Philippines - Smallholder Tree Farming and Forestry Project

Report No. 1696a-PH 1 Philippines Appraisal of the 1"N' Smallholder Treefarming and Fo Tject November 4, 1977 FILE c Regional Projects Department F L C East Asia and Pacific Regional Office FOR OFFICIAL USE ONLY Document of the World Bank 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 (P) 7.4 P 1.00 US$ 0.135 WEIGHTS AND MEASURES - METRIC SYSTEM 1 hectare (ha) 2.47 acres 1 kilometer (km) 0.62 miles 1 square kilometer (sq km) = 0.3881 square miles 1 meter (m) = 39.37 inches 1 cubic meter (cu m) 35.31 cubic feet 1 millimeter (mm) 0.039 inches 1 kilogram (kg) 2.2 pounds ABBREVIATIONS BFD - Bureau of Forest Development (DNR) BOI - Board of Investments BPI - Bureau of Plant Industry (DA) CRC - Cellophil Resources Corporation DA - Department of Agriculture DATICOR - Davao Timber Corporation DBP - Development Bank of the Philippines DNR - Department of Natural Resources FORI - Forestry Research Institute GMC - General Milling Corporation MICO - Mandaue Milling Corporation MVC - Mabuhay Vinyl Corporation PCARR - Philippine Council for Agriculture and Resources Research PICOP - Paper Industries Corporation of the Philippines PROFEM - Program for Forest Ecosystem Management RPPMI - Rustans Pulp and Paper Mills Incorporated PCWID - Presidential Committee on Wood Industries Development GOVERNMENT OF THE PHILIPPINES FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY PHILIPPINES APPRAISAL OF THE SMALLHOLDER TREEFARMING AND FORESTRY PROJECT TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS i -ii 1. INTRODUCTION .. 2. BACKGROUND ......... . .1............. . . General .1 The Forestry Sector. 2 Contribution to the Economy . . . . . . . . . . . . . . 2 Forest Resources and their Maintenance . . . . . . . . . 2 Institutional Responsibilities and Programs . . . . . . 3 Ongoing Pilot Tree Farm Development . . . . . . . . . . . . 4 3. THE PROJECT.5 General Description.. 5 Objectives . . . . . . . . . . . . . . . . . . . . . . . . 5 Detailed Features 6 A. Smallholder Tree Farming Components. 6 B. Plantation Development Components . . . . . . . . . 6 The Project Areas, Climate, Topography and Soils . . . . . 7 A. Smallholder Tree Farming . . . . . . . . . . . . . . 7 B. Plantation Development Components . . . . . . . . . 7 Species . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Land Tenure and Farm Size. 8 A. Smallholder Tree Farming . . . . . . . . . . . . . 8 B. Plantation Development . . . . . . . . . . . . . . . 8 Project Phasing. 9 A. Smallholder Tree Farming . . . . . . . . . . . . . . 9 B. Plantation Development . . . . . . . . . . . . . . 10 Project Preparation Units. . . . . . . . . . . . . . . . 10 Wood Industry Development Study . . . . . . . . . . . . 10 Cost Estimates and Financing ..11 Costs . . . . . . . . . . . . . . . . . . . . . . . . . 11 Financing . . . . . . . . . . . . . . . . . . . . . . . 13 Procurement ..13 A. Smallholder Tree Farming . . . . . . . . . . . . . . 13 B. Plantation Development . . . . . . . . . . . . . . . 14 Disbursements ..14 Accounts and Audit ..15 Environmental Effects . . . . . . . . . . . . . . . . . 15 This report is based on the findings of an appraisal mission composed of Messrs. D. Forno, J. Andreu and C. Keil who visited the Philippines in March/April, 1977. 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.  Page No. 4. ORGANIZATION AND MANAGEMENT ... . . . . . . . . . . . . . 15 A. Smallholder Treefarming . . . . . . . . . . . . . . . 15 Lending Policies and Procedures . . . . . . . . . 15 Technical Services and Market Agreements . . . . . 16 Subloan Agreements.. . . . . 16 Subloan Disbursements and Repayments . . . . . . . 17 B. Plantation Development . . . . . . . . . . . . . . . 17 C. Project Preparation Unit - DNR . . . . . . . . . . . 18 D. Project Preparation Unit - DA . . . . . . . . . . . 18 5. MARKETS, PRICES AND REVENUES . . . . . . . . . . . . . . . 18 Markets ..18 A. Smallholder Treefarming . . . . . . . . . . . . 18 B. Plantation Development . . . . . . . . . . . . . 19 Prices and Revenues ..19 A. Smallholder Treefarming . . . . . . . . . . . . 19 B. Plantation Development . . . . . . . . . . . . . 21 6. BENEFITS, JUSTIFICATION AND RISKS . . . . . . . . . . . . . 21 Sector Development ..21 Production ..21 Employment and Income . . 21 Financial and Economic Viability . . . . . . . . . . . . . 22 Risks . . . . . . . . . . . . . . . . . . . . . . . . . . 22 7. RECOMMENDATIONS . . . . . . 23 ANNEXES (attached to main report and preceeded by individual table of contents) 1. Implementing Agencies and Participating Companies 2. Market Prospects and Prices 3. Treefarming: Species, Technical Data and Farm Models 4. Plantation Development: Technical Details and Cost Estimates 5. Research on Establishment, Marketing and Technical Aspects Relating to Treefarming 6. Phasing of Project Expenditures, Financing and Disbursements 7. Economic Analysis MAPS No. 13076 No. 13077 BFD Plantation Development Location  PHILIPPINES SMALLHOLDER TREEFARMING AND FORESTRY PROJECT SUMMARY AND CONCLUSIONS 1. The Government of the Philippines has requested Bank technical assistance and financing for their reforestation efforts throughout the country, both by smallholders and by government services. This would support the recently formulated National Program for Forest Ecosystem Management (PROFEM), which has as its basic objectives, the reforestation and protection of the Philippines' rapidly declining forest resources. The project should be regarded as an important first step towards the longer term objective of assisting widescale Government reforestation efforts by helping to reduce some of the basic technological gaps in the sector. With this in mind, the Annexes of the report have been prepared in some detail to assist in project implementation. 2. The project consists essentially of two main components: (a) Smallholder Treefarming under supervised credit from the Development Bank of the Philippines (DBP) and (b) Pine Plantation Development by the Bureau of Forest Development (BFD). The components are complementary in the sense that the tree farm subproject seeks to establish and demonstrate the technology whereby smallholders on marginal agricultural and often steeply sloping land, can obtain an improved and sustained source of income from their farms. At the same time, the plantation subproject would seek to establish an economically attractive mode of settling shifting cultivators and other subsistence farmers who occupy Government forest lands and hinder implementa- tion of large scale reforestation. Additionally, the project would provide funds for the Departments of Natural Resources (DNR) and of Agriculture (DA), to help set up and operate project planning of integrated national programs in the forestry and agricultural sectors. 3. The Smallholder Treefarming subproject would seek to encourage farmers on marginal agricultural lands throughout the country to go into treefarming for production of firewood, charcoal, pulpwood and leaf meal. The subproject is innovative and experimental, and builds on the institutional experiences of DBP in providing supervised credit for smallholder treefarming, which was gained under a US$2 million Bank-financed pilot project with a single species in one area of the country (ref. Loan 998-PH). Five private companies would participate in the project by guaranteeing smallholders a market and minimum price for their trees at maturity. Species grown would be for the production of short fibre pulp, particle board, charcoal for use in manufacturing polyvinyl resins, high protein leaf meal for use in livestock feeds, and firewood, particularly in the four provinces of the Ilocos region where firewood demands for tobacco curing have resulted in the clearing of large areas of hill slope bush land and river basin catchments. Financial rates of return from tree farming would be between 23 and 27%, except in the case of leafmeal production, which would be over 50%. Research funds would be provided to the Philippine Council for Agriculture and Resources Research  - ii - (PKARR), to assist studies into some of the more important agronomic, socio- economic and marketing aspects of tree farming, which need to be resolved to facilitate wide-scale expansion of agro-forestry development in the Philippines. 4. The Plantation Development subproject would assist Government to strengthen the project planning and implementation capabilites of BFD. The project would also help to develop the technical parameters and expertise needed to improve the Government's reforestation efforts, particularly with plantings of the much needed long fibre pine species. The 3,000 ha of pine to be established would initiate a program to plant an additional 10,000 ha in the project area (Abra province). The project would also provide a replicable model for pine plantation development throughout the country. Already the value of pulp imports, mainly long fibre, amount to about US$30 million annually and this is expected to double by 1985. At the current rate of cutting and reforestation, the forest resources of the Philippines have a projected commercial life of less than 50 years. 5. At full maturity the project would provide raw materials for produc- tion of some 10,000 tons annually of short and 8,000 tons annually of long fiber pulp, together valued at US$8 million, and representing gross import savings of US$6.5 million. Particle board production from wood produced under the project would amount to about 33,000 tons, valued at US$8 million annually. Fuelwood and charcoal wood production, to the extent of some 400,000 cu m annually, would reduce crude oil imports by about US$2 million, eliminate the need for about US$1.5 million of coal imports, and facilitate the production of an additional US$0.7 million worth of polyvinyl resins and related chemicals. High protein leaf meal production, to the extent of about 55,000 tons yearly, would provide export earnings of some US$5.5 million. 6. Total project costs would be US$16 million, and the loan amount, US$8 million (50%) would be divided among the implementing agencies in the following approximate proportions: 53% to DBP; 38% to DNR; 5% to DA and 4% to PCARR. Although a relatively small loan, the project would provide some 7,400 smallholder families, on a total of about 28,600 ha, with a greatly improved source of income from their otherwise marginal and often idle holdings. Some 10,000 manyears of on-farm employment would result from the establishment phase of the treefarm subproject and a further 1,100 manyears annually would be required when the plantation development subproject reaches 2,000 ha/year. Benefits from treefarming itself and from employment created by the project, would almost entirely accrue to the lower 40% income group of the rural population. Resulting indirect benefits would include reduced erosion and siltation problems, less flooding, prevention of grass and bush fires and the creation of continuous employment for a large number of families which so far have depended upon slash-and-burn cultivation of marginally agricultural land. 7. The proposed project is suitable for a Bank loan of US$8.0 million for a period of 20 years with a 5 year grace period. The Borrower would be the Republic of the Philippines.  PHILIPPINES SMALLHOLDER TREE FARMING AND FORESTRY PROJECT 1. INTRODUCTION 1.01 The Government of the Philippines has requested Bank assistance in financing their reforestation efforts throughout the country, both by small- holders and by government services. This would support the recently defined National Program for Forest Ecosystem Management (PROFEM) which has, as its basic objectives, the reforestation and protection of the Philippines forest resources. The project would provide for the establishment and maintenance of some 31,600 ha of industrial tree farms and plantations, mostly on denuded land. It would be implemented both by smallholders (28,600 ha) under a super- vised credit program of the Development Bank of the Philippines (DBP) and by the Bureau of Forest Development (BFD) (3,000 ha). 1.02 In scope the project is innovative and experimental, i.e. in regard to promoting tree farm development by smallholders, establishing much needed pine plantations by BFD and in learning how to cope with the widespread problem of shifting cultivation and grazing in forest reserves. In size, however, the project is constrained by BFD's implementation capability, technical unknowns, and because of the time needed to demonstrate the potential rewards from tree farming, particularly among smallholders on marginal agricultural land who are among the poorest of the rural sector and to whom institutionalized credit is an unknown factor. While the immediate benefits of the project would be small, relative to the overall needs of the country in the much neglected area of forest resource and watershed maintenance, the area to be planted under the project would nevertheless amount to about 50% of the area to be planted by BFD if its present rate of reforestation continued. The project would help launch the Government's program for forest ecosystem management and establish a sound planning and technical base for its implementation and expansion. 1.03 The project was identified jointly by the Government and the Bank, with CP/FAO assisting in project preparation. This report is based on the findings of a Bank appraisal mission which visited the Philippines in March- April 1977, composed of Messrs. D. A. Forno, J. Andreu and C. Keil. 2. BACKGROUND General 2.01 The Philippines covers some 297,000 sq km scattered over more than 7,000 islands between the Pacific Ocean and the South China Sea. The 45 largest islands account for 98% of the area. The population is around 43 million (1975) and grows at a rate of about 2.8% annually. Real GNP, which had a growth rate of 5-6% annually in the 1960s, grew by 10% in 1973 due to high prices for export commodities. From 1974 to 1976, however, it grew by only about 6% annually as some industries were adversely affected by the recession in the Philippines' trading partners. Inflation related to high  -2- export prices and increased oil and food prices was a major problem in 1974, but abated markedly in 1975. Unequal income distribution and underemployment remain major economic problems. 2.02 Out of a total land area of some 30 million ha, more than half is forest land and about one-third is cultivated. About 2.0 to 2.5 million ha of fairly level land is still available for growing crops, although some 1.0 million ha of this is cogon grassland (Cylindrica imperata). Cogon also covers about 5 million ha of the public forest land which has become denuded through the actions of shifting cultivators, illegal logging, bush fires and grazing. The Forestry Sector 2.03 Contribution to the Economy. Exports of forest products became an increasingly important source of foreign exchange during the 1950s and 1960s. Starting from negligible amounts in the early 1950s, exports of logs and other forest products rose to about US$300 million by 1970 and accounted for 27% of export earnings. The growth in earnings in the first half of the 1970s was constrained by increasing difficulties in expanding log production and the relatively slow growth in overseas demand, especially in 1974-75. However, earnings from wood products are projected to rise by an average of about 20% a year during 1976-85, as processed wood products replace exports of logs in line with Government policy to increase the value added benefits from forest products. Log exports are expected to be phased out by 1985, when earnings are projected to be about US$1.4 billion. 2.04 Forest Resources and their Maintenance. Forest lands cover an estimated 18 million ha (60% of total land area), of which about 8 million ha are commercially exploitable and some 5 million ha already denuded. Mostly the forests are dipterocarp (short fiber species). The long fiber pine forests cover only about 0.2 million ha, and occur mainly in inaccessible areas. Each year some 0.2 million ha of forest are logged over, but reforest- ation by BFD compensates for only 5% of the forest cut. Furthermore, much of BFD's reforestation efforts have concentrated on restoring ground cover, with little attention being given to planting of species for ultimate commercial use. Also, follow-up maintenance of reforested areas has been lacking, resulting in much of the plantings being destroyed by weeds, animals or fires. 2.05 The situation is worsened through the activities of Kaingineros (shifting cultivators). These squatters frequently move into virgin and logged-over areas, clear cut existing vegetation and plant subsistence crops for one to three seasons before moving on. Such areas are quickly covered by cogon grass, thereby suppressing regeneration of tree growth and adding to bush-fire hazards. 2.06 As population grows, so the pressure on the forest resources in the Philippines increases. Already imports of pulp, mainly long fiber, are almost 100,000 tons annually. By 1985, Bank projections are for the Philip- pines domestic demand for paper and paperboard to increase from current demand of around 400,000 tons, valued at US$250 million, to 800,000 tons, or US$500 million annually. However, the strategy for wood industry  -3- development in the country has not been clearly defined. While the Board of Investments (BOI) provides a techno-economic check on the viability of new wood industry ventures, criteria for determining location and type of wood industry development, need to be better formulated with regard to such factors as existing and planned wood resource establishment, employment, environment, and other industry development (see para. 4.09). 2.07 Fuelwood demands are also growing, both due to the rapid rise in oil price and population pressure. Although much of the fuelwood comes from noncommercial forests, the effect of continuous fuelwood cutting is serious. More than 5 million ha of largely sloping land in the Philippines are now denuded, leading to serious erosion and siltation problems in rivers and dams and a perennial fire problem which yearly causes destruction of surrounding wooded areas. 2.08 Institutional Responsibilities and Programs. Responsibility for the maintenance and regulation of forest resources and products lies with the Bureau of Forest Development (BFD), a line agency of the Department of Natural Resources (Annex 1). Its mandate for operations is contained in the Revised Forestry Code, introduced in 1975 as Presidential Decree 705. Emphasis in the Code is given to (a) acceleration of land survey and classi- fication; (b) protection, development and rehabilitation of forest lands; (c) rationalization and expansion of the wood processing industry; and (d) strengthening of forest research. BFD, however, is unable to adequately enforce regulations contained in the Forestry Code, although enforcement has been stepped up in recent years. 2.09 However, apart from legislation which appears adequate, alleviation of the problem of forest destruction requires a two pronged approach. Firstly, the increasing needs of rural people for firewood and building material must be realized; and secondly, the cooperation and/or involvement of an area's inhabitants must be obtained if reforestation efforts are to be successful. Thus, while legislation has been enacted outlawing indiscri- minate cutting of forest lands, there is a growing awareness by Government and private forest-concession holders that they must also provide for the needs of local inhabitants. The Government, through the recently formed Presidential Council for Forest Ecosystem Management (PROFEM), has therefore adopted a number of measures designed to create conservation awareness among the rural population. 2.10 While BFD's Division of Reforestation and Afforestation acts as Secretariat of PROFEM, the program is to be implemented by all Government agencies concerned with the rural sector. Foremost in the program of PROFEM is the stimulation of interest in commercial woodlot and individual tree planting activities in rural areas. Government concern at the rate of forest destruction is exemplified by the recent Presidential Decree requiring "every able-bodied Filipino ten years old or more residing in the country to plant one tree every month." The success of Government efforts to maintain and hopefully improve their forest resource base, however, will depend largely on effective regulation of logging in existing forests and the implementation of well-planned reforestation efforts by Government and private concession  - 4 - holders, and through commercial scale tree farm or commercial woodlot develop- ment. Complementary to this would be a change in attitude of the people as a whole towards conservation, but this can only be realized when their basic needs for firewood and rough building materials are met relatively cheaply from commercial tree farms, woodlots, etc. Ongoing Pilot Tree Farm Development 2.11 Tree farming in the Philippines commenced in the late 1960's when a company, Paper Industries Corporation of the Philippines (PICOP), launched a program aimed at (a) ensuring raw material supplies for its mill complex, and (b) improving the socio-economic position of smallholders surrounding the company's concession at Bislig in Mindanao. Subsequently, in 1972, the Development Bank of the Philippines (DBP), began providing tree farming loans to these smallholders in close cooperation with PICOP. Then in 1974, US$2 million was provided by the Bank to DBP to expand its Tree Farm Loan Program around PICOP (ref. Loan 998-PH). Participating farmers grew Albizzia falcataria for pulpwood and were guaranteed a market and minimum price for their trees at harvest from the seventh year onwards. Originally, it was envisaged that this would be a four-year project, but disbursements are well ahead of schedule. At the time of this appraisal, about US$1 million had been disbursed, double that originally envisaged. Commitments totalled about US$1.2 million and would have been even greater, but for recent staff short- ages at the DBP branch office and resultant large backlogs in subloan approvals. This, in fact, has been the only important problem to arise under the Bank's pilot project, and several steps would be taken under the proposed project to remove these and other processing constraints (Annex 1). Funds provided under the Pilot Tree Farm Project are expected to be fully committed by mid-1978. 2.12 The success of the Pilot Project is due largely to the efforts of PICOP and DBP, and the considerable benefits being derived by both smallholders and PICOP from tree farming. Although it is still too early for full benefits to be derived from the Bank assisted tree farm activities, those smallholders who planted under the original scheme are deriving income from thinnings (supervised by PICOP) in the fourth and fifth years of the planting. At appraisal of the Pilot Project, income was not expected until the eighth year. About 50 cu m/ha of thinnings are being obtained, giving a gross income of about P 2,250/ha (US$306). PICOP has raised its guaranteed minimum stumpage price from P 15/cu m to P 20/cu m but actual stumpage prices have been about P 40 to 50/cu m. Companies participating under the proposed project will also be able to provide technical services, market and price guarantees (see para. 4.03 and Annex 2). 2.13 PICOP has benefited greatly from the program, both through the establishment of wood resources for its pulp mill, and closer cooperation with smallholders in and around its concession. The forest concession is now less subject to frequent damage from bush fires and Kainginero (shifting cultivator) activity. PICOP has also achieved good public relations value from the project. Hence, under the presently proposed Smallholder Tree Farming subproject, four companies producing a variety of products have indi- cated their desire to participate in smallholder tree farming activities.  3. THE PROJECT General Description 3.01 The project, formulated in close cooperation with the Development Bank of the Philippines (DBP), the Department of Natural Resources (DNR), and the Department of Agriculture (DA), provides for a multifaceted approach to reforestation. Building on the experiences gained from the US$2 million Bank- financed Pilot Project (Loan 998-PH), supervised credit for tree farming would be provided to smallholders through DBP, this time with five private companies participating. Each of these companies would guarantee markets and a minimum price for trees at maturity. Species grown would be for the production of short fiber pulp, particle board, charcoal for use in the manufacture of polyvinyl resin, and high protein leaf meal for use in livestock feeds. Supervised credit would also be provided for large areas of firewood produc- tion in the four provinces of the Ilocos region, where firewood demands for tobacco curing have resulted in the clearing of large areas of hill-slope bush land (see Map 13076). 3.02 A second line of funding under the proposed loan would go to the Bureau of Forest Development (BFD) to upgrade their reforestation implemen- tation capacity. More specifically, the project would initiate commercial scale reforestation by BFD with long fiber, fast-growing pine species, mainly Pinus caribaea. In this first Bank assistance to BFD, the project would concentrate on a single area in the Province of Abra of Northern Luzon (see Map 13077). The planting of pine species would also initiate a program aimed at reducing the country's deficit in long fiber pulp, and complement the faster growing short fiber pulp species being planted by smallholders under the Pilot Project (i.e. 8-year rotation for Albizzia vs. 15-year rotation for pine). Objectives 3.03 The two components of the project are complementary. By assisting the BFD to strengthen its project planning and implementation capabilities, and by initiating industrial-scale reforestation with long fiber species, the project would help to pave the way for wide-scale, industrial reforestation. To achieve the latter, however, it would be necessary to have developed an economically attractive mode of resettling occupants of government forest lands and of providing them with employment opportunities. Also, by assist- ing smallholders to develop tree farms, the project would seek to demonstrate that tree farming could serve as a lucrative crop for the very large numbers of smallholders and subsistence farmers on marginal agricultural lands who presently contribute to the destruction of forest and logged-over lands, causing serious wood resource and wildlife destruction, erosion, siltation and water shortage problems.  -6- Detailed Features The Project would provide: 3.04 A. Smallholder Tree Farming Components: (i) Supervised credit and technical services for tree farm development for some 7,400 smallholders occupying about 28,600 ha of marginal agricultural land. (ii) Increased nursery capacity and facilities for BPI in the Ilocos region to facilitate production and distribution of giant Ipil-Ipil seedlings to sub-borrowers. (iii) Vehicles, motorbikes and office equipment for DBP branch offices serving the project area. (iv) Research into aspects of the project. which would facilitate monitoring of tree farm development, and subsequent expan- sion of the programs. In particular studies would be conducted on impact on income distribution, agronomic factors affecting tree growth, marketability, processing and efficiency of wood use in domestic ovens. (v) Provision of market agreements and minimum price guarantees by four participating companies./l 3.05 B. Plantation Development Components (i) Nursery facilities including worksheds, irrigation facilities, and importation of seed. (ii) Development of 3,000 ha of trial pine plantations (Pinus caribaea), in Abra province of Northern Luzon, thereby initiating a program for planting some further 10,000 ha in the Abra region. (iii) Construction and maintenance of forest roads, paths, firebreaks and watchtowers. (iv) Project headquarter buildings, machine and storage sheds, staff quarters and supporting facilities for management and technical staff. (v) Specialist technical services and incremental staff manpower requirements. /1 The five companies, and the extent of their participation would be (a) for leaf meal production - General Milling Corp. (GMC), 5,000 ha; and Mandaue Manufacturing Industries Corp. (MICO), 500 ha; (b) for charcoal produc- tion - Mabuhay Vinyl Corp. (MVC), 3,700 ha; (c) for particle board produc- tion - Davao Timber Corp. (DATICOR), 4,000 ha; and (d) for pulpwood - Rustans Pulp and Paper Mills (RPPMI); 2,400 ha.  -7- (vi) A Steering Committee to annually approve and monitor the work program. (vii) Consultants, travel, and other such support funds for strengthening the Planning Service of DNR through the establishment of a Projects Preparation Unit. (viii) Consultant services for conducting a Wood Industry Development Study to assist in rationalizing forestry sector planning. 3.06 The project would also provide for the establishment of a Project Preparation Unit within the Department of Agriculture to improve project identification and preparation. Funds would be provided for incremental staff and office equipment, short-term consultants, and travel expenses. Both the Departments of Agriculture and Natural Resources would therefore be assisted under the project to set up and operate project planning and preparation units. Since both units would be established under the Office of the respective Secretary, this would help remove past constraints due to inadequate and often uncoordinated sector planning. and project preparation. The Project Areas, Climate, Topography and Soils 3.07 A. Smallholder Tree Farming. Of the 28,600 ha of tree farm develop- ment to be financed under the project, 10,100 ha would be located in Mindanao, 5,500 ha in the Visayas and 8,000 ha in the Ilocos region of Northern Luzon. Funds for a further 5,000 ha would be provided for tree farm development in other parts of the country. It is anticipated that, apart from the areas and market outlets specifically identified, the project would stimulate interest in tree farming among smallholders in many other parts of the country. For example, in the Davao region there are indications that some 500 ha of Giant Ipil-Ipil plantings for production of banana props would be financially re- warding. DBP would be responsible for apportioning credit provided for the additional 5,000 ha, subject to demand, satisfactory financial aspects and to the land being best suited for tree farming. All of the areas identified for tree farm development have satisfactory climates and soil types to sustain the growth rates on which the financial projections are made (Annex 3). 3.08 B. Plantation Development. The 3,000 ha of trial pine plantation to be established under the project by BFD would be located in Abra province in Northern Luzon. The section to be planted forms part of a minimum 15,000 ha area in the catchment of the Abra river, which has been identified by BFD as a priority reforestation area for pulpwood production and soil conservation purposes (see Map 13077). Soil type and climate in the project is suited to the growing of Pinus caribaea. Species 3.09 The species to be used for Treefarming would be mainly Giant Ipil Ipil (Leucaena leucocephala) and Albizzia falcataria. Both are fast growing leguminous species and considerable experience with their cultivation already exists in the Philippines. Giant Ipil Ipil produces a hardwood suitable for firewood and charcoal, and its leaves can be used for feeding livestock. The leaves have nutritive value similar to that of alfalfa. Albizzia, on the other hand, produces a soft wood suitable for pulping (short fibre) and  particle board production. For the plantation development subproject, Pinus caribaea would be used. This is a fast growing tropical pine suited to low elevations, but relatively little experience with the species exists in the Philippines, particularly in the drier areas. However, it grows well in countries such as Fiji, Australia and Brazil with similar environments to that in the project area (Abra province). Land Tenure and Farm Size 3.10 A. Smallholder Tree Farming. To be eligible for tree farm credit under the project, borrowers would be required to have either freehold title, homestead lease, or leasehold rights (Annex 1). DBP would also satisfy itself that such lands are marginal agricultural lands best suited for tree crops, because of slope, soils, distance from markets, etc. 3.11 Average subloan size under the Tree Farming Project has been for tree farm plantings of 11 to 15 ha, and in fact more than 93% of loans so far committed have been for amounts under P20,000 (US$2,720), i.e. 15 ha equivalent. Less than 1% of borrowings have been for plantings of more than 25 ha. Therefore, since land occupancy and proposed tree farm development around the DATICOR and RPPMI concessions are similar to that around PICOP, it is expected that for the new DATICOR, and RPPMI components, tree farm size would be mainly for plantings of between 7 and 15 ha with an average around 10 ha. However, tree farms for production of firewood and charcoal would be smaller due to generally smaller sized holdings. An average tree farm size of 5 ha is expected. For leaf meal production even smaller farms would be developed, e.g. 2 ha average, due to much smaller holdings and because harvesting of leaves for leafmeal production is very labor intensive; 2 ha of plantings would be all that an average farm family could manage by themselves. Based on the experiences of the Pilot Project, however, it could be expected that during the first few years of the project, farm size will tend to be larger than average with increasing numbers of smaller holdings coming into the project towards the end. 3.12 B. Plantation Development. Only Government forest lands free from forest concession holders would be reforested under the project. The proposed area in Abra covers a plantable area of at least 15,000 ha, which when reforested would constitute a relatively large plantation. Inherent in any logged-over or denuded forest lands in the Philippines, are the problems of pasture lease and permit holdings, squatters, shifting cultivators and uncon- fined grazing of cattle. In Abra these problems are less than in other possibly more suitable reforestation areas. However, since the problem of population pressure is the major constraint to forest development, the less densely populated Abra region was chosen. The 3,000 ha delineated for the project is virtually free of pasture permits and leases, and there is scope for reforesting a relatively contiguous total area of some 15,000 ha. Within the project area, however, unauthorized grazing is occurring, but herd popula- tions are very low since the land is mostly covered with cogon. Nevertheless, the initial plantings would need to be fenced and fire breaks and towers maintained and patrolled. Also, the project would provide for forestry extension activities, whereby families occupying land to be reforested would be given employment opportunities in the replanting program on a priority  - 9 - basis. Thus, while the problem of illegal and legal inhabitants does exist and provides an opportunity for Government to determine how best to meet their needs, the problem is only minor and would not endanger the project's success. The number of households to be moved would probably be of the order of 50-100. At negotiations, it was agreed that BFD would not issue or renew any pasture permits or leases in the project area or in the declared priority Abra river basin and that Government would assist in providing suitable land ouside the project area and alternative employment opportunities for any household displaced by the project (para. 7.04). Project Phasing, 3.13 A. Smallbolder Treefarming: The rate at which tree farm develop- ment occurs in t'e various subproject areas would depend largely on the effort expenided bLy the participating companies and the DBP branch offices. Developrner.r m'ijections, based on the mission's estimates, are given below: Tree Spe'ijes! Area of Tree farm Development (ha) Total Total Purpose Year 1 Year 2 Year 3 Year 4 Area (ha) No. Farms For tobacco curing /a 600 1,900 4,000 4,000 10,500 2,100 For charcoal 700 1,000 1,000 1,000 3,700 750 for leaf meal /a 700 1,800 2,500 3,000 8,000 3,900 B. Albizzia falcata For pulpwood 400 600 700 700 2,400 250 For particle board 500 900 1,300 1,300 4,000 400 Totals 2,900 6,200 9,500 10,000 28,600 7,400 /a Asssumes that 5,000 ha of unspecified tree farm development would be divided equally between plantings for firewood and leaf meal. 3.14 Development would be expected to be fast around Iligan where the company, MVC, has already been actively stimulating interest among small- holders in tree farming. Likewise development of Albizzia under contract with RPPMI, a company recently taken over by PICOP, would be quite rapid due to PICOP's considerable experiences with on-going tree farm development. Slowest development could be expected in the Ilocos region, where although market demand is large, no company is involved to add to the stimulus for tree farm development. DBP and BPI would therefore have to be particularly active in stimulating interest among smallholders in the Ilocos region. DBP, with the assistance of BPI, would be responsible for providing appropriate extension services and literature to tree farm developers and actively promote such development.  - 10 - 3.15 Concurrent with smallholder treefarm development, research funded under the project into various aspects of treefarming would be coordinated by PCARR, the Philippine Council for Agriculture and Resources Research. In particular, the research would concentrate on ways of optimizing treefarm establishment, maintenance and profitability (Annex 5). Studies on income distribution before and after the project, including the ongoing project, would be conducted also. This would be done in coordination with DBP and would greatly complement DBP's monitoring of the project's effectiveness, both in terms of the institutional and development aspects. It was agreed at negotiations that PCARR would submit details of research projects to the Bank for review by May 31, 1978, and that progress reports on such studies would be submitted annually for Bank review (para. 7.03 (iv)). 3.16 B. Plantation Development: Because of the rapidly increasing deficit of long fibre pulp in the Philippines and the depletion of natural pine resources, (Annex 2), the project is especially designed to facilitate rapid testing of Pinus caribaea strains and development of techniques for pine plantation development. Seed of the various strains of Pinus caribaea would have to be imported. In the first three years of the project, field trial plantings would cover some 400 ha and thereafter, plantation scale development would begin with plantings of 600 ha and 2,000 ha in the fourth and fifth years respectively. A further 10-12,000 ha of government forest suitable for pine plantation also adjoins the project area. Surveys and plannings for continuing plantation development in Abra would be conducted during the project. 3.17 Some 80 man-years of labor would be used during the first year, and this would increase to about 1,100 man-years when wide scale plantation development begins in the fifth year. Annex 4, Tables 3 and 8 provide a breakdown of labor and staff requirements by activity. From population and farm statistics in the Abra region, there would appear to be sufficient labor available to meet peak labor demands, but the effectiveness of the forestry extension activities (para. 3.12) will be critical in determining to what extent the inhabitants of the project area would be employed by the project. 3.18 Project Preparation Units. The project would assist both the Departments of Agriculture (DA) and Natural Resources (DNR) to strengthen their project planning capabilities. In DNR the central unit responsible for planning development of the forestry sector would be strengthened. In DA a new unit would be established with responsibility for planning and preparing agricultural projects. The organization and functions of these units are discussed more fully in paras. 4.09-4.10 and in Annex 1. 3.19 Wood Industry Development Study. Under the project, funds would be provided for some 8 man-years of consultant services to assist the Planning Service of DNR in conducting a study of wood industry development in the Philippines. In scope, the study would cover pulp and paper and the mechani- cal forest industries, and link the industrial development with the long-term availability of raw materials. Investment proposals would be investigated in terms of national, regional and provincial planning goals, taking into consider- ation such factors as employment, environment, other industries and transport  - 11 - flow. The study would explore domestic and export market prospects and would guide investments in the direction of maximum foreign earnings and import substitutions. The study would develop a national investment straegy for the sector to maximize benefits to the national economy on a sustained basis. Draft terms of reference are given in Annex 1, Attachment 4. At negotiations it was agreed that DNR would submit TOR's to the Bank for review by June 30, 1978 and that consultants for the study would be hired by December 31, 1978. Cost Estimates and Financing 3.20 Costs. Total project costs are estimated at US$16 million, of which about US$3.5 million or 22% is foreign exchange. All prices and salaries are expressed at November, 1977 levels. Physical contingencies of 10% for plantation development are included and amount to 2% of total project costs. Costs due to expected price increases amount to 20% of base project costs, and are calculated assuming the following inflationary rates: 1978/80 1981/82