Philippines - Second Livestock Development Project

Report No. 1070-PH FILE COPY Philippines Appraisal of the Second Livestock Development Project February 20, 1976 General Agriculture Division East Asia and Pacific Projects Department FOR OFFICIAL USE ONLY International Bank for Reconstruction and Development International Development Association This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS US$1.00 = Pesos (t) 7.50 ' 1.00 = US$0.133 WEIGHTS AND MEASURES - METRIC SYSTEM 1 hectare (ha) = 2.47 acres 1 kilometer (km) 2 = 0.62 miles 1 square kilometer (km ) = 0.3886 square miles 1 meter (m) 2 39.37 inches 1 square meter (m ) = 10.76 square feet 1 kilogram (kg) 2.24 pounds INITIALS AND ACRONYMS BAE = Bureau of Agricultural Extension BAEcon = Bureau of Agricultural Economics BAI Bureau of Animal Industry BOI Board of Investments BPI = Bureau of Plant Industry COA - Commission on Audit DBP Development Bank of the Philippines DNR = Department of Natural Resources FTI = Food Terminal Incorporated NEDA = National Economic Development Authority NFAC = National Food and Agricultural Council NMIC = National Meat Inspection Commission PLA Pasture Lease Agreement PNB = Philippine National Bank UPCA = University of the Philippines, College of Agriculture GOVERNMENT OF THE REPUBLIC OF THE PHILIPPINES Fiscal Year July 1 to June 30  FOR OFFICIAL USE ONLY PHILIPPINES APPRAISAL OF THE SECOND LIVESTOCK DEVELOPMENT PROJECT TABLE OF CONTENTS MAIN TEXT Page No. SUMMARY AND RECOMMENDATIONS .......... .. ............... I . INTRODUCTION . ......................................... 1 II. BACKGROUND ............................................ 2 A. General .......................................... 2 Climate ..................................... 2 The Economy ................................. 2 B. The Agricultural Sector ................. 3 Contribution to the Economy ............... . 3 The Livestock Sub-sector and Government Policy .................................... 3 Demand and Prices ........................... 4 Livestock Population and Production Systems . 4 Animal Health ............................... 6 Agricultural Credit ......................... 7 C. Development Bank of the Philippines .... .......... 7 D. Implementation of the First Livestock Development Project ..................................... 9 E. Agricultural Services ............................ 10 Institutions ................................ 10 Marketing ................................... 11 F. Project Formulation .............................. 11 III. THE PROJECT ........................................... 12 A. General Description .............................. 12 The appraisal team comprised A.J. Blackwood, D.J. Babelon, M.L. Brown (Bank), D.I. Sillar, E.W. Root and M.J. Walshe (Consultants). This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  -2- Page No. B. Detailed Features ................................ 13 Project Area ... ............................. 13 Sub-loan Size ........ ....................... 14 Farm Development ............................ 15 Pig Farms . .................................. 15 Poultry Broiler Farms ...... ............... .. 15 Poultry Layer Farms ...... .................. 15 Hill Beef Cattle Breeding Farms ............. 15 Integrated Coconut/Beef Cattle Breeding/ Fattening Farms ........................ 16 Integrated Coconut/Dairy/Beef Farms . ........ 16 Backyard Cattle Breeding/Fattening .... ...... 16 Slaughterhouse Development .............. . . ... 16 Livestock Feed Quality Control Program ...... 17 Technical Services, Training and Research ... 17 Environmental Impact ........................ 19 C. Cost Estimates ................................... 19 D. Financing ........................................ 21 E. Procurement ...................................... 22 F. Disbursements ............ o ....................... 22 G. Organization and Management ....................... 23 H. Lending Policies and Procedures ................. . 23 I. Accounts and Audit ............................... 25 IV. PRODUCTION, MARKETS AND MARKETING, AND PRODUCER BENEFITS ................................ 25 A. Production ....................................... 25 B. Markets and Marketing .... . . ....................... 26 C. Producer Benefits ....... .............. ........... 27 V. ECONOMIC BENEFITS AND JUSTIFICATION ................... 27 VI. AGREEMENTS REACHED AND RECOMMENDATIONS ....... .. ... 29  - 3 - ANNEXES 1. Agriculture and the Livestock Sub-sector Map - Climate Types (No. IBRD-10133) Chart - Monthly Precipitation According to Type of Climate (no. IBRD-6160) Table 1 - Crop Areas Table 2 - Crop Production Table 3 - Value and Volume of Imports of Livestock Products Table 4 - Livestock and Poultry Population by Regions 2. Pig and Poultry Production 3. Cattle and Buffalo (Carabaos) Production 4. Pig and Poultry Rations 5. Slaughterhouses 6. Demand, Marketing, Transport and Prices of Livestock and Livestock Products Table 1 - Consumption of Animal Proteins Table 2 - Animals Slaughtered in the Provinces and Greater Manila Area 1974 Table 3 - Present and Proposed Retail Price Ceilings and Actual Prices - Meat and Eggs Table 4 - Transport Cost of Cattle Table 5 - Transport Cost of Pigs 7. Pig Breeding/Fattening Model 8. Broiler Production Model 9. Egg Production Model 10. Hill Beef Cattle Farm Model 11. Integrated Coconut/Beef Cattle Fattening Model (5 ha & 20 ha) 12. Integrated Coconut/Dairy/Beef Model 13. Backyard Cattle Breeding and Fattening Model 14. Municipal Slaughterhouse Model 15. DBP Administration, Technical Services, Equipment and Research - Investment Projections  - 4 - 16. Development Bank of the Philippines Table 1 - Agricultural Projects Department - Staffing Chart 1 - DBP-Organization Chart (No. World Bank 9981) Chart 2 - DBP Agricultural Projects Department - Organization Chart (No. World Bank 15163) 17. Technical Services 18. Phasing of the Lending Program and Proposed Financing 19. Estimated Schedule of Quarterly Disbursements 20. Projected Project Cash Flow 21. Financial Rates of Return and Projections Table 1 - Financial Rates of Return Table 2 - Producer Benefits 22. Economic Rate of Return Table 1 - Summary Economic Rate of Return Calculations MAP The Philippines - Regions and Provinces (No. IBRD 11869)  PHILIPPINES APPRAISAL OF THE SECOND LIVESTOCK DEVELOPMENT PROJECT SUMMARY AND RECOMMENDATIONS The Republic of the Philippines has requested a second Bank loan to assist the livestock loan program of the Development Bank of the Philip- pines (DBP). The first livestock project (Loan 823-PH, US$7.5 million) is progressing satisfactorily and all funds have been committed. Sound financial and technical appraisal procedures have been adopted, and about 90 livestock appraisers have been trained, but there is need for more adequate sub-loan supervision and monitoring. The proposed second loan of US$20.5 million would assist DBP to continue financing livestock production, would improve sub-loan supervision and monitoring, and would assist the Government to introduce a feed quality control program. The proposed Project would finance about 1,850 pig farms; 400 poultry farms; 60 hill beef farms; 440 integrated coconut/ cattle farms; 200 small scale cattle farms; 10 municipal slaughterhouses, and provide for supporting technical services, training and research. A total of about 48 man-months of consulting services would be provided under the Project. The Project would support DBP's continuing trend towards financing smaller scale livestock enterprises. ii. The proposed loan would be the eleventh loan for agricultural de- velopment in the Philippines. Government would be the borrower and DBP would be the on-lending agency for most of the funds, assisted by the Bureau of Animal Industry (BAI) on technical matters. DBP is a Government develop- ment bank and is the single largest source of long term development finance. DBP is the on-lending agency for seven Bank loans totalling US$193.4 million (Loans 720-PH, 823-PH, 891-PH, 998-PH, 1048-PH, 1120-PH and 1190-PH). The proposed Project would continue the institution building role of the first livestock project through further expanding and improving DBP's livestock loan capability. iii. Agriculture is the most important sector in terms of employment (50% of the labor force) and export earnings (about 47% of total). The sector contributes about 35% of GNP with the livestock sub-sector contri- buting about 18% of total agricultural output and about 5% of GDP. The Government placed special emphasis on livestock development in the 1972-75 Agricultural Development Plan, but although the country has been fairly successful in meeting demand for pig and poultry meat, beef production has lagged behind requirements. The National Beef/Carabeef Development Program has been designed to correct this situation through the accelerated expansion of beef production. Pork and poultry meat production will continue to receive priority treatment as the main means of stabilizing consumer prices for meat. The Project has been formulated to respond to these Government objectives. iv. Pig raising is the most important livestock production activity in the Philippines and although most pigs are raised as scavengers, the use of modern management techniques and improved breeds has increased rapidly in the last few years, particularly around Manila and in South Cotabato prov- inces. In rural areas the traditional raising of native poultry is widely  - ii - practised. Commercial flocks vary in size from a few hundred birds to many thousands. Commercial pig and poultry farms use modern production methods and management standards are generally satisfactory. Carabaos (buf- falo) represent about 70% of the ruminant population and are used mainly for draft. Three main beef cattle production systems can be distinguished: (i) extensive grazing (mainly on rolling hill country); (ii) grazing under coconuts; and (iii) backyard cattle raising. A fourth production system, feedlot fattening on crop by-products (mainly sugarcane tops and reject bananas) has developed recently but is not yet significant. Do- mestic dairy production is very limited. Although most of the common live- stock diseases are present in the country they are not a serious constraint on production. v. The total cost of the Project is estimated at US$41.3 million (t 310 million) of which US$12.4 million (t 93 million) is foreign exchange. The proposed Bank loan would be for US$20.5 million, of which about 60% would be for foreign exchange requirements. The Bank loan would be to the Govern- ment for 14-1/2 years including 5-1/2 years of grace. The Government would on- lend US$19.8 million of the proceeds of the loan to DBP on the same terms and conditions and would bear the foreign exchange risk. The balance of US$700,000 of the loan would be used by Government to finance in part the feed quality control program, the research component and the short term consultants. Sub-loan commitments by DBP would be over three years and Bank disbursements would be over 5-1/2 years. On average, sub-loan beneficiaries would con- tribute about 13% o, investment costs although this would vary from minor beneficiaries who would contribute about 10% to major beneficiaries, includ- ing municipalities for slaughterhourses, who would contribute at least 25%. Sub-loan terms would be similar to those for the first livestock project but interest rates would be 12% for loans secured by land and for loans of 1 5,000 or less and 14% for other loans, with a 2% one time service fee for major beneficiaries as defined by enterprise size after development. All but US$3 million of the Bank loan would be on-lent to small to medium sized farms. All sub-loans which exceed the equivalent of US$200,000 and all slaughter- houses subloans would require the prior approval of the Bank. vi. Procurement for farm development (US$35.6 million) would be by farmers from local suppliers, as in the first project. There are generally adequate commercial outlets for the main inputs (concentrate feed, medicines and -vaccines, and fertilizers) to permit sub-borrowers to obtain supplies at competitive prices. The short supply of feeder and breeder cattle is a potential constraint, but this problem is specifically addressed by this Project and by the National Beef/Carabeef Program (1976-1985). The scattered location and phasing over several years of the farm sub-loan projects and diversity of equipment and supplies required makes bulk purchase of inputs impractical. Some of the local suppliers are subsidiaries or associate companies of international firms. Slaughterhouse contracts totalling about US$1.9 million) would be locally advertised since their small size (average of US$190,000 each), scattered locations and phasing according to demand, is unlikely to be attractive to international contractors and does not permit aggregation into larger contracts. There is adequate local fabrication and construction capability and compeitition to ensure that  - iii - the relatively simple slaughterhouses proposed can be procured efficiently. Equipment and materials for the feed quality control laboratory (US$0.4 mil- lion) would be procured by international competitive bidding. Contracts for technical services (about US$0.2 million) may be provided by bilateral aid but would otherwise be awarded according to standard Bank procedures. The vehicles and equipment (US$160,000) required for administering the Project and for technical services would be procured locally by DBP, using standard procedures which are satisfactory to the Bank. Bulk international procure- ment of vehicles and equipment is not warranted because requirements are phased over several years and the lot sizes are too small to be attractive to international bidders. vii. The Project is of high priority and has an estimated economic rate of return of 25%. Annual incremental production at Project maturity in Year 11 would be about 25,000 tons of livestock products, 8,000 tons of copra and 5,200 cattle weaners. The Project would directly create the equivalent of 5,830 full time jobs. The Project would result in about US$17 million for- eign exchange savings at maturity. Based on experience under the first live- stock project about 80% of direct and indirect beneficiaries (over 40X of sub-borrowers and most wage earners) would be in the rural poverty target group with present annual per capita incomes of less than US$140. viii. The proposed Project is recommended for a Bank loan of US$20.5 mil- lion with a 14-1/2 year maturity including a grace period of 5-1/2 years.   PHILIPPINES APPRAISAL OF THE SECOND LIVESTOCK DEVELOPMENT PROJECT I. INTRODUCTION 1.01 The Republic of the Philippines has requested a second Bank loan to help finance the livestock loan program of the Development Bank of the Philippines (DBP). The first loan for the livestock sub-sector (Loan 823-PH, US$7.5 million) is fully committed and the proposed second loan of US$20.5 million would mainly assist DBP to continue financing livestock production. 1.02 The proposed loan would be the eleventh Bank loan for agricultural development in the Philippines. 1/ Government would be the borrower and DBP would be the executing agency. DBP is a Government development bank and is the single largest source of long term development finance. Loan approvals to date total US$2.8 billion, but of this, only about US$220 mil- lion (about 8%) is for agricultural production, the bulk of loans having been for industry (including agro-industry). DBP is the on-lending agency for seven Bank loans totalling US$193.4 million (Loans 720-PH, 823-PH, 891-PH, 998-PH, 1048-PH, 1120-PH and 1190-PH). DBP's complete operations have been reviewed most recently during appraisal of the second industrial loan. 2/ Based on this analysis and progress on the first livestock loan, DBP is 1/ 393-PH, 1964, US$6 million - Agricultural Education, UPAC (Los Banos) 432-PH, 1965, US$5 million - First Rural Credit Project (Central Bank) 607-PH, 1969, US$12.5 million - Second Rural Credit Project (Central Bank) 637-PH, 1969, US$34 million - Upper Pampanga Irrigation Project 720-PH, 1971, US$14.3 million - Rice Processing and Storage (DBP) 823-PH, 1972, US$7.5 million - Livestock I (DBP) 891-PH, 1973, US$11.6 million - Fisheries Credit (DBP) 984-PH, 1974, US$9.5 million - Aurora-Penaranda Irrigation Project (with US$9.5 million IDA Credit 462-PH) 988-PH, 1974, US$50 million - Industrial Credit Investment Project 1048-PH, 1974, US$20 million - Inter-Island Shipping Project 1010-PH, 1974, US$22 million - Third Rural Credit Project (Central Bank) 1080-PH, 1975, US$17 million - Tarlac Irrigation 1102-PH, 1975, US$25 million - Rural Development Project 1120-PH, 1975, US$30 million - Small and Medium Industrial Development Project 1190-PH, 1975, US$75 million - Second Loan for Industrial Financing Through DBP. 2/ Appraisal of a Second Loan to the Republic of the Philippines for Industrial Financing through the Development Bank of the Philippines, Report No. 820-PH, November 5, 1975.  -2- considered a satisfactory on-lending channel for the proposed second livestock development loan. Two other follow-up projects through DBP (grain processing and fisheries) have been appraised and are expected to be presented to the Board in FY76. There has been a marked improvement in the execution of Bank projects in the Philippines in the last two or three years compared with ex- perience in the 1960's, and project implementation performance is now very satisfactory. 1.03 The Project was prepared by DBP staff and this report is based on the findings of an appraisal mission comprising Messrs. A.J. Blackwood, D.J. Babelon, M.L. Brown (Bank), D.I. Sillar, E.W. Root and M.J. Walshe (Consult- ants), which visited the Philippines in April/May 1975. II. BACKGROUND A. General 2.01 The Republic of the Philippines, with an area of about 30 million ha, is situated in the Tropics between latitude 4'23' 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. The Population in mid 1973 was 40.2 million with a growth rate of 3.0%. GNP per capita was about US$250 in 1973. Climate 2.02 High temperature, humidity and rainfall characterize the climate. Mean temperatures range between 21' C in January to 190C in May. Rainfall, the most important climatic variable, ranges from 1,000 mm in Southwest Mindanao to 5,500 mm in the highlands of Luzon. Annual rainfall is most reliable with an average variation between years of about 14%. However, pronounced dry seasons do occur. Climatically, the Philippines has high potential for crop and forage production. The environment is well suited to pig, poultry and beef production. The Economy 1/ 2.03 Prior to 1973 the economy grew for a decade at 5-6% a year in real terms. In 1973 this rate increased dramatically to 10%, largely as a result of increased export prices. The subsequent deteriorating external terms of trade reduced the real growth rate to about 6% in 1974, and the real growth of GNP in 1975 is estimated at about this level. The Government's 1/ Detailed analysis of the economy may be found in report No. 568-PH, Current Economic Position and Prospects of the Philippines, November, 1974. The Report of the recent Basic Economic Mission which visited the Philippines in April/May, 1975, is in preparation.  - 3 - real growth target is 7%. Agriculture grew by 7% in 1973, following three years of poor weather which depressed output. In 1974 farm output registered a 10% growth rate, although with a dramatic fall in forestry production the growth of the agricultural sector (which includes forestry and fishing) was only 3.4%. Inflation emerged as a major problem in late 1973 with consumer prices rising at an annual rate of 40% for 1974; inflation moderated sub- stantially in 1975, however, and is expected to be about 10% for the year. The trade deficit has increased with falling export prices and this trend is not expected to reverse until the recession in major export markets is over. Employment increased by 5% in 1974, but real wages declined by 20% except for rural wages which increased in real terms as a result of the rice price being increased. In 1975 real wages continued to decline. To meet these trends the Government is committed to development policies which concentrate on food production to achieve food self-sufficiency, diversified export production and investment in import substituting production. B. The Agricultural Sector Contribution to the Economy 2.04 Agriculture is the most important sector in terms of employment and export earnings. Agriculture, forestry, fishing employ about 50% of the labor force and farming contributes on average just under half of exports. The main exports are coconut and sugar cane products. From 1972-74 agricul- ture contributed about 35% of GNP. Food crops contributed 12%, livestock 6%, export crops 9%, fisheries 4% and miscellaneous 4%. The agricultural sector could make a significant contribution to import substitution. In 1974, imported agricultural products accounted for 11% (US$356 million) of total imports by value. Of this, US$155 million was grains and grain prep- arations, US$74.5 million was dairy products and US$36 million was feedstuffs. The Livestock Sub-Sector and Government Policy 2.05 The livestock sub-sector contributes about 18% of total agricul- tural output and about 5% of GDP. In addition carabao (water buffalo) and steers are an important source of draft power. The Government places high priority on the development of the livestock sub-sector to (a) increase production to meet increasing domestic demand, and (b) as a means of diver- sifying smallholder production. The Government put special emphasis on livestock development in the 1972-75 Agricultural Development Plan in order to satisfy demand for meat and increase meat and egg consumption towards matching national nutritional targets by 1975. Funds were allocated mainly to pig production (about 55%) and poultry development (about 15%). The country has been fairly successful in meeting demand for pig and poultry meat, but beef production has lagged behind requirements. The Government is very conscious of the effect on prices of supply shortages, and in the Greater Manila area, the most important consumption center, meat prices are a major cause of popular concern. The livestock sub-sector is included in the Gov- ernment's Investment Priorities Plan which entitles investors to various  - 4 - financial concessions when their investments contribute to meeting unsatis- fied domestic demand or exports. A new livestock development program is under preparation and is expected to place emphasis on feedstuff production and on an expanded beef cattle development program. Pork and poultry meat production will continue to receive priority treatment as the main means of satisfying domestic demand for meat. Demand and Prices 2.06 Domestic demand for livestock products is expected to grow at about 6% p.a. (para 4.02) through 1985 and increased dependence on imports or higher prices will result if domestic production expansion is not com- parable. Philippine per capita meat consumption at 15.8 kg p.a. in 1972 is relatively high compared with per capita income. Of this, 52% was pork, 20% was beef (including carabao beef) and 18% was poultry. Fish is also a very important protein source in the Filipino diet. Increasing production of meat has only just kept pace with population increase so that per capita intake has not increased over the past decade and may have even decreased. For the whole country, the National Economic Development Authority (NEDA) estimated total protein intake in 1972 to be 97% of NEDA's recommended level. For animal proteins the intakes as a percentage of the target intake in a balanced national diet were for meat, poultry and fish 88%, for dairy pro- ducts 28%, and for eggs 51%. 2.07 Domestic prices for livestock products except milk have been comparable to world prices, although local beef prices in 1974 were 80% above the unusually low Australian prices and poultry prices have recently been 20-50% above world prices. Fresh milk is about twice the price of developed countries supplies. In the long term domestic prices for meat and eggs are likely to be determined mainly by the local demand and supply situation. The opportunities for importing significant quantities of the main livestock commodities (pork, poultry meat and eggs) to stabilize prices in the event of domestic production not satisfying demand, are not likely to be significant. World trade in these three products is relatively small. Pork and beef imports are subject to a 10% tariff and there is a 70% tariff on imported poultry meat, but imports are controlled more by embargoes, during periods when price ratios favour imports, than by import duties. Livestock Population and Production Systems 2.08 In January, 1973, the livestock population was estimated to be 9.7 million pigs, 100 to 110 million poultry, 2.2 million beef cattle and 5 million buffalo. 2.09 Pigs: Pig raising is the most widespread livestock production activity in the Philippines. The pig population is spread throughout the islands but there is a notable concentration in Central Luzon serving the major consuming center of Greater Manila. Some 80-90% of pork production is believed to come from backyard producers. Most of these pigs are local razor-back breeds. Commercial piggeries, which have expanded rapidly in the last few years, are located principally in Central Luzon around Manila and  in South Cotabato provinces. Most commercial production is in relatively small herds of less than 50 head. Commercial enterprises employ modern technology and management systems. Pig rations are generally well-balanced, although there may be periodic and/or regional shortages of some ingredients. Many large producers compound their own feed. In commercial units pure bred boars of several of the improved temperate zone breeds are used to produce crossbred pigs for market. The role of the large commercial pro- ducers is expected to increase in the future but there is also opportunity for major expansion of small scale production, provided credit and technical assistance is available. 2.10 Poultry: Nearly three million households are estimated to keep poultry. Like the pig industry, the poultry industry is heavily concentra- ted around Manila near the feed mills and main consumption center. Some 90% of the poultry are in units with less than 500 birds and there are a few very large producers. In rural areas the traditional raising of native birds is widely practiced. Individual output of these birds is very low, but the aggregate output of meat from this source is about 75% of total poultry meat produced. Commercial flocks vary in size from a few hundred birds to many thousands and generally birds are kept in intensive confinement. On commercial farms modern production methods are used and management standards are satisfactory. A small number of large vertically integrated units with 30,000 to 100,000 birds have developed recently and are expanding rapidly. These units are owned mainly by the feed milling industry and operate complete systems from breeding farms, through hatchery, feed compounding, product,on units and processing plant to retail outlets. Many medium sized broiler producers have contracts with these 'integrators' who supply them with chicks and feed and take back the grown broilers. As in other countries this trend towards contract production may be expected to continue. Egg production in the Philippines is highly developed particularly in urban areas. Modern housing, equipment and management is used and the expanded egg industry has had a great impact on the market through quality control, price reduction and improving seasonal supplies. 2.11 Pig and Poultry Feeds: The main problem facing the pig and poultry industries is adequate availability of reasonably priced good quality feed- stuffs. The Government is addressing the quality problem through the introduction of a feed quality control program which is supported by a component in the proposed Project. A large part of the soyabeans, fishmeal and meat and bone meal used in feeds is imported. Sorghum grain for feed was imported for the first time in 1974 (20,000 metric tons). However, given the broad base of corn production (about 2.7 million ha) and the present very low average yield (o.8 m.t/ha), the Philippines has great potential for expanding feedgrain production. Improving the availability of high protein feedstuffs has greater problems (Annex 4). The feed production position is discussed in greater detail in Annexes 2 and 4 and reasons are given there for addressing the problem more in the context of other programs and projects rather than directly under this proposed project. Briefly, (i) the problem of feed production is considered more appropriately handled under the on-going national coarse grain program Masaganang Maisan, which provides production finance, and (ii) funds for post-harvest grain handling are available under other Bank credit projects (the Third Rural Credit through the Central Bank and the present and proposed grain processing projects).  - 6 - 2.12 Beef Cattle and Carabao: Eighty-two percent of the cattle and carabao are equally distributed between the two largest islands of Luzon and Mindanao with the Visayas accountiug for the balance. Carabaos represent about 70% of the ruminant population and are mainly used for draft. Culled animals are slaughtered for meat and carabao beef accounts for 60-70% of all beef consumed in the country. However, in the long run the carabao as a specialist beef producing animal is unlikely to compete in the Philippines with cattle which are potentially more efficient producers. Present methods of beef cattle production are mainly traditional and are generally characterized by inefficient land use and poor management. Three main beef production systems can be distinguished: (i) extensive grazing (mainly on rolling hill country); (ii) grazing under coconuts; (iii) backyard cattle raising. A fourth production system, feedlot fattening on crop by-products (mainly sugarcane tops and reject bananas), has developed recently but is not yet significant. Beef cattle production is stratified. The hill farms are breeder units which supply stock to the other enterprises. Coconut/cattle enterprises are both fattening and breeding operations. Backyard production by small farmers is principally for fattening hill raised cattle, but there are also backyard breeder units and some steers are used for draft. Native cattle have been crossed with Bos indicus breeds for several decades and most recently American Brahmans have been introduced to upgrade these crossbred cattle. The resulting animal is large boned and suitable for beef produc- tion under Philippine conditions. 2.13 The average annual weaning rate for beef cattle in the Philippines is low at about 50% because of poor management and nutrition and possibly disease. It is too early yet to judge average weaning rates being achieved on cattle enterprises financed under the first livestock project, but rates of 70% to 80% should be achieved on coconut farms, with rates of 55%-60% being likely under the less favorable conditions on hill farms. There is ample scope for increasing production of fat cattle under the backyard, coconut grazing and feedlot systems if the supply of feeder cattle could be increased. Thus it is essential to concentrate first on increasing numbers and weaning rates of the national breeding herd in any development strategy. This is the main focus of the National Beef/Carabeef Development Program (1976-85), which was published in late 1975. Further detail on cattle production systems is in Annex 3. 2.14 Dairying: There are only about 50,000 dairy-type animals in the Philippines and most of the milk and dairy products consumed in the country are imported. Apart from carabao, which are sometimes milked for home con- sumption, there is no tradition of dairy production in the Philippines and there are only seven commercial dairy farms located in the vicinity of the main cities. However, there is potential for expanding the dairy industry based on improved grass/legume pasture under coconuts, particularly in the vicinity of towns where fresh milk can be readily marketed at an attractive price. Animal Health 2.15 Many of the common livestock diseases are present in the country but they are not a serious constraint on production. Disease control is  aided by the island structure of the country. Veterinary supplies are avail- able throughout the country, mainly through the private sector, and most commercial producers use modern vaccines and prophylactic measures and maintain reasonable standards of hygiene. Agricultural Credit 2.16 Institutional sources supply probably about a third of agricul- tural production credit which in real terms has not changed significantly since the late 1960s. This has partly been the result of Government policy which formerly channelled financial resources more towards industrial de- velopment. There were inadequate institutions serving agriculture and collateral requirements have not in general given the predominant small farmers, particularly tenant farmers, access to institutional credit. Government strategy to overcome these constraints focuses on the rapid ex- pansion of private rural banks with supervision and subsidized funds from the Central Bank. There are now over 700 rural banks with assets of 12.1 billion (US$280 million) and they have provided three quarters of the increased institutional credit, in current terms, for agriculture since 1965. Most of the rural banks lending is for short term production credit but they also provide medium term finance for machinery and equipment and they have in- creasingly financed small farmers. Three Bank loans (432-PH, 1965, US$5 million; 607-PH, 1969, US$12.5 million, and 1010-PH, 1974, US$22 million) have provided funds for rural banks through the Central Bank. The Philippine National Bank is also an important but declining source of credit for agri- culture, accounting for 28% of the outstanding institutional loans to agri- culture. It provides mostly short term production credit and has financed half the loans in the national rice and corn programs (Masagana 99 and Masaganang Maisan respectively). Some 30 private commercial banks provide about 27% of institutional agricultural credit. In order to halt the relative decline in the proportion of funds from this source going to agriculture, a Central Bank directive requires that a minimum of 25% of all loanable funds of the commercial banks go to agriculture. In addition 32 private develop- ment banks (total assets of f300 million) are a further important source of agricultural credit. They lend long term funds for small scale enterprises and about half their loans are for agriculture. DBP is an expanding source of agricultural credit (in 1974 holding about 12% of institutional loans outstanding to agriculture), although its operations are dominated by industrial lending (78% of total approvals compared with 8% for agriculture). Ceiling interest rates in the Philippines have been fixed since 1970 by the Monetary Board at 12% for loans secured by land and 14% for loans secured by other forms of collateral. The 12% and 14% rates were negative real rates of interest during the period of high inflation (1970-1974) but with infla- tion now expected to stabilize at about 10%, a real positive interest rate will be restored. C. Development Bank of the Philippines 2.17 The Development Bank of the Philippines (DBP) is a Government owned bank which plays a major role in mobilizing capital resources and in the past  two years has accounted for 13% of total fixed capital formation. As of June 30, 1975, DBP's outstanding loans totalled P3,560 million (US$475 mil- lion) of which agricultural loans totalled 1989 million (US$132 million). Total assets at this date were F2,923 million (US$390 million). Over 40% of DBP's agricultural lending is approved by its 35 branches, which have approval power up to f50,000 (US$6,670). Agricultural loans cover most activities and in cumulative amounts approved are distributed as follows: food crops (mainly rice), 38%; commercial crops (mainly coconuts and sugar), 34%: livestock, 19%: and fisheries, 9%. Of the livestock portfolio almost 70% is for pigs, about 20% for poultry and about 10% for cattle. For FY75 DBP reports net earnings (excluding trust funds) of 171 million (US$9.5 million) on total operating income of ?570 million (US$77.2 million). More detailed information on DBP as a whole is available in the appraisal report for the second industrial loan. 1/ DBP has been charging a general interest rate of 12% with a special preferential rate of 9% for loans under f5,000 (US$670). However, to improve its financial position DBP has agreed during negotiation of the second industrial loan to raise its interest rates for all types of loans to 12% for loans fully secured by land and loans under f5,000, and to 14% for all other loans. These are the present Monetary Board ceilings. 2.18 The Agrictultural Projects Department is responsible for the agricultural credit programs of DBP, and fisheries and forestry loans. The Department has 178 staff (of which over 140 are professionals) and is headed by an experienced DBP officer. This officer resports to a Super- vising Governor who is also responsible for the Branches and Agencies Department, thus providing the necessary close coordination of headquarters and branch agricultural lending. The Agricultural Projects Department is divided into five technical groups for (a) Fisheries, (b) Livestock and Poultry, (c) Cereals and Feedgrains, (d) Crops, and (e) Plans and Programs, and a Management Services Group (Annex 16). The Livestock and Poultry Group was established under the first Livestock Development Project (para 2.22). 2.19 In common with the other DBP departments the arrears position of the Agricultural Projects Department has been improving over recent years. As of April 30, 1975, some 45% (Y125 million) of the total agricultural portfolio was in arrears, but many of the accounts in arrears date back to the period before improved appraisal and collection procedures were intro- duced in 1974. Many of these accounts are being restructured, which should improve collection performance. Out of the 7,169 accounts in arrears, 1,411 were mature accounts of which 230 (16%) were in litigation with values of f17.5 million of principal balance and f21.5 million in arrears. Collect- ion performance has improved since the early 1970s with 89% and 84% realized respectively for the two quarters October-December 1974 and January-March 1975. During negotiation of the second industrial loan DBP agreed to improve its arrears position by increasing penalty charges on all delinquent 1/ Appraisal of the Second Loan for Industrial Financing through the Development Bank of the Philippines, Report No. 872-PH, September 22, 1975.  9 loan accounts, and this can be expected to improve the arrears position further. D. Implementation of the First Livestock Development Project 2.20 A US$7.5 million Bank loan was signed in May, 1972 for livestock development in specified areas by providing finance, through DBP as on- lending agency, for some 1,450 small and medium size pig, poultry and integrated coconut/beef cattle farms, 25 hill beef cattle breeding ranches, three slaughterhouses, and for technical services. After a slow start, the project is now progressing satisfactorily. All of the loan funds have now been committed by DBP. Commitments are similar to appraisal estimates for numbers of farm loans approved. In view of the delayed commitment of slaughterhouse funds (US$0.6 million) the Bank agreed to reallocate these funds to farm sub-loans, and DBP undertook to complete the slaughterhouse component of the project from its own funds. Disbursements as of January 31, 1975 totalled US$5.2 million (69%). Of total farm/ranch funds, loans for pig- geries absorb about 75% (appraisal estimate 44%); poultry, 15% (40%); coconut/beef cattle, 5% (10%); and hill beef, 5% (6%). The enterprises financed are in accordance with the project objectives and DBP has demonstrated its ability to handle medium and long term financing of mainly small to medium sized livestock enterprises. For the principal category of loans, for pig- geries, the loans average aboutt50,000 (US$6,700) for 11 sow units. This is in contrast to the official view when the first project was appraised that, since economies of scale were financially essential, it would not be possible to establish viable small scale modern livestock enterprises. The good results obtained under the first project have contributed to this change in official thinking and policy. Debt repayment flows have not yet reached levels which allow judgements to be made on repayment performance, but inspection of a wide sample of enterprises indicates that sub-loans are being used to establish viable units. 2.21 The loan was approved initially for livestock development in specific areas of the country: Central and Southern Luzon, Mindoro and Masbate islands and areas of North and South Mindanao. However, as DBP's livestock loan supervision capabilities expanded and more branches and agencies were opened the Bank agreed tto expand the project area to cover most of the country. The only limit to this expansion has been DBP's ability to process and service loans in new areas with the appropriately qualified staff. How- ever, as a result of demand sub-loans have been committed mainly in the highest priority areas of Central Luzon and South Cotabato for pigs; Central and Southern Luzon for poultry; and Mindanao, Mhasbate and Mindoro for cattle. 2.22 The Livestock and Poultry Group in the Agriculture Projects De- partment of DBP was established for the first project and is functioning effectively. It has 34 staff. Sound financial and technical appraisal procedures have been adopted, but there is need for improved loan supervision and monitoring. So far ninety-one livestock appraisers have been trained under the project (40 existing DBP staff and 51 new staff), and of these after wastage, promotions and transfers, 70 remain in the branches or at  - 10 - head office to process and supervise sub-loans. The Project provided for three full time technical specialists to assist DBP management, but these posts were filled through New Zealand aid and the funds have been reallocated for farm/ranch financing. The Project has provided short term consultants in the use of sugarcane by-products for cattle and in pig breeding and their reports are forming the basis for further developments in these fields. E. Agricultural Services Institutions 2.23 The Department of Agriculture, mainly through the Bureau of Animal Industry (BAI), is primarily responsible for the administration of the livestock sub-sector. The Department of Natural Resources also has an important role in the sub-sector, since Pasture Lease Agreements for hill land are administered by it under the Forestry Reform Code. The BAI provides veterinary services and maintains breeding stations, stock farms and artifi- cial insemination centers. The BAI is a large organization with some 2,200 technicians but the quality and effectiveness of its services could be im- proved. Problems which require attention include staffing, poor service conditions, and inadequate incentives for field travel. The Government is aware of the present problems of the BAI, but at the time of appraisal it was agreed with Government that these problems should not be resolved in isolation for this bureau alone since many of BAI's problems are common to other agencies and would have been more effectively addressed in an agricul- tural services project which was then under consideration. Subsequently the Government has decided that the agricultural services project is premature and is not expected to request some assistance for BAI under the upcoming rural credit and education projects. Consequently the proposed Project limits direct involvement of BAI to the provision of technical services, according to a new coordination agreement to be negotiated with DBP (para 3.17) and assistance for the establishment of a livestock feed quality control program (para 3.13). 2.24 Within the Department of Agriculture there are four other agencies which are closely concerned with the sub-sector. These are the National Grains Authority (controls import and distribution of all grains, including feedgrains); the National Food and Agricultural Council (coordinates and implements all Government food self-sufficiency programs); the National Meat Inspection Commission (regulates slaughterhouses and meat standards); and the Bureau of Agricultural Extension (which together with BAI supplies ex- tension advice to livestock farmers). Livestock industry research is mainly the responsibility of the BAI but is also carried out by a number of other agencies. The Bureau of Agricultural Economics (BAEcon) in the Department of Agriculture provides data and analyses for planning and policy purposes and disseminates price and market information. The University of the Philip- pines College of Agriculture (UPCA) at Los Banos and the College of Veteri- nary Medicine conduct the main basic research. Other universities and colleges also have livestock research programs. The Bureau of Forestry in  - 11 - the Department of Natural Resources conducts range management trials, while Central Mindanao University, the BAI and UPCA are other important centers of pasture improvement work. The agricultural research program as a whole is coordinated by the Philippine Council for Agricultural Research, which also has direct control of all Government funded research. Marketing 2.25 The marketing of livestock products is predominantly in private sector hands and although the system is generally adequate, costs and margins are high. The Greater Manila area, with four million population and high per capita incomes, dominates the meat and egg marketing system. The establish- ment by Government of the very large Food Terminal Incorporated (FTI) facility to serve as a wholesale outlet and storage system for the Greater Manila area has not yet had a major impact on the marketing of livestock products. DBP has a majority shareholding in this public corporation, but FTI's operations are in effect directed and controlled by the Government. Only 5% of FTI's capacity is at present used, but through the introduction of numerous pro- vincial buying points FTI hopes to lower marketing margins and reduce seasonal supply and price fluctuations, particularly of perishable produce (mainly vegetables, fruit, meat and fish). Present traditional methods of marketing pigs and cattle involve mainly live shipment to the Manila area, from the outer islands and Luzon generally, of batches of animals aggregated by middlemen. Typically, animals pass through several hands before reaching the consumer. Chickens and eggs are also handled in the traditional manner, but there is a greater degree of direct selling by producers to retail outlets, particularly by producers located around Greater Manila. Marketing is not a constraint on development of the livestock sub-sector and with the growing participation of FTI producers will have an additional outlet. F. Project Formulation 2.26 The Project was prepared mainly by the Agricultural Projects Depart- ment of DBP. The preparation report proposed a livestock sub-loan program similar to that under the first livestock project, finance for two large slaughterhouses and a 23,000 ha feedgrain development component. The feedgrain component was later dropped from the Project for reasons given in para 2.11 and in Annex 4. Finance for two large regional slaughterhouses (mainly to allow shipment to Manila of carcases instead of live animals) in the first livestock project has not been committed and the Bank agreed to reallocate these funds for farm loans. However, new Government requirements to improve slaughterhouses have given rise to a need for finance by municipalities for upgrading over 500 small slaughterhouses which process local meat requirements and the Project provides some initial funds for this purpose. The Project appraisal also added additional small components to develop small scale back- yard cattle breeding and fattening and for small dairy enterprises on pasture under coconuts. The feed quality control component of the Project was pre- pared by BAI.  - 12 - 2.27 The main constraints on expansion of the livestock sub-sector are availability of suitable long term finance, inadequate technical services for livestock producers, feedstuff availability and quality, and inadequate breeder and feeder cattle supplies. In addition the poor state of public slaughterhouses is a further problem which is not strictly a constraint on production expansion, but which constitutes a significant health and environ- mental hazard. The Project has been formulated with these problems in mind and would contribute significantly to ameliorating factors now restricting expansion of livestock production. III. THE PROJECT A. General Description 3.01 The Project would: (a) continue to assist the Philippines to increase domestic production of livestock products by providing funds to enable DBP to continue and extend its lending for livestock producers, particularly for smallholder pig and poultry enterprises (69% of farm investment) and for beef cattle; (b) finance a number of small scale beef cattle and dairy enterprises; (c) improve the technical services provided to DBP livestock borrowers by both DBP and BAI; (d) provide for applied re- search and trials on specific livestock production problems; (e) assist the country's efforts to upgrade municipal slaughter facilities and (f) assist the establishment of a livestock feed quality control program. The Proj- ect components are as follows:  - 13 - Z Total Number of Project Cost Project Components Loans (t Million) (US$ Million) Cost (a) Farm Development Pig breeding/fattening 1,850 108.8 14.5 35 Poultry: Broiler 250 20.8 2.8 7 Layer 150 27.1 3.6 9 Cattle: Hill Farms 60 18.2 2.4 6 Integrated coconut/ beef breeding/ fattening 440 40.8 5.4 13 Small scale breed- ing/fattening 200 1.1 0.2 - Sub-total 2,950 216.8 28.9 70 (b) Municipal Slaughterhouses 10 11.6 1.5 4 Sub-total (a + b) 228.4 30.4 74 (c) Feed Quality Control Program 6.0 0.8 2 (d) Administrative Costs, Technical Services, Equipment and Research 11.9 1.6 4 Sub-total (a + b + c) 246.3 32.8 80 Expected price increases 63.2 8.5 20 Total 309.5 41.3 100 A greater proportion of farm development funds is expected to be required for poultry and cattle enterprises than have been committed under the first project since DBP is placing greater emphasis on financing these types of sub-loans. Greater emphasis on financing beef production is required in order to support the implementation of the National Beef/Carabeef Program (1976-1985). Farm and slaughterhouse models are presented in Annexes 7-14. B. Detailed Features Project Area 3.02 Sub-loans under the Project would be available on a countrywide basis subject only to DBP having qualified livestock staff available in the relevant branches and agencies concerned. The appraisal mission also discussed  - 14 - with DBP the concept of adopting a campaign approach to promote certain categories of loans in favorable locations in order to achieve a significant initial impact in new areas. This would provide greater impact in high priority areas compared with the present loan program which relies mainly on demand for loans without specific promotion by DBP. This would economize on processing time and reduce the work load by processing batches of similar loans simultaneously. It was agreed that this approach should be a regular feature of the Project. 3.03 Although it is proposed that the project should be countrywide in scope DBP is aware that there are a number of practical factors that militate against enterprises being financed without critical regard to their locations. It is important that the resources available are concentrated in areas and enterprises where they can achieve the best results. This implies inter alia, that pig and poultry production is financed only where there are readily available feed supplies and that hill farms are not financed where they are likely to have only a limited life because of land use problems (Annex 3). In the case of the initiatives in small scale cattle finance and dairying it is important that the enterprises are concentrated in a few highly suitable areas to facilitate close specialist supervision. Assurances were obtained during negotiations that DBP would concentrate its efforts to committing funds in locations which take into account sound environmental, technical and financial criteria. Sub-loan Size 3.04 Average sub-loan size under the first livestock project has been satisfactory at about J 56,000 (US$7,470). This reflects the financing of a large number of small and medium sized sub-projects and a few large sub- projects. It is expected that the trend towards financing smaller sub-loans, established under the first project, would continue under the Project. Larger loans would be made but on equity grounds and since many larger pig and poultry enterprises can expand using internally generated funds, the number of sub-loans which exceed US$100,000 equivalent would be limited to a total of US$3 million (15%) of Bank funds, of which amount not more than US$500,000 would be for pig and poultry sub-loans. This provision would ensure that about US$2.5 million of Bank funds would be available to finance hill cattle and coconut/cattle farms, the development of which forms an important part of the cattle expansion program. Accordingly, assurances were obtained during nego- tiations that DBP would commit no more than US$3 million (of which no more than US$500,000 would be for pig and poultry sub-loans) of the Loan funds to financing sub-loans which exceed US$100,000 equivalent (taken together with any outstanding balance on previous DBP livestock loans). Sub-loans below US$100,000 equivalent are split into two categories according to enterprise size after development to allow for different sub-borrower equity contributions and a one time service fee for all but the smallest sub-borrowers (paras 3.26 and 3.28).  - 15 - Farm Development Pig Farms 3.05 About 1,850 pig farms would be financed under the Project. Loans would finance the purchase of 10 sows on average, construction of buildings, and working capital for a two year development period. Typically the Project would finance both small new operations with 5-10 so0W and the expansion of small operations from the 5-10 sow level to the 15-30 sow level. The Project would finance about 6,160 sows per year on about 616 farms and this would represent about 80% of DBP's present financing of piggeries and about 26% of the expansion of sow numbers required to meet projected increases in domestic demand for pork (Annex 2). The bulk of the finance for the remaining expansion of pig production is expected to come from surplus funds from existing piggeries. Poultry Broiler Farms 3.06 The Project would finance about 250 farms. The development period for these sub-projects would be one year. This would represent about 57% of the incremental growth required to satisfy the minimum expected increased domestic demand (Annex 2). On average sub-loans would finance the expansion of units by 4,000 birds per batch (average investment per farm of US$10,700) and would be mainly contributing to the expansion of small units (1,000-5,000 bird capacity) to a size where they are more commercially viable. Loans would finance mainly buildings, equipment and incremental working capital. Borrowers would normally be expected to have some previous experience of commercial poultry management. Poultry Layer Farms 3.07 The Project would finance about 150 egg farms of about 4,000 addi- tional layers each. This would represent about half the estimated incre- mental growth required (Annex 2). Sub-loans would average about US$24,000 and would finance mainly buildings, equipment and incremental working capi- tal over the two year development period. The main objective would be to expand small semi-commercial growers from about 2,000 layers to 6,000 which is a more viable commercial scale. Hill Beef Cattle Breeding Farms 3.08 The Project would finance about 60 hill beef farms. Hill cattle farming is a medium to large scale operations, with Pasture Lease Agreements being generally for areas of from about 100 hectares upwards. Investments would therefore range from about US$20,000 per farm to over US$100,000 for larger properties. The Total Loan funds for these larger properties would be limited for a maximum of US$3 million (para 2.04). Finance would be for mainly buildings, corrals, fencing, additional stock, a small area of improved pasture and incremental working capital. Farms would average 400 ha in size and loans would enable them to be developed over 4 years to carry about 150 animal units, a 52% increase wn present stocking rates (Annex 3). Hill cattle farms are a very important source of feeder cattle for small backyard fattening  - 16 - units,and also provide breeder cattle for the development of integrated coconut/beef cattle farms. The output from these Project farms will be readily absorbed by both Project and other demand for feeder and breeder cattle. Integrated Coconut/Beef Cattle Breeding/Fattening Farms 3.09 Some 440 farms would be financed with an average loan size of about US$14,500. Two types of breeding/fattening farms would be developed: about 150 small units of about 5 ha to carry 8 feeder cattle (US$3,400 investment) and about 270 farms averaging 20 ha of pasture to carry a breeding/fattening herd of 40 animal units (US$16,000 investment). Larger farms could be fi- nanced within the limit set for large loans (para 3.04). The development period would be 3 years for all sizes of farm. Investment would be mainly for fencing, corrals, water supply, pasture establishment, stock and incre- mental working capital (Annex 3). Cattle under coconuts represents a major opportunity for expanding the national breeding herd (a major policy ob- jective) since the production coefficients are most favorable on this type of enterprise. Integrated Coconut/Dairy/Beef Farms 3.10 This pilot development would aim to finance about 20 farms suitably located to allow convenient milk sales either fresh or to existing processing plants. Investment would average US$11,10W per farm of about 10 ha of pasture and would establish herds of about 27 animal units with 13 milking cows. Investment would be for fencing, water, a corral and milking shed, stock and incremental working capital. The development period would be 2 years. This component of the project would seek to establish the parameters for this type of enterprise with a view to a possible larger development at a later date. Backyard Cattle Breeding/Fattening 3.11 The project would finance about 200 small farmers to establish small units at an average cost of US$700 each. Finance would primarily be for a heifer and 3 feeder steers and the unit would build up over 9 years to contain 8 animals, of which 3 would be breeding cows (Annex 3). Other minimal investment would be for a small corral, legume seed and working capital. This type of livestock production has great potential for the smallholder with surplus feed from his farm and family labor available to tend the cattle. DBP already finances this type of enterprise, mainly for fattening on by-products. Slaughterhouse Development 3.12 The project would finance the establishment, replacement or upgrading of 10 small municipal slaughterhouses over a three year period at an average cost of US$190,000 each. The slaughterhouses would have capacity for a daily throughput of 20 cattle and 100 pigs, this being the size most in demand, and would be located in smaller cities throughout the country (Annex 5). This would permit municipalities not only to improve hygiene and efficiency in town slaughterhouses but where appropriate would also permit the reloca- tion of these facilities to lower cost, less congested areas away from town  - 17 - centers. Investment in new slaughter facilities is required by a recent Government directive to improve all unsatisfactory slaughter arrangements. The new facilities would be self-financing and would reduce wastage, particularly that caused by the poor flaying and curing of hides. Slaughter- house model designs would be subject to the approval of the Bank (para 3.14). The finance provided would cover site work (but not land purchase since these are replacement facilities), buildings, utility services, plant and equipment and meat transport. Funds for much larger slaughterhouse in the first project have not been committed as quickly as expected (para 2.20) but commitment of funds for the ten much smaller municipal slaughterhouses is expected to proceed more rapidly, since there are over 500 public slaughter- houses, most of which will require improvement to meet the new standards. Livestock Feed Quality Control Program 3.13 The greatly expanded feed milling and compounding industry is not at present subject to adequate regulation and poor feed quality is a potential constraint on the further development of the livestock sector. The Government has formulated plans to provide for the routine analysis of commercial feeds and to improve the quality of feeds. The Project would finance the equipment and material needs for the establishment of a feed quality control laboratory, which is the main infrastructure requirement of the program. The laboratory would be operated by the Bureau of Animal Industry in the Department of Agri- culture and it is intended that its operating costs would be largely financed from analysis fees. Regular analysis of commercial feeds would be required by law. Further preparation of the program is required and assurances were obtained during negotiations that full details of the proposal would be pre- pared and submitted to the Bank for review and comment before plans are finalized and expenditures on the feed laboratory are incurred. Technical Services, Training and Research 3.14 The Project provides for three categories of specialists: (a) two full time specialists for one year to assist DBP (cattle production and monitoring); (b) four short term consultants to be engaged by Government (to cover pig nutrition, poultry nutrition, use of by- products by ruminants and backyard cattle production systems); and (c) consultants to DBP to design model slaughterhouses. Much of the two technical specialists' time will be spent in the field based on branch offices. Terms of reference are in Annex 17. They will be assisted by DBP technicians who will be assigned to work with them and who will be trained by the specialists to assume responsibility for promotional, super- vision and monitoring programs. The emphasis of the two specialists' work in the Project will change, however, compared with the first project, to concentrate more on providing borrowers with technical services, on pro- motional work and on monitoring of sub-loan performance. Less emphasis is  - 18 - now required on the routine processing of sub-loan applications, although this will fall within the monitoring role of the specialists in order to assist DBP to improve its processing performance, particularly to reduce sub-loan processing delays. The present three technical specialists engaged by DBP under the first livestock project are to remain until November, 1976. Assurances were obtained during negotiations that DBP would engage two specialists acceptable to the Bank on terms and conditions acceptable to the Bank for the 12 month period beginning not later than December 1, 1976, or such other period to be agreed with the Bank. The four short term con- sultants would be engaged by the Department of Agriculture. The work on the use of by-products by ruminants is a continuation of that financed under the first project, which showed encouraging results. Investigation of pig and poultry nutrition and backyard cattle productive systems would improve the quality of the technical services provided to livestock farmers. Assurances were obtained during negotiations that the Government would, within six months of loan signing, engage four short term consultants acceptable to the Bank on terms and conditions acceptable to the Bank. The slaughterhouse consultants are required to design model slaughterhouses which DBP can use as the basis for making loans to municipalities. Once acceptable models have been esta- blished it is expected that they would be used, with suitable adaptation, for all slaughterhouse sub-loans. Assurances were obtained during negotiations that DBP would engage consultants acceptable to the Bank, on terms and conditions acceptable to the Bank, to design model slaughterhouses acceptable to the Bank, and use these models as the basis for all slaughterhouse sub-loans. Some of these technical services may be provided by bilateral assistance, in which case the Bank funds in the loan would be reallocated to other categories, as in the first project. 3.15 Training of DBP staff for livestock work would continue as under the first project, both through formal training and on-the-job instruction by experienced DBP staff assisted by the three full time consultants as necessary. Training and retraining of technicians would provide staff replacements and further expand DBP's livestock lending capability, both at head office and in the branches. Formal training would consist of intensive courses over several weeks of groups of 20-30 staff with both classroom lectures and practical experience being given in livestock production techniques and loan processing procedures. These training periods would also serve to identify more promising staff for appointment to specialist livestock posts. The Pro- ject also provides for international travel to enable DBP staff to improve their knowledge of livestock production systems. Assurances were obtained during negotiations that DBP would train or retrain an adequate number of livestock technicians to support the livestock lending program. 3.16 Under the Project the Government would provide funds (about US$150,000 for mainly equipment, livestock and feeds to enable suitable institutions to undertake applied investigational work on rations for pigs and poultry. This work would be planned and supervised by the pig and poultry nutrition consultants in consultation with the Bank. Assurances were obtained during negotiations that the Government would within 12 months of loan signing submit to the Bank for review and comment the terms of reference for the applied investigational work into pig and poultry nutrition, and following Bank review would provide grant funds of not less than US$150,000 equivalent, or such other amount to be agreed with the Bank, for the work to be carried out.  - 19 - 3.17 Since 1973, DBP has had an agreement with the Bureau of Animal Industry to coordinate their roles in the development of livestock produc- tion. Under this agreement DBP agrees to provide borrowers with "technical assistance and advisory services" for planning, budgeting and marketing and BAI agrees to provide animal husbandry and veterinary technical services upon the request of DBP. However, this agreement is not very effective be- cause BAI technicians are not involved in the sub-loan application and appraisal process and there is little incentive for them to become involved at a later stage of enterprise development. Since DBP cannot be expected to provide full livestock extension services from its own resources it is proposed that under the Project, DBP and BAI would renegotiate and implement a new agreement acceptable to the Bank to ensure that BAI technicians can be involved in sub-loan projects from the outset. Whenever the appropriate BAI technicians are available to assist, the new arrangement will be designed to facilitate the involvement of BAI technicians as a matter of routine and not only at the request of DBP. Assurances were obtained during negotiations that as a condition of effectiveness the Government would cause BAI and DBP to enter into an agreement satisfactory to the Bank to provide for increased assistance by BAI to DBP borrowers for livestock purposes. Environmental Impact 3.18 The impact of the Project on the environment would be minimal, although the location of some livestock enterprises close to residential property requires review. All pig and poultry farms would use or sell waste products for fertilizer and fish farming purposes. Some pig farms would use wastes to manufacture methane gas for cooking using simple digesters. DBP includes finance for this purpose if requested. Hill farm and coconut/ cattle sub-projects would be developed on existing grassland or coconut farms and would require negligible clearing of land. Hill farm development on natural grassland is subject to adequate Government controls and would not contribute to erosion problems. Slaughterhouse design would be subject to Bank approval and would include facilities for satisfactory handling of waste products and effluents (para 3.14 and Annex 5). C. Cost Estimates 3.19 The estimated total cost of the Project is US$41.3 million (0310 million) of which US$12.4 million (f93 million) is foreign exchange. Components of total project cost are shown in the table below.  - 20 - Total Project Cost % of Total LC FE Total LC FE Total Project % FE ----Ct Million) - - --(US$ Million)- Cost Cost I. Fixed Investments Pasture Estab- lishment 6.6 2.6 8.2 0.9 0.2 1.1 3 20 Fencing 5.0 2.2 7.2 0.7 0.3 1.0 2 30 Farm Water Facilities 8.1 2.0 10.1 1.1 0.3 1.4 3 20 Farm Buildings 51.7 9.1 60.8 6.9 1.2 8.1 20 15 Farm Machinery 1.0 10.5 1.5 0.1 0.1 0.2 - 33 Breeding Stock 36.7 1.1 37.8 5.0 - 5.0 12 - Slaughterhouses Buildings and Equipment 6.1 4.4 10.5 0.8 0.6 1.4 3 42 Feed Laboratory 3.0 3.0 6.0 0.4 0.4 0.8 2 50 Miscellaneous 4.2 0.5 4.7 0.5 0.1 0.6 1 10 Sub-total 122.4 24.4 146.8 16.4 3.2 19.6 47 15 II. Incremental Working Capital Concentrate Feed 22.8 34.2 57.0 3.0 4.6 7.6 18 60 Medicine and Vaccines 1.5 2.2 3.7 0.2 0.3 0.5 1 60 Fertilizers 4.6 6.9 11.5 0.6 0.9 1.5 4 60 Labor 3.7 - 3.7 0.5 - 0.5 1 - Feeder Steers 4.8 - 4.8 0.6 - 0.6 1 - Day-old Chicks 3.9 - 3.9 0.5 - 0.5 1 - Miscellaneous 2.0 - 2.0 0.3 - 0.3 1 - Sub-total 43.3 43.3 86.6 5.7 5.8 11.5 28 50 III. Administration, Technical Services, Equipment and Research 6.1 5.8 11.9 0.8 0.8 1.6 4 49 IV. Base Cost Estimate 171.8 73.5 245.3 22.9 9.8 32.7 79 30 V. Physical Con- tingencies (Slaughterhouses 10%) 0.6 0.4 1.0 0.1 ... 0.1 ... 42 VI. Expected Price Increases 44.3 18.9 63.2 5.9 2.6 8.5 21 30 VII. TOTAL EXPECTED COST OF PROJECT 216.7 92.8 309.5 28.9 12.4 41.3 100 30  Costs were estimated at late 1975 prices mainly from data obtained under the first livestock project with physical contingencies of 10% for slaughterhouses. Expected price increases are 10% for 1975, 8% for 1976 and 7-1/2% thereafter for local costs and as follows for foreign costs of equipment: 1975, 12%; 1976, 10%; 1977-79, 8%; and 1980-85, 7%. Expected price increases have been included in the allocation of funds for the loan program so that the physical program could be achieved and would not reduced by the effects of inflation. The size of the sub-loan program is related to the expected demand for finance by enterprise type and DBP's capacity to process loans. D. Financing 3.20 Financing of the Project would be in about the following amounts and proportions: Financing - (US$M) Beneficiaries DBP/Govt IBRD Total Components Amount % Amount % Amount % Amount % Farm Development 4.8 13 t3.7 37 18.5 50 37.0 100 Slaughterhouses 0.5 25 0.5 25 0.9 50 1.9 100 Feed Quality Control Program - - 0.4 50 0.4 50 0.8 100 Administration, Technical Services, Equipment and Research - - 0.9 56 0.7 44 1.6 100 Total 5.3 13 15.5 37 20.5 50 41.3 100 3.21 The proposed Bank loan would be for US$20.5 million, of which about 60%, or US$12.4 million, would be for foreign exchange requirments and about 40%, or US$8.1 million, would be for local currency requirements. 3.22 The Bank loan would be to the Government for 14-1/2 years including 5-1/2 years of grace. The Government would relend US$19.8 million of the loan funds to DBP on the same terms (including interest rate and grace period) and would assume the foreign exchange risk. The balance of US$700,000 of the loan would be used by Government to finance in part the feed quality control program, research component and the short term consultants (para 3.14). Assurances were obtained during negotiations that the Government would relend the proceeds of the loan to DBP on terms and conditions acceptable to the Bank. On average, beneficiaries would contribute about 13% of investment costs although this would vary from minor beneficiaries who would contribute about 10% to major beneficiaries, including municipalities for slaughterhouses, who would contribute at least 25%.  - 22 - E. Procurement 3.23 Procurement for farm development (US$35.6 million) would be by farmers from local suppliers, as in the first project. There are generally adequate commercial outlets for the main inputs (concentrate feed, medicines and vaccines, and fertilizers) to permit sub-borrowers to obtain supplies at competitive prices. The short supply of feeder and breeder cattle is a potential constraint, but this problem is specifically addressed by this Project and by the National Beef/Carabeef Program (1976-1985). The scattered location and phasing over several years of the farm sub-loan projects and diversity of equipment and supplies required makes bulk purchase of inputs impractical. Some of the local suppliers are subsidiaries or associate companies of international firms. Slaughterhouse contracts (totalling about US$1.9 million) would be locally advertised since their small size (average of US$190,000 each), scattered locations and phasing according to demand, is unlikely to be attractive to international contractors and does not permit aggregation into larger contracts. There is adequate local fabrication and construction capability and competition to ensure that the relatively simple slaughterhouses proposed can be procured efficiently. Equipment and materials for the feed quality control laboratory (US$0.4 million) would be procured by international competitive bidding. Contracts for technical services (about US$0.2 million) may be provided by bilateral aid but will otherwise be awarded according to standard Bank procedures. The vehicles and equipment (US$160,000) required for administering the Project and for technical services would be procured locally by DBP, using standard procedures which are satisfactory to the Bank. Bulk international procurement of vehicles and equipment is not warranted because requirements are phased over several years and the lot sizes are too small to be attractive to international bidders. Equipment and materials for the feed quality con- trol laboratory ($0.4 million) would be procured following international competitive bidding in accordance with the Guidelines. F. Disbursements 3.24 Loan commitments by DBP would be over three years and DBP would disburse to sub-borrowers over periods up to 4 years, depending on the type of enterprise. Bank disbursements would be over 5-1/2 years, allowing for phasing of commitments and for 6 months slippage (Annex 19). The Bank would reimburse, against statements of expenditures, 50% of medium and long term loans granted by DBP to Project beneficiaries for pig, poultry, backyard cattle, dairy and slaughterhouses and 54% for coconut/beef and hill beef loans. This latter higher disbursement rate is necessary to ensure that Bank disbursements for these slower maturing developments do not extend beyond 5-1/2 years, after which time investments on these two types of enterprises will be small. For consultants, the Bank would reimburse 100% of the foreign exchange costs, or 60% of the total costs if local con- sultants are engaged, to cover salaries, international travel, and allow- ances. The Bank would reimburse 100% c.i.f. for equipment and materials imported by DBP or the Government for its use or 60% of total expenditures if procured in country. For the feed laboratory equipment the Bank would reimburse 100% of the foreign exchange cost or 100% of the ex-factory cost  - 23 - of goods produced in the Philippines. The estimated schedule of quarterly disbursement is in Annex 19. Since the project would support DBP's on-going livestock program and the proceeds of the First Livestock Loan were fully committed at the end of 1975, it is proposed that the proposed loan finance retroactively up to $1.5 million of costs incurred under DBP's livestock lending program after December 31, 1975. G. Organization and Management 3.25 The Project will be executed mainly by DBP, in particular by the Livestock and Poultry Group of DBP's Agricultural Projects Department (paras 2.18 and 2.19). Coordination of headquarters and branch activities is main- tained by the Supervising Governor who is responsible for both the Agricultural Projects Department and the Branches and Agencies Department. For sub-project technical services, DBP will increasingly rely on its new agreement with BAI (para 3.17). DBP would monitor once a year a randomly selected sample of sub-loans (financed under both this Project and the first Livestock project) of each enterprise type to evaluate the economic, financial and physical impact of the lending program for the guidance of DBP management and staff processing further sub-loans. Monitoring would be mainly the responsibility of the existing Plans and Programs Group of the Agricultural Projects Depart- ment, assisted as necessary by the Livestock and Poultry Group and the two Project specialists (para 3.14). Assurances were obtained during negotiations that DBP would annually monitor in a manner acceptable to the Bank a randomly selected sample of sub-loans (financed under both this Project and the first livestock project) and submit the monitoring report to the Bank together with the annual reports (para 3.29). The feed quality control and research com- ponents would be the responsibility of the Bureau of Animal Industry (BAI) in the Department of Agriculture. H. Lending Policies and Procedures 3.26 Loans would be made by DBP direct to project beneficiaries, both to farmers and to municipalities in the case of slaughterhouses. Loan applications would be evaluated with regard to technical, financial and economic feasibility, and creditworthiness. The trained technicians re- sponsible for this work would be assisted as necessary by Project technical specialists. Sub-loans of less than 1 50,000 (or such other limit as DBP decides) would be approved by branch managers, subject to confirmation by DBP's board. Assurances were obtained during negotiations that DBP would use the standard sub-loan agreement for sub-loans as approved by the Bank for Loan 823-PH and not alter it materially without prior consultation with the Bank. Loans would not exceed 70% of the market value of the property to be mortgaged including improvements financed by the loan, or 65% of market value of items securing a loan by chattel mortgage. Minor benefi- ciaries would on average be required to provide 10% of the incremental investment from their own resources while major beneficiaries (as defined in para 3.28) would contribute at least 25% of the incremental investment. 3.27 Repayment terms would be flexible and would be based primarily on the ability of the applicant to repay the loan from the proceeds of the investment. Terms would in general be in accordance with the following schedule:  - 24 - Total Grace Term Period -----Years