Philippines - Energy sector survey (Vol. 2 of 2) : Annexes

Report No. 3199a-PHR Philippines Energy Sector Survey FILE COPY (In Two Volumes) Volume II: Annexes February 12, 1982 East Asia and Pacific Regional Office Projects Department; in association with The Asian Development Bank 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 Fank authorization.  ABBREVIATIONS AND ACRONYMS ADB - Asian Development Bank BED - Bureau of Energy Development BEU - Bureau of Energy Utilization BISUDECO - Bicolandia Sugar Development Corporation BOE - Board of Energy BOI - Board of Investments BPD - Barrels per (calendar) day BTU - British thermal unit CASUCO - Cagayan Sugar Corporation CNED - Center for Nonconventional Energy Development DBP - Development Bank of the Philippines EDC - Energy Development Corporation ENERCON - Energy conservation (an industry-sponsored energy conservation movement) ENMAP - Energy Management Association of the Philippines GDP - Gross Domestic Product GNP - Gross National Product GOP - Government of the Philippines GWh - Gigawatt hour ISA - International Sugar Agreement km - Kilometers KV - Kilo volt kWh - Kilowatt hour LPG - Liquid petroleum gas LRMC - long run marginal cost MMBOE - Million barrels of oil equivalent MECO - Manila Electric Company MOE - Ministry of Energy MTOE - Thousand tons of oil equivalent MW - Megawatt NASUTRA - National Sugar Trading Corporation NCA - National Coal Authority NEA - National Electrification Administration NEDA - National Economic Development Agency NGO - Non-governmental organization NPC - National Power Corporation OMS/OMY - Output per manshift (output per manyear) PAEC - Philippine Atomic Energy Commission PANELCO - Pangasinan Electric Cooperative PCCP - Philippines Chamber of Coal Producers Inc. PGI - Philippine Geothermal, Inc. PHILSUCOM - Philippine Sugar Commission PNAC - Philippine National Alcohol Commission PNB - Philippine National Bank PNOC - Philippine National Oil Company R&D - Research and Development SWIP - Small-scale water impounding projects TOE - Tons oil equivalent TPA - Tons per annum USAID - United States Agency for International Development WASP - Wien Automatic Systems Program  FOR OFFICIAL USE ONLY LIST OF ANNEXES Page 1. The Outlook for Biomass Alcohol Production .................... 1 2. The Coal Sector ............................................... 46 3. Petroleum: Exploration and Production ........................ 76 4. The Electric Power Expansion Program (1980-89) .... ............ 97 5. The Outlook for Reducing Petroleum Demand in the Transport Sector . ...................................................... 144 6. The Industrial Demand for Petroleum Fuels (Including Prospects for Conservation and Conversions) ...... 159 7. Nonconventional Renewable Energy .............................. 173 Maps (at end of volume): 1. Coal Regions of the Philippines. 2. Oil Exploration Areas and Sedimentary Basins. 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.   ANNEX 1 THE OUTLOOK FOR BIOM1ASS ALCOHOL PRODUCTION Page An Overview of the Alcogas Program . . . . . . . . . . . . . . . 1 Targets and organization . . . . . . . . . . . . . . . 1 Alcohol pricing . . . . . . . . . . . . . . . . . . . . 3 The Production System for Alcohol . . . . . . . . . . . . . . . . 5 The land resource . . . . . . . . . . . . . . . . . . . 7 The sugar industry . . . . . . . . . . . . . . . . . . 10 Cassava and sweet potato . . . . . . . . . . . . . . . 15 Other raw materials . . . . . . . . . . . . . . . . . . 18 Production Costs . . . . . . . . . . . . . . . . . . . . . . . . 19 Costs of raw materials . . . . . . . . . . . . . . . . 19 Sugarcane .... . . . . . . . . . . . . . . . . . . . 19 Cassava and sweet potato . . . . . . . . . . . . . . . 25 Costs of distilleries . . . . . . . . . . . . . . . . . 25 Conclusions and Policy Implications . . . . . . . . . . . . . . . 28 Target feasibility . . . . . . . . . . . . . . . . . . 28 The economics of alcohol production . . . . . . . . . . 31 Implications for policy . . . . . . . . . . . . . . . . 34   -3- ANNEX 1 Page 1 The Outlook for Biomass Alcohol Production An Overview of the Alcogas Program 1. The "alcogas" program, which was formally launched by the Govern- ment in late 1979, is one of several efforts undertaken to reduce the coun- try's heavy dependence on imported energy. As outlined by the Philippine National Alcohol Commission (PNAC), the program seeks to introduce an 80-20% blend of regular and premium gasoline and anhydrous ethanol in the early years of the program and to use ethanol as an industrial feedstock and in pure alcohol engines in later years as production expands. The stated aims of the program are to replace imported fossil fuels to the extent possible with indigenous renewable energy sources and to generate rural job oppor- tunities through the production of energy crops. Hydrous alcohol has been produced from molasses for many years in the Philippines, largely for indus- trial and potable use, but was used as a liquid fuel during World War II. 1/ 2. Targets and organization. The original target for the program was the production of 22 M liters (ltr) of ethanol in 1980, rising sharply there- after to 925 M ltr in 1988. 2/ The maximum 20% blend of alcohol was to be reached by 1986, with the use of ethanol as a chemical feedstock and in pure alcohol engines in the years thereafter (see Table 1). If gasoline consump- tion in the Philippines increases to 18.1 M bbl by 1985 and 19.9 M bbl by 1988 as projected, the 20% blend would require some 580 and 630 M ltr, re- spectively, in those years. Projected ethylene consumption of 238,000 metric tons in 1988 could absorb another 500 M ltr of ethanol. 3. PNAC provides overall policy guidance for the program. This Com- mission, established in early 1980, is chaired by the Minister of Energy and includes the Chairman of the Philippine Sugar Commission (as Vice Chairman) and the Ministers of Agriculture, Industry, Finance and National Resources as well as a (yet unnamed) representative of the private sector. A small Secretariat of 6-8 technical staff assists in program planning and opera- tional tasks. As of May 1980, many of the operational details of the pro- gram were still being developed. 4. The private sector is expected to provide the bulk of the invest- ment and managerial resources in both the industrial and agricultural as- pects of the program, although limited public sector involvement is fore- seen in early years. The PNAC is to determine the level and nature of 1/ Anhydrous alcohol, usually at least 99.5% water free, is mixed with gaso- line up to a 20% portion to produce "alcogas." Hydrous alcohol, of about 95% purity, is used in specially designed, all-alcohol engines. Capital and operating costs to produce hydrous alcohol are slightly less than pro- duction costs for anydrous alcohol because of reduced distillation requirements. 2/ These initial targets were all revised downwards with the publication of the Five-Year Compressed Program in July 1980. By the spring of 1981, PNAC had cut the original estimate for new-sugar hectarage by about 80% from the January 1980 figure, mainly because it had decided to switch most existing molasses exports into domestic alcohol production.  Table 1: THE ALCOGAS PROGRAM AS PROPOSED BY THE PHILIPPINE NATIONAL ALCOHOL COMMIISSION Model I 1/ Model II 2/ Model III 3/ Total Production of Anhydrous Year Units in Production Units in Production Units in Production Alcohol Production (M liters) Production (M liters) Production (M liters) (M liters) 1980 2 22 - - 22 1981 4 44 - - 1 11 55 1982 6 66 1 45 3 33 144 1983 8 88 2 90 6 66 244 1984 10 110 4 180 10 110 400 1985 10 110 6 270 15 165 545 1986 10 110 8 360 20 220 690 1987 10 110 10 450 25 275 835 1988 10 110 12 540 25 275 925 1/ Characterized as small (30-60 ltr/day) distilleries, existing or new and annexed to existing sugar centrals. 2/ These units of 120,000 ltr/day capacity or larger would be either autonomous or annexed to existing sugar mills. These units are expected to come on stream more slowly but would eventually provide the bulk of proposed alcohol production and meet the requirements of larger urban areas. 3/ Autonomous distilleries with capacities of 30,000-60,000 ltr/day. These units would provide the alcohol requirements of smaller regional markets. hd > lb z o t4 IX  ANNEX 1 Page 3 incentives to private sector investors in the program. At present, modest incentives are available to participants, the most important of which appear to be a guaranteed purchase price for alcohol and access to credit from public financial institutions for approved projects. All fuel alcohol projects which are consistent with PNAC policy and approved by the Govern- ment's Board of Investments (BOI) are given "pioneer status" under the Energy Priorities Program and are eligible for the same investment incen- tives as other "pioneer" industries. 1/ For loans from local financial institutions, up to 75% of approved project cost is to be financed at 16-18% "effective interest," with a 2-year grace and a 10-year repayment period. Project approval requires that at least 50% of total installed equipment be locally manufactured or fabricated. Distillery projects must meet minimum production performance standards with regard to juice extraction, alcohol recovery, steam consumption and alcohol purity. Distilleries are to have a guaranteed supply for at least 50% of their annual raw material requirements and may not use petroleum-based fuels in processing. They must also conform to environmental standards set by the National Pollution Control Commission and will be encouraged to acquire storage facilities equal to at least 15 days of alcohol production. 5. Alcohol pricing. The PNAC, in consultation with the Philippine Sugar Commission (PHILSUCOM), is to determine in advance the annual national production quota for fuel alcohol as well as the producer price for this product, taking into account program objectives and world prices for sugar and petroleum. Alcohol quotas are to be allocated to participating sugar mills/distilleries. The Government, acting through the Philippine National Oil Company (PNOC), is to purchase all fuel alcohol at the establisned price for resale and allocation to local distributors of petroleum products. Dis- tributors are to pay the same price for alcohol as for gasoline, ex refinery. In-line blending of gasoline and alcohol will take place at tank-truck loading stations. Retail prices for alcogas will be identical to gasoline prices. 6. The alcohol price to producers is to be set at remunerative levels, taking into account the incentive assumed necessary to promote private investment in raw material producing and processing facilities. For the program start-up year, 1980, the guaranteed price for anhydrous alcohol, ex distillery, is P 3.11/ltr. This is estimated to consist of P 2.10/ltr for 1/ In September 1979, the President issued Letter of Instruction No. 953 which includes fuel alcohol production in the Government's Energy Priorities Program. It directs the Central Bank, the Development Bank of the Philippines (DBP) and the Philippine National Bank (PNB) to relax collateral requirements and rediscounting policies for fuel alcohol projects registered under the program. Other provisions include accel- erated depreciation, tax exemptions on imported capital equipment, tax deductions on preoperating expenses, deductions of R&D expenses and costs associated with the training of labor.  -6- ANNEX 1 Page 4 the raw material, P 0.44 and 0.29/ltr for fixed and variable costs, respec- tively, and P 0.28/ltr as markup. This price compares with a price for gaso- line, ex refinery, of P 2.56/ltr in May 1980. With oil companies paying the same price (P 2.56/ltr) for alcohol and gasoline, the PNOC thus incurs a loss of P 0.55 on each liter of alcohol sold to distributors. Subsequent price adjustments for alcohol are to equal 50% of all future price increases for gasoline. In early 1980 this price of P 3.11/ltr represented a premium of 10-20% over the gross returns available to growers if the cane had in- stead been processed into sugar and molasses. 1/ However, it was not sig- nificantly higher than ex-distillery prices being quoted in May 1980 (in the range of P 3.00/ltr) for lower-grade hydrous alcohol. One year later, in May 1981, the world price of sugar had fallen by 40%, while the Government price of alcohol remained at P 3.11/ltr. Thus sugar mills and growers were showing new interest in converting cane to alcohol rather than sugar and molasses. This more favorable price incentive for alcohol had not yet gen- erated any surge of investment in alcohol production, however (see para. 17 for part of the explanation). 7. Some bench and road testing of "alcogas" has been completed in the Philippines. In December 1976 the PNOC initiated a testing program involving the voluntary participation of some 360 automobiles from government fleets and local auto dealers. Both hydrous and anhydrous alcohol blends with pre- mium gasoline in 15-85% ratios were used. 2/ Results with the anhydrous blend were judged as highly satisfactory in all drivability characteristics in a 500-km test run from Metro Manila to Baguio and return. Initial testing of all-alcohol engines is also underway, using automobiles provided by auto- mobile manufacturers in Brazil. 8. By the time of the mission's visit (April-May 1980), a decision had been made by PNAC to initiate fuel alcohol production (and alcogas dis- tribution) in late 1980 in the Province of Negros Occidental. Agreement had been reached with a privately-owned sugar mill in Negros to supply ethanol from an annex distillery which was being rehabilitated for this purpose (para. 38). 3/ Discussions were underway between PNAC and distributors of 1/ One ton of cane yields about 98 kg of raw sugar and 38 kg of molasses or, alternatively, 68 ltr of alcohol. In early 1980 prices, the sugar- molasses option would gross to cane growers approximately P 120 = 0.65 (98 kg x P 1.66/kg + .038 ton x P 600/ton), while the alcohol alter- native would gross P 143 (= P 2.10 x 68). In the Philippines the gross receipts from sugarcane (raw sugar and molasses) are divided between cane growers and millers in the ratio of about 65-35. 2/ See footnote 1 on page 1. 3/ Both annex and autonomous distilleries are proposed for the Philippine alcohol program (para. 10 and Table 1). An annex distillery is attached to a sugar mill and uses molasses or diverted sugarcane juice as the feedstock for alcohol production. Cane delivered to the facility can be processed into either sugar (and molasses) or alcohol, depending on relative prices or production targets. An autonomous distillery is not associated with an existing sugar mill and generally is equipped to process cane supplies only into sugarcane juice for direct fermenta- tion into alcohol.  7 ANNEX 1 Page 5 petroleum products in Negros on procedures for alcogas blending, distribu- tion and sale. PHILSUCOM had also agreed to allocate some sugarcane (and possibly molasses) from three other mill districts and was negotiating with foreign suppliers for the sale and installation of distilleries at these mill sites (paras. 39-41). In general, by April-May 1980, sugarcane pro- ducers and millers were not sufficiently familiar with the national alcohol program to have firm judgments on its financial attractiveness. Although the Development Bank of the Philippines reported some interest among private investors in the program, no loan applications for this purpose had yet been received. The Production System for Alcohol 9. Sugarcane, cassava and sweet potato are viewed as the primary raw materials for the fuel alcohol program, with sugarcane the crop of first choice. Alcohol production in the early years of the program is expected to derive largely from sugarcane or molasses. The influential Philippine Sugar Commission has taken the view that most of the sugarcane to be proc- essed for fuel alcohol should be produced in new areas to minimize any pos- sible disruption of local and export markets for molasses, raw and refined sugar. PHILSUCOM is therefore invested with the authority to approve all sugarcane areas which are to be included in the program. Projections of the PNAC Secretariat call for the development of some 260,000 ha of additional land in 1980-88 for the alcohol program, of which about 210,000 ha would be in sugarcane and the balance would produce cassava or, in accord with recent thinking within the Secretariat, sweet potato. 10. While planning for the design, location and size of distilleries continues to evolve, three basic models have been proposed (Table 2): Model I -- Some 10 of these small annexed (30,000-60,000 ltr of ethanol/ day) distilleries are envisaged by 1984. As new or annexed to existing sugar mills, it is expected that these facilities would provide the first significant quantities of alcohol for the program. Some of these distilleries would utilize molasses as a feedstock. Model II -- These units of 120,000 ltr/day capacity (or larger) would be either autonomous or annexed to existing sugar mills. While requiring more time to become operational, distilleries of this model are envisaged as eventually producing more than 70% of the alcohol projected for 1985. The program calls for 12 of these units by 1988. Model II is based largely on monoculture (sugar- cane) production systems, although some utilization of root crops is also assumed. Output from these distilleries is assumed to supply the larger urban markets. Model III -- These autonomous distilleries are expected to have an average daily capacity of 30,000-60,000 ltr and to be the major source of alochol requirements for smaller regional markets. The program calls for some 25 units to be in place by 1985, of which  Table 2: CROP LAND REQUIREMENTS OF THE PROPOSED ALCOGAS PROGRAM (January 1980 Plan -- but see footnote 2, p.1) Model I Model II Model III Year Cassava 1/ Sugarcane Cassava 1/ Sugarcane Cassava 1/ Sugarcane Total 2/ - - - - - - - - - - - - - - - - - - - -000 ha - - - - - - - - - - - - - - - - - - - 1980 1.2 5.0 - - - - 6.2 1981 2.4 10.1 - - 0.6 2.5 15.6 1982 3.7 15.1 2.5 10.3 1.8 7.5 40.9 1983 4.9 20.1 5.0 20.6 3.7 15.1 69.4 1984 6.1 25.2 10.0 41.1 6.1 25.1 113.6 1985 6.1 25.2 15.0 61.7 9.2 37.7 154.9 1986 6.1 25.2 20.0 82.3 12.2 50.3 196.1 1987 6.1 25.2 25.0 102.9 15.3 62.8 237.2 m 1988 6.1 25.2 30.0 123.4 15.3 62.8 262.8 Note: These land requirements are based on the assumptions that cassava yields 3,600 ltr alcohol/ha/yr while sugarcane yields 3,500 ltr. See Table 1 for description of each model. 1/ Possibly including other root crops such as sweet potato and taro. 2/ Model I: 31,300 ha Cassava: 51,400 ha Model II: 153,400 ha Sugarcane: 211,400 ha Model III: 78,100 ha Source: National Alcohol Commission. 1 >W X Qz OQ z (DtM fD > a .  -9- ANNEX 1 Page 7 10 would be located in the Visayas, 8 in Luzon and 7 in Mindanao. This model is based on the small-farm production systems which characterize much of Philippine agriculture. 11. The land resource. Analysis elsewhere has shown that the eco- nomics of producing biomass alcohol are heavily dependent on the economic costs of the raw material (accounting for about two thirds of total produc- tion costs). 1/ Raw material costs are strongly influenced by the amount and quality of land available for production. In the absence of comprehen- sive land use and land capability studies in the Philippines, some uncer- tainty exists as to the extent, quality and degree of utilization of the country's agricultural lands at present. Despite the fact that expansion of cropped area continues to be an important contributor to growth of output (with the cropped area increasing by just under 5% during 1974-78), there are clear manifestations of growing land scarcity in the Philippines. These include: (i) heavy outmigration from the overcrowded regions of Central Luzon and the Visayas to Northern Luzon and Mindanao; (ii) expanding cultiva- tion of hillsides and the practice of destructive slash-and-burn agriculture; and (iii) declining average size of farm over the past decade. Some 2 M ha of public forest land are under illegal cultivation, frequently in produc- tion systems which result in serious degradation of land, timber and water resources. The total degraded area is estimated at about 5 M ha. The good flat lands suitable for rice, corn or sugar were largely occupied years ago, although further intensification of production on those lands is possible. Population density exceeds 125/km (some 50% greater than the Asian average) and the area per worker is a little over I ha. 12. Preliminary data by the Bureau of Soils suggest that about 7.5 M ha in the Philippines are suitable for sustained annual cropping if good management practices are used. 2/ Some 6.8 M ha of this total appear to have been under annual cropping in 1975, suggesting that another 700,000 ha were relatively underutilized at that time. Much of this appears to have been located in the Eastern Visayas and Northern Luzon (Table 3). Growth in the physical cropped area since 1975 may well have pushed the total of 1/ World Bank, Brazil: Alcohol and Biomass Energy Sector Review, Report No. 3001-BR, IPD, May 1980. Benefits of course are determined largely by the economic value of alternative liquid fuel sources assumed to be gasoline, which in turn is determined by the world price of crude oil. From the national viewpoint--where a judgment is wanted on whether an in- vestment will be advantageous to the economy--calculations are normally made using economic or "shadow" prices, i.e., numbers which are consid- ered to represent the true value of inputs and outputs in the economy. For the cane producers and millers, anticipated market prices are the relevant considerations. Economic and market prices may or may not coincide with each other. 2/ Classes A, B, C and D land. See Table 3 for definition.  Table 3: INDICATIVE ESTIMATES OF LAND SUITABILITY AND LAND USE (1975) 1/ (000 ha) L a n d U s e A,B,C & D Net Availability M and X Land Suitability, by Class 2/ Agriculture Classes of Classes Classes Unutilized Region and Land in A,B,C,D Land Land in Classes A,B,C,D if X N Y Total Fisheries Urban Farmland for Agriculture Farmland A,B,C,D Land _________________ __ _ 3/ 4/ 5/ 6/ Luzon 3,954 6,331 221 2,163 1,462 14,131 3,599 590 2,976 3,364 623 388 I 398 1,467 34 158 98 2,159 379 42 356 356 23 - II 917 1,305 20 1,388 12 3,642 617 15 617 902 - 285 III 732 1,047 47 - - 1,826 539 200 532 532 7 - IV 1,513 1,243 92 548 1,351 4,747 1,110 300 1,110 1,213 - 103 V 394 1,269 28 69 - 1,760 954 33 361 361 593 - Visayas 1,730 2,350 96 1,151 332 5,659 1,946 130 1,273 1,601 673 328 VI 456 1,690 46 226 4 2,422 783 57 400 400 383 - VII 245 299 21 522 9 1,096 488 47 198 198 290 - VIII 1,029 361 29 403 319 2,141 675 26 675 1,003 - 328 Mindanao 2,645 6,303 240 871 119 10,178 3,257 96 2,549 2,549 708 - IX 641 902 79 217 29 1,868 671 17 624 624 47 - X 730 1,846 53 124 59 2,812 888 29 701 701 187 - XI 517 2,229 41 372 - 3,159 855 25 492 492 363 - XII 757 1,326 67 158 31 2,339 843 25 732 732 111 - PHILIPPINES 8,330 14,984 557 4,185 1,912 29,968 8,802 816 6,798 7,514 2,004 716 1/ Land classification according to preliminary data from Bureau ot Soils. All 3/ Includes annual crops, permanent crops, pasture and calculations made at provincial level and then aggregated to obtain regional tishponds. Area is trom the 1971 Agriculture totals. Census, projected at 1960-71 annual growth rate tor regions where 1971 area is greater than 1960 area. 2/ Classes A, B, C and D are considered suitable for cultivation. Class defini- For other regions, the 1975 tarmland area is assumed tions are: equal to the 1971 farmland area. Class Descriptions 4/ Total land in Classes A, B, C and D, less land area A Very good land which can be sately cultivated. in urban use. (This assumes that virtually all B Good land which can be safely cultivated. urban land is relatively flat, well-drained and C Moderately good land whiich must be cultivated with caution. suitable tor annual cropping.) D Fairly good land which must be cultivated with extra caution. M Steep land which is eroded and/or too shallow for cultivation. 5/ Land in agricultural and fisheries, less Classes N Very steep land, excessively eroded and suitable largely for forestry. A, B, C and D land in these uses. X Land which is wet most of the time and cannot be economically drained. Y Very hilly or mountainous land suitable largely for forestry or wildlife. 6/ Column 10 less column 9. Source: Adapted from G. W. Gwyer, "Agricultural Employment and Farm Income in Relation to Land Classes: A Regional Analysis," Technical Paper No. 6, April 1977, NEDA-UNDP/IBRD Regional Planning t > Assistance Project. The approximate nature of many of these estimates should be emphasized. - m m >d  - 11 - ANNEX 1 Page 9 Classes A, B, C and D land under crop to over 7 M ha. 1/ The actual cropped area exceeds 12 M ha, reflecting widespread double cropping in the rice areas. Much of the increase in the cropped area in recent years appear to have come from additional double cropping. In many regions df the country, annual cropping has already been pushed to lands which are marginal in terms of slope, soil type and climate. 13. Although there is little room to expand the areas planted to annual crops, there is considerable potential for perennial crops (coconut, fruit trees, coffee, rubber, etc.) on other lands. For most regions of the Philippines, the hillsides represent the agricultural land frontier. Effec- tive use of these increasingly marginal lands (in terms of their agricul- tural potential) will require investment in land clearing, road construction, terracing and rebuilding of soil fertility, as well as research and exten- sion assistance to develop production systems which can be sustained. The net economic returns from some of these lands may be low in view of their lower inherent productivity in the absence of costly ameliorative measures. 14. Considerable demands will be made in the future on the land re- sources of the Philippines. Population may grow in excess of 2.5% per annum during the next decade, and by the year 2000 the agricultural sector will be required to provide as many as 2 M additional jobs. While the Philippines is a net exporter of food (largely sugar and coconut oil, but with small exports of rice in very recent years), malnutrition continues to be a problem among low-income groups. 2/ A key issue is whether the agricultural sector can meet future domestic requirements for basic foods, supply the important export market and meet the requirements of a biomass energy program. 15. The land requirements for the proposed alcohol program through 1988 (210,000 ha for sugar; 50,000 for root crops) appear modest when com- pared with the present physical cropped area (just over 3%), but more sub- stantial when related to the existing sugar area (55%). Because low-cost sugar (and alcohol) production requires relatively good land in terms of soils, topography and climate, marginal lands formerly in sugar may not be suitable for this program (para. 18). It is doubtful that the required additional land can be located in tracts big enough to accommodate the raw material needs of the larger (Model II) distilleries (6,000-8,000 ha/distil- lery). A question also remains as to whether the relatively unutilized lands of Classes A, B, C and D (para. 12 above) in Northern Luzon and the Eastern Visayas are suited for sugarcane from a climatic viewpoint (erratic rainfall in Northern Luzon; vulnerability to typhoons in parts of the 1/ At present, just over 8 M ha (in all land classes) of the 30 M ha land area of the Philippines are under annual or permanent crops. About three quarters of this are accounted for by rice, corn and coconuts. 2/ Food consumption and nutrition studies in 1978 indicated that more than 2.8 M households (about 38% of the total) have diets which provide less than 80% of nutrient energy requirements.  - 12 - ANNEX 1 Page 10 Eastern Visayas). Although representatives of the sugar industry and the national alcohol program frequently mention Mindanao as an area with good potential for expanded sugarcane production, available data do not indicate significant underutilized quantities of Classes A, B, C or D land in that region (Table 3). The Bureau of Soils, in a 1975 tentative assessment, in- dicated that only about 63,000 ha of land in Mindanao were suited for sugar (Regions X, XI, XII). 1/ With the area actually planted to sugarcane in Mindanao (1978-79) totaling about 18,500 ha, some expansion seems possible. However, the security situation in the region may deter private investment. The question of land availability for the national alcohol program clearly requires additional study. The tentative pircutr which emerges is one of considerable scarcity. The sharp downward revision of original plans for bringing new land into sugarcane for alcohol production,and the decision to use the existing molasses supply instead, thus seems sound. 16. The sugar industry. The sugar industry in the Philippines dates from the Spanish colonial period when it played a key economic role in trade with the metropolis. With well over half of production entering world trade, growth of the industry continues to be heavily dependent on development in the export market. Following the United States' break with Cuba in sugar trade, the Philippine export quote to the US was increased, and in response raw sugar production grew from about 1.3 M metric tons (1960) to 3.4 M tons in 1974. With the subsequent slump in world prices, production declined to 2.3-2.8 M tons in recent years. The 1979-80 harvest is expected to total 2.2-2.4 M tons. 17. Exports in recent years have been in the range of 1.0-1.5 M tons, except in 1978 when accumulated stocks and a strong global market permitted shipments of nearly 2.5 M tons. In 1979, Philippine exports of 1.1 M tons represented just under 5% of global sugar exports. 2/ In recent years the country has had difficulty filling its annual export quota (1978-80) of 1.4 M tons. The sugar trade (raw and refined; domestic and export) is the monopoly of the National Sugar Trading Corporation (NASUTRA), a subsidiary of PHILSUCOM. The administered, or "liquidation," price passed to producers is established by PHILSUCOM and represents a blend of prices established for the domestic and export markets (Table 4). In April-May 1980, a period of unusually high world sugar prices, prices paid to Philippine producers were only about half the world price level. 3/ The molasses trade is handled 1/ "Strategies for Expanding Agricultural Production and Employment Oppor- tunities in the Regions," National Economic Development Authority, undated, Table 8. 2/ This can be compared with 8% of total exports provided that year by Brazil. 3/ On the other hand, during an earlier period (1977-78) of low world prices, prices to local producers generally exceeded the world price. Trading deficits accumulated by NASUTRA during that period reportedly totaled about P 2.7 billion. It is expected that 30-40% of this amount will be recovered by operations in 1980.  - 13 - ANNEX 1 Page 11 Table 4: PRODUCTION, UTILIZATION AND PRICING OF CENTRIFUGAL SUGAR CROP YEARS 1971-80; PROJECTIONS FOR 1985, 1990 Prices for Raw Sugar Crop Production Consumption Liquidation Price World Year 1/ Domestic Export Total Reserve to Philippine Price 3/ Producers 2/ --------------million metric tons--------------- ---------US cents/lb-------- 1971 2.06 0.68 1.41 2.09 (0.03) n.a. 4.5 1972 1.82 0.71 1.26 1.97 (0.15) n.a. 7.3 1973 2.24 0.79 1.37 2.16 0.08 n.a. 9.5 1974 3.44 0.89 1.31 2.20 1.24 n.a. 30.0 1975 2.39 0.87 0.97 1.84 0.55 11.6 20.4 1976 2.82 0.73 0.97 1.70 1.12 10.5 11.5 1977 2.68 1.00 1.47 2.47 0.21 7.8 8.1 1978 2.34 1.00 2.49 3.49 (1.15) 8.7 7.8 1979 2.30 1.10 1.11 2.21 0.09 9.6 9.9 1980 (prelim.) 2.35 1.18 1.14 2.32 0.03 10.7 13.2 1985 4/ 3.00 1.43 1.57 3.00 - 25.4 1990 4/ 3.54 1.74 1.80 3.54 - 33.9 1/ In most sugar districts in the Philippines, milling normally begins late in the year previous to the one indicated. In addition to centrifugal sugar, a small amount of traditional sugar is produced by boiling of syrup in open pans. 2/ An ex-mill price representing a blend of prices received from domestic and export sales. The liquidation price to the 1980 crop of 10.7 US cents equivalent can be compared with the world price (see Footnote 3 for definition) of February 1980 of 22.7 cents. 3/ FOB, stowed, Caribbean ports, current prices. 4/ Future production depends heavily on government's pricing policy for sugar. As experience in the mid-1970s indicates, Philippino producers expand output rapidly under the stimulus of attractive prices. The Philippine Sugar Commission (PHILSUCOM) is assuming an export quota under the International Sugar Agreement of 1.4-1.5 M tons for 1981-83. The ISA quota is lifted when world prices rise above 16 US cents/lb. PHILSUCOM is projecting total Philippine sugar production of 3.8 M tons in 1985 and nearly 4 M tons in 1990. Source: Ministry of Agriculture and PHILSUCOM. Price projections are from the World Bank Report No. 814/80, Price Prospects for Major Primary Commodities, January 1980, p. 90.  - 14 - ANNEX 1 Page 12 by the private sector. Sugar production in the Philippines is responsive to price changes and has undoubtedly been restrained in the last year (1979-80) by the low liquidation price (relative to world prices) in the presence of steadily increasing production costs. It appears that the liquidation price in 1980 may be lower than in 1975. 18. Despite a research effort in sugar that dates back many years, yields of cane or sugar per ha in the Philippines have shown little increase in the past decade (Table 5). Average cane yields in 1976-78 were about 75% of the world average and just under 80% of yields in Brazil. Growth in pro- duction, when permitted by developments in the world market, have generally come from an increase in planted area, although on increasingly marginal lands. Following the high world sugar prices in 1974-75, the area planted to cane in the Philippines increased to 550,000 ha (1976-77), but has since declined to less than 450,000 ha. Many of the 100,000 ha formerly in sugar appear to have been planted to food crops and cassava, although a significant part consists of lands now largely abandoned and not well suited to intensive sugar production. Since 1977, producers have reduced plantings on marginal lands apparently in response to weak sugar prices and increased production costs (particularly those related to agricultural chemicals and liquid fuels). More than half of the total sugarcane area is in Negros, 27% in Luzon, and the balance in the Eastern Visayas and Mindanao (12%) and Panay (9%). Only about 15% of cane area is irrigated, although yields in irrigated areas appear to be nearly twice the national average. 19. The centrifugal sugar industry in the Philippines is estimated to employ some 430,000 workers on 31,500 farms. 1/ Production tends to be concentrated among the larger farmers, particularly in Negros, although few large-scale plantations (planted areas of more than 1,000 ha under one manager) exist. More than half of all sugar growers operate farms of 5 ha or less but about a quarter of the total cane area is on farms of more than 100 ha (Table 6). In Negros, half of the sugar area is on farms larger than 50 ha. Despite protective labor legislation, field workers in the industry are frequently considered to be among the disadvantaged groups in Philippine society. 20. Cane growing areas are divided into 42 mill districts, each of which is served by a privately owned sugar mill. Eight of the mills were established since 1970 and several of these are operating well below rated mill capacity, largely because of limited cane supplies. Several of the new mills are in financial difficulty ("distressed mills") and are in arrears on loan repayment to Philippine development banks. At the request of the Government, PHILSUCOM has taken over the management of these mills, a few of which are to be equipped with distilleries to produce anhydrous alcohol for the alcogas program (para. 39). Cane shortages reflect several factors, siting of the new mills in areas of, e.g., inadequate soils or rainfall or 1/ A small amount of traditional, open pan sugar ("moscovado") is also produced throughout the country.  - 15 - ANNEX 1 Page 13 Table 5: CANE AND SUGAR YIELD, BY REGION Eastern Crop Visayas and Year Luzon Paray Negros Mindanao Philippines C S C S C S C S C S - - - - - - - tons/ha - - - - - - - - - - -