Philippines : tree crops for rural development - issues and strategy options (Vol. 1 of 2) : Main report

Report No. 19281 PH Philippines Tree Crops For Rural Development Issues and Strategy Volume 1-Main Report June 22, 1999 Rural Development and Natural Resources Sector Unit East Asia and Pacific Region u Docuet of the WrdBankb  CURRENCY EQUIVALENTS (as of December, 1998) Currency Unit = Pesos (P) US$1.00 = P 40.0 FISCAL YEAR January I - December 31 ABBREVIATIONS AND ACRONYMS A&D = Alienable and Disposable AFMA = Agriculture and Fisheries Modernization Aact ARB = Agrarian Reform Beneficiaries ARC = Agrarian Reform Communities CARL = Comprehensive Agrarian Reform Law CARP = Comprehensive Agrarian Reform Program CEF = Competitiveness Enhancement Fund CocoFed = Coconut Federation of the Philippines CPO Crude Palm Oil DA = Department of Agriculture DAR Department of Agrarian Reform DENR = Department of Environment and Natural Resources DOST Department of Science and Technology DPS = Direct Payment Scheme DTI = Department of Trade and Industry FELCRA = Federal Land Consolidation and Rehabilitation Authority (Malaysia) FELDA Federal Land Development Authority (Malaysia) FFB = Fresh Fruit Bunches HVCCP = High Value Commercial Crops Program ISF Integrated Social Forestry LBP = Land Bank of the Philippines LGU = Local Government Unit LOI = Letter of Instruction MTPDP = Medium Term Philippine Development Plan NES Nucleus Estate Schemes ODA Official Development Assistance ORRAF = Office of the Rubber Replanting Aid Fund (Thailand) PD Presidential Decree PTF = Government-owned Plantation (Indonesia) RA = Republic Act RCF = Rural Countryside Fund SAFDZ = Strategic Agricultural and Fisheries Development Zones SCU = State Colleges and Universities VLT = Voluntary Land Transfer VOS = Voluntary-Offer-to-Sell Vice President :Jean-Michael Severino, EAP Country Director :Vinay Bhargava, EACPF Sector Manager :Geoffrey Fox, EASRD Task Team Leader :Richard Anson, EACPF  PHILIPPINES TREE CROPS FOR RURAL DEVELOPMENT: ISSUES AND STRATEGY CONTENTS EXECUTIVE SUMMARY i L INTRODUCTION 1 A. Policy/Strategy Context 1 B. Study Objectives and Rationale 2 II. BACKGROUND 4 A. Tree Crop Production in the Philippines 4 Importance within Agricultural Sector and Linkages with Other Sectors 4 Tree Crops as an Instrument to Fight Rural Poverty and Promote Environmental Conservation 5 Classification of Tree Crop Production by Tree Crop Farm Types 7 B. Production, Processing, Marketing, Trade and Consumption of Main Tree Crops 10 C. International Market Prices and Prospects 14 D. Support Services and Institutional Roles - Public and Private Sectors 15 E. Government Policies and Programs Affecting Tree Crop Development 17 F. East Asia Experience in Tree Crop Development 21 II. POTENTIAL FOR AND KEY CONSTRAINTS TO TREE CROP DEVELOPMENT 26 A. Agronomic Potential and Suitability for Different Tree Crops 26 B. Market Scope for Expansion of Tree Crops 30 C. Current and Potential Profitability of Tree crops (Financial & Economic) 32 D. Constraints to Tree Crop Development 33 Lack of Access to Finance 33 Problems of Access to Land and Unclear Property Rights 36 Output Marketing Constraints 37 Technology Weaknesses 38 Problems Associated with Critical Inputs 38  Transportation and other Infrastructure 39 Other Constraints 39 E. Summary Review of Alternative Investment/Management Systems 39 IV. PROPOSEDSTRATEGIES,IMPLICATIONSANDACTIONPLAN 42 A. Assessment of Broad Strategy Options 42 B. Implications and Recommendations 48 Strengthening Institutional Roles and Capacities 51 Investment Scenarios 53 Financing Arrangements and Mechanisms 56 Price and Market Implications 58 Poverty Reduction, Gender and Environmental Implications 59 C. Proposed Tree Crop Development Action Plan 61 Actions Related to Ongoing Activities: Short-term Actions 61 Proposed New Activities and Initiatives 68 Actions Requiring Legislation 69 Actions Requiring Constitutional Review/Amendment 70 D. Proposed Framework for Commercial Crops and Diversification Program 70 E. Suggested Next Steps 71 Text Tables: Table 2.1 Tree Crops in Agric. GDP 4 Table 2.2 Poverty Incidence in Selected Asian Countries 5 Table 2.3 Average and Best Farm Yields of Tree Crop 6 Table 2.4 Present Smallholder Family Incomes by Crop 6 Table 2.5 Percent Tree Crop Farms and Tree Stocks in Each Size Category 8 Table 2.6 Classification of Tree Crop Farm Types 9 Table 3.1 Present Areas Under Major Tree Crops 27 Table 3.2 Present and Potential (Future) Areas and Yields of Major Tree Crops 27 Table 3.3 Summary of Coconut Production Statistics in 28 Highly Suitable Provinces 28 Table 3.4 Summary of Financial and Economic Characteristics of Different Crops in Favorable Areas, under Good Management Conditions 32 Table 4.1 Policy Linkages with Tree Crop Farm Types 46 Table 4.2 Summary of Indicative New Planting Investment Needed Under Three Tree Crop Development Options (1999-2008, constant prices) 55 Table 4.3- Proposed Tree Crop Development Investment Cost-Sharing Options 58 Table 4.4 Present and Potential Smallholder Family Income by Crop 60  Annexes Annex 1 Overview of Tree Crop Production & Marketing Annex 2 Classification of Different Tree Crop Farm Types Annex 3 Overview of Tree Crop Support Services, Institutional Roles & Performance Annex 4 Government Policies Affecting Tree Crop Development Annex 5 Philippine Experience/Lessons Learned, Key GOP Programs, and Budgetary Allocations in Tree Crop Development I. Overview II. Summary of Lessons from Case Studies III. Overview of Past and Current Tree Crop Development Programs IV. GOP Budgetary Allocations for Tree Crop Research Development Annex 6 International Price & Market Prospects Annex 7 Financial Impact of Tree Crops on Smallholders Annex 8 Current Financing of Tree Crop Planting and Options for the Future Annex 9 Economic Returns from Tree Crop Investment Annex 10 Alternative Investment and Management System for Tree Crop Annex 11 Tree Crop Specific Strategy Frameworks * Overall Summary Table (by main crop) * Indicative Frameworks for the Main Tree Crop Strategies (includes 9 Attachments: coconut; coffee; rubber; oil palm; mango; banana; cacao; other fiuits; timber trees) Bibliography Map IBRD 27408R1  ACKNOWIEDGEMENTS This report is based on the findings of a World Bank (WB) mission in October, 1998. The study team comprised of Messrs. Richard Anson (Task Team Leader & Sr. Rural Development. Specialist), Paul Harrison (Agricultural Economist/Financial Analyst), Rolando T. Dy (Agribusiness Specialist), Ricardo Gloria (Institutional Development Specialist), Don Larson (Sr. Economist, WB) Victor Gross (Tree Crop Specialist), and Ms. Florence Mojica (Junior Agribusiness Specialist). The study Steering Committee (comprised of experts from public and private sectors), and the subsequently formed Technical Working Group (TWG, chaired by Undersectary D. Panganiban from DA) and supporting subgroups (for Commercial Crops and Diversification Program) also provided valuable inputs and collaboration, starting from the initial mission. Valuable inputs and feedback on the various drafts were provided through three consultation meetings convened with various stakeholders. The final review meeting with GOP/private sector was held on June 8, 1999, and chaired by Honorable E. Angara, Secretary for Agriculture. Peer reviewers from within and outside the Bank provided valuable inputs/guidance at key stages of the report: P. Boyer (EASRD); D. Lister (MNSRE); D. Meadows (external); and C. Shearing (external). M. Bale, Sector Leader for EASRD, also provided valuable overall guidance during the preparation and review process. Assistance in document processing was provided by Brenda Phillips (EASRD/HQ), Marjorie Espiritu and Araceli Tria (RMP).  Philippines at a glance 9/30J98 East Lower- POVERTY and SOCIAL Asia & middle- Phipphes PacifIc income Development diamond* 1997-. Population, mid-year (mifions) 73.4 1,753 2.285 Life expectancy GNP per capita (Atlas metod4 USAt 1,220 970 1,230 GNP (Atlas meth04 US$ billons) 89.6 1,707 2,818 Average annul growth, 91- .97 Population (5) 2.S 1.3 1.2 Labor forme(56 27 1.4 1.3 GNP Gro per pnmary Most recnt estimate (latest year avaNlable 19914,7) capita enrollment Poverty ( of population beow national poety e) 54 Urban population ( oftotapopulaion) 56 32 42 Life expectancy at t (ea,s) 66 69 69 Infant mortality toer 1, OOlive births). 36 38 36 Child malnutiition (% oftchidren under 5) 30 1 ,, Access to safe water Access to.safe water (% otpopulation) 8S 84 84 Illiteracy ([ opopuDation age 15+) 5 17 19 Grossprimaryenroment (5ofschool-aepopulation) . 11 -11 t11 Philippines Mabt .. 11B 116 Lower-middle-income group Feale -.. 116 113 - - KEY ECONOMIC RATIOS and LONG-TERM TRENDS: '1976 198 1996 1997 Economic ratlos GOP (US$ bUwns) 17.2 29.8 82.8 82.2 Gross domestic lnvestment1GDP 32.9 10.0 24.0 24.8 Trade Expols of goods and services/GDP 19.3 26.3 40.5 49.0 Grossdonesticsavings/GDP 26.9 19.9 16.2 14.5 Grossnalional savings/GVP 27.7 19.3 19.3 i18.8 Curerettaccount balancetGDP -6.4 3.2 -4.8 5.2 Domestic Ivsmn Interest paymentslGDP 1.0 '3.8 21 2.3 SIngs t n Total debtGDP 35.11 94.5 49.7 55.5 Total de sevIce/exports, 16.9 33.7 14.4 9.1 Present vatue of debtGDP .. .. 48.6 Present value of deWexports 96.3 Indebtedness 1976486 198797 1996 1997 199842 (aveage annua growth) GDP 1.6 3.2 5.7 5.3 .philippines GNPpercapiti .0.8 1.4 4.5 3.3 Lower-middle-income group Exportsof goods and services 6.0 9.5 15.4 17.5 ,. STRUCTURE of the ECONOMY 1976 1986 1996 1997 Growth rates of output and Investment (%) (56 of GDP) 20 Agriculture 29.3 23.9 20.6 18.7 10 Industry 35.7 34.6 32.1 32.2 Manufacturing 25.4 24.6 22.8 22.3 9 Services 35.1 41.5 47.3 49.2 2. 9 93 9 .20 Private consumption 62.3 72.1 72.8 72.5 430 General govemmentconsumption 10.8 8.0 11.9 13.0 GD1 e*GDP Imports of goods and services 25.2 22.4 49.3 59.4 1976-86 1987-97 1996 1997 Growth rates of exports and Imports (%) (average annual growth) Agriculture 1.4 1.8 3.0 3.7 25 Industry 0.7 3.1 6.3 6.0 20 Manufacturing 0.5 3.0 5.6 4.2 15 Services 3.2 3.9 6.5 5.4 10 Private consumption 2.4 3.7 5.3 3.7 General govemment consumption -0.3 3.9 5.2 0.6 o Gross domestic investment -3.2 6.3 15.6 9.2 .5 92 93 94 95 9e 97 Imports of goods and services 2.1 11.3 16.7 14.4 -Exports -e Imports Gross natonal product 1.5 3.8 6.9 5.5 Note: 1997 data are preliminary estmates. The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete.  Philippines PRICES and GOVERNMENT FINANCE Domesfic10 prices 1976 1986 1996 1997 Inflation (%) (X change) 20 Consumer prices 9.2 0.8 8.4 5.1 '5 Implicit GDP deflator 8.3 3.0 7.8 6.0 1o Govenment flnance ( of GDP, includes cunent grants) 0 I I I Current revenue .. 13.0 18.9 92 93 94 9s as 97 Current budget balance .. 1.4 - GDP deflator t CPI Overall surplus/defcit .. -5.0 0.3 TRADE 1976 1986 1996 1997 Export and Import levels (USS millions) (US$ Millions) Total exports (fob) .. 4,842 20,543 25,228 40,000 Coconut oil .. 333 571 673 Sugar .. 103 136 83 30000 Manufactures .. 2,672 17,106 21,488 Total imports (cit) .. 5,044 31,885 36,355 20,000 - Food 193 1,578 1,435 10,000 Fuel and energ . 869 3,008 3,074 Capital goods .. 839 10,472 14,369 o 91 92 93 94 95 00 97 Export price index (1995-100) .. 76 100 .. lmportpriceindex(1995=100) .. 61 101 *- mExports Imports Terms of trade (1995=100) - 124 99 .._| BALANCE of PAYMENTS (US$ millions) 1976 1986 1996 1997 Current account balance to GDP ratio %) Exports of goods and servioes 3,262 7,702 27,627 S4,359 0; t_ _ - Imports of goods and services 4,381 5,868 41,371 50,477 -' Resource balance -1,119 1,834 -13,744 -16,118 -* Net income -253 -1,321 9,202 10,735 Net current transfers 268 441 589 1,080 -3 Current account balance -1,105 954 -3,953 -4,303 -4 Financing items (net) 1,051 184 8,060 7,666 -. Changes in net reserves 54 -1,138 -4,107 -3,363 4- Memo: Reserves inciuding gold (US$ millions) .. .. 11,745 8,768 Conversion rate (DEC, locakUSS) 7.4 20.4 26.2 29.5 EXTERNAL DEBT and RESOURCE FLOWS 1976 1986 1996 1997 (US$ millions) Composton of total debt, 1997 (US$ millions) Total debt outstanding and disbursed 6,039 28,204 41,214 45,603 IBRD 316 3,017 4,666 4,179 IDA 27 92 193 195 A: 4,179 Total debt service 571 2,961 5,778 4,463 G:11,824 B:195 IBRD 35 406 766 709 C: 855 IDA 0 1 3 3 D: 2,947 Composition of net resource flows Official grants 61 401 246 280 E:_16 Official creditors 212 198 -310 107 Private creditors 883 294 1,859 3,022 Foreign direct investment 132 127 1,408 1,253 F: 14,439 Porfolio equity 0 0 1,333 0 World Bank program Commiments 226 151 528 60 A - IBRD E - Bilateral Disbursements 102 197 457 305 B - IDA D - Other multilateral F - Prvate Principal repayments 14 170 426 409 C - IF G - Short-term Netflows 88 27 31 -104 Interest payments 20 238 343 303 Net transfers 68 -210 -312 -408 Development Economics 9/30/98  PHILIPPINES TREE CROPS FOR RURAL DEVELOPMENT: ISSUES AND STRATEGY EXECUTIVE SUMMARY 1. Introduction. The performance of the Philippines' agriculture sector over the past two decades has been disappointing: low growth rates (less than 2.0% per annum, which is below the population growth rate); limited levels of public and private investments; and deteriorating natural resources. The management and institutional capacity of the sector has been weak because of fragmentation and deficient co-ordination. The medium-term Philippines development plan (MTPDP) is currently being finalized by the Government of the Philippines (GOP), and is focusing on strategies and programs which will reduce pervasive poverty (of which nearly 70% of the poor are located in rural areas). In parallel, the World Bank recently finalized it's Country Assistance Strategy (CAS), which aims to support the implementation of the MTPDP. The rural component of the CAS is focusing on (a) deepening and implementing key rural development policy reforms; (b) enhancing investment levels and impacts in the rural sector; (c) promoting sustainable natural resource management; and (d) strengthening of the institutional roles, capacity and co-ordination of the agencies concerned. 2. This study has the overall objective of assisting GOP to formulate sound operational policies and strategies which will further develop its potential in tree crop production, marketing and processing, within a rural development and farming systems framework. It focuses on those strategies which will expand some of the few options of smallholders for sustainable increases in incomes and employment, as well as promoting crop diversification. There are 4 main reasons for giving special attention to tree crops: (a) existing policies, direct and indirect, are biased against treecrops; (b) there are some serious governance issues in the tree crop sector (especially involving the reported US$2.5 Billion in "frozen" coconut levy funds; (c) for rural areas and smallholders in particular, tree crops are important and traditional sources of income and employment, represent one of the largest income generating assets (with the current stock of trees having involved investments of about US$3.6 Billion equivalent, or about Ph. P 140 Billion), with annual re-investment requirements to maintain this stock cost about $150 Million, and generate over US$ 1 Billion in annual foreign exchange; and (d) tree crops provide a low- cost alternative to helping to address deforestation problems. A successful tree crop strategy would support two of the Bank's main objectives in the Philippines: (a) poverty alleviation through raising smallholder incomes and employment, and (b) promotion of the private sector through creating viable opportunities to both invest and increase capacity utilization of existing processing and marketing facilities. Accordingly, this study does not purport to "pick winners", but rather to assess the potential for and strategies for expanding tree crop options as part of a sustainable and pro-poverty rural development strategy. Government proposes to promote diversification, but there are few programs to achieve this important objective. Why not build on the unrealized potential role of tree crops, which many experts cite as the Philippines' "forgotten child" of agriculture.  - ii - :3. Production and Marketing. Tree crop production and processing plays an important role in the agrarian structure and is the major source of incomes for nearly 5 million rural households. About 45% of the total agricultural area is devoted to tree crops and about 65% of rural households are involved in their production, either commercial or backyard. There is a strong linkage between tree crop production and downstream processing and export; tree crop exports earned over US$1.2 billion in 1997 (about 15% of total exports). Most tree crop farms are relatively small. Only in the case of rubber and banana is a significant proportion of the tree crop stand on farms of over 10 hectares. 4. In order to examine more closely the tree crop sector and the impact of policy changes upon it, tree crop producers have been classified into nine broad types, according to the dominant cropping system. These types, together with the estimated tree crop areas on each farm type are: (a). Coconut - high potential (1.75 million ha, & 12.4% of rural households); (b) Coconut - medium potential (0.8 million ha, & 6.2%); (c) Rubber - smallholder (110,000 ha, 1%); (d) Rubber - estate (35,000 ha, 0.2%); (e) Coffee (70,000 ha, 1.0%); (f) Oil Palm - commercial (15,000 ha, nil); (g) Fruit Trees - commercial (70,000 ha, 0.8%); (h) Mixed tree systems (1.6 Inillion ha, 27.2%); (i) Backyard - less than 0.1 hectares of tree crops per household (80,000 ha, & 22.1%). 5. Coconut is the dominant tree crop in all respects. Coconut production has stagnated over the past two decades at about 2.5 million tons; copra equivalent and the processing industry is operating well below its capacity. The Philippines produces about 60,000 tons of coffee per year. While in the past it was a significant exporter, it is now more or less in supply/demand balance, with the domestic market. Rubber production is about 65,000 tons per year. Yield is low, largely as a result of old tree stocks. Some 30% - 40% of production is exported. Oil palm is presently a minor crop with about 15,000 hectares. The country has been a net importer of palm oil and its products since 1992. 6. A wide range of fruit crops are grown, the most important being banana, whose production is estimated at about 3.5 million tons per year. Most of the banana area is for the local market, although there is a small but highly successful enclave production of Cavendish bananas, resulting in exports of over 1.1 million tons for export in 1997. Mango production was estimated at 670,000 tons in 1997. There has been considerable new plantings of mango in the past decade, and as a result, further substantial production increases are anticipated over the next few years. 7. International Price Prospects. For coconuts and palm oil, projections by experts (over the next 10 years) expect continued growth in the volume of trade, but a price downturn in real terms. Prospects for rubber prices are for an upturn, partly as a result of the depressed prices at present. International coffee and banana prices are expected to trend downwards, while for mangoes the likely supply upturn will be expected to cause downward pressure on export prices unless some form of rationing (as with bananas) is practiced. With the current exchange rate, the Philippines has a comparative advantage in all of these tree crops, although the extent will vary according to agro-climatic areas and farming practices. 8. Institutional support services and roles for the tree crop subsector have generally been weak and the linkage between research, extension and farmers has been limited. To some extent, the private sector is active in the contract growing of coffee, banana and oil palm. A more  - iii - serious constraint has been unclear, overlapping and uncoordinated roles among various agencies, although recently there has been recent efforts by DA, DENR and DAR to coordinate more closely as part of their "Convergence Strategy." There also has been inadequate attention to promoting strong public and private sector partnerships, especially given that sustainable tree crop activities are market sector-driven. 9. Government Policies. Government policies, direct and indirect, are biased against tree crops. There also have been numerous market "failures" and imperfections which have further constrained the fanner and investor incentives to invest in tree crops. Tree crops are often known as the "forgotten child" of agriculture. Public sector investments have focused on irrigated crops (primarily rice); slow implementation of land reform has contributed to investor uncertainties, and militated against re-investment in tree crops; limited grace period for tree crops (3 years) and the high real and nominal interest rates resulting partly from Government macro policies have made investment in long-gestation crops unattractive. Furthermore, limited access to logged-over land and a narrow definition of tree crops has constrained tree crop development on former forest areas, except for rubber. GOP's adoption of the AFMA (1997), and the new Administration's stated intentions to implement it forcefully as a key component to reducing poverty (from 32% to 25-28% of households by 2004), imply that greater attention will need to be placed on promoting tree crops as a strategic instrument for achieving these objectives. However, poor sector performance and growing food imports of rice is also shifting attention to a self-sufficiency strategy for each province (and even municipality), which could undermine the broader AFMA and rural income objectives. There is a need for greater policy and strategic clarity and consistency, especially to ensure adequate private sector participation. There is a need to build on the relevant experiences of past and on-going high value crop programs (e.g., Key Commercial Crops Development Program, Gintang Ani High Value Crops, fumding through the Quedancor, and the newly launched Agrikulturang MakaMasa Program, or "agriculture for the masses"). While they have merits, these programs have tended to be short- lived (primarily due to leadership changes) and to have received limited public funds (less than 5% of the Department of Agriculture budget, which is contrary to their potential contribution). 10. Regional Experience. Other countries in the region have promoted tree crops more actively and successfully. They have used various mechanisms to organize replanting through agencies such as ORRAF in Thailand or RISDA in Malaysia, and have consolidated and developed land to tree crops through agencies such as FELCRA and FELDA in Malaysia or nucleus estate schemes (NES) in Indonesia. Recent assessments of these experiences provide mixed results, with serious concerns regarding the need to establish appropriate institutional arrangements which will provide sustainable support to smalIholders (e.g., Project Management Units provide short-lived results; NESs perpetuate monopoly arrangements which are not favorable to smallholders; there are limited successes in effective cost-recovery arrangements). Conversely, the Philippines has relied largely on private sector initiatives with minimal support from Government. Except for coconuts, which were largely developed spontaneously in the 1950s through 1970s, Philippine tree crop development has been limited and its export of tree crop products is lagging behind that of the neighboring countries (Indonesia, Malaysia or Thailand). With the devaluations resulting from the E. Asia financial crisis, tree crop producers, processors and investors have reaped an unplanned "bonanza" in export and income earnings from these pasts investments.  - iv - 11. From regional experiences (including some 23 case studies carried out for the Philippines), the best approach for development of tree crops in the Philippines in future would need to vary among the different crops. A modified NES approach would be appropriate for oil palm development, while a project coordination unit (PCU) approach could apply to coconuts, provided funds are made available. Rubber revitalization will require substantial replanting. The Thai model would be most appropriate to ensure this could happen across the board, but a semi-autonomous rubber replanting agency (or alternative institutional arrangement) would be required, with a clearly defined source of income, to support an appropriate mix of investment cost-sharing which would need to be provided to farmers. This would mean that a cess has to be introduced, at least in the medium-term and, and as in Thailand, initially this could be initially supported by ODA loans and technical assistance. Fruit tree development has been largely private sector driven, with Governments providing primary support through improved technologies and rural infrastructure. 12. Agronomic Potential. The Philippines is well suited to grow a wide range of tree crops. It is at the right latitude, and has right rainfall and appropriate soils over a substantial part of the territory. The main limiting factor to successful tree crop development is the exposure to typhoons of much of Luzon and the Visayas, but this constraint does not affect Mindanao. Coconuts can be successfully grown over a wide range of the Philippines, although only about a half of the present area is in the "high potential" zone where yields of over 2.5 tons per hectare should be achievable. Coffee can be produced widely over the country and is less susceptible to typhoon damage than the taller tree crops. Rubber production is concentrated in Mindanao, but the present area of 90,000 hectares could be expanded on suitable land there by a factor four. Oil palm is presently an infant industry but performance of oil palm plantations is good and a large expansion, up to 300,000 hectares, would be feasible in terms of land suitability and economic viability. Mango, bananas and other fruits can all be widely grown with mango performing best in areas with pronounced dry seasons, whereas bananas do best in areas with a year-round rainfall. Current productivity levels for most tree crops are significantly below achievable yields (by a factor of 3 to 10 times difference, varying according to tree crop), which reflect weaknesses in available technologies and supporting systems. Mindanao offers the greatest potential for flurither development (provided the security situation is further improved). 1]3. Market Prospects. On the international market, any expansion of Philippine exports could be readily accommodated for the globally traded crops (palm oil, coconut oil, rubber, coffee, cacao). However, because the Philippines is a major supplier of bananas and mangoes to the Asian market and the Middle East, there is already a market determined limit on exports, and profitable export growth will depend on growth of demand in these markets. Nonetheless, experts generally believe that the Philippines can further develop its market "niches" in exporting high quality fresh and processed fruits, agro-processed coconut, oil palm, and rubber products (although this is subject to further study). 14. The domestic market prospects for the non-exportable crops are good. The expected demand growth for fruits is 3-4% per year, resulting from population increase and higher per capita incomes. Consequently there is likely to be an upward pressure on prices because, in the medium-term, growth in supply (which has been about 2% for the last decade) is unlikely to match that of demand. Only with mangoes, where in the short-term supply is likely to grow at about 7% annually, is there expected to be a downward pressure on domestic prices. With coffee  -v - and oil palm, both of which would switch from being imported products to exported products if the Philippine production expanded substantially, there would be a resultant 15 - 20% reduction in price. 15. Economic and Financial Viability. Well-managed tree crops are economically viable at present prices and, even in the light of projected reductions in long-run prices, they would remain so. A major reason for the very sound economic prospects for tree crops now is the significant peso devaluation (from P26 in 1997 to nearly P40 in mid 1998) which has reflected directly on output price, but has had only a modest impact on total input cost (which is largely labor). There are many site and farmer-specific factors which will determine the ultimate comparative advantage of each tree crop, but available information suggests that suitably located areas in the Philippines will enable it export and remain competitive in international markets for the above mentioned tree crops. 16. The major tree crops show sound financial rates of return at projected long run prices. The critical problem is financing planting or replanting in smallholder situations where the smallholder does not have sufficient cash flow from the rest of his holding to cover planting costs. Provided that mechanisms can be devised to solve this (such as inter-cropping with suitable crops, and enhanced by appropriate investment cost sharing), tree crops are attractive to smallholders. The incomes per man-day from farming the main tree crops, when they are mature, are some two to four times greater than the present wage rate ( equivalent to US$2.50/day). These can be compared with the returns from producing alternative low output crops, such as rain fed rice or corn, which are only about the same as the rural wage rate. 17. Tree crops which are already established are highly suitable for smallholders. They have reasonably even labor profile, good returns to labor, and tend to lead to stability in that they are fixed assets of significant value. Furthermore, because tree crop products are linked with further processing and exports, their production is helpful in value adding and job generation in associated sectors. Accordingly, it is estimated that given the agronomic potential and financial returns, total tree crop area could remain about the same, but total production, yields, and diversification could increase substantially, with appropriate support. 18. Constraints. Tree crops are facing multiple constraints, involving policy, institutional and financing factors (in the form of direct and indirect "biases", and market "failures"). Tree crops require substantial financing during the establishment period. Ideally, this would be provided as equity by farmers who would plant part of their area on a regular basis, financing it out of current cash flow. Unfortunately, this situation does not apply in much of the Philippines. Using long-term debt finance for tree crop development is a problem, partly because of macro conditions (high nominal and real interest rates) and the structure of the banking sector (dealing mainly with short-term assets and liabilities). In recent years, virtually no long-term debt financing has been used for tree crop development, neither by commercial banks nor as part of Landbank's agrarian lending. Debt financing is not really practicable anyway for stand-alone investments in long-term tree crops by smallholders. (e.g., with rubber, a loan of at least 15 years would be required, with at least seven years' grace on interest and principal). For shorter- term tree crops, such as coffee or oil palm, debt finance could be feasible, provided it was packaged using a commercial organization as an anchor.  - vi - 19. Problems of access to land and unclear property rights are constraining tree crop development by commercial investors. The advent of CARP has meant that there has been virtually no replanting on most commercial estates over the past decade, and in the case of rabber, there has been tendency to 'mine' the resources. Land titling on distributed land has been slow, preventing such land being used as collateral. There are large tracts of logged-over public land which technically would be suitable for tree crop production, but which are being prevented from such prudent use by overly restrictive forest land regulations. 20. Other constraints to tree crop development include small unit size of production, low product quality, deficient technologies, difficulties in obtaining the best planting materials, lack of transportation and other infrastructure, and the erratic law and order situation in parts of Mindanao. 21. Management Options. New planting and replanting of tree crops will be essential for the tree crop sector to contribute towards smallholder development and rural industrialization. There are a number of organizational options which can help address the land and financing constraints, and will vary according to crop, and involve either, collectively organized systems, or systems based on individual ownership. Collective systems include: (a) outgrowers based on a nucleus estate (modified to break the monopoly arrangements on smallholders) which is appropriate for oil palm; (b) centralized management through smallholder co-operatives, which tc date has been pretty unsuccessful in the Philippines; and, (c) centralized management, either with private sector control or else as a joint venture between the private sector and smallholders. The private sector control arrangement has worked within the banana sector, but the joint venture possibility (e.g., "corporatives"), which appears attractive, has still to be tested in practice. 22. Development based on individual ownership can occur with different levels of support, varying between no support whatsoever (which is fine for large-scale commercial operations havving their own research and development capacity), to individual farmers heavily supported by a project management unit (PMU). The main problem with PMUs is that they tend to rely on specific grant funding, which is not universally available, giving rise to short term inequities between those covered by the PMU and those not, and non-sustainability in the long term. An intermediate option is for the strengthening of existing support institutions, and using a Project Coordination Unit to focus efforts on a particular geographical area and strengthening the relevant institutions to provide the needed support services. Whether such strengthening can be sufficient to catalyze development is still to be tested. Another alternative to supporting individual development would be a scheme whereby replanting would be supported on a national basis for specific crops (like the ORRAF scheme for rubber in Thailand). For such a scheme to be sustainable long-term, it would need to be funded outside the GOP budget, from, for example, through a cess on marketed products, or exports, or some form of appropriate cost sharing arrangements. 23. Broad Strategy Options. The study has identified three broad options for tree crop development: (a) Status Quo; (b) "Active" Development; or (c) "Pro-active" Development. These options are associated with varying degrees of reforms and allocation of additional public and primarily private investments. The Status Quo option could result in a decapitalization of the costly tree crop assets, limit the adoption of one of the few options to increase rural incomes  - vii - in a sustainable manner, and would be contrary to the thrust and intentions of the MTPDP strategies. Accordingly, it is recommended that, as a minimum, GOP should aim to support an "Active Development" tree crop strategy, and build up to promoting a "Pro-active" strategy as part of a phased approach. 24. Key elements of an "Active Development" strategy would focus on removing the more important policy, institutional and financing constraints to and "biases" and market "failures" against tree crop development and supporting selective actions which will catalyze private sector responses, including (with further details in para. xxxiii): (a) clarifying "investor-friendly" modalities and timetable for broadening and expediting the implementation of the CARP (and active promotion of various types of viable enterprise arrangements with agrarian reform beneficiaries/ARBs and encouraging foreign participation); (b) providing clear and transferable land title to ARBs (which could then be used as collateral); (c) clarifying and implementing clearer institutional arrangements and roles for spearheading private sector-driven tree crop development (involving DA, DAR, DENR, LGUs, private sector associations, NEDA, PCA, possibly re-structuring the PCA to provide an effective institutional arrangement to promote the sustainable smallholder development of tree crops and diversification within a farming system framework). These institutional options need to be assessed early in the preparation period; (d) working out other appropriate financing mechanisms to expand access of term fmance for supporting commercially viable tree crop development (including investment cost sharing, actions to enhance viability, reduce transaction costs and risks in a manner which minimizes distortionary financing arrangements; (e) working out other appropriate financing mechanisms to expand access of term finance for supporting commercially viable tree crop development (including removal of the lending grace period, currently limited to three years; adopting sound investment cost sharing arrangements; actions to enhance financing viability, to reduce financial transaction costs and risks in a manner which minimizes distortionary financing arrangements); (f) clarifying ownership of the massive funds/assets from the coconut levy and establishing clear and transparent guidelines for its effective utilization; in the meantime, actively exploring the use of ERAP Bonds to support post-harvest and processing activities; (g) re-assessment of DENR logged-over forest and widening the use of tree crop options to meet forest cover requirements (rather than a narrow definition of trees); and  - viii - (h) arranging for the preparation of tree crop-specific operational strategies for which the Philippines has a comparative advantages (this is not to pick "winners", but to facilitate the identification of a menu of viable options to be chosen by producers and investors); and formulation and implementation of a phased pilot program of Commercial Crop and Diversification as part of GOP's emerging Rural Development Strategies/MTPDP. 25. A "Pro-Active" strategy would involve expediting and intensifying the implementation of above actions, spurred by additional policy and legislative reforms (outlined in para. xxxiii). The scaling-up of the strategies and supporting actions should be adjusted according to the initial iimplementation experiences. 26. Removal of Investment Constraints. As part of its support for tree crop development, CJOP would need to take specific steps to remove investment barriers, covering improving land access and security of land tenure, encouraging the development of an open land market, improving support services to smallholders, strengthening institutional roles and arrangements, facilitating financing (especially to enhance the financial viability, reduce transaction costs, and sharing risks), and relaxing constraints on foreign participation. 27. Agencies and Responsibilities. A re-structured PCA is likely to be the key agency for developing the coconut sector, generally guided by the Department of Agriculture (DA), and supported by the Department of Science and Technology and the State Universities and Colleges. There are no specific commodity agencies at present for the other crops. Development of these will be supported by the appropriate sections of the DA (although a focal unit/bureau such as Plant and Industry, needs to be designated by DA Management as one of the options, together with a re-structured PCA to support smallholder tree crop and diversification program), but with irncreasing private sector inputs on a commercial basis. DAR is seeking to strengthen its capacity to foster private sector linkages to its ARBs within the ARCs and enterprise development strategies. LBP and UCPB Foundation will continue to provide formal credit to tree crop smallholders, through co-operatives. Commercial and rural banks will service commercial farmers and any wholesale finance would be channeled to accredited commercial and rural banks, by LBP. The possibility of setting up a specific rubber replanting agency or using the transformed PCA are options which need to be further assessed. Proceeding with some type of rubber entity should only be undertaken if there is commitment to authorizing a rubber cess or some other means of financing it outside the regular Govermment budget (and applying the relevant lessons from the coco levy "saga"). DENR will play a key role in endorsing the role of a wider spectrum of viable tree species to meet the forest cover requirements, as well as expediting land titles. In all aspects, LGUs and local producer associations should play the primary role in supporting the implementation of the proposed program. 28. Indicative Investment Levels. Average past economic investment in tree crops has been about US$112 million per year, of which roughly over 50% was on-farm labor. Future requirements from "Active Development" strategy would be about US$ 150 Million per annum, w]hereas a "Pro-active" scenario would require around US$200 million per annum. Most of these investments would need to come from the private sector (where more than 70% is likely to come from farmers/private sector, including labor costs, supported by commercial bank  - ix - financing). Public sector funding will aim to support activities which involve "public goods", including the removal of "market failures" and actions to catalyze government/LGU/private sector/smallholder partnerships (e.g., research and extension, key infrastructure, strengthening relevant stakeholder arrangements roles, capacities, and supporting services, sound investment cost sharing varying by crop). The rationale for appropriate investment cost sharing is based on the need to redress GOP-induced market distortions, market failures and imperfections, and externalities (in terns of environmental aspects and poverty reduction). There is an urgent need to find and sustain more cost-effective alternatives for forest cover, and to reduce rural poverty through a sustainably viable option which will better utilize an underperforming valuable asset. 29. Even with negligible GOP support, there will be substantial investment in tree crops (with a major portion being in the form of labor), but over half of this would be in fruit trees, and little investments would be made in rubber and coconut. The system of financing of future tree crop investments would vary by crop, and would be driven by private sector sources (supported by bank loans). Oil palm and coffee could be handled largely by the private sector. Rubber replanting requires cost sharing, given the relatively long gestation period before a positive cash- flow is achieved. Even if no cess were introduced, the incremental cost of such a grant would be fully recovered by Government through incremental value added tax and profits tax on the rubber processing sector. Only with increased technical support and planting materials provided to backyard producers, and whose output would not enter normal commerce, would there be no cost recovery. Overall, the net fiscal impact of the proposed policy of tree crop expansion is likely to be positive in the long run. 30. Markets and Prices. The main market implications of an expansion of tree crops would be the likely reduction in price of coffee and palm oil as the country swings from importing to exporting. With the main plantation crops, and even coconuts, Philippine production expansion would have only a modest impact on world prices. On the domestic market, with the exception of mangoes, prices will probably continue to rise for fruit crops as supply growth fails to keep pace with demand growth in the short-term. Accordingly, the Philippines should proceed to further identify and develop market "niches" in raw and processing form of tree crops. These "niches" and required adaptations (by the private sector) will become clearer during the course of embarking on the "Active Development" scenario. 31. Impact on Different Farm Types. The "Active Development" strategy would benefit all tree crop farm types, to varying degrees. The proposed approach to removing the constraints and catalyzing broad-based participation would also expand the income and employment options for large numbers of smallholders ("mixed tree systems" and "backyard" tree crop farmers, which could represent up to 50% of rural households, once the program is fully replicated). Coconut farms would benefit from the revitalization of PCA and private sector partners, while clarification of land ownership would encourage input usage by them. Those on the most productive areas would be likely to replant, supported by PCA, while in medium potential areas, the focus would be on inter-cropping. Existing rubber farms would benefit enormously from a replanting scheme and also from medium-term financing at the start of the tapping period. Clarification of land issues could lead to new commercial development of rubber, possibly as joint ventures with indigenous land interests on logged-over areas. Both coffee and oil palm farmers would benefit from long-term credit availability and oil palm in particular from  encouragement of outside investment and clarification of land issues. Commercial fruit farmers would benefit from improved access to medium and long-term finance and for those with high value crops, improved infrastructure (especially farm-to-market roads) would make a big difference. Both mixed tree system farms and backyard farms would benefit from improved applied research and market linkages with the private sector, and could also be supported by the provision of high-quality planting material through local nurseries, also using cost sharing arrangements. 32. Poverty, Gender and Environmental Implications. An "Active Development" strategy vould have a positive effect on reducing poverty (having the potential of increasing farm incomes by more than 50% for participating smallholders), enhancing environmental aspects (through providing a needed vegetative cover and soil nutrients, while also generating a steady income stream), and positive gender effects. For example, improved backyard tree production will (a) help increase women's income, and hence the families. (b) improve nutrition in rural households. The additional supplemental income will also enable these smallholders to purchase productivity-augmenting inputs for their food crops. P'roposed Tree Crop Development Action Plan 33. Given GOP's stated policies (under AFMA, "Agrikulturang MakaMasa" High Value Commercial Crops Program, the Convergence Framework for Sustainable Development and strategic thrusts of the MTPDP in reducing rural poverty in a sustainable manner), it is proposed that GOP pursue at minimum the "Active" Tree Crop Development Strategy, and preferably the "Pro-active" strategy. Based on this study's findings, Table I provides a summary matrix of a riecommendedframework for an action plan which is sequenced according to on-going activities and new initiatives (with the latter reflecting a "pro-active" strategy), and involve priority policy, institutional and financing actions. As they are taken in the short term (within the next 1 year), this will create the commitment, momentum, and demonstration effect to contribute to achieving the longer term vision of the MTPDP. While efforts need to be made to prioritize the actions, the constraints are multifaceted and therefore require a comprehensive yet focused and sequenced approach to achieve tangible results. The main responsibilities and target timeline for operationalizing these actions are being worked out during the course of discussing this report and subsequent stages (and to be coordinated by the DA, to ensure adequate operationalization and follow up); most of these actions are part of on-going initiatives and institutional strategies by the relevant departments (especially DA, DAR, DENR, DOF, NEDA). Since this report aims to provide farmers and investors an expanded menu of enterprise options, these are presented by generic areas (e.g., land, finance, institutional roles) and by tree crops for which Philippines has a demonstrated and added potential comparative advantage.  -xi - Table 1: Summary of Recommended Tree Crop Action Plan RECOMMENDED ACTIONS AND PRIMARY RESPONSIBILITY (IES) COMMENT OR INDICATIVE TIMELINE (1) Short Term Actions (part of on-going activities) Note: Proposed actions to (a) Clarify Key Agrarian Policies: be further discussed, sharpened by, agreed within * GOP/DAR/DENR to provide "doable" timetables on CARP land acquisition GOP, and initiated during program in private and public lands; 1999; specific actions and * DAR to establish clear and concise guidelines on allowable farm target dates to be management modalities; coordinated by the Dept. of Agriculture, in consultation * DENR to accelerate the rate of land titling in CARP lands; with the relevant * GOP/DAR to address the CARP's "second generation" problems. stakeholders) * DENR to delineate protected forestry areas (including re-evaluation of the environmental sustainability of logged-over areas, and those lands which could be "environmentally-safely" used for commercial trees. (b) Rationalize and Strengthen Institutional Roles and Capacities: * DAIDAR/DENR and participating LGUs to rationalize the current First half of 1999, as part of institutional arrangements and roles to achieve a well-coordinated and cost- finalizing the MTPDP and effective support to a market-driven, private sector-led tree crop preparing supporting action development; 2 options to be assessed and decided upon (during 1999, plans followed by implementation): designate Bureau within DA; transform PCA to become a market-sector driven Tree Crops and Diversification Development Board * DA/DAR/DENR to formulate and implement appropriate operational strategies and actions to improve and rationalize support services, especially 1999 onwards those involving "public goods"; * DA/DOST should harness the SCUs in the above efforts and review and adjust their budget allocations to ensure appropriate balance between grains (e.g. rice and corn) and tree crops; * DA/DAR/DENR and the private Sector, with support from interested donors, to build and/or strengthen the roles and capacities of multiple private sector groups and organizations which could help advocate for tree crop development; * Private Sector Participation. Promote an active role of private sector in the distribution of inputs and good quality planting materials (facilitated by the proposed TCDDB); (c) Investment Cost-Sharing: GOP (DA and NEDA, in consultation with NEDA to take the lead relevant stakeholders) needs to: during the course of * formulate a policy on investment cost-sharing for smallholder tree crop finalizing the MTPDP development, particularly in the early phase of tree crop immaturity; (1999) * operationalize it for phased implementation (general principles and by  - xii - commodity, to be updated periodically, according to implementation experience and strategic imperatives). (note: It is envisioned that the cost sharing would include producers, DA/relevant LGUs, and participating banks (based on economic viability criteria). The main rationale is: to redress the GOP-induced "market distortions; market failures and imperfections" which mitigate against Philippines' realizing its potential and comparative advantage in selected tree crops; to reap environmental externalities from encouraging a wider range of options; and to achieve sustainable poverty reduction from an income-generating asset). (d) Expand Access to Long-term Finance: * ][ncrease Access to Viable Tree Crop Lending: LBP and commercial banks Later in 1999 should be encouraged to promote tree crop financing, based on commercially viable considerations. GOP, under the coordination of ACPC, should also formulate appropriate options for tree crop collateral, insurance, and shared cost guarantees to reduce credit risks; ACPC already lhas convened a financing subgroup; * Interest Rates: LBP should re-assess its interest rate policy to enable it to compound unpaid interest on medium to long term loans. Otherwise, there Early 1999 rnay be undue bias against making them, hence limiting access to finance for tree crops; in general, there is a need to ensure market-based interest rates to ensure sustainable access; and * GOP/Monetary Board to Remove Restrictions on Loan Grace Periods: the proposal to remove the 3 year grace period should be formally approved by Overdue action (as soon as the Monetary Board, with guidelines to be issued as soon as possible. possible) (e) Prepare/Implement Long Term Smallholder Coconut Strategy: PCA and other stakeholders * GOP to clarify the resources available and allocation guidelines to coconut have prepared a draft smallholders from the coconut levy funds strategy; there is a need for * DA/PCA to prepare a sound long term coconut development strategy and DA to provide overall appropriate supporting policies (including the amendment to Coconut policy and strategy Preservation Act, which currently limits sustainable crop choices to drection. firmers); (f) Prepare/promote private sector-led development of other tree crops: Given To begin in 1999 (some that Ihe Philippines appears to have a demonstrated comparative advantage for crop subgroups already other tree crops, there is a need for GOP (coordinated by DA, together with key started work) stakeholder representatives) to formulate private sector-led strategies for other promising tree crops (including oil palm, rubber, fruits, cacao, coffee, fast growing timber species). This report (Annex 1 1) provides suggested initial strategy frameworks for these crops. (2) Proposed New Activities and Initiatives (to be initiated about early (note: To jumpstart and sustain tree crop development as part of a broader rural 2000) development strategy, the following strategies/actions are recommended as part of the "pro-active development" strategy (could be initiated during 1999, but woulid probably need to be pursued over the next three years before achieving From 2000 onwards (when tangible results) experience is available)  - xii - (a) Intensify/expand implementation of "Active Development Strategies: based on the experiences in implementing the proposed actions outlined above, to scale-up the scope of activities; (b) Encourage the Prudent Availability of Long Term Finance: 1999 onwards (when ready) Experience strongly suggests that given the long gestation nature of the crops, and normal bank lending criteria, liability structures and lending patterns, and the "market failures" involving lending for tree crops, the provision of additional long term finance would be required to ensure access for long term lending for viable and commercially sound tree crop investments. Accordingly, the lending decisions would be made by banks; 1999 onwards therefore, would not create an artificial demand for loans; * Given the limited technical knowledge which banks have of tree crop lending, there is a need for ACPC to take a lead in disseminating knowledge of tree crop development, and to coordinate appropriate actions which could later in 1999 (when enhance the viability and reduce transaction costs and risks; informnation is available) * Given these market failures, notwithstanding the aggregate availability of funds in the banking system, there is a need for GOP/NEDA to confirm the need for donor funding assistance to help develop non-distortionary long term financing mechanisms (say, using a rediscounting finance "window"). As tree crop programs get established and as the financial system continues to mature, it is envisioned that the future funding needs could be met from internal sources over time. (3) Actions Requiring Legislation Note: To promote investments as well secure access to land by small and "landless" investors, the following legislative agenda require consideration (over the next 3 years): * Post-CARL. DAR to revisit CARL (RA 6657) and review its provisions that discourage private investments; To be initiated in 1999 * Relax limits on Banana Hectarage. * Amend the Coconut Preservation Act to remove disincentives to replanting and good husbandry practices. (4) Actions Requiring Constitutional Review/Amendments As the country moves to review the 1987 constitution, the following To be initiated in 1999 provisions need closer scrutiny (over the next 2 years) as they affect tree crop investments. * The 40% foreign equity limits on land-related and natural resource investments; * The 25 & 25 year leases on public lands; and * The regulations concerning the conversion of public lands to alienable and disposable lands as these restrictions are inhibiting farmer choices involving tree crop development.  - xiv - Proposed Framework for Commercial Crops Development and Diversification Program 34. On the assumption that GOP decides to address the above mentioned issues/actions as part of taking an "active" or preferably "proactive" strategy to tree crop development, below are outlined four broad components which could comprise a framework for guiding the preparation of a private sector-led and phased Commercial Crop Development and Diversification Program; it could be designed to follow a phased and pilot approach, testing various smallholder enterprise management arrangements in selected geographical areas. Policy and Institutional Reforms (taking a well-sequenced approach, addressing the priority elements outlined above, and working out and implementing the preferred institutional option(s); * Strengthening Key Supporting Services and Capacities (with strong public and private sector partnerships and capacities, reinforced through appropriate funding mechanisms, including: research and extension, farmer/market linkages, market information; and support to strengthening appropriate management/enterprise modalities/arrangements between investors and smallholders and/or ARCs). It is expected that the national agencies (especially DA and DAR) will provide a facilitating role, with LGUs taking a more active role in providing support services; * Provision of Key Infrastructure. (e.g., farm to narket roads, irrigation and drainage, based on cost-sharing arrangements with LGUs and central agencies, such as DA, DENR and DAR); and * Expanded Access to Long Term Finance and Productive Investments. Emphasis would be given to enhancing the financial viability of investments, improving the creditworthiness of borrowers, and strengthening participating financing institutions (wholesale and retail levels) to support viable tree crops (as part of financing a series of pilot smallholder enterprise arrangements). 35. Suggested Next Steps (to be done concurrently over the next few months) * Based on the constructive consultations and feedback obtained from various groups/stakeholders on the three drafts (dated January 22, 1999, March 23, May 10, 1999, respectively), it was revised by the study team. The review meeting was held with GOP/private sector on June 8, 1999, chaired by the Honorable Angara, Secretary for Agriculture. The present final version will be more broadly disseminated and used as a framework for supporting implementation of the priority agreed recommendations; * As part of the on-going finalization of the MTPDP, and in line with DA's strong positive response to the study's recommendations, the Secretary for Agriculture is in the process of establishing an inter-agency (public and private sector) Project Steering Committee (SC) and Technical Working Group (TWG) to prepare a smallholder tree crops and diversification program, and arranging to prepare a project concept paper/TOR for preparing such a program; and  - xv - * The draft TOR for preparing the program should include further technical and economic analysis on a number of key areas to better underpin the "menu" of options (e.g., agro- climatic "mapping" of suitable areas for tree crops; more detailed comparative analysis; detailed marketing assessment of potential domestic and external market "niches" for various tree crops); identification of initial "pilot" areas and smallholder enterprise schemes (perhaps liaising with DAR and including ARBs); * Given the cross-cutting nature of the proposed program (if GOP/DA decides to proceed), and to give operational direction and results), the above mentioned SC and TWG will need to liaise closely with the Committee on "Convergence Towards Sustainable Rural Development" and the rural sector Planning Committee for the MTPDP; this will help provide overall guidance to the TWG/subgroups and ensure integration with GOP's rural development strategy.  I. INTRODUCTION A. Policy and Strategy Context 1.1 The Estrada administration of the Government of Philippines (GOP) was elected in mid- 1998 with a strong mandate to tackle frontally, pervasive and growing poverty. About 32% of the population are classified as poor (1997); two-thirds of these poor are located in rural areas, and rely primarily on agro-based activities. GOP's Medium Term Philippine Development Plan (MTPDP - 1999-2004), currently being finalized, is therefore focusing its strategy and supporting programs on promoting broad-based rural growth with greater equity. 1.2 In parallel, the World Bank recently finalized its Country Assistance Strategy (CAS), with the aim of supporting the implementation of the MTPDP. Accordingly, CAS policies and programs would be directed towards the following: * economic recovery following the Asian Crisis and El Nino; * enhancing investment in human development, poverty alleviation and social safety nets; * accelerating environmentally sustainable rural and urban development;