Philippines - Sixth Power Project

FILE COPY DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Not For Pub0c Us port No. 1-1474-PH REPORT AND RECONMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE NATIONAL POWER CORPORATION OF THE PHILIPPINES TO BE GUARANTEED BY THE REPUBLIC OF THE PHILIPPINES FOR A SIXTH POWER PROJECT June 20, 1974 This report was prepared for official use only by the Bank Group. It may not be published, quoted I or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completenes of the report.  Curreny Unit Peso (P) US$1 - 6.8 P 1 - US$.148 P 1,000 - US$148 P 1,000,000 - US$148,000 Fiscal Year - July 1 to June 30  REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE NATIONAL POWER CORPORATION OF THE PHILIPPINES TO BE GUARANTEED BY THE REPUBLIC OF THE PHILIPPINES FOR A SIXTH POWER PROJECT 1. I submit the following report and recommendation on a proposed loan to the National Power Corporation for the equivalent of $61.0 million with the guarantee of the Republic of the Philippines. The loan would be for a term of 25 years including a four-year grace period at 7-1/4% per annum. PART I - THE ECONOMY 2. The most recent Economic Report - "Current Economic Position and Prospects of the Philippines" (No. 78-PH of April 20, 1973) was circulated to the Executive Directors on May 2, 1973 (R73-85). An economic mission visited the Philippines in April and its preliminary conclusions are incorporated below. The full report of the mission will be distributed to the Executive Directors in due course. Annex I contains country data. Recent Developments 3. Since 1972, the Government has re-formulated its development strategy by introducing a number of important and potentially far-reaching economic and social reforms through decrees in such areas as agrarian reform, taxation, customs administration and tariffs, banking and government organi- zation. These reforms provide an opportunity to improve the performance of the Philippine economy. Aided by the recent commodity boom in the inter- national markets, economic activity in the Philippines has increased consid- erably. The growth in real GNP, which had been about 5% a year for more than a decade, is estimated to have doubled and reached 10% in 1973. However underemployment and unemployment remain quite high, and in common with most other countries the rate of inflation has increased appreciably in the past year. These problems and the long-term implications of the energy crisis for domestic production, the balance of payments, costs and employment are now being examined by the economic mission. 4. The strong recovery of the economy in 1973 resulted from increased agricultural production, a recovery in the industrial sector including manufactured exports, a boom in export incomes and an expansion in public and private investment. The agricultural sector, which had suffered from adverse weather conditions during the previous three years grew by 11% in 1973. Rice production in the present crop year is estimated to have increased by 30% over the level of the previous year when floods reduced production levels. This increase has been mainly due to favorable weather conditions, increased use of fertilizers, more supervised credit and increased investments in supporting rural services as part of a general drive for rice self-suffi- ciency. The Government has vigorously implemented a program of agrarian re- form among rice and corn tenants concentrating mainly on the larger holdings in the first phase. Titles are being transferred to tenants and supporting services improved.  - 2 - S. The increased activity in agriculture has provided the base for renewed expansion of the industrial sector. The growth of industrial produc- tion for exports has also been stimulated by the Government's Industrial export drive which included a range of export incentives. Nontraditional industrial exports, which have been increasing since 1970, are estimated to have doubled in 1973 to about $200 million. The prospects of increased profitabilitv are attracting a large amDunt of new investment into industries such as plywood, textiles and garnments, handicrafts, light consumer durables and electronics. 6. The growth in production was also assisted by the sharply acceler- ated public development outlays in 1973 made possible by a signlficant iW.- provement in the financial position of the Government. The Government has implemented a series of long--needed tax reforms and improvements in tax administratior., such as customs and tariff reform, tax amnnesties, reforms in corporate and local taxation, continuation of the export tax, and increased taxation on luxury itemis and on gasoline. These reforms resulted in a 37% increase in tax revenues in FY 1973, and an estinated 40% this fiscal year. As a result the ratio of Central Government tax revenues to GNP has increased from an average of 9% in recent years to an estimated 129% this fiscal year. High prices for the Philippines' chief exports, including coconut products, sugar, copper and wood products, were largely responsible for an increase in merchandise receipts of almost 70% in 1973. The merchandise trade account recordled a surplus of about $270 million, as compared wit.h a $120 million deficit in the previous year. International reserves rose by $594 million during the year and stood at $876 million, equivalent to about five months of imports, at the end of the year. 8. However, in the latter part of 1973 inflation emerged as a major problem in. the Philippines. Since mid-1973 consumner prices have been rising at an annual rate of more than 40%. This has been caused by the higher rate or world inflation, bty higher export prices, by domestic food shortages, and more recently by the increased cost of petroleum. Provided the Government obtains sufficient cereal imports for the coming July-September lean period for domestic supplies, and provide Lthere is a good harvest later in the year, the rate of inflation should moderate in 1973, but it probably will take 1-2 years for the price effects of the energy crisis to work themselves out fully. Trie rapid inflation has also exacerbated the decline in real wages whichi fell by a total of about 25% between 1969 and 1973. The urban wage earners have been most affected. In the past year, agricultural incomes have improved very substantially, while, with some exceptions, entrepreneurs have been. able to pass oni increased costs. Money wages will have to be raised in the near future if further deterioration in the living standards of wage earners is to be avoided. The Energy Crisis 9. Imported petroleum provides some 93% of the Philippines' total energy requirements. In 1973 the equivalent of 71 million barrels of petroleum crude and other petroleum products were imported at a cost of about $230 million e.i.f. When the energy crisis developed late last year,  -3- it looked as though economic activity in the Ehilippines would be severely disrupted. There were temporary dislocations while reduced quantities of petroleum were available, but the Government moved quickly with conservation measures to reduce non-essential consumption. By March these problems had been overcome and the Philippines is now obtaining sufficient petroleum for its needs. In 1974 imports of petroleum and products are likely to be about 73 million barrels at a cost of about $820 mi.'.lion c.i.f. 10. In response to the energy crisis the Government has decided to accelerate the development of local energy sources, especially hydropower and geothermal energy. These will be supplemented with nuclear energy in the 1980's. The transport sector, which now accounts for 40% of total energy consumption, is likely to continue to be the major consumer of energy. The growth in demand for energy will therefore be influenced by policies that affect the pattern of expansion in this sector. In any event, total demand for energy is expected to grow at about 10 percent a year, and even with more rapid development of natural power sources, petroleum would still account for 85% of total energy needs by 1980. The Philippines does not have any commercial oil fields, but the Government has recently taken steps to encourage more exploration. Growth Prospects 11. Earlier this year the Government decided that, despite the energy crisis and rapid inflation, the growth momentum built up last year should be maintained, to provide for a continued increase in employment and to ensure that export income expands rapidly enough to meet most of the country's for- eign exchange needs. The labor force will continue to grow at almost 3% a year for another decade. Providing half a million new jobs a year as well as dealing with unemployment and underemployment will be a major task. 12. The economy has the potential to continue growing at 7-8% a year in real terms. This growth is not likely to be seriously constrained by lack of foreign exchange, for despite the big increase in the cost of petroleum and other imports, continued high prices for major export commodities will result in another overall balance of payments surplus this year. Moreover, the rapid increase in export prices at a time when external debt has not been changing, has resulted in a sharp fall in debt service from 23% of export earnings in 1972 to an estimated 14% this year. There has also been a sub- stantial improvement in the climate for private investment in the Philippines, especially in exports. Unless there is a calamitous drop in export prices, the Philippines should be able to maintain a reasonable balance of payments position throughout the rest of the decade. There will probably be a substan- tial increase in financing requirements, but with rising domestic incomes and a substantially improved capacity to borrow abroad, it should be possible to mobilize the needed resources. 13. A substantial increase in both public and private investment to support the growth and employment strategy is required, with priority being given to increasing food production, to export ventures and to selective import-replacing investments. The Government plans to spend about P 17 bil- lion on infrastructure and other public investments during FY 1974-77; about  - 4 - 40% of the proposed investment program would be allocated to the transport sector, 21% to power and 13% to irrigation. This would mean doubling the pro- portion of these expenditures to GNP from 1.7% in FY 1968-72 to about 3.5% in FY 1974-77. To finance this program, the ratio of taxes to GNP would have to be increased to 15-16%, and public savings would have to be raised from the present level of 1.4% of GNP to beyond 2% in the next few years. With the Government's program for further tax reforms, there are reasonable prospects for achieving these objectives. Even so, it would mean continued heavy reliance on public borrowing from the local market and from abroad. Implementing this program would also call for continued improvements in public sector management which has already been strengthened by the Govern- ment reorganization. 14. The improved climate for private investment is attributable to the strong performance of the economy in 1973 after three years of stagnation, the current higher prices for many commodities, and the efforts of Govern- ment to attract more foreign investment. A number of big projects are pro- posed in mining, wood processing, fertilizer, steel, aluminum and other industries which seem likely to push up the private investment rate from recent levels of about 16% of GNP to perhaps 22% by the latter part of the decade. A large portion of the funds for these projects is likely to come from abroad. Even so, the supply of long-term funds from domestic sources will need to increase substantially. Balance of Payments 15. Because of continued high prices for major export commodities, export receipts are expected to increase by 33% this year to $2.5 billion. Merchandise imports are likely to increase by about 66% to $2.6 billion, largely because of the increased cost of petroleum. In response to the energy crisis the Central Bank negotiated a series of standby credits with various foreign commercial banking groups earlier this year. However, be- cause of the improved outlook for export receipts, these standby credits may not be used this year. The economic mission estimates that the overall balance of payments will record a surplus of about $250 million this year, with international reserves increasing to about $1.1 billion, the equivalent of about 3-1/2 months of imports. With export prices continuing at relatively high levels, a small deficit in the overall balance of payments is likely in 1975. 16. After allowing for continued reserve accumulation and repayment of loans, the total foreign exchange requirements for the period 1975-79 would be about $7 billion. About $2.5 billion would be provided by remittances, official grants, direct investment, and short-term trade finance. The re- maining $4.5 billion would have to come from foreign borrowing. Last year the Bank estimated total requirements for 1974-78 at about $4 billion. In June 1973 the Consultative Group for the Philippines met and accepted the need for rising levels of commitments for development projects to support the Philippines' increased development program. The increased estimate of requirements reflects the effects of inflation, the more optimistic outlook for growth in the Philippines, and the improved capacity to carry foreign debt.  -5- 17. Borrowing on this scale would not pose serious problems for balance of payments and external debt management. At the end of 1973, the Philippines' medium and long-term external debt stood at about $1.9 billion, of which pub- lic debt was 44%. Because the Government has exercised strict control over the amount and type of new external borrowings, the total amount of debt out- standing has not increased much since 1970, and the maturity structure has improved. Moreover, the debt service ratio is expected to remain at about 14% in 1975. With this moderate debt burden the Philippines will be able to contract substantially larger amounts of external debt which would probably lead to a small increase in the debt service ratio, perhaps to about 14-15% by the early 1980s. 18. The Philippines' development program will continue to require re- sources in excess of the foreign capital which will become available for fi- nancing the import component of development projects. Some financing of local currency expenditures will be justified, especially for projects of economic and social importance which need only limited amounts of foreign exchange. PART II - BANK GROUP OPERATIONS IN THE PHILIPPINES 19. The Philippines has received 23 Bank loans and three IDA credits totalling $466 million, net of cancellations. About 48% of the Bank/IDA lending, about $225 million, has been for infrastructure projects in power, transportation, water supply and for education. The remainder has been divided about equally between agriculture and industry. About $126 million of this has been for irrigation, livestock, rice processing and rural credit and about $115 million for industry in three loans to the Private Development Corporation of the Philippines and one loan to the Development Bank of the Philippines. There has been a marked improvement in the way our projects in the Philippines have been executed in the last two or three years compared with experience in the 1960's when shortages of peso counterpart funds com- bined with poor administration caused serious problems. Apart from the rice processing project, where some major changes made necessary by changed circumstances have been proposed, all our projects are now going well. Annex II contains a summary statement of Bank loans, IDA credits and IFC investments as of May 31, 1974, and notes on the execution of on-going projects. 20. The size of our lending program increased substantially in FY1974 reflecting the ambitious development program of the Government and its improved capacity to prepared and implement projects. Our lending in FY1974 amounted to $165.1 million compared to an average of about $30 million a year in the previous five years. Future Bank lending will continue to concentrate on public infrastructure and agriculture. We will also continue to help industry and provide more assistance for projects in the social sectors. 21.. The following projects are among those which may be ready for Board consideration in FY 1975 - Population, Inter-Island Shipping, Tarlac Irriga- tion, Mindoro Rural Development and Small Industry. The population project would assist the broad objectives of the population program and strengthen  - 6 - the health and famuily planning delivery system of the Department of Health. The loan for inter-island shipping would be relent through DBP to private shipping companies for the acquisition of new and used ships and conversion and repairs of existing ships of the inter-island fleet. The Tarlac Irriga- tion project would help rehabilitate irrigation systems in a lheavily tenanted area of Central Luzon, while the Rural Development project would help finance a range of rural investments designed to promote the integrated development of the island of Mindoro. The small industry loan would provide funds for relending to small firms and technical assistance to help strengthen the institutions serving these firms. 22. Since 1972 the Philippines has received a limited amount of assist- anice from IDA, but on the basis of a reappraisal of the prospects for the Philippines' balance of payments in the light of changes in commodity prices, and in view of the sharply increased needs of the poorer members of IDA for conicessional assistance, further IDA lending to the Philippines does not appear to be justified. The Philippines now has the capacity to borrow larger amounts abroad to meet the needs of the increased investment program now planned. The Bank's share in this higher level of foreign borrowing will be reviewed in the light of the findings of the recent economic mission. At present, the Bank/IDA share in total debt outstanding is about 9% and its share in debt service is about 5.5%. Since the Philippines will have the capacity to service more commercial debt in future, it is unlikely that the Bank's share in debt service will rise even with a higher level of lending. 23. IFC has made commitments in the Philippines totalling $68.0 mil- lion for investments in ten companies in the fields of development banking, power, telecommunications, ceramic tiles, paper, petroleum products, nickel mining and refining, chemicals and synthetic fibers. Of these investments, as of May 31, 1974, $18.2 million have been sold, $0.4 million cancelled and $1.3 million repaid, leaving a net portpolio of $47.6 million. On the same date $12.6 million was undisbursed. Preliminary proposals have been received for an aluminum smelter and other projects in the pulp and paper, dinner ware, metal alloys and shipbuilding fields. PART III - THE POWER SECTOR 24. Development of the power sector in the Philippines has been hindered by haphazard planning and poor coordination, particularly between the National Power Corporation (NPC) and the Manila Electric Company (MECO), the two largest entities. This arose partly from a strained relationship between NPC, which is wholly Government owned, and MECO, which is privately owned. A major change in sector policy occurred with the publication of Presidential Decree No. 40 of November 7, 1972. A long range electrification program, involving industrial development, dispersal of industry and rural electrification, was announced based upon establishing island grids, integ- rating power generating systems and consolidating electric distribution franchise systems. NPC was made responsible for the construction of national grids, the development of all future generation supplying the grids, and ultimately for owning and operating all generating facilities. However the  - 7 - terms and timing of the implied transfer of MECO's existing generating facilities remain to be decided. The National Electrification Administration (NEA) was made responsible for reorganizing the distribution sector and implementing rural electrification, while the Power Development Council was to prepare an integrated plan of electrification and power development and to coordinate its implementation. 25. The Philippines is not rich in energy resources. Coal deposits are limited in amount and quality and although some gas reserves have been found, they are insignificant for the electric power sector. More than 90% of total energy consumption and 80% of electric generation is thermal and dependent on imported oil. The energy crisis has accelerated the Govern- ment's plans for development of indigenous geothermal and hydro energy and of nuclear power. The hydroelectric potential is estimated at 3,600 MW, two- thirds in Luzon and one-third in Mindanao; 16% of this has already been developed. The capacity of the geothermal field at Tiwi, Southern Luzon has been estimated at several hundred megawatts and NPC has begun development of a geothermal plant there. A feasibility study for a nuclear power plant has been completed and a 600 MW nuclear power unit is planned for operation in the early 1980's. 26. Electricity supply nationwide is provided by more than 400 utilities of which one-quarter are public, including NPC. The remainder are privately owned, of which the Manila Electric Company (21ECO) is much the largest. MECO now accounts for 66% and NPC for 26% of the country's totai generation, the remaining 8% being provided by small self-generating utilities. MECO depends almost entirely on oil-fired thermal generation while NPC's generation is primarily from hydroelectric resources. 27. MECO serves the Greater Manila area and expects load growth to increase at about 8% a year as it has in the recent past. NPC is a bulk supplier and serves 177 small electric utilities and 104 non-utility customers throughout the Philippines. NPC's load growth has increased by 15% a year during the last five years, reflecting the Government's policy of total electrification. However, electrification is far from complete and rural areas in particular have only limited service. In Luzon, the most developed region, 242 small towns and villages out of a total 636 have no power supply at all. 28. Before the energy crisis NCP's long-term generation expansion program for the combined NPC-MECO Luzon grid, and the Visayas and Mindanao regions was expected to almost double total capacity from 2058 MW in 1973 to 4018 MW in 1980. To finance this program, total investment of about US$463 million is planned in FY1975-78 to be financed from internally generated funds (15%), borrowing (84%), and equity contributions (1%). NPC requires US$286 million in foreign currency financing. It has firm commitments of US$157 million including the proposed loan. Arrangements for the balance are being discussed with bilateral and multilateral donors. NPC will raise the required peso financing (US$177 million equivalent) through retained earnings (39%), sale of bonds (59%) and equity contributions (2%). In response to the energy crisis the government and NPC are now revising the  above program in order to further accelerate hydro, geothermal and nuclear power developments and reduce dependence on oil-fired thermal plants. The new program will probably increase NPC's total investment requirements. In considering the size of the new program NPC will have to take account of its ability to raise and service foreign and domestic borrowings. 29. NPC and MECO have been operating independently with only seasonal and emergency exchange of energy between the two systems. Joint operation in the future will yield technical and economic advantages and will be necessary when MECO becomes dependent on NPC for its power supply. The NPC-MECO task force study on "combined operation" of the two systems would be reviewed by the consultants who would prepare a feasibility study for a load dispatching center (para 37). In Mindanao, NPC plans to increase installed hydro capacity on the Agus River from 150 MW in 1973 to 440 MW in 1978. PART IV - THE PROJECT 30. The proposed project was identified by a Bank mission in June 1973. A Bank mission appraised the project in November/December 1973 and negotiations were held in May 1974. The leader of the Government's negotiating team was Ambassador Eduardo Z. Romualdez. The Appraisal Report (No. 421-PH) on the proposed project is being circulated separately to the Executive Directors. Annex III provides a loan and project summary. Description of Project 31. The proposed project would provide for the construction of the 100 MW Pantabangan hydro power plant and another portion of the transmission system expansion program in Luzon. The Pantabangan hydro power plant is an addition of power generating facilities to the dam and reservoir being financed under the Bank loan for the Upper Pampanga River Project (UPRP) (Ln. 637-PH). Two 50 MW units would be installed and a re-regulation dam would be built downstream of the plant to regulate the river flow for irrigation purposes. The plant would have a firm capacity of 70 MW and would supply the Luzon grid via a 230 KV transmission line. Commissioning is planned for April 1977. The Luzon transmission grid would be extended by constructing about 210 km of 230 kv and about 535 km of 69 kv transmission lines and 33 substations with a capacity of 1,375 MVA. Of this, about 250 km of 69 kv lines and 13 substations (75 MVA), included in the Fifth Power loan but for which bids have not been invited, have been transferred to this project, because funds in the Fifth Power loan are insufficient to finance the total project as defined at the time of that loan (Loan Agreement, Section 7.02). This is because of sharp cost increases since 1971. The present cost of the transferred items is $10.1 million. The transmission expansion program would be complete by December 1977. The loan would finance the feasibility studies for the Chico River hydro power development, which was identified as one of the better potential areas in Luzon for power generation by studies financed under the Fifth Power loan and credit. It would also finance a study to determine the site and detailed design for a dispatching center for NPC. This  - 9 - would permit effective pooling operations of the combined NPC-MECO system and efficient use of the second Bataan thermal unit when it becomes operational. The Borrower 32. NPC was created in 1936 and in 1960 was converted to a stock corporation wholly owned by the government. Presidential Decree No. 380 of January 22, 1974 revised NPC's Charter by raising the authorized share capital from P 300 million to P 2,000 million, by raising the total peso indebtedness ceiling from P 500 million to P 3,000 million and by placing NPC under the direct supervision of the Office of the President. The life of the corporation, due to expire on January 4, 1976, was extended by 50 years. 33. NPC's management was hampered in the past by inadequate organization and management information. With the advice of consultants financed under earlier Bank loans, NPC has now reorganized its management, overhauled its accounting and reporting procedures and provided on-the-spot training for staff implementing the revised procedures. All this has provided the neces- sary base for NPC to become a well-managed utility. The most recent revision of the Charter authorized NPC to prescribe a standard form of contract for the supply of power, and appropriate rules and regulations for uniform application to apply to both new and existing customers; permitted NPC to sell bulk supplies of power to enterprises in franchised areas; simplified NPC's compensation procedures; and directed that all industrial disputes of the Corporation will be settled by compulsory arbitration. This has further strengthened NPC. 34. The Bank Group has made five loans and one credit to the Nationial Power Corporation (NPC); the most recent of which was a loan of $22.0 million (Ln. 809-PH) and a credit of $10.0 million (CR. 296-PH) made in 1972 to finance the Bataan No. 2 unit and a part of NPC's ongoing transmission program. Following initial delays, this project is proceeding satisfactorily and commissioning is now expected in April 1976, about 10 months behind the original schedule. roject Execution 35. The National Irrigation Authority (NIA) would execute the Pantabauigan plant on behalf of NPC under the terms of a Memorandum of Agreement on Imple- mentation of the Power Phase of the Upper Pampanga River Project (UPRP) between NIA and NPC dated January 22, 1973. The Pantabangan plant is one part of the UPRP, a major on-going multipurpose project, for which the NIA is executing agency. Since NIA already has shown itself fully capable of managing the UPRP project, the Government decided that it should be responsible for con- structing the Pantabangan plant as well. NPC would cooperate very closely with NIA and supplement NIA personnel to ensure efficient implementation of the project. Under the Agreement, NPC would be the borrower for the Bank loan and responsible to the Bank for salisfactory compleLion of the project, in- cluding procurement. NPC would own the facilities on completion of the project and water releases would be in accordance with guidelines set out by NIA. NPC would bear only the incremental costs of the power phase. The civil works  - 10 - contractor for UPRP will undertake the Pantabangan civil works under the terms of a negotiated contract, in order to implement the Pantabangan project as soon as possible. These works would not be financed by the proposed loan, but additional materials and equipment needed by the contractor would be financed by the loan and procured through international competitive bidding. NPC would execute the transmission projects and carry out engineering and construction supervision of the transmission projects using its own staff. NPC's experience makes this arrangement satisfactory. Cost and Financing of the Project 36. The estimated total cost of the project is $84.5 million, with a foreign exchange component of $56.0 million (66% of total project costs). The estimates include the cost of a small number of items which may be manufactured locally. They also include a 5% allowance on all items for physical contingencies and an allowance for annual price increases of 7.5% to 18%, depending upon the particular item and the year in which it would be purchased. The proposed Bank loan would finance the foreign exchange component of $56.0 million, and interest during construction of $5.0 million for a total loan of $61.0 million. The local cost component of $28.5 million and interest during construction of $2.4 million would be financed by NPC from internally generated funds and sales of bonds. Items Financed with IBRD US$ Million Participation Local Foreign Total (See Annex III for further details) Pantabangan Hydro Plant 10.51 12.25 22.76 Contingencies 3.99 4.15 8.14 Sub-Total 14.50 16.40 30.90 Transmission Expansions 9.41 30.55 39.96 Contingencies 4.29 7.45 11.74 Sub-Total 13.70 38.00 51.70 Consulting Services 0.34 1.60 1.94 Total 28.54 56.00 84.54 Interest during Construction 2.42 5.00 7.42 Grand Total 30.96 61.00 91.96 37. NPC has a history of chronic financial problems, due in large p;rt to difficulties in securing timely rate increases. Recognizing this, the Govertnment amended NPC's Charter in September 1971 to exempt NPC rate acttons from lower court injunctions and to exempt NPC from all taxes  - 11 - including income and other taxes. However the rate of return for FY 1974 is forecast at only 6.2% compared to the minimum of 8% required under the Bank's fifth power loan to NPC (809-PH) and which would be required under the proposed loan (Loan Agreement, Section 5.05(a)). NPC has reviewed its tariff schedule and is implementing increases to be effective on July 1, 1974, which should yield sufficient revenue to achieve the required overall rate of return of 8% in FY 1975. NPC has agreed to take the action necessary to reduce unpaid bills to not more than the revenue of the previous 3 months by December 31, 1976 (Loan Agreement, Section 5.06). A special committee has been set up, chaired by the Executive Secretary, to look into the management and financial affairs of NPC's delinquent customers. The Govern- ment has allowed the cement companies, who are the worst delinquents, to increase cement prices by 40%. 38. As in previous agreements with the Bank, NPC has agreed to seek Bank approval before incurring any long-term debt if its revenue is less than 1.3 times the maximum debt service for any succeeding year, including the debt to be incurred. As in the past, the Government will ensure that NPC obtains the domestic capital required for its investment program. In considering the size of its future investment program, NPC will have to take account of its ability to raise and service foreign and domestic borrowings. 39. A fuel adjustment clause for NPC's rate schedule in Luzon became effective in July 1973. This empowers NPC to pass on to the consumer any variation in the average cost of fossil fuel above a stipulated base price. In November 1973 the cost of fuel oil at NPC's Bataan Thermal Plant was $4.40 per barrel, which was included in the average price of $1.05 cents per kwh sold by NPC to its Luzon customers. A doubled fuel oil price would raise the average price to customers by US$0.19 cents per kwh, equivalent to an 18t', tariff increase. 40. NPC has a service contract with an international company to provide geothermal steam for the Tiwi project. Payment will be subject to escalation according to mutually acceptable cost indices still to be arranged, but subject to geothermal power remaining competitive with alternative gene- rating sources. Before the Tiwi geothermal plant is commissioned in 1979, NPC's fuel clause formula will need to be amended to cover changes in the cost of steam. Procurement 41. The goods and services to be financed by the proposed loan, including basic materials and equipment for civil works construction, would be procured through international competitive bidding in accordance withi the Bank's Guidelines. Since some of the project items may be manufactured locally, a preference of 15% of the c.i.f. price of imported goods or the custom duty if lower, would be extended to domestic manufacturers in the evaluation of bids. Bidding for the Pantabangan project and the items transferred from the Fifth Power Project is underway but no contracts would be awarded before the loan is approved. On the basis of the present procure- ment schedulle, it is unlikely that contracts would be ready for award before the loan is signed.  - 12 - Disbursement 42. Disbursements would be made against 100% of the c.i.f. cost of imported equipment, 100% of the ex-factory cost of locally manufactured equipment and 100% of the foreign expenditures for professional services. Retroactive financing is recommended for about $100,000 for foreign costs of consultants' services incurred between December 1, 1973 and loan signing. Economic Justification 43. Electricity consumption in Luzon for the combined NPC-MECO interconnected system has increased at 10% a year since 1967; and is fore- cast to grow at about the same rate, up to 1982. However the growth rate in energy requirements and peak demand in NPC's market is expected to remain substantially higher than for MECO's, reflecting the Government's policy of rural electrification. 44. When the Malaya No. 2 thermal unit is completed in 1978, the combined NPC-MECO system will meet energy requirements up to 1981. However a deficit is expected in peak-supply capability from the dry season in 1977 onwards. NPC's four hydro plants do not have sufficient reservoir capacity. Consequently their plant capacities are reduced to only 302 MW in the December to June dry season compared to 427 M.W during the wet season. Irrigation releases from the Pantabangan reservoir, with their potential for power generation in the dry season, would complement the existing power system. The Pantabangan project would be more economical than gas turbine capacity, the only alternative peaking source, for discount rates up to 35%. The financial return on the Pantabangan plant would be 18% on the basis of additional revenues. 45. The transmission facilities comprise two parts. One would connect the Tiwi geothermal plant to the Mfanila area increasing the electricity supply available to MFCO; the other would extend electricity supply by 1980 to about 130 towns and municipalities not connected to the Luzon grid, and connect about 60 large consumers including 27 pumped irrigation projects to the NPC grid. Of the towns to be connected, 60 now rely on small high-cost diesel plants and 70 have no electricity supply at all. These grid connections would make reliable, lower cost electricity available to consumers and would encourage pumped irrigation, agro-industry development and the dispersal of industry. A rate of return for the transmission projects was not calculated because of the difficulties in quantifying benefits and allocating incremental revenues to the facilities. NPC however has justified each of the rural electrification projects as the optimum scheme for the purpose. PART V - LEGAL INSTRUMENTS AND AUTHORITY 46. The draft Loan Agreement between the National Power Corporation and the Bank, the draft Guarantee Agreement between the Republic of the  - 13 - Philippines and the Bank, the Report of the Committee provided for in Article IIl, Section 4(iii) of the Articles of Agreement of the Bank and the text of a draft resolution approving the proposed loan are being distributed separately to the Executive Directors. The draft agreements conform to the normal pattern for loans for power projects. 47. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 48. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments June 20, 1974   ANNE 1 Page 1 of 3 paiges GOUNTRy DATA - PHIjLTPPINES AREA POPULATION SeNSIU e mTarbaln 29 cCeSkm 59,0t"in (mtd-1972) FrW faal w SOCIAL DNDICATIORS Re..4ference Conue Ridlippineo 1obo7tba ogp OStn GN? PER CAPITA USe (ATLAS BASIS) 1 .160 /u 210 /6 5140 210 200 ODORAnHIC ,-.-,'42 144 144 145 Crude birth rate (Perthuad170 Crude death rate (per thousand5 . 11 10170 Infan motality rate (per thouaand live birtha) So 70 /c 125 80-90 Life etmpoectancy at birth (years) 56 /4 59 50 59 Gross reproduct ratea /2 *2.9 5.1 5.0 5.2 Population growth rate 5.0d 5.0d 5. 2. 3. Population growth rate - urban14/5 /d545 Age structure (percent) 1 ' 74 15-614 51 55 50 54 65 and over 5 14 5 Denendency ratio /41.5/e 1. 3/tA- 1.7 0.9 Urban population as percent of total 50 /d 55 a~ 564 Family planning: No. of anceptors cumulative (thous.) *1409 316 200 19 No. of users (% of married women) . 69 10 Total labor force (thousands) 9,120 17.220 /f 6,200 9,170 16,900 /E Percentage emwployed in agriculture 6i 56 7414 55 77 Percentage unemployed C7 f/7 51 INCOME DISTRIBUTION S-rent of-n-ational income received by highest 5% 29 /4/ 25 'L) Percent ofnational income received by highest 20% 5i 54 ~ 4 If i Percent off natioonal income received by lowest 20% iii 1f' 6 / Percent of national income received by lowevit 140% 15 f 12 MISTININTION OF LAND 0OUERSH{IP T -cned by top 105 of owne;rs ... 5 owned by smallest 10% of owners... HEALTF AND NUTRITION PoPLIatilon -per physician J., da 4' 2,50620 200 1,6oo Population per nursi-ng person .2,050 2,700 1,1400 2,6470 Population per hospital bad i,i50 /4 91 120 1470 1,500 Par capita calorie supply as % of.requirements /5 0 /57 /48 1214 100 Per capita protein supply, total (grams per day9L6 145 1 553 / 55 76 5'1 In Of which, animal and pulse 19 7) 22 7429 19 17 ~ Deat;h rate 1-14 years /7 911 7/ EWUCAO..ION i73sfd /8 prinary school enrollment ratio 91 /c 11 n9O/ 09 Adjusted 79 secondary school enrollment ratio 26 149 22 /E 50 13 Ye.:.s of sc'hooling provided, first and second level 10 10 11 12 12 V cational enrollment as % of sec. school enrollment 114 10 /P 21 /p ie, 25 Adult -iteracy rate % 72 /0 22. 2c 70 Average No. of persons per room (urban) ... .1.6 Percent of occupied units without piped water 50 77 /4..1 Accses to electricity (as % of total population) .20 70 ..15 Percent of ,'ural population connected to electricity ..10 56 CONSWQTrION Wro_reai~rsper 1000 population 22 145 Ic105 152 78 Passenger cars per 1000 population 5 71 Electric power consumiption (kwh p.c.) 110 lh 229 3775 268 106 Newsprint consumption p.c. kg per year l.14L .,j 1. 8/ 2.14 1.0 1.2 Notes: Figures refer either to the lates-; periods or to account of environmental temperature, body we l7 the latest years. Latest periods refer in principle to distribution by age and sex of national populations. - the years 1956460 or 1966-70; the latest Years in prin- /6 Protei-n standards (requiraxmnts) for all ocuntire as estab- ciple to 196,0 and 1970. Only sigoificantly different llshed by USDA Economic Research Service provide for a minimu periods, or yearn are footnoted separately. allowance of 60 grams of total protein per day, and 20 grams of /4, Thn Per Capita aNEP estimates for years other than 1960 animal and pulse protein, of which 10 gramer should be animal is at market prices, calculated by the same conversion protein. These standards a.re somewhat lower than those of 75 technique &as the 1972 World Bank Atlas. gram of total protei-n and 25 grass of animal protein as an /2 Average numher of daughters per woman or reproductive average for the world, proposed by FAO In -,he Third World Food age. Survey. 13 Poraulation growth rates are hbr thke desades ending in /7 Some studies have suggested that crude death rates of children 1960 and 1970. ages 1 through 14 nay be used as a first approximation index of N a An of under 15 and 65 san over age brackets to mainutrition. those in labor force bracket of ages 15 through 614. /8 Percentage enrolled of correspondiing popula,,tion of school age Zi FAO reference standards represeant physiological re- as defined for each oountry. quiren-ents for normal activity and health, taking /0 19-u149. /51 19c5/701. 4 196d8. /d For tic~ definition of uri-n scc I.". Denoz,ruphic Y-erboolk 1971, p. 16 7 Pa~tio of oPuleItioc _under 5 en eSnd over to totni bloc' forc. If 1971. /4e Rapl-ed icier force. /4, 1961. 71 scocoV. j invenst cuiotiln, rural population only. A4 1962. ifl 1960/5_2. 'a 1969. /n 1964/66. In Includes cverapc atudents. 9;15(7. I'15 ,yars ,nd Hi-. Ir Loen not include Bangkok metrap,iita.n area ulere 63% of the population ban. accens to electricity. 196105~. t!;Iports only. /0 Computed ny applying to the 1950' fig ae tnc groth rate of ON/capita in real terms frm, 1900 to 1970. 77 19711 estimated per capita 01? of $2140 based on racised national accounts and includen USi inflation. R3, June 14, 19714  ANNEX I Page 2 of 3 pages e1/ ECONOtNC INDIoATORS CROSS NATIONAL PRODUCT IN 1975 ANNLUAL RATE OF GROWTH (g, constant prices) Pesos Mln. % 1960-65 1965-70 1971 1972 1975 GNP at Market Prices 71,766 1O0.C 5.5 5.7 6.5 4.3 10.0 Gross Domessic Investment 15,942 19.4 12.6 1.6 5.9 -3.5 9-. Gross hat'onal Saving 17,015 25.7 15.0 5 15.2 -6.2 49.1 Current Account Balance -5,071. 2.4 . Exports of Goods. NBS 16,856 25.5 11.0 h S S.C 1 18.7 Imoorts of Goods NBS 13,000 19.1 7.3 7.2 5.4 2.7 13.1 urr PUc LAPOR FORCE APN, PRODUCTIVITY IN 1973 Value added .abor Force V. A. Per Worker US$ 09 -. 0 141n. % US $ % Agriculture 1,494 ,2.2 7.0 52.9 213 61.0 Industrv 1,226 26.4 2.0 15.2 6o4 175-9 Services 1,922 41.4 4.0 31.6 461 157.3 Unallocated . . 0.3 0.2 4,64L 100.0 13.3 100.0 h49 1.00.0 / GOVE ONNENT FINANCE - General Government Central Government Mln.) % of GDP (Pesos FIn. f of SDP 197 197 196 -7 1973 1971 1972 1975 Current Receipts .. .. .. 6,969 9.9 6.3 9.8 Current ExpenditLre .. .. 5,995 6.0 7.6 8.4 Current Surplus .. .. .. 9 0.9 0.7 T Capital Expenditures .. .. .. 1,4L44 0.5 1.6 5/ 2.C Exte-nal Assistence (net) .. .. .. 2t9 0.7 - 4 MONEY. CPEDIT and PRICES 1965 1969 1970 1971 1.972 1975 (Million pesos outstanding end perioi) Money and Quasi Money 7/ 5.136 8,959 10.140 11,720 15.243 16,857 Bank credit to Public Sector 7 960 5,565 3,4;79 5,907 4.77e 6,541 Bank credit to Private SeCtor 3,223 13.159 15,396 16,010 22,692 25,577 (Percentages or Index Numbers) Money and Quasi Money as % of GDP 21.1 27.0 25.0 25.2 25.5 23.5 General Price Index (1965=100) 100.0 111.4 1.37.7 159.3 175.3 216.L Annual percentage changes in: General Price Index 2.2 1., 23.6 15.7 10.0 24.6 3ank credit to Public Sector 27.9 -2,4 12.3 22.5 56.9 BanL credit to Private Sector .. 9.0 .7.2 17.0 27.0 10.9 1/ lio projections are provided in this annex sirce existing projecticns are being revised in tbo light of higher oil prices by the economic mission. 7 Constant 1967 prices. 5/ Total labor force; unemployed are allocated to sector of their normal occupation. "Unallocated' consists mainly of unemployed workers seeking their f-rst job. 7/ Based cn 'actual` figures from the "Cash Budget". Dats prior to 1971 not available. 5/ Counteroart funds from external comm.odi-y aid. 6/ Economic mission estimates. 7/ Covers credits from all important financial institutions. ..not available . not applicable  ANNEX I Page 3 of 5 pages TRADE PAYMENTS AND CAPITAL FLOWS BALANCE OF PAYMENTS MERCHANDISE EXPORTS (AVERAGE 1971-75) US$ Mln. T 1971 1972 1975 (Million us$) Coconut Products 284.7 21.5 Sugar Products 2L4.3 i8.4 Exports of Goods, NFS 1,597 1,432 2,447 Forest Products 314.3 23.7 Imports of Goods, NFS 1,L22 1,484 2,008 Mineral Products 254.0 19.2 Resource Gap (deficit -25 -52 +455 Fruits and other 87.7 6.6 agricultural products Interest Payments (net) -76 -92 -53 Other manufactures 140.7 lG.6 Workers' Remittances Total 1,525.7 100.0 Other Factor Payments (net) -24 -53 -60 Net transfers 154 188 234 E Balance on Current Account +9 +11 556 EXTERNAL DEBT, DECEMBER 51, 1975 us$ Mln Direct Foreign Investment -4 -22 77 Net MLT Borrowing Public Debt, incl. guaranteed 829.9 Disbursements 358 390 577 Non-Guaranteed Private Debt 1,o4.0 Amortization 302 250 335 Total cutstanding and Subtotal 6 555 42 disbursed 1,870.9 Capital Grants 1 Other Capital (net) 2 134 15 -43 7 Other items n.e.i. 2/ -144 -106 -38 DEBT SERVICE RATIO FOR 1975 D Increase in Reserves (+ D- +31 +-