Philippines - Shipping Project

CIRCULATING COPY FILE COPY TO BE RETURNED TO REPORTS DESK DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Not For Public Use Report No. P-1510-PH REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF THE PHILIPPINES FOR AN INTER-ISLAND SHIPPING PROJECT October 2, 1974 This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization.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.  Currency Unit = Peso (P) US$1 = 6.729 P 1 = US$.149 P 1,000 = US$149 P 1,000,000 US$149,000 Fiscal Year July 1 to June 30  REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF THE PHILIPPINES FOR AN INTER-ISLAND SHIPPING PROJECT 1. I submit the following report and recommendation on a proposed loan to the Republic of the Philippines for the equivalent of $20.0 million. The loan would be for a term of 18 years, including a grace period of 4 years and at an interest rate of 8%. The proceeds of the loan would be relent on the same terms to the Development Bank of the Philippines (DBP) for onlending at an interest rate of 12% with various terms for the acquisition of new and used ships and for major repairs and conversions. PART I - TiE ECONOMY 2. The most recent Economic Report - "Current Economic Position and Prospects of the Philippines" (No. 78-PH of April 20, 1973) was circulated to the Executive Directors on May 2, 1973 (R73-85). An economic mission visited the Philippines in April and its preliminary conclusions are incorporated below. The full report of the mission will be distributed to the Executive Directors shortly. Annex I contains a summary of country data. Recent Developments 3. Since 1972, the Government has re-formulated its development strategy by introducing a number of important and potentially far-reaching economic and social reforms through decrees in such areas as agrarian reform, taxation, customs administration and tariffs, banking and government organi- zation. These reforms provide an opportunity to improve the performance of the Philippine economy. Aided by the recent commodity boom in the inter- national markets, economic activity in the Philippines has increased consid- erably. The growth in real GNP, which had been about 5% a year for more than a decade, is estimated to have doubled and reached 10% in 1973. However underemployment and unemployment remain quite high, and in common with most other countries the rate of inflation has increased appreciably in the past year. These problems and the long-term implications of the energy crisis for domestic production, the balance of payments, costs and employment are now being examined by the economic mission. 4. The strong recovery of the economy in 1973 resulted from increased agricultural production, a recovery in the industrial sector including manufactured exports, a boom in export incomes and an expansion in public and private investment. The agricultural sector, which had suffered from adverse weather conditions during the previous three years grew by 11% in 1973. Rice production in 1973-74 is estimated to have increased by 25% over the level of the previous year when floods reduced production levels. This increase has been mainly due to favorable weather conditions, increased use of fertilizers, more supervised credit and increased investments in support- ing rural services as part of a general drive for rice self-sufficiency.  - 2 - The impact of the recent floods on rice production in the present crop year appears to be moderate, chiefly because of the short duration of the typhoon, and the quiick drainage and protection provided by the rehabilitation work undertaken after the 1972 disaster. The Government has vigorously implemented a program of agrarian reform among rice and corn tenants concentrating mainly on the larger holdings in the first phase. Titles are being transferred to tenants and supporting services improved. 5. The increased activity in agriculture has provided the base for renewed expansion of the industrial sector. The growth of industrial produc- tion for exports has also been stimulated by the Government's industrial export drive which included a range of export incentives. Nontraditional industrial exports, which have been increasing since 1970, are estimated to have doubled in 1973 to about $200 million. The prospects of increased profitability are attracting a large amount of new investment into industries such as plywood, textiles and garments, handicrafts, light consumer durables and electronics. 6. The growth in production was also assisted by the sharply acceler- ated public development outlays in 1973 made possible by a significant im- provement in the financial position of the Government. The Government has implemented a series of long-needed tax reforms and improvements in tax administration, such as customs and tariff reform, tax amnesties, reforms in corporate and local taxation, continuation of the export tax, and increased taxation on luxury items and on gasoline. These reforms resulted in a 37% increase in tax revenues in FY73, and an estimated 40% in FY74. As a result the ratio of Central Government tax revenues to GNP has increased from an average of 9% in recent years to an estimated 12% in FY74. 7. High prices for the Philippines' chief exports, including cocorut products, sugar, copper and wood products, were largely responsible for an increase in merchandise receipts of almost 70% in 1973. The merchandise trade account recorded a surplus of about $270 million, as compared with a $120 million deficit in the previous year. International reserves rose by $594 million during the year and stood at $876 million, equivalent to about five months of imports, at the end of the year, and had risen to $1.2 billion by May 1974. 8. However, in the latter part of 1973 inflation emerged as a major problem in the Philippines. Since mid-1973 consumer prices have been rising at an annual rate of more than 40%. This has been caused by the higher rate of world inflation, by higher export prices, by domestic food shortages, and more recently by the increased cost of petroleum. Provided there is a good harvest this year, the rate of inflation should moderate in 1975, but it probably will take 1-2 years for the price effects of the energy crisis to work themselves out fully. The rapid inflation has also exacerbated the decline in real wages which fell by a total of about 25% between 1969 and 1973. The urban wage earners have been most affected. In the past year, agricultural incomes have improved very substantially, while, with  -3- some exceptions, entrepreneurs have been able to pass on increased costs. Money wages will have to be raised in the near future if further deterioration in the living standards of wage earners is to be avoided. The Energy Crisis 9. Imported petroleum provides some 93% of the Philippines' total energy requirements. In 1973 the equivalent of 71 million barrels of petroleum crude and other petroleum products were imported at a cost of about $230 million c.i.f. When the energy crisis developed late last year, it looked as though economic activity in the Philippines would be severely disrupted. There were temporary dislocations while reduced quantities of petroleum were available, but the Government moved quickly with conservation measures to reduce non-essential consumption. By March these problems had been overcome and the Philippines is now obtaining sufficient petroleum for its needs. In 1974 imports of petroleum and products are likely to be about 73 million barrels at a cost of about $820 million c.i.f. 10. In response to the energy crisis, the Government has decided to accelerate the development of local energy sources, especially hydropower and geothermal energy. These will be supplemented with nuclear energy in the 1980's. The transport sector, which now accounts for 40% of total energy consumption, is likely to continue to be the major consumer of energy. The growth in demand for energy will therefore be influenced by policies that affect the pattern of expansion in this sector. In any event, total demand for energy is expected to grow at about 10 percent a year, and even with more rapid development of natural power sources, petroleum would still account for 85% of total energy needs by 1980. The Philippines does not have any commercial oil fields, but the Government has recently taken steps to encourage more exploration. Growth Prospects 11. Earlier this year the Government decided that, despite the energy crisis and rapid inflation, the growth momentum built up last year should be maintained, to provide for a continued increase in employment and to ensure that export income expands rapidly enough to meet most of the country's for- eign exchange needs. The labor force will continue to grow at almost 3% a year for another decade. Providing half a million new jobs a year as well as dealing with unemployment and underemployment will be a major task. 12. The economy has the potential to continue growing at 7-8% a year in real terms. This growth is not likely to be seriously constrained by lack of foreign exchange. Despite the big increase in the cost of petroleum and other imports, there will be only a modest deficit in the overall balance of payments this year, because of continued high prices for major export commodities. Moreover, the rapid increase in export prices at a time when external debt has not been changing, has resulted in a sharp fall in debt service from 23% of export earnings in 1972 to an estimated 14% this year. There has also been a substantial improvement in the climate for private  - 4 - investment in the Philippines, especially in exports. Unless there is a calamitous drop in export prices, the Philippines should be able to maintain a reasonable balance of payments position throughout the rest of the decade. There will probably be a substantial increase in financing requirements, but with rising domestic incomes and a substantially improved capacity to borrow abroad, it should be possible to mobilize the needed resources. 13. A substantial increase in both public and private investment to support the growth and employment strategy is required, with priority being given to increasing food production, to export ventures and to selective import-,.1-acing investments. The Government plans to spend about P 17 bil- lion on infrastructure and other public investments during FY74-77; about 40% of the proposed investment program would be allocated to the transport sector, 21% to power and 13% to irrigation. This would mean doubling the pro- portion of these expenditures to GNP from 1.7% in FY68-72 to about 3.5% in FY74-77. To finance this program, the ratio of taxes to GNP would have to be increased to 15-16%, and public savings would have to be raised from the present level of 1.4% of GNP to beyond 2% in the next few years. With the Government's program for further tax reforms, there are reasonable prospects for achieving these objectives. Even so, it would mean continued heavy reliance on public borrowing from the local market and from abroad. Implementing this program would also call for continued improvements in public sector management which has already been strengthened by the Govern- ment reorganization. 14. The improved climate for private investment is attributable to the strong performance of the economy in 1973 after three years of stagnation, the current higher prices for many commodities, and the efforts of Govern- ment to attract more foreign investment. A number of big projects are pro- posed in mining, wood processing, fertilizer, steel, aluminum and other industries which seem likely to push up the private investment rate from recent levels of about 16% of GNP to perhaps 22% by the latter part of the decade. A large portion of the funds for these projects is likely to come from abroad. Even so, the supply of long-term funds from domestic sources will need to increase substantially. Balance of Payments 15. Because of continued highi prices for major export commodities, export receipts are expected to increase by 33% this year to $2.5 billion. Merchandise imports are likely to increase by about 90% to $3.1 billion, because of the increased cost of petroleum and the rapid increases in the prices of other imports. In response to the energy crisis, the Central Bank negotiated a series of standby credits with various foreign commercial banking groups earlier this year. The economic mission estimates that the overall balance of payments will record a deficit of about $100 million this year. 16. After allowing for continued reserve accunulation and repayment of loans, the total foreign exchange requirements for the period 1975-79 would be about $7 billion. About $2.5 billion would be provided by remittances,  official grants, direct investment, and short-term trade finance. The re- maining $4.5 billion would have to come from foreign borrowing. Last year the Bank estimated total requirements for 1974-78 at about $4 billion. In June 1973 the Consultative Group for the Philippines met and accepted the need for rising levels of commitments for development projects to support the Philippines' increased development program. The increased estimate of requirements reflects the effects of inflation, the more optimistic outlook for growth in the Philippines, and the improved capacity to carry foreign debt. 17. Borrowing on this scale would not pose serious problems for balance of payments and external debt management. At the end of 1973, the Philippines' medium and long-term external debt stood at about $1.9 billion, of which pub- lic debt was 44%. Because the Government has exercised strict control over the amount and type of new external borrowings, the total amount of debt out- standing has not increased much since 1970, and the maturity structure has improved. Moreover, the debt service ratio is expected to remain at about 14% in 1975. With this moderate debt burden the Philippines will be able to contract substantially larger amounts of external debt which would probably lead to a small increase in the debt service ratio, perhaps to about 14-15% by the early 1980s. 18. The Philippines' development program will continue to require resources in excess of the foreign capital which will become available for financing the import component of development projects. Some financing of local currency expenditures will be justified, especially for projects of economic and social importance which need only limited amounts of foreign exchange. PART II - BANK GROUP OPERATIONS IN THE PHILIPPINES 19. The Philippines has received 25 Bank loans and three IDA credits totalling $552 million, net of cancellations. About 52% of the Bank/IDA lending, $286 million, has been for infrastructure projects in power, trans- portation, water supply and for education whilst $25 million has been for population. The remainder has been divided about equally between agri- culture and industry. Of this, $126 million has been for irrigation, livestock, rice processing and rural credit and $115 million for industry in three loans to the Private Development Corporation of the Philippines and one loan to the Development Bank of the Philippines. There has been a marked improvement in the way Bank financed projects in the Philippines have been executed in the last two or three years compared with experience in the 1960's when shortages of peso counterpart funds combined with poor administration caused serious problems. Apart from the rice processing project, where some major changes made necessary by changed circumstances have recently been made, all these projects are now going well. Annex II  contains a summary statement of Bank loans, IDA credits and IFC investments as of August 31, 1974, and notes on the execution of on-going projects. 20. The size of the Bank/IDA lending program increased substantially in FY74, reflecting the ambitious development program of the Government and its improved capacity to prepared and implement projects. Commitments in FY74 amounted to $165.1 million compared to an average of about $30 million a year in the previous five years. Future Bank lending will continue to concentrate on public infrastructure and agriculture. We will also con- tinue to help industry and provide more assistance for projects in the social sectors. 21. In addition to the loans already approved bv the Executive Directors for the Population and Sixth Power Projects, the FY75 lending program is expected to include loans for the following projects -- Fourth Industrial Credit (PDCP), Tarlac Irrigation, Mindoro Rural Development, and Small Industry. The Fourth Industrial Credit (PDCP) loan would provide funds to PDCP for relending to finance direct imports for projects, mainly in manu- facturing industry. The Tarlac Irrigation project would help improve irrigation systems in a heavily tenanted area of Luzon. The Rural Development project would help finance a range of rural investments designed to promote the integrated development of the island of Mindoro. The Small Industry loan would provide funds for relending to small firms and possibly technical assistance to help strengthen the institutions serving these firms. 22. Beginning in 1972 the Philippines received some financing from IDA, but on the basis of a reappraisal of the prospects for the Philippines' balance of payments, and in view of the sharply increased needs of the poorer members of IDA for concessional assistance, further IDA lending to the Philip- pines does not appear to be justified. The Philippines has the capacity to borrow substantial amounts abroad to finance some of the costs of the increased investment program now planned. At present the Bank/IDA share in total debt outstanding is about 9% and its share in debt service is about 5.5%. Since the Philippines will have the capacity to service more commercial debt in future, it is unlikely that the Bank's share in debt service will rise even with a higher level of lending. 23. IFC has made commitments in the Philippines totalling $69.2 million for investments in eleven companies in the fields of development banking, power, telecommunications, ceramic tiles, paper, petroleum products, nickel mining and refining, chemicals and synthetic fibers. Of these investments, as of August 31, 1974, $18.2 million have been sold, $0.4 million cancelled and $1.8 million repaid, leaving a net porpolio of $48.8 million. On the same date $13.0 million was undisbursed. Preliminary proposals have been received for an aluminum smelter and other projects in the pulp and paper, dinnerware, metal alloys and shipbuilding fields.  - 7 - PART III - THE TRANSPORT SECTOR 23. Ports and shipping play a dominant role in the transport sector of the Philippines and continue to provide the most important means of transport and communication between the islands of the archipelago. In recent years an expanding network of highways, particularly on Luzon, has provided access to the interiors of the larger islands, and road transport has played an increasingly important role. The relatively short inland distances have limited the railways to a small fraction of the total traffic. Development of the transport sector has had a history of haphazard planning and poor coordination compounded by a lack of funds which has made it impossible to maintain or improve transport facilities to adequate levels in an archipelago where numerous islands, difficult terrain and heavy rainfall have always been natural obstacles to the provision of transport infrastructure. Over the past eighteen months, there has been a substantial increase in the amount of funds made available for infrastructure investment and maintenance, and the agencies concerned with infrastructure planning and coordination are being overhauled. 24. The Philippine merchant fleet totalled approximately 1.6 million gross registered tons (GRT) in 1971. This includes 130 ocean-going vessels totalling 830,000 GRT and 130 inter-island vessels of over 1,000 GRT each totalling about 280,000 GRT, the remainder being craft of under 1,000 GRT each. About 65% of the interisland fleet and 41% of the ocean-going fleet were 20 or more years old in 1971. In 1968, seven new cargo/passenger vessels for inter-island services, of 7,000 deadweight tons each, were bought with aid from the Federal German Republic. More recently, a few tankers and cargo vessels have been acquired with private external financing. Some vessels are poorly maintained, built to obsolete standards and ill-suited to modern cargo-handling methods and their safety record is also poor. This applies particularly to the inter-island services. 25. There are some 90 national and 390 municipal ports throughout the Philippine archipelago, plus numerous private piers and wharves. Some six national ports handle all the international traffic which goes through public ports. Manila, much the largest public port, accounts for about 70% of all imports and 5% of exports. The other ports handle inter-island traffic only. Most of the public ports are small and the Government envisages the gradual elimination of the less economic ports from the national system. This is being achieved through the concentration of investment at selected locations, a process which should yield economies of scale. Most of the public ports are poorly maintained and have not been designed for modern cargo-handling techniques. Sheds are often lacking, although private ware- houses are usually available nearby. Cargo-handling is generally in the hands of private companies, and many ports lack equipment. 26. The highway network consists of about 16,000 km of paved roads, 38,000 km of gravel, and 20,000 km of unimproved roads. The highways of Luzon and Mindanao comprise three-quarters of the entire system, most of  - 8 - the rest being on the main islands of the Visayas. The condition of the road system is generally poor, with even the national primary and secondary roads in a deteriorated condition, because of inadequate maintenance. 27. The most important railway is the wholly Government owned Philippine National Railways (PNR), which has about 1,000 km of main line and 1,000 km of branch lines on the island of Luzon. The main line is paralleled by high- ways for most of its length. Management and operation of the railway has been poor and unprofitable and maintenance of facilities inadequate. PNR has been carrying out an improvement program since 1972 and in FY74 expects an operating surplus as a result of increased traffic, increased tariffs, and improved cost control. The next phase of the program is to rehabilitate the track. 28. Manila, the only international airport in the Philippines is served by Philippine Air Lines (PAL) and 15 other airlines. An extensive network of domestic airports is now served by PAL, which took over the two other major domestic airlines at the end of 1973. Domestic passenger traffic has been increasing at about 17% a year over recent years. Transport Planning and Coordination 29. As part of the continuing GovernmLent reorganisation, transport planning is now the joint responsibility of the National Economic and Development Authority (NEDA), the Department of Public Works, Transportation and Communica- tions (DPWTC), the Department of Highways (DPH), the proposed Philippine Port Authority (PPA) and the Maritime Industry Authority (MIA). The changes stemmed in part from a UNDP financed Transport Survey in 1970, for which the Bank was executing agency. Further recommendations on organisation and planning were made by consultants employed in connection with Bank financed projects. Each agency will have a planning service responsible for transport planning within its respective jurisdictions. The Pnilippine Port Authority and the Maritime Industry Authority are new organizations and they are in the process of organizing their planning services. The PNR is responsible for planning railway development. 30. Inter-island shipping regulation is now to be carried out by the MIA, as part of that agency's regulatory powers over the maritime industry. The main objective in exercising these powers is to provide better coordination, rather than increased control, of the maritime industry. This should improve the efficiency of the sector. 31. The Government's four-year public infrastructure program for highways and ports (1974-77) calls for a very substantial increase in public investment, and a large number of transportation projects have been identified. This emphasizes the importance of the role of planning in the various Government Agencies in establishing priorities amongst competing projects, since the Government clearly will not be able to implement all the projects proposed within this period. DPWTC is already receiving technical assistance, financed by the UNDP, in its physical planning studies. A general improvement in the  quality of basic data is also required. Steps have already been taken to improve the planning and implementation of highway projects. The Government is also strengthening the Port Programming and Planning Branch of the Bureau of Public Works (BPW) to improve the collection of data and the preparation of projects for all national ports. A Philippines Ports Authority is being established with technical assistance financed under the Bank's second ports project (Ln. No. 939-PH). It will have responsibility for developing a na- tional port policy and will have general jurisdiction over all port districts. The MIA will collect data for shipping consistent with that collected for ports. PART IV - THE PROJECT 32. The proposed project was identified in July, 1973 by a Bank reconnaissance mission. It follows a series of four previous Bank loans for transport infrastructure development in the Philippines, the most recent of which was the Second Highways Project (Ln. No. 950 - PH) in 1973. A Bank mission appraised the project in January 1974 and negotiations were held in June 1974. The leader of the Government's negotiating team was Miss Fe Villafuerte. The Appraisal Report (No. 437a-PH) on the project is being distributed to the Executive Directors separately. Annex III provides a loan and project summary. 33. A principal purpose of the loan would be to assist in strengthening existing institutions and establishing a new institution serving the shipping sub-sector. Therefore the loan would also assist in the establishment and organization of the MIA, the formulation of a maritime industry develop- ment program, as well as providing technical assistance to DBP. The loan would encourage increased efficiency and improved safety standards of the inter-island fleet, and would help to improve Government coordination and supervision of the shipping sector. The proposed loan of $20.0 million would be made to the Government, for on-lending through DBP. The Bank has previously made three agricultural loans and one industrial loan through DBP. The proposed loan would provide financing for the acquisition, conversion and major repair of vessels of the inter-island fleet, with em- phasis on replacement of ships over 20 years of age and the major repair of ships up to 16 years of age. As of December 31, 1973, DBP's Maritime Section had a shipping portfolio of 14 loans and 6 guarantees totalling V 233 million (US$34.7 million). This was less than 1% of its total portfolio. Nine loans and 5 guarantees had been in arrears (principal and interest) for over one year. This reflects both a past weakness in DBP's appraisals, and the effects of the revaluation of the Deutsche Mark, the currency of denomination for the bulk of its shipping loans. 34. The Government would relend the loan proceeds, at the same interest rate, to DBP, which would in turn on-lend the funds to shipowners at an in- terest rate of 12% in all cases and for terms of (i) up to 16 years including 2 years grace for new ships, (ii) between 8 and 12 years including 6 months  - 10 - grace for used ships and (iii) up to 5 years, including one year's grace for conversions and major repairs. Sub-borrowers would assume the foreign ex- change risk on the currencies of the countries from which goods and services are procured. The Government would bear any residual exchange risk between this currency and the currency owed to the Bank. 35. DBP was established in 1958 as a wholly Government-owned develop- ment bank. Its financing in the past four years accounted for 11% of total fixed investment in the Philippines. The bulk (79%) of its lending is for industrial financing followed by agricultural financing (9%) with the bal- ance of 1?% going for municipal lending, lending to private development banks and for real estate. DBP has experienced severe financial difficulties in recent years principally because heavy debt-service obligations were incurred as a result of guaranteeing a large amount of private foreign borrowing between 1965 and 1970. Although the situation remains serious, it is improving and arrears now relate mainly to those foreign currency guarantees made by DBP before the de facto devaluation of 1970. The Maritime Section in DBP's In- dustrial Department would have the main responsibility for handling sub-proj- ects to be financed under the proposed loan. It has a well qualified and competent staff of 21, which has the capability to undertake adequate proj- ect appraisal. DBP would further strengthen its maritime lending operations by hiring a maritime finance expert and a maritime technical expert, each for two years to act as advisers. They may be financed from bilateral sources, in which case the funds earmarked for this purpose under the loan could be used by DBP for additional sub-projects under the proposed loan. The Maritime Section would work within the guidelines of the Statement of Operating Policies and Procedures, adopted by DBP in connection with the Industrial Investment Credit Project (Ln. No. 998-PH). The Bank would also review the first ten sub-projects under the loan, after which a free limit for sub-loans would be established. These arrangements would ensure that Bank funds would go to shipping projects which are economically as well as financially sound. 36. The Government has established MIA to place coordination and super- vision of the maritime industry within one agency. MIA is responsible for issuing certificates of registration, and for organizing a data collection system for shipping. MIA will also prepare a ten-year Maritime Industry Development Program within two years of its inception. Technical assistance will also be provided from a recognized international ship classification society. The Philippine Coast Guard will be assisted by MIA in carrying out its ship inspection services. As in the case of the technical assistance for DBP, technical assistance for MIA will be financed either from bilateral aid or from the loan if bilateral funds are not available. Cost of the Project 37. The total cost of the project is $34.1 million, with an estimated foreign exchange component of about $32 million (93% of total project costs). The proposed Bank loan would finance 59% of the total cost of the project  - 11 - (63% of the foreign exchange costs). This percentage may vary because shipowners may choose to finance a larger proportion of a sub-loan with their own equity than expected, and because in the case of sub-loans for used ships DBP's contribution will vary depending on the age of the ship to be acquired. For new ships DBP's loans would cover 80% of the procure- ment cost, for used ships 50-60% of the cost (depending on the age of the ship acquired), and for major repairs and conversions, about 80% of the cost. Since DBP sub-loans would not cover the full foreign exchange cost of ships acquired abroad, the Government would ensure that shipowners would be able to obtain the additional foreign exchange needed to cover their equity contribution in the imported ship. The estimates include the cost of construction of new ships, procurement of second hand ships, and conversion or repair of existing inter-island ships. Both construction of new ships and repair of existing ships may be carried out locally. The estimates also include funds for technical assistance to MIA and DBP in the event that bilateral financing cannot be arranged. US$ million Items financed with IBRD participation Local Foreign Total (See Annex III for further details) New and used ships 0.8 29.2 30.0 Major repairs and conversions 1.2 1.8 3.0 Technical Assistance and Training 0.2 0.9 1.1 2.2 31.9 34.1 Procurement 38. Procurement of new ships would be on the basis of international competitive bidding in accordance with the Bank's guidelines, against owner's outline specifications approved by DBP's Maritime Section. Since some new ships may be built in the Philippines, a preference of 15% of the c.i.f. price of the imported vessel, or the customs duty if lower, would be extended to domestic ship builders in the evaluation of bids. Procurement of used ships would be on the basis of quotations secured by DBP from international shipbrokers, due account being taken of price, suitability, delivery time and costs of having the ships brought up to international classification standards. 39. Ship conversions and repairs to be financed under the loan do not lend themselves to international competitive bidding because of tlle specialized nature of the work and the small amount of each sub-project - about $200,000. Contracts for the work would be let in accordance with normal commercial practice, and are unlikely to be carried out abroad, since Philippine shipyards are very competitive. Repairs would be carried out according to the technical standards of an international classification society. Materials would be procured from local commercial sources where international suppliers are widely represented.  - 12 -- Disbursement 40. The Bank would reimburse DBP for the full amount of its sub-loans to shipowners except for major repairs or conversions where the Bank will finance 75% of the sub-loans (the estimated foreign exchange cost). For consultant's services, disbursement would be on the basis of actual foreign exchange costs. DBP is expected to co. the Bank's loan over two years and fully disburse it within four years. Economic Justification 41. Inter-island traffic has increased at about 5% a year for freight and at about 7.5% a year for passenger traffic over the last 10 years. Freight traffic, estimated at about 1 million tons a year in the early 1960's had in- creased to 3.5 million tons a year by 1972. Passengers carried totalled 1.5 million in the early 1960's and had likewise increased to some 3.5 mil- lion in 1972. The growth in freight traffic has been caused largely by the growing importance of Mindanao as a supplier of foodgrains to Luzon and the Visayas and by the dominance of Manila as the industrial center of the Philippines. The growth in passenger traffic is a result of increasing urbanization and transmigration, together with rising income levels and the close ties which Filipinos maintain with their home provinces. Traffic is likely to grow faster in the future in line with a more rapid overall rate of economic growth. Annual growth rates for freight and passenger traffic of 5% and 7.5% respectively have been assumed. These imply about 5.25 million tons of freight and 6.25 million passengers carried by 1980. 42. An economic evaluation of the project was undertaken on the basis of two typical cases of actual ship acquisition plans submitted to DBP by shipowners. The first case is the introduction of a modern, second-hand, 5000 GRT roll-on roll-off type ship on the main Manila-Cebu route replacing a number of conventional passenger/cargo vessels. This yields an economic rate of return of about 30% with a 25 year project life. The second case is the replacement of 25 year old combined passenger/cargo ships by modern, second-hand 1200 Dwt passenger/cargo ships which yields an economic rate of return of about 27%. Both cases result in upgrading inter-island shipping operations and enable simultaneous scrapping of old and less suitable World War II surplus ships, which have been a serious safety hazard. They both result in a reduction of about 15% in the economic cost of traffic carried. More generally, the improvement of inter-island shipping would result in more efficient transport of domestic production and would enhance the con- tinued overall economic development of the Philippines. PART V - LEGAL INSTRUMENTS AND AUTHORITY 43. The draft Loan Agreement between the Republic of the Philippines and the Bank, the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement of the Bank and the text of a  - 13 - draft resolution approving the proposed loan are being distributed separately to the Executive Directors. The agreements referred to in Part IV - the Project - are set forth in sections 3.05, 3.06 and 3.08 of the Loan Agreement. The Loan would not become effective until a Subsidiary Loan Agreement was concluded between the Government and DBP. 44. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 45. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments October, 1974   AINE I rpeg 1 Of 3 pages OJUI2RY DATA - PhllIPPINES ~~~'~IOS (sid-187 P~~ar heof arable lend SOCIAL D(DICATOR R.farenoe Ca.tr4or.a OM CAPnIA Ui(ATLAS BASIS)a A60/a 240 /b 210 /b 34.0/b 290 /0 CBbdriHltith r-ato (P., thoeaesd) 45AI 4c 3 /c 10 ~ 26 Crude death rat. (Per thousand) ..12 7Wc 10 7W 15_ 3 Infant eartality rate (par tLhousa,d live blrth8) .. 0 60-90 120.150 Life axe-t-oy at birth (yeace) 51 A 53 59 55 65 Oroes reprOd-tibn. rateLA 3.3 3.2 2.9 2.5 P.plrti-o groot,, raei 3.0 3.0 /f 3.1 If 2.5 If 2.4 If Popal&ticr growth rate - urnan 2/g ,'hi 5 7W 77 6 7W AS. otrutor. (peroet) V ~ 0-11 42 .. 0 15-61 5 53 ..51 65 and over 3 L ...4I D-',darcy ratio . 1.5 /1 1.3 /b. . 1.0 /I lu4 /1 tirbam psoulati.n a. peroeot of total 31 /gh 32 Ih 25 /I 39 QI 41 /k Famil-y pl.-oIng, W. of acoeptoro -mua.ti-e (thocs. .. 13 490 232 No. of users (1 of ..arrled woenm) .. 10 4 RWA=M~Tbor foros ( thosanmds) 9,100 13,200 lb 16.900 I 16,000 10,24070 ?eomtO epicyod iv agrivltur. 61 5o 7O 77 no 17/ Peronatage maoployed 117- leret of I tlM I i.oome recei,ed by highe-t 5% 29 ~ 25 /b1 , 3 16 Csl Perveot. of ,aiionm1 incom reei-ed by highest 20% 56 A,o- 54 /0 0 46I /0 61 I r 36 4l fer o.tio otlool i.- -Oe r ived by lowest 20% 137W 12 73 Peruont of ..tiosa 1o3 eeodbylae 0 , 12W~ 13 214 W,meoby to ONo owners . ..23 % owned by allest 10% of owners ...2 FOpulatioc per phymlolan .. ~~~~~~~~~ ~~~~~~9,100 Is 7,970 2,220 2.210 It Population per mreiog person . 5,390 7; 6,650 1,880 1,70 o7 Population per hoepita1 bed 1,15 /,,I 850 rcb 850 190 1,9620 Per ..pit. calorie eupply ae % of reqoiremnot. 4 80 Iw a7 /v 96 Io 130 Ix 106Il, Pea capita Protein mapply, total (grome per dayrL 4P X 53 r; 01T 7d 77 72 Of ChAdc, 13.a and poalese9 2 17 T 22 7 1 Death rat. 1-4 yearoa/ 397 227;. M. /8 primary eahool enrolleent ratio 91 / 112 /d 80 /q 111 /0 101 Adjudted 27W esndary eohool aoioleect ratio 21 IS 7q 13 Zi 26 Li1 T.,arI f iSoling pr-id.d, first aod aeond leel1 10 12 13 12 vOat ional `eroll"e`t s of ec. achool enrollmen.t l4 10/d aa 12 Z". 14 15 / AduIlt literacy rate %. 702 7~ 0 Z 55 l-am 81 Ver0vN. of pereone per rom. (urban) . . 2.2 /ab ai Perceot of occupIed unite withouat piped water ..66 /d . J/ai.a AN Acoass to eleotricity (a. 9 of total popualation) 17 /..I 23- I? U1 at a 62 Perceot of f.ral. populaticos connected to electricity 6I 6 13 10 1-~ir re Per 1000 Ppoplation 22 L5 /a 78 89 026 Paeeongroarse Per lOO Ppeulation 3 8 5 44 2 lseotri. perr coooootion (koCh p.c.) 101 229 120 215 308 Newsprint ooosompttoo p.c. kg per year 1.3 1Lk 1.6 lab 1.0 2.0 3... Not..e Figures refer eithe to the lateet periodo or to ooo feoiom a temperature, bndy w.ialtt, and the lat.ot Year. Lateet periodo refar in pri.oiple to dietribatio, by .ageand aen of uatineal Popalationi. the years 1956-60 or 1966-70j the latest yearse in prin- /6. Protao etandrda (reqfresnet.) for .11 ecantriss a.e etab- dpi. to 1960 and 1970. liAhed by USDA Ecaonmeo Remearoh SeryCoe Provide folr a311m The Per Capita Wha eatianeto is ate~rkvt prioso for allowa,,e of 60 grams of total protein per day, and 20 green of y-ar Otthr than 1960, clculated by the Iame omrrbon"ro miani and boles protein, of which 10 rarma shoold be animal technique e. the 1972 World Bank Atl.s. protein. Theme atdardAo are aewMeht ieee thee those of 75 Li Averge .umh- of daughtero per -sa of rapraduntire green of total protein and 23 gress of pnmaprtein as as age. averag for the world, propoaed by PAO in the Third World Food zi Pbpulati.. growtb ratee are for the decoadso ending in w y 1960 end 1970. .Since stodiea have 9ugge.ted that oruds death rtate of dholidran AjRatio of -nder 15 and 65 and oer age brckcheto ages 1 throagh I may he used Ce a first apprcimatlbo index of those in laber forc bracket of egee 15 through 61. sClOOtritien. Y, AO referenc otandards rep . .oent physiological re- Li Percetage enrolled of onr-easpoending pop.latlon of coho1 age qulrmentoM for sorma activity and health, takig dO defined for emoh oontry. IA C_oorted by applylng to tie 19,0 figura the growth rate of ONP/.-Pit. in real terms fror 19tc to 1910; 191 7E 19615-70 [[N aetivate; /d 196?; /a 19l6-4a9; If 1960-71; I / 19506;I ortedfrato fara,oeI De,,.4-24C p i5Y /,,O~ ro 7o0 populatIon; /5 POvoilMon of the 1ocalities withino the mool- cipoilityl!ld65t: 3531ITtr 1Otl e- cetro of provinces an ii.tricti6; Ac Urban centere With 5,000 or core peple; / Ratio of population onder 15 and 65 and over to total labor forca; I.~ _Jnployed labor force; /n 1961; / Householdo; ~ Urban oni; ~ 1968 P - Personal disposable incor, ao a forcti.c of number of bousebolsi; 7-; Pereo_c,inT g ...dovr_ vent eervicoo Only; /t Thoehr on the register, cot all w-kiog ic the -ootry; /o 1962; 1o--1969; /u i96o-62; /01961-66; /Z T-viti7a; In I.clude. overage etodect; /aa Public edu~catloc ooly; lab Igluding ruiral haefpita3o; Iac Igta 0n vocational educatioc rafo tO 2p40110 Schools and o1 technical edo.ati.o at tic 9o--sem---aY lo-!; 7ad 15 Years and over; Ac 6. years anad over; /af 1972; ILM Definition of lit-ray -4ko-nf; /Ah "tal, oron o-a -ard;-/ai Oa..ed On reulo TcPle s-rey; /aj As a Percen.tage of total dwellings; lobkOnports o-lyl /al VWagend eelary!monee of howeeholde; /c Water pipedITnaide; /an 1966-67. Ko-va -0 haeos selected 00 tiehaei b Of its similar pop.latiro, location and 000000 level and liky the Philipplnen, it is ecoecled to grow rapidly in the ovn years. J6 August 16, 1974.  ANNEX I Page E of 3 pages ECONOMIC INDICATORS GROSS NATIONAL PRODUCT IN 1973 ANNUAL RATE OF GROWTH (*, constant prices) Pesos Mln. j 1960-65 1965-70 1971 1972 1973 GNP at Market Prices 71,766 100.0 5.5 5.7 6.5 4.3 10.0 Cross Domestic Tnvestment 13,942 19.4 12.6 1.6 5.9 -3.5 9.4 Gross National Saving 17,013 23.7 15.0 3.6 13.2 -8.2 49.1 Current Account Balance -3,071 2.4 Exports of Goodc, NFS 16,856 23.5 11.0 4.5 5.0 1.5 18.7 Imports of Goods NFS 13,000 18.1 7.3 7.2 5.4 2.7 13.1 CUTPUT LABOR FCRCE AB, PRODUCTIVITY IN 1973 Value added Labor Force / V. A. Per Worker US$ Kln. * Mln. US $ Agriculture 1,4914 32.2 7.0 52.9 213 61.0 Industry 1,228 26.4 2.0 15.2 614 175.9 Services 1,922 41.4 4.o 31.6 481 137.8 Unallocated . . 0. 0.2 . _ 4,644 100.0 15.3 100.0 349 100.0 GOVERNMENT FINANCE General Government Central Government Mln.) $ of GDP (Pesos . in.) % of GDP 197 197 196 -7 1973 1971 1972 1973 Current Receipts .. .. .. 6,989 8.9 8.3 9.8 Current Expenditure 8.0 7.6 8.4 Current Surplus 994 0.9 0.7 Th Capital Expenditures .. .. .. 1,444 0.5 1.6 5, 2.0 External Assistance (net) .. .. .. 249 .. 7 .4 MONEY, CREDIT and PRICES 1965 1969 1970 1971 1972 1973 (Million pesos outstanding end period) Money and Quasi Money 5,136 8,959 10,140 11,720 13,243 16,837 Bank credit to Public Sector 7 980 3,s65 5,479 3,907 4,778 6,541 Bank credit to Private Sector 8,225 15,139 15,396 18,010 22,892 25,377 (Percentages or Index Numbers) Money and Quasi Money as * of GDP 21.1 27.0 25.0 23.2 23.5 23.5 General Price Index (196s=1oo) 0oo.o 111.4 137.7 159.3 175.3 218.4 Annual percentage changes in: General Price Index 2.2 1.3 23.6 15.7 10.0 24.6 Bank credit to Public Sector . 27.9 -2.4 12.3 22.3 36.9 Bank credit to Private Sector .. 9.0 17.2 17.0 27.0 10.9 J No projections are provided in this annex since existing projections are being revised, Constant i9b7 prices. 3/ Total labor force; unemployed are allocated to sector of their normal occupation. "Unallocated" consists mainly of unemployed workers seeking their first job. j Based on "actual" figures from the "Cash Budget". Data prior to 1971 not available. a Counterpart funds from external commodity aid. o/ Economic mission estimates. v/ Covers credits from all important financial institutions. ..not available . not applicable  ANNEX I Page 3 of 3 pages TRADE PAYMENTS AND CAPITAL FLOWS BALANCE OF PAYMENTS MERCHANDISE EXPORTS (AVERAGE 1971-73) US' mln.- - 16 1971 1972 1973 7' (Million us$) Coconut Products 284.7 21.5 Sugar Products 244.3 18.4 Exports of Goods, NFS 1,397 1,432 2,443 Forest Products 314.3 23.7 Imports of Goods, NFS 1,422 1,484 2,008 Mineral Products 254.0 19.2 Resource Gap (deficit = -) -25 -52 +435 Fruits and other 87.7 6.6 agricultural products Interest Payments (net) -76 -92 -53 Other manufactures 140.7 iO.6 Workers' Remittances Total 1,325.7 100.0 Other Factor Payments (net) -24 -33 -60 Net transfers 134 188 2 4 EXTERNAL DEBT, DECEMBER 31, 1973 Balance on Current Account +9 +11 55 us$ Mln Direct Foreign Investment -4 -22 77 Net MLT Borrowing Public Debt, incl. guaranteed 829.9 Disbursements 338 390 377 Non-Guaranteed Private'Debt ' 1,041.0 Amortization 302 250 335 Total outstanding and Subtotal 3140 U disbursed 1,870.9 Capital Grants 1 Other Capital (net)! 134 15 -43 Other items n.e.i. .2/-144 -106 -38 DEBT SERVICE RATIO MOR 1973 7 Increase in Reserves (+) D +)3T +_W +59T Gross Reserves (end year 4 524 735 1,416 Public Debt, incl. guaranteed 7.9 Net Reserves (end year) -20 80 753 Non-guaranteed Private Debt 10.4 Int. Reserves (end year) 244 282 876 Total outstanding and disbursed 18.3 IBRD/IDA LENDING, (AUg t 31, 1974 (Killion, us$) Fuel and Related Materials. IBRD DIA Imports of Goods, NFS 1,422 1,514 2,008 - c.f which: Petroleum 141 147 184 Outstanding and Disbursed 154.2 3.6 RATE CF -XCHANGE Undisbursed 305.0 28.6 Outstanding incl. 9'