Philippines - Central Visayas Regional Project

q. q r~~~~~~~~~~ Ii..T It~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~5a  PR112287/AC-385/13949/50 CURENC EQVET US$1.00 - Pesos (P) 14.00 P1.00 - US$ 0.07 REFULIC OF THE PHILPPIS FISCAL TEMR January 1 - December 31 ABVIAXIONS 3FAR - Bureau of Fisheries and Aquatic Resources BED - Bureau of Forest Development RL - Buream of LaTds CVI - Central Visays Regioml Project IRP - Iategrated Reorgaizatio Plan MA - Mitry of riculture ME - Ministry of Budget mm. - Mlnistry of Natural Resources NACID - National Councll n Ite ted Aea Development NEDA - National Economic and Development Authority NIA - National Irrigation Adainistration RIO - NEDA Regional Office PEO - Proviwial Englieer-s Office hSEAR - RegLonal Office of the Bureau of Fisheries and Aquatic Resources REFD - Regional Office of the Bureau of Forest Development RDC - Regional Development Council RDlP - Regional Development Investment Program RFORI - Regional Office of the Forestry Research Institute ERxA - Regional Office of the Ministry of Agriculture RPO - Regional Projects Office s2I - Site ngeent unit  FOR OMCIAL USE ONLY PHILIPPINES CENTRAL VISAYAS REGIONAL PROJECT Loan and Project Summary * Borrower : Republic of the Philippines Amount : $25.6 million (including capitalized front-end fee) Terms : The loan would be for a term of 20 years, including five years of grace, at the standard variable interest rate. Project Description : The proposed project is the first in the Philippines to support a Regional Development investment Program. The project aims, initially on a pilot scale, to improve the incomes and living standards of some 14,600 participant families, about 90,000 people, in five watersheds of Central Visayas by offering them security of tenure over tneir land, through an innovative land stewardship program, and associated improved production systems in agro-forestry and nearshore fisheries. At present, the production base of these families is declining due to severe soil erosion and fishing habitat degradation. The project would also reinforce the Government's regionalization program as part of its evolving, long-term decentralization policy. Project activities would be carried out in watersheds in each of the four provinces of the Region, comprising a total land area of 140,000 ha, a coastlire of about 200 km, and would benefit directly about half the population of some 200,000. The project would finance programs of (a) watershed management in upland agriculture; (b) social forestry; (c) nearshore fisheries; and (d) infrastructure (mainly rural roads and trails to provide access to the sites). Associated support services would include strengthening the Regional Offices of the Ministry of Agriculture and the Ministry of Natural Resources, training and technical assistance, and applied agro-forestry research. The preparation of additional regional projects would also be supported. About 70Z of project costs apply directly to the productive components of the project including infrastructure; about 30% generate benefits region-wide, or in other regions of the country. Risks associated with the project are mainly institutional in nature since the Government has not previously supported such a systematic development effort in a single region. It is recognized that the new system of decentralized budget and administrative control could take time to consolidate This document has a reswicd disrbution and may be used by rcipients only in the performance of thei official dutie Its contents may not otherw ise be discoed without World Bank authorization.  - ii - under the evolving process of regionalization. The Region's poor agricultural resource base requires that innovative measures of soil conservation and upland farming be introduced, so that there are also some technical risks. While most of the technology proposed under the project has been tested and proven effective in the Region, it remains to be seen if existing "slash and burn" farmers can be transformed into permanent settlers under .he land stewardship program being introduced under the project and maintain stable enterprises on small plots over time. Land occupants at all sites have expressed strong interest in participating in the project. The prospect of long-term stewardship over their land is a powerful incentive to join the programs. The settlers are also attracted by the proposal to reward labor for conservation and rehabilita- tion works with payments in-kind, and by the opportunity to be introduced to, and advised on, new production technologies. The project provides adequate management resources and support services to achieve its objectives. Estimated Cost: Local Foreign Total s a( million) Watershed management 11.7 8.7 20.4 Support services 4.6 2.5 7.1 Project preparation 1.1 4.5 5.6 Project Preparation Facility - 1.1 1.1 Base Cost Estimates 17.3 16.8 34.1 Physical contingencies 0.5 0.9 1.4 Price contingencies 5.6 3.2 8.8 Total Project Cost /_ 23.4 20.9 44.3 Front-end Fee on Bank Loan - 0.1 0.1 Total Financing Requirements 23.4 21.0 44.4 Financing Plan IBRD /2 4.6 21.0 25.6 Government 18.8 - 18.8 Total 23.4 21.0 44.4  - iii - Estimated Disbursements: Bank FY: FY84 FY85 FY86 FY87 FY88 FY89 FY90 (3 million) Annual 3.1 2.5 4.0 5.0 6.0 4.5 0.5 Cumulative 3.1 5.6 9.6 14.6 20.6 25.1 25.6 Economic Rate of Return: 17Z (for the production components of the project). Staff Appraisal Report: No. 4504-PR, dated October 26, 1983. /1 Total project cost includes identifiable taxes of $1.8 million; differ- ence in subtotal for base cost estimate is due to rounding. /2 Including repayment of two advances from the Bank's Project Preparation Facility totalling $1 million, exclusive of interest.  REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF THE PHILIPPINES FOR THE CENTRAL VISAYAS REGIONAL DEVELOPMENT PROJECT 1. I submit the following report and recommendation on a proposed loan to the Republic of the Philippines for the equivalent of $25.6 million including the capitalized front-end fee of $0.1 million, to help finance the Central Visayas regional development project. The loan would be repaid over 20 years, including 5 years of grace, at the standard variable interest rate. PART I - THE ECONOMY 2. An economic report, entitled -The Philippines: Selected Issues for the 1983-1987 Plan Period' (No. 3861-PH) was distributed to the Executive Directors under Sec. M82-542, dated June 16, 1982. A special report, "Aspects of Poverty in the Philippines: A Review and Assessment" (No 2984-PH), was distributed to the Executive Directors on December 1, 1980 under Sec. M80-919. Country data are given in Annex 1./1 Performance in the 1970s 3. During the 1970s, the Philippines followed a much more dynamic, growth-oriented development strategy than in earlier decades. The growth rate of GDP rose from 5.1% in the 1960s to 6.3% in the 1970s, a rate well above that of lower middle-income oil importers (5.4%) but lower than that of com- parab'le Asian countries. Expansion of the agricultural sector was rapid at about 5% p.a. Manufacturing industry, growing at the same rate as GNP, did not play a leading role in the Philippines- economic development. Although manufactured exports grew dramatically, the greater part of the sector remained oriented to the domestic market and was affected by severe inefficiencies. 4. Although economic performance was relatively good in the 1970s, structural weaknesses in the economy held it back below its full potential. GDP growth was achieved at a high investment cost - the incremental capital/output ratio (ICOR) was about 35% higher than those of comparable Asian countries. Although inherently capital-intensive infrastructure invest- ments explain part of the high ICOR, inefficiency of industrial investment was the more important cause. Inappropriate trade, industrial, financial, and exchange rate policies designed to foster import substitution, provided high protection for domestic manufacturers, and led to investments in activities in which the Philippines did not have a clear comparative advantage. External borrowing and imports expanded rapidly while traditional exports and domestic resource mobilization lagged. This resulted in a chronic shortage of foreign /I The projections in the Annexes are under revision.  - 2- exchange and increasing external debt. 5. Despite satisfactory aggregate growth during the 1970s, the incidence of poverty remained around 40%, income distribution continued to be skewed, and regional disparities remained pronounced. The incidence of poverty reached 60-70% in the least developed regions. Large numbers of people, especially in the rural areas, still suffer from malnutrition and lack safe water, basic education, and health facilities. An increasingly unfavorable man/land ratio, the resulting expansion of cultivation into marginal lands, limited employment opportunities in the industrial sector, and the sharp deterioration in the external terms of trade put downward pressure on real incomes. Although the Government instituted several programs to improve directly living conditions of the poor, most of these were implemented on any significant scale only during the last few years and will require several years to achieve a marked impact. 6. Growth of productive employment, pa-ticularly in the industrial sector, has lagged behind the rapid expansion of the labor force, and consid- erable underemployment exists. During the 1970s, the agriculture and service sectors had to absorb an excessively high proportion of new entrants to the labor force. Manufacturing employment stagnated in the first half of the decade, and picked up only slightly thereafter as labor-intensive export pro- duction grew. Oversea. employment, especially in the Middle East, increased rapidly, providing a temporary income opportunity. 7. Population growth in the Philippines was reduced from 3% in the 1960s to 2.5% in the early 1980s. There are indications, however, that it may have levelled off prematurely at that level. Thus, rapid population growth continues to strain available land resources, aggravate already serious employment and poverty problems, and burden the public budget with a high growth in demand for basic public services. The Philippines has family planning program which expanded rapidly during the 1970s, however, partici- pation in the family planning program is still low by East Asian standards. 8. The structural weaknesses of the Philippine economy and unfavorable world economic conditions exacerbated the balance of payments problems towards the end of the decade. In the late 1970s, the country-s terms of trade deteriorated sharply due to oil price increases, accelerated international inflation, and depressed prices for major export commodities. The continued heavy reliance on export earnings from a few primary products (coconuts, sugar, copper, and timber) kept the Philippines extremely vulnerable to international commodity price fluctuations, while continued high dependence on imported oil further aggravated the balance of payments problem. Also the industrial sector remained a net burden on the balance of payments; although manufactured exports grew rapidly, their net foreign exchange earnings were limited due to a high import content. Structural Adjustment Measures 9. To improve economic performance within the framework of a more adverse external environment, the Government, since 1980, has been implementing a medium-term program of structural reforms to improve the  allocation and efficiency of investment and increase the mobilization of domestic resetrces. The program aims at reducing the current account deficit to more sustainable levels of 2-32 of GNP, limiting the country's reliance on foreign savings, and establishing a more liberal and competitive environment for economic development by strengthening the role of market forces in resource allocation. The structural adjustment program has been phased to give tie economy time to adapt to the new policy framework. The first phase focused on trade, industrial, and financial policies, which have been primary causes of the low efficiency and unsatisfactory allocation of investment in the private sector. The second phase, which is currently being implemented, extends the industrial and trade reforms and includes initial measures in the energy sector and public resource management. Future phases will address issues in the energy, public finance, and in agricultural sectors. 10. Industry. Industrial and related policies are one focus of the Philippines- structural adjustment program. Excessive protection and an arti- ficially low cost of capital led to low efficiency of investment and stagnant employment in industries producing for the domestic market. Export promotion measures induced rapid growth in nontraditional manufactured exports, e.g., garments, electronics and handicrafts, from $50 million in 1970 to $2.4 bil- lion in 1982. However, export expansion was concentrated on a few items, and backward linkages were limited by high cost and low quality of domestic inputs. As part of the structural adjustment program, the Government has initiated major policy reforms designed to move towards an industrial structure utilizing more effectively the country's comparative advantage with respect to labor cost and raw material availability and which is internationally competitive. The reforms cover the following major areas: (a) trade policy, (b) expert incentives, (c) industrial investment incentives, and (d) industrial rehabilitation. The implementation of the program has been good despite the international recession, which has hampered the adjustment proce.-s in the manufacturing sector ana slowed down the growth rate from arorad 4% in 1980-81 to an estimated 1% in 1982-83. 11. Financial Sector. Although well developed, the Philippine financial sector has not performed adequately in raising private sector savings and pro- viding investment financing. Among the main reasons have been the level and structure of interest rates which were not geared to mobilize sufficient sav- ings and encourage longer maturities; their low level contributed to rela- tively inefficient and capital-intensive investment. Further, the Central Bank's rediscounting scheme frequently resulted in encouraging over investment in some sectors while others were relatively neglected. In 1981, the Government introdnced far-reaching financial policy changes. The banking sys- tem was given greater flexibility, interest rates were deregulated, and the Central Bank was given a stronger position in its role as -lender-of-last- resort-, all of which produced positive real interest rates (for the first time since 1978) and a significant increase in domestic savings. Government- owned lending institutions have made less progress; as a result of insuffi- cient autonomy in the selection of their portfolios, loan collection rates continue to be very low and substantial government budgetary support is required. Rehabilitation of several government-owned institutions is necessary to reduce strains on the budget and to continue important develop- ment banking operations.  - 4 - 12. Agriculture and Rural Development. While the performance of the agricultural sector was satisfactory during the 1970s, some policy problems still remain unresolved. The Philippines, once a major importer of rice, eliminated rice deficits in the late 1970s and expanded fish and meat produc- tion. There is, however, a need for further diversification and promotion of commercial crops to improve the balance of payments position either through expansion of agricultural exports or through efficient import substitution. Trade policies in the Philippines have discriminated agalnst agriculture. Pricing and exchange rate policies have also had a negative impact on incomes in the agricultural sector. The institutional framework for agricultural policy formulatton and implementation suffers from serious fragmentation. Overall, there is a need to deal directly with the problem of the rural poor, particularly farmers engaged in rainfed agriculture, coconut growers, municipal fishermen, and landless sugar workers. Increasingly, investment programs wiil have to be directed towards rainfed agriculture and include innovative approaches to reaching smallholder farmers. 13. Energy. Another sector critical for the success of the Philippines' structural adjustment effort is the energy sector. Since the 1973-74 oil price increase, the Philippines has made a considerable effort to reduce its dependence on imported oil. Through a combination of pricing, taxation, and conservation measures, the government exerted downward pressure on comercial energy consumption. Steps to increase and diversify domestic energy supply i.e., the development of hydroelectric, geothermal, nuclear and coal based power sources, have contributed to reducing import dependence. Limited domes- tic petroleum production also began in 1979. However, due to the long gesta- tion period of energy projects, domestic energy production still constituted only 21% of total coumercial energy supply In 1982. In response to the second oil crisis, the Government included in its adjustment program policy measures for the energy sector which aim at further reducing the country-s dependence on oil imports through improving the efficiency of energy use and increasing the share of domestic sources to nearly 50% of commercial energy supply by 1987. Pricing policy will continue to support conservation and revenue objectives. 14. Public Sector Resource Management. The management of public sector resources has been a chronic problem in the Philippines, which has been fur- ther aggravated by the current recession. The fiscal stress generated by the growing imbalance between public investment and public sector resource mobilization has manifested itself in a number of ways. Government current expenditures (exclusive of interest payments) have been reduced to only 9% of GNP, as compared to an average of 14% of GNP in middle-income developing countries. Implementation of projects has been stretched over longer periods of time than is economically efficient. The overall public sector deficit has become excessively high and has threatened the stability of the economy, particularly in 1981-1982. A rapidly rising level of public investment and an inadequate financial performance of public corporations contributed to increase the fiscal deficit despite a reduction of recurrent expenditures. In 1982 the public sector deficit, which traditionally had been relatively small, increased to 5.5% of GNP.  15. As a short-term response, the Government is now implementing a fis- cal austerity program designed to reduce the national budgetary deficit to manageable 'evels. The Government has reduced equity contributions and investment programs and enacted revenue measures which will improve the cur- rent imbalance. However, to improve the medium-term outlook for public finances, structural problems of the system need to be addressed. The Current Economic Situation 16. The economic situetion of the Philippines has deteriorated seriously in the last three years. The global recession, with low commodity prices, high interest rates on external borrowing, and an increasingly unfav- orable trading climate has stymied economic growth, slowed down export growth, depressed domestic demand and private investment activity and aggravated the fiscal and balance of payments problems. Real GDP growth fell from 5.9% in 1980 and 3.8X in 1981 to an estimated 2.9Z in 1982 and is projected to reach only 2% in 1983. Agriculture continued to perform satisfactorily, but industrial sector growth deteriorated markedly. Recessionary conditions and a liquidity crisis in the financial sector in 1981 restrained private invest- ment, although this was partially offset by a further expansion of public fixed investment to around 8% of GNP in 1980-82. In the wake of the second oil crisis, the economy suffered from a temporary acceleration in the inflation rate, which rose from 7% in 1978 to around 17% in 1979/80 before moderating to 10% in 1982. 17. On the balance of payments side, the current account deficit widened from $2.1 billion (5.9% of GNP) in 1980 to $3.4 billion (8.5% of GNP) in 1982. To finance the large current account deficit, the Government had to increase its external borrowing, most of which has been in short-term maturi- ties. With the increased external borrowing and poorer export performance the total debt service ratio, including interest on short-term debt, increased from 21% in 1980 to 38% in 1982. The overall deficit reached $1.2 billion in 1982. 18. To reverse the deterioration in the balance of payments, the Govern- ment formulated an austere financial program for calendar 1983, supported by an IMF Standby Agreement. The principal objectives of the program were to reduce the current account deficit to $2.5 billion (6.2% of GNP), and to reduce the overall deficit to $600 million. These objectives were to be achieved throfigh a tight monetary policy, a significantly tighter fiscal policy, and continued implementation of a flexible, market-oriented exchange rate policy. Although the Government adhered to the financial program agreed with the IMF (except for a technical violation of domestic credit ceiling), the balance of payments failed to improve as intended. The main causes of these disappointing results were: (a) agricultural export shortfalls caused by a severe drought; (b) some speculation against the peso and capital flight; and (c) apparent reluctance of the international commercial banks to increase their exposure to the full extent envisaged in the financial program. The overall deficit for the first three quarters of 1983 was $1.3 billion, or twice the target for the year.  - 6 - 19. Under these circumstances, the Government and IMF have agreed to replace the 1983 program with a new, even more austere, financial program covering the last quarter of 1983 and all of 1984. The most significant measure, a 21% devaluation at the peso, was adopted in October, and further tightening of monetary and fiscal policies is expected. Ten major creditor commercial banks from North America, Japan, and Europe recently agreed to a 90-day moratorium on repayments of principal and on the formation of a debt management advisory committee. The IMF is consulting closely with the commer- cial banks and the World Bank to ensure the availability of adequate financ- ing, including debt rescheduling if appropriate, for the new program. Medium-Term Prospects 20. The outlook for the Philippines' balance of payments during the next 2-3 years remains difficult as new constraints emerged due to slow recovery of the economy and limited availability of external resources. Exports are likely to remain sluggish in 1983/84, as supply of coconut oil and sugar, the major primary exports, has been severely affected by a drought in the southern Philippines. In addition, the country faces a rapid increase in debt service obligations and needs to build up net official reserves which have fallen considerably in the last few years. Constraints on private-source capital inflows emerged as international commercial banks became reluctant to increase their exposure in developing countrles. Under these circumstances, the avail- ability of external resources will determine the maximum external deficits which the Philippines will be able to sustain in 1983-85 without incurring liquidity problems. A drastic reduction in the current account deficit from $2.3 billion in 1983 to $400 million in 1985 would be required. The adjust- ment would have to be made in domestic resource availability through a temporary reduction of imports. As a result, growth of GDP, investment, and consumption are projected to be affected negatively in 1984. The structural improvements and adjustment measures now underway, however, should make it possible to restore economic growth after 1985 to pre-recession levels. 21. At present, the Philippines' balance of payments position is highly sensitive to exogenous and endogenous factors, which make projections subject to a wide margin of error. Externally, world market conditions, petroleum prices, access to international commercial bank lending, and the level of interest rates will have a significant impact on the balance of payments per- formance. On the domestic side, the effectiveness of the Government's stabi- lization and adjustment programs will also have a significant effect on the country-s balance of payments position. During the current financial crisis, the MLT debt service ratio increased from 18% in 1980 to 26% in 1982 and is likely to remain high through 1984. Thereafter it is expected to decline gradually to a level of 22% by the late 1980s. External conditions have begun to improve; negotiations with the IMF and comuerical banks are progressing well, and the Government is taking appropriate adjustment measures to improve balance of payments performance. Therefore, the Philippines remains credit- worthy for new Bank borrowing on conventional terms. Local cost financing for some projects continues to be justified, particularly in the aftermath of the current recession when the economy faces an exceptionally tight resource position.  PART II - WORLD BANK OPERATIONS 22. As of September 30, 1983 the Philippines had received 90 Bank loans (of which two were on Third Window terms) amounting to $3,867.10 million and six IDA credits amounting to $122.2 million. IFC investments totalled $159.7 million. The share of the Bank Group in total debt disbursed and out- standing is currently about 15, and its share in total debt service is about 10%. These ratios are expected to be about 16% and 13%, respectively, by 1985. Annex II contains a summary of IDA credits, Bank loans, and IFC invest- ments as of September 30, 1983. 23. Bank Group lending to the Philippines expanded from an average of about $90 million per year in FY71-75 to an average of $459 million in FY79- 83. Although the Bank has financed projects in virtually all sectors of the economy, particular emphasis has been given to agriculture, which has accounted for almost one-third of total Bank/IDA lending. Lending for industry, transportation, power, and socia. sectors followed in declining order of size. 24. In agriculture, lending initially focussed on expanding the irriga- tion system, credit programs, and other services to support rice production. More recently, efforts have been made to diversify agricultural production through loans for tree-crops, livestock, fisheries, and integrated rural development projects. Agriculture and rural development will continue to account for the largest share of lending, with emphasis on food production, poverty alleviation, policy reform and institutional building. 25. In the industrial and financial sectors, lending has supported policy reforms under the Government's structural adjustment program. An Industrial Finance Loan sought to bring about improvements in financial sector policies and introduced a new institutional concept to broaden the reach of Bank lending by channelling loans through an 'apex' unit in the Central Bank. In addition, the Bank has continued to provide financial support and technical assistance to small and medium industries. 26. In the energy sector, sector work and the structural adjustment pro- gram initiated under SAL II provide the basis for future lending operations. While previous Bank lending focussed on the power subsecte., the Bank now seeks to support a broader range of activities; in addition to recent energy exploration loans, the Bank plans to continue assisting the accelerated development of geothermal and coal, power generation and transmission, energy conservation, and rural electrification. 27. By and large implementation of Bank-financed projects In the Philippines has been satisfactory. Disbursements, however, have been slower than anticipated, particularly in the last three years. The disbursement ratio (amount disbursed during the fiscal year as compared to the total undis- bursed at the beginning of the fiscal year) declined from 1.;.7% in FY79 to  -8- 14.2Z in FY83./2 The East Asia Regional average was 20.0Z and the Bank-wide average wai; 20.82 in FY83;J13 the comparable ratios for Thailand and Morocco were 16.9Z and 13.72 respectively in the same fiscal year./4 Implementation problems 'ncreased in the last few years, reflecting in part problems caused by inflacion, tight budget constraints, and changes in the scope of the Bank's ler--tag operations (a substantial increase in the number of projects, new areas of lending, emphasis on institution-building, and efforts to reach spe- cific target groups and deprived regions). In recognition of growing imple- mentation problems, the Government and the Bank have instituted a process of joint Country Implementation Reviews. Four reviews have been held since May 1980 and will be continued on a regular basis. 28. This is the first loan to the Philippines to be presented to the Executive Directors this fiscal year. A land settlement project and a second Land Bank project have been appraised and are scheduled for Board presentation during this fiscal year. Staff are now preparing two new operations, an agri- culture sector loan and an export development fund, for consideration during the next twelve months. Two supplementary loan packages for agriculture, and the urban and transport sectors are being prepared under the Bank's Special Action Program (SAP), and would be presented to the Board in the second half of FY84. SAP measures already approved include increasing the cost sharing ratio, the provision of retroactive financing and the establishment of special accounts for a number of projects. PART III - THE RURAL SECTOR AND REGIONALIZAIION General 29. Agriculture is the predominant sector in the Philippine economy, accounting for about 302 of gross domestic product (GDP), 602 of foreign exchange earnings and over half the total employment. Although agriculture-s share of GDP is falling, food production rose during the 1970s at an average of 52 p.a. This was achieved by the introduction of high yielding crop varieties and technical packages coupled with improved extension and farm credit and, to a lesser extent, irrigation. Most of these initiatives were directed at rice and corn production, which together account for about one third of the value of agricultural production, two thirds of rural employment, and over half of the cropped area. /2 Excludes disbursements under the first and second Structural Adjustment Loan. If included, the ratio increases to 21.6%. /3 Regional and Bank-wide figures also exclude disbursements under SALs. 14 Thailand and Morocco are useful as comparators as they have similar per capita income levels and Bank Group lending programs. Figures also exclude SALs.  30. About 70% of the country's populatiom lives in rural areas, where nearly two thirds of the households depend on small farms for most of their income. About 85Z of the 2.35 million farms in the Philippines are smaller than 5 ha. The average farm size is 2.7 ha. Five percent of all farmers have 10 ha or more in production, accounting for 34% of all farmland. About 58Z of farmers own their land, 30% are share tenants, and the remaining 12%, excluding squatters, have a variety of tenancy arrangements including leaseholding. About 41% of all rural households subsist below the absolute poverty income level of $204 per capita. Government Objectives and Strategy 31. The Government-s latest (1983-87) five-year development plan sets general objectives of high growth, greater resource mobilization, reduced income disparities and improved environmental quality. All of these apply to rural development, but specific goals most relevant to the agricultural sector are poverty reduction, continueA rice self-sufficiency and more diversified agricultural production. Specific-programs include land tenure reform, crop research, and a wide range of crop production programs combining credit, input supply and/or technical support. Infrastructure investments emphasize rural electrification, irrigation and roads. Experience with Past Lendin 32. A total of 38 loans and credits have been granted to the Philippines for investments in agriculture, fisheries and rural development. Of these loans, 12 were for irrigation development or rehabilitation and another 12 were for agricultural credit. The current rural portfolio will comprise, by the end of 1983, 20 projects including seven In area development, five in irrigation, three in support services, two in agricultural credit, and three others in watershed management, fisheries and tree crops. 33. The experience with lending for agriculture has been mixed. The Eank's Operations Evaluation Department Report (1982) on the agricultural and rural development program in the Philippines states that -the lending portfo- lio has reflected well the major objectives and priorities of national development plans. Developments in irrigation have been positive, including the establishment of a strong institution (-he National Irrigation Administra- tion) and an expansion of irrigated areas. In credit, operations have been largely successful in providing funds for onfarm investment, but serious institutional and loan recovery problems remain. Ongoing area development projects such as Mindoro Rural Development (Loan 1102-PH), Land Settlement I (Loan 1421-PH), Samar Island Rural Development (Loan 1772-PH), and Rainfed Agricultural Development (Loan 1815-PH) have encountered implcmentation delays due to problems of interagency coordination and lack of authority at the local level but. nevertheless, appear likely to attain their objectives.  - 10 - 34. Experience with the above projects has been considered in designing the proposed project. In particular, three guiding principles have been applied: first, that the project be based on the stated needs and priorities of the intended beneficiaries; second, that involved Government agencies be made acc3untable to project clients and their local political representatives; and third, that funds be passed directly from the Ministry of Budget (MB) to a regional project office to decentralize implementation authority and improve efficiency. The regional offices of line ministries have been involved throughout in project design. Regionalization 35. Since 1954, Government has select'vely decentralized its adminis- tration of the rural sector and agriculture. This became more pronounced since 1972 when the Integrated Reorganization Plan (IRP) was adopted. The Plan called for the creation of a National Economic and Development Authority (NEDA) to be responsible for economic planning, and for the establishment of new administrative regions. Subsequent administrative subdivision of the country grouped 73 provinces, excluding Metro Manila, into 12 regions. Concurrently, NEDA set up Regional Development Councils (RDCs) in each region to facilitate regional planning and representation in lawmaking bodies, and to coordinate all planning and programming activities of local and national bodies at the regional level. Regionalization required Ministries to establish regional offices with adequate powers to act over a wide range of administrative matters designed to improve public services. In 1976, a system of regional budgeting was instituted to provide a link with regional planning and to provide a mechanism for the RDC to monitor budgetary releases to regional offices. 36. At present, 15 ministries have regional offices and another six have regional representation. However, surveys have indicated that "region- alization' is interpreted differently by the various ministries and that delegation of administrative powers has been quite uneven. Recently, the Government set as a priority the delegation of stipulated responsibilities to regional authorities. 37. With assistance from a Bank-executed UNDP-financed technical assistance project,/5 the NEDA produced in 1977 comprehensive national and regional five-vear, 10-year and year 2000 development plans. The Government and the Bank agreed, in 1977, to formulate a regional development program for the Central Visayas (Region VII) which would became a prototype for all twelve regions. In line with methodology stipulated in the five-year plan, an area development strategy was adopted to formulate a Regional Development /5 NEDA-UNDP/IBRD Technical Assistance Project on Regional Planning and Development, 1975-present.  - 11 - Investment Program (RDIP) which could be replicated in other regions. The in-country work was supported by a Bank mission in 1978 which set guidelines for the first Bank-supported regional project in the Philippines.l6 As a result of the successful experimental program for preparing the RDIP in Region VII, which became the basis for the Central Visayas regional project, in 1980 the President instructed the other regions to formulate RDIPs. The regional five-year plans were revised in 1982 for the second five-year period (1983-87). The RDIPs are currently being updated and will become the basis of future regional projects as well as the basis for regional budgeting which is being introduced by the Ministry of Budget (MB). 38. Despite the progress noted above, the RDCs remain limited in their influence over regional development as they have no supervisory authority over the regional offices of line agencies, local governments or statutory bodies operating in the regions, nor do they have substantial budget resources of their own although they do receive small allocations from the Regional Development Fund - a line item in the national budget which so far has not received significant funding. However, it is also clear that regionalization does have momentum, that further delegation of responsibility is being sought, and is being cautiously allowed, and that the experience with the Region VII experiment will be a vital factor in determining the future of regionalization. The Central Visays 39. The Central Visayas Region comprises the island provinces of Cebu, Bohol, Siquijor, Negros Oriental (eastern Negros) and a number of smaller, minor islands (Map #17219). The Region's population was 3.8 million in 1980, representing 8Z of the national total. It has limited agricultural potential, due mainly to its rugged and inacccessible topography dissected by numerous river systems, and accounts for only 6Z of the total national gross value added in agriculture (including fisheries and forestry). Over the years, the pattern of land use in the Region has been characterized by insecurity of tenure which leads to short-term, low-cost production strategies, and inequities due to conflicting policies of government agencies regarding land allocations for fish ponds, grazing and logging. In turn, this has led to deterioration of the natural resource base and perpetuated poverty for thousands of settlers on forest land, uplands and nearshore areas constituting about 46X of the Region's area. 40. The Region has pioneered a land stewardship program under which conditional leases are granted to present land occupants. Stewardship contracts provide settlers with security of tenure, for 25 years extendable to 50 on condition of compliance with a resource management plan, which /6 The Philippines: A development strategy and investment priorities for the Central Visayas (Region VII). Two volumes. World Bank Report No. 2264-PH. January 4, 1979.  - 12 - would be evaluated periodiLally. To support the stewardship policy larger scale concessions in public lands within the Region for fish ponding, timber cutting and grazing have become more difficult to obtain. 41. The Bank's review of povertv in the Philippines /7 identified the Region as the nation's second poorest having an average poverty incidence of almost 60% in 1975, compared with 47.5% for the country as a whole. The Region ranks among the poorest in the Philippines in terms of per capita distribution of arable land and agricultural productivity. For these reasons the Region was chosen in 1977 by the national government for implementation of the nation's first regional project. PART IV - THE PROJECT Background 42. The proposed project was prepared by the Central Visayas Regional Project Office (CVRPO), the first region-based project preparation unit to be established in the Philippines, with assistance from the FAO/IBRD Cooperative Program, and was appraised in November 1982. Negotiations were completed in Washington, D.C. by October 7, 1983. The Philippine negotiating team was led by NEDA Deputy Director General A. Locsin. A staff appraisal report No. 4504-PH, dated October 26, 1983 is being circulated separately. Supplementary data are provided in Annex III. 43. The project is region-wide in scope in that investmeants are pro- posed at five watersheds in all four provinces (Map #17031) and constitute part of the overall Regional Development Investment Program (RDIP). The original proposal covered 12 watershed sites in the four provinces, but owing :' budgetary constraints and the need to test new proposed procedures for regional development initially on a pilot scale, the Government reduced the initial proposal to five sites requesting that the other seven sites be considered in a subsequent project after the first has been evaluated. Objectives 44. The project would improve the incomes and living standards of poor, sm.ll-scale producers in the project areas, particularly upland farmers and artis,aaal fishermen, through improvements in the management of the forest, upland, and nearshore habitats both by arresting the rapid degrada- tion of the environment and augmenting the resource base. The project would 17 Aspects of poverty in the Philippines: A Review and Assessment. World Bank Report No. 2984-PH. December 1, 1980.  - 13 - also reinforce the Government's regionalization program, set out in the Integrated Reorganization Plan introduced in 1972, as part of its evolving, long-term decentralization policy, thus ensuring greater administrative and budgetary antonomy for the Region, maxi:um financial accountability by project managers and staff, and maximum participation by local officials and beneficiaries. Description 45. The project would be implemented on a pilot scale in one watershed in each of four provinces and a social forestry area in Negros Oriental Province. The sites involve a total land area of 140,000 ha, a coastline of 200 km and a population of about 200,000. Project sites were selected according to provincial development priorities, relative poverty of inhabitants, degree of ecological degradation, development opportunities including public land availability, and attitudes of the people toward development. The technologies being introduced under the project are simple, inexpensive and do not depart radically from current practices. In fact, examples of all the advocated technologies can be found within the Region. Supporting institutions would be strengthened and the project would fund specialized training, technical assistance and research in support of the production activities. Project preparation efforts in other regions would also be supported. Components 46. Watershed Management. Because the region has a limlted agricul- tural resource base, but a substantial forestry and fisheries potential, a watershed /8 development approach was adopted. The watershed management component comprises programs on upland agriculture, social forestry, near- shore fisheries and infrastructure, mainly access roads and trails. The upland agriculture program would be implemented in four watersheds. With the incentive of securing tenure over their land, upland farmers would be assisted in transferring from shifting cultivatioa of annual crops which causes serious soil erosion, to more stable systems utilizing perennial crops and livestock. Planting material, farm tools, crop inputs and live- stock would be provided to farmers as payment in-kind for soil conservation and replantiug works according to farm development plans conceived with, and supervised by, project technical staff. Management units would be estab- lished at each site including service buildings, plant nurseries, stock facilities, holding areas for vehicles and materials, and staff. /8 Watershed is defined as the river system, from its land source to its sea outlet.  - 14 - 47. The social forestry program would be implemented at one site, a fo?mer company concession, in Negros Oriental Province where slash-and-burn farmers (kaingin) have entered the iorest and claimed land causing further denudation. The program has two main activities: forest stand improvement and reforestation. The former would be implemented on logged-over forest land of about 8,000 ha which is beginning to regenerate, the latter on about 8,000 ha of open grass, brush and cultivated land, about 3,000 ha of which would be retained for subsistence cropping. Seedlings, fertilizer, herbi- cides, tools and fire prevention equipment would be provided to farmers as payment in-kind for soil conservation and reforestation works under land stewardship agreements with government, which offer the settlers security of tenure over their land. A management unit would be established at the site including service buildings, a seedling nursery, a holding area for vehicles and material, and staff. 48. The nearshore fisheries program would establish artificial reefs, replant denuded mangrove areas, establish coral reef sanctuaries at four sub-sites in the four provinces, and include the allocation of use rights to cooperating families. The sites would include most of the shoreliue areas adjacent to three of the upland agriculture sites (Cebu, Bohol and Siquijor) and the social forestry site (Negros Oriental). Investments would include reef construction materials, nonmotorized barges, motorized baucas to tow the barges, tools, buoys and mangrove seedlings. Subsite management units would be established at the four coastal sites including service buildings, holding areas for vehicles and supplies, and staff. 49. To service the various agriculture development programs, the pro- ject would support construction of access roads and trails, including 97 km of new works, 125 km of improvements, and the grading of about 475 km of trails in the five project sites, including the nearshori locations. 50. Support Services. The support services component of the project would comprise institution strengthening, training and technical assistance, and research. Under the former, the Regional Office of the Hinistry of Agriculture (RMA) would be strengthened to provide soil and livestock services to the project. The Regional Office of the Bureau of Forest Development (RBFD) would be strengthened to undertake off-farm reforestation at all the sites, and general regulatory services at forestry sites. The Regional Office of the Bureau of Fisheries and Aquatic Resources would be strengthened to provide regulatory services. A new Regional Projects Office (RPO) would be established to manage the overall project. These four offices above would be provided funds for staff, service buildings and civil works, vehicles, equipment, soil survey materials, livestock facilities, and stock. 51. Project training and technical assistance would improve the skills of project staff and participants, particularly farmers and fishermen, and related line agency personnel, to implement the project. It would also improve regior.al training facilities which are generally inadequate for the scope of the project. Training would cover 22 courses dealing with all  - 15 - aspects of the project, with 10 for project staff and participants, and 12 for related line agency personnel. A total of 44 fellowships and tours would be offered in 11 subjects to complement project-funded training. The project would fund about 27 staff-years of consultant time, about one third of which is exHected to come from overseas, comprising studins on management, agriculture including credit, forestry, fisheries, communal irrigation, socioeconomics, and development of training materials. 52. Applied research aimed at improving low-input farming systems for the slopes and uplands of the Region would be supported. RMA would conduct on-farm trials in the project sites utilizing annual and perennial crops and livestock. The work would be integrated with research by the Farm Systems and Soil Research Institute of the University of the Philippines at Los Banos. Funds would also be provided RMA to establish an upland research station to complement the Ministry's lowland research facilities on Bohol Island which are being upgraded under the Bank-supported Agricultural Support Services Project (Loan 2040-PH). Forestry research would be supported by funding an expanded program by the Regional Office of the Forest Research Institute (RFORI). 53. Project Preparation. The proposed loan would include repayment of two advances from the Bank's Project Preparation Facility (PPF) which partly funded the preparation and preimplementation of the project. Addi- tional funds would be provided to assist preparation of other regional projects, including a possible second phase of the proposed project, and for preimplementation of the second Central Visayas Regional Project (Urban) due for appraisal in FY84. Organization and Ilanagement 54. The Central Visayas Regional Project (CVRP) is the first major foreign-funded project in the Philippines to support regionalization and involve local governments in the design and implementation osf RDIPs. The project is innovative in nature as it proposes fiscal and administrative reforms to strengthen decentralization, and new institutions and procedures to bring it about. An Action Program has been agreed with the Government to ensure the establishment and staffing of site management units for the various project components (Section 3.06 and Schedule 5 of the draft Loan Agreements). Most of the arrangements for implementing the Program are in place. The immediate implementation of the Action Program would ensure that project activities would commence on schedule. 55. The Regional Development Council (RDC) has primary responsibility for regional planning, programming and budgeting. Executive Order No. 907, dated September 10, 1983 has amended earlier legislation and created the Regional Projects Office (RPO) as an implementing agency which has taken over from CVRPO which was responsible for preparation and pre-implementation of the project. A Central Visayas Regional Projects Board has been designated by the Prime Minister to establish and direct the RPO. The  - 16 - chairman of RDC serves as chairman of the Board. The Executive Director for the RPO has been nominated and would hold overall responsibility for all investments in Region VII including this project. The Executive Director has been involved in the planning of this project since its inception. Formal appointment of the nominated Executive Director and confirmation of the designated Board members are expected shortly. The RPO would be funded directly by MB, according to RDC-approved annual schedules of expenditures, and is empowered to appoint staff, and to contract work with Government and private agencies. It would also be responsible for project monitoring and evaluation, the system for which has been formulated during 1983 and would be established immediately following loan effectiveness. It is a condition of loan effectiveness that the Board would place in RPO an overall project manager with qualifications and experience satisfactory to the Bank (Secton 5.01(a) of the draft Loan Agreement). 56. Site Management Units (SMUs), under the RPO, would be responsible for implementing agricultural programs in the four watersheds and the social forestry program. Sub-SMUs would be responsible for managing the nearshore fisheries program. By June 30, 1984, the RPO would acquire land and establish (a) five SMIIs to implement the upland agriculture and social forestry programs and four sub-SMUs to implement the nearshore fisheries program; and (b) appoint five managers of the SMUs and four deputy managers of the sub-SMUs (Section 3.06 of the draft Loan Agreement). 57. The social forestry SMi would operate like the SiUs at the four upland agricultural sites. The SMU would ve responsible for issuing stewardship contracts on forest land to settlers selected from amonG the itinerant occupants, according to established criteria. The substance of the contracts has been drafted already, as the program was pioneered in the Region. By June 30, 1984, the RPO would request that BFD Central Office reserve the Ayungon-Bindoy site for the social forestry program (Section 3.06 of the draft Loan Agreement). 58. RBFD also would be responsible for off-farm reforestation and forest regulatory services at all sites under the project. In addition, the Bureau would be responsible, through the Regional Office of the Forest Research Institute (RFORI), for forestry research activities under the project. RBFD would also implement the forestry part of the training and technical assistance components of the project. By June 30, 1984, the RPO would designate RBFD to provide support services under the project, under memoranda of agreement with RPO, and would appoint officers-in-charge of the services (Section 3.06 of the draft Loan Agreement). 59. The Regional Office of the Ministry of Agriculture (RMA) would be responsible for providing soil and livestock services under the project. In addition, RMA would be responsible for establishing an upland research station, administering an upland research fund, and providing packages of technology to farmers. RMA would also be responsible for the agricultural part of the training and technical assistance components of the project. By  - 17 - June 30, 1984, the RPO would designate RMA to provide support services under the project, under memoranda of agreement with RPO, and would appoint officers-in-charge of the services (Section 3.06 of the draft Loan Agreement). 60. The Regional Office of the Bureau of Fisheries and Aquatic Resources (RBFAR) of MNR would be responsible for providing regulatory services and implementing the fisheries part of the training and technical assistance components of the project. By June 30, 1986, the RPO would designate RBFAR to provide support services under the project, under memoranda of agreement with RPO, and appoint officers-in-charge of the services (Section 3.06 of the draft Loan Agreement). 61. The four Provincial Engineers' Offices (PEOs) of Cebu, Negros Oriental, Bohol and Siquijor Provinces would implement the infrastructure component of the project. A rural road construction section would be established within each PEO, and would be responsible for implementing the programs with assistance from qualified local consultants. By June 30, 1984, the RPO would designate the four PEfls to implement and maintain the infrastructure program of the project, under memoranda of agreement with RPO, establish rural road construction sections within the PEOs, and appoint officers-in-charge of the programs (Section 3.06 of the draft Loan Agreement). The detailed engineering designs of the programs were completed during 1983. Cost 62. Total project cost is estimated, as of the third quarter 1983, at $44.4 million, including taxes and duties equivalent to $1.8 million. The estimated foreign exchange cost is $20.0 million (47%). Expected price increases ($8.8 million) over the project period amount to about 25Z of total base costs; inflation of local costs was estimated at 12% for 1984, 8.0% for 1985, and 7% through 1990 and inflation of foreign exchange costs was estimated at 7.5% for 1984, 7% for 1985 and 6% thereafter. Physical contingencies ($1.4 million), at 5% of base cost for buildings and 10% for equipment and civil works, have been applied, but not for on-farm develop- ment costs as these are based on actual farming costs. Consultancies ($1.4 million), including about 8 staff-years of overseas and 19 staff- years of local expertise, are required to implement the project, and are estimated to cost on average about $10,000 (including international travel, and subsistence) and $1,700 per month, respectively. - Financing 63. The proposed Bank loan of $25.6 million, including the capitalized front-end fee of $0.1 million, would contribute 60Z of total project cost, excluding taxes, and cover the total foreign exchange cost of $21.0 million plus local costs equivalent to $4.6 million. The remaining $18.8 million  - IR - plus local costs equivalent to $4.6 million. The remaining $18.8 million would be provided by Government. The partial coverage of local costs by Bank lending is designed to assist the Government at a time of overall budgetary stringency (para. 21). Procurement 64. Construction equipment for the PEOs to be utilized for road improvement and maintenance ($0.9 million) and vehicles ($0.6 million) would be bulked where suitable and purchased through international competitive bidding (ICB) in accordance with Bank guidelines. Eligible domestic manu- facturers would receive a preference of 15% of the c.i.f. price of the imported goods, or the import duty, whichevez is lower. Equipment (mostly hand tools) for on-site development of farming, forestry and nearshore fisheries ($1.4 million) as well as planting materials, fertilizers, chemi- cals, and other materials ($4.4 million) would be purchased through local competitive bidding (LCB) in accordance with procedures acceptable to the Bank; foreign suppliers are well represented in the country and would be eligible to participate. Equipment costing less than $10,000 per lot but not more than $150,000 in total would be purchased by prudent shopplng based on three price quotations. Contracts for construction of new secondary roads and trails ($8.2 million) and civil works contracts for the construc- tion of buildings ($1.4 million) would be awarded under LCB. The small size and dispersed location of the facilities would render them unsuitable for ICB, but foreign contractors would not be precluded from bidding. The improvement and maintenance of roads and watershed rehabilitation works would be carried out by force account because of the difficult terrain and the problem of attracting contractors to the upland sites. The construction of artificial reefs and nearshore works would also be carried out by force account to ensure proper implementation of the relatively new technologies. Work carried out under force account would be limited to an aggregate amount of $500,000. Construction materials and supplies would be procured through normal commercial channels. Livestock purchases ($1.7 million) would be procured by direct purchase from local ranchers at prices agreed on by a review committee comprising a representative from project management, RMA and the farmers. Overseas consultants for technical assistance would be contracted according to Bank guidelines. All bidding packages for goods and civil works over $100,000 would be subject to prior review by the Bank. This would result in coverage of about 68% by amount of goods, and 75Z of civil works procurement. The balance of contracts would be reviewed by Bank staff on a selective basis during supervision after contract award. Disbursements 65. Disbursements from the loan would cover: (a) 80% of civil works expenditures; (o) 100% of foreign expenditures for vehicles, construction equipment, production inputs and materials; 100% of local expenditures when locally manufactured (ex-factory); and 70% of other local expenditures;  - 19 - (c) 100% of foreign expenditures or 80% of local expenditures for consultants, technical assistance, and overseas training; (d) 100% of foreign expenditures or 80Z of local expenditures for CVRP II (Urban) and other regional project preparation activities; (e) refinancing Project Preparation Facility advances; and (f) the front-end fee. 66. Disbursements for civil works carried out by force account and for locally purchased items costing less than $10,000 would be made against statements of expenditure. Disbursements for other expenditures would be made against full documentation. All statements of expenditure would be * certified by the Project Manager and Financial Controller. Supporting documents would be retained in the RPO and made available for review by Bank supervision missions until the project closing date of September 30, 1990. Accounts and Audit 67. The RPO would appoint a Project Financial Controller by May 31, 1984 who would follow accounting and auditing procedures satisfactory to the Bank, and who would forward to the Bank by June 30 each year, beginning in 1985, project accounts and auditors' reports for the Philippine fiscal year (Section 3.06 of the draft Loan Agreement). The audit report should certify that funds disbursed against statements of expenditure had been used for the purpose for which they were provided. It is a condition of loan effective- ness that a revolving fund of up to $2.0 million would be established as a Special Account within the Central Bank under the name of the Central Visayas Regional Project to expedite disbursements and help overcome current budgetary constraints. The fund would cover all categories of expenditures to be financed under the loan. Production 68. At full production, about 5,700 direct participants in the upland agriculture program would generate incremental annual crop production of about 9,000 m tons. Incremental production from perennial crops, including firewood, and from livestock products would also be significant. About 1,200 families would participate in the social forestry program. Production from forest stand improvement is expected to be 15,000 cu m of logs and 232,000 poles during the first five years of the project. Production from reforestation would be 423,000 m tons of firewood, 1,330,000 cu m of saw logs, 4,512,000 cu m of rattan, and 300,000 posts during the life of the project. There are an estimated 7,705 families in the four nearshore fish- eries areas, over 4,000 of whom depend on fishing as their sole or major source of income. Their production, at full development, is estimated to be 8,125 cu m of fuelwood from mangroves, 400 m of finfish and 180 m tons of other sea products.  - 20 - Marketing 69. There is a well established and reasonably efficient private sector marketing network to handle production inputs and projecL output in the watershed areas of the project, and marketing margins for both inputs and output are commensurate with costs and risks involved. Where marketing infrastructure is deficient, traders often link provision of credit and supplies to purchases of farm output. Often strong business bonds are based on principles of allegiance and reciprocity between farmers and marketing agents. The improved road and trail access provided by the project would help reduce transport costs and improve marketing services in the project areas, particularly after the pilot phase is completed. Benefits 70. The main focus of the project and its primary economic benefit would be the increased incomes of some 14,600 poor families in five water- sheds of Central Visayas, with indirect benefits for many others, through incremental production of agriculture, forestry and nearshore fisheries. At present, the incomes of these families are declining due to severe soil erosion and fishery habitat degradation. The project is designed to promote cultural practices which would reverse the trend and improve productivity of the watersheds. The project would also create more effective regional and local institutions for implementation of rural development activities in Central Visayas and test the concept for broader application regionwide, and ultimately for other regions in the country as well. 71. The incremental per capita incomes derived directly from project investments range from P 1,050 to P 3,400 a year for upland farming; from P 450 to P 4,300 for social forestry; and from P 600 to P 1,500 for fisheries. These income levels are modest compared with average incomes around the country. For example, the national average per capita rural income demarcating the absolute poverty line is estimated to be about P2,000 and per capita incomes resulting from project activities fluctuate around this level although they would be significantly higher than at present. Per capita incomes without the project could be expected to decline further in most cases. 72. Indirect benefits to other producers would include increased nearshore fish production due to reduced reef siltation, reduced beach erosion due to mangrove replanting, a reduction in destructive fishing methods, reduced flooding and damage to downstream farms and roads, reduced soil runoff leading to increased moisture supply for crop production, increased employment as upland production increases, and reduced urban migration. The project would help to stabilize the Cebu-based rattan furniture industry since inadequate and unreliable supply of poles is a primary constraint to increased production. Timber supplies would also be improved as lumber consumption within the Region is estimated at 38 million bd ft yearly which requires 178,OOD cu m of logs all of which come from outside the Region.  - 21 - 73. The labor requirement to implement the production components of the project would be substantial. It is estimated that almost two million man-days would be required to implement and maintain the new farm systems until they reach full development. Although most of the labor would be provided by members of participant families, some would be contributed by other workers seeking employment within the four watershed sites. Environmental Impact 74. The project is designed to have a beneficial environmental impact ranging from stabilization and rehabilitation of the upland forestry and agricultural areas, which are badly eroded, to reductions in siltation and damage to the nearshore mangrove and reef areas; in turn, this would lead to increased productivity from all parts of the watershed. Possible adverse effects resulting from the use of agricultural chemicals would be minimized through the use of composting and the introduction of farm systems that reduce rainfall runoff so that residues from the small amounts of chemicals applied would not be carried downstream. Cost Recovery 75. The project would not attempt to recover the relatively small investment costs from farmer and fishermen participants for two reasons: (a) beneficiaries' income at full development would be only moderately above absolute poverty levels; and (b) a modest government input is necessary to induce farmers and fishermen to shift from current harmful practices to practices which conserve the soil and nearshore resources in the project areas. Labor contributed by project participants would be equial to or greater than the in-kind compensation which they would receive as planting material, tools, livestock and agricultural chemicals. In the forestry component, the project would attempt to recover the initial on-farm investment costs from beneficiaries through stumpage charges, which would be a percentage of the market price of the cut wood at the farm gate. The details of amount and timing of the stumpage charges would be recommended by the SMU and decided by the RPO in coordination with RBFD during project execution. Justification 76. The production components of the project, including infrastruc- ture, account for about 70% of total costs, and show air estimated economic rate of return of 17%. For the production components of the project, a decline in benefits of 40%, or a cost increase of 67%, would reduce the NPV to zero, or the ERR to 10%. Benefits could be reduced if there is less participation in the project than expected, or if yields fail to reach projected levels, or reach them later than anticipated. In any of the above cases, the ERR is unlikely to be reduced below about 12%. It is unlikely that costs will rise significantly.  - 22 - Risks 77. Since neither the Bank nor the Philippine Government has supported such a large systematic development effort in a single region-before, the project's main risks are institutional in nature. Project design has attempted to minimize these risks, but it is recognized that new systems of budget and administrative control would take time to consolidate under the evolving process of regionalization. In upland agriculture, the Region's poor agricultural resource base requires that innovative measures of soil conservation and upland farming be introduced so that there are also some technical risks. While the technology proposed under the project has proven effective, much of it within the Region itself, it remains to be E?-n whether existing "slash and burn" farmers can be transformed into permanent settlers r'nder the land stewardship program being introduced under the project and maintain stable enterprises on small plots over time. 78. Land occupants at all sites have expressed strong interest in participating in the project. The prospect of long-term stewardship over their land is a powerful incentive to join the programs. The settlers are also attracted by the proposal to reward labor for conservation and rehabi- litation works with payments in-kind, and by the opportunity to be introduced to, and advised on, new production technologies. The project provides adequate management resources and support services to achieve its objectives. PRT= V - LEGAL INSTRUMENTS AND AUTHORITY 79. The draft Loan Agreement between the Republic of the Philippines and the Bank and the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement of the Bank are being distri- buted to the Executive Directors separately. Special conditions of the project are listed in Section III Annex III. 80. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank.  - 23 - PART VI - RECOINATIONS al. I rec: wend that the Executive Directors approve the proposed loan. A. W. Clausen President Attachseats Wasbingtou, D.C. November 10. 1983  BEST COPY AVAILABLE AE24 - aNe KI TA3LE 36 NWEPrpI3 -SOfI DOWATRS UATA s mm ~ l c3uD CIMIE AVERCES)= osr CISr &ZCur ZSEMAIE) /b 1960& 197AtA 1 PACL! Lr. uaMR am CtM 3. noO TOM 300.0 300.0 300.0 ACE1cm.1113M. wa9s 104.0 109.2 Cup mmCl c CUSS) 160.0 260.0 790.0 10286 2088.2 (KMOARAS OF CAL EQIIaEr 159_0 333.0 380.0 792.1 1407.6 POPULAOM111-U*Z CTMOUSAiS) 27396.0 3688.0 6955.0. 033*1 POPULATION C, Or =TOL) 30.3 32.9 36.7 3ZL9 65.0 MOPULALTIW IEOJEcrZiss POPULATIO Ig YEAR 2000 OIL) 76.6 STATTMU POIULATIOW CN0L) 137.2 TEAR SUTIOUl P0p. ZEAD 2105 POPUL.ATICW DSSEX PEm sq. . 91.3 122.8 161.0 260.7 35.6 PM 5Q. QL ACRI. 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