Philippines - Agricultural Education Project

RESTRICTED FILE CO1PY Report No. P-40 1 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF THE PHILIPPINES FOR THE UNIVERSITY OF THE PHILIPPINES' COLLEGE OF AGRICULTURE EDUCATION PROJECT October 2, 1964  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVEOPMENT PiPORT AND RECOMI>BiDATIONS OF THE PRESIDENT TO THIE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF THE PHILIPPINES FOR THE UNIIVERSITY OF THE PHILIPPIINES' COLLEGE OF AGRICULTURE EDUCATION PROJECT 1. I submit the following report and recommendations on a proposed loan in various currencies equivalent to $6 million to the Government of the Philippines for the University of the Philippines' College of Agri- culture (UPCA) Five-Year Development Program. PART I - HISTORICAL 2. In January 1963 the Philippine Govermnent applied for an IDA credit to help finance the construction and equipment required for the UPCA Five-Year Devalopment Program. The Government was informed that because IDA funds were short and the Philippines was capable of servicing additional foreign debt, the Bank, rather than IDA, would be the appropriate source. The Bank would, however, be prepared to consider making a loan for the project with a term somewhat longer than was customary. It was agreed to proceed on this basis. 3. The project was appraised by the Bank in July/August 1963 and further discussions were held in Manila in February 1964. Negotiations for the proposed loan were held in Washington in August 1964. The Govern- ment was represented by Dr. Sacay, Head of the Agricultural Division of the Program Implementation Agency (PIA), and Mr. Zamora of the legal staff of PIA; the University of the Philippines by Dr. Umali, Vice President of the University of the Philippines and Dean of the UPCA. 4. If approved this would be the Bank's seventh loan in the Philippines and would increase the total amount lent by the Bank in the country to about $106 million net of cancellations. Loans previously made are:-  -2- Original Principal Year BorrowTer Purpose Armount 1957 National Power Corporation Electric Power (Binga) $ 21,000,CCO 1961 Republic of the Philippines Dredging 8,500,000 1961 National Power Corporation Electric Power (Angat) 3h,0C0,C00 1962 National Power Corporation Electric Power (Maria Cristina) 3,700,000 1963 Philippine National Bank Relending to the Private Development Corporation of the Philippines ( PDCP) 15,000,000 196L Nlational Waterworks and Sewerage Authority Manila Wiater Supply 20,200,000 Original principal amount $102,400,000 of which has been cancelled 2,600,000 Total net of cancellations C)9,800,000 of which has been repaid 2,300,000 Total now outstanding 97,500,000 Amount sold 3 5,200,coo of which h2s been repaid 1,800,0cc 3,400,000 Net amount held by Bank 94,100,000 Undisbursed balance as of August 31, 1964 `61,100,000 5. As reported when the loan to the National Waterworks and Sewerage Authority was considered by the Executive Directors, disbursement of the dredge loan has been slow. The present construction schedule is expected to be maintained. Also as reported the construction of the Angat works is about 15 months behind schedule. Houever, the project is now proceeding satisfactorily. PART II - DESCRIPTIONi' COF TE PROPOSED LOANT 6. Borro!,;ar: Republic of the Philippines Amount: $6 million Amortization: By semi-annual payments which together with interest will make level debt service payments throughout the life of the loan. The first amortization payment of $80,0cO.00 is due January 1, 1975 and the final pay- ment of ;3240,0CO.C0 is due January 1, 1995. Intarest Rate: 5 1/2% per annum Commitrment Charge: 3/8 of 1% per annum Purpose: Construction and equipment required for the UPCA Five-Year Development Program.  -3- PADT III - THLN PROJECT 7. The project is described in the attached report "Appraisal of the Development Program of the University of the Philippines' College of Agri- culture at Los Banos", No. TO-439a (No. 1). 8. About two-thirds of the population of the Philippines live in rural areas and their livelihood is directly or indirectly dependent upon the country's agricultural output. HIowever, except for export crops, farm in- comes are substantially lower than the average for the Philippines. The principal reason is the generally low level of crop yields resulting from the poor quality of Government agricultural services and the disincentives associated with a system of share tenancy. Farmers' needs for better extension services, production supports and research have long been recog- nized in the Philippines, but until 1963 effective steps to improve the situation had not been taken. The present Government has embarked on a major land reform program designed to abolish share tenancy and at the same time has begun to reorganize its agricultural services, giving priority to the areas designated for land reform. Apart from its direct effects on agriculture, this reorganization is expected also to have in- direct benefits. It will raise the productivity of other investments in the agricultural sector and thereby encourage the development of irriga- tion schemes as well as the opening up of new lands for plantations and cattle ranching. 9. In support of these objectives the Five-Year Development Program of the UPCA is aimed at improving the quality of the UPCA's graduates who provide more than 80'o of the key technical staff of the Government agri- cultural services. The essential features of the Program are: upgrading the academic qualifications of the teaching staff through exchange programs with overseas institutions, strengthening the program of undergraduate and especially graduate instruction, expanding the research program with emphasis on applied research related to the production of foodstuffs,and the improve- ment of faculty salaries and amenities to attract and hold highly qualified people in academic life. In addition, the UPCA enrollment will be increased from 2,000 to 2,500. The largest proportionate increase will occur in the graduate student body. 10. The project to be financed by the proposed Bank loan is the con- struction of the physical facilities and the procurement of the necessary equipment to carry out the Program. Together with site facilities, architects and engineering fees and administration costs the total cost of this part of the Program is estimated at 47 million pesos of uhich the loan would finance about half. This estimate is based on preliminary drawings which were used to establish satisfactory space utilization ratios to ensure that the facilities were adequately suited to the academic curriculum and that unit costs would be reasonable. The Government has already appropriated 21 million pesos for the project and has undertaken to provide the University of the Philippines when needed with additional funds necessary to complete the project. The Government will provide the University of the Philippines with the funds to cover the total cost of the project, including the pro- ceeds of the Bank loan, as a grant.  11. The Gov2rmJint has also undertalken to provide the University of the Philippines with funds required for the on3ration and maintenance of the UPCA on the basis of the Program to the extent that this requirement should not be covered by the University of the Philippines' and the UPCA's own resources. The operating expenses are expected to increase from about threa and a half million pesos in the fiscal year 1963/64 to about seven million pesos in 1970/71. 12. By special legislation the University of the Philippines has been given exemption from the payment of all import duties on all supplies and materials imported for use in the Program. Contracts for civil works and procurement of equipment will be awarded without any restrictions or preferences. All procurement will be on the basis of international competitive bidding and in conformity with the "Guidelines Relating to Procurement under Bank Loans and IDA Credits". As far as practicable con- tracts will be prepared in amounts sufficient to attract foreian bidding. It is probable, however, that identifiable foreign exchange outlays on the Project will be relatively small and that the greater part of the loan will be disbursed against expenditures in pesos. 13. The UPCA is establishing a Technical and Administrative Unit to supervise the overall implementation of the Project and has already selected the Project Mvianager. Negotiations are now underway with the architects who have been selected with the Bankts agreement to design the major buildings. Including detailed desi-n iwork, the project is expected to take 5 1/2 years to construct with completion scheduled for 1970. PART IV - THE ECONOMY L1. The economic background against which the proposed loan should be considered was described in detail when the proposed loan to the National Wateriyorks and Sewerage Authority was considered in July 1964. The "I'Memorandum on the Economic Situation" (R64-86),dated July 13, 1964, which was part of the documents then submitted, brought up to date the information contained in the report "Current Economic Position and Prospects of the Philippines" (R64-2), dated January 6, 1964. At that time, it appeared that the Philippine authorities had brought under control the upsurge of monetary expan-;ion that had reached its peak around the end of 1963 and had led in- ternally to rising prices and externally to losses of foreign exchange reserves. 15. Developments during the last few months confirm that financial stability has been reestablished. Money supply has remained stable at the level of June 1964 when it was 10% below the peak of December 1963. Efforts of the Administration directed at keeping Government outlays below appropriation ceilings have begun to make themselves felt. Net credit out- standing to the public sector declined. This decline made it possible to permit a moderate increase in credit to the private sector where restrictions on credit threatened severely to dampen economic activity, while at the same time total net domestic credit remained stable. As regards external finances, net foreign exchange reserves have continued to rise since early June and'now  are about .$25 million higher than they were at their lowest in April. In mid-September 1964 they stood nearly at $100 million, roughly equivalent to two months' imports. This increase in reserves reflects in part the continuing high level of export earnings. However, its main cause lies in reduced payments which probably result largely from renewed confidence in the stability of the exchange rate. 16. It is estimated that in order to sustain a rate of growth of gross national product around 4-5% a year, the Philippines will need to supplement its own resources for domestic investment by a net capital inflow from abroad around $75 million annually over the next several years. Since during this period service on existing external debt and additions to the country's ex- chang,e reserves will require about $75 million a year, the annual gross in- flow of capital will have to be about $150 million in order to make available for investment roughly $75 million a year. A large part of the needed gross inflow is likely to be provided by means other than borrowing abroad, i.e. Japanese reparations, foreign grants, war damage payments, and, above all, net private capital inflow. The remainder - perhaps upwards of Yj50 million - will probably have to come annually from drawings on foreign loans. Per- haps p20-25 million can be expected from drawings over the next few years on the undisbursed portion of loans alreac5y committed. New financing would have to be fouid, therefore, for 425-30 million a year. External public debt contracted, including debt undisbursed, presently amounts to about ML406 million, requiring maximum annual debt service (1968) of (h3 million. In addition, there exists from the time prior to the abolition of exchange restrictions in 1962, private external debt with an exchange guarantee, amounting to $164t million at the end of 1963. If this debt is included, total service on present debt amounts at its peak (1967) to about $74 million, roughly equivalent to 10% of exDort income. This is not a large portion are,because service payments on presently contracted debt will decline towards the latter 1960's and export prospects are favorable, there is scope for additional borrowing on conventional terms. At the moment, it is not certain whether the substantial inflow of capital required by the Philippirnes will be forthcoming and the terms on which loans can be obtained are not known. In these circumstances, a Bank loan having a grace period of 10 years and a life of 30 years seems appropriate. PART V - LEGAL INS Th,LLPK`T A11D LEGAL AUTHORITY 17. Attached are drafts of the following documents: (a) Loan Agreement between the Bank and the Republic of the Philippines (No. 2) (b) Project Agreement between the Bank and the University of the Philippines (No. 3) 18. The draft Loan Agreement conformis generally to the pattern of loan agreements with member governments. 19. Attached is the report of the committee provided for in Article III Section 4(iii) of the Bank's Articles of Agreement (No. 4).  - 6 - PART VI - CO14PLIU.NCE `.ITH THE ARTICLES OF AGREENINT 20. I am satisfied that the proposed loan complies with the Articles of Agreement of the Bank. PART VIII - RECOPiENDATION 21. I recommend that the Bank grant a loan to the Republic of the Philippines in various currencies equivalent to $6 million for a term of 30 years including a grace period of ten years at a rate of interest of 5 1/2%, and on such terms and conditions as are specified in the Loan Agreement attached and that the Executive Directors adopt a resolution to that effect in the form attached (No. 5). Washington, D.C. George D. Woods October 2, 1964 President