Philippines - Irrigation Operations Support Project

Document of The World Bank FOR OFMICIAL USE ONCY Repowt No. P-4746-PH MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN THE AMOUNT EQUIVALENT TO US$45 MILLION TO THE REPUBLIC OF THE PHILIPPINES FOR AN IRRIGATION OPERATIONS SUPPORT PROJECT May 11, 1988 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EOUIVALENTS (November 1987) Currency Unit - Philippine Peso (P) P 1.00 - US$0.048 US$1.00 P 20.7 WEIGHTS AND MEASURES Metric System FISCAL YEAR Government of the Philippines January 1 - December 31 ACRONYMS & ABBREVIATIONS IA - Irrigators' Association IOSP - Irrigation Operations Support Project ISF - Irrigation Service Fee NIA - National Irrigation Administration NIS - National Irrigation System O&M - Operations and Maintenance  I OMCIAL USE ONLY PHILIPPINES IRRIGATION OPERATIONS SUPPORT PROJECT Loan and Project Summary Borrower: Republic of the Philippines Beneficiars: National Irrigation Administration (NIA) Amount: US$45 million equivalent Terms: Repayable in 20 years, including 5 years of grace, at the standard variable interest rate Financing Plan: IBRD Loan US$45.0 million Government/NIA US$15.2 million Tosal USS60.2 million Economic Rate of Return: 34% Staff A&Rraisal ReRort: 6Report No. 7102-PH MaD: IBRD No. 20485 This document has a restricted distribution and may be used by recipients only in the perfornance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  MEMORANDUM 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 AN IRRIGATION OPERATIONS SUPPORT PROJECT 1. The following memorandum and recom'endation on a proposed loan to * the Republic of the Philippines for US$45 million equivalent is submitted for approval. The proposed loan would have a term of 20 years, including 5 years' grace, at the standard variable interest rate, and would assist the * Government of the Philippines in its efforts to improve tha operations and maintenance (O&M) of its national irrigation systems. 2. Background. The total irrigated area in the Philippines has doubled over the last 20 years to approximately 1.5 million ha. This expansion, and the related dramatic increase in paddy production have enabled the country to achieve marginal self-sufficiency in rice and to sustain a satisfactory rate of agricultural growth (averaging 4% p.a. since 1970). Some 47% of the total area under irrigation is served by small- scale communal systems, owned and operated by irrigators' associations (IAs), and another 13% are served by private pump units. The remaining 40% (0.6 million ha) is served by 127 large-scale national irrigation systems (NISs), built, operated and maintuined by the. semi-autonomous public National Irrigation Administration (NIA). By 1993, after completing several ongoing projects, NIA will be operating 147 such NISs, totalling nearly 750,000 ha. 3. As with any other infrastructure, proper O&M of irrigation works is needed to prevent system deterioration, which in turn leads to decreases in cropping area, yields and output. Although irrigation service fee (ISF) rates and collection efficiency are better, and the development of IAs is more advanced in the Philippines than in many comparator countries, the volume and quality of O&M are still inadequate to sustain system irrigation operating performance. Therefore, although the Government may initiate a few new construction or modernization projects over the next decade, it has shifted its priorities for tie irrigation subsector from system expansion to improving O&M of the installed NIS network, to avoid more costly expenditures on rehabilitation which would otherwise become inevitable over the next 10-15 years. 4. The main constraints to more effective O&M are posed by NIA's financial situation and the fact that, because of its past emphasis on new construction, NIA has yet to develop adequate procedures and technical capacity in O&M. NIA charges ISF, denominated in paddy equivalents and payable either in cash or in kind, which recover most of its current O&M costs (averaging US$16.50/ha p.a. in recent years). Nonetheless, these represent only about 60% of the expenditures which NIA should be making to prevent NIS deterioration. While ISF rates per se are not low, current ISF receipts would not support these higher expenditure levels, although  NIA could cover most of the funding gap by making a concerted effort to improve its ISF collection efficiency (estimated at 59% in 1987) and expand its ongoing and fairly successful IA development program. To ensure the effectiveness of higher O&M expenditures, NIA would also need to strengthen further its internal planning, operating procedures and the structure of staff incentives, as well as to upgrade staff skills in proper water management and irrigation system O&M techniques and IA development. 5. Due to the Bank's long involvement in the Philippines irrigation subsector, several years ago NIA requested assistance in evaluating the operating performance of the NISs and developing an action plan for improvement. A consultant study financed under the Medium-Scale Irrigation Project (Loan 1809-PH), completed in 1985, identified specific areas for upgrading and institutional strengthening. Drawing on these recommendations, NIA has prepared a nine-year Irrigation O&M Improvement Program, and has requested Bank funding for a three-year Phase I, under the proposed Irrigation Operations Support Project (IOSP). 6. Rationale for Bank Involvement. The IOSP would be the first Bank-financed project in the Philippines designed primarily to address irrigation system O&M. It would complement the Bank's past support (17 loans and credits totalling US$738 million) for irrigation subsector development. In the aggregate, by 1990, the ongoing and completed Bank- financed projects will be irrigating about 490,000 ha (or nearly one-third of the total irrigated area in the country). They will benefit some 290,000 families, and will help to produce more than 2 million tons of paddy, or about 22% of total projected rice production alnd 30% of irrigated production. The proposed project would help the Government to ensure maximum returns from these earlier investments and, therefore, is an important component of the Bank's future country assistance strategy for the Philippines. 7. Proiect Objectives. The IOSP would support institutional development and training which is critical to improving the long-term O&M capability of NIA and the lAs/beneficiaries. It would also provide financing for minor rehabilitation work to restore existing NISs to original or modified design levels, and would increase the volume and quality of O& work, so as to reduce the current trend of system deterioration. Post-project activities during subsequent Phases II and III of NIA's nine-year Irrigation O&N Improvement Program would include some major rehabilitation (on 18 NISs) and system modernization, as well as continued work to improve 06M levels and further develop the IA network nationwide. The main targets for the overall Program are the reduction of NIS performance deterioration; improvement of water delivery and water use efficiency to permit higher rates of cropping intensity; and achievement of full recovery of higher O&M expenditures through ISF payments by beneficiaries. The three-year IOSP is expected to achieve about 75% of the final Program targets. 8. project DescriRtion. The project would cover all NISs, excluding a few selected areas where major rehabilitation would be needed before improved O&M would have the desired impact. The project would support the following:  - 3 - (a) Institutional Strengthening of NIA to Provide Improved O&M Services. Increased O&M performance and efficiency would be obtained through: (i) improvements in the ISF collection process; (ii) full implementation of NIA's Irrigation Management Information System (IMIS); (iii) staff training in O&M and farmer organization development; (iv) execution of system rehabilitation studies and preparation of manuals and (v) reconditioning of some existing, and procurement of some additional, O&M equipment; (b) Acceleration of NIA's Irrigators' Association JeveloRment Program. Some 390 new lAs, comprising about 96,000 farmers in an area of 114,000 irrigated ha, would be fully organized and trained to enable them to assume responsibilities for O&M of the laterals and sublaterals in their NIS service areas. (c) Execution of Minor Rehabilitation. Essential small rehabili- tation works would be carried out to restore and sustain the operational capability of the 127 NISs and enable them to respond effectively to increased levels of O&M. (d) Execution of an Exganded 0gerations and Maintenance Program. The volume of O&M work would be stepped up nationwide, including: (i) system operations, such as timely operation of gates and spillway controls, proper operation of canal control structures, adequate supervision of system performance, timely remedial measures, and regular recording of canal and river discharges; and (ii) system maintenance, such as canal desilting and weed control, minor repairs to canals and structures, drainage clearing, and repair and maintenance of service roads, buildings, equip-ent and vehicles. 9. The total project cost, including physical contingencies and expected price increases, is estimated at about US$60.2 million, with a foreign exchange comporant of US$17.1 million. The proposed Bank loan of US$45.0 million would finance about 75% of total costs, including 100% of the foreign exchange requirement and about 65% of local costs. The remaining project cost of US$15.2 million would be funded by NIA and the Government. NIA's current annual income of about US$6.1 million from ISF and US$2.6 million from equipment rental and management fees would be supplemented by the additional US$2.5 million in average annual ISF revenues to be achieved under the project through improved collection efficiency. NIA has been channelling all ISF revenue and most of its income derived from investment activity into O&M. To encourage this practice, NIA's US$10.3 million counterpart contribution would all be used to finance part of the O&M component of the project. Bank loan funds would cover the full cost of all other components and 48% of incremental O&M costs. To ensure that NIA continues to allocate increasing amounts to O&M, Bank reimbursement against the O&M component expenditures would be on a declining basis, at 85%, 55%, and 30% of the incremental O&M expenditures in the first, second, and third years of the project, respectively. Retroactive financing of up to US$1.5 million for expenditures after October 15, 1987 may be required for some start-up activities, particularly equipment purchases, engineering services and parcellary mapping.  -4- 10. A summary of the project costs and financing plan is given in Schedule A. Amounts and methods of procurement and the disbursement schedule are shown in Schedule B. A timetable of key processing events and the status of Bank Group operations in the Philippines are given in Schedules C and D, respectively. A map is also attached. The staff Appraisal Report, No. 7102, dated April 27, 1988, is being distributed separately. 11. Agreed Actions. During negotiations, confirmation was obtained from the Government and NIA on the following: (a) that NIA would revise its iucentive grants to provide separate bonus payments for quality of O&M work and for ISF collections; (b) that NIA would modify its agreements with each IA, to implement separate contracts for ISF collections and for O&M; (c) that NIA would limit investments for system restoration under the project to a P3,000/ha average in each Region and to repairs essential to supply of required irrigation deliveries; (d) that for each calendar year, NIA would submit a detailed work program and funding proposals for Bank review by June 30 of the preceding year; and (e) that NIA would receive Government budgetary support, if needed, to ensure O&1 funding at the levels agreed to under the project. 12. Benefits. The main benefit of the proposed project would result from improved O&M of the 127 NISs, which would expand agricultural production, increase and stabilize farm incomes, and generate employment, while making a substantial contribution to the country's food self- sufficiency objective. Since the project is national in scope, its benefits would have a positive impact nationwide. In addition, terough the projected increased irrigated land-use intensity and the constant need for O&M of thie systems, the farm and local laborer employment impact would be year-round, helping to prevent outward migration from the rural areas. The project would directly benefit about 430,000 farm families, or 2.6 million persons, in the NIS service areas. Most are sm4llholders; 88% cultivate farms of less than 3.0 ha size, and 40% cultivate farms of 1 ha or less. The estimated economic rate of return o the project is 34%. Sensitivity tests indicate that attractive economic returns would accrue even with substantial adverse changes in project costs and benefits. 13. Risks. The main project risks are the possibility of adverse farmer reactions to measures to improve ISF collection efficiency and thereby raise the effective cost recovery levels, and the fact that in some areas targets may be difficult to reach because of prevailing peace and order problems. However, these potential problems are not considered significant and should be eased by improved irrigation services and increased farmer participation through lAs, both supported by the project. 14. Recommendation. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve the proposed loan. Barber B. Conable President Attachments Washington, D.C. May 11, 1988  Schedule A IRRIGATION OPEATIONS SUP-PORT PROECT Estimated Costs and Financing Plan Estimated costs Local Foreign Total --------US$ million-------- Rehabilitation Works 10.5 7.0 17.5 Incremental O&M Prog.-am 18.8 1.7 20.5 Equipment and Spares 1.8 5.4 7.2 IA Development Program 0.6 0.1 0.7 Technical Assistance 1.1 0.2 1.3 Staff Training 0.3 0.1 0.4 Engineering and Administration 3.3 0.0 3.3 Total Base Costs 36.4 14.5 50.9 Physical contingencies 5.5 2.2 7.7 Price contingencies 1.2 0.4 1.6 Total Project Cost La 43.1 1A.L 60.2 Financing Plan: IBRD 27.9 17.1 45.0 Government/NIA 15.2 0 15.2 Total A3.1 17.1 60.2 La Including duties and taxes of about US$2.0 million.  6- ScheduleB Page 1 of 2 PHILIRRIEX IRRIGATION QPERATIONS SUPPORT PROJECT PROCUREM {K/ (US$ million) Not Force appli- Total Expenditure category IGB LCB account cable cost Civil works - minor - 10.3 10.3 - 20.6 restorative work and (9.2) (10.3) (19.5) equipment sheds Irrigation system - 4.9 14.5 4.9 24.3 maintenance (2.2) (6.5) (2.2) (10.9) O&M equipment, workshop 3.3 - - - 3.3 tools and hydrometric (3.0) (3.0) equipment Reconditioning O&M 1.6 2.2 0.7 - 4.5 equipment (1.5) (2.0) (0.7) (4.2) Hand tools and 0.7 - - 0.7 implements, and (0.6) (0.6) training equipment Parcellary mapping and - 0.8 0.6 - 1.4 updating ISF registers (0.8) (0.6) (1.4) IA development, train- - - 1.5 i.5 ing, studies, and O&M (1.5) (1.5) manuals, including 62 man-months local consultancy Engineering and admini- - - - 3.9 3.9 stration v/ (3.9) Total 4.9 18.9 26.0 10.4 60.2 f4.5) (14.8) fl8.1) f7.6) f45.0) A/ Includes physical and price contingencies. Figures in parentheses are amounts financed by the Bank. / Includes system operations, which are minimal in cost relative to maintenance.  -7- Schedule B Page 2 of 2 PHILIPPINES IRRIGATION OPERATIONS SUPPORT PROJECT Disbursements Amount % of expenditures Category (US$ million) to be firanced Rehabilitation Works 19.5 95% Incremental O&M Program (a) 4.3 85% over first US$5 million (b) 4.4 55% over next US$8 million (c) 3.9 30% over final US$13 million Equipment and Spares 7.8 100% of foreign exchange expenditures, 100% of ex- factory costs of locally manufactured items and 85% of expenditures for items procured locally. Technical Assistance, Staff 5.1 100% Training, IA Development, Engineering & Admin. Total 45,0 Estimated IBRD Disbursement: Bank Fiscal Year 1989 1990 1991 1992 ---------US$ million--------- Annual 16.4 18.0 10.3 0.3 Cumulative 16.4 34.4 44.7 45.0  -8- Schedule C PHILIPPINES IRRIGATION OPERATIONS SUPPORT PROJECT Timetable of Key Processing Events (a) Time taken to prepare 3 years (b) Prepared by National Irrigation Administration (c) First IBRD mission October 1984 (d) Appraisal mission departure October 1987 (e) Negotiations April 11, 1988 (f) Planned date of effectiveness September 1, 1988 (g) List of relevant PPARs Loan/Credit No. Project PPAR Date Loan 637-PH Upper Pampanga River Irrigation June 1980 Loan 984-PH Aurora Penaranda Irrigation June 1983 Loan 1080-PH Tarlac Irrigation Systems Improvement December 1985 Loan 1367-PH Jalaur Irrigation December 1985  9 g Schedule D Page 1 of 2 _THE STATUS OF BANK GROUP OPERATIONS IN THE PHILIPPINES A. STATEMENT OF MANX LOANS AND IDA CREDITS la As of March 31, 1988 Loan or credit Amount (less cancellations) number FY Borrower Purpose Bank IDA Undisbursed Seventy-one loans and five credits fully disbursed 2,681.51 72.96 - 1710 1979 Rep. of the Philippines Provincial Water Supply II 7.00 - 4.26 923 1979 Rep. of the Philippines Population II - 34.40 5.92 1786 1980 Rep. of the Philippines Fisheries Training (Educ. VI) 37.25/b - 5.26 1809 1980 Rep. of the Philippines Medium-Scale Irrigation 37.00 - 14.03 1814 1980 Rep. of the Philippines Manila Sewerage & Sanitation 48.61 - 6.65 1821 1980 Rep. of the Philippines Third Urban 71.00 - 14.23 1860 1980 Rep. of the Philippines Rural Roads Improvement 60.27 - 18.24 1890 1981 Rep. of the Philippines Watershed hanagement 35.60 - 7.89 1984 1981 Central Bank of the Phil. Industrial Fi*ance (Apex) 45.65 - .45 2030 1981 Rep. of the Philippines Elementary Educ. Sector Loan 80.50 - 16.92 2040 1982 Rep. of the Philippines Agric. Support Services 22.00 - 13.14 2127 1982 Rep. of the Philippines Textile Sector Restructure 16.70 - 2.05 2156 1982 Rep. of the Philippines National Fisheries Development 2.10 - 0.83 2169 1982 Rep. of the Philippines SM III 67.45 - 5.17 2173 1982 Rep. of the Philippines Communal Irrigation 71.10 - 48.47 2200 1983 Rep. of the Philippines Education VIII 24.40 - 10.05 2201 1983 Republic of Phil. & PNOC Petroleum Exploration Promtion 8.00 - 0.32 2202 1983 Republic of Phil. & PROC Petroleum Exploration Promotion 8.44 - 1.20 2203 1983 Republic of Phil. & PNOC Geothermal Exploration 8.23 - 0.29 2206 1983 Rep. of the Philippitas Water Supply and Sanitation 29.00 - 9.90 2257 1983 Rep. of the Philippines Regional Cities Development 47.00 - 31.48 2360 1984 Rep. of the Philippines Central Visayas Regional Development 25.60 - 18.77 2418 1984 Rep. of the Philippines Highways V 102.00 - 86.96 2435 1984 Rep. of the Philippines'w. Municipal Development 40.00 - 33.26 2495 1985 Rep. of the Philippines Telecom. Tech. Assistance 4.00 - 1.89 2570 1985 Central Bank of the Phil. Agricultural Credit 100.00 - 49.38 2676 1986 Rep. of the Philippines Manila Water Distribution 48.00 - 36.57 2716 1986 Rep. of the Philippines Rural Roads II 82.00 - 76.62 2787 1987 Rep. of the Phillppines Eco, tc Recovery Loan 300.00 - 100.00 2788 1987 Rep. of the Philippines Ecouomic Recovery Loan TA 5.00 - 4.00 2823 1987 Rep. of the Philippines Provincial Ports 32.00 - 28.05 Total 4.147.41 107.36 652.25 of which has been repaid 940.52 l1.63 Total now outstanding 3,206.89 105.73 Amount sold 31.94 Of which has been repaid (third parties) 30.78 - Total now held by Bank and IDA (prior to exchange rate adjustments) 3.174.95 105.73 Total undisbursed 646.33 5.92 652.25 /a The status of the projects listed in Part A is described in a separate report on all Bank/IDA-financed projects in execution, which is updated twice yearly and circulated to the Executive Directors on April 30 and October 31. /b Includes S7.45 million NORAD funds.  Schedule D Page 2 of 2 B. STATEMENT OF IFC INVESTMENTS (As ot March 31, 1988) Investment Fiscal Loan Equity Total number year Obligor Type of business - (US$ million) - 57/233 1963/1973 Private Dev. Corp. of the Philippines Development finance 15.0 4.4 19.4 116 1967 Manila Electric Company Utilities 8.0 - 8.0 116 1967 Meralco Securities Corporation Utilities - 4.0 4.0 157/899/1091 1970 Phil. Long Distance Telephone Co. Utilities 57.7 0.8 58.5 158/218 1970/1972 Mariwasa Manufacturing, Inc. Cement & constr. mat. 0.8 0.4 1.2 165 1970 Paper Industries Corp. of the Phil. Pulp & paper products - 2.2 2.2 188/369 1971/1977 Philippine Petroleum Corporation Chemicals & petrochem. 6.2 2.1 8.3 207 1972 Narinduque Mining & Industrial Corp. Mining 15.0 - 15.0 241 1973 Victorias Chemical Corporation Chemicals & petrochem. 1.9 0.3 2.2 257 1974 Filipinas Synthetic Fiber Corp. Textiles & fibers 1.5 - 1.5 272/464 1974/1979 Maria Christina Chem. Ind. Inc. Iron & steel 1.6 0.6 2.2 288 1974 Republic Flour Mills Corp. (RFM) Food & food processing 1.2 - 1.2 300 1975 Philippine Polyamide Industrial Corp. Textiles & fiber 7.0 - 7.0 329 1976/1980 Philagro Edible Oils, Inc. Coconut oil & copra 2.6 0.2 2.8 379 1977 Acoje Mining Company, Inc. Mining 2.5 1.2 3.7 374 1977 Sarmiento Industries, Inc. Plywood 3.5 - 3.5 423 1978 Cebu Shipyard & Eng. Works, Inc. Ship repairing 2.1 - 2.1 469 1979 General Milling Corporation Food & food processing 4.0 1.1 5.1 481/665 1980 PISO Leasing Corp. (All Asia capital) Money & capital market 11.0 0.2 11.2 480 1980 Ventures in Industry & Business Money & capital market - 0.3 0.3 Enterprises, Inc. 519 1980 Consolidated Industrial Gases, Inc. Chemicals & petrochem. 4.5 - 4.5 582 1981 Loans to Seven Corp. for SMSE Money & capital market 18.5 0.6 19.1 553 1981 Phil. Assoc. Smelting & Refin. Corp. Mining - 5.0 5.0 572 1981 Davao Union Cement Corp. Cement & constr. mat. 16.0 - 16.0 627 1982 NDC-Guthrie Plantations Palm oil 11.0 - 11.0 841 1986 Pure Foods Food & food processing - 1.4 1.4 946 1988 BPI Agricultural Development Bank Development finance - 1.9 1.9 Total Gross Commitments 191.6 26.7 218.3 Less sold, acquired by others, repaid or cancelled 111.6 16.4 128.0 Total Commitments Now Held by IFC 80.0 10.3 90.3 Total Undisbursed (including participants' portion) 44.0 0.9 44.9  010' 120l t2o2 241 126_ NATIONAL IRRIGATION SYSTEMS REGION I I LeOSom.T44 PHILIPPINES AsMcsesswrnrxlN IRRIGATION OPERATIONS SUPPORT PROJECT REGIONAL LOCATION OF NATIONAL IRRIGATION SYSTEMS 0055 ILOLOCIIOLN 20'~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~2' oi .. a0044-0 r 0 Notioeolf migotion Systems iI 0051 4000JollS Roilroods I REGION II Roods 410*105O - Rrgion Boundaries 014006561,4s oIntmwioronl Boundarie oll r f r.F REGtON Ill o '104A10 lA ILOMETERS r1 bOL Ico 4'^ REGION II/ s. soLenvlu soE 1 i; t3Id,~t /1 5 650 SU-OLO t . '., ;3 irowx T2~~~~~~~~~~~~~~Ak iCb |r ouebf 0400 A"T j REt310'N v 14 r ' - A 10.