Philippines - Livestock Development Project

RESTRICTED Report No. PA-117a This report is for official use only by the Bank Group and specifically authorized organizations or persons. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION APPRAISAL OF LIVESTOCK DEVELOPMENT PROJECT PHILIPPINES April Z6, 1972 Agriculture Projects Department  CURRENCY EQUIVALENTS US$1 - P 6.4 P 1 - US$0.16 P 1 million - US$156,250 WEIGHTS AND MEASURES Metric System 1 hectare (ha) - 10,000 m - 2.47 acres 1 kilometer (km) 2 - 0.62 miles 1 square kilometer (km )- 0.39 sq mi - 100 ha 1 kilogram (kg) - 2.20 pounds 1 liter (1) - 0.26 gallons 1,000 kg - 1 metric ton X 0.98 long ton ABBREVIATIONS ACA - Agricultural Credit Administration APC - Agricultural Productivity Commission BAI - Bureau of Animal Industry DANR - Department of Agriculture and Natural Resources DBP - Development Bank of the Philippines NEC - National Economic Council NFAC - National Food and Agricultural Council PDBs - Private Development Banks PNB - Philippine National Bank DBP FISCAL YEAR July 1 - June 30  PHILIPPINES APPRAISAL OF LIVESTOCK DEVELOPMENT PROJECT TABLE OF CONTENTS MAIN TEXT Page No. SUMMARY AND CONCLUSIONS ............................. i-iii 1. INTRODUCTION ........................................ 1 II. BACKGROUND .......................................... 2 A. General ........................................ 2 Climate .................................... 2 Population and Gross National Product ...... 2 B. The Agricultural Sector ....................... 3 Contribution to the Economy ............. .. 3 Livestock ................................. 3 Animal Health ............................. 4 Coconut ................................... 4 C. Government Policies ............................ 4 D. Agricultural Services .......................... 5 Marketing ................................. 5 Research, Extension and Education .... ..... 5 Agricultural Credit ....................... 6 III. THE PROJECT ....................................... 6 A. General Description ............................ 6 B. Detailed Features .............................. 7 Project Areas ............................. 7 Integrated Coconut/Beef Cattle Fattening Farm .................................... 8 Integrated Coconut/Beef Cattle Breeding/ Fattening Farm .......................... 8 Hill Beef Cattle Breeding Ranch .... ....... 9 Pig Breeding/Fattening Farm .... .......... 9 Poultry-Broiler Farm ..................... 9 Poultry-Layer Farm ....................... 9 Slaughterhouse Development ................. 9 Technical Services ........................ 10 C. Cost Estimates ................................. 11 D. Financing ...................................... 12 All Mission members, F. Knobel, M. McGarry, M. Walshe, R. Hanan (Bank), and M. McEvoy (Livestock Consultant), contributed to this report.  2- Page No. E. Procurement .................................... 13 F. Disbursements .................................. 14 G. Organization and Management ..... ............... 14 Development Bank of the Philippines .... ...... 14 Financial Condition ..... .................. 15 Operating Results ......................... 15 Loan Defaults ............................. 15 Agricultural Department .... ............... 16 H. Lending Policies and Procedures .... ............ 16 I. Accounts and Audit .............................. 17 IV. PRODUCTION, MARKETS AND MARKETING, AND PRODUCER BENEFITS 18 A. Production ....................................... 18 B. Markets and Marketing ....... .................... 18 C. Producer Benefits ......... ....................... 19 V. ECONOMIC BENEFITS AND JUSTIFICATION .................. 21 VI. AGREEMENTS REACIED AND RECOMMENDATION ................. 21 ANNEXES 1. Agriculture in the Economy Map - Climate Types Chart - Monthly Precipitation According to Type of Climate Table 1 - Agricultural Land Utilization 2. Marketing and Prices Table 1 - Livestock Population by Kind and by Region as of January 1, 1969 Table 2 - Total Cost of Transport of Live Cattle to Manila From Mindanao and the Visayas Table 3 - Average Annual Retail Prices for Livestock Products Per Kg in Manila Table 4 - Shipping Costs for Hogs from Outlying Islands to Manila Table 5 - Summary of Costs in Shipping Live Hogs and Savings Through Shipping Carcasses Table 6 - Summary of Costs in Shipping Live Cattle and Savings Through Shipping Carcasses 3. Agricultural Credit Table 1 - Loans Granted and Outstanding to Agriculture by Financial Institutions, 1965-70  4. Model - Integrated Coconut/Beef Cattle Fattening - 5 ha Table 1 - Herd Projection Table 2 - Investment Projection Table 3 - Sales and Operating Expenses Projection Table 4 - Financial Projections 5. Model - Integrated Coconut/Beef Cattle Breeding/Fattening - 15 ha Table 1 - Herd Projection Table 2 - Investment Projectibn Table 3 - Sales and Operating Expenses Projection Table 4 - Financial Projections 6. Model - ilill Beef Cattle Breeding - 600 ha Table 1 - lierd Projection Table 2 - Investment Projection Table 3 - Sales and Operating Expenses Projection Table 4 - Financial Projections 7. Model - Pig Breeding/Fattening - 25 sows Table 1 - Herd Projection Table 2 - Investment Projection Table 3 - Sales and Operating Expenses Projection Table 4 - Financial Projections S. Model - Broiler Production - 8,000 Broiler Capacity Table 1 - Flock Projection Table 2 - Investment Projection Table 3 - Sales and Operating Expenses Projection Table 4 - Financial Projections 9. Model - Egg Production - 6,000 Hen Capacity Table 1 - Flock Projection Table 2 - Investment Projection Table 3 - Sales and Operating Expenses Projection Table 4 - Financial Projections 10. Model - Slaughterhouse Daily Capacity 20 Head of Cattle and 200 Head of Pigs Table 1 - Investment Projection Table 2 - Sales and Operating Expenses Projection Table 3 - Financial Projections Table 4 - Profit and Loss Projections 11. Management and Technical Services - Investments Projections 12. Management and Technical Services - Terms of References 13. Plhasing of the Lending Program 14. Estimated Schedule of Quarterly Disbursements  - 4 - 15. Development Bank of the Philippines (DBP) Table 1 - Organization Chart Table 2 - Members of the Board of Directors Table 3 - Agricultural Department Staffing Positions Table 4 - Condensed Annual Balance Sheet Table 5 - Schedule of Installments on Regular Guarantee Table 6 - Schedule of Payments on CCC and CWB Credit Table 7 - Condensed Statement of Annual Earnings Table 8 - Costs and Returns on Average Annual Loan Portfolio and Investments Table 9 - Projected Cash Flow, FY1971-72 Table tO- Past Due Loans and Loans in Litigation Table 11- Annual Outstanding Loan Volume by Sector Table 12- Financial Data on Private Development Banks 16. Projected Project Cash Flow 17. Financial Rates of Return 18. Economic Rate of Return Table 1 - Summary Economic Rate of Return Calculations MAP Project Areas  PHILIPPINES APPRAISAL OF LIVESTOCK DEVELOPNENT PROJECT SUMMARY AND CONCLUSIONS i. This report appraises a project for the further development of livestock in the Philippines, for which a Bank loan of US$7.5 million equi- valent is proposed. The total cost of the Project, with a commitment period of three years, is estimated at US$15.5 million, of which US$4.8 million, or 31%, represents foreign exchange requirements. The inclusion of US$2.7 million for local costs would increase the Bank's participation in the Project from the 31% foreign exchange component to nearly 50% of total Project cost. This would be adequate to bring about the necessary improvements in organization, lending criteria and procedures required under the Project. ii. Agriculture is the most important sector of the Philippine economy, employing about 50% of the total labor force and producing about 35% of the Net Domestic Product. Livestock is an important sub-sector of agriculture contributing about 15% of agricultural production. Although the Government's Four-year Development Plan, 1972 to 1975, aims toward achieving self-sufficiency in rice, the Plan also supports greater diversification of agricultural pro- duction through increased livestock and feed grain development. The Project would help Government achieve this objective. iii. This would be the sixth Bank loan to the Philippines for agricul- tural development, but it would be the first loan devoted entirely to livestock development. The Second Rural Credit Project (Loan 607-PH made in 1969) initially moved slowly but with general improvement of the economy, following de facto devaluation of the peso early in 1970, and a reduction in the amount of contribution by participating rural banks and farmers, disbursements have increased significantly. iv. While large farms would not be excluded, the main aim of the Project would be to finance: (a) development of about 1,450 semi-commercial small to medium size pig, poultry, and integrated coconut/beef cattle farms; (b) development of about 25 hill beef cattle breeding ranches that are an important source of feeder cattle for backyard farmers; (c) constructing and equipping three small slaughterhouses; and (d) provision of technical services.  - ii - The Project would emphasize the provision of technical services to partici- pating farmers. This would be particularly important since the aim of the Project would be to finance a relatively large number of small to medium- size producers who would require intensive supervision and guidance to successfully carry out their investment programs. Because a less expensive, better quality pig and poultry ration is an important objective, technical services would emphasize full use of the wide range of cereal by-products available locally. Technical services would also include two consultants, one to advise on a pig breeding improvement scheme, and the other to advise on utilization of low cost molasses and sugarcane tops in beef cattle production. v. Government, as Borrower, would on-lend on the same terms the Bank loan to the Development Bank of the Philippines (DBP), which would execute all aspects of the Project. DBP, a large Government Bank with wide experience in agricultural lending, would grant loans directly to beneficiaries and, in some cases, would on-lend Bank funds to Private Development Banks (PDBs) which also would grant loans made by them under the Project. On average, beneficiaries would contribute about 16% of investment requirements, DBP/PDBs about 36% and the Bank 48%. The interest rate would be 12% per annum on medium- and long-term loans of 5 to 11 years. vi. Turnkey contracts, amounting to about US$600 thousand, 4% of Project cost, for construction and equipping three slaughterhouses would be subject to international competitive bidding. Goods for on-farm investments and incremental working capital inputs amounting to about US$13.9 million, 90% of Project costs, would be acquired through existing commercial channels because of the diversity, small size of individual purchases, which would leave the channel and source of supplies to the choice of the individual farmers. The Philippines has a good network of dealers in agricultural inputs and competition is keen. The balance of investment costs of US$1 million, 6% of Project cost, constitutes the estimate for technical services. vii. The estimated financial rates of return to the producers' incre- mental investments would range from 19% to 47%. The rate of return to the Philippine economy is estimated at about 36%. The Project is expected to provide significant increases in the production of eggs, broilers, pork, and beef and a small increase in coconut production. New investments for poultry and pork production constitute about 70% of total Project Cost. About 1,700 new jobs would be created in rural areas, providing work for people who previously were either unemployed or greatly underemployed, thus benefitting about 10,000 people. Additionally, some 1,500 subborrowers, with about 8,500 dependents, would benefit directly from the Project. viii. The Project is not without constraint. The attainment of technical production objectives at the farm level is dependent in particular on the reliability of high quality feed supplies and the quality and effectiveness of the technical services expected to guide small Filipino producers in the adoption of new, commercially-oriented production techniques.  - iii - ix. The Project is suitable for a Bank loan of US$7.5 million, for a term of 14 years including a grace period of six and a half years. Govern- ment would be the Borrower and would bear the foreign exchange risk.   PHILIPPINES APPRAISAL OF LIVESTOCK DEVELOPMENT PROJECT I. INTRODUCTION 1.01 The Government of the Philippines has requested a Bank loan to help finance a livestock development project to increase the meat supply for the domestic market. The proposed loan would be the sixth for agricultural development in the Philippines 1/, but the first exclusively for developing the livestock sub-sector. Government would be the Borrower and the Develop- ment Bank of the Philippines (DBP) would be executing agency. DBP is a multipurpose development bank with a direct loan portfolio of about US$400 million. Its agricultural portfolio is only about 25% of the total and Project lending would be roughly 3% of its total loan portfolio. It has not been possible to appraise the DBP in all its operations, but the Agricultural Department constitutes a satisfactory on-lending channel for purposes of this project. 1.02 Generally, the Bank's experience with other agricultural projects in the Philippines has been satisfactory. About US$400,000 remains to be disbursed under Loan 393-PH (Agricultural Education); Loan 434-PH (First Rural Credit Project) has been fully disbursed. After an initial slow start, Loan 607-PH (Second Rural Credit Project) is moving ahead. Recently, the Bank concurred with the Central Bank (Borrower) that an expected 10% contri- bution from participating rural banks may be contributed by the Central Bank, or other Government sources, and that the contribution from participating farmers may be 10% on an average rather than specifically so for each investment program. Implementation under Loan 637-PH (Upper Pampanga River Project) has been very satisfactory. Loan 720-PH (Rice Processing and Storage Facilities Project) is just getting underway. It, too, is adminis- tered by DBP. 1.03 The Project would include on-farm development of about 400 integrated coconut/beef cattle farms on Mindanao Island, 25 hill beef ranches on Mindoro and Masbate Islands, 600 pig farms in the Central Luzon, Southern Tagalog and South Mindanao Regions, 450 poultry farms in the Central Luzon and Southern Tagalog Regions, and three slaughterhouses on 1/ 393-PH, 1964, US$6 million for agricultural education, UPAC (Los Banos). 432-PH, 1965, US$5 million for first rural credit project for small farmers. 607-PH, 1969, US$12.5 million for second rural credit project for small farmers. 637-PH, 1970, US$34 million for irrigation project (Pampanga river). 720-PH, 1971, US$14.3 million for rice processing and storage facilities.  Mindanao Island. In addition, the Project would provide for technical services to all sub-borrowers and for employment of two short-term consultants. 1.04 The Project was prepared with the help of the FAO//IBRD Cooperative Program, which sent two missions to the Philippines, one in April/May 1969 and the second in October/November 1970. To achieve the greatest impact on the rural economy, and in agreement with Government, the thrust of the Project was changed from supporting the further development of large product- ion enterprises to the development of semi-commercial medium-size to smaller production enterprises. The bulk of livestock production in the Philippines still comes from the latter group and backyard producers who characteristically have their main resources in agriculture whereas the larger producers may have their major resources in other sectors such as industry and commerce. Project areas were also modified, commercial poultry hatcheries dropped from the Project as the present output is sufficient for the demand, and three small regional slaughterhouses were added. 1.05 This report is based on findings of an appraisal mission, composed of Messrs. F. Knobel, M. McGarry, M. Walshe, R. Hanan (Bank) and M. McEvoy (Livestock Consultant), which visited the Philippines in June/July 1971. II. BACKGROUND A. General 2.01 The Republic of the Philippines, with an area of about 30 million ha, is situated in the Tropics of East Asia between latitude 40230 and 21'25'N. The archipelago extends over 1,600 km from north to south and comprises more than 7,000 islands, of which 11 account for about 95% of the total land area. Climate 2.02 High temperature, humidity and rainfall characterize the climate. Mean temperatures range between 210C in January to 19