Philippines - Rice Processing and Storage Project

RESTRICTED Report No. PA-47a 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 The report may not be published nor may it be quoted as representing their views.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 INTERNATIONAL DEVELOPMENT ASSOCIATION RICE PROCESSING PROJECT PHILIPPINES January 11, 1971 Agriculture Projects Department  CURREXY EQUIVALENTS US$ 1 = P 5.80 - 6.5 - P 1 = US$ 0.17 P 1 million = us$ 16,667 WEIGHTS AND MEASURES (Metric System) 1 km = 0.62 mi 1 m = 3 ft, 3.37 in 1 m ton = 2,2o5 lb 1 kg = 2.2 lb 1 ha = 2.47 ac 1 cavan (paddy) = 44-46 kg = 97-101 lb 1 cavan (milled rice) = 56 kg = 123 lb 1 ganta = 2.43 kg = 5.36 lb ABBREVIATIONS DBP = DeveloDment Bank of the Philippines RCA = Rice and Corn Administration NFAC = National Food and Agriculture Council 'Pi = Bureau of Plant Industry .,.Pr, = Agricultural Productivity Commission I lI = International {ice Aesearch Institute 1/ T'he peso has Jeen allowed to F"loat as of February 1 970 as Part of the exchanze rate reform a.reed to )y . t -3 L 12.  PHILIPPINES RICE PROCESSING PROJECT TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS ..................i - ii I. INTRODUCTION ............................. 1 II. BACKGROUND .......... ............................ 2 A. General ......... ............................ 2 B. Rice Production ...... ....................... 2 C. Rice Processing and Marketing ............... 4 Paddy Dryi,ng ...... ...................... 5 Rice Milling ...... ...................... 5 Storage ........ ......................... 6 Credit ........ .......................... 6 Transportation ...... .................... 6 Policies ....... ......................... 7 III. THE PROJECT. 8 A. Project Description. 8 Technical Features. 8 Training. 9 B. Project Areas .10 C. Cost Estimates and Financing .10 Project Cost .10 Procurement .12 Disbursement .13 IV. ORGANIZATION AND MANAGEMENT ..... ................ 13 A. Development Bank of the Philippines ......... 13 B. Subborrowers and Terms of Subloans .... ...... 14 C. Financial Procedures and Auditing .... ....... 16 This report ia based on the findings of a Bank appraisal mission to the Plilippines in March/April 1969, composed of Messrs. M.J. Walden, G. von Gontard and T. Friedgut (of the Bank) and Messrs. L. Svoboda and N. Bond (Consultants).  -2- Lage~ No- V. BENEFITS AND JUSTIFICATION ..... ................... 16 A. Operating Arrangements and Financial Returns 16 Revenue Generation and Taxation of Subborrowers ............................ 17 B. Farmers' Benefits ...... ....................... 18 C. Economic Justification ..... ................... 18 VI. RECOMMENDATIONS ....... ............................ 19 ANNEXES 1. Rice Production Problems and Prospects 2. Rice Marketing and Processing in the Philippines 3. Outline Specifications 4. Training Aspects 5. Project Cost 6. Project Cash Flow 7. Estimated Disbursement Schedule 8. The Development Bank of the Philippines 9. The Grain Processing Section 10. Financial Projections for Typical Project Facilities 11. Financial Rates of Return 12. Economic Analysis of the Project MAP  PHILIPPINES RICE PROCESSING PROJECT SUMMARY AND CONCLUSIONS i. This report appraises a project for the construction, equipment and operation of modern rice processing, storage and handling facilities in the Philippines, for which a Bank loan of US$14.3 million is proposed. The loan would be made to the Government of the Philippines, which would on-lend the proceeds to the Development Bank of the Philippines (DBP) under a subsidiary loan agreement. DBP would be responsible for administering the project and would supplement the proceeds of the Bank loan with its own funds to provide long-term loans to qualified traders and millers in the private sector. The project is expected to remove a significant bottleneck to the further growth of rice production in the Philippines. ii. Most grain processing and storage facilities are in the private sector and many are in need of repair, replacement or modernization. How- ever, lack of credit on suitable terms and inadequate training of plant operators, superintendents and managers have hindered private investment in improved marketing systems. The proposed project would provide long-term credit to private owners and operators for setting up modern, integrated processing units. Working capital credit would be provided by commercial banks and the DBP. Training would be provided by the University of the Philippines with UNDP assistance. iii. Processing capacity created by the project is expected to be distributed among 6 large units and about 60 small units. In total, the proposed project is expected to provide mechanical drying capacity of about 225 ton/hour, modern milling capacity of about 60 ton/hour, bulk storage capacity of about 150,000 ton, together with complementary sack warehousing and ancillary handling, aeration and transportation equipment. These facil- ities would be able to handle about 480,000 ton paddy per annum, 15-20% of what is presently estimated to go through commercial channels. The bulk of project capacity is expected to be located in the highly productive paddy growing regions of Central Luzon and the Cagayan Valley, near major consum- ing centers, and in Mindanao. iv. Need for improved grain processing and marketing has long been recognized in the Philippines. However, the scope for productive invest- ment in modern marketing infrastructure was limited until the mid-1960's when new high yielding paddy varieties were introduced. In combination with fertilizer and assured irrigation, the new paddy varieties have led to production advances which, in turn, have brought out serious deficien- cies in marketing systems. Lack of mechanical drying equipment is hindering efficient processing of paddy varieties maturing in the wet season, and traditional milling and handling techniques are proving in- creasingly inadequate for handling commercial paddy flows in major pro- ducing areas. Finally, inadequate storage facilities are contributing  - ii - to relatively high spoilage losses and to producer price instability. The project would produce substantial direct benefits by adding to the coun- try's milling capacity, reducing grain spoilage, and increasing the effi- ciency of paddy and grain processing through bulk handling. The economic rate of return of the project, as customarily calculated for agricultural projects, is estimated at about 25%. v. Estimated project cost is about US$21 million, including contin- gencies. The cost estimate is based on engineering consultants' drawings and preliminary designs. Construction and equipment contracts would be awarded on the basis of international competitive bidding. The proposed Bank loan would cover foreign exchange costs, estimated at 68% of total cost. Subborrowers would contribute 21% from their own resources. The balance would be covered by DBP. Loans to subborrowers under the project would carry 11% interest and run for 14 years, including approximately one year of grace. vi. Subloans would be made to qualified entrepreneurs according to guidelines that would be approved by the Bank. A special Grain Processing Section, to be set up in DBP, would appraise loan applications and be re- sponsible for procurement operations. This Section would be supported by expatriate consultants suitable to the Bank. Hiring of such consultants would be a condition of effectiveness of the loan. vii. Need for the loan arises in part from the progress achieved under new Government policies emphasizing technological change in agri- cultural production. The proposed loan would be the fifth Bank operation designed to strengthen implementation of these policies. Loan 393-PH (US$6 million) contributed to the growth and improvement of the country's higher agricultural education by providing facilities to the College of Agricul- ture of the University of the Philippines. Loans 432-PH (US$5 million) and 607-PH (US$12.5 million) have provided funds for on-farm development through privately owned rural credit banks. Finally, Loan 637-PH (US$34 million) will finance priority irrigation works in Central Luzon. viii. Subject to various assurances and conditions, the project is suit- able for a Bank loan to the Government of the Philippines of US$14.3 mil- lion at the standard interest rate for a term of 19 years, including a 4-year grace period.  PHILIPPINES RICE PROCESSING PROJECT I. INTRODUCTION 1.01 The Government of the Philippines has requested a Bank loan of US$14.3 million to finance the establishment of modern rice processing and storage facilities in the private sector. The loan would be made to the Government which would on-lend the proceeds to the Development Bank of the Philippines (DBP) under a subsidiary loan agreement. DBP would provide long-term loans to qualified grain traders and millers. The Bank loan would finance construction of bulk storage and purchase and installation of paddy drying, rice milling and bulk handling equipment as well as technical serv- ices required for project administration. Six large, integrated rice pro- cessing units, providing about 5,000 tons of bulk storage each, and 60 small units, providing about 2,000 tons of bulk storage each, would be set up under the project. 1.02 The proposed Bank loan would be the fifth for agricultural de- velopment in the Philippines. Loan 393-PH supported the expansion of modern higher agricultural education at the University of the Philippines (Los Banos). Loans 432-PH and 607-PH provided credit funds for minor irrigation, mechaniza- tion and other on-farm improvements. Finally, Loan 637-PH will help spread new farming technologies through finance of expanded and improved irrigation in an important rice producing region of Central Luzon. The performance to date of the project financed under Loans 393-PH, 432-PH and 637-PH has been satisfactory. However, disbursement under Loan 607-PH is falling behind schedule, due mainly to the effects of the floating exchange rate which was introduced in early 1970. The de facto devaluation led to cost increases of about 65% for imported items while farm product prices have increased only by 25-30%. 1.03 In October 1968, the Government of the Philippines sent the Bank a project proposal prepared by DBP for financing grain storage and processing facilities. In March/April 1969, an appraisal mission composed of Messrs. M.J. Walden, G. von Gontard and T. Friedgut (of the Bank) and L. Svoboda and N. Bond (Consultants) visited the Philippines. This report is based on the findings of the mission. It draws on several grain mar- keting and storage studies, including a study by a US firm, Weitz-Hettel- sater Engineers, issued in June 1968. Furthermore, it is based on under- standings reached with the Philippine Government during a visit of Messrs. M. J. Walden and E. de Alba (of the Bank) in February/March 1970. Finally, in order to assess the effects of the de facto devaluation of February 1970 on the project costs, the cost estimates were updated in the Philip- pines by Mr. P. Pohland (of the Bank) in August 1970. 1.04 The project as first presented by the Government included the con- struction of 8 terminal bulk silos and about 100 small up-country silos and warehouses, together with complementary driers, modern milling equipment and other ancillary facilities. During appraisal of the project the need for some alterations became apparent. The project as now proposed would give emphasis to integrated drying, storage and milling systems. It would not  - 2 - include processing facilities for corn as originally proposed. These altera- tions have been agreed with the Government of the Philippines. II. BACKGROUND A. General 2.01 The population of the Philippines, currently estimated at 39 mil- lion, is growing at an annual rate of about 3.5%. Agriculture employs around 60% of the labor force, produces about a third of the GNP, and generates about 80% of foreign exchange earnings. 2.02 The country consists of some 7,000 islands stretching over 1,600 kilometers from near the equator northwards. Luzon in the extreme north, on which the capital (Manila) is located, is the largest island of the archipelago. Mindanao in the far south is the next largest and with Luzon, makes up two-thirds of the land area. These two, with nine others, make up 95% of a total area of 30 million ha. 2.03 The mountainous terrain and the lack of adequate transport infra- structure restrict thie area suitable for farming. About 8.5 million ha are cultivated. Another 2.5 million ha of land suitable for cultivation are still unopened. Approximately 10 million ha are under commercial forests. 2.04 With the tropical climate, year-round cultivation is possible as long as an adequate supply of water is available. Although rainfall is generous (average is 2,540 mm), it is highly variable and, in most areas, there is a pronounced dry season. The present irrigated area represents only 10% of the cropped land, less than a third of which has dry season irrigation. Considerable surface and ground water resources remain unex- ploited. 2.05 Although timber, coconuts and sugar are the major export commod- ities, about 6 million ha (70% of the cultivated area) are devoted to food crops for the local market. Of these, some 3 million ha produce rice and 2 million ha, corn. This foodgrain cultivation is small-scale: the aver- age farm area is only 2 to 3 ha. About half of the paddy and corn farms, representing a third of the paddy and corn acreage, is farmed by tenants. B. Rice Production I/ 2.06 Rice is the staple food for about three-fourths of the population and corn for the balance. During most of this century, rice production merely kept pace with population growth. In particular, between 1920 and 1960, yields stagnated and production gains resulted mainly from extension of the cropped area. Since 1960, on the other hand, hectare yields have risen and the growth in cropped areas has tapered off. The mediocre growth 1/ Annex 1 gives further details on Philippine rice production problems and prospects.  - 3 - performance of rice production till the mid-1960's reflected inadequate investment in rural infrastructure, which, in turn, was a result of the unduly high premium put on rapid industrialization by past Government policy. As a result, substantial grain imports were necessary (435,000 ton on average during 1963-65). 2.07 In 1966, foodgrain self-sufficiency became a major objective of public policy. The concomitant release of new high yielding paddy va- rieties developed at the International Rice Research Institute (Los Banos) and their rapid acceptance by farmers in areas of assured water supply con- stituted a turning point for Philippine agriculture (Annex 1). Through the activities of the National Food and Agriculture Council (NFAC), closer coordination of Government and private agricultural efforts and increased allocation of scarce inputs to areas enjoying favorable physical character- istics have been achieved. In these areas, the new paddy varieties are capable of outyielding the traditional varieties at least twofold, under normal farming conditions. Following their release to cultivators, paddy production recorded gains of over 10% in 1967/68, compared to an annual growth rate averaging less than 1% over the previous 4 years. A drought in 1968/69 brought a slight setback, which would have been much greater were it not for the new varieties. However, estimates for 1969/70 indicate a growth rate of over 10% over the previous year. In 1969/70, the new varieties were estimated to have covered 21% of the paddy area. No com- parable breakthrough is in sight for corn. 2.08 The advent of a new biological base for paddy production is significant, but it represents only one requisite for development of the Philippine rice economy. During the period 1965-68, output expressed in milled rice equivalent averaged 2.8 million ton while annual rice imports stood at about 170,000 ton on average. Average paddy yields in the Philip- pines are among the lowest in Asia. They average 1.3 ton/ha, compared to 3.7 ton/ha in Taiwan and 1.8 ton/ha in Ceylon. The low average productivity of rice production in the Philippines reflects not only inadequate genetic paddy materials but also restrictive environmental factors, particularly a low proportion of irrigated acreage relative to the total paddy area -- less than 30%. It also results from primitive field water management and lack of terminal field channel systems. 2.09 Timely availability of current production inputs (certified seed, fertilizer, pesticides) is an important requisite for rapid growth of paddy output; the new dwarf paddy varieties manifest high fertilizer responses at relatively high application levels. However, effective production per- formance depends on the use of pure seed and on whether adequate protection is provided against disease and insect pests, the incidence of which is increased by high fertility. 2.10 The new paddy varieties mature in a shorter time than traditional varieties (100 to 130 days compared to 140 to 180 days). This increases opportunities for multiple cropping. However, adequate field drainage and timely land preparation (sometimes calling for increased mechanization of farm operations) are particularly important for achieving this potential. 2.11 Although the net return of the new paddy technology is usually much higher than that obtained with traditional varieties, cultivation risks are considerable. The provision of adequate incentives to increase  - 4 - the marketable surplus of rice is therefore a further requisite of continued progress in rice production. This hinges partly on the results of research now underway and aimed at varietal improvements with respect to grain qual- ity, cooking features and milling characteristics. It also depends on the implementation of favorable policies regarding rice procurement, imports and prices. Finally, it requires modernization of rice transport, processing, handling and storage. 2.12 On the whole, the present technological breakthrough and current policy trends in the Philippines offer the opportunity for accelerated growth in the productivity of rice cultivation. Assuming continuing policy emphasis on food crops, foodgrains self-sufficiency in the early 1970's is possible. Looking further ahead, rice surpluses are likely to arise in good weather years. However, the very success of the foodgrains production program is likely to increase the scope for further diversification of agricultural production and regional specialization in the Philippines. (Profitable avenues for diversification into export crops and livestock development exist.) Furthermore, keen competition from other Asian producers is expected in the world rice market for the next several years. All in all, it is highly unlikely that long-run production trends in the Philip- pines will be such as to result in consistently large rice exports. Al- though the proposed project is expected to improve the competitive position of Philippine rice production on the world market, its success is not de- pendent on the Philippines becoming an exporter of significant quantities of rice in the future. C. Rice Processing and Marketing -/ 2.13 Because of transportation bottlenecks, the rice processing and marketing industry is widely dispersed, involving the services of inter- mediaries and buying agents. The isolation of farmers from markets and price information during part of the paddy season has contributed to the proliferation of buying agents, paddy traders and other wholesalers who benefit from farmers' immobility and lack of knowledge of prices, buying at relatively low prices and selling at substantial profits. In some cases paddy changes hands two or more times before arriving at the mill and a new set of transactions occurs between the mill and the consumer. To some extent, vertical integration is being developed by the more progressive entrepreneurs. To date, most of this activity has taken place adjacent to Manila, the main area of demand and also the best endowed with roads and other services. 2.14 Retailing of rice is handled mainly by small shops and by vendors in public markets who sell out of open bags and bins. Usually the unit of sale is not standardized, although lately some processors and retailers have 1/ Annex 2 gives further details on the structure of rice marketing and processing in the Philippines.  begun packaging rice in 1-ganta (2.43 kg) or 2-ganta bags. Brand names are of little importance, but the various varieties are each classified into "ordinary", "fancy" or "special" categories. Customers are very much aware of the difference, and relative prices asked and paid reflect this. 2.15 The amount of land planted to a second crop is only a fifth of the area planted to the first crop. This implies a seasonal pattern of production which has a major impact on rice marketing and storage systems. Over three-fourths of the total crop is harvested from October to January and behavior of paddy prices at farm level is highly seasonal. Paddy farm prices are usually highest around May-July and lowest around November- January. On the average, there is a 20% difference between ruling high and low prices. However, in areas poorly connected to urban markets, sea- sonal price swings can exceed 40%. Over the long run, seasonal peaks in supplies and prices are likely to become less pronounced as the marketing infrastructure improves and year-round rice cultivation becomes more prevalent. Paddy Drying 2.16 For adequate storage and milling performance, the moisture con- tent of harvested paddy must be reduced from 18-35% (depending on weather) to 14%. Where the dry season is pronounced, paddy is allowed to dry in the fields before being threshed. However, since most farmers sell the bulk of their paddy crop soon after harvesting, the drying operation is usually left to middlemen and millers. Sun drying on pavement areas or bamboo mats adjacent to the warehouse or the mill is the rule. This tech- nique leads to grain loss due to rats, birds, etc. In many cases, it also leads to overdrying, which results in a high cracked grain proportion and in significant mill losses. Furthermore, solar drying is largely ineffec- tive for short duration varieties harvested during the wet season. On the other hand, late drying causes discolored grains and reduces mill recovery. In many areas, lack of feeder -oads passable during the wet season limits possibilities for centralized paddy drying. Rice Milling 2.17 Although about 6,000 establishments are engaged in rice milling throughout the Philippines, less than 200, each employing 10 people or more, account for over 60% of the business. Over half of the milling ca- pacity is located in Central Luzon, reflecting the close link between high yields and commercialization of paddy output. Paddy that does not go through rice mills is pounded by hand or milled with primitive stone grind- ers. 2.18 Two types of milling machines, both locally made, are commonly used in the Philippines -- the Kiskisan and the Cono. Both use crude hull- ers which break much grain while dehusking. Very few mills are equipped with modern Japanese-type rubber hullers. The Kiskisan is a small machine (capacity, 2 ton/12-hour day) consisting of a huller/polisher. It is inef- ficient and much of its output is broken rice. On the other hand, its  - 6 - operatioa requires limited financial resources anid allows milling close to the farm. Milling is often done in small lots and paid for in kind. Kiskisan mills cater mainly to the needs of rural dwellers. 2.19 The Cono is a larger machine (capacity, 6 to 9 ton/12-hour day), usually located in commercial centers and towns. It is Imore elaborate and lhandles the hulling and polishing functions separately. if is equipped withi graders, separators and other accessories. As a result, it is more efficient, averaging a weight recovery of 65 to 70'Z; (compared to 50 Lo 60% for the Kiskisan). However, its performance falls considerably slhort of the modern quality and efficiency standards of imported mills which couinon- ly average 70-75% weight recovery. Storage 2.20 Reliable data on available storage facilities are scarce; however, most warehouses are small, less than 700 ton )n the average. Furthermore, most facilities are designed for sack rather chan bulk storage. The most recent official estimate puts total storage at 2.6 million ton, over 80% of which is privately owned. This probably overrates actual storage re- sources, since it includes deteriorated old facilities. A recent survey found a substantial proportion of warehouses in poor condition, with rusted walls, broken windows, inadequate ventilation and damaging levels of moisture. By contrast, a few more recently constructed warehouses, having structural steel and open rigid frames, were in relatively good condition. On the whole, quality storage was found to be in short supply. Credit 2.21 Lack of credit for financing paddy stocks is retarding moderni- zation of rice production and marketing in the Philippines. Paddy stocks are readily secured from farmers only if millers are able to extend pro- duction credit to their suppliers. While DBP and commercial banks engage in financing operations for paddy stocks, credit available for such pur- poses is inadequate for the country's increasing needs. Without adequate stocks, modern silos and mills cannot be used at capacity. Thus, increased provision of working capital to entrepreneurs engaged in modern rice mill- ing and processing is essential to ensure full benefits from investments in improved marketing. Transportation 2.22 An important factor limiting productive investment in modern rice processing systems (and, hence, the size of the proposed project) is the inadequate network of roads, isolating many important grain areas of the Philippines from their markets. Without a good road system, paddy farmers have access to few buyers able to lift their marketable surplus before it deteriorates. As a result, they often receive low prices for their produce, both on account of high transfer costs and a, a result of the lack of com- petition among buyers. Although Manila is tie center for a significant net- work of first class roads, much if the rice produced in Central Luzon and  the Cagayan Valley must flow to the city through narrow and poorly main- tained arteries, often made of crushed rock and difficult to travel on. Road networks on the other islands are even more primitive. 2.23 As part of a UNDP-finance.l transp3rt survey for which the Bank acts as executing agency, feasibility studi!s of high priority roads were undertaken, including the highway Cabanatuai - Tuguegarao, about 225 km, passing one of Luzon's important rice produ:tion areas and connecting it with the Philippines' main rice milling and consuming region in Central Luzon, including Manila. On completion, this trunk road would greatly improve rice transportation in an area which is expected to benefit from the proposed rice milling project. 2.24 In the absence of a good road network, water transport assumes a major role. Much water traffic is to and from small ports servicing small, isolated areas, a situation that leads to costly inter-island shipping with numerous stops and small cargoes. Rail service is limited and available on only two islands (Luzon and Panay). Given the poor state of transport facilities, regional price var4ations are wide. In remote areas poorly connected to major urban cente-s, e.g. Western Visayan, South and West Mindanao, etc., price suppor: operations are ineffective. Policies 2.25 Government marketing policy for rice and corn is implemented by the Rice and Corn Administration (RCA). RCA is the sole importer of grain in the Philippines. It also operates a price support scheme. The bulk of its domestic marketing is accomplisied through the private sector. Under the so-called "quedan" system, RCA pr cures paddy and corn from farm- ers against receipts (quedans) issued by botded warehouses, redeemable in cash at RCA agent banks. Warelousemen and tillers accepting the paddy are entitled to any rice recovery 'ver and above 63% of dry paddy weight as well as to by-products. UJnder the quedan s-'stem, RCA is able to deal with warehousemen, millers, traders, individual farmers or farmers' cooperatives with access to processing and storage facilities meeting RCA standards. RCA purchases directly from farmers only where private or cooperative fa- cilities are not available. 2.26 RCA operations inave so far failed in fully stabilizing a market beset by erratic weather and undergoing rapid technological change. RCA lacks operational flexibility, good market connections and financial resources. As a result, paddy prices have sometimes fallen below the support level of P34.8 per quintal (equivalent to US$60 per ton of grain) after harvest. Iowever, RCA's policies have, on the whole, been pragmatic and generally responsive to producers' interests.  - 8 - III. THE PROJECT A. Project Description 3.01 The project, part of the Government's grain processing and stor- age development program, would consist of the construction, equipment and operation of modern rice processing facilities, involving approximately 150,000 ton of bulk storage as well as complementary drying and milling machinery and other ancillary facilities and equipment. Training for man- agement and operating personnel of project facilities and consulting ser- vices to DBP required for effective project administration would also be provided under the project. Technical Features 3.02 While all 6 large processing units would likely be entirely new, it is expected that half of the small processing units set up under the project would incorporate existing sack warehouses and mills into their designs. Outline specifications and drawings are given in Annex 3. The major features would be: Small Facility Large Facility Total No. Aggr. Cap. No. Aggr. Cap. No. Aggr. Cap.