A procedure for the evaluation of pulpwood reforestation projects in Papua New Guinea : the Gogol Valley project

Abstract

A computer simulation model, designed to evaluate pulpwood reforestation projects, is used to study a project proposed in the Gogol Valley of Papua New Guinea. The project is evaluated using data available at two different times (1974 and late 1976) to assess the utility of the model as a method of project review. Two different silvicultural regimes (5 year and 10 year rotations), and two different methods of financing the project (Foreign ownership and Papua New Guinean ownership) are analysed. The evaluation is carried out using both market prices and shadow prices for all project inputs and outputs. The distribution of benefits to the groups likely to be most affected by the project is assessed, as are the aggregate regional benefits. Analyses are also carried out on the percentage contribution made by individual cost items to total discounted costs; the relative importance of growing, extraction, and processing costs; and the separation of direct onshore and offshore costs.

For the 10 year rotation regime the 15,000 hectare project has an expected present value at 8% discount rate of K2.8 million using market prices; and an expected present social value of K3.4 million using methods proposed by I.M.D. Little and J.A. Mirrlees. The 5 year rotation, based on less reliable data, is only marginally less profitable. Further research is needed to determine optimum rotations, particularly to suit small village based plantations (woodlots). For village woodlots the shadow wage rate may be lower and the discount rate higher than for large commercial plantations, and the optimum rotation may be correspondingly shorter.

The conclusion supports Papua New Guinean ownership of the reforestation project mainly because the project has a long pay-back period. The high perceived commercial and political risk causes the rate of return required by the foreign investor to exceed the social discount rate (for which risk loading is not considered appropriate). Also influencing this conclusion is the relatively simple technology, management, and marketing expertise required by the project.

The net regional benefits are higher than the net benefits assessed from a national view-point, as some costs relevant to the latter are not true costs to the region. The selection of projects based on regional development criteria is not generally supported in this study. Rather it is proposed that consistent rules based on the Little-Mirrlees approach will better account for the income distribution effects of the project. In particular it is suggested that a low shadow wage should be used for village projects which involve no migration of labour, and that this will encourage projects desirable from both the efficiency and equity viewpoints.

The analysis of the composition of discounted costs underlines the importance of labour productivity and the shadow pricing of labour. Wages comprise 40% of 'growing' costs and many other costs are related to labour requirements. The discounted cost analysis also stresses the importance of log extraction costs, which are estimated to be 2.6 times total growing costs. Direct offshore costs comprise only 30% of plantation growing costs.