
commodities, and whether many years of research outputs have had any impact on production.

Copra production has fluctuated in the past decade compared to the other crops, but these fluctuations
have more to do with farmers response to price fluctuations than technology-induced yield patterns.
There have not been any major new technologies emanating from research to enhance coconut yields
in the past decade.

Coffee and cocoa productions have been fairly stable, despite new and improved crop varieties
becoming available during the past decade. It might seem somewhat paradoxical that research entities
continue to request funding for varietal improvement research when the existing high yielding
technologies have not been adopted widely by farmers. However, one of the major reasons why
planting of new varieties has been relatively low is that these materials have not been adequately outscaled and made accessible to farmers.

The oil palm industry experienced consistent increase in production during the past 10 years except in
2012. 69 Adverse rainfall and weather conditions in 2012 affected production thus causing the sharp
fall.

Figure 4.4: Major cash crops - production trends

160000

Tonnes

140000
120000
100000

80000

Copra
Cocoa

60000

Coffee

40000
20000
0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Year

The oil palm FFB production is shown separately due to its relatively high production figures, which dwarfed the
production figures by the other commodities on the same graph, which made it difficult to see the trends clearly.
69 Oil palm FFB production figures provided by OPIC was only for smallholders, who produce 35% of the total crop. Large
estates and milling companies produce the balance of 65% of total FFB production in PNG.
68

[67]

Tonnes (FFB)

Figure 4.5: Smallholder Oil Palm Production - by project

site and total
1000000
900000
800000
700000
600000
500000
400000
300000
200000
100000
0

Hoskins
Bialla

Popondetta
Milne Bay
Poliamba

2003200420052006200720082009201020112012

Total

Year

4.2.2.2 Household agriculture income

There is little up-to-date and reliable data on the level of household income from major agricultural
commodities in PNG. Information presented in Table 4.2, although somewhat dated, may give some
idea of the level of household income in the major tree crop industries in PNG.
Table 4.2: Average Smallholder Household Income
Crop

Annual average household

income (Kina)
1998/99
2011

Study area

Cocoa

2,867 (a)

1,419 (b)

East New Britain

Copra

794 (a)

937 (b)

East New Britain

Coffee
Oil Palm

Not available
Not available

2,805 (b)

EHP, Simbu, WHP and Jiwaka

6,800 (c)

West New Britain

Data sources: (a) Omuru et al (2001), (b) Uniquest (2013), (c) Koczberski et al (2013).

Farm household surveys for cocoa and coconut by Omuru et al (2001) show gross average annual
income of farm households in East New Britain ranging from K784 for copra producers to K2,867 for
cocoa farmers. Cocoa incomes have declined in East New Britain Province (ENBP) by 50.5% between
1999 and 2011. A major reason for this is the negative impact of cocoa pod borer (CPB) in East New
Britain Province, as documented in other reports (e.g. Curry, Lummani and Omuru (2009), Uniquest
(2013). Gross copra incomes increased by 18% between 1999 and 2011 in ENBP. A major reason for
this is due to increased intensity in harvesting coconuts for copra in response to lower cocoa incomes

[68]

due to CPB. The average net returns to coffee at K2,805 in the four major producing provinces 70 is
almost at par with the income generated in cocoa. The average income from smallholder oil palm
ranges from K6,800 per household per year for a 2-hectare village oil palm (VOP) block to K13,600 per
household for a 4-hectare land settlement scheme (LSS) block.

Depressed crop prices, bio-security issues and increases in prices of goods and services in the past few
years all have the potential to contribute to eroding farm household income levels and the purchasing
power of the farmers disposal incomes. Research and development efforts to mitigate this through
improved technologies and/or farming practices would go a long way in cushioning this likely impact.
The recognition of the importance of socio-economic and cultural issues that affect smallholder
farming as found in recent studies (e.g. Omuru et al, 2001, Curry et al, 2007 and Curry et al., 2012) for
the major crops is providing relevant data and information that can be applied to inform appropriate
technical and policy responses. Gaining knowledge of farm household income and expenditure
information will make it easier to determine the level of income from farming and the expenditure
patterns of farm families. Without such information we have little understanding of the strategies that
farm households employ in the use of their income for their daily subsistence.
4.2.2.3 Food and nutrition security

Concerns over food and nutrition security will always be on the development agenda because as long
there are people, they will want to eat and eat well. This imposes obligations on the national
government to establish the enabling environment and the resources to ensure people will always
have access to adequate food (See Sitapai [Chapter 2] for a detailed exposition of the National Food
Security Policy).
From the outset, there is a critical need for agricultural research findings to contribute towards
addressing food security and nutrition needs of the country. Without adequate food supplies, a
population will starve and without a nutritious food intake, malnutrition and related diseases will
increase amongst vulnerable and marginalised populations of the country.

According to the FAO report (2003), 27 percent of the total population in PNG is classified as
undernourished 71; and surveys undertaken from the mid-1990s onward indicate widespread
nutritional deficiency. In 1999 twenty five percent of children under 5 years who attended health
clinics were severely to moderately malnourished. Against this backdrop, the concern is not only
about food security but nutrition security as well.

There has been an increasing emphasis on the production of cash crops, which has led to a reduction
in per capita food production since the early 1990s and food consumption patterns have also changed
over this period (Sharma, 2006). Consumption of starchy roots has declined; cereals have gained
importance as the main source of energy; and consumption of rice has tripled while fruit and
vegetable consumption has dropped from 24% to 18% (FAO, 2003). The use and exchanges of this
information by the health sector agencies in partnership with agriculture research organisations to
improve them is lacking in the country.

70
71

Eastern Highlands, Simbu, Western Highlands and Jiwaka.

FAO (2003) FAO Nutrition Country Profile: Papua New Guinea. Rome: FAO (www.fao.org)

[69]

In their study of the risks posed by HIV and AIDS, Grellier and Omuru (2008: p. 15) cautioned: At
present poor nutritional status increases susceptibility to transmission of HIV, it also increases
vulnerability to the impact of the virus in PNG. Women are at particular risk of both HIV infection and
of poor nutritional status; this vulnerability will increase if/when the HIV epidemic results in decreasing
food security and increasing levels of poverty. The study strongly recommended that the PNG NARS
needs to widen its scope of research from an agronomic focus to include a socio-economic approach. This
would strengthen understanding of the outcomes and impact of their existing scientific research and
ensure that future research programmes/interventions are relevant to the needs of smallholder farmers
and commercial plantations.
With the prevalence of diseases in PNG, research into improved food productivity and production and
improved education and extension services on nutrition is critical for the growing population. This
calls for commodity boards and research entities, within them or as stand-alone entities, to develop
stronger links and partnerships between them and with different sectors such as health and education
to help educate and prevent/mitigate the negative impacts of diseases. Such would also increase the
impact of positive aspects of research by enhancing opportunities to disseminate research findings
and put the findings of research into practice (ibid).

4.3

Macroeconomic Indicators

A selected group of macroeconomic indicators were used to assess and explain the magnitude and
composition of government spending in agriculture and the implications for these on sector
development. These indicators are: agriculture expenditure as a share of total government
expenditure; agriculture sector contribution to GDP; expenditure on agriculture as a share of
agriculture GDP; agriculture expenditure as a share of total GDP; and direct real government
expenditure per capita agriculture population.

4.3.1

Government agriculture expenditure as a share of total government

expenditure

Table 4.3 shows total government agriculture expenditure as a share of the total budget appropriation
from 2006 to 2012. In general, the share of funding to agriculture has increased during this period. A
major contribution to this growth has been the appropriation of K100 million per year to NADP. The
way NADP funds have been allocated and expended, however, gives little comfort as to whether the
funds have reached the rural areas where it was to be utilised as originally intended.

In 2006, the share of government agriculture expenditure relative to total government expenditure
was K57.2 million (0.9%). This decreased in the two subsequent years but increased to over 1% in
2009, and eventually reached K178.76 million (1.4%) in 2012. On average, agriculture expenditure
was K115.61 million per year or 1.1% of total government expenditure over the past seven years.

The stakeholder consultations indicated unanimous support for increases to the annual budget
appropriation for the agriculture sector. They in a way expressed the views of the majority of the
voiceless village small farm households in our country. If these resources are provided and are applied
well, have the potential to transform the agriculture sector, and rebuild the livestock industry, and
develop the grains industry in PNG.

[70]

Table 4.3:

Year
2006
2007
2008
2009
2010
2011
2012
Total
Average

Government Agriculture Expenditure as a percent of Total Government

Expenditure (2006 Base Year)
Agriculture
expenditure (Kina,
million)
57.20
59.84
58.44
121.61
169.69
163.70
178.76
808.24
115.61

Total expenditure
(Kina, million)
6,434.37
8,242.84
9,583.52
9,078.14
11,246.03
16,736.86
18,430.80
79,752.56
11,393.22

Share of agriculture
expenditure in total
expenditure (%)
0.9
0.7
0.6
1.3
1.5
1.0
1.4
7.4
1.1

4.3.2 Agriculture sector contribution to gross domestic product

Table 4.4 shows the agricultural sectors contribution to GDP in real terms in the past seven years.

The contribution of the agriculture sector to GDP in terms of the share of agricultural GDP increased
by 27% in absolute real terms from K3.04 billion in 2006 to K3.86 billion in 2012. However, the share
of agriculture GDP relative to total GDP decreased from 34.5% in 2006 to 27.1% in 2012, a decline of
21.4%. This declining share is partly explained by the declining productivity and overall production
levels; fluctuating commodity prices in the world market; and dominance of extractive industries such as
minerals, oil and gas in PNG (Komolong et al., 2012: p.47). The contribution of agriculture to GDP is
likely to be greater than has been reported because not all production from the sector has been
included in the calculations due to non-collection of the relevant data. 72
The relative growth of agricultural GDP has fluctuated between 0.3% and 8%. It slowed after 2006 and
remained stagnant until 2011 to reach the 2006 level (8% growth) and slumped again in 2012 to
0.3%. The average relative growth of agricultural GDP is 4% in the past seven years.
Table 4.4: Agriculture Sector Contribution to GDP in Real Terms: 2006 2012

Year
2006
2007
2008
2009
2010

Value-added to Agriculture
(Kina, million)
NonMarketed
Total
marketed
1,497.2
1,545.0
3,042.2
1,717.9
1,567.5
3,285.4
1,873.1
1,554.7
3.427.8
1,835.9
1,614.9
3,450.8
1,863.8
1,699.7
3,563.5

National
GDP

% Share of
Agricultural
GDP

Relative growth
of Agricultural
GDP

8,823.0
9,637.4
10,361.9
10,861.4
11,604.4

34.5
34.1
33.1
31.8
30.7

121.4
131.1
136.7
137.7
142.2

Some of data that does not come through the formal process are data from the subsistence production, informal sector that
has experienced exponential growth in recent years and other illegal production trade.

72

[71]

2011
2012

2,127.6
2,132.0

1,726.0
1,730.9

3,853.7
3,862.9

12,931.3
14,269.6

29.8
27.1

153.7
154.1

Sources: Department of Treasury, BPNG.

Notes:
(1) The figures for 2006 are from the National Statistics Office (NSO), while data from 2007 to 2012 are from Annual
National Budgets. Agriculture is divided up using BPNG shares of market and non- market.
(2) The non-marketed component is assumed to grow by population growth rate of 2.3% annually. It is also a sizeable
component of agriculture with over 85% of the population contributing to the growth in this.
(3) The relative size of the economy has been growing since 2008, much bigger than the expansion in agriculture.

4.3.3 Agriculture expenditure relative to agriculture gross domestic product

The governments agriculture expenditure was equal to 1.9% of agricultural GDP in 2006, increasing
significantly to 4.6% in 2012. On average, the governments agricultural expenditure as a percentage
of agricultural GDP was 3.2% per annum for the past 7 years. What this means is that from the average
market value that has been generated from all the officially recognised final goods and services that
the agriculture sector has produced in the past seven years, only 3.2% is reinvested in agriculture by
way of governments budget appropriations. This statistic is in concert with public spending on
agriculture per agriculture GDP for agriculture-based countries, where the share has been stagnant at
4% from the 1980s to 2004, as compared to 11% for transforming countries in 2000 (World Bank
Development Report 2008: p.7). The average number implies relatively low public spending on
agriculture as a share of the agricultural GDP compared to transforming countries. Other reports show
that public support to agriculture is often more than 20% in developed countries (HLPE, 2011),
however careful thought needs to be given before attempting to emulate similar level of government
support in PNG. Phased gradual increases with proper monitoring and assessment processes to hold
organisations accountable may generate better results than at present. As noted earlier, the
government budget appropriation to agriculture as a share of agriculture GDP had increased to 4.6%
in 2012, similar to other agriculture based countries. However, whether this increased proportion of
funding has translated to improving farming practices and/or the well-being of farming households or
impact at the farm level is hard to ascertain due to lack of relevant data.

The World Development Report 2008 (World Bank, 2007) recommends that 10% of total agriculture
GDP should be invested into agriculture to transform agriculture to the next level. Applying current
data, this would translate to K386.29 million or almost K400 million. However, proposing to increase
the proportion of support beyond the current levels as proposed by international organisations
without properly accounting for the current level of support and their generation of expected
outcomes or impact may be counterproductive to agricultural transformation and growth.

4.3.4

Government expenditure on agriculture as a share of gross domestic product

When government expenditure on agriculture is compared to the total GDP, the share is 0.6% in 2006,
increasing significantly to 1.3% in 2012. On average, the share of government spending on agriculture
relative to total GDP is 1.0% per annum in the past seven years. This statistic indicates a sign of
underinvestment that restricts the agriculture sector from being a key driver of economic growth, a
source of livelihood for the rural majority of the farming households and a provider of environment
services.

[72]

This disappointing statistic appears against the backdrop of continuous emphasis on the importance of
the agriculture for PNGs economic progress and achievement of the PNG Vision 2050. It has been
expressed time and time again by leaders and bureaucrats that agriculture is the backbone of the
economy (e.g. DNPM, 2010) and yet this public expression of the importance of the sector has not been
matched by the resources allocated over the years. Therefore, to a great extent this phrase has become
a misnomer and mere political rhetoric in the country.
When the mineral resources that PNG is blessed with are depleted, the people and the land they have
inherited from their ancestors will remain. The most crucial issue for the future wellbeing of the
people of this country is whether agriculture will be able to produce sufficient food to meet the needs
of a growing population over future generations. There is a great deal of uncertainty about the future,
but we can be fairly sure of two things. First, the food and nutrition needs of the country will continue
to rise because of population increases. Second, agriculture will remain a major source of livelihood as
there are limited other options to absorb the large proportion of youth growing up in rural areas
(Omuru et al, 2011).

It does not seem realistic to hope that the transformation of agriculture required to achieve PNG
Vision 2050 can actually happen unless there is increased and guaranteed government funding for the
agricultural sector for a sustained period of time.

4.3.5 Direct real government expenditure per person in agriculture

The 2000 National Census estimated the population engaged in agriculture activities both for cash and
own use and for rural and urban areas to be 2.74 million (NSO, 2003). This represents 52.9% of the
total population of PNG at that time. Due to the unavailability of the 2011 National Population Census,
the 2000 figure was used to estimate the direct real government expenditure per capita agricultural
population in PNG. The results for each year are shown in Table 4.5.
Table 4.5: Direct Real Public Agriculture Expenditure per Person in the Agriculture Population
Indicator

2006

2007

2008

2009

2010

2011

2012

Average
[20062012]

Direct real expenditure

per capita, agriculture
population (2006 Kina)

20.81

21.78

21.27

44.25

61.75

59.57

65.05

42.10

Direct real public expenditure per capita was K20.81 in 2006 and remained flat in the subsequent two
years. Then it more than doubled to K44.25 in 2009 and increased further to K65.05 in 2012. The
increases in recent years may be over-stated, as the population actively involved in agricultural
activities has probably been increasing over the period since 2000. On average, the direct real
agriculture expenditure per capita agriculture population is K42.10 per year in the past seven years.

It is important to note that the agriculture population also benefits indirectly from government
expenditure in other key areas such as the funds allocated through the District Services Improvement
Program (DSIP), infrastructure upgrade, health, education, and law and order from which people in
the rural areas also benefit. Casual observation suggests that per capita allocation to the rural

[73]

agriculture population from these other sectoral budget appropriations is likely to be high in recent
years. However, the important issue is not really how much funds have been provided via these other
avenues, but how these resources are contributing to improving services, the livelihoods of the
targeted people and how these resources are being accounted for. Consideration of these issues is
beyond the scope of this analysis.

4.4

Agriculture Sector Budget Process and Coordination

This section examines the budget processes and coordination between the governments central
agencies, DAL and the commodity boards and agencies, and assesses the efficiency and effectiveness of
provision of services to farmers.

4.4.1 Overall budget formulation and approval process

The budget process begins when the Departments of Treasury and National Planning & Monitoring
(DNPM) issue instructions via a circular, usually in the second quarter of each year, indicating the
dates for submission of the recurrent and development budgets from DAL and respective sector
agencies. Upon receipt of the circular, line agencies prepare the recurrent budget and new project
proposals. If there are ongoing projects funded by government, submissions to seek continuous
funding are also presented for consideration at that time.
Upon submission of the proposed projects and budget plans, technical officers in the two central
agencies screen the submissions. For the recurrent budget, the proposed budgets are examined
against the ceiling provided by Department of Treasury. Similar assessments are carried out by DNPM
project officers for new and ongoing project proposals and the Budget Screening Committee (BSC) is
advised. The BSC then assesses the merits of the submissions. At this stage (the first week of
September each year) agencies are requested to attend a budget screening meeting with the BSC to
defend their submissions. After the budget screening meeting, the recommendations of the BSC are
presented to the Central Agencies Coordinating Committee (CACC) and from there it is subjected to
further scrutiny by the Ministerial Budget Committee before presentation to cabinet for final
endorsement.

With regard to the agricultural sector, the processes outlined above are supposed to be supervised by
DAL. However, sector commodity boards and agencies suggested that the conduct of this role by DAL
has been ad hoc and reactionary, when instructions are issued by the two key central agencies. In
addition, most sector agencies expressed the view that DAL has never fulfilled the role of coordinating
the preparation and collation of the sector budget for presentation to the central agencies.

The national budget is usually handed down in the November Session of Parliament. The budget
appropriations for each organisation are contained in the budget papers and are made known during a
budget lock up prior to the presentation of the budget in Parliament. The agencies are then required
to prepare a work plan and cash flow and these are submitted to the Department of Treasury for
Recurrent and DNPM for Development funds. These outline the sum of money that is to be released to
the agency each month. These departments then recommend to Finance Department to release the
funds through their cash management branch on a monthly basis.

[74]

4.4.2 Efficiency and effectiveness of provision of services to farmers

This analysis is related to the budget process and coordination between central agencies, DAL and
sector agencies. To estimate the efficiency and effectiveness of the provision of services to farmers,
information is needed on the outputs and outcomes associated with the types of services provided and
different types of expenditure, and the efficiency and effectiveness of the process of remitting funds
and their application to the designated purposes and whether the planned outputs/outcomes have
been assessed. These would make it feasible to estimate the unit cost of how these services are
provided and their impact on the provision of services to farmers.

For recurrent funding, the appropriation for goods and services component is the focus, and for
development funding the focus is on areas where DAL has provision for projects that it oversees,
where the government provides counterpart funding. Similarly, for commodity boards and agencies,
the efficiency and effectiveness involves similar measures.
4.4.2.1 Role of Department of Agriculture and Livestock

DALs role in considering the efficiency and effectiveness of provision of services to farmers is largely
indirect. The Department has a role in facilitating and coordinating the projects and programs budget
preparation and liaising with the central agencies to ensure consistent and sustainable funding is
provided to the agricultural commodity boards and agencies.
As the lead agriculture and livestock department, DAL is mandated with planning and coordinating the
participation of sector agencies in quarterly budget reviews so that issues encountered in project
implementation are shared and discussed, and solutions can be found to problems identified.
However, DAL has failed to play its lead role in designing, planning and implementing recurrent and
development budgets for the commodity Boards and agencies. As a result, DAL is not in touch with
project implementation issues and commodity boards and agencies are left to their own devices to
implement projects and report directly to the central agencies.
The current functioning of DAL in facilitating and coordinating a sectoral approach to the budget
planning, preparation and coordination needs drastic improvement. The resourcing issues of the
sector as highlighted in this report calls for a serious review of DALs role and how it should relate to
sector commodity boards and agencies in linking the sector to the central agencies and higher level
policy objectives of the government. The sector comprises several agencies unlike other sectors and
therefore raises unique challenges that require attention and understanding to meet its unique needs.
4.4.2.2 Commodity boards and agencies

The information required to estimate the efficiency and effectiveness of the provision of services to
farmers, is grossly deficient. Specifically, collection and analysis of information on the outputs and
outcomes associated with the types of services and allocations of funds is not part of the current
organisation culture of commodity boards and research institution in PNG. Therefore there is a need to
establish and strengthen competences in monitoring and evaluation, and the associated data collection
methodologies and analysis.

In addition, it is difficult to measure the efficiency and effectiveness of the process of remitting funds
and their application to the designated purposes in order to assess their impact on the provision of

[75]

services to farmers and estimate the unit cost of providing these services. A major reason for this, as
noted above, is the non-availability of relevant data and information.

Although we are not able to measure the consequences of delays in remittance of funds for commodity
boards and agencies, it is obvious that they are adversely affecting project and/or program
implementation and the provision of services to farmers. At most times the first instalment of funds
for development projects are released towards the end of February or early March. This means that
almost three months of the implementation period has already lapsed. Therefore, work effectively
begins in the second quarter of each year. By November and December each year, the level of activity
tends to wind down as the festive period kicks in. In addition, at this time the education year draws to
a close, which takes away a lot of parents to attend school close-ups and speech days. Given that not
much is done during the period from November to March, most commodity boards and agencies have
only about 7 months less than 60% - of the year to implement project activities.

The commodity boards and agencies should use much of the 40% of the year that is not accounted for
implementing government funded projects to engage in other relevant and appropriate activities that
add value within their organisations.

4.5

A Funding Mechanism for Capitalising Commodity Boards and

Agencies

This section explores the potential for a central funding mechanism to provide a development funding
and governance structure for the commodity boards and agencies. The proposed funding mechanism
is intended to resource the commodity boards and enable them to play a more positive role in
facilitating innovation and agribusiness development that is likely to be of benefit to farmers. It is
envisaged that funds will come from the relevant funding components of the Sovereign Wealth Fund
(SWF), the current K100 million NADP appropriation, and the development projects funding currently
implemented by commodity boards and agencies as described below.
In considering a possible mechanism for capitalising commodity boards and agencies it is important to
draw lessons of success or failure from past funding schemes intended to improve performance of the
agriculture farm sector.

History shows that the outcomes of schemes designed specifically to fund agricultural programs
and/or projects in PNG have been far from optimal. 73 The most recent example is the National
Agriculture Development Plan (NADP), which has become famous for all the wrong reasons. The NADP
provides lessons in what to avoid in developing a funding mechanism to disburse public funds.

The disbursement of funds from NADP has been riddled with issues relating to misapplication and/or
abuse since its inception in 2007. The administration and management of the fund was initially with
DAL. Then it was shifted to DNPM and provided directly to districts, under the discretion of the
respective local MPs and the Joint District Planning & Budget Priorities Committee (JDP&BPC). More
recently, most of the funds have been parked at the NDB [See also Sitapai Chapter 2]. However, of the
73

See for example, Galgal and Kara (2010) for coffee industry subsidy initiatives.

[76]

K80 million (out of a total of K130 million) that was allocated to NDB in 2012 was for SMEs, and only
35% (K28 million) was provided to agriculture SMEs.
How the NADP funds have been approved and disbursed and the associated governance problems is
not dealt with in depth here since it is beyond the scope of this FER and is the subject of a separate
NADP review. However, it would not be amiss to note that the methods used and funding appropriated
thus far has not achieved the expected results.

There was general consensus amongst stakeholders in discussions with the FER team for an
improvement in the vetting processes, with greater involvement of the commodity boards and
agencies being proposed. That is, all proposals should be vetted by the respective commodity agencies
and physically checked to verify the existence of actual farms or facilities and a report submitted to the
screening and approval committees for consideration.
Before describing and proposing a funding mechanism that could go towards capitalising the
agriculture commodity boards and agencies from the PNG LNG SWF, an overview is provided of the
PNG-LNG linked SWF.

4.5.1

The PNG LNG Sovereign Wealth Fund

The PNG LNG SWF was established in accordance with Section 212A of the Constitution and consists of
(a) the Stabilisation Fund; and (b) the Development Fund. 74 The three objectives or purposes of the
SWF are:
(a)

(b)

(c)

To help the government to smooth out large or wide variations in revenue inflows to the
national government budget that are associated with PNGs exports;
To provide funding to support the social and economic development objectives of the
government, including long term social and economic development programs; and
To help the government save and invest surplus public moneys outside PNG for later use
when it is needed.

Proceeds from mineral and petroleum taxes and dividends will be channelled through the SWF into
the Stabilization Fund. The magnitude of funds to be withdrawn from the Stabilisation Fund account to
support the National Budget is based on a 15 years long term moving average of mineral and
petroleum revenues as a share of non-mining revenue. This sum is then remitted to the Development
Fund where the appropriation is decided by the usual budgetary process. The surplus is used to fund
investment projects outside of PNG according to an Investment Mandate, which the Minister for
Treasury issues after consulting with the SWF Board. According to the Organic Law on the SWF, the
investment mandate shall include:
(a)

(b)

Directions about the classes of investments in which the Fund can be invested and the
selection criteria for investments within those classes;
Information on the acceptable balance between risk and return in the overall Fund
portfolio;

See Papua New Guinea National Gazette No. G306 Constitution: Organic Law on the Sovereign Wealth Fund, 2 November
2011.

74

[77]

(c)
(d)
(e)
(f)

Guidelines on ethical investment, including policies, standards, and procedures for

avoiding prejudice to Papua New guineas reputation as a responsible member of the
world community;
Directions relating to the management of credit, liquidity, operational, currency, market,
and other financial risks;
Directions on prohibited or restricted investment or any investment constraints or limits;
and
In relation to the Development Fund the extent to which the Board may invest moneys in
domestic assets.

The design and institutional framework of the PNG SWF was guided by international best practice,
which is the SWF Generally Accepted Principles and Practices usually referred to as the Santiago
Principles, and other relevant domestic requirements (Government of PNG [GOPNG] Economic and
Development Policies, 2013). The government endorsed the policy and legislative framework in 2011
and subsequently the Organic Law was passed into law in February 2012. However this is being
reviewed to ensure it captures the preferred policy elements and is compliant with proper
constitutional processes. Furthermore, the government is considering modifying the design of the
SWF in the areas of inflow of dividends from the PNG LNG project and the inclusion of an
intergenerational equity. For the latter, the Ministerial Committee on Economic Sector has agreed to
replace the Development Fund with a Savings Fund (ibid. p. 32). The Ministerial Committee is of the
view that the critical priority development areas such as transport and education infrastructures and
their upgrade are already captured in the current budget process, so shifting focus on savings.

The potential to use the Development Fund to capitalise the commodity boards and agencies exists.
However, for this to be realized, it is essential for DAL and commodity boards and agencies to
collaborate to develop agriculture sector infrastructures upgrade plans in consultation with the
relevant central agencies that can then be included in the overall infrastructure development plans of
the government, under what the government terms as critical priority areas. This is because the use of
funds under the PNG SWF framework is governed by its own existing policy and legislative framework,
therefore any application for use of funds from it without provisions being made for them would be
difficult.
Against such a backdrop it would be advisable to ensure the relevant provisions to apply funding from
the development fund component to capitalise commodity boards and agencies are in place.

4.5.2

Proposed agriculture investment funding mechanism

There is adequate past and recent experience of funding mechanisms in PNG agriculture to draw
lessons from to inform the design and operations of a funding mechanism for capitalising and funding
the agriculture sector agencies. Although much of this experience provides lessons in what to avoid,
there have also been some successful schemes to draw lessons from. One successful scheme drawn
upon below is the Australian Government (AusAID) funded Agricultural Research & Development
Support Facility (ARDSF) piloted Agriculture Innovations Grants Scheme (AIGS) that operated from
2007 to 2012.
The need to establish functional agriculture investment arrangements is necessitated by the
experiences of inconsistent, unpredictable and intermittent funding of agriculture commodity boards

[78]

and agencies over the years. The startstop funding approach to the sector has been detrimental in
developing the sector in that projects and programs that get initial funding are often abandoned or not
completed properly as planned. The problem is more pronounced in agriculture research because
when funding is stopped before projects are completed they cannot be re-started from where they
were left. They have to start all over again.

Therefore, there is a need to adopt funding and/or investment arrangements that not only ensures
consistency and predictability of funding for implementing government and sector policies but also
promotes the commercialisation of viable research-induced agriculture innovations. A good point to
start would be to articulate strategies to ensure that the annual appropriations to commodity boards
and agencies are protected from short-term changes in the fiscal climate and changes in political
priorities that affect the funding landscape. The best way to achieve this is to ensure that funding
arrangements are embedded in an appropriate legislative framework.

4.5.3

Proposed Agriculture Investment Corporation

The FER team recommends the establishment of an Agriculture Investment Corporation (AIC) under
the Ministry of Agriculture and Livestock, a model that is similar to the Independent Public Business
Corporation (IPBC) and the State Owned Enterprises (SOEs). All the existing and/or rationalized
commodity boards and authorities will operate under the AIC and will initially draw most of their
funding requirements for capitalization and agribusiness (e.g. SMEs) development and innovation
through the AIC.

4.6

Rationale for the Proposed Governance Structure of the Agriculture

Investment Corporation

The proposed governance and reporting structure of AIC and proposed commodity boards and/or
authorities is illustrated in Figure 4.6 below. All the eight (8) commodity boards and/or authorities
will report to the AIC and be accountable to the AIC for their resourcing needs through a policy and
legislative framework that will be developed following National Executive Council (NEC) approval of
this FER recommendation. Under this arrangement, the eight commodity boards and/or authorities
will become facilitating agents or vehicles for agribusiness development and innovation. They will be
the conduits that will link the industry participants to the resource envelope housed in AIC.
The AIC will have its own corporate management structure, which will include the administration of
the two funds as described below. In addition, under this structure, it is proposed that the Secretary
for DAL will be the Chair of the AIC Board. In this way, DAL will provide policy oversight, coordination
and monitoring of the performance of the commodity boards and agencies. The rest of the board
members should be appointed independently.

The National DAL should be streamlined and some of its current functions transferred to appropriate
commodity boards and/or authorities. For example, the food security functions to be transferred to
the proposed Food and Grains Board and rubber to the proposed Rubber Board (RB).

[79]

Figure 4.6:

AIC Organisational and Governance Structure

Ministry of Agriculture &

Livestock

National
Development
Bank

National Department of
Agriculture & Livestock

Agriculture Investment
Corporation

Cocoa Board

Coconut
Development
Board

Coffee
Industry
Board

Food &
Grains Board

Livestock
Development
Board

Oil Palm
Industry
Board

Rubber
Board

NAQIA

There should be an independent review of DAL to redefine its role in the light of the re-aligned NADP
[See Sitapai, Chapter 2] so that it can set the agenda for the agriculture sector and reassert itself as the
sectors central agency. Specifically, DAL must firstly, clearly define and maintain the overall
agriculture policy direction and oversight to the agricultural sector; and secondly, cooperate with the
commodity boards and work towards strengthening its linkage to the districts through the provincial
governments division of primary industries (DPI). In this way the necessary linkages will be
established to deliver the expected outcomes in response to the directional statements and strategic
policy directions as outlined in the PNG Vision 2050 Strategic Policy Directions and Expected
Outcomes. At the moment this link is not clear and where it exists, is weak. Strengthening this link is
critical in realising the governments expected outcomes at the district level.
In addition to its administrative function, the AIC would comprise two fund components: (i) A Capital
Formation Fund (CFF), and (ii) A contestable Agribusiness Development and Innovations Grant Fund
(ADIGF). These are described below.

4.6.1 Capital formation fund

The lethargic nature of funding to the agriculture commodity boards and agencies has meant that
resources to repair, upgrade and procure physical assets, including capital equipment and facilities,
has been non-existent. This has led to a situation where fixed assets and facilities have become so rundown that very substantial funds now need to be spent to maintain, restore, upgrade or replace them.
Therefore, a capital formation fund for meeting capital expenditures of commodity boards and
agencies is considered to be crucial. The commodity boards and agencies will be responsible to plan
and submit to the AIC their capitalization expenditure plans for funding consideration.

[80]

The governance structure for revenue generation and capital expenditure of the current PNG state
owned enterprises (SOEs) should be considered to develop an appropriate funding model for the
agriculture commodity boards and agencies.

Like the SOEs that are currently regulated by the Independent Consumer & Competition Commission
(ICCC), each of the eight commodity boards and/or authorities would develop a five (5) year
Operational Agreement that outlines the expenditure plans and priorities for procurement of new
capital equipment and upgrade of facilities and existing infrastructures on an annual basis, and spread
over five years. That would be followed by a review process, involving discussions between the boards
and agencies and AIC. The plan will be implemented after the parties reach agreement and sign off.
Annual performance monitoring assessments will be conducted by the AIC, and an independent audit
or review conducted midway through the plan (after two and half years) to assess whether commodity
boards and agencies are delivering on the expected outputs/outcomes. This audit or review process
would serve as a mechanism to evaluate performance of commodity boards and agencies under this
new arrangement.
Funding under this component would be guaranteed and will therefore allow for consistency and
predictability of funding compared to the current ad hoc arrangements.

4.6.2

Agribusiness development and innovations fund

The ADB Final Report (2004) recommended the need for establishing a national system for funding
that includes contestable grants and clear criteria for proposals (p. viii). In the spirit of this
recommendation, and consideration for pooling financial resources to provide initial funding support
toward development of agriculture based small to medium enterprise (SME); a contestable or
competitive grant scheme is described and proposed based on the successes and lessons from the
AIGS experience.

As highlighted earlier, a contestable agribusiness development and innovations grant fund will be
established in the AIC. This fund will comprise two parts: (i) an Agribusiness Development Grant
Scheme (ADGS); and (ii) an Innovations Grant Scheme (IGS). These funding components would
contribute to growing the sector and upgrading it to the next level.
4.6.2.1 Agribusiness development grant scheme

The National Government currently has a policy of promoting the SME sector. A lot of the target
participants would be from the agricultural sector. To complement and facilitate this policy direction,
an Agribusiness Development Grants Scheme (ADGS) is proposed to promote and fund agriculture
based small to medium size businesses. Under the proposed ADGS, grants would be provided through
a competitive process to develop and upgrade SMEs to more commercially oriented processing,
manufacturing, and service industries. This is consistent with and will support government policy as
foreshadowed in the current MTDP 2010 2015 document, which states: subsequent MTDPs will
focus on transforming the rural subsistence agriculture sector into commercial farming (DNPM, 2010:
p. 67). The ADGS will be established and will be resourced to facilitate this projected transition. It
would be targeted particularly for farmers and small agriculture enterprises that are innovative and
are willing to invest in value adding activities such as processing of raw materials.

[81]

The lack of adequate capital for start-up or expansion of agribusiness enterprises has been a major
obstacle for smallholder farmers and potential agribusiness ventures to progress. Therefore, the
rationale behind this fund is to get them started. When they do well and are prepared for the next level
or for expansion of their business operations, they can be recommended and guided to seek funding
support from the NDB and other financial institutions. This sequential resourcing would contribute to
empowering agribusiness SMEs and has potential to produce generations of entrepreneurs who will
champion growth in the agriculture sector.
4.6.2.2 Innovations grant scheme

The IGS on the other hand will target funding of innovative projects through: (1) commodity boards
and agencies, in partnership with private sector service providers. These will encourage competition
in the innovativeness of commodity boards and agencies in partnership with private service providers
and innovators to prepare and submit project proposals that address the needs of smallholder
agricultural producers through technological, institutional and enabling policy solutions. The details of
how these will operate can be drawn from the documented experiences of AIGS (Mbabu et al, 2012:
pp. 160 199).
Support for agriculture research and practical innovation and effective awareness and information
exchange (including on the ground farmer advice/extension) requires innovative methods and
solutions. Application of funds from the grant scheme by public and private sector service providers in
agriculture will promote and enhance investments and growth in smallholder agriculture and will
certainly improve broad based economic development in rural PNG that is fundamental and crucial to
achieving inclusive and sustainable income generation and food security nation-wide.

The grant schemes will be administered through transparent and accountable processes established
within the AIC. They will be established as best-practice facilities, with independent technical
assessment committees. In addition, the AIC will explore and negotiate resourcing partnerships with
other interested international development partners and non-state contributors. This should
gradually evolve to a mutually beneficial managed partnership between AIC, commodity boards and
other interested international and non-state contributors which is consistent with the intent of the
aligned National Agriculture Development Plan (NADP 2007 2016), the PNG Development Strategic
Plan 2030 and the PNG Vision 2050.

4.7

Funding Strategies for the Agriculture Investment Corporation

For initial injection of funds into the AIC, the FER team recommends the following:
(a)

(b)

Explore the potential for funds to be sourced from the PNG LNG SWF Development Fund to
be used to fund project and/program by commodity boards and agencies that are
categorised as critical priority areas in the overall development plans of the National
Government;

National Government to allocate the current NADP appropriation of K100 million to AIC as
a direct contribution of the State, where this can be split 50:50 between the Capital
Formation Fund and the contestable Agribusiness Development and Innovations Grant
Fund;

[82]

(c)

(d)

Redirect and/or channel all current PIP funded projects funding currently implemented by
the commodity boards and agencies through the AIC. The Task Force that oversees the
implementation of the FER recommendations must liaise with the DNPM to facilitate this
realignment of funds for the projects and how it will be done; and

DAL to facilitate the conduct of a nationwide audit of all sector fixed assets, whether in its
custody or given away to sector agencies use especially land portions that were used by
the department under Certificate Authorizing Occupancy. The audit should include
identification surveys to establish boundaries and current state of the assets and obtain
titles to all land portions. When these assets are property accounted for they can then be
used as collateral for attracting private sector investment into the sector. In addition,
business ventures can be established in partnership with private sector through jointventure business enterprises for sustainable income generation.

These potential sources of initial funding can be complemented by other resourcing partnerships,
which the AIC should seek and broker from international and non-state contributors as described
earlier.

4.7.1 Recurrent funding options

The National Governments central agencies have always emphasized the need for agriculture sector
agencies to work towards generating internal revenue to cover some of their recurrent expenses.
Under this proposed arrangements commodity boards and authorities would be encouraged to
seriously explore the internal revenue generating options available to them. For example, some of the
commodity boards and research institutes already have some capacity to generate internal revenue.
Depending on what proportion of the annual budget is sourced through this component, each
organisation should be encouraged to work towards generating at least 50% of their total annual
revenue budget over a period of time.

It is envisaged that recurrent funding arrangements would eventually be phased out as commodity
boards and agencies become commercially sustainable without such assistance. In the interim,
however, it would be appropriate to ensure greater certainty in recurrent funding under proposed
arrangements discussed earlier in this chapter and in Chapter 3.

4.7.2

Expected outcomes

Having made the case for resourcing arrangements, and reflecting on the macroeconomic measures
analysed earlier, especially the proportion of government expenditure on agriculture as a share of the
agriculture GDP currently averaging 3.2%, the FER team recommends a gradual increase to 10% or
about K400 million annually. This level of development funding when provided and managed
prudently has potential to transform PNG agriculture, driven by demand emanating from small to
medium processing and manufacturing industries and domestic market oriented consumption
enterprises, and ably guided by commercially oriented commodity boards and authorities as
facilitating agents. This could elevate PNG to what the World Bank categorises as transforming
countries as far as agriculture development is concerned.

[83]

4.8

Comparative Advantage of Proposed Structures versus the Current

Structures

This section assesses the comparative advantage of proposed structures versus the current situation
in terms of expenditure and budget analysis. These are shown in Tables 4.6 and 4.7, focussed on the
current commodity boards and agencies and the proposed entities as outlined in NEC Decision No.
99/2013. Specifically, Table 4.6 provides an analysis of the income and expenditure levels, whilst Table
4.7 compares the proposed new entities against the current state.

It can be seen from Table 4.6 that only three out of the seven organisations under the review provided
information and data on income and expenditure and staffing levels. 75 The others were not able to
provide that information although requests were made for provision of this information. The rest of
the assessments can be read directly off the two tables. This assessment complements the review and
assessment in Chapter 2 of this FER report.
The rationalisation will definitely have cost implications and there may be teething problems initially.
To ensure a smooth transition, the current managements in the commodity boards and DAL will need
to plan and strategize the way forward in terms of the resourcing and management issues for the start
of the transitional period in 2015. Specifically, the immediate task would include preparation of the
expenditure budgets in 2014, taking into account the human talents/resource implications.
Table 4.6: Analysis of the Current Income, Expenditure and Staff Levels

Commodity
Board/Agency
Cocoa Board

Fresh Produce
Development Agency

Kokonas Indastri
Koporesen
Livestock Development
Corporation
Oil Palm Industry
Corporation
Rubber Board

Average annual
income (2006
2012) [Kina,
million]

Average annual
operational
expenditure (2006
2012) [Kina,
million]

Average net
surplus/(deficit)
(Kina, million)

3.38

3.32

7.94
3.98

4.97
4.22

No data available

No data available

No data available

No data available

No data available

No data available

Staff
Ceiling

On
strength

0.06

(0.24) 76

26

15

2.97

Not applicable

Not applicable.
Not applicable

75 The LDC was locked out of its office at Burns House due to non-payment of rental by government and their files, computers
and equipment are still locked in that office and so could not provide the data.

This operational net deficit is due to provision made for depreciation and does not necessarily reflect KIK operating
beyond its income. It operated within its budget.

76

[84]

Spice Industry Board

Table 4.7:

No data available

Not applicable

15

5 77

Analysis of the Comparative Advantage of Proposed Structures versus Current

Structures

Commodity
Board/Agency

Cocoa Board
(CB)

No data available

NEC proposed
commodity
board/
authority
Merge with KIK

Comparative Advantages
Proposed structure

A combined entity will reduce

both capital and operational
costs. The average cost of
operating two boards is about
K7.5 million per annum. The
board of directors expenses for
both entities is about K700,000,
however will be reduced by
50% with one board.

The internal revenue generation

from fixed assets is different in
CB and KIK. An amalgamation
will create unnecessary tension
amongst staff that may be
difficult to manage. For example,
KIK generates 20% of its
internal income from both
physical and financial assets
compared to Cocoa Boards
0.6%.
A merger will result in
unhealthy
competition
for
resources between cocoa and
coconut teams within the
proposed merged organization.

Current structure

Specific commodity focus.

On average, from 2006 to 2011 the

CB had a net operating surplus of
K60,000 compared to a net
operating deficit of K240,000 for
KIK. However, the latter is due to
provisions made for deprecation.
CB has had tendency to duplicate
the extension functions currently
carried out by the Cocoa Coconut
Institute, and expending levy
funds collected from cocoa bean
exports
for
research
and
extension. 78

CB to remain separate but with an

expanded mandate with inclusion
of research and development by
subsuming the cocoa research and
development component of the
Cocoa Coconut Institute. The
Tavilo Research Centre in East
New Britain will become the
research
and
technology
development hub of the cocoa
industry in PNG.
There is potential for growth that
will see the industry expand with
new and improved planting
materials that have already been
released
to
the
industry.
Subsuming the research and
development component will
increase
the
annual
cost
operational cost; however the net

77

According to the CEO, all the staffs have now left.

Subsuming the cocoa R&D functions will address this issue and may lead to cost reductions due to streamlining the staff
required and making others redundant.

78

[85]

effect is likely to be lower than the

combined cost of two entities,
when the rationalization of the
new Cocoa Board is complete.

Kokonas
Indastri
Koporesen
(KIK)

Merge with
Cocoa Board

Refer to points outlined under

Cocoa Board (above)

Easier
to
implement
a
corporatized governance and
management model like CIC with
merging of cocoa R&D functions
from CCI then the current
arrangement.
Specific commodity focus.

Remain as it is with inclusion of

research and development by
subsuming the coconut R&D
component of CCI. The Stewart
Research Station at Murnas in
Madang will become the research
and technology hub of the coconut
industry in PNG.
On average, KIK appears to have
been operating on a net budget
deficit but this is due to provisions
made for deprecation in its
financial statements.

There is potential for growth that

will see the industry expand with
promotion
of
downstream
processing.
Subsuming
the
research component will increase
the annual cost operational cost;
however, the net effect is likely to
be lower than the combined cost
of two entities when the
rationalization of the new
Coconut Development Board is
complete.

Fresh Produce
Development
Agency (FPDA)

Subsumed into
the proposed
Food & Grains
Board (FGB)

May provide the basis to focus

on a priority group of crops as
opposed to the 60 plus crops
that FPDA is supposed to service
at present.

[86]

Easier
to
implement
a
corporatized governance and
management model like CIC with
merging of coconut R&D functions
from CCI then the current
arrangement.

On average, between 2006 and

2012 FPDA had a net operating
surplus of K2.97 million, which
reflects under-spending.

Consistent funding support from

 Use the established network to

develop other crops that will be
under the new entity with
expanded mandate.

Two options can be considered:

government and stable board.

These may be foregone in the
short to medium term.

First option is for FPDA to

amalgamate with NARI. The
rationale for this is that FPDA
deals with the same crops
that NARI is mandated to
conduct research on so ideally
an
amalgamation
would
strengthen the extension and
outreach program. However,
this subject to NARI returning
of
to
the
Ministry
Agriculture& Livestock.

Livestock
Development
Corporation
(LDC)

Livestock
Development
Authority

Second option is for FPDA to

be the base organization for
this new board to which the
other crops can be subsumed
into. The new board will need
to develop a new research
facility for its extension
programs at the lowlands and
highlands. This option will be
taken if the return of NARI to
agriculture sector is not
tenable.

LDC has not been resourced

adequately to realize its full
potential. An authority would
give it an expanded mandate
and adequate resource support
would
facilitate
the
development of the livestock
industry in PNG.

79
80

It is proposed that a Livestock

Development Board to be
established instead of an
authority. The new Board with
expanded mandate would be the
catalyst to facilitate building and
upgrading the ailing livestock
industry in PNG.

Livestock Development Authority Ltd Annual Work Plan 2013.

Lack of adequate funding. Despite

LDC been established in 1983, the
lack of proper government
support left the livestock industry
high and dry. The initial intent to
commercialize
the
livestock
industry that was inherited from
DPI did not go down as planned
and left LDC to struggle over the
years. PIP funding only came
through in 2007. 79 It may have
been this backdrop that made
stakeholders to comment, LDC
has been presiding over a
disaster from the beginning. 80

Jamie Graham, General Manager Ramu Agri Industries, consultation, November 2013.

[87]

It is not clear if the new entity will

continue the level and consistency
of government funding support
that FPDA has enjoyed since its
establishment from a projectbased entity.

 The current DAL livestock

research facilities and centers to
be transferred to the new board
so it can facilitate the breeding
of new bloodlines. In the initial
stages the board can explore the
potential for buying and redistribution of livestock in order
to rebuild the populations in
selected locations.

Oil Palm
Industry
Corporation
(OPIC)

Oil Palm Board

May attract new and increased

funding.

Will expand the current OPIC

mandate, which would include
incorporation of the R&D
functions currently undertaken
by OPRA amongst others and be
a catalyst to grow the industry
at the smallholder level.
Improved access to government
therefore could regain funding
support.

Rubber Board

Subsumed into
the Minor Cash
Crops
Development
Authority

This may marginalize the rubber

industry and lose whatever status it
has at the moment.

The OPIC management is of the

view that the current model has
outlived its use-by period 81 .
Therefore, the proposed elevation
to a board status with expanded
functions is timely.
There has been no recurrent
funding from the government
since 1997.

At the national level the oil palm

sub-sector has no formal structure
in place to communicate with and
influence policy and planning
processes. Elevation of OPIC to a
board status may address this
consultative mechanism and link
with government more effectively.

81

Lesly Wungen, Acting Secretary General, OPIC.

[88]

There is great potential for the

rubber industry. With proper reorganisation and resourcing the
industry will regain its importance
as an important cash crop for both
smallholders and estates.
The Cape Rodney Rubber Project
should be transferred to the
proposed Rubber Development
Board (RDB) to be the prime asset
for its research and extension
functions.
DAL managing the industry has
not been the most effective in
building and growing the industry.
Duplicating the role of current
staff and withholding recurrent
funds channeled through the

Spice Industry
Board

4.9

Subsumed into
the Food &
Grains Board

A proposed Food & Grain Board will

facilitate a new direction for the
spice
industry
with
other
alternative food and cash crops.

department.

Lack of funding from government.

The last funding from the
government was in 2005.

DAL assumed the financial

responsibility in the interim.
Does not have adequate support
and lacks economies of scale.

Conclusions

Recurrent funding to commodity boards and agencies has been stagnant in the review period.
Although there has been significant growth in development funding, this has been concentrated in two
agencies, NARI and NDB. Whilst the general increase in development funding is welcome, there are
issues in accounting for the use of these funds, both in acquitting financially and in terms of impact at
the farm level.

Indicators for measuring outputs and outcomes have been identified and include productivity and
production levels, household income, and food and nutrition security. However, evaluation of outputs
and outcomes is difficult because of the unavailability of relevant information and data. Urgent
remedial action is needed to set in place processes to collect data and ensure commodity boards and
agencies have the necessary capacity for data analysis.
Five macroeconomic indicators were estimated to explain the level of government expenditure and
budget for the agriculture sector in the past seven years. These were: (i) government agriculture
expenditure as a share of total government expenditure, (ii) agriculture sector contribution to GDP,
(iii) public expenditure as a share of GDP, (iv) public expenditure on agriculture as a share of total GDP
and (v) direct real government expenditure per capita agricultural population. On average, the share
of government agriculture expenditure against total government expenditure for the past seven years
has been relatively low at K115.61 million or 1.1% per annum. The agriculture sector contributed an
average of K3.5 billion or 31.6 per cent per annum to the National GDP in the past seven years. The
average relative growth of agricultural GDP is 4 per cent. On average the governments agricultural
expenditure as a share of agricultural GDP is 3.2%, as opposed to a recommended 10% of total
agricultural GDP to be invested into agriculture to transform the sector.

An Agriculture Investment Corporation (AIC) is proposed to provide consistency and predictability in

the allocation of resources to commodity boards and agencies. The proposed AIC would have two
major funding components: (i) Capital formation fund; and (ii) Contestable agribusiness development
and innovations grant scheme. The first element provides the basis to procure and/or upgrade fixed
assets and infrastructures that have been run down for many years.

The second element provides a basis for SME agribusiness development and promotes
commercialization of research outputs or products. It would provide start-up capital for small to
medium size agribusinesses. The commodity boards and agencies would participate in the process by
preparing competitive and innovative project proposals and ensuring implementation of approved

[89]

projects. The comparative advantages of the proposed structures versus current structure were
considered. On balance, the analysis is of the view that:

Cocoa Board and KIK remain separate, but subsume the respective research and development
functions that are currently provided by CCI and abolish CCI.

In the proposed Food and Grain Board, FPDA is to be subsumed into the new Board with other
food crops. Suggestions have been made for FPDA to be amalgamated with NARI. However,
NARI does not report directly to the Agriculture & Livestock Ministry and Department, which
makes this option less tractable. Therefore, if NARIs reporting route is maintained then it
would be proposed that FPDA be the base agency from which the proposed Food and Grains
Board can be anchored.
If cocoa and coconut R&D functions are to be corporatized like CIC then it would follow that
the R&D functions of NARI may be subsumed into the new Food and Grain Board, if NARI
returns to the Agriculture and Livestock Ministry.

The proposed Livestock Development Board and Rubber Board will both require increased
funding support to reflect the expanded mandate and roles to grow these industries for the
benefit of the smallholder farmers.

Agriculture will continue to be a key instrument for sustainable development and wealth creation.
Given that more than 80% of the population dwell in rural areas and most are engaged actively in
agriculture, promoting and adequately resourcing agricultural instrumentalities is imperative to
meeting their subsistence, economic and social needs.

A strong political commitment, in terms of funding is required to achieve the transformation of

agriculture needed to achieve Vision 2050 sustainable development and wealth creation goals. That
transformation requires the visible hand of state to be seen to make an effective contribution in the
farming communities of this country.

[90]

CHAPTER 5: ORGANISATIONAL ANALYSIS

5.1

Introduction

Author: Gabriel Selibu

This chapter considers organisational issues relating to the Cocoa Board (CB); Kokonas Indastri
Koporesen (KIK); Rubber Board (Rubber Industry Development Corporation); Spice Industry Board;
Livestock Development Corporation (LDC); Cocoa & Coconut Institute (CCI); Fresh Produce
Development Agency (FPDA) and Oil Palm Industry Corporation (OPIC). Reference is also made to the
Coffee Industry Corporation (CIC) and National Agriculture Research Institute (NARI).
This chapter addresses the following organisational issues:
(a)

(b)
(c)

the current organizational structures of commodity boards and agencies in relation to

their respective mandates and an assessment of their effectiveness in service delivery to
farmers;

the remuneration levels of commodity boards and agencies in comparison to the public
service and the private sector with the aim of streamlining allowances and benefits for
permanent and contract positions, establishing appropriate remuneration structures; and

the comparative advantages of the proposed organizational structures of the commodity

boards and agencies to the current designs in terms of service delivery to the farmers.

The chapter aims to provide findings in relation to the above three identified tasks and to propose
appropriate mechanisms to address relevant issues.

The terms of reference of this FER, as outlined in Chapter 1, specify that the proposed rationalization
of the agriculture commodity boards and agencies is aimed at achieving the following outputs:
(a)

Improved performance;

(c)

Optimized management structures.

(b)

5.2
5.2.1

Improved governance and accountability; and

Commodity Board Organisation Structures

The building blocks

The Vision 2050 sets the broad context in which services of commodity boards are to be delivered, and
should therefore have a major influence on organisational design and structures. The goals of Vision
2050 underpin the PNG Strategic Development Plan 2010-2030, the Medium Term Development Plan
(MTDP) 2011-2015, the Alotau Accord, the National Agricultural Development Plan (NADP) and the
individual corporate plans and strategies for each commodity board.
In aligning with Vision 2050, the commodities boards are expected to work towards achieving the
following three long term key outcomes:

[91]

(a)
(b)
(c)

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

Increased number of national men and women in small, medium and corporate business
in agriculture; and
Increased number and volume of new investments in the agriculture sector.

In order for the commodity boards to achieve the Governments overall goals it is imperative that
planning at all levels in the agriculture sector is aligned with those goals. This alignment should be as
complete as possible, as agriculture is the backbone of the country and is the source of livelihood for
the vast majority of people in PNG.
Socio-economic expectations and drivers for rural communities have changed significantly over the
years. These changes have resulted in an increasing proportion of people becoming engaged in
commercial activities on a part-time basis. However, the rate of growth of employment in the
agriculture/fisheries and livestock sector by private sector companies has been declining since 2005
and such employment actually fell by 7.9 percent in 2013. 82

While the Department of Agriculture and Livestock (DAL) is responsible for overall agricultural policy
development, the commodity boards are the critical vehicles for channelling focused services 83 to
farmers including compliance measures for quality control, adaptive research for improving imported
production technologies, innovative extension approaches for technology transfer to farmers and for
identifying strategic investment options for increasing smallholder participation in income generating
activities for the realisation of the three key outcomes noted above.

The important deficiencies in the legal framework in which DAL, commodity boards and
provinces/districts function which are highlighted in Chapter 6 need to be addressed urgently so the
reorganised commodity boards can effectively contribute towards the achievement of the proposed
three key outcomes. New legislations will be prepared for Food and Grains Board, Rubber Board and
Livestock Development Board under the proposed rationalisation exercise. The proposed
organisational structure for the existing Livestock Development Corporation is pending at the Salaries
Conditions and Monitoring Committee (SCMC), subject to the findings of this current FER. The Spice
Board, although has an approved Act to operate, it does not have the capacity to deliver the required
services because of the way it is being managed under DAL. This review proposes for the Spice Board
to be abolished and its functions undertaken by the proposed Food and Grains Board.

So, do the commodity boards have appropriate structures, capability and the capacity to achieve the
three key outcomes? This is the basic question considered in the following sections of this chapter.

Commodity boards and agencies have had major issues in delivering extension services to the
satisfaction of their clients and stakeholders. For example, KIK and Cocoa Board have attempted to
deliver appropriate extension services through their research and development subsidiary, CCI, to the
82

Data source: Bank of PNG, Quarterly Bulletin.

Services in this context are defined as the provision of enabling systems and processes, facilities, information, advice and
guidance, training, specialist knowledge and skills, etc.

83

[92]

farmers. Others boards such as Spice Board and Rubber Board have struggled to provide relevant
extension services to their farmers. The differing level of success in service delivery can be safely
assumed to be directly linked to three main factors:

Structure: Are the commodity boards appropriately structured to be able to facilitate the
growth strategies and deliver the required agriculture services?

Capability: Do the commodity boards have the required leadership (senior staff with vision),
quality human capital (competent staff), and governance (systems and processes) ability to
deliver the required agriculture services?

Capacity: Do the commodity boards have sufficient human capital (adequate number of key
staff), financial resources and technological capacity to deliver the required agriculture
services? Are the incentives sufficient to attract and retain competent key people and
technologies being sought?

While each factor, structure, capability and capacity can be addressed separately, it is important for
them to be considered together to ensure that interdependencies are addressed in line with service
delivery imperatives. It is also important that appropriate supporting policies are established to
underpin the implementation of services.

5.2.2 Organisational structure, capability and capacity

The capability and capacity of each commodity board, underpinned by an innovations policy, should
enable the commodity boards to meet domestic and international customer needs and expectations,
and address any specific problems associated with the production of the particular commodity or
livestock products.

While some of the commodity boards are appropriately structured to deliver required services, others
are not. As already noted, the Rubber Board and Livestock Development Corporation, have not yet had
their organisational structures approved. Their operations remain in limbo until the necessary
approvals are given or alternative decisions are made regarding the future direction of the entities.

The other commodity boards 84 covered by this Review have mandates that empower them to establish
appropriate systems and processes to deliver the necessary services to the farmers and stakeholders.
These systems include management, administrative and governance structures, compliance, research
and development, and extension services and networks.

As discussed in Chapter 4, funding constraints limit the ability of the boards to contribute effectively to
the achievement of the three key outcomes. Limited financial resources are a major constraint to
delivery of services. The technical knowledge and skill levels of staff employed in the commodity
organisations are adequate, but the FER team has identified that boards are having difficulty hiring
Commodity boards with existing legislations include Coffee Industry Corporation, Kokonas Industry Koporesen, Cocoa
Board, Oil Palm Industry Corporation, Rubber Board and Spice Industry Board. Rubber Board currently has an Act dated
1953 which is deemed inadequate, and Livestock Development Corporation (LDC) and Fresh Produce Development Agency
have been established under the Companies Act. LDC is yet to be declared under the RSA Act 2004 to become a statutory
entity.

84

[93]

appropriately qualified personnel to fill senior vacant positions because of financial capacity
constraints.

Information provided to the FER team indicates that the boards differ greatly in their capability. In
addition to lack of financial capacity and associated staffing and capital equipment constraints, there
are also internal capability issues that need to be addressed. Some stakeholders have indicated that
commodity boards are not meeting their expectations as mandated because of leadership and
management problems, including mismanagement of resources, use of obsolete or inefficient systems
and duplication of roles.
The Chairman of NARI, Dr John Kola, suggested to the FER team that fundamental institutional
shortcomings need to be addressed before agricultural sector reforms can bear fruit. He pointed out
that:

Reforms should be preceded by rooting out corrupt practices, negligence to public duty and
incompetent leadership. More importantly it is essential to tighten fiscal audit and general
accountability. Deficiencies in the execution of mandated duties must be resolutely corrected to
allow the agriculture sector regain its true significance as the backbone of the national economy
and secure all round policy support it needs and deserves 85.

The Review has identified that inconsistent service delivery levels are more common and more often
manifested in those boards with leadership issues, particularly at the senior executive management
level. Although there are fully developed corporate and operational plans in many boards,
implementation is minimal due to a lack of clear direction, which has adverse implications for staff
morale and team cohesion. This can result in low levels of staff performance, high turnover of key
personnel associated with resignations, and non-acceptance of direction from management.

There are generalised perceptions of mistrust in the top management of some of the boards. It has
been noted that organisational politics permeates some organisations, undermining authority of
management and weakening mechanisms needed for the delivery of services. Leadership and
management capability become increasingly questioned as support declines for executive
management. The service delivery mind-set has been displaced by organisational politics, often
manifested in gossip and undermining of authority 86.

5.2.3

Organizational design and structure

Commodity boards are designed to regulate the production, processing and exporting of particular
type of commodity products. The major functional responsibilities are based around regulation and
marketing, research and development, and training and extension services with functional support
services being provided through corporate sections (finance and administration, information
85

Letter to FER team leader, dated February 18, 2014.

Some boards, such as FPDA, seem to have a very functional culture with appropriate rewards and benefits systems and
performance management systems.

86

[94]

technology and personnel). As discussed in Chapter 2, the structures of existing commodity boards
include a varying range of different functions:
(a)

(b)

(c)

some structures include regulation (compliance and marketing), research and extension
and corporate services (finance, personnel and marketing);

some structures incorporate some research and extension services; and

some structures exclude research and extension services.

There is a fairly strong research capability in some of the commodity boards, but the capability and
capacity for training and extension services are not at the same level. In order to grow and expand the
commodity products it is critical that extension services, networks and relationships are fully
developed and resourced to function effectively.

5.2.4

Organisational structure and design options

The design of organisation structures should aim to:

(a)
(b)
(c)
(d)

ensure clarity in role distribution and reporting relationships;

enable appropriate decentralization in decision making;
ensure stability and consistency during volatile and changing situations; and
enable the organization to adapt to changing situations and expectations.

What is the most appropriate organisation structure to deliver the governments expectations regarding
agriculture service delivery by commodity boards?
The current structure of commodity boards is based on a single commodity or groups of commodities.
The main implications we see arising from this type of organisational arrangements are:
(a)

(b)
(c)
(d)
(e)

focus on a single commodity may enhance effectiveness in regulation, certification,

monitoring, promotion and marketing of that commodity;

a research and development service that is dedicated to a single crop can be more readily
linked to farmer training and extension services to improve the development of the
commodity and to control specific plant pests and diseases;
the relationship between farmers, other stakeholders, and the board are likely much
closer because they have the same focus;

development funding proposals may be easier to understand when a single commodity is

involved; and

easier for technical and scientific staff to develop specialisation of skills over time as staff
focus on a single commodity.

An ideal streamlined organisational structure would have an optimum level of staff in each core
functional area (regulatory marketing services, research and development, farmer training and
extension services) to ensure required services are being provided appropriately. This will require an
expansion in the number of technical/scientific officers in the commodity boards, as well as for new

[95]

institutional arrangements to be developed to mobilise provincial agriculture extension officers to

work more effectively in collaboration with technical/scientific from the boards.
The advantages and disadvantages of organisational models involving internal and external research
functions are outlined below.
5.2.4.1 Commodity boards with internal research functions

The potential advantages of having an internal research arm are:

(a)

the overall corporate direction is easily built into the research and extension programs;

(b)

research will be focused on specific issues related to the particular commodity;

(d)

there can be full accountability for funding;

(c)

(e)

(f)

research and extension services are easily interlinked and form part of the normal
business plan and planning process, making budgeting and resource allocation easier;
donor fund agencies can easily relate commodity with development and extension
requirements; and

breakthrough improvements and results are the property of the commodity board, and
can easily be accessed internally.

The potential disadvantages of having an internal research division are:

(a)

(b)
(c)

(d)

funding can easily be withheld or diverted to other areas thus affecting research and
extension programs;
alliances can be developed over time, thereby making appointments difficult;

there may be higher overhead costs related to administration and the cost of maintaining
facilities (if the organisation is unable to reap scale of economies available under an
alternative model); and
there is potential for a them-and-us situation developing between research units and
other elements of organisations, with possible adverse effects on service delivery (if
organisational leadership is not strong enough to prevent this).

5.2.4.2 Commodity boards without internal research functions

The potential advantages are:
(a)

(b)
(c)

research and extension programs can be performed through a third party under a service
level agreement;
high service delivery levels can be demanded from specialists; and

administrative overhead costs may be lower if scale of economies can be realised.

[96]

The potential disadvantages are:

(a)

(b)
(c)

reliance on external research organisations provides boards with less control over
priorities in delivery of services;

since boards lack direct control of research programs, the linkages between research and
extension work can become disconnected from the boards corporate direction, thus
boards attempting arrest this disconnect by duplicating extension functions; and
breakthrough results and records may remain the property of external organisations and
may not necessarily be made freely available to boards.

5.2.4.4 Commodity boards with partial research functionality

Commodity boards which maintain some internal research functionalities stand to leverage on some
of the risks associated with the former two models where it is disadvantageous to them. It is expected
that there will be:
(a)
(b)
(c)

some control on the types of research programs and extension services being provided;
some research results will be retained as intellectual properties; and
inclusion of research programs under the business budgeting process.

5.2.4.5 Dedicated research organisations owned jointly by boards

CCI is a dedicated research organisation which performs specific research, development and extension
services on behalf of the parent organisations, KIK and the Cocoa Board. While this arrangement has
the advantage of bringing together a larger number of fully qualified scientific specialists and
professionals, it has several major disadvantages:
(a)

(b)
(c)
(d)

accountability and supervision for cocoa and coconut development and extension services
may be compromised;
funding allocation of research programs between the two commodities becomes an issue
if research funds are not appropriated as budgeted;

chairmanship of the Board is based on a 3-year alternating cycles between KIK and Cocoa
Board. The arrangement while may be seen to be fair, can also results in bias towards
whichever organisation the Chairman is hailing from; and

there is a potential for duplication of extension work if or when KIK or Cocoa Board decide
to take a more active role in extension work, as has been the case with Cocoa Board in
recent years.

The FER team considers a corporatized model whereby each commodity board has its own internal
research facility and an extension service is the best option available. This is similar to the current CIC
organisational structure.
Implementation of the CIC model will obviously have major implications for CCI, Cocoa Board and KIK
with regards to the reorganisation and redeployment of personnel and facilities for research. Other

[97]

commodities including grains and spices would utilise the existing NARI (or the proposed Food and
Grains Board) for research and development.
5.2.4.6 Internal support functions for commodity boards

In line with the options of streamlining and optimisation of the boards, there also needs to be a rethink of how internal support functions (human resources, payroll, accounting and financial and IT
services) can be arranged to provide best outcomes from available resources. Consideration should be
given to whether outsourcing of support functions to an external service provider would provide
better value for money than the status-quo of maintaining internal support functions.

It is proposed that further organisational analysis be undertaken to map out the actual needs based on
the corporate plans, and in line with the overall government direction.

5.2.5 Organisational culture and performance management

As already noted, some of the commodity boards have leadership and staff morale problems. Effective
organisational practices such as performance management systems and processes appear to be nonexistent or implemented on an ad-hoc basis by many of the commodity boards and agencies. Where
performance management is not being applied, or is loosely implemented, salary progression has been
perceived to be stagnant, thus leading to the departure of critical staff. Failure to implement regular
performance appraisals makes it difficult to correct problematic work-related behaviours and to
ensure that development needs of staff are properly assessed. This can lead to frustrations, poor work
performance and resignation of staff who have potential to be highly productive.
The importance of performance management has been emphasised by Jeffrey Pfeffer, an acclaimed
American business theorist:

What is important to recognize is why success.can be sustained and cannot readily be

imitated by competitors. There are two fundamental reasons. First, the success that comes
from managing people effectively is often not as visible or transparent as to its source. We can
see a computerised information system, a particular semiconductor, a numerically controlled
machine tool. The culture and practices that enable an organisation to achieve its success are
less obvious. Culture, how people are managed, and the effects of this on the behaviour and
skills are sometimes seen as the soft side of business, occasionally dismissed. Even when
they are not dismissed, it is often hard to comprehend the dynamics of a particular company
and how it operates because the people are managed often fits together in a system (Pfeffer,
2005).

The FER team considers that robust performance management systems processes linking
organisational plans and objectives and key outcomes are developed and implemented across all
levels of the organisation, holding individuals accountable for their performance and that of the
organisation. Salary adjustments should also be linked to individual and organisational performance.

[98]

5.3

Remuneration and Reward Practices

5.3.1

Remuneration and reward practices at commodity boards and agencies

Remuneration practices of all commodity boards are subject to Government Pay Policy as determined
under the SCMC Act. 87 The current remuneration levels of the heads of departments, statutory
authorities, including those of the commodity boards are determined by the SRC 88 under the SRC Act,
reviewed once every three years. The current leaders remuneration was reviewed in 2013 for
implementation up to 2015.

5.3.2

Base salary market comparison

Remuneration levels of statutory authorities are generally pitched around 10 - 15 percent above the
public service salary midpoints, with an intention to provide additional incentive and a competitive
edge to attract and recruit qualified and competent personnel. Due to the stagnation of salary
movements experienced by some of the statutory authorities, the public service salary structure has
gradually caught-up. The implications for commodity boards is that attracting quality personnel into
the organisations would be more difficult, in the sense that remuneration levels would be perceived as
being the same as those of the public service and therefore unattractive.

It is generally accepted that State Owned Enterprises (SOE) 89 offer slightly higher remuneration levels
than the statutory authorities and the public service, but positioned within the median of the general
remuneration market or higher. 90

5.3.3

Remuneration movement

According to the Hay Group (PayNet, 2013) the remuneration levels have generally moved by at least
70% since 2005, and in the last 5 years, base salary for all organisations had moved by at least 39%,
while the total remuneration levels moved by at least 40%. Fixed benefits and allowances shifted by
approximately 39%. Table 5.1 (below) shows the general remuneration movements since 2009.
Table 5.1:

Annual Movement of Remuneration Over 5 Years (2009 2013)

Percent Annual Movement

Remuneration Component
Base Salary

Fixed Annual Reward

2009
6.2
5.4

2010
3.4
4.8

2011
8.4
8

2012
9.4
7.6

2013
6.8
8.2

87 SCMC Salaries and Conditions Monitoring Committee. This Committee determines the remuneration levels for Statutory
Authorities.

SRC Salaries and Remuneration Commission. The Commission determines the remuneration levels for all Leaders (Public
Service, Parliamentary and Judiciary).

88

State Owned Enterprises (SOE) include PNG Ports Corporation, PNG Telikom, Post PNG, PNG Power Ltd, EDA RANU, Air
Niugini, and MVIL.

89

Remuneration Comparison of Public Service against the All Organisations (All Industries) market, Hay Group PayNet
Survey, 2013.

90

[99]

Total Annual Reward

Source: Hay Group, PayNet, 2013.

5.8

4.8

8.2

7.4

8.7

The public service base salary levels were adjusted by 7.5% per year in 2011, 2012 and 2013, and
again approved for the next 3 year cycle (2014 to 2016). Remuneration surveys by Hay Group indicate
that salary levels have grown by at least 95% and 69% in the private sector and public service,
respectively, between 2001 and 2013 and have generally moved with the CPI trends. 91

5.3.3

Benefits and allowances

Benefits and allowances being offered by the commodity boards are generally in line with the public
service general orders and also as determined by the SCMC.

The current list of benefits and allowances provided by the commodity boards mainly to the
management team and specialists, as approved by the SCMC include the following:

Gratuity payment 92;

Domestic market allowance 93;
Special domestic market allowance 94;
Housing allowance 95;
School fee subsidy 96;
Motor vehicle allowance 97; and
Contract allowance (covers telephone and utilities). 98

The Hay Group PayNet Survey, 2013, indicates that the most prevalent benefits and allowances are:

91

Mandatory superannuation contribution;

Housing allowance;
Medical insurance;

This information is sourced from Annual Hay Group Remuneration Surveys.

Gratuity Payment part of contract payment and paid every 6 months or annually after review. This is paid at
25% of base salary (or DMA included in other arrangements).
92

93 Domestic Market Allowance compensates the differential between the salary levels in the market and the
base salary offered by the Public Service.
94 Special Domestic Market Allowance intended to pay for special cases not covered under by the standard
Domestic Market Allowance.

95 Housing Allowance Some boards provide accommodation or rented accommodation for management and
specialist staff.

School Fee subsidy Some boards pay school fees as part of their contract arrangement with the staff, and pay
directly to the education institution.

96

Motor Vehicle Allowance Some boards provide an allowance to contract staff who use their own vehicles to
work as part of their contract.
97
98

There may be other allowances not included in this list.

[100]

Short term variable bonuses;

Education allowance; and
Car allowance.

The Hay Group PayNet Survey, 2013, indicates that there has been an 8.2% increase in the movement
of fixed annual reward 99. The 5-year trend from 2009 indicated a total increase of almost 39% in the
movement of fixed rewards.
Figure 5.1:

Prevalence of Benefits and Allowances in Remuneration Packages

Source: Hay Group, PayNet Survey, 2013.

There is a growing trend in total remuneration packaging (TRP), especially for senior management
and staff. This allows managers to arrange and apportion their total salary according to their
requirements, and also take advantage of the tax provisions 100 set out by the IRC on salary packaging.

The expected slow-down of economic growth in PNG seems likely to have an impact on the cost of
goods and services being provided, in particular housing. While there remains a great deal of
uncertainty about future movements in the price of accommodation, various reports suggest that the
price may have already plateaued as a result of the increased supply of accommodation. 101

99

Fixed Annual Reward includes fixed salary, fixed allowances and benefits.

100
101

Provisions under the IRC Salary Packaging covers Housing, School Fees and Annual Leave Fares.
Housing needs for many low wage earners is being met by the informal housing market in the settlements

[101]

5.3.4

Factors influencing remuneration growth

The LNG construction and project development has been a major factor contributing to increases in
the cost of goods and services over the past 5 to 6 years. Continuing economic growth 102 is also
attributed to the project as well as other non-renewable resource developments, underpinned by a
stable government.
The current state of the economy in PNG, including movements in CPI, GDP and the labour market, has
implications for establishing competitive human resource strategies, hence should be taken into
consideration in remuneration decisions. The 2nd Quarter CPI figure for 2013 103 has been reported to
be 3.5 percent while the forecast for the year is 8 percent 104. GDP growth rate for the year was 9.2
percent in 2012 however it was forecasted to ease to 7.2 percent in 2013. Total employment in the
private non-mining sector dropped slightly by about 1% over 12 months between September 2012
and September 2013. The agriculture sector has had a significant drop in employment (approximately
8%), while the mining sector increased its employment by at least 50%. 105

5.3.5

Employment security

The FER team has noted an increasing number of turnover issues in some of commodity boards. One
particular commodity organisation has recorded an increasing trend of turnover of staff from its
scientific research and extension services division over a 3 year period due to frustrations over
performance management and pay issues. The increasing turnover of staff with scientific and research
knowledge and experience is of great concern. As noted earlier, leadership and management issues
including lack of performance assessment have been important contributors to low morale and high
staff turnover. Voluntary staff turnover has been directly linked to frustrations over salary growth and
inequity in remuneration.

Lack of employment security may also create problems. Some CEOs of commodity boards and agencies
who are acting in their roles may feel constrained to avoid tackling difficult problems of organisation
culture, or to make certain controversial management decisions that could make their positions more
tenuous.
According to Jeffrey Pfeffer:

Security of employment signals a long-standing commitment by the organisation to its

workforce. Norms of reciprocity tend to guarantee that this commitment is repaid. However,
conversely, an employer that signals through word and deed that its employees are dispensable
is not likely to generate much loyalty, commitment, or willingness to expend extra effort for the
organisations benefit. Besides getting the right people in the door, recruiting has an
important symbolic aspect. If someone goes through a rigorous selection process, the person
feels that he or she is joining an elite organization. High expectations for performance are
created, and the message sent is that people matter (Pfeffer, 2005).

102

BPNG quarterly bulletin / Hay Group PayNet, Context Report, 2013

CPI movements for September Quarter, 2013, World Bank.

104 Hay Group PayNet Survey, June 2013.
105 Statistics by BPNG, 2013.
103

[102]

The point that Pfeffer makes about getting the right people in the door is of the utmost importance.
Giving security of tenure to an incompetent CEO has potential to have a much greater adverse impact
on organisational performance than failure to provide appropriate security of tenure to a competent
CEO.

The FER team observed that there was no uniformity in terms of salary and benefits structures
amongst the commodity boards and agencies. It is proposed that a total review of remuneration
practices at each commodity board should be undertaken separately and a strong business case put
forward for consideration. The proposed review should take into consideration how remuneration
packages should be linked to performance outcomes and how the costs should be funded. This issue is
addressed in the next section.

5.4

Remuneration and Grade Structures

Subject to the relevant commodity board legislations, remuneration levels for staff in organisations
whether established under their own legislations or by a NEC decision are subject to the Salaries and
Conditions Monitoring Committee (SCMC).

5.4.1

Proposed grade structure

A standard compressed 16 Point Grade Structure would be suitable for most commodity boards and
agencies as these organisations are small and many of the roles can be grouped into grades based on
Hay point ranges derived from actual work value assessment using the Hay Group Job Evaluation 106
method. Flatter grade structures based on either 14 or 15 Grade tiers are also common in many other
regulatory and statutory organisations including the private sector and can be easily applied.
However, one of the commodity boards indicated that a 14 Grade Structure was to compressed from
Grades 10 to 14 and have renegotiated with SCMC for a 16 Grade Structure which has been approved
for implementation in 2014 (Kaiulo, pers. communication) 107.
Table 5.2:

Grade

16 Point Grade Structure

Hay Point Range

Minimum

Midpoint

Maximum

80

88

96

118

175

2
4
6

96

107

117

144

159

174

131
194

213

236

143
212
259

Hay Job Evaluation Method is the Governments approved work value assessment tool and job grading method under the
Governments Pay Policy. It is required for determining job grades, and forms the basis for effective benchmarking and
setting of consistent salary levels.
106

107

Dr James V Kaiulo, Managing Director for Kokonas Indastri Koporesen.

[103]

260

288

316

387

429

471

317

10

352

472

11

524

576

12

575

639

703

13

386
702

780

857

856

951

1044

1415

1554

14

1045

1160

16

1555

1726

15

1275

Executive Level

1274

Grade for Chief Executive Officer is determined by SRC*

1896

Note: *SRC denotes Salaries and Remuneration Commission.

5.4.2

Proposed salary and benefits structures

Commodity boards depend largely on levies and government grant to fund operational costs, including
salaries and wages therefore it is important to ensure there is a link between service delivery
outcomes and pay levels. In addition, it may also be important to ensure relativities and consistency is
maintained between all commodity boards to limit boards poaching staff from each other.
Furthermore, it is proposed that remuneration levels be directly linked to a 7-step performance level
salary structure. The salary steps within each salary grade should be based on 5% incremental steps,
and any salary adjustment between each step must be based on annual performance reviews. These
reviews must be based on clearly articulated and communicated performance guidelines, which must
also be documented in each boards performance and salary administration guidelines. Some
examples of salary movements are: entry level salary for new employees should be at 85% or Step 1
(subject to the CEOs discretion higher payment could be made to very experienced staff); and all
salary adjustment above 100% or Step 4 must be based purely on performance assessment.
Table 5.3: Sample 7-Step Performance Level Salary Structure
Grade

Hay Point Range

Steps
1

Min.

Mid.

Max

85%

90%

95%

100%

105%

110%

115%

80

88

96

11486

12162

12837

13513

14189

14864

15540

118

143

13435

14225

15016

15806

16596

17387

18177

96

107

117

`144

159

174

213

5
7

175
260

131
194
236
288

212
259
316

12365
14773
16454
18556
21193

13092
15642
17422
19648
22440

[104]

13820
16511
18390
20739
23686

14547
17380
19358
21831
24933

15274
18249
20326
22923
26180

16002
19118
21294
24014
27426

16729
19987
22262
25106
28673

317

352

386

24442

25880

27317

28755

30193

31631

33068

10

472

524

575

33652

35631

37611

39590

41570

43549

45529

11
12
13

387
576
703
857

429

471

639

702

780

856

951

1044

1415

1554

14

1045

1160

16

1555

1726

15
MD/CEO*

1275

1274
1896

2448

28530
40072
48059
58072
70606
86140

105091

30209

31887

42429

44786

50886

78913

111272

96274

117454

49500

56540

64904

74759

35243

47143

53713

61488
91207

33565

59367

68320
83066

101341
123636

71736
87219

106408
129818

36922
51857
62194
75152
91373

111475
136000

38600
54214
65021
78568
95526

116542
142181

Notes: MD denotes Managing Director; CEO denotes Chief Executive Officer.

In addition to the basic salary, it is also proposed that benefits and allowances are structured in line
with the level of qualification and marketability of the incumbent to ensure retention, and to
incentivise staff to remain committed to the organization.

Where it is difficult to attract and recruit critical personnel, specialists or senior managers into
commodity boards, it is recommended that an SCMC-approved special domestic market allowance be
applied. This allowance should have a range based on remuneration market practices. The allowance
structure provides the CEO of the organisation with some flexibility in making terms and conditions
attractive for the purposes of attracting, recruiting and retaining qualified staff.

Samples have been provided in this section for the purpose of clarification and understanding,
however, further review and benchmarking will be required to establish a more appropriate salary
structure and Special Domestic Market Allowance (SDMA).
Table 5.4: Sample of Special Domestic Market Allowance (SDMA)

Special Domestic Market Allowance (K)

Grade

Certificate
Min.

Mid.

Diploma

Max.

Min.

Mid.

Degree
Max.

Post Graduate Degree

Min.

Mid.

Max.

Min.

Mid.

Max.

16

14820

17985

21582

15820

18985

22782

14

9547

12185

14820

10547

13185

15820

15

12185

13
12
11

1600

2000

2400

600

750

900

10
8

800
400

1000
500

1200
600

3600

4500

5400

1200

1500

1800

2400
900
600

3000
1125
750

3600
1350
900

[105]

5625
4500
3600
1800
1350

14820
7031
5625
4500
2250
1688

17985
8437
6750
5400
2700
2026

13185
8438
6750

15820
10547
8438

18985
12656
10126

5.5

Government Imperatives

5.5.1

Improved linkages

To achieve the key outcomes of the FER, commodity boards need to have the appropriate linkages at
all levels of Government, working in partnership with the provincial and district administrative
systems as well as in partnership with the private sector and non-government organisations.
Improved linkages between the national commodity boards and the provincial agriculture systems are
critical to ensuring effective and efficient services are being provided to the farmers and the key
functions that link these elements together are the training and extension services as highlighted in
Chapter 2.

5.5.2

Improved performance

The improved level of performance by commodity boards will underpin the achievement of the FER
key outcomes. In order to address the performance issues of commodity boards, there needs to be a
substantial change in the performance mind-set of some of the commodity boards. A new funding and
governance model, as described in Chapter 4, is required to provide the boards with necessary
incentives to initiate the changes required. In making adjustments to the new funding and governance
structure, the boards might find it helpful to initiate internal institutional and capability needs
assessments, as well as external demand assessments, to identify gaps in performance and to develop
the appropriate mechanisms to drive improvements.

Moreover, assessment of best practices from other organisations within the agriculture sector, both
domestically and internationally, needs to be made and used as benchmark and models for the
commodity boards within PNG, using a new National Agriculture Plan framework, MTDP and PNGDSP
as roadmaps for the sectors development.

The change in the performance perspectives must include innovation in agriculture. The commodity
boards with new directions and their own research and development functions are in a position to be
able to identify and bring into the country new innovative technologies for developing new or
improving the quality of existing commodity products through the existing research establishments to
meet current and future customer and stakeholder demands and expectations.

5.5.3

Improved governance and accountability

As an integral part of the boards governance and accountability structures, including policy
frameworks, effective leadership and management behaviour modelling are required by CEOs to
harness and engage organisational commitment to improve service delivery. Effective performance
management systems should be introduced to guide the staff appraisals with the aim of improving
performance of staff and, thus, commodity boards.

5.5.4

Optimised management structures

It is a widely accepted management principle that flatter or leaner management structures enable
more effective service delivery. Such structures allow the CEO to be in close contact with operational
activities. This arrangement can work well if individual functional areas are given the flexibility to

[106]

operate as autonomous work groups or units. The design also enhances individual accountability and
development of management capability. However, flat management structures require CEOs to have
highly developed management talents in order to coordinate different autonomous work units. The
implications of this approach will be that existing or new CEOs to be recruited need to participate in
short term leadership and strategic management workshops being offered by international leadership
and management training providers.

5.5.5

Basic infrastructure in rural areas

It is important to point out that delivery of agriculture services to farmers is also dependent on the
availability and quality of transport (land and sea) and communication infrastructure in rural areas in
PNG. While it is not part of this FER to discuss the effect of infrastructure on service delivery, its
impact on services provided by commodity boards must be highlighted because these services have
important implications for the productivity and income-earning capacity of farmers. In the light of this,
it is suggested that a separate study be undertaken to determine the level of economic returns
obtainable from improvement of basic transport and communication infrastructure used for
marketing commodity products in rural areas.

5.6

Conclusions

The main findings of this chapter are as follows:

(a)

(b)
(c)
(d)
(e)
(f)

Some commodity boards do not have permanently appointed boards or competent CEOs
to provide leadership direction. This has resulted in a number of related issues (e.g.
morale and motivation problems) affecting the performance of the organisations.

Organisational culture in some commodity boards is not conducive for effective service
delivery as highlighted by stakeholder feedback.
Performance management systems are either non-existent or not fully utilized in the
commodity boards.

Existing management structures in most commodity boards seem sound, but boards need
to be resourced appropriately to improve performance.
Management and organisational capability of commodity boards are not adequate to
achieve the proposed key outcomes for the agricultural sector.
The level of service delivery by the commodity boards is adversely affected by funding and
human resource constraints. In addition, poor transport and communication
infrastructure also impact on agriculture service delivery to rural areas.

[107]

The main organisational proposals arising from the chapter are:

(a)

CEOs should be appointed on merit and provided with appropriate tenure.

(c)

Robust performance management systems should be developed with direct linkages to

service delivery outcomes of the commodity boards.

(b)

(d)
(e)
(f)

(g)
(h)

Consideration should be given to whether outsourcing some internal support functions,

such as human resources management and IT, to external service providers would enable
such services to be provided at lower cost and assist the boards to focus their efforts on
their core mandates, i.e. regulation, marketing and R&D, extension, etc. The outsourcing of
some of the support functions could be done through dedicated service organisations
based on special service level agreements (SLA).

A model whereby each commodity board has its own internal research and development,
and extension services is the best option available. This is similar to the current CIC
organisational structure.

Greater efforts should be made to identify management talent and develop appropriate
skills.

The skills of technical (scientists and socio-economists) officers should be further

developed to enable them to meet increased responsibilities under the new organisational
arrangements proposed for the commodity boards to work directly with provincial and
district agriculture officers.

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.

Subject to financial resources capacity, each commodity board should undertake

independent remuneration reviews on a regular basis, with the aim of attracting and
retaining the best talent, as well as rewarding high performance.

[108]

CHAPTER 6: LEGAL ISSUES AND IMPLICATIONS

6.1

Introduction

Author: Joel Alu

The agriculture sector has implementing agencies with duplication of roles and functions leading to
inefficiencies in delivery of extension services in the provinces and districts. There is also a lack of a
sector voice and shared vision to influence government planning and budgeting processes. The
National DAL as the lead agency of the sector has not played its leadership role effectively in
coordinating the sector to be an important contributor to the overall economic growth of PNG over the
last two decades. This chapter makes an attempt identifying the underlying factors affecting the
leadership role of DAL in enhancing the commodity boards and agencies and provincial agencies to be
productive partners with smallholders and other private sector players in fostering economic
development in the provinces and districts from a legal perspective.
This chapter addresses the following issues:
legal framework for agriculture,
legal status of commodity boards and agencies,
requirements for merging, abolishing and creating of entities,
commodity marketing regulations, and
improved coordination of agriculture.

6.2

Legal Framework for Agriculture

6.2.1 Laws under the ministry of agriculture and livestock

The Minister for Agriculture and Livestock is responsible for administering the following Acts: Animals
Act 1952, Animals Regulation 1967, Rubber Act Ch. 222 (1953), Rubber Regulation 1954, Animal
Disease and Control Act 1952, Animal Disease and Control Regulation 1955, Quarantine Act 1953,
Quarantine Regulation 1956, Slaughtering Act 1964, Slaughtering Regulation 1965, Veterinary
Surgeons Act 1966, Veterinary Surgeons Regulation 1967, Cocoa Act Ch. 388 (1981), Cocoa Regulation
1982, Spice Industry Act 1989, Coffee Industry Corporation (Statutory Functions and Powers) (CIC)
Act 1991, Oil Palm Industry Corporation (OPIC) Act 1992, National Agricultural Research Institute
(NARI) Act 1996, National Agriculture Quarantine and Inspection Authority (NAQIA) Act 1997 and
Kokonas Indastri Koporesen (KIK) Act 2002, and the National Development Bank Act 2007.

In terms of agriculture and livestock production, the statutory regulatory powers of the State are
vested in the commodity boards by Parliament through various legislations. These powers include the
control and regulation of production, processing and quality control, inspection and licensing,
marketing and export of commodities. The boards with these powers include: Cocoa Board (CB), CIC
Board, KIK Board, Rubber Board, and Spice Industry Board (SIB). There are several other entities
mandated by legislation to carry out specific functions: the NARI conducts research on food crops and
small livestock; the NAQIA is responsible for quarantine matters and the OPIC has the responsibility
for providing extension services for smallholders in the oil palm industry. Livestock Development
Corporation (LDC) is incorporated under the Companies Act 1997 and has no regulatory powers.

[109]

The most recent commodity board legislation passed by Parliament was the KIK Act 2002, but the
Koporesen still operates under the Interim Board provisions because of practical difficulties in
forming a full board as stipulated in Section 6 of its Act. Unlike the other commodity Acts the Rubber
Act 1953 plays no significant role in regulating the industry; this commodity was the only one left with
DAL after responsibility for control and regulation of other commodities were transferred to the
various incorporated commodity boards. It has no administrative structure to enable it to perform any
State functions. The only power that Rubber Board has is inspection and grading of cup lump rubber
for export. 108
It is apparent that twelve (12) of the above legislations were developed during the colonial period and
these need to be reviewed and updated to make them relevant for regulating the agriculture sector
today. Moreover, all the other legislations developed since independence need to be updated because
agriculture management practices and technologies have changed so much in the last two decades that
the current regulations (e.g. quality standards) being enforced by the commodity boards may not meet
the quality requirements of domestic and export markets.

6.2.2 Role of Department of Agriculture and Livestock

The weakness in agricultural policy formulation and direction at government level can be attributed
partly to the aging legislations and the inability of the Department of Agriculture and Livestock (DAL)
to provide necessary leadership. In order to provide the leadership that has been lacking, DAL must
be given a legislative mandate to initiate action to rectify any chronic lapses in performance of
commodity boards and provincial agencies responsible for delivery of services to farmers.
The DAL has no control mechanisms to influence how the commodity boards exercise the roles and
responsibilities mandated by their various legislations. The Secretary is an ex-officio member of the
boards, but this membership provides little influence over these statutory agencies. The Secretarys
membership only gives him one voting right on matters arising at board meetings. In effect, DAL has
been legislated out of the commodity boards in so far as providing the strategic leadership is concern.
It is apparent that DAL therefore does not have the mechanism to ensure that the boards remain
accountable to government. For instance, in March each year the commodity boards are required to
furnish reports for presentation to Parliament, but they have no responsibility or are not duty bound
under their respective Acts to submit their reports to the Secretary of DAL, or comply with any
directives issued by the DAL Secretary.

The reforms of the 1980s 109 in the agriculture sector left DAL with no vested statutory functions and
powers comparable to those of its sister agencies or departments such as the Education Department
(Education Act 1983), Department of Justice and Attorney General, the Department of Health (National
Health Administration Act 1997). It should be pointed out that the Department of Environment and
Conservation, National Fisheries Authority and National Forestry Authority were once divisions of the
Department of Agriculture, Stock and Fisheries (now DAL). The department and agencies are now
108

Refer to Sections 4, 5 and 6 of the Rubber Act 1953.

These reforms resulted in the corporatization of functions of DAL in the area of export crops and livestock commencing
with cocoa (1981), livestock (1982), spice (1989), coffee (1991), oil palm (1992), agriculture research on food crops and
small livestock (1996) and quarantine (1997). Coconut industry was corporatized in 1954 as the Copra Marketing Board and
the industry legislation was updated in 1983 as Copra Marketing Board Act 1983.
109

[110]

vested with statutory powers, legally defined roles, and clearly established command and control
mechanisms.

The DAL, however, lacks similar functions and due to legal restraint the Secretary of DAL cannot
perform certain roles that his colleagues perform. As a result, DAL cannot perform its intended role in
coordinating agricultural policy development and implementation.
The DAL is established as part of the general administrative structure under the Public Service
Management (PSM) Act. While some Departments have statutory functions and powers separate from
the Department of Personnel Management (DPM), DAL has no such luxury. Though the majority of
administrative functions of DAL are still exercised by DPM, Departmental Heads have recently been
given certain powers, such as recruitment, discipline, training through the devolution of powers from
the Secretary of DPM under the revised PSM Act. Reforms proposed in the current FER should elevate
DAL to its proper legal status and enable it to assume the leadership role of the sector that has been
lacking over the last 10 to 15 years.

In order for DAL to play the sector leadership role, it is proposed that the Secretary of DAL, through
the reforms, in executing his responsibility under Section 24 subsection (1) of the Public Services
Management Act 1995, and subject to any directives by the Government through the Minister, should
be:

responsible to the Minister and Government to ensure that the commodity boards
perform their functions effectively and efficiently;
responsible for advising the Minister on matters relating to development of policies,
planning, and programing for various commodity boards;
advise the Minister on national policies and plans affecting the agriculture sector, and
where appropriate confer with appropriate state agencies address the policy implications;
and
responsible to the Minister and Government for coordinating and monitoring the
implementation of agricultural policy reforms (including those arising from this FER) by
commodity boards and agencies and provincial agents in the districts.

It is proposed that the commodity boards in turn, will be legally responsible to the Secretary of DAL,
to:

submit their plans and programs/projects for development purposes to ensure

consistency with medium and long term development strategies and development
priorities of the government;
submit all recurrent and development funding estimates as part of the annual budget
estimates of agriculture sector as required;
provide on request, socio-economic information required for sector development strategy
formulation, monitoring and evaluation.
submit annual work plans and programs for purposes of monitoring and evaluation of the
performances of the commodity boards and agencies ;
advise the Secretary of new strategic plans and development programs; and
approach the Minister through the Secretary of DAL and avoid the current practice of
seeking direct access to the Minister, unless requested by the Minister.

[111]

The above proposed roles of National DAL should be incorporated into the proposed National
Agriculture Administration Act, analogous to that of the National Health Administration Act 1997,
which should enable National DAL to provide the leadership and the linkages to other sector
agencies that are currently missing in the sector.

6.2.3

Role of commodity boards and agencies

6.2.3.1 Functions of commodity boards

As discussed in Chapter 2, the key functions performed by commodity boards and agencies in recent
years are: regulation, agricultural research, extension, marketing and quality control, and collection of
levy revenue to fund provision of such services. Only CIC Board performs all those functions. For the
other organisations, these functions are performed by their subsidiary organisations

The boards are sometimes perceived to provide little, if any, benefit to farmers. For instance, cocoa
farmers have raised concerns that the Cocoa Board and its officers are not providing extension
services. 110 The reasons are obvious. The extension functions for cocoa were performed by Cocoa and
Coconut Extension Agency (CCEA) but when CCEA was merged with Cocoa and Coconut Research
Institute (CCRI) to become the Cocoa Coconut Institute (CCI), incorporated as a company in August
2003, has been performing the extension services. 111 The establishment of CCI was to give effect to the
intention of legislation, for research and extension for cocoa and coconut industries. However, in
recent memory the Institute has been under constant threat from politics and in-house staff threats for
trivial and irrelevant matters.

Cocoa Board out of frustration commenced utilizing its staff and resources in major regional cocoa
producing areas to provide extension services instead of accessing extension services from CCI for its
cocoa producers. This approach by Cocoa Board to be responsible for extension may be timely as the
views by the sector stakeholders indicate that it would be better to have commodity boards undertake
research and extension similar to the corporatized CIC model. However, under this model clear
transparent governance and management structures must be embedded in creative legislation to
ensure that funds are disbursed in accordance to the approved budget needs of divisions responsible
for administration, industry affairs and research and development in the boards.

6.2.3.2

Governance issues

A report presented by the Food and Agriculture Organization (FAO) in 2000 highlighted the following
policies that constrained the governance of the commodity boards:

110
111

lack of transparency and political interference in the appointment of Board Directors and CEO,
ineffective government representation on the Boards,
political interference in the operations of the boards,
board members exercising powers they dont have,
poor accountability, and

These concerns were raised by stakeholders in Kokopo.

PNG CCI was incorporated as a company in August 2003.

[112]

inefficient control of levies, fees, salaries, and other terms and conditions for management and
board.

The findings by the FAO regarding the need to improve governance were not surprising, as this has
been an ongoing issue until Parliament passed the Regulatory Statutory (Appointment to Certain
Officers) Act (RSA Act) 2004. Prior to the RSA Act, the ministers had powers to appoint directors and
the CEO of the commodity boards. There was no transparency in this appointment process.
The RSA Act calls for due diligence and merit based appointments and vests the powers of
appointment with the NEC. The Act calls for the Public Service Commission (PSC) to adopt and apply
appropriate matrix so that all qualified and experienced candidates are appointed to the Boards.

The FER team during its visits to provinces to consult with commodity boards, had opportunities in
meeting with commodity growers or their representatives such as PNG Growers Association. The main
concerns raised are summarized in the following points:

Boards and CEOs should be appointed without delay and political interference.
Competent, qualified board members must be appointed, taking into account gender and
farmer representations.
Nomination processes under the various enabling agriculture legislations should be revisited
with the view to making amendments.
Appointments under the RSA Act were intended to be fair, transparent and merit based.
However, the noble intention of the Act has been eroded because of political interference in the
process, causing serious delays in appointments to boards.
Commodity boards are busy with administrative issues rather than assisting providing
meaningful extension support to farmers. Some boards have duplicating roles.
Extension services are non-existent.
Plantation sector to be revived to create skilled and semiskilled employment and generate
revenue112.
Government must seriously address infrastructure and lack of market access, i.e., inability of
farmers to export their produce directly to their market of choice. 113

Whilst the intention of Parliament under the RSA Act is both noble and workable, the implementation
of the Act has been disappointing. Delays in implementing recommendations of the Public Service
Commission by the NEC continue to be a concern. 114This Act must be amended to accommodate real
practical issues in the appointment process.
6.2.3.3 Qualifications and terms of appointments

The RSA Act prescribes the process and manner of appointment of CEOs and directors but it does not
prescribe the terms of appointment of the directors and CEOs. The specific terms of appointments are
It was also suggested that as a condition for renewing licenses, exporters should at least own a plantation of not less than
10,000 hectares. Joint Venture arrangements were recommended where both parties (one a local farmer or an exporter) are
able to meet conditions set out under a license.
112

113
114

This was a farmers concern at the Kokopo meeting.

The RSA Act calls for appointment on merit. This is coordinated and facilitated by the PSC.

[113]

provided for under each of the commodity board Acts and the enabling legislations prescribe the term
of appointments of directors and CEOs. For instance, Section 18 of the KIK Act 2002 stipulates that the
term of appointment of the Managing Director shall be in accordance with his contract of employment
and subject to the Salaries and Conditions Monitoring Committee Act 1988. Most of the legislations
have similar provisions, and the typical contract of employment is for four years.
For most commodity boards, the term of appointment of directors is for three years, but there is some
variation from board to board (see Table 6.1).

The process and manner of appointment of board chairmen and deputies, and their terms of
appointment, are prescribed by legislation. For most boards, the appointment of a chairman is by the
members. However, the chairman of the Cocoa Board is now appointed through the RSA Act process.
(The Cocoa Board Act previously provided for the chairman to be appointed by the Minister for a term
of three years)
Table 6.1:

Terms and manner of appointment of directors, chairmen and CEOs of

commodity boards and agencies

Board

Number of
Directors

CIC
Cocoa Board
FPDA
KIK 116
LDC
NAQIA
NARI
OPIC

Twelve (12)
Nine (9)
Seven (7)
Eleven (11)
Five (5)
Nine (9)
Nine (9)
Seven (7)

Rubber
Spice

6.3

Five (5)
Seven (7)

Terms of Appointment
Director Chairman
CEO 115
3 years
3 years
4 years
3 years
3 years
4 years
3 years
3 years
4 years
2 years
2 years
4 years
4 years
3 years
3 years
4 years
3 years
3 years
4 years
3 years
3 years
4 years
3 years
3 years

3 years
3 years

4 years
3 years

Manner of Appointment
Directors
Chairman
CEO
NEC
Board
NEC
NEC
NEC
NEC
Shareholder Board
Board
Minister
Minister
NEC
Shareholder Shareholder Shareholder
NEC
Minister
NEC
NEC
Minister
NEC
NEC
Board
NEC
Minister
NEC

Legal Status of Commodity Boards and Agencies

Minister
Minister

DAL 117
NEC

The National Agriculture Research Institute (NARI) branched out in 1996 from the former research
branch of DAL. The Cocoa Coconut Institute (CCI) was established under the Companies Act 1997 after
CCRI and CCEA were merged in August of 2003. Coffee Research Institute was established under the
CIC Act 1992 for coffee research.
Livestock Development Corporation (LDC), Fresh Produce Development Agency (FPDA) and Cocoa
Coconut Institute (CCI) were incorporated under the companies Act and are limited by shareholding.

115

A CEO or a Managing Director is normally appointed under contract of employment approved by the NEC.

KIK Board currently operates under an Interim Board provisions comprising of 3 ex officio directors and 6 non ex officio
directors.

116

The Rubber Act does not have provisions for the appointment of a CEO. The Rubber Act is currently administered by
National DAL and a CEO is appointed by the Minister.

117

[114]

These companies were intended to function as independent not-for-profit bodies. However, a

declaration was made for CCI to come under the RSA Act for the purposes of appointing its CEO and
Directors. This change resulted in more political interference in the appointment of the CEO until 2012
when the NEC appointed the first CEO in line with the RSA Act requirements. LDC and FPDA are the
only institutions that have the independent autonomous status through shareholding and exist under
the Companies Act. Their roles and functions are prescribed under their respective company
constitutions.

Although issues of shareholding and directorship have not been raised at any forum (mainly due to
ignorance) records with IPA 118 show the following: LDC Shareholder is the Minister for Agriculture
and Livestock in Trust for the State; FPDA Shareholders are a former Secretary for Finance and former
Secretary for Agriculture and Livestock; CCI Shareholders are Cocoa Board of PNG and Kokonas
Indastri Koporesen; CIC Shareholders are IPBC, Plantations and Processors Association, Block Holder
Association, WHP Small holder Association, EHP Small Holder Association, Momase Small holder
Association, Southern Smallholder Association, Other Smallholder Associations, PNG Coffee Exporter
Council. The Palm Oil Research Association and coffee research institute were established as Business
names not limited by shares. However, the coffee institute has since changed its name from Coffee
Research Institute to Research and Grower Division of CIC.
Though FPDA has autonomous status it is still a company incorporated under the companies act and is
responsible to the shareholders. It activities are concentrated in the Highlands region but progress
has been made to spread FPDA activities to other parts of the country by establishing regional offices
in Lae, Kokopo and Port Moresby. There is huge potential in this subsector and the State must ensure
that this industry is regulated so that its functions and powers are mandated by law and legally
sanctioned. Through the rationalization exercise FPDA should be made a Statutory Corporation and
take on board other minor crops including spices.

6.4

Requirements for Merging, Abolishing and Creating of Entities

6.4.1

Status of incorporated companies

The current shareholders of FPDA are, the former Secretaries of Finance and Agriculture and
Livestock for and on behalf of the Department of Finance and Treasury and Agriculture and Livestock
respectively. According to the latest information available from IPA, as of the 18th of November 2013,
the shareholders are residents of Mt Hagen WHP. This information at IPA demonstrates the lack of
updating company records and the current information is therefore flawed and the company records
for FPDA are defective. The same flaws were detected with the CIC records with their Directorship and
shareholding.
These flaws reflect the seriousness and fundamental legal issues in the shareholding of FPDA and CIC.
For FPDA the shareholders are no longer the Secretaries of the Departments they represented at the
time of incorporation of the company. They ceased to be Secretaries years back and in fact the former
The PNG IPA company records as of the 18th of November 2013 show that no changes were made for shareholding and
directorship.

118

[115]

Secretary of Agriculture and Livestock has since passed on. FPDA management seems to lack the
willingness to address the statutory obligation of ensuring that their companys records are up to date.

CIC has the same problem, with directors and shareholders no longer with DAL, or the sector, or not
actively involved in the coffee industry, but continue to be directors and shareholders. CCIs
shareholdings are in order except for the directorship. 119 The Minister for Agriculture and Livestock is
the sole shareholder for LDC since the 30th of August 2013. The Directors terms have expired and the
shareholder under the company constitution and the Companies Act will appoint new directors
subject to the recommendations of this FER report.

6.4.2

Status of shareholders of commodity boards and agencies under the Companies

Act

The following agencies have shareholding issues that need to be addressed urgently:
(a)

(b)

(c)

6.4.3

Fresh Produce Development Agency: The Directors have failed to address the issue of
shareholding at their meetings. Although the company can legally operate under section
16 of the Companies Act, the requirement concerning shareholding, under sections 40 and
73 must be addressed adequately. It is not appropriate for the shares to continue to be
held by a person who is no longer the Secretary for Finance. By law, however, since there
is no other shareholder, he is the owner of the company.

Coffee Industry Corporation: IPBC is one of the shareholders of the company and it is
interesting to note that neither DAL nor its Secretary is one of the shareholders when the
Minister responsible for CIC is the DAL Minister. This confusion is created due to the fact
that CIC has dual operational statues under the CIC Act 1992 and the Companies Act 1997.
This dual operation can be addressed by dissolving CIC Statues under the Companies Act
and for CIC to operate under the CIC Act 1992.
PNG Cocoa Coconut Institute: The shareholding of this institute is shared between Cocoa
Board and KIK on a 50% basis. The shares will automatically transfer to these boards if
CCI is dissolved according to their current legislations.

Implications of legislative changes for commodity boards and agencies

The agriculture policy and economic rationale have been provided in chapters 2 and 4 for rationalising
the commodity boards and agencies. The rationalisation of these organisations will consist of merging
certain boards and agencies or abolishing certain boards and agencies or amending the functions and
powers of these entities. The overall objective of rationalising the commodity boards and agencies is to
improve their performances in terms of leadership direction, governance and accountability. The
proposed rationalisation process will require major legislative changes to establish the new entities.

119

CCI shareholders are Kokonas Indastri Koporesen (KIK) and the Cocoa Board of Papua New Guinea.

[116]

Table 6.2 outlines the legislative changes that need to be undertaken to in order to rationalise the
commodity boards and agencies.
Table 6.2:

Required Legislative Changes for the Proposed Commodity Boards and Agencies

Commodity Entity

Required Legislative Changes

Cocoa Board (CB)

CB Act will be amended to include provisions for:

research and development and extension mandate;
marketing provisions made to promote smallholder
cooperative marketing; and
CB will also become a processor and an exporter to
underwrite the marketing arrangements for smallholder
marketing SMEs.

Coconut Development Board (CDB)

KIK Act will be amended to include provisions for:

research and development and extension mandate;
marketing provisions made to promote smallholder
cooperative marketing; and
KIK will also become a processor and an exporter to
underwrite the marketing arrangements for the
smallholder marketing SMEs.

Oil Palm Industry Board (OPIB)

Food and Grain Board (FGB)

Livestock Development Board (LDB)

This board will replace LDC and it will have regulatory, research,
marketing and extension powers which LDC lacks. The new
legislation to be drafted will account for regulation
(compliance), smallholder marketing arrangements and
extension in the provinces and districts.

Rubber Board (RB)

Coffee Industry Board (CIB)

The word corporation in CIC be replaced by the word board.

The amended Act of CIB makes the board to become a processor
and an exporter to underwrite the marketing arrangements for
smallholder marketing SMEs.

OPIC Act will be amended to include provisions for:

the control and regulation of the oil palm industry; and
facilitating the change from the current oil palm extension
model without a R&D base, to negotiate for the
incorporation of R&D functions undertaken by OPRA.
The details of the two options to be considered for the merger of
NARI with FPDA are provided in Chapter 4 (Section 4.8, Table
4.7).

The details of the options to be considered for reforming the

board are provided in Chapter 4 (Section 4.8, Table 4.7).

[117]

Agriculture Investment Corporation

(AIC)

CIC has dual operational statues under the CIC Act 1992 and the
Companies Act 1997. This dual operation can be addressed by
dissolving CIC Statues under the Companies Act and for CIC to
operate under the CIC Act 1992.

AIC to be established under the Ministry of Agriculture and

Livestock, a model that is similar to the Independent Public
Business Corporation (IPBC) and the State Owned Enterprises
(SOEs). All the existing and/or rationalized commodity boards
will operate under the AIC and will initially draw most of their
funding requirements for capitalization and agribusiness (e.g.
SMEs) development and innovation from the National
Government via the AIC.

An AIC funding and/or investment arrangements is necessary

to: (a) ensures consistency and predictability of implementing
government and sector policies, and (b) promotes the
commercialisation of viable research-induced agriculture
innovations.
A new AIC Act will be developed and approved by NEC to ensure
that funding arrangements are embedded in an appropriate
legislative framework.

Only assets should be inherited by the new commodity board entities to ensure that they will have a
new lease of life with lean organizational structures with well-defined functions and powers to
effectively perform their roles in delivering agriculture services to smallholders in rural areas to
improve their income generation potentials through production, processing and export of commodity
products. A case should be made to the Government that liabilities from entities that are being merged
or abolished should be settled through the annual budget process.
It is important that appropriate legal instruments will be prepared to ensure smooth transition of
functions and powers to the new entities. The exercise is expected to reduce overhead costs and the
savings diverted to relevant research and development programs and market excess. It is also
expected that the lean and well equipped entities will effectively deliver agriculture services to
smallholder farmers in rural areas in accordance with the national goals and aspirations.

Increased budgetary appropriation is required in the first year of implementation of rationalisation of

the commodity boards and agencies to settle retrenchment or lay off payouts. The National DAL and
the commodity boards and agencies must ensure that appropriate budget estimates for staff
retrenchments must be included the in 2015 National Budget submissions.

[118]

6.5

Commodity Marketing Regulations

6.5.1

Commodity licencing requirements

6.5.1.1 Commodity boards as sole traders in agriculture commodity products

According to the current commodity board legislations, no person except the commodity boards have
the right to buy, process and export agriculture commodity products in Papua New Guinea (PNG). The
commodity boards are empowered by their legislations to issue licences to industry clients who have
the capacity to buy, process and export commodity products in PNG. A buyer, processor and exporter
licence can be terminated at any time by the commodity boards if requirements of the respective
board legislations are not adhered to.

Reports on progressive achievements of any conditions endorsed by the commodity boards must be
submitted for annual review. All licences are renewed each calendar year. It is important to ensure
that licences are not transferable to any other party.

6.5.1.2 Credit worthiness and financial standing

Applicants and existing registered buyers must demonstrate their financial ability through evidence
such as overdraft facilities or cash at the bank for purpose of buying commodity products. This must
be verified by a letter from a bank together with copies of bank statements for the preceding 12
months.
The commodity boards determine their own minimum financial requirements per annum for
commodity products traders.

Any credit arrangements with overseas companies and partners must be checked and confirmed by
the commodity boards. The companies must demonstrate that this are strictly credit arrangements
and provide all the necessary supporting documents to the commodity boards.
6.5.1.3 Corporate details

Applicants should be wholly nationally-owned PNG registered companies with the Investment
Promotion Authority (IPA).

A co-operative arrangement is allowable with the endorsement from the Registrar of Co-operative
Societies (Ministry of Trade, Commerce & Industry).

Corporate details for small scale commercial entities (annual turnover of less than K200,000) that
must be submitted by all applicants are:

List of Shareholders/Copy of share register.

List of Board of Directors.

A certified financial statement for the last three years from a registered accountant.

Copy of Certificate of Registration.

Corporate details for large scale commercial entities (annual turnover of more than K200,000) that
must be submitted by all applicants are:

List of shareholders/Copy of share register.

List of Board of Directors.

[119]

Audited Accounts for the last three years or a certified financial statement from a
registered accountant.
Copy of Certificate of Registration.
Registered buyers must advise KIK of any changes in shareholding.

Applicants must state clearly the physical location of their trading premises and postal address,
telephone and facsimile numbers, and email address.
6.5.1.4 Management expertise

Applicants for commodity trading licences must demonstrate expertise in the specific commodity
products trading, quality control and general marketing of the products. The management and trading
credentials of the individual (s) must be included in the submission.
The management and trading must be duly registered under the Companies Act of PNG and is duly
certified to carry out business in PNG under the Investment Promotion Act.

The commodity boards may accept management agreements with overseas partners but any such
arrangements must be fully documented and subject to the approval the commodity board.

6.5.1.5 Target performance

The commodity boards determine the minimum volumes to be procured for various commodity
products for trading per annum.
Commodity licenced traders not meeting the minimum volume required will have the licenses
reviewed and be required to show cause why its license should not be cancelled.
6.5.1.6 Warehouse or storage facilities

Each buyer must have its own warehouse or storage shed, own weighing equipment (e.g. electronic
weigh bridge or flat form scale or hanging scale); sample knife; bags to collect sample; weight note
dockets and tally sheets; and bagging and marketing equipment.

The commodity boards will inspect all facilities used for storing commodity products for processing
and exporting.
The buyers must undertake to purchase from registered provinces only. Any buyer in breach of this
condition will have its licence reviewed.

6.5.1.7 Quality control

Traders must have technical knowledge on the quality requirements (e.g. field production, processing
or value addition and marketing) for the specific commodity product they will be dealing with.

The commodity boards will require traders to demonstrate that they have a sound understanding of
quality requirements for the various commodity products they wish to procure from the producers in
the provinces or districts.

[120]

6.5.1.8 Failure to trade

Any licensed commodity products trader that fails to trade in any one year will have their license
reviewed and will be required to show cause why its license should be renewed when license renewal
is sought.
6.5.1.9 Revocations of licences and appeals

The commodity boards can revoke a traders licence, if the trader is proven to have supplied false or
incomplete information or inaccurate or misleading information when an application was first lodged.

Holders of commodity product traders licences are required to furnish six monthly reports of their
trading activities to the respective commodity boards. The commodity boards can revoke a traders
license, if the trader fails to submit a six monthly report.

A person aggrieved by a decision of a commodity board to refuse or cancel a licence or registration

may appeal to the commodity boards Appeal Committee for a review of the boards decision as
stipulated in various legislations within a specified time period after notification by commodity board.

6.5.2

Proposed changes to marketing regulations

6.5.2.1 Current marketing arrangements

A review of the current commodity board legislations show that no legal provisions were made to
encourage smallholders to participate in the trading of the commodity products they produce other
than just selling the raw materials.

The current commodity board legislations, most of which were developed during the colonial period
and amended over the years have effectively allowed the smallholder village based farmers to be
trapped into becoming cheap labourers to produce commodity products for the licenced and mostly
foreign owned trading companies to buy, process and export the raw or processed products. For
example, a person can be issued a licence to buy, process and export coffee as long as the person has
the capacity to buy 300,000 bags of coffee. This licensing policy has made it impossible for
smallholders to participate as small and medium enterprise (SME) traders in the coffee industry.

It has been a concern that the commodity industries under the current marketing arrangements have
not stimulated an increase in productivity and production levels of commodity products in the last
three decades. The smallholders continue to produce the commodity products when the commodity
prices are above a certain economic threshold. Once the prices decline below the threshold then the
smallholders abandon farming and producing of the low priced commodity crops and seek other
alternative income generating actives such as selling of cooked or garden foods in local markets
(Kaiulo and Manoka 2010). This type of farming culture has been developed as a result of the
following factors:
(a)

The current commodity crops (e.g. coffee, cocoa and coconut) farmed by the smallholders
are perennial species so it is easy to abandon these crops when the global prices are down.
The smallholders are used to harvesting what is available in terms of coffee berries or
cocoa pods on the trees or coconuts falling from palms when prices increase again. Curry

[121]

(b)
(c)

et al (2007) described this type of farming as foraging for whatever they can harvest from
low yielding senile trees just to earn a small income.

The smallholders have shown that they are able to survive the periods of low global
commodity prices by engaging in other livelihood sustenance activities (e.g. selling of
garden or cooked foods or harvesting other cash crops for sale).

Smallholders do not normally practice intercropping with their cash crops. Even though
the local tall coconuts a suitable for intercropping, the older coconut stands were planted
to close together

DAL or commodity boards have never really understood the underlying reasons for the low
productivity and production for smallholder farms. Although several major studies have been
conducted to identify the reasons for the low production performance of smallholder farms in PNG
(e.g. Omuru et al, 2001; Curry et al, 2007; Curry et al, 2012), the findings have never been used to
formulate policies by the respective commodity boards and agencies and DAL to address the low
productivity and production by smallholders. This neglect in appropriate policy formulation has been
a major obstacle to advancement of smallholders.

It is obvious that no incentives have been provided to smallholders for them to consider farming of
commodity crops as a serious business venture. It is proposed that if smallholders are given the
opportunity to market their cash crops than they may consider seriously to develop their commodity
crop farming as small- to medium agriculture business ventures with assistance from the commodity
boards. This concept is further developed in the next section below.
6.5.2.1 Smallholders to be producers and traders

Currently smallholders produce about 80% or more of the major commodity products for exports (e.g.
coffee, cocoa and copra). This is in contrast to oil palm industry where smallholders produce 35% of
the fresh fruit bunches for the milling companies. Nonetheless, smallholders cultivate and produce
commodity crops on their own land on a family unit basis. This production approach minimises the
development of potential conflicts between family units if they were supposed to produce commodity
products on a clan or village basis.

It is proposed that smallholders should not only produce the commodity products but should be
involved in marketing their products. The smallholders can organise themselves as SMEs and these
can be in the form of marketing cooperatives or business name entities to market their commodity
products. In order to enable this approach to work certain changes have to be made to the current
commodity marketing regulations. The most important ones are highlighted below:
(a)

(b)

Smallholders to be encouraged to form marketing cooperatives in order to be eligible for

buying, processing and exporting licences.
The targeted volume for exporting by smallholder marketing cooperatives should be
generated from family based commodity production units who will pool their produce to
make the required volume to export their products.

[122]

(c)

(d)

All fermentaries and dryers for processing commodity products to be registered and
monitored by the commodity boards.
All downstream processing facilities for commodity products to be registered and hazard
analytical critical control point (HACCP) 120 protocols to be developed in line with
international best practice standards.

6.5.2.2 Proposed changes to commodity board functions

The legislations of existing commodity boards will have to be revised and/or amended and the new
legislations of new proposed boards will have to introduce new innovative marketing provisions for
smallholder farmers to establish cooperative marketing entities to be licenced by the boards.

The commodity boards will ensure that they recruit competent technical (scientists and socioeconomists) staff to facilitate the transfer of improved technologies or skills to farmers to improve the
quality of their commodity products for domestic and export markets. The technical staff from
commodity boards will work closely with provincial and district agriculture extension officers to help
train smallholder farmers in all essential aspects of producing commodity products.

It is also important that DAL and commodity boards work with financial institutions (e.g. banks and
micro finance organisations) to develop appropriate micro-finance products that will assist eligible
smallholder farmers to develop their commodity production and marketing business in rural areas.

The commodity boards will identify existing or new or developing niche markets for commodity
products produced by smallholder farmers. The commodity boards in collaboration will:
(a)

(b)

6.6

identify strategic office locations in Asia (e.g. Asia and Pacific Coconut Community office in
Jakarta), EU (e.g. PNG Foreign Affairs mission in Belgium) and Americas (e.g. PNG Foreign
Affairs mission in New York) where competent technical officers will be situated to
undertake the essential marketing and liaison functions for the commodity boards; and

post competent technical officers to these strategic overseas offices to promote and
market the PNG smallholder produced commodity products.

Improved Coordination of Agriculture

It is apparent from sections 6.2.1 and 6.2.2 of this report that despite agriculture having a central role
to play in ensuring sustainable economic development, current commodity legislations in the sector
are out dated and irrelevant, especially in relation to achieving the five Pillar 2 directional statements
for the agriculture sector as set down in the PNG Vision 2050 (PNG Vision 2050:6-7) and these are as
follows:
(a)
(b)
(c)

Establish two major economic projects in each of the 89 districts;

Expand the production volume of all major cash crops to enable downstream processing;
Provide two agriculture extension officers in each district;

Hazard analysis and critical control points or HACCP is a systematic preventive approach to food safety and
biological, chemical, and physical hazards in production processes that can cause the finished product to be unsafe, and
designs measurements to reduce these risks to a safe level. In this manner, HACCP is referred as the prevention of hazards
rather than finished product inspection. The HACCP system can be used at all stages of a food chain, from food
production and preparation processes including packaging, distribution, etc.
120

[123]

(d)
(e)

Improve the terms and conditions of employment of agricultural officers; and

Establish a unified agricultural plan by 2015.

In order for DAL to provide effective leadership in achieving the above Pillar 2 directional statements
for the agriculture sector, a new legislation needs to be drafted to specify the respective roles of DAL,
commodity boards and provincial agencies responsible for delivery of services to farmers.

In considering what kind of legislative structure might be appropriate, it is helpful to compare

different models that have been applied to state agencies and institutions with similar objectives,
development constraints and issues. The District Development Authority Bill 2013 121 and the National
Health Administration Act 1997 122 provide relevant examples of different approaches that can be
considered for the agriculture sector.

The District Development Authority Bill creates an Authority for the districts but it provides no
linkages between the national department, i.e. the Provincial Affairs Department, and the intended
District Authority. 123 By contrast, the National Health Administration Act does create a linkage
between the National Health Department and the provincial health boards and district health
management committees. This is achieved through the establishment of provincial health boards and
district health committees under the Act.
The National Health Administration Act provides linkages between national, provincial and local levels
by specifying that the functions and powers at the higher levels include the approval of national health
plans and health standards and implementation of the plans and monitoring of implementation at
lower levels. The Act manages to minimize duplication of roles and responsibilities as far as possible
by specifying the roles of the various organizations involved at the national department, provincial
and district administrators and public hospitals (Section 18).

The legislative framework of the National Health Administration Act may be a suitable model for
overall agriculture sector legislation. It is therefore proposed that a new legislation, to be known as the
National Agriculture Administration Act, be developed to address issues of coordination and service
delivery in the agriculture sector in the districts. The proposed Act should ensure that it accounts for
the needs of agriculture sector in the draft District Development Authority. The proposed legislation
should improve the overall coordination of the sector in the long term and should facilitate the
development of a unified national agriculture plan by 2015.

121

This bill in a draft form and yet to be passed by the Parliament as law.

The national Health Administration Act creates linkages between the national department, provincial department and the
district authorities.
122

The Government has prioritized rural development with substantial budget appropriations over the last couple of years,
but the implementation machinery is not adequately resourced and available at the district level. This calls for the immediate
passage of the District Authority Bill. This Bill is intended to address service delivery, however to date it is still in a draft form
and Parliament has yet to en-act it as law.
123

[124]

The proposed relationship between agencies to be embedded in the National Agriculture

Administration Act is shown in Chart 6.1. The chart depicts three main changes from the status quo:
(a)

(b)
(c)

6.7

First, the Agricultural Investment Corporation provides a funding and governance

structure for the commodity boards as described above.

Second, there are strong links between the commodity boards and districts to enable
improvements in delivery of extension services, for example through implementation of
the voucher system described above.
Third, there are strong links between the commodity boards and small to medium size
enterprises, based on fostering innovative projects that will help transform the traditional
agricultural sector.

Conclusion

The following key points have emerged from this chapter:

(a)

(b)

(c)

(d)

(e)

Most of the legislations under the Ministry of Agriculture and Livestock need to be
reviewed and updated to make them relevant to the needs of the various agriculture based
industries in PNG.

Commodity boards have no legal obligation to report to DAL as the lead agency. Hence DAL
has no direct responsibility for the management of the boards, except through the
Secretarys representation as Ex-officio Director on each of the commodity boards and
DALs involvement in budget preparation and submission. DAL must be mandated through
regulatory provisions to provide the leadership responsibility that has been lacking for the
last 15 to 20 years.

The performance of some commodity boards has been disappointing, and has fallen far
short of meeting the needs and aspirations of the people of PNG. This is partly attributable
to the fact that the current commodity legislations are out dated and not relevant within
political and socio-economic circumstances.

The most important reason for under-achievement arises from problems in management
of some boards, which can be linked to delays in appointing directors and CEOs. Such
delays have arisen from practical problems in implementing the noble provisions of the
RSA Act. This Act should be amended to address such problems.

Amalgamation of some commodity boards and agencies such as FPDA with NARI is to bring
together the research and extension functions on food and related crops under one entity
to improve service delivery to smallholders.

[125]

CHART 6.1: RELATIONAL FRAMEWORK FOR AGRICULTURE

NATIONAL EXECUTIVE COUNCIL

MINISTRY OF AGRICULTURE & LIVESTOCK (MAL)

ENABLING LEGISLATIONS
(a) Proposed National Agriculture
Administration Act
(b) Proposed Agriculture
Investment Corporation Act

NATIONAL DAL

AGRICULTURE INVESTMENT
CORPORATION

NDB

PROVINCES
Agriculture Development Committees
Secretariat - Provincial Agriculture
Divisions (PAD)

COMMODITY BOARDS
Coffee Industry Board, Cocoa
Board, Coconut Development
Board, Food and Grain Board,
Livestock Development Board,
Oil Palm Industry Board, Rubber
Development Board, NAQIA

VALUE CHAIN ACTORS

Commodity producers, traders,
processors & exporters
Domestic markets
Export markets

DISTRICTS
Agriculture Development Committees
Secretariat - District
Agriculture Divisions (DAD)

SMALL & MEDIUM

ENTERPRISES
Rural producers,
traders, processors
and exporters

FARMER GROUPS
Family Farming Units
Community Based Groups
Cooperatives

[126]

(f)

(g)
(h)
(i)

(j)
(k)

Abolishing of some boards and agencies and transferring their functions to the new entities
will reduce overhead costs in operating these boards over the long term. This is the case
made for the abolishment of CCI and transferring the cocoa and coconut research and
extension functions to Cocoa Board and KIK, respectively. This move brings together the
regulation and service delivery of cocoa and coconut R&D products to smallholder farmers
and should also cut the costs of operating three boards by the elimination of CCI Board. The
amalgamation of Cocoa Board and KIK has been considered to be inappropriate because of
technical reasons in producing, processing and marketing these two commodities.
Provision will need to be made for budgetary appropriations required to implement FER
rationalization proposals. In particular, government funding will be needed to settle debts of
affected boards and to make compensation payments to affected officers.
New innovative marketing regulations will be introduced to enable smallholder farmers to
be producers, processors and exporters of commodity products through the amended or
new legislations of proposed commodity boards and agencies.

A new legislation to be prepared for the establishment of the proposed Agriculture

Investment Corporation (AIC) to provide oversight to proposed funding arrangements of the
commodity boards and agencies. AIC to be chaired by the Secretary of DAL to ensure that
commodity boards and agencies implement Government or agriculture sector policies.

The proposed National Agriculture Administration (NAA) Act should be able to improve the
overall coordination between DAL, commodity boards and agencies and provincial agencies
in terms of delivery of agriculture services in the provinces and districts.
The proposed NAA Act should ensure that it accounts for the needs of agriculture sector in
the draft District Development Authority. The proposed legislation should improve the
overall coordination of the sector in the long term and should facilitate the development of a
unified national agriculture plan by 2015.

[127]

CHAPTER 7: THE WAY FORWARD FOR IMPLEMENTATION

7.1

Introduction

Author: Dr James V Kaiulo

The overall goal of the Functional and Expenditure Review (FER) of the agriculture commodity
boards and agencies is to provide realistic agriculture policy directions on how an overhaul of
commodity boards and other sector agencies can contribute to greater investment and higher
economic growth in the agricultural sector of PNG, with better opportunities for men and women
to participate in semi- or commercial agriculture based activities.

The objective of this chapter is to provide proposed courses of action for urgent consideration by
the Government to implement the FER recommendations for rationalising the commodity boards
and agencies and improving the coordination of the agriculture sector for improved service
delivery to agriculture smallholder farmers.

The reason for these policy initiatives to be addressed urgently is because the agriculture sector is
in crisis in terms of declining commodity prices, the unattractiveness of the sector to the young
generation, dilapidated transport infrastructure in rural areas, the demise of the estate subsector,
the law and order issues affecting the agriculture sector in general, lack of clear policy framework
in promoting and resourcing agriculture-based small and medium enterprises (SMEs) and export
industry, and the deprivation of the local population from active participation in the economy
through semi- or commercial agriculture business ventures.

7.2

Agricultural Policy Priorities

Twelve major policy areas have been identified that need to be addressed in the process of
rationalisation of the targeted commodity boards and agencies. Table 7.1 outlines appropriate
recommendations that have been made and proposed courses of action to implement them.
Table 7.1:

Recommendations and Proposed Courses of Action relating to Agricultural

Policy Priorities

Recommendations

Proposed Courses of Action

(1)

The Minister to appoint in 2014 a FER

Implementation and Advisory Unit of two or three
persons with appropriate experience and
competences to conduct an FER for DAL, and draft
the proposed National Agriculture Administration
(NAA) Act to define the responsibilities of National
DAL, commodity boards and agencies and
provinces/districts in relation to its role in directing
and
coordinating
policy
formulation,
implementation and monitoring.

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.

[128]

(2)

(3)

(4)

(5)

(6)

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 other
agricultural agencies, including provincial
agencies in relation to agriculture matters.

Same as for Recommendation (1).

DAL must address the issue of inadequate

funding of 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 of funding to agriculture
institutions.

DAL can achieve this outcome by chairing the AIC.

The AIC will be established by legislation.

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).

The role of DAL Secretary to be incorporated in the

proposed National Agriculture Administration Act.

NARI to 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, by a
Prime Ministerial Determination.

(a) The Minister to ensure that a Prime Ministerial

Determination for NARI to return to the Ministry of
Agriculture & Livestock is secured in 2014. (b) NARI
to merge with and Fresh Produce Development
Agency (FPDA) so that R&D functions are directly
linked to development functions in the districts. (c)
The current NARI Act to be amended to reflect the
changes in functions and a name change to Food and
Grains Board.

There is a need to formulate a new

extension policy framework that promotes
a pluralistic, farmer driven, and market
oriented extension service that: (a) brings
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.

DAL, commodity boards and agencies and

provinces/districts to review the existing agriculture
extension framework and the proposed pluralistic
model to be incorporated into the proposed National
Agriculture Administration Act so the responsibilities
all sector players are identified and clearly outlined
for implementing the new agricultural extension
system farmer-driven and market oriented for
improved service delivery.

[129]

(7)

Commodity boards should 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.

DAL, commodity boards and agencies and districts to

review the Bris Kanda and PPAP models which
should promote the development of agriculture
based SMEs which would be to approach AIC for
funding under the Agribusiness Development and
Innovations Grant Fund (ADIGF).

Policies to 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.

Commodity boards will be instrumental in reviving

the estate sector. Coffee, cocoa and coconut
industries will explore the feasibility of commodity
boards being the investment vehicles by working
with districts in establishing joint venture projects
with the districts for producing, processing and
exporting these commodities.

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.

Commodity boards and agencies to work with the

districts to identify factors affecting fresh produce
production including (a) climatic impacts; (b)
government policy on free education; and (c) time
allocation to fresh produce production during times
of high prices for export cash crops.

(10) The Government should encourage

cooperation between relevant agriculture
sector 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.

(a) Secretary for DAL should be appointed (i) as a

member of the National Education Board who
should ensure that appropriate agriculture
curriculum for lower and secondary education are
updated with the latest production technologies in
agriculture and livestock; and (ii) appointed on the
university councils of Unitech, University of Natural
Recourses and Environment and University of
Goroka. (b) Commodity Boards and Agencies should
develop suitable educational materials on
production, processing and marketing of various
commodity products.

(11) Policies should be developed to enhance

the resilience of smallholder farmers in the
face of inevitable fluctuations in
commodity prices.

The commodity boards should be required to give

due consideration to this issue in developing project
proposals for funding through AIC.

(8)

(9)

(12) A peak body needs to be established for

registering agriculture professionals in
PNG which is part of the proposed
rationalisation of the commodity boards
and agencies following similar legislative
model of the Medical Registration Act
1980 and the Lawyers Act 1986.

The appointed FER Implementation and Advisory

Unit (FIAU) to facilitate the drafting of a bill to be
known as the Agriculture Professionals Registration
Act. The National DAL to administer the Act and
provide secretariat services at the initial stages until
a separate secretariat is established to be funded
under the National DAL recurrent activities.

[130]

7.3

Achieving Balance between Subsidisation and Cost Recovery

Three recommendations were made in relation to agriculture taxation and input subsidies that
need to be addressed in the process of rationalisation of the targeted boards and agencies. Table
7.2 outlines the proposed courses of action to implement these policy recommendations.
Table 7.2:

Recommendations and Proposed Courses of Action relating to Subsidisation

and Cost Recovery

Recommendations

Proposed Courses of Action

(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
Agriculture
Investment
Corporation and the grant schemes rather
than through industry levies.

This proposal will require a separate NEC

submission as part of the proposed AIC Act.

(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.

Commodity boards and agencies in consultation

with the districts to develop an innovative
framework for administering the proposed
voucher scheme. The commodity boards and
agencies in consultation with the district
agriculture officers to verify that the farmer is a
genuine smallholder engaged in real agriculture
business activities.

(15) The funding principles for provision of

services to agriculture should be embodied
in legislation which sets out rules for
determining
funding
levels
and
contributions by government and industry.

The proposed AIC Act to legislate for these

provisions under the ADIGF mechanism.

7.4

Towards Commodity Boards and Agencies Renewal

Six recommendations were made to promote renewal of commodity boards and agencies through
structural reforms. Table 7.3 provides a matrix of proposed courses of action to implement these
recommendations.

[131]

Table 7.3:

Recommendations and Proposed Courses of Action in relation to Commodity

Board Renewal

Recommendations

Proposed Courses of Action

(16) Chairpersons of commodity boards and

agencies should be appointed by the
government according to RSA Act 2004
procedures.

All legislations of commodity boards and agencies

will be amended to make them subservient to the
RSA Act in regard to the appointment of
chairpersons.

(18) There should be a maximum of five

directors appointed to each commodity
board or agency, with three attendees
constituting a quorum.

This proposal to be addressed when the Acts for

commodity boards and agencies are amended in
2014.

(20) Board members, chairpersons and their

deputies should not be permitted to hold
office for more than two consecutive
terms.

Same as for recommendation (17).

(17) The proposed National Agriculture

Administration Act should specify that the
Secretary of DAL should be default
chairperson
(and
responsible
for
exercising all the powers of chairperson)
when the position of chairperson of a
commodity board is vacant for any reason.

Section 13 of RSA Act will need to be repealed to

enable this proposal to be effective in the
proposed NAA Act.

(19) Processes for appointment or election of

board members should be designed to
ensure that the people selected have the
skills required to make an effective
contribution to governance and leadership
of a commodity board.

Same as for recommendation (17).

(21) To ensure commodity board positions are

filled in a timely fashion, a course of action
should be specified for appointments to be
made if time limits on standard approval
processes are not met.

Same as for recommendation (17) but provisions

made for a time limit of three months for the
Boards and/or NEC to appoint new CEOs if it is
deemed necessary. However, if appointing
authorities fail to do so in three months than the
incumbent CEO should be automatically
reappointed. This is to minimise political
interference in executive appointments.

[132]

7.5

Improving Organizational Capability

Three recommendations are made for improving organisational capability that need to be
addressed in the process of rationalisation of the targeted boards and agencies. Table 7.4 outlines
the proposed courses of action to implement these recommendations.
Table 7.4:

Recommendations and proposed courses of action to improve organisational

capability

Recommendations

Proposed Courses of Action

(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.

This proposal to be addressed under the

proposed AIC Act and the respective legislations
of the commodity boards and agencies in 2014.

(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.

This proposal can be implemented by the

introduction of private sector participation in
the sector through industry participation
certificates. The procedure and the conditions of
awarding industry participation certificates will
be slightly different for various boards. The
certificate will confirm that the private industry
actor has agreed to comply with the disclosure of
annual information on production, trading,
processing and exporting.

(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.

This proposal can be addressed in the AIC Act

and the amended legislations of commodity
boards.

(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.

All commodity boards should adopt a similar

salary and benefits structure such as a 16 Point
Grade Salary and Benefits Structures but
sufficiently
flexible
as
highlighted
in
recommendation (23).

[133]

7.6

Scope for Rationalisation

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

performance in service delivery to various agriculture subsectors. Table 7.5 provides a matrix of
five recommendations and proposed courses of action to implement them.
Table 7.5:

Recommendations and Proposed Course of Action for Rationalisation of

Boards

Recommendations

Proposed Courses of Action

(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.

The Minister to direct both Cocoa Board and KIK

management teams to seek legal advice on abolishing
CCI and transferring its assets to the two boards in
East New Britain and Madang respectively after the
draft FER report is approved by NEC. The liability
issues of CCI to be resolved between the two mother
boards. The two boards to amend their Acts to include
R&D functions and address the administrative and
financial implications of these new functions for 2015
budget support.

(27) An oil palm commodity board should be

established to take over the functions of
OPIC and provide a formal consultative
mechanism between the industry and
government, with a view to facilitating
further development of both the estate
and smallholder sectors of this industry.

DAL Secretary direct and coordinate the preparation

of the draft bill for the proposed Oil Palm Industry
Board as soon as the draft FER report is accepted and
approved by the NEC in 2014. The draft bill should be
approved as law before the end of 2014.

(28) A Food and Grains Board (FGB) should

be established (through the merger of
NARI and FPDA).

(29) Proposals for establishment of a

Livestock Development Board (LDB)
and Rubber Development Board (RDB)
should proceed as planned.

7.7

In the event that a Prime Ministerial Determination for

the return of NARI to the agriculture sector for the
merger of FPDA and NARI proves difficult, then the
Minister for Agriculture and Livestock will declare FPDA
to be the lead agency for the food and grains subsector
under a new Food and Grains Act to cover regulation,
research and development, extension and marketing.

DAL Secretary to ensure that the draft bills for the

LDB and RDB Acts are completed and considered by
the NEC for tabling in the Parliament to become laws
in 2014. In the meantime competent CEOs should be
appointed to manage the two boards during the
transition period.

Achieving Greater Consistency in Government Funding

There is scope for improving the funding mechanisms in the proposed rationalisation of the
commodity boards and agencies for resourcing these organisations to further improve their

[134]

performance in service delivery in the districts. Table 7.7 provides a matrix of four
recommendations and proposed courses of action to implement them.
Table 7.6:

Recommendations and Proposed Courses of Action to Improve Funding

Recommendations

Proposed Courses of Action

(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.

Secretary for DAL to negotiate with his counterpart

responsible for the development fund of the PNG LNG
Sovereign Wealth Fund to establish whether certain
commodity boards can be eligible for funding
considerations.

(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.

This concern can be addressed in the regulations of

the ADIGF to be managed by AIC.

(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 positive
role in policy implementation, and
prudent resource allocation and utilisation
in the agriculture sector development.

Secretary for DAL to coordinate the preparation of

draft bill for the establishment of AIC. This draft bill
should be completed and approved by Parliament
before the end of 2014.

(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.

The Minister to ensure that (a) funds earmarked for

NADP be appropriated under AIC in 2015 national
budget, and (b) all underutilised DAL land assets to be
mobilised to raise funds for capitalising AIC in 2015.

7.8

FER Recommendations 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 competences to
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 or three full time appropriately qualified consultants, with specific terms of reference to

[135]

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 budget estimates 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.

7.9

Conclusion

In a nutshell, the issue at hand is to assess the current status quo of the agriculture sector in PNG
and ask what needs to be done to enable the agricultural sector to make a better contribution to
economic growth and meeting the aspirations of the people of PNG for higher living standards. This
question is particularly important in view of PNGs current heavy reliance on extraction of nonrenewable resources to improve living standards. That strategy is obviously not sustainable
indefinitely.

The FER findings have confirmed what is already known about problems in the agriculture sector.
The proposed policy directions in the FER report have responded positively to the PNG Vision
2050 strategic policy directions and expected outcomes, 124 and major agriculture sector issues
identified by the CEOs of the commodity boards and agencies. 125
The strategic policy directions and expected outcomes for agriculture sector are outlined in PNG Vision 2050 Strategic
Policy Directions and Expected Outcomes, pp 30-32.

124

A meeting of the chief executives of the commodity boards and agencies, held on the 16th May 2013, identifies thirteen
major issues that the FER needed to address and make appropriate recommendations. The issues included: Private
sector participation in the sector industry participation certificate; Explore an appropriate business model (e.g. IPBC or
National Roads Authority type) for the Commodity Boards; Examine the R&D models currently in the sector (e.g. CIC
versus CCI a subsidiary of Cocoa Board and KIK); Review the extension function between Commodity Boards and
provinces; Quarantine derivation grants from the Government to Commodity Boards; Expand functions of Commodity
Boards to include micro-financing, licensing, monitoring, pricing, etc.; Commodity Road Improvement Program/Corridor
development Program; Special Agriculture Business Lease (should be changed to Special Business Lease); Commodity
Price Stabilization Fund to be funded by the Sovereign Wealth Fund; Commodity Boards to be independent of DAL and
report to an independent Peak Agriculture Body which will represent the Boards; Review DAL FER after the Commodity
125

[136]

Appendix 1: FER Consultants

This report has been prepared by the following consultants, contracted for the purpose by the
Technical Steering Committee of the Functional and Expenditure Review on Agricultural
Commodity Boards and Agencies, chaired by Dr James Kaiulo:
Team leader and Agricultural
Taxation & Input Subsidies Expert

Mr Winton Bates

Agriculture policy analyst:

Mr Ted C Sitapai

Economist:

Dr Eric E Omuru

Human relations expert:

Mr Gabriel Selibu

Legal expert:

Mr Joel Alu

The Team leader wishes to acknowledge the important contribution of the Chairman of the FER
Technical Steering Committee, Dr James Kaiulo, in proposing organisational arrangements to
implement the recommendations of the Review.

The Team leader also wishes to acknowledge the assistance of Mr Brian Kakini, Executive Officer,
and the support of staff of the Kokonas Indastri Koporesen, which provided the secretariat of the
Review.

Boards; Review of NADP and propose an alternate funding model based on input subsidy; and Review of Agriculture Tax
Regime & Incentive for investment in Agriculture sector.

[137]

Appendix 2: Acronyms
ARDSF
AIGS
AusAID
CACC
CCI
CCRI
CCEA
CIC
CIMC
CPC
CRI
DAL
DNPM
DoT
DPI
DPM
DSIP
EIRR
EHP
FAO
FER
FPDA
IMF
INA
IPA
IPBC
JV
KIK
LDC
MDC
MTDP
NADP
NAQIA
NARI
NARS
NDB
NEC
OLPLLG
OPIC
OPRA
PSIP
PNG LNG SWF
PSC
PSMA
RSA

Agricultural Research and Development Support Facility

Agriculture Innovations Grants Scheme
Australian Agency for International Development Aid
Central Agencies Coordinating Committee
Cocoa Coconut Institute Limited
Cocoa and Coconut Research Institute Limited
Cocoa and Coconut Extension Agency Limited
Coffee Industry Corporation
Consultative Implementation and Monitoring Council
Constitutional Planning Committee
Coffee Research Institute
Department of Agriculture and Livestock
Department of National Planning and Monitoring
Department of Treasury
Divisions of Primary Industry (Provincial)
Department of Personnel Management
District Service Improvement Program
Economic internal rate of return
Eastern Highlands Province
Food and Agriculture Organization
Functional and Expenditure Review
Fresh Produce Development Agency Limited
International Monetary Fund
Institute of National Affairs
Investment Promotion Authority
Independent Public Business Corporation
Joint venture between the PNG Government and private firms
Kokonas Indastri Koporesen
Livestock Development Corporation
Mining Development Contract
Medium Term Development Plan
National Agriculture Development Plan
National Agriculture Quarantine and Inspection Authority
National Agriculture Research Institute
National Agricultural Research System
National Development Bank
National Executive Council (Cabinet) of the PNG Government
Organic Law on Provincial and Local Level Government
Oil Palm Industry Corporation
Oil Palm Research Association
Provincial Service Improvement Program
Papua New Guinea Sovereign Wealth Fund
Public Services Commission
Public Services Management Act
Regulatory Statutory Authorities

[138]

SADP
SAP
SoE
UNITECH
WHP

Smallholder Agriculture Development Project

World Bank Structural Adjustment Program
State-owned Enterprise
Papua New Guinea University of Technology
Western Highlands Province

[139]

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