Canberra, 12 July 1968
Confidential
Papua and New Guinea development programme
This submission recommends endorsement of a five-year development programme for Papua and New Guinea and puts forward a suggested attitude by the Commonwealth Government towards the aid aspect of the programme.
2. The Government’s basic policy for Papua and New Guinea is to develop it for self-determination and to ensure that when this stage has been reached the Territory will, to the greatest extent feasible, be able to stand on its own feet economically. The proposed programme aims to quicken progress along these lines giving particular emphasis to the increasing role of Papuans and New Guineans in economic development and in social, administrative and political affairs.
Objectives Of Programme
3. In 1965 the Cabinet endorsed as a working basis for planning the economic development programme suggested by the 1964 Report of a Mission from the International Bank for Reconstruction and Development (Decision No. 885 of 21st April, 1965).1 This programme as a whole covered the five years from 1964/65 to 1968/69 (certain production programmes covered the ten years to 1973/74) and requires updating to take account of the Territory’s changing needs and opportunities.
4. While the Mission’s original programme was confined largely to the development of the Territory’s agriculture, livestock and forest industries, the programme now proposed is wider in scope and spells out programmes for the various economic sectors in greater detail for the five year period 1968/69 to 1972/73. (Figures are given for agricultural livestock and forestry development up to 1974/75.) The overall programme and sectoral programmes will of course be subject to revision in the light of changes in circumstances.
5. The main purpose of the revised programme, like that of the programme put forward by the l.B.R.D. Mission, is to encourage the most effective use of the Territory’s human, physical and financial resources. It aims to achieve this purpose by
• setting ambitious but realistic targets so as to give a clear sense of direction
• obtaining endorsement by the House of Assembly to the broad basis of the programme
• enabling effective planning by the Administration especially in fields such as education and major public works where plans need to be viewed against a longer term perspective
• highlighting future growth potential and prospects and thereby giving assurance and stimulus to private enterprise
• encouraging maximum effort and acceptance of greater responsibility by the Territory public, especially the indigenous people.
6. The aims of the programme are in harmony with the l964 I.B.R.D. Mission’s recommendations. Major emphasis will therefore continue to be placed on building up the productive potential of the Territory and on the advancement of the indigenous people through secondary and higher education and vocational training and the acceptance of greater responsibility. Expenditure on such services as health and primary education will be contained. As the Mission’s Report stated:
‘Only by these means can the real income of the native people be raised, the tax base broadened, the disproportionate gap between Government expenditures and revenues raised in the Territory narrowed and the widening deficit in the balance of payments—now met by grants from the Government of Australia—reduced.’
7.The proposed programme aims to hasten movement towards economic self-reliance. Viability is a long way off but substantial economic growth will be achieved. There will be a stronger base for expanded production. There will be accelerated indigenous participation in production through ownership and management and through employment both in private industry and in Government. Action will also be taken to promote and provide scope for expanded expatriate investment.
Content Of Programme
8. Key targets in the programme are set out in Attachment ‘A’.2
Major production programmes
9. The agricultural programme gives greater emphasis than did the Mission’s programme to new high value crops especially tea, pyrethrum and oil palm. It also envisages higher returns from indigenous coffee production. Private investment by expatriates in copra, cocoa and rubber has not been achieved on the scale projected by the Mission. The programme however provides for substantial new expatriate plantings of copra and cocoa as well as tea and oil palm.
10. If production from existing plantings is maintained, new plantings contemplated in the programme will double current production when they reach maturity.
11. The livestock programme while ambitious is substantially lower than that recommended by the Mission which over-estimated the rate at which breeding herds could be increased and the availability of cattle imports.
12. The forestry programme is in line with the Mission’s. The longer-term prospects for timber appear bright although marketing difficulties may be encountered from time to time.
13. Considerably accelerated progress is envisaged in manufacturing industries.
14. The following table gives major production targets—
Programme
| 1967/68| 1968/69| 1972/73| Annual Increase 1967/68-1972/73)%
New Agricultural Plantings
(‘000 acres)
Indigenous
Total
24
40
27
49
39
63
10.3
9.5
Agricultural Production ($M)
Indigenous
Total
19
49
21
51
30
63
9.6
5.2
| Beef Cattle population (‘000) |
6
61
10
72
31
138
38.9
17.7
| Beef Cattle Turnoff ($M) | 0.9 | 1 | 2.3 | 20.6. |
| Forestry Production ($M) | 10 | 12 | 25 | 20.1 |
| Manufacturing Output ($M) | 58 | 69 | 121 | 15.8 |
Other economic programmes
15. Substantial growth is planned in service industries particularly transport to cope with the expanded production programmes.
16. While it is proposed to spend $17.2M on roads, bridges and other transport facilities in 1968/69, future expenditures will be considered in the light of the findings of the comprehensive United Nations Development Programme survey due to be completed in mid 1969.
17. Rapid growth in telecommunications will be achieved under the $14M programme now under way which will be financed partly from the recently negotiated $6.3M loan from the IBRD.
Social services
18. In harmony with the recommendations of the 1964 I.B.R.D. Mission, the programme envisages that the standards and coverage of social services be related to the capacity and willingness of the local people to contribute towards them.
19. In education priority will be given to secondary and tertiary education with special attention to technical and vocational training. The health programme emphasises preventive medicine such as malaria control as against curative services. There will be a positive programme to make available facilities for population planning. It is expected that over the five years to 1972/73 the growth of population will be of the order of 2.6% per annum. With the continued improvement in the health of the population this could rise to around 2.8% in the late 1970’s.
Total programme
20. There is no satisfactory single measure which would express in quantitative terms what the success of the proposed programme would mean in terms of progress towards higher living standards and greater economic self-reliance. Much of the investment expenditure proposed in the programme will produce results in terms of increased production only after a period of years.
21. Thus the agricultural programme is largely concerned with accelerated plantings of slow maturing tree crops; much of the investment in the public sector is on infrastructure designed to spark off development in new regions or new industries by reducing the handicaps imposed by lack of accessibility and high transport costs. Again the heavy investment proposed in education, especially secondary and tertiary education, in preventive medical services and the employment of expatriate manpower with specialist skills, will bear fruit over a period rather longer than the five year programme period. Major elements of the programme are designed to provide essential services such as roads, ports, communications and power for increased private business investment.
22. The major economic advances aimed at by the programme may be summarised as:
•Increased plantings of export crops
• Expansion of local manufacturing and service industries
• Provision of basic capital works and services, including roads, harbour facilities, power and water supplies
• Enlargement of the educated work force along with progressive increases in the employment of Papuans and New Guineans in the public service and private enterprise with expatriates being employed in key areas of Administration to the extent that qualified indigenes will not be available.
23. The possible impact of the programme on the economy as a whole is set out in Attachment ‘B’.3
24. The programme will also expand the tax base of the Territory. At current levels of taxation, local revenue is projected to increase from $50M in 1967/68 to $80M in 1972/73. Revenues generated by the programme will be substantially greater when new plantings and other investment made during the plan period reach maturity after 1973.
25. The 1964 I.B.R.D. Mission recognised that the gap in the Territory’s trade balance would have to increase for some years (and be financed largely by Australia) until the Territory economy could generate enough savings to finance the rate of investment necessary for self-sustaining economic growth. Much of the activity to be generated under the proposed programme will not be reflected in export earnings and import saving until some time after the end of the programme. On the balance of payments on current account the deficit for 1967/68 is expected to be about $108M and is projected to reach around $185M in 1972/73 but begin to decline within a few years thereafter. The gap will be met mainly by Commonwealth grant but also to an increasing extent by private investment and for the first time by the raising of international loans. If the Bougainville copper project goes ahead according to the company’s plans the balance of payments picture could change dramatically.
26. Apart from serving Australia’s basic policy objectives in the Territory the proposed development programme will benefit Australia in a number of ways. Papua and New Guinea, already Australia’s second largest export market for manufactures will further increase its imports while rising Territory exports will add to foreign exchange earnings. Remittances to Australia from dividends earned by Australian investment in the Territory and from savings by expatriates are expected to rise substantially.
Resources Required To Meet Targets
Private investment
27. Considerable investment, e.g. in oil and mineral exploration, can be expected to go ahead regardless of the level of government spending; other private investment will be related more closely to levels of-government expenditure.
28. Since 1963/64 private investment excluding new plantings (which as in Australia are not treated as investment for national accounting purposes) has been increasing at about $10M each year. It is considered that an increase of $10M (excluding the Bougainville copper project) in each year to 1972/73 could be achieved with a continuing programme of investment promotion and incentives.
Administration receipts
29. The following table shows projections of expenditure, local revenue and public loans. The figures of Commonwealth grant have been derived from these projections.
| 1968/69 | 1972/73 | 1968/69 to 1972/73 | ||||
|---|---|---|---|---|---|---|
| $M | % | $M | % | $M | % | |
| Local revenue | 56.0 | 36.3 | 91.0 | 38.7 | 364.0 | 37.4 |
| Public loans (incl. IBRD/IDA finance) | 11.5 | 7.4 | 15.0 | 6.4 | 69.5 | 7.1 |
| Commonwealth Grant | 87.0 | 56.3 | 129.0 | 54.9 | 540.0 | 55.5 |
| Administration Expenditure | 154.5 | 100.0 | 235.0 | 100.0 | 973.5 | 100.0 |
30. It is assumed that increases in costs and prices will be of roughly the same order as in recent years.
31. The projections of local revenue assume a continuing increase in the level of taxation in the Territory. Unless there are unforeseen developments affecting revenue prospects, a higher rate of growth than projected (13% p.a.) could discourage expatriate recruitment and enterprise. The 1964 I.B.R.D. Mission favoured a policy of keeping the burden of tax on the European sector light to increase the attractiveness of private investment and to attract and retain badly needed European staff.
32. The projections do not include revenues to be collected and expenditures to be borne by Local Government Councils. Over the plan period Councils will make an increasing contribution in the raising of revenue from local taxpayers (currently $1.7M) and in assuming responsibility for activities now financed by the Administration.
33. The programme as designed implies an increase in the Commonwealth grant of the order of 10% per annum from 1968/69. The rate reduces from 12.1% in 1968/69 and 12.6% in 1969/70 to 10.2% in 1971/72 and 9.3% in 1972/73. This increase compares with an average annual rate of increase of 11.4% over the last four years:
| %Increase | %Increase | |||
|---|---|---|---|---|
| 1964/65 | 10.9 | 1966/67 | 12.5 | |
| 1965/66 | 10.7 | 1967/68 | 11.2 |
Direct commonwealth expenditure
34. Net direct expenditure by Commonwealth departments and instrumentalities has been projected on the basis of present administrative arrangements and estimates by the agencies concerned:
| $M | $M | ||
|---|---|---|---|
| 1968/69 | 24 | 1971/72 | 26 |
| 1969/70 | 22 | 1972/73 | 29 |
| 1970/71 | 26 |
Skilled manpower
35. The programme envisages the addition to the Territory Public Service of about 2,000 overseas officers for new positions for which no local officers are expected to be available. Of these 1,450 officers will be required in professional and technical fields including 820 officers essential for the agricultural, livestock, forestry, education and works programmes. More than 500 positions now held by overseas officers are expected to be filled by local officers. Expatriate recruitment for general government services will be kept to a minimum.
36. The achievement of the target for expatriate recruitment will require special measures including the provision of additional housing in Port Moresby.
Bougainville Copper Project
37. This project if it comes to fruition could make a significant contribution to Territory revenues and export earnings during the final year of the plan period. By the mid-1970’s it could, if successful, raise the Territory’s gross export receipts by more than one-half and the Territory’s revenues by more than one–third. The project would likewise involve substantial additions to imports and other payments and to administration expenditure.
38. A decision will be made by C.R.A. during the second half of 1969 on whether it will proceed with its proposals to develop the extensive copper deposits on Bougainville.
Longer Term Perspective
39. Towards the end of the Programme period increases in public expenditure and overseas recruitment should level off. With increasing indigenisation of the public service the Territory should be able to finance the greater part of its current public expenditure by the mid-1970’s.
40. It is not possible to predict when the Territory will have reached the stage of self-sustaining economic growth with ability to finance the greater part of its total budgetary requirements from domestic savings while at the same time supporting an acceptable rate of growth of living standards.
41. The 1964 Mission believed that the approach to economic viability would take at least several decades. There is no evidence that this will not be the case but tentative long-range projections suggest that there should be a significant measure of viability during the 1980’s provided action is taken now to expand the Territory’s productive potential.
Consultation Procedures And Commonwealth Commitment
42. In preparing this programme the Administration has paid close attention to expressions of native opinion and has been in consultation with private enterprise and Commonwealth authorities.
43. Subject to Cabinet’s approval it is proposed to consult the Administrator’s Executive Council and subject to the views of the Council seek endorsement of the broad basis of the programme by the House of Assembly. In accordance with Decision No 417(M) of 19th July, 1967, in relation to the grant to the Administration for 1967/68,4 and in harmony with the proposed attitude for the 1968/69 grant, the help from Australia towards the accelerated economic development of the Territory which is envisaged in the programme would be offered on the basis of the co-operation of the House of Assembly and the people of the Territory. As in the case of the budget it is proposed that in the event that the House of Assembly should attempt to vary the programme in a way unacceptable to the Government the intention would be that the amount of the grant and arrangements for Australian aid should be open to review.
44. The feasibility of the programme depends on the Commonwealth’s support primarily through the provision of grants to the Territory budget of the order indicated in paragraph 29.
45. Unpredictable changes, for example in movements in the prices for the Territory’s exports and in the flow of private investment from overseas, will affect key magnitudes in the programme. Adjustments will have to be made in the event of constitutional change and changing circumstances affecting local revenue and loan raisings.
46. The programme sets out projections for Territory revenue, loans and expenditures for the next five years allowing for reasonable stability in costs and prices in line with the experience of recent years. The projections of revenue imply a progressively increasing effort by the Territory. They provide for new revenue measures to yield about $1M each year in addition to normal growth at current levels of taxation. The projected increase in total revenue from $50M in 1967/68 to $91M in 1972/73 (excluding the Bougainville copper project) is considered to be as much as can on current indications reasonably be achieved. There would be a steady increase in the proportion of Territory expenditure being met from Territory revenue.
47. The programme implies an increase, taking one year with another, of the order of 10 per cent per annum in the Commonwealth grant over the period of the programme. It is proposed that this be the order of magnitude of increase in the grant to be contemplated at this stage by the Commonwealth.
Proposed attitude5
48. It is proposed that the Government should reaffirm that it will continue to help towards greater economic development and greater economic self-reliance in the Territory.
49. In harmony with this approach it is also proposed that the Government would indicate that allowing for such modifications in the programme as may be needed from time to time in the light of changing circumstances it endorses the proposed objectives and targets (key targets are set out in Attachment ‘A’) as a basis for planning subject to a similar endorsement by the House of Assembly.
50. The achievement of the proposed objectives and targets will require steadily increasing Administration expenditure. It is therefore proposed that the Government would indicate that on a basis of mutual co-operation between the Australian Government and the House of Assembly and the people of the Territory it is prepared for its part to contemplate increases in its financial contribution to the Administration budget of the order of 10% per annum over the period of the programme. The Government would say that it is prepared to do this if the House of Assembly indicates that it is prepared to increase progressively the Territory’s financial self-reliance by raising the level of Territory receipts (revenue and loans) as much as practicable.
51. It would need to be made clear that within the order of magnitude referred to above the actual financial contribution by the Commonwealth to the Administration budget in any one year would be subject to the Commonwealth’s own budgetary situation and any special circumstances arising in the Territory (e.g. fruition of C.R.A.’s Bougainville project or the discovery of oil in commercial quantities).
52. The proposed commitment by the Commonwealth, it is intended, would not rule out the possibility of changes in future years in the method by which financial contribution is made to the Administration budget (it is currently in the form of grants), nor would the Commonwealth commitment mean any change in the Government’s policy towards constitutional development in the Territory. Both these points would need to be stated publicly.
53. Subject to approval by Ministers of the foregoing, it is envisaged that the proposed programme and the proposed Commonwealth attitude (as set out in paragraphs 48–52) be put to the Administrator’s Executive Council (which includes 8 elected members of the House of Assembly, all but one of them being Ministerial Members), and that subject to the views of the Council an outline of the proposed programme and a statement of the Commonwealth attitude would then be put before the House of Assembly.
54. A public statement on the Commonwealth attitude on the lines of paragraph 48–52 would not explicitly cover the position that would arise for the Commonwealth with regard to its aid to the Territory if the Territory became self-governing or independent during the period of the programme. On present indications such a development is not perhaps likely within the coming five years. Nevertheless the possibility cannot be ruled out. However, an explicit reference in a public statement to the Commonwealth Government’s position in such a contingency would it is considered give rise to a variety of problems in the Territory and if such a development did in fact occur it may be expected that the development programme along with a number of other arrangements would have to be subject to review and possibly, so far as the Commonwealth’s role in the programme was concerned, to renegotiation.
Recommendation
55. I recommend endorsement of the proposed five year programme and Commonwealth support for it on the basis set out in paragraphs 48-54.6
[NAA: A5868, 234]
1 Not printed.
2 Not printed.
3 Based on estimated annual growth rates of between 9 and 11%, it was projected that consumption would increase from $231m in 1968/9 to $340m in 1972/3, while in the same period investment would grow from $127m to $193m; imports from $196m to $287m; exports and other receipts from $85m to $116m; balance of payments on goods and services (excluding property income) from -$111 to -$171; gross monetary sector product at market prices (excluding non-marketed supplies) from $247m to $362m; and balance of payments on current account from -$120m to -$184m. The figures excluded the possible impact of the Bougainville copper operation.
4 See Document 136.
5 During drafting, considerable debate occurred over the wording of the following section. Hay had been concerned at different points that Territories drafts ‘feel like a sledgehammer blow’ (telex 6059, Hay to Warwick Smith, 4 July 1968, NAA: A452, 1968/3566) and ‘might expose the Government unnecessarily to the suggestion that it is using its grant to influence the development of the political situation’—a perception that ‘could, inter alia, lead to difficulties here in getting endorsement of development programmes’ (telex 6127, Hay to Warwick Smith, 9 July 1968, ibid.). Hay gained some concessions (see telex 5229, Warwick Smith to Hay, 5 August 1968, and telex 5336, Gutman to Hay, 11 July 1968, ibid.), but DOET obtained Barnes’ support for a firm and explicit statement of respective Commonwealth and PNG responsibilities (submission, Gutman to Barnes, 6 July 1968, and telex 5229, Warwick Smith to Hay, ibid.). More generally, Hay cabled that he was anxious that Cabinet avoid a rigid policy prescription on the relationship between the grant and internal revenue (telex 5960, Hay to DOET, 1 July 1968, ibid.). He also affirmed the plan’s ‘figures [which] underline the long term nature of the movement towards viability. To my mind, this is realistic. It involves smaller strain on the machinery of government and {on the social and racial situation} [in] the Territory. It keeps up a steady pressure but means that any steeper rise in the pace of development must await localisation. This is reflected in an increased emphasis on training’ (loc. cit.).
6 On 24 July, Cabinet ‘endorsed the proposed objectives and targets of the Papua New Guinea five-year development programme as a basis for planning and subject to a similar endorsement by the House of Assembly’. This was ‘on the understanding that such approval for planning purposes does not carry with it endorsement of any implied commitments for financial provisions’. Regarding attachment B, the Ministry felt that the estimates should not be published ‘at this stage and at least until there has been an opportunity to check the basis of the estimates with Treasury and the Commonwealth Bureau of Census and Statistics’. There was also an ‘understanding that any public statement to be made on the matter on behalf of the Government will be the subject of prior consultation with the Treasurer’ (decision no. 354 (M), NAA: A5868, 234).