Philippines - Industrial development problems and prospects (Vol. 2 of 2) : Review of selected sub-sectors

Report No. 280-PH Industrial Development Problems LE C P And Prospects in the Philippines (in two volumes) Volume 2 Review of Selected Sub-sectors March 19, 1974 Industrial Projects Department Not for Public Use Document of International Bank for ReconstrueItion and Development International Development Association This report was prepared for official use only by the Bank Group. It may not be published quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.   INDUSTRIAL DEVELOPM4ENT PROBLEMS AND PROSPECTS IN THE PHILIPPINES TABLE OF CONTENTS Page No. VOLUME II - REVIEW OF SELECTED SUB-SECTORS V(i) ENGINEERING INDUSTRIES ........... ....... 1 V(ii) SHIPBUILDING INDUSTRY ................... 12 V(iii) AGRICULTURAI. MACHINERY AND EQUIPMENT .... 31 VI. PULP AND PAPER .. ......... ....... ...... 40 VII. TEXTILES ANDi GARMENTS .... o...... 70 VIII. FOOTWEAR INDUSTRY .... .-.-. .-. . . .... ....... 80 TABLES - V(ii)-1 to VIII-1   V(i). ENG[NEERING INDUSTRIES Introduction 5.1 For purposes of this report, engineering industries may be defined as comprising the following groups of the ISIC classification: 35 - Manufacture of metal products, except machinery and transport equipment; 36 - Manufacture of machinery, except electrical machinery; 37 - Manufacture of electr:Lcal machinery, apparatus, appliances, and supplies; and 38 - Manufacture of transport equipment. 5.2 In the Philippines, the earliest firms in this area of endeavor were companies which established themselves to provide construction, erection, maintenance and repair services to industries employing mechanical equipment such as sugar factories, mining and (land and sea) transport enterprises. Some of the largest firms engaged in "engineering" have grown from this background; they continue to thd!s day in their original pursuits, but they have generally added capabilities for the manufacture of a wide variety of spare parts as well as new equipment requiring a relatively low level of sophistication, such as mining ctarts, centrifugal pumps, chain and pulley blocks, etc. Not only size (up to P 150 million annual revenue), but also equipment and skills available in some of these firms are impressive. Capa- bilities include well-equipped ferrous and non-ferrous foundries, large and well-maintained machine tools, and employees - workers, foremen and engi- neers - with the requisite skills. 5.3 In the area of land transport equipment, the automobile industry is in the process of transition from purely assembly operations to selective manufacture of major components for both domestic and export markets under the guidelines of the "progressive car manufacturing program" (PCMP). Hither- to, a large number of assembly plants produced a wide variety of vehicles for the limited Philippine market, and domestic operations were limited to assembly and painting. Bodies for commercial vehicles and "jeepneys" were constructed in workshops on a small scale. Now under the officially spon- sored program, five manufacturers have been allowed to assemble a limited variety of vehicles in the Philippines subject to the condition that each one will also manufacture an agreed list of parts, e.g. body panels, trans- missions, engine blocks, etc. for both home and export markets, and earn a certain percentage of the foreign exchange required for import of CKD pack- ages through exports. 5.4 Several firms are engaged in the manufacture of consumer durable goods, such as air-conditioners., refrigerators and sewing machines. In this area, designs are invariably of foreign origin; and overseas companies  -2- generally are influential, either as owners or as licensors. Some plants in this category are excellently equipped and obviously well managed. In contrast with the appliance industry, the manufacture of industrial electrical equipment is not well developed. There is one maker of distribution trans- formers and one of small electrical motors. Capacity utilization is low (around 50 percent on a one-shift basis), due in part to high costs in compari- son with imports. In agricultural equipment, there existed, roughly 15 years ago, some manufacture. In the 1960's, with more liberal import policies prevailing, the manufacturers found it impossible to compete and closed shop, or turned to other products. At present, there is a re-emergence of firms in this area, stimulated to some extent by the availability of designs specially developed for use in less advanced countries. A few small firms have emerged as support industries (e.g. tool and die makers); and a number of companies are engaged in specialty markets, such as replacement parts for crawler tractors, LPG (liquified petroleum gas) cylinders, welding equipment, etc. 5.5 It can be said without hesitation that the Filipino worker has unusual mechanical aptitude and trainability. As a result, it seems that manufacture proceeds efficiently and without undue scrap losses, even though equipment at times is rudimentary and partly "jerry-rigged". Some plants exhibit considerable ingenuity, adapting general-purpose machine tools for tasks which are usually reserved for specialized equipment. These advantages, in combination with the prevailing relatively low wage levels, point to real possibilities for a profitable development of the Philippine engineering industry. It should be said, however, that with the exception of the work of appliance makers and the participants in the PCMP, operations are currently largely of the "jobbing" type. Modern production methods are as yet little developed. 5.6 The fact that in the Philippines a considerable quantity of plant equipment is idle or grossly underutilized, has been brought out by a number of observers. 1/ Most factories work for only one 8-hour shift per day, and there are many which do not use a very substantial portion of their available equipment on a regular basis. As installed capacity is poorly utilized, it appears that there is an artificially high capital- output ratio in some industries. 5.7 The major identifiable building blocks available for further growth of the engineering sub-sector appear to be the metal working industry, the automobile industry, and the shipbuilding industry. The farm equipment and industrial electrical equipment industries are infant industries with potential for growth in due course. The existing capability range of these industries is shown in the table below: 1/ "Survey of Idle Plants and Equipment in the Philippines", published by The Economic Development Foundation, Inc., Makati, Rizal, November 1972.  EBNGIN7ERING INDUSTRTES OF THE PHILIPPINES Primary Conversions Components/Sub-assemblies Thd-Products Metal-working industry Heavy castings Replacement parts for mining, Fabricated struct- Forg-ings sugar and other industrial ures machinery Industrial pumps Boilers, tanks etc. Mining carts Grinding balls Welding equipment Logging blocks and rigging Barges, etc. Train wheels Tractor undercarriage etc. Passenger car industry Engine blocks Transmissions. engines Passenger cArR Body stampings Radiators Jeepneys Leaf Springs Exhaust system Repair Parts Commercial Vehicle Industry Body/chassis Trucks Repair parts Buses Shipbuilding Industry Ship repair parts Small ships Fittings and deck equipment Barges Boats Industrial equipment Electrical equipment industry Parts for repair and rebuilding Appliances Distribution transformers Small motors Farm equipment industry Small engine (diesel) Power billers Attachments Irrigation pumps Replacement parts Rice Hullers Grain Dryers  4- 5.8 The shipbuilding industry and agricultural machinery and equip- ment are reviewed in some detail in Sections V(ii) and V(iii). Metal working industries, car manufacture, industrial electrical equipment, machine tools, etc. are briefly discussed in the following paragraphs. 5.9 The metal working industry comprises a few large and several small plants engaged principally in jobbing work. In the absence of an industrial machinery industry in the country, the metal working industry perhaps comes closest to fulfilling this role, although its operation is limited to the making of replacement parts and sub-assemblies. Actually, the industry may be described as a group of general shops with foundry, machining and fabrication capabilities and, in this sense, is distinct from regular manufacturing industries dealing with specific lines of products. The larger units are equipped to make heavy items, e.g. mining machinery components, parts for logging equipment, train wheels, steel structures, etc. They are by and large vertically integrated, transforming scrap into finished products. Collectively, theirs is an important presence in the engineering scene. They keep industrial machinery in operation through supply of repair and replacement parts. As heavy engineering develops in the country, they may be expected to play a key role. Some are being linked with the PCMP and other manufacturing programs as suppliers of components. The ability of these shops to make a successful transition from jobbing to production operations will enhance in a major. way the indus- trialization process of the country, and efforts are underway to provide the necessary assistance; in this connection, the proposed. program at the Metals Industry Research and Development Center (MIRDC) should fulfill a significant role, and it merits technical assistance and financial support. Progressive Car Manufacturing Program (PCMP) 5.10 The program approved by BOI for the automobile industry is an important example of the "sectoral" approach to industrial development in the Philippines. It was developed after detailed discussion of problems between BOI and industry representatives; and it is characterized by pragmatism on the part of all concerned. 5.11 The following major projects are in progress: (i) GM-YF Motors - a transmission plant with machining and heat- treating facilities for General Motors vehicles.. (ii) Delta Motors - an engine plant with foundry and machining facilities to produce engine blocks and cylinder heads, in collaboration with Toyota Motors of Japan. (iii) Chrysler Philippines - a transmission plant, in collaboration, with Mitsubishi of Japan. (iv) DMG - local manufacture of selected car parts (e.g. chassis), with the assistance of Volkswagenwerk of West Germany.  -5- (v) Ford Philippines - a car body stamping plant in the Mariveles Export Processing Zone, Bataan; key facilities will include 2,500-ton presses. (vi) Major makers are a:Lso proceeding with their plans to produce light-duty utility trucks, typified by the Ford Fiera (a 3/4-ton vehicle selling for: around P 10,000) that was brought out in late 1972 and has enjoyed early market success. These vehicles are designed to minimize tooling costs and simplify manufacturing processes; the Fiera body, for example, is made of welded sheet metal, and GM is working on a larger vehicle with FRP (glass- fiber reinforced p:lastic) body panels. 5.12 New production technologies will be introduced including high technology casting, machining with semi-automatic equipment, heat treating, etc., in addition to the spread of knowledge of production scheduling, quality control practices, and cost control methods. However, more impor- tant than these direct benefits will be the indirect benefits to the nation through the establishment of various supplier industries. The PCMF is impressive for the way in which three variables - cost, domestic content and market - have been brought tcgether into what appears to be a viable program. The key elements of the program are: (a) A flexible domestic content schedule, pegged to the realities of the domestic supplier capabilities; and (b) Establishment of export-oriented sub-assembly production parallel to the car manufacturing operation, providing a double-barrel opportunity for supplier industry development. 5.13 The manufacturers themselves seem generally satisfied that the program will meet its stated goals. The two transmission plants (combined capacity over 100,000 units/year, with about 80 percent for export) are considering the feasibility of developing local sources of supply for forgings and castings. If this comes about, domestic contribution to the value of output would increase very substantially, as the cost of metal (pig iron and various types of steel) is only a small part of the value of forgings and castings. 5.14 Existing local supply capability includes radiators, leaf springs, exhaust systems, batteries andi tires, aside from non-engineering industry inputs such as weather strips, upholstery, carpets, etc. Plans are under- way to expand the list, in consultation with the major automobile manufac- turers so that the objectives of the PCMP may be speedily achieved. 5.15 From the standpoint of the development strategy, there is perhaps a good case for greater emphasis on trucks and buses. Truck and bus manufacturing is fairly labor intensive, and many components require less precision; hence the development of the domestic supplier sector should be economically more feasible as well as advantageous. It should be  - 6 - possible to develop low-cost manufacturing facilities for frames, van bodies, chassis, and shipping containers. 5.16 The overall prospects for automotive industries in the Philippines appear to be good. The policy considerations reflected in the PCMP are sound; emphasis is placed on technically efficient and cost-competitive production of selected items for both domestic and export markets, and the approved assemblers are given considerable flexibility for import of items which cannot be economically manufactured within the country. It is too early, however, to judge the economic consequences of the PCMP. Much will depend on the behavior of the approved assemblers. If they manage their components manufacturing facilities efficiently, export at a profit, and sell their vehicles (comprising considerable import value) at reasonable prices, the industry could grow fairly rapidly. Even though the Philippine domestic market for automobiles is small, the industry could develop export capability for specific sub-assemblies, as in Mexico; and the rate of growth would then be more rapid than that of any other industry, with the possible exception of shipbuilding, discussed in Section V(ii). Industrial Electrical Equipment 5.17 The principal items of electrical equipment for industry manufac- tured in the Philippines are small motors, distribution transformers, and a few related items of equipment for industrial and agricultural users of power. This pattern of growth is consistent with the trend in several other developing countries. The manufacture of light electrical equipment charac- teristically tends to establish itself early in the industrialization process because the products are relatively simple to make and there is a secure domestic market. In the agricultural sector, the demand arises in conjunc- tion with rural electrification and irrigation programs. In the industrial sector, numerous manufacturing operations require electrical motors and related equipment. 5.18 In terns of major manufacturing facilities, there is only one maker of motors (fractional to 30 HP), with an installed capacity of 6,500 units per year. In recent years, it has been operating at around 60 percent of capacity. A second manufacturer, scheduled to go into production late in 1973, was approved in anticipation of growth of demand, which has not yet materialized. For distribution transformers, there is one domestic manufacturing facility that started operation in 1969 with an installed capacity of 300,000 KVA. It makes conventional oil-immersed transformers (10 KVA to 330 KVA) for residential as well as commercial and industrial uses. Capacity utilization dropped from about 60 percent in 1972 to around 50 percent in 1973. 5.19 The manufacturers mentioned above are, in a sense, monopolists in the domestic market; but they have not been able to establish their position in the face of competition from imports. Domestic products enjoy a nominal level of protection of 30 percent ad valorem; but they complain that this is not meaningful, as they have to pay the same rate on materials and components which they have to import; and these account for 55 percent of  7- the value of output in the case of motors and 65 percent for distribution transformers. Indeed, for some items, e.g. insulated wire, they have to pay even higher rates of duty. Moreover, as they are small producers, and have to order small lots of wire or silicon steel and components, as well as carry rather large inventories, their unit costs are higher than those of foreign producers. Philippine users of industrial electrical equipment also prefer foreign sources of supply because of brand preference, compatib- ility of specifications with original supplies, and greater variety of choices. 5.20 In view of the limited share of domestic value added in the total value of output, the effective protection is probably about 11-12 percent of total value. It is arguable that this should be sufficient for the industry, which also benefits marginally from the tax credit allowed to users of domestic capital equipment for BOI-approved projects. There is, however, apparent need for closer coordination between this nascent industry and the national plans for power generation and distribution. Some of the problems of the transformer manufacturing industry could be resolved through adequate dovetailing of its production plan with the rural and urban elec- trification programs. The total public investment for power distribution in the next few years appears quite adequate to generate a substantial demand for transformers. The problems facing the motor manufacturers are more intricate, and they will need to focus much more closely on the choice of ranges of capacity and design which can be manufactured efficiently for the domestic market. Cost reduc;tion through more efficient purchasing and inventory control will also be necessary. 5.21 It is obvious that the industrial equipment manufacture has lagged considerably behind the electrical appliance production. A shift of emphasis from consumer durables t:o producer goods may merit consideration in the context of the current industrialization strategy and the size of domestic market now available to the industry. Machine Tools 5.22 Machine tools are generally defined as power-driven, metal-working cquipment which are non-locomobile. Typical machine tools are lathes, mill- ing machines, shapers, drill presses, gear-cutting machines, etc. Disre- garding the manufacture of some drill presses in the 1960's by a firm which has since become defunct, no machine tool have been regularly manufactured in the Philippines. 1/ 1/ The emphasis is on "manufacture". A number of metal-working concerns have successfully rebuilt, for their own use, second-hand machine tools imported from abroad. Also some special press equipment were encountered which had been mLde locally. Further, the defunct firm NASSCO had reportedly built some prototype lathes with a view to eventual manufacture.  5.23 In late 1969, position papers were written at the BOI on lathes, shapers and drill presses. On the basis of these papers, it was decided that pioneer status should be available for the manufacture of these items. The current (6th) Investment Priorities Plan lists the production of 2,700 shapers, 8,900 lathes, and 6,800 drill presses as possible. One entrepreneur has been registered by the BOI for the lathes project; no other potential registrants have, so far, come forth. An analysis of the position papers and a discussion with the sole registrant in this category indicates that the inclusion of the three types of machine tools in the cited quantities in the BOI's planning may be based on a misinterpretation of Philippine import statistics. These statistics (Category 715 - 01.01) show, for the years 1962 to 1968, an average annual importation of about 12,000 units; this nuitber would indeed seem to furnish a basis on which to establish a machine tool industry. An examination of the import values, however, leads to an average c.i.f. value of $141 per unit; obviously, the average item in the category was not a lathe, or a shaper, or any similar item, for which a c.i.f. value of over $2,000 would apply. 5.24 The registrant of the lathes project who - quite understandably - Is considering merely the manufacture of one model (400 mm swing, 800 mm distance between centers) feels that the Philippine market would not absorb more than 100 units per year and even judges this quantity as rather optimis- tic, once the temporary demand for equipment needed in government spon- sored new training establishments has been satisfied. I, 5.25 A report published by the Economic Commission for Europe 2/ stipulated an annual output of 700 to 1,000 tons (a typical machine tool will weigh around one con) as the "minimum profitab'le capacity" of a plant for metal-working machine tools, based on average conditions prevail- ing in 1965 in W4estern Europe. The economic viability of a plant designed for an output.smaller than that must, therefore, appear extremely questionable. I/ It should also be said that the above-mentioned registrant is at this time quite hesitant to pursue the project he had planned to undertake. His idea had been to enter into the "progressive manufacture" of a particular lathe now being made in India. However, in the course of less than a year, the prices quoted by the Indian manufacturer for complete or partial kits of parts have risen by almost 100 percent (from about $1,100 to approximately $2,000 for a complete-kit); and the probability of commercial success of the venture has shrunk correspondingly. 2/ The Engineering Industry and Industrialization, 1968 (U.N. Sales No. 68 II.E/Mim. 21), as quoted on page 22 of UNIDO's monograph "Engineering Industry" (U.N. Sales No. E.69.II.E.39, Volume 4).  -9- Tools and Dies 5.26 The expression "tools and dies" is usually a catch-all for press and forging dies, handling tools, drill and assembly jigs, fixtures of various types, special gauges and many other non-standard hardware items needed in modern manufacturing plants in order to make better use of per- sonnel and/or machine tools, :Lnsure interchangeability of mass-produced parts and "de-skill" operations. We use the term 'tools' to refer to all these items. Tools are usualLy required singly or at most in a few units. The making of tools, therefore, requires the intelligent and careful work of skilled craftsmen. 1/ As already mentioned previously, Filipino workers appear to have good mechanical aptitude. In combination with prevailing low wage levels, and a potential market, there appears to be scope for promoting a tool making indust:ry. 5.27 Traditionally, the naking of tools has been an in-house activity of metal-working concerns, largely because the sub-contracting of this activity requires a more formal system of communication (drawings, specifi- cations, delivery schedules, etc.) than has been customary in most small- or medium-size firms. However, in the United States, and more recently in Europe also, the sub-contracting of tool manufacture has become an accepted practice. Due to a shortage of skills in the trade, specialty tool makers charge high prices for their products; and even so, the timely availability of tools remains a perennial problem. 5.28 There exist now in the Philippines several small firms in the tool making business. They make up with skill and ingenuity what they lack in equipment; the tools made by them are generally acknowledged as being of good quality, and prices are favorable. 2/ They are trying now to obtain work from the new major tool users, namely the progressive car manufacturing plants. If they can demonstrate their capability in this field, it appears likely that major U.S. and European firms would be interested in the possib- ility of having some of their tools built under the conditions that the Philippines is able to offer. One approach might be to induce a European firm to become part (perhaps even majority) owner of an efficient tool making plant. Such a plant might, in addition to making tools for the parent organization, also produce for other (probably Philippine) customers and gradually establish a reputation for this new industry. 1/ Through the use of "numerically-controlled machine tools", certain tools can now be made more or less automatically. However, at this time, these processes are neither universally applicable nor, in many cases, economical. 2/ One tool manufacturer said he has no difficulty selling his tools - equal in quality to imported ones - "for as many pesos as the imported ones cost dollars", while still making an acceptable profit.  - 10 - 5.29 One matter which, institutionally, may currently have a negative effect upon the growth of the tool making industry (and perhaps several others which have similar characteristics) is the fact that the BOI's incentives must be based on "the analysis, synthesis and projections of data" concerning "specific products ... and the additional production capacities that must be induced ..11 A tool maker (as well as a number of other specialists who provide services, or articles which become part of someone else's products) has difficulty in defining his "specific product" and has no other way to determine "production capacities". It is readily admitted within the BOI that Act No. 5186 was passed primarily with process industries' in mind. It would seem that the rules might advantageously be amended to allow other industries to qualify more easily for benefits under the Act. 5.30 In this context, it may be proper to mention that availability of a capable tool making industry might also in another, more indirect way, help the Philippine economy: some of the existing manufacturing plants have very good, and potentially very productive, major equipment, such as presses, milling machines, etc. The tooling with which they are equipped, however, is in many cases rather primitive; as a consequence, the inherent capability of the equipment is not fully utilized. The result can easily be that more heavy equipment is bought, installed and seemingly kept busy than would really be needed. Better tooling would, in established plants, free some equipment for other work. In new plants, it may substantially reduce the required fixed assets investment. 5.31 It was also noticed that some shops have "open time" on major equipment, and could therefore do sub-contract work for others. However, the difficulty of obtaining tools often leads to the importation of parts which could be made locally if a tool making industry were in place. Medium-Precision Instruments 5.32 Instruments have become so much part of everyday life that one is not always consciously aware of their existence. Most automobiles have half a dozen separate indicating gauges (speedometer, odometer, fuel tank gauge, water temperature gauge, oil pressure gauge), each of which receives its signal for a "sending unit". Most heating and cooling devices (air-conditioners, refrigerators, etc.) have thermostats; welding equip- ment has gas pressure gauges; and so on. While no specific data are readily available to permit a definitive statement as to the economies of manufac- ture of such devices, it appears prima facie that the local advantages which favor establishment of a tool making industry (namely mechanical skills and low wage levels) would also apply to the manufacture of instruments of the types mentioned. Complete manufacture of all parts may only be viable if an export market can be developed; but even assembly from partly imported, partly locally-made components may be interesting.  Rebuilding of Second-Hand Machinery as a Business 5.33 As already mentioned, in a number of plants second-hand machinery was seen which had been rebuilt with ingenuity and skill. Most of such mach- inery was almost fully as efficient as equivalent new machinery; but its cost, even including the rebuilding work, was much less. Both within the Philippines and elsewhere, there exists a fairly active market for rebuilt equipment, which generally is quite comparable for performance to new equip- ment, though it may require more maintenance, and usually sells for much less. Some equipment, particuLarly in the more advanced countries, comes on the market not because it is worn out, but because an expansion of the market or a technological reason makes newer or larger equipment more econo- mical. Again, with reference to the skills available and the relatively favorable labor rates in the Philippines, there appears to exist a business opportunity in this field. Organized in an efficient manner - perhaps in cooperation with a major used equipment dealer overseas, the rebuilding of machinery and equipment could conceivably become a venture suitable for location in the free-trade zone.  - 12 - V(ii). SHIPBUILDING INDUSTRY 5.34 According to the Board of Investments, there are approximately 35 establishments engaged in shipbuilding and ship repair in the Philippines. Among these, 28 are located in the Manila Bay area and the rest in the Visayas and Mindanao. The majority are small boatyards, without any slip- way or shop facilities, engaged in the construction and repair of woopden or steel vessels of average size under 200 GT. The demand for these vessels is steady, and the boatyards are generally able to operate at or near full.. capacity. 5.35 There are several intermediate-size yards capable of building and repairing inter-island vessels such as light cargo ships and tankers up toa 1,000 GT. Two yards have concentrated in new ship construction - the Dynamarine Shipyard in Navotas and the Philippine Iron Construction and Marine Works (PICMAW) near Cagayan de Oro. In both yards, investment in capital equipment is minimal beyond the slipways, and the shipbuilding process is similar to that in the small boatyards. In this manner, they have been able to build ships cheaper than in most foreign yards, including Japan. Their main customers have been the small shipowners; the large inter- island shipping concerns still prefer buying new or second-hand vessels from abroad. Apparently, there has been a recent decline in new orders; Dynamarine reports a significantly reduced order backlog compared to 1972 and the PICMAW yard appears largely idle. 5.36 The larger yards are all principally engaged in ship repair. The largest is the Bataan shipyard which is the only yard capable of drydocking and repairing ocean-going ships. It occupies one of the finest known sites in the country in terms of deep water, shelter from the weather, proximity to a major shipping lane and availability of cheap power and skilled labor. It has a 10,000 GT graving dock equipped with two mobile cranes on rails and a 2,000-GT slipway. The plate forming, machining and outfitting equip- ment in the shops seem more than adequate. However, the yard has had a history of financial difficulties, and the facilities show age and neglect. Since the transfer of the yard from government to private ownership in February 1973, some urgent repair and improvement of facilities appear to be underway. The most important repair facility for inter-island ships is the Cebu Shipyard in the south. In fact, this yard handles roughly 70-80 percent of all inter-island ship repair. It has six slipways ranging from 200 CT to 4,000 GT. The 4,000-GT slipway, which is being completed this year, is said to be the only major new installation built in the Philippines over the past twenty years. The yard is generally well laid out and equipped. As in the case of the Bataan yard, the shop equipment in the Cebu yard seems excessive with respect to the yard facilities. 5.37 Table V(ii)-1 lists the larger yards in the Philippines with slipway or docking capacity of 500 GT and above. With the exception of two graving docks (Bataan and Iloilo), all drydocking is done by means of slipways. The slipways in most cases are minimally equipped; many do not  - 13 - even have a winch, lifting being done by means of mobile cranes or vehicles. Facilities for new ship construction are practically non-existent in all the yards. Small inter-island ships have been built either on the ground, or on slipways not designed for such work. The state of the shipbuilding industry may be summarized as follows: (a) Shipbuilding in recent years has been limited to vessels under 1,000 GT (excepting barges); only small boatyards have enough orders to mainc:ain a regular construction program. (b) Over 1,000 GT, there are repair facilities only for ships up to 10,000 GT maximum; repair demand exceeds available capacity. (c) No existing yard is properly laid out and equipped for con- struction of inter-island or ocean-going ships. Maritime Fleet 5.38 The fleet in 1973 totals roughly 1.6 million gross tons, includ- ing about 0.8 million gross tons of ocean-going ships, 0.4 million gross tons of inter-island vessels, and about 0.4 million gross tons of barges, tugboats and fishing vessels. Attention in this study will be confined to the inter-island and ocean-going vessels. Information on the tonnage distribution, age and imports of the inter-island and ocean-going fleet is summarized in Tables V(ii)-2, 3 and 4. 5.39 In the inter-island fleet, almost 80 percent of the tonnage is in the range 500 to 5,000 GT. As for the number of ships, there are roughly 250 vessels over 500 GT. In the ocean-going fleet, ships below 5,000 GT account for about 20 percent of the total tonnage (52 ships); the bulk of the fleet (roughly 50 percent of the total tonnage and number) is composed of ships in the range 5,000 GT to 10,000 GT. As for the age of vessels, roughly 70 percent of the inter-island vessels and 40 percent of the ocean-going ships are twenty years or older. Many, if not most, of these ships operate without certification of class. Scope of Study 5.40 The unsatisfactory state of the shipbuilding industry in rela- tion to the fleet requirements of the country is recognized by the BOI through its listing of the shipbuilding industry in the Investment Priori- ties Plan (IPP) and its support to a National Shipbuilding Program. Under the national program, the problemis of the maritime sector will be treated in their totality, e.g. the shipping industry, the port facilities, the maritime fleet, the traffic and route regulations as well as the shipbuild- ing and ship repair capabilities. In the present study, however, the shipbuilding industry will be treated as a manufacturing entity, separate from the other elements in the maritime sector, to determine whether a shipbuilding proposition for the Philippines makes economic sense from the standpoint of market and cost factors. Although the need for ships is great, it is not apparent, a priori, that the country should invest in  - 14 - the building of these ships rather than buying them from abroad. The issues to be examined are: (a) whether shipbuilding on a national scale is a viable economic proposition; (b) whether the shipbuilding industry can develop as a healthy, low-cost manufacturing activity; (c) whether an industrialization strategy organized around ship- building makes sense; and (d) specifically, what sort of a program would be appropriate for the country, based upon the above considerations. The following study attempts to deal with these questions. Some Recent Development 5.41 Under the Investment Incentives Act (RA 5186), the building of inter-island and ocean-going ships is included in the Investment Priorities Plan as a "pioneer"1 industry and, as such, registered enterprises are allowed the full range of benefits covering access to foreign exchange, depreciation, tax exemption/credit, and tariff protection. The projects in shipbuilding that have been approved or are under consideration by the Board of Investment, as of May 1973, are listed in Table V(ii)-5. Only two yards have been approved and registered by the BOI, under the "pioneer" category for building inter-island vessels. Their registered capacities are 6,400 GT and 15,000 DWT (corresponding roughly to 9,000 GT), respective- ly. No projects have been registered for building ocean-going vessels. 5.42 Under the new Tariff and Customs Code of the Philippines (TCCP), as amended by Presidential Decree No. 34 dated October 1972, parts for ships, which were formerly allowed duty-free under Section 105(d) of the Code are now taxed at a minimum rate of 10 percent; and various items which are or can be manufactured domestically have to pay 30 or 50 percent. Some shipbuilders claim that this has the net effect of penalizing the existing industry, which constructs hulls and fits imported parts into them, for the protection of a non-existent or nascent industry, namely the makers of ship parts. However, the claim is difficult to assess without detailed cost data. At first glance, the overall cost of encouraging domestic manu- facture of parts does not seem to be very high. It should be noted that the amended code imposes a 10 percent duty on ships entering under their own power, which came in duty free earlier; and this element of protection to the shipbuilding industry should offset substantially the cost of pro- duction to some domestic manufacturer of components, which would be for only a fraction of local value. 5.43 As part of a comprehensive program to improve the shipping ser- vices, the Government drafted a tentative plan to construct 56 ships ranging  - 15 - from 1,500 to 4,500 DWT, (approximately 1,000 to 3,000 GT) over a period of ten years in accordance with the following schedule: Phase I (First 3 years) 8 ships Phase II (Next: 2 years) 8 ships Phase III (Last: 5 years) 40 ships The construction program is proposed to be undertaken at three shipyards - one each in Luzon, Central Visayas and Mindanao - the sites to be selected by BOI on the basis of shipyardl capabilities and in accordance with the regional dispersal program of the Government. The program also calls for the establishment of a Shipping Fund by the Development Bank of the Philip- pines to finance the purchase of ships built in local yards. This is con- sidered essential to sustain any domestic shipbuilding program, in view of the supplier's credit available to finance the purchase of foreign ships. 5.44 In February 1973, an 8-member Japanese team visited the Philip- pines to advise the Philippine Government on its 10-year Shipping Program.1 Their principal recommendations on the shipbuilding aspects of the program are understood to be as follows: (a) To start with, only ships below 1,000 GT should be built, and subsequently larger ships may be built as inter-island port facilities are improved; (b) Long-term, low interest loans should be provided for im- proving the facilities of shipyards selected to implement the program (2 to 4 yards); (c) The possibility of locally supplying ship plates from the Iligan Integrated Steel Mills, and some ship equipment, such as pumps, heat exchangers, cargo-handling equipment and electrical equipment from local sources should be examined; and (d) Existing ship repair facilities should be improved and expanded. 5.45 A 2-member team from France visited the Philippines in March 19731/ at the request of the BOI to suggest strategies and program for the modern- ization and development of shipbuilding and related industries in the Philippines, and prepare a preliminary design of a typical shipyard for the construction of inter-island vessels. This team estimated the market for new vessels as follows: 1/ The full report of this team was not available to the Bank mission at the time of writing.  - 16 - Ocean-going vessels: 83,000 GT/year Inter-island vessels: 72,000 GT/year For ocean-going vessels, their recommendation is understood to be in favor of importing new ships initially, and favoring the establishment of a new shipyard of 40,000 GT annual capacity, at some time about 6 to 10 years hence, to build 4 to 6 ships in the size range 6,500 GT and 10,000 GT. For inter-island vessels, they recommend: (i) building 12,000 GT in exist- ing yards, (ii) building 38,000 GT in two new yards or highly improved existing yards, and (iii) importing 22,000 GT (mainly specialized or sophis- ticated vessels). The 12,000 GT building program presumably meets the aim of the government 10-Year Program and can be started immediately. The 38,000 GT program is to be started in 3 to 5 years, and may be broken down as follows: 16 vessels 600 GT 9,600 CT 10 vessels 1,000 GT 10,000 GT 4 vessels 2,500 GT 10,000 GT 2 vessels 4,200 GT 8,400 GT 38,000 GT It is also understood that they further recommend that new construction facilities should be separate from repair activities, and have advised the establishment of new shipyards at new sites. A Closer Look at the Market 5.46 In planning for the shipbuilding industry to date, attention seems to have been focused primarily on the replacement demand of the inter-island fleet. There is no doubt that the fleet is old; imposition of an effective inspection system could possibly condemn as much as one-third of the fleet. The question might be asked, what scale of shipbuilding can be sustained, once the replacement backlog is satisfied? Moreover, with reference to Table V(ii)-2 it is seen that roughly 70 percent by number of the inter- island fleet is composed of vessels of 1,000 GT or less. Such ships are within the capability of the existing yards to build (after some improve- ment). Is the replacement demand for ships of higher tonnages (above 1,000 GT) large enough to support one or more new yards? 5.47 This point may be explored further by examining the replacement market for inter-island vessels over 1,000 GT. Table V(ii)-6 shows the breakdown of these vessels by age in the tonnage ranges 1,000-2,000 CT, 2,000-5,000 GT and over 5,000 GT. 1/ The assumption that all ships twenty years or older will be replaced gives us (as a first approximation), the following replacement tonnages (refer Table VI(ii)-6). 1/ The data was compiled from a fairly complete list of inter-island vessels provided by the BOI.  - 17 - Replacement Tonnage of Inter-Island Vessels All Sh:Lps over 1,000 GT Ships 1,000 GT - 5,000 GT 1973 - 1978 74,000 GT 62,000 GT 1978 - 1983 22,000 GT 22,000 GT Total 96,000 GT 84,000 GT The total for the period 1973-1978 includes all inter-island ships which are now 16 years and older in Table V(ii)-6. The total for 1978-1983 includes those now between 11 to 15 years. There are two possible sources of error in the total. The list: may not be a complete listing of all inter- island vessels, and some ships listed do not have an age record. Neverthe- less, accepting the above totals as a fairly representative approximation, the replacement market for inter-island vessels in the tonnage range 1,000 GT-5,000 GT is estimated as being of the order of 84,000 GT over the next 10 years. 5.48 The demand for new bottoms to meet the growth of inter-island trade is likely to be small. It has been suggested that no significant demand for additional tonnage will be generated for some years to come (except for small vessels to serve presently neglected feeder routes) because the average load factor of the fleet is presently quite low (under 30 percent) and increased inter-island traffic can and should be met by improvements in efficiency, through replacement of old vessels, better ship maintenance, proper regulation of routes and frequency of service, etc. Also, some ships to be taken out of service from the main routes through replacement would still be useable on the less important routes, and provide buffer capacity for adding to the total tonnage of the inter-island fleet. 5.49 The above analysis of the market for inter-island ships in the size range of 1,000 GT-5,000 GT Lhen leaves us with a total demand for 84,000 GT over the next ten years, which breaks down to about 62,000 gross tons over the first five years, ;nd only 22,000 gross tons over the sub- sequent five years. In the consLderation of a domestic shipbuilding program, some balancing of demand will be necessary to assure a rational construction schedule; and in addition, allowance should be made for the fact that the totals include some types of ships that will not be economical or technically feasible for const:ruction in the Philippines. Broadly speak- ing, this building schedule is in line with the government program for 16 ships over the first five years, but considerably below the projected program for 40 ships for the subsequent five years. It could probably be met by improvement of facilities in selected existing yards; and it appears that the demand for new inter-is].and vessels alone may not justify any significant expansion in shipbui]ding capability beyond rehabilitation and improvement of existing yards.  - 18 - 5.50 The ocean-going ships' market presents a different picture. Again, concentrating on ships above 1,000 GT, the market may be divided into re- placement and expansion demand. The replacement market is derived from the data shown in Table V(ii)-6 and summarized below: Replacement Tonnage of Ocean-Going Vessels All Ships Ships Ships Over 1,000 CT 1,000 GT - 5,000 GT Over 5,000 GT 1973 - 1978 230,000 GT 50,000 GT 180,000 GT 1978 - 1983 284,000 GT 28,000 GT 2563000 GT Total 514,000 GT 78,000 GT 436,000 GT Tonnage-wise, it is seen that the replacement demand for ocean-going vessels in the size range 1,000 GT - 5,000 GT is roughly the same as that for inter- island vessels. The big market, as might be expected, is for ships over 5,000 GT. 5.51 The expansion demand for the ocean-going fleet may be deduced from foreign trade statistics. The calculations shown in Table V(ii)-7 illustrate the possible size of this demand under different sets of assumptions. The following assumptions have been made: (a) Estimates for 1973 are based on statistics for 1971 and 1972. (b) Total foreign trade is estimated to grow at 9.5 percent per year, which is the average growth rate for the past decade. (c) Two cases are considered. In one (Case A) the percentage share of freight carried by Philippine vessels is assumed to remain constant at 10 percent; in the second (Case B) the Philippine percentage share is assumed to increase gradually to 20 percent by 1984. (d) Shipping efficiency (or shipping space productivity) is assumed to increase gradually from 3.0 MT/GT-year to 4.0 MT/GT-year by 1977, and then more rapidly to 7.5 MT/GT- year by 1984, as new ships will be added to the ocean service. The results for all ships, and for ships in the range 1,000 GT-5,000 GT, (the latter being estimated at 20 percent of the total) are summarized below (from Table V(ii)-7):  - 19 _ Expansion Demand for Ocean-Going Fleet All Ships Ships 1,000 GT - 5,000 GT 1973 - 1978 Case A 210,000 GT 42,000 GT Case B 630,000 GT 126,000 GT 1978 - 1983 Case A 10,000 GT 112,000 GT Case B 550,000 GT 110,000 GT Total Case A 220,000 GT 154,000 GT Case B 1,180,000 GT 236,000 GT Several comments are in order. The negligible expansion demand in the period 1978-1983 under Case A is duie to the assumed rapid increase in shipping effi- ciency, which would be sufficient to take care of the 10 percent Philippine bottoms share of the expanding trade. This constant 10 percent share over the next decade may not be a realistic assumption. The return on investment of selected ocean-shipping companies in the Philippines suggests a figure around 9 percent. Although this may not offer a strong enough argument by itself for expanding the ocean-going fleet, other reasons may be added, including the balance-of-payments argument. The freight payment to foreign vessels could attain a level of about $730 million by 1983, if the Philippine flag share remains at 10 percent assuming a low shipping rate of $10 per ton on average. By increasing the Philippine share to 20 percent, about $75 million in freight payment could be diverted from foreign to domestic shipowners in that year. The net saving of foreign exchange, with allowance for disbursements overseas aEs well as other foreign exchange losses such as capital charges, may be estimated at 30 percent of the freight payments.1/ For the example in Table V(ii)-7 the net saving could be about $25 million in 1983. The total net savirng over ten years (1973-1983) could be over $100 million, accomplished by an addition to the ocean-going fleet of roughly one million gross tons over the same ten-year period. To achieve this saving, the country would have to acquire shipping capacity valued at about $300 million - allowing $300 per gross ton for a mixture of new and second- hand vessels; but the initial, cash outlay for this capacity may be about $60 million, on the assumption that a 20 percent down payment on average can attract 80 percent suppliers' credit. This exercise indicates a possible line of approach, which will need, of course, to be examined in detail for definitive conclusions. During 1973 the cost of steel for ship- building has risen sharply. Long term trends would have to be considered and their implications analysed. It appears, however, a priori, that an increase of the domestic flag share in foreign trade from the current level (10 percent) to about 20 percent in the course of 10 years may be a justifiable target.2/ 1/ Consultants' estimate based on information from Philippine shipping firms and other sources. 2/ In Indonesia, the domestic flag share in foreign trade was roughly 25 percent in 1969/70, on a total ocean freight of 7 million Mt. The figures do not include the tanker fleet operated by Pertamina.  - 20 - 5.52 The total replacement demand for inter-island and ocean-going ships, and expansion demand for ocean-going ships, for all ships over 1,000 GT, and for ships in the size range 1,000 GT-5,000 GT are shown in Table V(ii)-8. Using the higher figures of Case B for the projected demand for ocean-going fleet expansion, the demand for ships in the range 1,000 GT- 5,000 GT over the next 10 years is summarized below: Total Demand for Ships, 1,000 GT-5,000 GT 1973-1978 1978-1983 Ocean-going vessels Projected Fleet Expansion 126,000 GT 110,000 GT Replacement 50,000 GT 28,000 GT Inter-island vessels Replacement 62C?OO GT 22,000 GT Total 238,000 GT 160,000 GT From the above table, the replacement market alone over ten years totals 162,000 gross tons, or at an average of 2,000 GT per ship, about 80 ships. The sharp decline in replacement tonnages between the first and the second 5-year period is a consequence of the age distribution characteristics of the existing fleet. The lower "fleet expansion demand" in 1978-1983 is due to an assumed more rapid increase in shipping efficiency from 1978. If a shipbuilding program were to be designed only for the replacement tonnages, some appropriate phasing of replacement schedule will be necessary to assure a rational construction program. The important point to note is that, with some allowance for ship import, the replacement demand for ships in the range of 1,000 GT-5,000 GT would only sustain a shipbuilding effort of the order of 10,000 gross tons a year, and this requirement can probably be met by existing yards, with some improvement of their facilities. Including the projected fleet expansion, however, the total demand over ten years is approximately 400,000 gross tons. Even though many of the ships required would be imported, this market could provide the basis for a major domestic shipbuilding program, provided sufficient economic justification exists. A possible program scope and schedule will be outlined in a later section. 5.53 From Table V(ii)-8 the market for ships over 5,000 GT is seen to total approximately 1.4 million gross tons over the next ten years. As might be expected, the total is composed almost entirely of ocean-going vessels - about 450,000 gross tons of replacement ships and about 950,000 gross tons of ships to expand the fleet. There is a negligible inter-island tonnage of 12,000 gross tons. Most of these large ships will likely be imported. The domestic construction could concentrate on ships between 5,000 GT and 10,000 GT, which comprise roughly 50 percent ocean-going fleet both by tonnage and number. A home market of the order of 50,000 gross tons per year, with ship construction starting around 1977/78, should prove feasible. This market plus export prospects could sustain a joint venture shipyard with an experienced foreign shipbuilder. As a joint venture, the  - 21 - consideration of this proposition need not await the establishment of the previously-discussed program for the construction of ships below 5,000 GT. Rather, it should be advantageous to proceed with both propositions in parallel, since they would complement each other. Cost Factors 5.54 Information on new shipbuilding in the Philippines suggests that vessels around 500 GT or less were built locally at a significant cost advantage over Japan or Singapore. This is rather remarkable, considering the physical conditions under which ships were built. Labor was substituted for capital to an extreme degree, with investment in capital equipment limited to simple slipways. The cost advantage will presumably decrease with larger vessels, but since none was built in recent years, any assess- ment of cost competitiveness will necessarily be speculative. 5.55 Since shipbuilding in the Philippines is an infant industry, it can be argued that assistance of some form will be required for the sector to grow. Nevertheless, judgment on such assistance must be based generally on the industrialization strategy of the country, and specifically on whether or not the sector can attain a competitive posture within some reasonable time. A tentative shipbuilding proposition for the country calls for ships in the tonnage range of 1,000 GT-5,000 GT. A benchmark case will be con- sidered to help assess the proposition. The case is for building 3,000 GT general cargo ships (4,800 DWT), which may serve inter-island routes or some ocean routes, in a modern shipyard in the Philippines. 5.56 A breakdown of ship construction cost is shown below: (Direct Material (Direct ( ( (Direct Labor ( ( (Construction Cost ( (Other Direct Costs Total cost ( (Indirect Costs (General administrative costs Under direct material, steel in. the form of plates, angles and bars comprises about 20 percent of the total cost, but the price of steel also influences the costs of prime movers and other ship components. The direct labor cost is a function of wages as well as labor productivity. The other direct and indirect costs include such items as utilities and supplies, depreciation and interest. It is estimated that these costs will be comparable between the Philippines and Japan. This is not quite true, but may be acceptable as a first approximation. For example, the depreciation cost can vary greatly from one shipyard to the next; some small yards in the Philippines have gotten by with negligible investment in capital equipment. However, in a properly-equipped modern yard, the depreciation value in the Philippines will expectedly be only moderately lower than in Japan. The cost of supplies and the administrative costs will generally be higher. Some shipbuilding  - 22 - cost data in Japan and Korea suggest a figure of $90/GT for costs other than direct material and direct labor, and this figure will be used in the analysis of shipbuilding cost in the Philippines. For the sample case of 3,000 GT general cargo ships, an approximate cost profile is shown in the following table: Analysis of Shipbuilding Cost 3,000 CT (4,800 DWT) Cargo Ship Unit Japan % Philippines % A. Direct Material Steel plates, angles and bars (estimated at 60% of ship GT value) MT 1,800 1,800 Average price of steel $/MT 180 198 Cost of steel plates, angles, bars $ 324,000 356,000 Direct material cost (steel cost estimated at 35% of direct material cost for type of ship considered) $ 925,000 1,020,000 Material Cost/GT $/GT 308 67 340 75 B. Direct Labor Wage (mean) $/man-hr 1.50 0.25 Productivity measure man-hr/GT 40 80 Labor Cost/GT $/GT 60 13 20 5 C. All other costs, includes other direct costs, indirect costs and general adminis- trative costs $/GT 90 20 90 20 D. Total Cost, A + B + C $/GT 458 100 450 100 The cost factors for a similar ship built in Japan are shown on the table both for comparison purposes and for providing a basis for checking the assumptions used in the estimation of the Philippine costs. The major assumptions are:  - 23 - (a) Steel plates, angles and bars expressed in metric tons comprise 60 percent of the ship gross tonnage for the size and type of ship considered. (b) Total steel cost comprises 35 percent of the total direct material cost. (c) Steel cost in the E'hilippines is 10 percent higher than in Japan. (d) Direct labor wage in the Philippines is one-sixth that in Japan. (e) Labor productivity in the Philippines is assumed at 80 MH/GT against 40 MH/GT in Japan (productivity unit in shipbuilding is usually given as man-hours per gross ton, which is actually a reciprocal of productivity). (f) All other costs (other direct costs, indirect costs and general administrative costs) are combined and expressed as $90/GT. The results show that the shipbuilding costs in the two countries can be quite competitive, with the higher direct material cost in the Philippines offset by lower direct labor cost. It might be noted that the direct labor cost in the analysis represents only the wage component and does not include many of the overhead costs that are often expressed in terms of man-hours and included under the heading of direct labor. For additional comparison purposes, data on a 1,000 GT general cargo ship built recently in Korea gives the following percentage breakdown: direct material 73 percent direct labor 7 percent all other costs 20 percent 100 percent It will be difficult to compare the results of this analysis with any ship- building cost data in the Philippines not only because of lack of data on ships of this size, but also because any reported cost structure would likely be distorted, for example, by idle capacity giving inflated labor costs. 5.57 The benchmark case actually analyses the slhip cost on the basis of the sum of direct material and direct labor costs. The key variables are the price of steel and labor productivity. Figure 1 shows the effect on ship cost of varying steel price and varying productivity. The Philip- pines has no control over steel price. Its leverage to cost competitiveness is labor productivity. The calculations show that a productivity figure of less than 100 MH/GT coupled: with the low labor wages can make shipbuild- ing in the Philippine quite attractive.  - 24 - Strategic Considerations in Shipbuilding 5.58 The industrial scene in the Philippines, as a whole, is largely consumer goods oriented. Significant activity in heavy engineering is to be found only in metal-working (jobbing plants), and ship repair. The industrialization process appears, however, to have reached a stage which is appropriate for selective promotion of heavy manufacturing. Shipbuilding seems to be a natural priority choice. Aside from a long maritime tradition, the country already has excellent capabilities in metal fabrication and ship repair, has one of the lowest labor wage rates among the developing nations and there is a home market for ships that needs to be served. There will be competition from the established shipbuilding countries (new as well as second-hand ships) and also from such countries as Singapore, Taiwan and Korea, that are actively promoting shipbuilding. However, a program initially scaled to the home market should be a low-risk proposition. Shipbuilding will also provide a natural end-product link for the established metal-work- ing industry. As the shipbuilding program develops, the metal-working in- dustry will not only have the opportunity to develop ship ancillary supply activities, but also serve as a source of engineering capabilities that shipyards do not possess. 5.59 In the promotion of shipbuilding, there is need to bring about a structural change of the industry, from service-oriented ship repair to manufacturing-oriented shipbuilding. Shipbuilding exists today in the Philippines largely as a captive branch of the shipping industry, with the majority of shipyards owned by shipping interests. The shipowners view the yards primarily as facilities for servicing and maintaining their fleet. The situation favors growth of ship repair but could seriously constrain shipbuilding development. 5.60 The earlier analysis of the size and character of the market as well as the level of productivity that needs to be attained (for ships above 1,000 GT) serves to identify in a general way the type of shipyards that are needed in the Philippines. The translation of demand tonnage data into actual number and type of vessels is difficult because of the numerous variable factors; and yet this information is necessary to deter- mine the scope of a recommended shipbuilding program for the country and the most efficient scale of shipyards. It might be helpful to deliberately shift the planning focus from shipyards to ships. The shipbuilding industry is most visibly represented by the shipyards, and it would be natural for attention in planning to be drawn to the accumulated problems surrounding the yards. However, planning should start with a consideration of the ships that will best serve the Philippine inter-island and ocean trade, and proceed from there to the determination of the most effective means of building these ships. 5.61 The concept of a standard all-purpose ship is interesting but begs the issue. There is no logic for the Philippines to limit, a priori, its shipping service options or shipbuilding options. There is not enough data available to determine what types of vessels have performed best in  - 25 - Philippines water, or even as to what types of cargo enter and leave the ports in different types of vessels. Without such information, it should be difficult to justify the construction of "standard ships", since im- provement of shipping service requires not only replacement of old bottoms, but also specialization of service by type and speed of vessels. Moreover, standardization of ship design should not be a major concern in a country where cheap labor is its primary asset. Ship design and associated tech- nologies can be imported and learned; the lack of these skills should not dictate the course of development of the industry. 5.62 Several countries today provide financial assistance in one form or another to promote their shipbuilding activities. Shipowners are primarily interested in the financial terms available to them. Shipbuilding loans and shipyard investment loans, at low or subsidized interest rates, may be needed in the Philippines as the country moves forward on the shipbuilding program. Construction subsidies which are designed to make up the difference between domestic construction costs and lowest cost available in foreign yards, may not be necessary in the Philippines. The industry already has a nominal 10 percent protection. This is offset to some extent by the tariffs, ranging from 10-50 percent on various ship components. As part of an adequate in- centives package, it may be necessary to provide shipbuilders with some compensation for the duties payable on imported components, particularly those that cannot be produced domestically at reasonable cost. 5.63 There is no domestic source of steel for ship construction in the Philippines, and the industry would have to pay about 10 percent or more on steel cost to cover freight and import handling charges. A rough cost analysis suggests that a modern Philippine yard may absorb this added material cost, but for the long run, it would need to explore the possibil- ities of securing shipbuilding plates at internationally competitive cost. Shipbuilding Program 5.64 There is not much advantage in relating future shipbuilding programs to the existing shipbuilding activities in the Philippines. First of all, the existing industry is primarily a repair (service) industry. Next, the relevant types of ships to be considered for the future have not been built in the past decade. Finally, the financial statements of major shipyards (earnings, profits, etc.) refer primarily to ship repair activities and not to ship construction. It might simply be noted that small inter-island vessels (around 500 GT) were built in a couple of shipyards under quite primitive conditions with practically no capital equipment. Presumably, this will not be necessary when funds for shipyard development become available on reasonable terms. 5.65 The main thrust of a major new shipbuilding program will lilcely be in the building of ships in the range 1,000 GT-5,000 GT. Market study suggests that, for ships in th,is range, the inter-island traffic needs alone will not be large enough to support a major shipbuilding proposition. The proposition will need to consider ocean-going ships'. The combined  - 26 - demand for inter-island and ocean-going ship has been discussed in paragraph 5.52 above. Assuming that production could start in 1976/77, and that 60 percent of inter-island ship tonnages and 30 percent of ocean- going ship tonnages will be met from vessels built in domestic yards, the following table shows the possible scale of shipbuilding operations: 1976/77 1978 1979 1980 1981 1982 1983 Production For Hlome Market ('000 GT) 15 15 20 20 25 25 30 Export ('000 GT) - - - 5 5 10 10 Total ('000 GT) 15 15 20 25 30 35 40 By 1983, there could be room for shipbuilding capacity of 45,000 GT per year in the country for building ships of 1,000 GT to 5,000 GT, at 90 percent capacity utilization. 5.66 A parallel shipbuilding program is suggested for ships in the range 5,000 GT - 20,000 GT. The market for ships over 5,000 GT (ocean- going ships) has been estimated at around 1.4 million gross tons over the next ten years. Presumably the bulk of this tonnage will be purchased abroad. However, if 20 percent of the total were to be built locally, and assuming production starts in 1977/78, the following scale of shipbuilding operation may be possible: 1977/78 1979 1980 1981 1982 1983 Production for Home Market ('000 GT) 30 30 40 50 60 70 Export ('000 GT) - - - 10 15 20 Total ('000 GT) 30 30 40 60 75 90 By 1983, there could be a shipbuilding capacity of 100,000 GT per year for the construction of ships in the range 5,000 GT - 20,000 GT, at 90 percent capacity utilization. This proposition envisages collaboration with experienced foreign shipbuilders.  - 27 - 5.67 The two programs outlined above will provide the country with a total shipbuilding capacity in the neighborhood of 145,000 gross tons per year by 1983: - 45,000 gross tons capacity for ships in the range 1,000 GT-5,000 GT - 100,000 gross tons capacity for ships in the range 5,000 GT-20,000 GT This scale of activity could support 3 or 4 shipyards, including at least one joint venture. The main market will be the home market, but some ships for export may be possible beyond 1980. Existing yards are capable of building ships of around 500 GT; and the demand for ships below 1,000 GT could be met through improvement and expansion of their facilities. In the related ancillary sector, the contemplated shipbuilding activity could generate demand, for example, lor welding rods of around 2,000 tons per year, and for castings and forgings of around 5,000 tons per year. In addition, there will be demand for numerous domestically-available items such as lumber, fittings, cargo-handling equipment, paints, etc. On the other hand, there are items such as pumps, valves, etc. that are made locally for land use but may not meet the rigid standards for use on board ships for some time. 5.68 It should be noted that a shipbuilding program will make a heavy demand on the capital resources of the country. The question might be asked, what are the economic benefits? Would it be more advantageous for the Philippines to simply buy the ships and avail itself of foreign subsidies and tied loans? (a) The first answer to the "make vs buy" issue is the ship construc- tion cost. It was shown earlier that Philippine shipyards have the potential to build ships competitively with Japan. Indications are that, once the learning stage is over, the shipbuilding in- dustry can develop into a low-cost manufacturing activity and compete for orders from shipowners. (b) By 1983, based on a labor productivity value of 80 man-hours/GT, the program will have created employment for 4,500 additional workers (direct labor) in the shipbuilding industry. The total employment effect will be greater, with indirect labor as well as new jobs in related industries. It does appear that shipbuilding on the scale indicated could be an attract- ive proposition for the Philippines. A more detailed examination of the proposition will be necessary to determine the types of ships to be built, the number and size of new shipyards, the construction program, and the relevant investment costs and blenefits.  - 28 - A Note on Possible Development in Boatbuilding Industry 5.69 The Philippines has a busy boatbuilding industry constructing fishing vessels, tugboats, cargo boats and native crafts. In the case of the fishing vessels, the fleet numbers approximately 2,500 vessels, almost 70 percent of which are in the size range less than 50 GT making up a total of about 100,000 GT. The Philippine Fisheries Commission estimates that an additional 30,000 gross tons of fishing vessels will be needed; the annual production is at the level of 5,000 gross tons per year. Many of the exist- ing boatyards are shifting from the construction of wooden vessels to steel vessels, but report difficulties with the supply of steel plates. It is also noted that the construction of small vessels falls in the non-pioneer category, and steel import for their construction is not exempt from duties. 5.70 Among the newer construction materials for boatbuilding are glass- fiber reinforced plastic (FRP) and ferrocement. Fiberglass is relatively costly, requires relatively sophisticated technology and skills, and is known to be sensitive to tropical temperatures; therefore, its use in the Philippines would offer no particular advantage over wood or steel. Ferro- cement by constrast seems well suited to the Philippine situation. It is superior to wood in its durability in tropical waters, and is cheaper than steel or fiberglass. Some of its advantages are that: (i) the basic raw materials are readily available (sand, cement ancd wire mesh), (ii) much hand labor is required, boti) in the framing of layers of wire mesh into desired shapes and ill the plastering of mortar into the mesh layers (this may explain why many countries with high-cost labor have not shown much interest); and (iii) construction of simple crafts can be done on site, even in remote villages, since the problems of logistics and the need for equip- ment are minimal. Perhaps, a major obstacle to its widespread acceptance has been psychological, namely a tendency to equate ferrocement with ordinary reinforced concrete. A recent report of the U.S. National Academy of Sciences describes the material as follows: "Ferrocement is essentially a form of reinforced concrete, but it exhibits behavior so different from conventional reinforced concrete in performance, strength and potential applications that it must be classed as a completely separate material ... Thin panels of ferrocement can be designed to levels of strain or deformation, with complete structural integrity and water tightness, far beyond limits that render conventional concrete useless."  - 29 - This is not to suggest that the Philippines should rush into mass construc- tion of ferrocement boats. Design specifications and standards on the material have yet to be developed, and experience needs to be gained as to the proper construction techniques. Experimental ferrocement boats were first built by the Philippine Navy about five years ago. As in several other countries that experimented with this new material, the results were mixed. Their difficulties were (a) unfamailiarity with the mechanical properties of the material, (b) absence of structural-design information, particularly with regard to specifications and standards, and (c) errors in techniques of construction. Actually, the material becomes easy to use, once its basic characteristics are properly understood. In the People's Republic of China, thousands of small ferrocement sampans are in service (3-5 tonners); these were produced typically by unskilled workers in rural communes at the rate of one a day when necessary. Larger boats are being built presently in S. Viet Nam. Of course, the standards will be more stringent for deep-water vessels. Ongoing investigations in the U.S. and in other countries suggest that detailed design specifications and standards will be available soon. It is likely that within the decade, ferrocement will compete favorably with wood or steel as a boatbuilding material; and Philippine boatyards should be prepared to take advantage of the situation. Conclusions 5.71 The most urgent need in the Philippines is for improving the inter- island transport service. Among the actions required will be progressive replacement of old bottoms with newer ships designed specifically for this type of service. Less urgent perhaps, but no less real, is the need to improve and expand the ocean-going fleet. The issue for the shipbuilding industry is whether ships can be built economically in the country to sustain a viable shipbuilding operation in response to these demands. 5.72 The construction of vessels below 1,000 GT should be considered as being within the capability of the existing shipbuilding industry; it will need some improvements of facilities, for which financial assistance should be provided. It seems appropriate to focus more attention on shipbuilding capacity in the 1,000 to 5,000 GT range. In this range, the combined demand for inter-island and ocean-going ships could total approximately 400,000 gross tons over the next ten years. This tonnage could provide the market base for a shipbuilding capacity of about 45,000 gross tons per year by 1983. Analysis of shipbuilding costs suggests that, beyond the learning stage, this activity could be a competitive manufacturing activity. 5.73 A parallel program is suggested for the building of ships in the range 5,000 GT to 20,000 GT. A projected market for about 1.4 million gross tons over the next ten years could support a shipbuilding program with capacity of 100,000 gross tons by 1983. The proposition would require technical collaboration with an experienced foreign shipbuilder; and a suitable finan- cial participation may be mutually advantageous. The prospect should be actively pursued.  - 30 - 5.74 By 1983, these programs could add about 4,500 jobs in the ship- building industry (direct labor only). The total employment effect would be m.uch greater, with indirect labor and jobs created in related industries.  - 31 - V(iii). AGRICULTURAL MACHINERY AND EQUIPMENT 5.75 For this report we define tractors as four-wheeled vehicles whose principal purpose is to impart pulling force to agricultural implements attached to them, and which are steered and operated by persons carried on the vehicles themselves. A hand-tractor, in distinction, while used for similar purposes, is a relatively light-weight and low-power device, requir- ing for operation a person who guides it while walking behind. 5.76 Hand-tractors currently used in the Philippines may be classified into three types: Single-axle power tiller (Type I) These power units are light-weight, usually with 4-to 6 hp gasoline engines. Rotary tiller blades are mounted on a transverse main axle which is directly driven by the engine through chain and sprocket. These tractors are often equipped with pneumatic tires for dryland work or haulage applications. There is no differential mechanism in the axle and no provi- sion for steering clutches. General power tillers (Type II) This type of hand-tractor is usually equipped with an air- cooled gasoline engine of up to 8 hp capacity. It is equipped with wheels and can perform several farm operations by adapting conventional draft-dependent farm implements, such as plows, barrows, cultivators, etc. Tillers of this type have provisions for steering clutches, reverse drives, and multi-speed shifting transmissions. Double-axle power tillers (Type III) These have two drive axles; the tilling mechanism consists of a series of knives attached to a rotating shaft installed behind the main wheel axle. Although these tillers are not as versatile as the other two types, they are well suited to tilling heavy clay paddy fields because of their sturdier con- struction and larger engines. Generally, these tractors are equipped with diesel engines of 6 to 14 hp. 1/ 1/ See "Economic Aspects of Hand-Tractor Ownership and Operation" by Bert Orcino (presented at the Seminar on Farm Mechanization in Southeast Asia, Penang and Alor Star, Malaysia, November-December 1972).  - 32 - 5.77 Tractors, having a weight of usually above 2 tons, are not well suited to wet land farming. Their size and relatively large turning radius makes them unwieldy on small plots of land. Moreover, their capital cost is such that their acquisition becomes economical only if a machine can serve about 30 (general work) to 70 (plowing and harrowinig only) hectares. For the typical Filipino farmer, owning only 2 or 3 ha of wet land, the use of regular 4-wheeled tractor is, therefore, not a feasible approach to farm mechanization. This does not mean, however, that tractors are absent from Philippine agriculture. They are used on sugarcane estates and in a variety of other suitable applications. 5.78 Disregarding tractors, whose manufacture in the Philippines is neither currently in progress, nor contemplated for the foreseeable future, 1/ we are dealing in the agricultural equipment sub-sector essentially with three major groups of equipment, namely: (i) tractor-drawn implements; (ii) self-powered soil preparation machines ("power tillers"); and (iii) a number of relatively small (often transportable) devices for the processing (threshing, winnowing, drying, etc.) of grain. 5.79 Tractor-drawn implements are, by definition, used in conjunction withi tractors; as their useful life is generally similar to that of tractors, the sale of these implements parallels the sale of agricultural tractors. From 1961 to 1971, agricultural tractor sales averaged 1,064 units per year; in May 1973, the annual rate of sales was believed to be near 1,200 units. The dominant importer of agri.cultural tractors, who is also an assembler (and to a small extent a manufacturer) of tractor-drawn implements, reports that about 2 implements have traditionally been sold per tractor. 5.80 The implements are of varying types, such as mold-board plows, disc plows, disc harrows, etc. (all "dead" devices) and cultivators, trench diggers, etc., which contain in themselves mechanisms driven through the tractor's power take-off (PTO). All these implements generally consist of: (i) a robust frame welded or otherwise assembled from structural steel shapes, (ii) the working elements made from wear-resistant steel, (iii) anti-friction type bearings, I/ Some tractors, mostly of U.S. origin, are imported in kits and assembled locally; the contributed value due to this assembly operation is about P 500 per tractor, an insignificant portion of the sales price of the unit, which is near P 60,000.  - 33 - (iv) some of them also have gearing and drive shafts, (v) rubber-treaded wheels, and (vi) hydraulic cylinders. Actual manufacture (as distinct from the assembly of imiported kits) in the Philippines is, at the present time, negligible. Therefore, import statis- tics will give a reasonable idea of the market; 1 9 7 1 1 9 7 2 Quantity Value Quantity Value (units) ($ FOB) (units) ($ FOB) Plows 550 224,463 1,024 219,767 Cultivators 11 8,348 15 11,689 Harrows 175 87,157 399 279,240 Other agricultural machinery and appliances for preparing and cultivating the soil 1,098 520,598 2,006 1,098,944 Totals 1,834 840,566 3,444 1,609,640 Average Value ($/unit) 458 467 Imports of Tractors (units) 1,065 1,188 Source: Official Import Statistics of the Philippines. 5.81 From examination of the import data in light of the characteristics of the implements mentioned earlier, it appears reasonable to conclude that: (i) the average annual number of implements required will not be less than about 2,500 units; (ii) about 80 percent of the implements required lend themselves to local manufacture; and (iii) the average value of tractor-drawn implements is about P 3,000. Hence the local market for tractor-drawn implements which can be manufactured domestically would be worth about P 6.0 million. 1/ 1/ 2,000 units at P 3,000 each.  - 34 - 5.82 For the time being, all bearings and all hydraulic parts (with the exception of some cylinders, which are now being manufactured loc-ally), as well as the wearing parts which require specialty steels, will ha're to be imported. Gears (containing much "added value") can be made in the Philippines. At least some of the structural steel shapes can be obtained from local rolling mills. And there is a substantial labor effort involved in the cutting, welding, driiling, assembling and painting of the units. Hence, locally contributed value will be substantial enough to make the local manufacture of agricultural implements an interesting project from the viewpoint of the Philippine economy. 5.83 Hand tractors or "Power Tillers" exist in several basic designs, as already explained. Tillers of the relatively complex "Type III" have been, and will continue to be imported; but their rapidly increasing price (now over P 16,000, compared to less than P 7,000 about four years ago) makes them less and less accessible for the typical Filipino farmer. One company in MIanila has obtained BOI registration for the progressive manufacture of a Japanese tiller of this type. However, at this time, the company's efforts to increase the local content is far behind the agreed schedule. 5.84 The International Rice Research Institute (IRRI) at Los Banos, Laguna, has designed a power tiller which, while fundamentally of "Type II", is in certain respects functionally superior to the typical tiller of this type and, in particular, uses constructional concepts which result in important advantages, including ease of manufacture without elaborate tool- ing, as well as (due to its simplicity of construction) excellent service- ability in rural mechanic shops. 1/ Persons knowledgeable in the field (in particular some senior members of the Agricultural Productivity Commission) feel that the IRRI design is indeed a good one for the wet land method of rice cultivation which prevails in many parts of the Philippines. 2/ 5.85 At least 3 manufacturers in Manila have begun building slightly differing versions of the IRRI tiller under the BOI's incentive plan. The sales price is around P 4,000 per unit. Even though this price will very likely increase in the future, these tillers will cost substantially less than hand-tractors which have in the past been available in the Philippines. Current market size is believed to be for about 5,000 units per year, with potential for considerable increases later on. 1/ IBRD Report 39a-PH, Volume IV, Paragraph 58, identifies "the lack of adequate service facilities" as one of the principal causes that "large numbers of tractors and tillers (provided under earlier IBRD Loans) have had to be repossessed". 2/ "Daily cultivating capacity will be approximately one-half that of standard tillers, costing five times as much" (IBRD Report 39a-PH, Volume IV, Paragraph 70). At current prices, the IRRI tiller now costs closer to 1/4 rather than 1/5, of the competing standard tiller; but the statement remains essentially correct.  - 35 - 5.86 Oricino 1/ has shown that for farms of an area of 4.2 ha minimum to 50 ha maximum, the total cost of land preparation is least with a hand-tractor, compared with a "carabao" or a regular tractor. He has also calculated that roughly half of the cultivated area in the Philippines consists of farms having a size of 4-50 ha; and he concludes that there appears to be a substantial potential demand for hand-tractors. This conclusion is reinforced by a cooperative field experiment held in the Philippines, in which a three-crop total output of 23,500 kg/ha was obtained in 315 days. Only 50 days were thus available for land preparation for three crops, or roughly a fortnight per crop. While there is no evidence of an effect of mechanization on crop yield, the availability of machinery for rapid land preparation and harvesting may determine whether a farmer can realize this potential gain in output, 2/ as it take 3 days for the carabao to accomplish what a hand-tractor can do in one day. 3/ 5.87 Despite the relatively low cost of the IRRI tiller, acquisition will still be a problem for the average farmer who owns no more than 2 or 3 ha of land; and methods of cooperative ownership, or loans on lenient terms will be needed if a mass market is to be developed. The Philippines lags far behind comparable countries in the availability of power tillers per unit area of paddy; and with the substantially cheaper IRRI design available, the number of power tillers in the country should eventually increase considerably. How soon this increase occurs, however, may well depend upon the efforts which will be made to familiarize potential owners with the economic advantages of mechanized tillage, and to make available to them the financial resources needed for the changeover. But if one may assume that the necessary act:Lon will be taken in order to achieve greater agricultural output, then the scope for hand-tractor sales will increase rapidly to perhaps 15,000 per year by 1980. 5.88 While some observers object to the low mechanical efficiency (in the narrow technical sense of the term) of the IRRI tiller, caused by the inherent mechanical inefficiencies of a roller-chain-and-sprockets trans- mission system, this design is; an integral and essential part of the low- cost machine. More to the point is the objection that the prime mover used in the machine is generally a gasoline engine. Diesel engines not only have the advantage of a flatter torque-speed curve (an indication of the availability of more usable power in applications such as tilling, where the load varies from one moment to the next); but, in the absence of a spark ignition system, they are less complex, more easily serviced and less 1/ Bert Oricino, op. cit. 2/ IRRI Reporter, Volume VI, No. 3, May-June 1970. 3/ N. R. Decampo-Comparative economic analysis of experimental data on use of tractor and carabao on wet land rice farming. Philippine Agriculture, January 1969.  - 36 - prone to failure due to splashing water (a continual problem in flooded rice paddies). In a later part of this report, some comments will be made on the subject of small internal combustion engines. 5.89 Miscellaneous (mostly transportable) Agricultural Machinery consti- tutes a group of relatively small devices specially conceived, or at least adapted, for use in the Philippines. Included are grain dryers, threshing machines, hammer mills, etc. A number of machines are currently in manufac- ture. The "konopak" rice mill is said to be "entirely successful in its aim of replacing the inefficient imported 'Kiskisan' huller". 1/ An initial order of 84 units is currently being built for the Bureau of Agricultural Extension Services; and a follow-on order for 9,000 units from the National Grain Authority is expected. The machine has received a Philippine patent and foreign patents are reportedly being sought. The inventor and the manufacturer believe that the machine has good export possibilities. It must be said that in its present configuration the mill - just like the IRRI tiller - can easily be copied by any shop with basic machine-tools and sheet metal working equipment. Whether foreign patents, if and when -ranted, will be an effective deterrent thereto, is questionable. If the anticipated order for 9,000 units indeed materializes, it might be possible to justify an effort in "production engineering" and tooling which will allow the Philippine manufacturer to produce the device considerably more cheaply than would be possible for a small overseas manufacturer who has, as yet, no established market. However, at the present moment, this is conjectural. 5.90 A grain drver, also "recommended as an acceptable commercial drier for 'palay' or corn by U.N. experts 2/ has had no market success so far despite the fact that it is reported to have capability for saving a good part of the rice which is destroyed by rot in years when wet weather inter- feres witlh the sun-drying of rice. The problem is evidently financial or possibly an organizational one: With a drying capacity of about 10 tons per 24 hour day, the machine is considered the smallest unit of its Lype which can be built with reasonable economy, but is too large for the small farmer and, at a price of P 11,000, also much too expensive. The established rice mills are generally willing to purchase wet rice from the farmers - provided it is only wet, not spoiled - at about 25 percent lower price, as many of them do have rice drying facilities in their mills. Cooperative ownership - for this rice dryer, as well as for power tillers - might be a feasible approach, and efforts to promote user cooperatives are in fact in progress (by the Extension Service of thle Agricultural Productivity Commission). 1/ Statement attributed to "'United Nations experts with the Grain Development Center of the Philippine Government's Rice and Corn Administration" in the manufacturers' sales prospectus. 2/ Harry van Ruiten, Grain Milling Consultant, and John Rawnsley, Grain Drying and Storage Consultant, both from the Food and Agriculture Organization of the U.N.  - 37 - Nevertheless, after an initial production run of 20 units, manufacture of the rice drying machines has - at least temporarily - been abandoned. Inas- much as the machine is said to be basically sound in concept and economically advantageous, the fact that for the time being it is commercially unsuccess- ful in the Philippines would not necessarily preclude the possibility of its being accepted elsewhere, proviLded the machine is indeed "an advance in the art" of rice processing. Hence, if patent coverage can be obtained, so that direct copying is not legally possible, the design might become a license- able item and result in a small. foreign exchange earning for the Philippines. It does not seem, however, that: the machine is of such novelty or commercial potential that major promotional efforts would be justified. 5.91 Other machines in this category which are being made in the Phil- ippines (and successfully marketed) are feed mixers and hammer mills. These are simple, straight-forward designs (presumably derived from foreign makes), involving, as far as manufacture is concerned, structural and sheet metal work, the making of a few shafts, and simple nut-and-bolt assembly. 5.92 IRRI has designed a number of devices which come under this category, including paddy seeders, weeders, threshers, grain cleaners, etc. As already stated in IBRD Report 39a-PH, Volume III, paragraph 34, "None of these are in sizeable production, but they represent the first line of products designed to be adaptable to the socio-economic requirements of small paddy growers and technological capability of machine manufacturers in the Asian region". The mentioned products will, in all probability, gradually introduce themselves into the local agricultural scene. However, no mass market is foreseen; and existing manufacturing enterprises are well capable to undertake manufacture of these items in moderate quantities. 5.93 Low-Power Internal Comibustion Engines are required as prime movers for many power-driven devices. For agricultural applications (power tillers, water pumps, threshing machines, etc.) preferred power ratings are around 7 and 12 hp. At this time, no one manufactures engines of this kind local- ly. _11 Imports are generally d:Lvided between gasoline engines of U.S. manu- facture and diesel engines (of mauch heavier and costlier configuration) coming from either India or Japan. The principal advantages of available gasoline engines are lightweighl: and low cost (a typical U.S.-built 8 hp unit sells for less than P 800). Truly comparable diesel engines are apparently not on the market. Diesel engines of similar power are of much more rugged design and sell for at least P 5,000. Were it not for this very significant price difference, many users would prefer diesels, due to their more constant torque, lesser complexity, and their inertness vis- a-vis rain or splash water. 1/ The Japanese Kubota engine, and the Indian Kirloskar engine, the manufacture of which is currently being proposed, are not really in the class of engines here under discussion.  - 38 - 5.94 The domestic annual market for small internal combustion engines has been estimated by IRRI personnel to be in the range of "tens of thou- sands", perhaps as high as 50,000 units. There would be some export poten- tial, too. The current (6th) Investment Priorities Plan of the BOI lists "Small Gasoline Engines" as a pioneer project, with a measured capacity of 68,000 units per year. In view of the well-justified preference by many of the users for a dies-el unit, and further considering that there is really no obvious inherent reason why diesel engines should cost so much more than comparable gasoline engines (a small price difference will probably always exist), it is felt that a well-conceived engineering project may quite possibly lead to a low-cost design of a multi-purpose diesel engine which could find a wide market in the Philippines as well as other parts of the world. The matter was discussed in some detail with personnel of the Agri- cultural Engineering Section of IRRI, who feel that the need in the first instance is for a diesel engine which is light in weight, and of horizontal design (to result in a low center of gravity). Ratings of 7 and 12 hp are believed to be the ones with the greatest potential demand. The engine should be designed so that it can easily be removed from one machine (say a tiller) and connected to another (say a thresher), to assure maximum utilization of this relatively expensive piece of equipment. It would be worthwhile for an appropriate Government agency to investigate this possibility before approval is granted for the manufacture of gasoline engines in large numbers. 5.95 Summary of Findings. While manufacture of tractors (4-wheel) is neither economically feasible nor contemplated at present, on account of the small volume of demand, there may be scope for the manufacture of tractor- drawn implements. The domestic market is currently valued at about P 6.0 million and will grow gradually. Any plan to manufacture implements for imported tractors will need active cooperation from the importing and marketing agencies. 5.96 The market for power tillers, as also for other agricultural machinery required for small and medium-sized Filipino farms, e.g. rice and grain dryers, rice mills, etc. is small at present but growing. IRRI has developed various simple designs and specifications especially suited to the manufacture of machinery in small workshops and easy maintenance in prevailing conditions. Domestic capability for production of most items already exists, but commercial success has not yet been achieved on any significant scale. The pace of growth of demand is dependent on government policy in the agricultural sector, particularly in respect of land holdings and finance for farming. Wlile the prospects are not yet clear, it appears likely that demand would grow only gradually, in response to felt domestic needs; and the agricultural machinery sector will be able to expand its production as required, provided access to sufficient financial and technical assistance is allowed to it. There is need for coordinated planning for use of machinery in the farm sector and domestic production of the machinery required. 5.97 The case of low-power internal combustion engines, which are already listed in the IPP for the production of 68,000 units per year of gaso- line engines, needs to be re-examined. The principal demand for these  - 39 - engines comes from agricultural. operations, for which diesel engines are preferred and appear to be technically more suitable. The problem of high cost of diesel engines (compared with gasoline engines of similar power) needs further technical examination. It may be possible to develop an economic diesel engine for the Philippine market; and the case should be examined before any investment for production of gasoline engines (which would preempt the market) is allowed. 5.98 The investment and employment effects of development of agricul- tural machinery manufacturing are not likely to be substantial in the next 5-7 years.  - 40 - VI. PULP AND PAPER A. Present Status 6.1 The pulp and paper industry in the Philippines had an important beginning with the construction in 1941 of the world's first pulp and paper mill based on bagasse. No further development took place until 1956, when a papermill to produce unbleached grades from imported pulp and domestic waste paper was started in the Manila area. Following that, several small paper mills were built near Manila, together with one integrated pulp and paper mill on Bataan which was initially based on bamboo but converted to hardwood later. The picture at the end of the 1960's was as follows: 1/ (a) one integrated bagasse-based mill with a capacity of 10,000 MT/annum of printing and writing paper and 5,000 MT/year of paperboard, Central Azucarera de Bais; (b) one integrated hardwood-based mill (converted from bamboo) with a pulp capacity of 16,000 M./year and a paper capacity of 18,000 MT/year of printing and writing paper, Bataan Pulp & Paper Mills, Inc.; (c) one non-integrated paper mill with a total capacity of 56,000 MT/year of paper and paperboard based on imported pulp and waste paper, Manila Paper Mills, Inc.; and (d) thirteen non-integrated paper mills with a total capacity of 69,000 MT/year of various grades of paper and paperboard, all using imported pulp, and some in addition using waste paper. (Of these thirteen mills, six of the smaller units owned small pulp mills which were idle at the time of the mission's visit.) 6.2 There has been a marked change in the situation since 1969, with the following developments: (a) The start-up in late 1969 of the integrated pulp and paper mill of Rustan Pulp and Paper Mills, Inc. The mill uses mixed short-fibre pulpwood, waste paper and imported unbleached long-fibre pulp. It has a capacity of 19,000 MT/year unbleached short-fibre pulp, 5,500 MT/year of long-fibre pulp produced from abaca, 20,000 MT/year linerboard and corrugating medium, and 4,500 MT/year paperboard; 1/ Source: Table VI-I.  - 41 - (b) The start-up, at the end of 1971, of the largest pulp and paper mill in the country by Paper Industries Corporation of the Philippines (PICOP). The mill uses mixed short-fibre puLpwood and imported long-fibre pulp in the production of mechanical pulp and bleached and unbleached sulphate pulp. The mill has a capacity of 73,000 MT/year of newsprint and 63,000 MT/year of linerboard and corrugating medium; (c) The start-up, by Menzi Development Company, in early 1973, of a small integrated mill pulping abaca fibre and producing either bleached abaca pulp for sale, or high-grade specialty printing and writing grades using abaca pulp and imported bleached short-fibre pulp. The mill has a capacity of 1,600 MT/year bleached abaca pulp and 3,000 MT/year printing and writing grades; and (d) The construction of zn integrated pulp and paper mill by United Pulp and Paper Mills, Inc., to be commissioned in late 1973, using bagasse and imported unbleached long- fibre pulp. The mill has a capacity of 16,000 MT/year of unbleached bagasse sulphate pulp and 28,000 MT/year of sack kraft. 6.3 The total capacity of the industry at the end of 1973 will then be as follows: - integrated pulp and paper mills: pulp, 189,000 MT/year; paper, 208,200 MT/year; and paperboard, 7,500 MT/year - non-integrated paper mills: paper, 105,500 MT/year; and paperboard, 53,000 MT/year In terms of numbers of mills built, the major development of the industry took place between 1956 and 1966, with 13 of the 21 now existing mills coming into production in that period. Nevertheless, the emphasis at that time appears to have been on the construction of small mills to saLisfy bits and pieces of the domestic market. These nineteen mills have a com- bined capacity of only 122,500 MT/year paper and paperboard or about 33 percent of the total paper and board making capacity. In contrast, between 1966 and the end of 1973, 5 mills were built with a combined capacity of 245,500 MT/year paper and paperboard or close to 66 percent of the total paper and paperboard production capacity of the country. The PICOP mill alone, at 133,000 MT/year, has a capacity greater than the total of the 13 mills built between 1956 and 1966.  - 42 - B. Xarket Prospects Past Production, Imports and Apparent Consumption 6.4 Over the ten years ending 1971, apparent consumption of paper and paperboard products increased at an average rate of 8.1 percent per annum, as shown in the Table below. This period included, however, a decrease in apparent consumption in 1969 and 1970; dutring the seven-year period ending 1968, apparent consumption actually rose at an average annual rate of 11.1 percent. Paper and Paperboard Products, / Imports and Apparent Consumption (1961-1971) a (1,000 metric tons) Year Production Imports Apparent Consumption 1962 63.9 79.2 143.1 1963 82.3 84.8 167.1 1964 80.5 117.3 197.8 1965 82.1 120.5 202.6 1966 92.3 120.7 213.0 1967 102.0 146.2 248.2 1968 124.6 145.1 269.7 1969 124.3 137.8 262.1 1970 126.2 125.6 251.8 1971 153.6 136.1 289.7 Source: Tables VI-1 and VI-2. /a During the period, exports were negligible. 6.5 During the same ten-year period, domestic production rose at an average rate of 10.3 percent year year, while imports increased at an annual rate of 6.2 percent. In 1971, the CIF value of all paper and paperboard imports exceeded US$30,000,000. 6.6 During this 10-year period, domestic pulp production, other than secondary pulp, was not a large factor in the country's requirements, reaching only 14 percent of the total demand in 1971. Secondary or regenerated pulp, imported and domestically produced, has been the largest single factor in pulp consumption, at times exceeding 50 percent and never being less than 30 percent of the total pulp demand.  - 43 - Pulp Production, Imports and Apparent Consunption (1961-1971) (1,000 metric tons) Year Production Imports Apparent Consumption Secondary Virgin Secondary Virgin Secondary Virgin Pulp PuLp Pulp Pulp Pulp Total 1962 18.6 14.4 2.2 28.7 20.8 43.1 63.9 1963 14.1 26.2 7.4 34.6 21.5 60.8 82.3 1964 22.8 20.8 2.9 34.1 25.7 54.9 80.6 1965 42.4 16.3 7.2 16.1 49.6 32.4 82.0 1966 39.6 22.1 9.0 22.4 48.6 44.5 92.1 1967 40.3 19.3 6.7 35.7 47.0 55.0 102.0 1968 56.9 23.7 4.1 39.9 61.0 63.6 124.6 1969 62.2 19.8 3.6 39.3 65.8 59.1 124.9 1970 52.1 20.9 7.8 52.1 59.9 73.0 132.9 1971 86.1 22.7 11.9 40.0 98.0 62.7 160.7 Source: Tables VI-4 and VI-5. In 1971, the CIF value of the virgin pulp imports was close to US$7,000,000. 6.7 Per capita consumption of paper and paperboard products rose from 4.9 kg in 1962 to 7.6 kg in 1971. While this is low in comparison with some Asian countries, it is significantly higher than others, as shown in the following table: Per Capita Consunption of Paper and Paperboard Products in Selected Countries in 1971 (kg) Japan 119 Taiwan 35 South Korea 13 Philippines 7.6 India 1.9 Pakistan 1.4 Indonesia 1.1 Source: Pulp & P?aper International, Review No. 14, No. 8: 25 July 1972 (except for Philipp:Lne data) 6.8 Over the period 1962 to 1971, per capita consumption increased at an average rate of about 5 percent per year. At the same time, the per capita gross domestic product in constant 1967 prices was increasing at a rate of about 2.6 percent per year. Over the 1962 to 1968 period, however, per capita consumption increasei at the rate of 6.7 percent a year compared  - 44 - to an annual increase in per capita gross domestic product of 2.2 percent. 1/ In 1969 and 1970, there was a marked decrease, not only in the per capita consumption of paper products but also in the total annual consumption. It seems likely that this was a temporary drop in the market similar to that which occurred in other countries also in that period, the general business recession affecting Philippine exports and hence the level of business activity and paper consumption there. In 1971, per capita consumption again approached the 1969 level. 6.9 For most countries, and for the world as a whole, per capita paper consumption correlates very well with per capita income (see Table VI-10). If the Philippines had followed the "normal" pattern in the period 1962 to 1969, per capita consumption would have increased from 4.9 kg to about 6.6 kg, a rate of about 3.4 percent per year. In this period the actual ratio of consumption growth to growth in GDP was 3.0 compared to a "normal" ratio of 1.5. This subject will be discussed further in the following section. Future Domestic Consumption of Paper and Paperboard 6.10 In the 1970 FAO report 1/ on Philippine forestry, the following comments were made: "On Graph 14 are plotted the relationships between per caput GDP and per caput paper consumption for a group of countries in Southern Europe,Latin America and Asia. It will be noted that a majority of countries follow very closely the trend line marked "Normal", but that a few - notably Philippines, Brazil, Costa Rica and Japan - are abnormally high consumers ..... Greece and Peru occupy a high normal position. There would seem to be three reasons for the abnormally high levels of consumption in relation to income: (a) a 'dual economy' - a highly commercialized sector with high consumption of paper with a vast rural area which depresses the per caput income (Brazil, Philippines); (b) Very high levels of literacy and of newspaper circula- tion relative to per caput income (Philippines, Japan); and (c) An important 'demonstration effect' from the heaviest paper consumer in the world, namely the U.S.A. (Philip- pines, Japan, probably Costa Rica and Brazil). 1/ Source: Report No. 78-PH "Current Economic Position and Prospects of the Philippines," April 20, 1973. 2/ FAO - FOR: SF/PHI 16 Technical Report 1, "Demonstration and Training in Forest, Forest Range and Watershed Management," Rome, 1970.  - 45 - Since all three 'reasons' apply to the Philippines, it seems unlikely in the extreme that the consumption/income ratio will fall to the 'normal' level in the foreseeable future. The lowest level of projection which could be entertained is one which follows the 'normal' trend but stays well above it." The FAO graph referred to is produced in part with additional data in Table VI-10. The FAO report also gives levels of probable consumption for 1975 and 1985. These are give1n below, together with BOI projections for 1975 and 1980. The BOI projections were made by extrapolating plots of past consumptions for differenit grades and adding the values obtained. They have not considered population increase, and increases in Gross Domestic Product. Projections of l'otal Paper Consumption (1,000 Metric Tons) FAO BOI Year High Medium Low 1975 500 420 350 360 1980 - 580 /a - 470 1985 1,100 800 600 600 /a /a Determined from Table VI-10. While, in fact, the FAO report would have shown higher per capita consumptions at lawer per capita income leveLs than is evident from Table VI-1O, with the data on consumption now availab:Le, it appears that the rate of growth of consumption decreases sooner tham the FAO projection expected. Coincident- ally, however, the per capita consumptions obtained by dividing FAO cdats on total consumption by population figures now available, correlates Vrery well with per capita GDP as usecl in the present report. The Philippi;,- consumption trend appears to fall to the "normal" between 1980 and '1910' when the per capita GDP is expected to be about $350. The BnI projec (tii are unusually low and fall well below the "normal" trend line for 1980. The projections used subsequently in this report are all based on the fcl- lowing calculation:  - 46 - Projected Per Capita and Total Paper Consumption Per Capita Total Annual Consumption Consumption Year Population (kg) /a (1,000 MT) 1975 42,680 9.8 420 1980 48,760 11.8 575 1985 55,710 14.4 800 /a The estimated consumption could be significantly higher or lower, depending on the development of the Philippines economy and the degree of success of control of population growth. Sources: Tables VI-8 and VI-10. 6.11 Over the 10-year period 1962-1971, the proportions of the various grades in the total paper consumption were as follows: Paper Consumption by Categories 1962-1971 (Percent) Grade Range Average Newsprint 18.5 - 28.4 24.1 Printings and Writings 17.2 - 27.8 21.6 Industrial Paper 26.4 - 33.5 30.0 Paperboard 14.5 - 20.1 17.1 Tissue and Others 4.6 - 8.8 7.2 Source: Tables VI-2 and VI-3. During the period, the following trends were evident: - industrial paper was increasing its share of the market, reaching its maximum in 1971, although there were pro- nounced fluctuations in the proportions in the mid-years. - paperboard likewise appeared to be obtaining an increasing share of the market, although the trend in the last five years was erratic. - the category - tissue and others - showed a consistently rising trend over the 10-year period. - the proportions of the market obtained by the cultural grades - newsprint, printings and writings, fluctuated widely but both appear to be showing a downward trend.  - 47 - With the preceding points in mind, and considering the increasing industrializa- tion and per capita income in the Philippines, it appears to the mission that the proportions of each category might be as follows in the next 10 to 15 years. Newsprint 10% Printings and Writings 19% Industrial Paper 35% Paperboard 18% Tissue and Others 8% Using these proportions and the projections of total consumption in para 6.10 above, the following consumptions by categories are derived: Future Paper Consumption by Categories (1,000 metric tons) Category 1975 1980 1985 Newsprint 84 115 160 Printings and Writings 80 109 152 Industrial Paper 146 201 280 Paperboard 76 104 144 Tissue and Others 34 46 64 Total 420 575 800 6.12 Neither the data on past consumption nor the projections of future demand include the substantial amount of industrial paper used in the pack- aging of bananas for export. In 1971, over 267,000 metric tons of plantains and bananas were exported. At a usage of 100 kg of board per ton of bananas, the container board used was in excess of 25,000 tons. Banana exports are expected to increase and, if the linerboard and corrugating medium are produced in the Philippines, a significant increase in industrial paper requirements would result. Future Pulp Requirements 6.13 While total domestic self-sufficiency in pulp and paper making is considered impossible by 1975 and unlikely by 1980, it is conceivable that self-sufficiency in paper making alone could be achieved by 1985. In addition, a much larger degree of self-sufficiency in pulp production could also be attained by that time. It is of interest, therefore, to deter- mine the pulp requirements for the years in question, based on the projected paper consumptions above.  - 48 - Future Pulp Requirements for Papermaking Self-Sufficiency (1,000 metric tons) Pulp Grade 1975 1980 1985 Long fibre chemical - bleached 25 34 47 - unbleached 44 60 84 - total 69 94 131 Short fibre chemical - bleached 97 133 185 - unbleached 76 106 146 - total 173 239 331 Mechanical 79 108 150 Secondary 137 188 261 Total 458 629 873 Source: Based on pulp usages given in Table VI-9 and 1,000 Kg air dry pulp per ton of printings and writings, and 1,100 Kg air dry pulp per ton of all other grades. Should the industrial paper for banana boxes be produced in the country, the requirements of both unbleached long and short-fibre pulp would be increased by at least 15,000 and 10,000 MT/year respectively. Philippine Supply and Demand 6.14 At the present time there are several projects, firm and otherwise, for expansion of the Philippines pulp and paper industry which will affect its position in the region and world markets. These projects are listed below:  - 49 - Projected Expansion Plans and New Mills Company New Capacity and Description Projects which could be effective by 1975 PICOP Addition of new dryers to expand paper machine capacity by 15 percent, thus adding 11,000 MT newsprint and 9,500 MT industrial papers per year Manila Paper Mills Start-up of rotary digesters to produce 6,500 MT per year long-fibre unbleached pulp from rope, rags, etc. Projects which could be effectlve by 1980 Manila Paper Mills Bagasse pulping installation to produce 27,000 MT per year unbleached bagasse pulp for own use. Bataan Pulp & Paper Addition of new digester and auxiliary equipment increasing bleached hardwood pulp capacity by 10,000 MT per year. P-lar-agon Paper Industries New mill to produce 24,000 MT per year of paperboard from purchased pulp and waste paper. Abaca Pulp & Paper Industries New mill to produce 66,000 MT/year abaca of the Philippines pulp for export. Isarog Pulp & P,aper Co. New mill to produce 6,600 MT/year abaca pulp for export. Container Corporation of Addition of 12,500 MT/year of paperboard. the Philipp,nesp Projects which could be effective by 1985 PICOP New installation to produce 100,000 MT/year semi-cghmiai.A pulp and corrugating medium primarily for export. United Puip & Paper Mills Doubling of mill capa4ity adding 28,000 MT/year of sack kraft. Sources: Board of Investments, and discussions with individual producers.  - 50 - Of the foregoing projects, all those which would possibly become effective before 1980 are reasonably firm with the exception of the Container Corporation expansion. 6.15 With the projects listed above and better utilization of existing capacity, projected supply, demand and supply-demand gap for papers and paperboards would be as given below: Paper and Paperboard Projected Supply, Demand and Supply-Demand Gap by Categories (1,000 metric tons) 1975 1980 1985 Supply Demand Gap Supply Demand Gap Supply Demand Gap Newsprint 84 84 0 84 115 -31 84 160 -76 Printings and Writings 68 80 -12 69 109 -40 69 152 -83 Industrial Paper 144 146 -2 150 201 -51 178 280 -102 Paperboard 68 76 -8 75 104 -29 75 144 -69 Tissue and Others 14 34 -20 14 46 -32 14 64 -50 Total 375 420 -42 388 575 -183 420 800 -380 /a The possible PICOP production of 100,000 MT/year of corrugating medium for export has been ignored in this calculation. Source: Board of Investments. Since many of the mills have the possibility of varying production to suit the market, the supply-demand gap for each category can onily be considered approximate. Nevertheless, the total gap is equivalent to a daily pro- duction of 135, 565 and 1,160 tons in 1975, 1980 and 1985, respectively. 6.16 Using this data, it is possible to determine the potential supply-demand gap for different grades of pulp in the same years. The results of such a calculation are given below:  - 51 - Pulp, Projected Supply, Demand and Supply-Demand Gap by Grades (1,000 metric tons) 1975 1980 1985 Pulp Grade Supply Demand Gap Supply Demand Gap Supply Demand Gap Long-fibre chemical - bleached 1 1!9 -18 1 19 -18 10 19 -9 - unbleached /a 15 41 -26 20 43 -23 30 55 -25 Short-fibre chemical - bleached 40 80 -40 50 81 -35 66 81 -15 - unbleached 96 72 +24 123 76 +47 139 92 +47 Mechanical 69 75 -6 69 75 -6 69 75 -6 Secondary 126 /b 125 +1 172 /b 134 +38 200 /c 145 +55 Total 347 412 -65 435 428 +3 514 467 +47 /a Unbleached long-fibre pulp supply is based on PICOP's and Rustans current plans to pulp abaca and other non-woody plant material with the hardwood, and by 1985 the utilization of plantation pine in the PICOP mill. Capacity of the 6 idle pulp mills is not included. /b 30 percent recovery of total. paper use. /c 25 percent recovery of total paper use. Source: Based on pulp usages given in Table VI-9. Should the industrial paper for banana boxes be produced in the country, the requirements of both unbleached long and short-fibre pulp would be increased by at least 15,000 and 10,000 MT/year, respectively. Pulp supplies for export are not included in the above table. Export Markets 6.17 While exports of pulp and paper products have not been a sa: nificant factor in the Philippine trade, they have been increasing recently. n 1972 exports of pulp amounted to 959 metric tons (classed in official statistics as "pulp of straw, of fibres and rags," principally abaca pulp, the FOB values being close to $500/ton). More important was the dramatic increase in exports of paper and paperboard and their finished products. In 1971 these totalled less than 1,000 tons with an FOB value of $390,000; in 1972 the quantity had increased to 10,860 tons with an FOB value of $1,960,000. 1/ The largest export product was paperboard (7,100 tons) with over 95 percent going to Japan. 1/ "1972 Foreign Trade Statistics of the Philippines" Bureau of Census and Statistics, Manila.  - 52 - 6.18 Discussions with different producers in the country indicate that exports could increase in the following categories: Corrugating medium - to Japan, Hong Kong Paperboard - to Japan, Hong Kong Wrapping paper - to Hong Kong, Taiwan, Kuwait Printings and writings - to Hong Kong, Malaysia 6.19 A recent report 1/ gives projections of chemical grade woodpulp supply and demand for the three major producing and consuming regions in the world. These projections are summarized below: Projections of Pulp Balance (1,000 metric tons) 1975 1980 1985 High Low High Low High Low North America +3,160 +3,320 +4,450 +4,740 +5,940 +6,390 Western Europe -1,890 -2,040 -2,790 -3,000 -3,910 -4,300 Japan -1,410 -1,500 -2,520 -2,680 -3,380 -3,660 + Net exportable. - Net to be imported. Thus, the estimated chemical grade market pulp deficit in Western Europe and Japan may grow over the combined regional and North American supply in such a way, tthat mills with a joint daily production of approximately 500, 2,500 and 4,000 metric tons are needed to fill the gap by 1975, 1980 and 1985, respectively. 6.20 In a more specialized area the report points out that "owing to the advantages of integration, the non-captive production of unbleached kraft pulp, NSSC-pulp and groundwood is likely to have a decreasing share of the total volume." The implications of the foregoing for the Philippines pulp and paper industry will be discussed in the next section. 6.21 Future demands for long and short-fibre chemical paper pulp have also been estimated by Sundelin. 2/ His estimates are as follows: 1/ Report FAO:PAP/72/5 Rev. April 1973. "The Present and Future Outlook for Chemical Paper Grade Market Pulp," prepared for FAO Advisory Committee on Pulp and Paper, 14th Session, May 1973. 2/ Sundelin A. "The International Market for Chemical Paper, Pulp to 1985" Report prepared for IBRD 1973.  - 53 - Estimates of Future Demand of Chemical Paper Pulp from Wood and Non-Wood Materials (1,000 ADMT) 1975 1980 1985 Long Short Long Short Long Short Fibre Fibre Fibre Fibre Fibre Fibre Latin America 1,635 1,505 2,375 2,295 3,110 3,480 Africa 300 405 455 560 715 770 Asia & Far East /a 1,495 1,125 2,305 2,130 3,480 3,775 Japan 3,675 4,495 5,190 6,095 6,955 7,840 Oceania 805 280 1,170 390 1,615 540 Western Europe 14,650 5,985 16,670 8,060 18,785 10,570 North America 35,025 7,430 39,430 9,860 42,575 12,720 Total 57,585 21,215 67,600 29,390 77,235 39,695 /a Excluding Japan and Mainland China. These projections are of interest to the Philippines in that they illustrate the trends and expected shortages in the grades of pulp that are required by the Philippine 'pulp and paper industry. It follows that if surpluses of either short or long-fibre pulps are produced they should find a ready market in Japan and the South East Asia region. Summary of Market Prospects 6.22 The data given in the preceding paragraphs and tables show the following: (a) Even if all currently known plans (firm and otherwise) for increased production are carried out, the Philippines will have a need for increasing imports of all the categories of paper considered, reaching a total of 380,000 metric tons inT 1985. It is emphasized that the categories shown in the tables are very broad classifications. Within any one category there will be grades for which there will be surplus production capacity. (b) With pulp usages based. on current practice in the Philippines and in other countries, the Philippines could develop surplus capacity for the production of unbleached short fibre pulp, and surplus secondary pump supplies. (c) Over the period considered the country may have decreasing deficits of bleached and unbleached long-fibre pulp, and bleached short-fibre pulp; the decreases envisaged are 9,000, 25,000 and 15,000 metric tons respectively, by 1985.  - 54 - (d) If complete self-sufficiency in pulping and paper- making is desired, by 1985, projected annual pulp supplies will have to be increased by the following amounts: - Long-fibre chemical bleached 37,000 tons unbleached 54,000 - Short-fibre chemical bleached 119,000 " unbleached 7,000 - Mechanical 81,000 " - Secondary 61,000 (e) In addition to the domestic market there are increasing export possibilities for both long and short-fibre pulp in the nearby markets of Japan and South-East Asia. In light of current experience, it is evident that surplus production of many paper grades can also be sold in the same Asian markets. Export prospects would, of course, depend on cost-competitiveness, and this issue is considered in paragraph 6.40 below. C. Raw Material Supply: Pulpwood 6.23 The Philippines' major pulpwood resource is in the stands of mixed tropical hardwoods. In 1971, 15.9 million ha, 53 percent of the land area, were classed as forest land and, of this, 14.1 million ha were classified as productive or commercial forest land. Some 13.5 million ha of the com- mercial forest land is covered with dipterocarp forest. The major areas were in Mindanao with 5.8 million ha, and Luzon with 5.1 million ha. In addition, of the sound commercial wood, 53 percent was in Mindanao. 1/ 6.24 Mixed tropical hardwoods have not yet been widely accepted as a satisfactory pulpwood resource. The major objection to their use is the large number of species in any one area and the consequent difficulty of producing a uniform pulp. This is particularly true for mills producing market pulp. As recently as May 1973 2/, comments were made by representatives of leading pulp producing and consuming countries to the effect that there 1/ Report No. 39a-PH "Agricultural Sector Survey, Philippines" Annex 2 Forestry, May 2, 1973. 2/ FAQ Advisory Committee on Pulp and Paper, Fourteenth Session, Rome, 17-18 May, 1973.  - 55 - would be no requirement for pulp from mixed tropical hardwoods for some time to come, the additional fibre pulpwood being produced from plantations of eucalyptus and other species. Such comments should not, however, dis- courage a study of the Philippine resource, with the special conditions prevailing in the country (described in the following paragraph) and the evident demand for short-fibre pulp in Japan and South East Asia. The problems of non-uniformity of wood supply are not as critical in integrated pulp and paper making operations where suitable adjustments can be made throughout the process. 6.25 In contrast to many other mixed tropical forest areas, the Philippines is fortunate in that 66 percent of the sound commercial wood in the old stands are dipterocarp species and this proportion reaches 72 percent in Mindanao. These dipterocarps supply most of the wood volume exported from the Philippines .md processed in the country. Logging and sawmill wastes of the speci:es form the major pulpwood resources for the mills of PICOP, Rustan Pulp & Paper, and Bataan Pulp & Paper. 6.26 It has been calculated that the potential logging waste available in the islands in the fiscal year 1971-72 was 4.4 million cubic meters, and sawmill waste, another 250,000 cubic meters. 1/ Over 60 percent of the logging waste is found in Mindalnao. The total potential waste, 4.65 million cubic meters, is equivalent to approximately one million tons of pulp. It must be emphasized that the 4.65 million cu. m. estimate is based on allowable cut and lumber production. The actual amount readily available for pulp production is far less, ready availability being interpreted as concentrated supply in an area, making collection possible for a pulping operation of economic size. When it is considered that in 1971 there were 353 logging firms and 349 sawmills, 1/ it is obvious that the obstacles to assembling wood waste at locations suitable for large-scale pulp production have been virtually insurmountable. 6.27 Two recent developments should help in overcoming the problems of assembling wood waste, namely, the cancellation of the.short duration special timber licenses, and the proposal to reduce and eventually eliminate log exports. Both these should encourage larger scale logging and wood processing industries and hence improve the availability of wood waste for the pulp and paper industry. 6.28 The long-fibre pulpwood resource of the country is concentrated in the stands of native Benguet Pine (Pinus Insularis) in Northern Luzon. The pine is estimated to cover an area of 200,000 ha. At present, there are two concessions in the area, assigned to Araneta and Eastern Paper. Both concessions are due for cancellation in connection with the program for rationalization of the pulp and paper industry. The Araneta concession covers 70,000 ha and is estimated to contain 6.1 million cu. m. of pine. The Eastern Paper area is estimated to contain about one-half 1/ "Philippine Forestry Statistics," Bureau of Forestry, 1972, and Board of Investments.  - 56 - this amount of wood. The Bureau of Forestry estimates that the Araneta pine could support a pulp operation of 240 T/day for 30 years, with plantations to sustain a mill beyond that time. There is some difference of opinion between the Bureau of Forestry and some members of the pulp and paper industry as to the actual extent of the pine resource and its accessibility. The FAO report on Philippine forestry was also pessimistic regarding the possibilities of using the Luzon pine to support a kraft pulp mill. 6.29 A third potential pulpwood resource lies in the establishment of plantations of both fast growing hardwoods and pines. At present, as far as the pulp and paper industry is concerned, plantation work is being carried out by individual companies themselves. PICOP has a program to plant a total of 40,000 ha at a rate of 4,000 ha/year. The main species being used are Eucalyptus Deglupta, Albizzia Falcata and Pinus Caribbea. The company has established two nurseries and, in addition, is assisting individual farmers to enter the tree-farming program through the provision of Albizzia Falcata seedlings. Rustan Pulp & Paper has also embarked on a plantation program using Albizzia Falcata and Kenaf. Bataan Pulp & Paper has carried out experimental plantings with Albizzia Falcata and Gmelina Arborea and is actively seeking land close to the mill where plantations could be established. Non-Wood Fibres 6.30 As with pulpwood, the Philippines has large resources of non-woody short-fibre materials - bagasse and rice straw - and limited resources of long-fibre materials. At the present time, there is one mill utilizing bagasse for pulp production and a second mill is in the process of start-up. Bagasse is widely used as a pulp resource throughout the world, over 40 mills with capacities in excess of 20 T/day each using it as a raw material. In 1971, sugarcane production in all of the Philippines was 23.3 million metric tons, 1/ equivalent to approximately 3 million metric tons of dry bagasse. The major current use of bagasse is as fuel for steam generation in the sugar mills. Between 70 percent and 80 percent of bagasse is used in this way leaving 0.6 to 0.9 million metric tons available for pulp production and other uses. Potential for bleached paper grade pulp at 31 percent yield is, therefore, between 180,000 and 280,000 metric tons per year. It would also be possible to replace some of the fuel bagasse at individual mills with alternate fuels such as oil or coal. In such event, the boilers of the sugarmill must be modified or replaced and bagasse sold at the equivalent fuel value. In the Philippines at the present time, one mill estimates, waste bagasse can be delivered at a cost of P 4/ton whereas fuel replacement bagasse will cost about 10 times as much. The increasing cost of petroleum products tends to make this alternative less attractive than it had been previously. The problem with bagasse is similar to that with waste wood, namely the collection of sufficient bagasse at a central point. This problem can be alleviated to 1/ Report No. 39a-PlH "Agricultural Sector Survey, Philippines," Annex 8, Sugar and Tobacco Production, May 2, 1973.  - 57 - a large extent if there is more than one sugar mill within a reasonable trucking distance of one another. A further complication in the Philippines is that ownership of the non-fuel bagasse is vested in the planters and any user of bagasse for pulp piroduction must come to a satisfactory arrangement with the planters as well as with the sugar mills. 6.31 It has been mentioned above that there are at least 40 bagasse pulp mills in the world with capacities of over 20 MT/day each. Of particular interest are the larger mills, of a type which could possibly produce exportable products. They are listed below: Major Bagasse Pulp Mills Mill and Location Capacity Process Product (MT/day) Compania Industrial de 230 Soda Bleached and un- San Cristobal S.A., bleached pulp for Mexico City, Mexico fine paper, tissue, wrapping Puerto Rico International Paper, 120 Soda Corrugating medium Arecibo, Puerto Rico Ledesma S.A., 110 Soda Bleached pulp for Argentina printing and writing Propal, Cali, 165 Soda Bleached and un- Columbia bleached pulp for tissue, printing Compania Papelera Trujillo, 150 Soda Unbleached pulp for Trujillo, Peru sacks, wrapping and corrugating medium Sociedad Paramonga, 150 Soda Bleached and un- Paramonga, Peru bleached pulp for corrugat4ng medium, linear, xrapping, printing tissue Venezolana de Pulpa y Papel, 100 Soda Corrugating medium, Caracas, Venezuela bleached pulp Taiwan Pulp and Paper, 150 Sulphate Bleached pulp for Hsunying & Tatu, Taiwan printing, writing and market pulp Source: UNDP-"Utilization of Bagasse, Review of Bagasse Technology," Sand- well & Company, December 5, 1969.  - 58 - 6.32 Well over 50 percent of the Philippines cane and sugar production is in Negros and in that area there are several large sugar mills which could perhaps lend themselves to becoming centers for pulp production. One of these - Central Azucarera de Bais - already has a pulp and paper mill, and consideration is being given to erection of a pulp mill at another, the location not yet having been decided. 6.33 A further short-fibre resource is the large quantity of rice straw in the country. While this is used as a raw material for pulp manufacture in many countries, it is inferior to bagasse and short-fibre woods. In view of the large quantities of these available, rice straw does not merit consideration in the Philippines pulp and paper industry at this stage. 6.34 It has been inferred earlier in this review that the Philippines is lacking in long-fibre pulp resources. While the statement is true in general, it is also true that the country is an exporter of abaca fibre, a large proportion of which is destined for the manufacture of pulp and paper products. Pulp produced from abaca fibre is superior in most respects to that produced from even the best coniferous wood. The pulp finds use in high quality printing and writing papers, specialty papers and non-woven fabrics. The abaca fibre itself commands a high price, which in 1971 averaged $262/metric ton. Abaca pulp consistently sells for more than $300/metric ton and may reach $500/metric ton. Production of abaca pulp in the Philippines is carried out at present in three small mills with a total pulp capacity of about 14,000 MT/year. Abaca fibre production in the Philippines has been declining in recent years, exports having decreased from 78,900 metric tons in 1966 to 50,200 metric tons in 1971. 1/ This factor together with a predicted world shortage has led to the organization of a committee to study and recommend steps for the rationalization of production of the material. 6.35 In the past, large-scale use of abaca fibre for pulp production has been hampered by the difficulties of harvesting, decorticating and drying the fibre. Dry fibre yields under the best conditions are around 4 MT/ha and pulp yields are of the order of 70 percent. Thus a 100 MT/day mill would require a plantation of close to 12,000 ha. In 1972, with a total area under abaca of 145,000 ha, actual fibre yields in the entire country averaged about 0.75 MT/ha, with the best average yields of 1 MT/ha being attained in Southern and Western Mlindanao. Considerable work,has been carried out in the country on improving the fibre yield per hectare and also making the harvesting, de- corticating and drying more efficient for use for pulp production. Experimental plantations of an improved variety yielding up to 20 tons per hectare have been established and pilot plant work is now underway on recently developed equipment for harvesting and processing the plants. If this work proves successful, a mill to produce 65,000 MT/year of abaca pulp will be established. This mill will be based on new plantations of the improved variety. Such a development will not, however, solve the country's long-fibre pulp shortage, 1/ Source: Board of Investments.  - 59 - unless there is a desire to use premium grade exportable abaca pulp in the production of normal commercial grade papers. Such a development could occur if Philippine paper producers continue to find it necessary to pay excessively high prices for imported long-fibre pulp. 6.36 Other possible sources of long-fibre pulp are commercial banana stalks and wild banana plants. The use of these has not been proven commercially but current shortages of long-fibre woodpulp, particularly unbleached, has aroused interest in their possibilities. 6.37 In the past, bamboo has been used but as has been stated in Section A, the only mill based on this resource was converted to pulpwood use. For reasons that are not entirely clear, the bamboo resource was exhausted and regeneration did not occur. 1/ Secondary Fibre 6.38 An important and growing fibre resource in the Philippines as in other regions is secondary or recycled fibre. Sundelin 2/ states that the extent to which waste paper can be recovered and re-used in paper manufacture is dependent on economic as well as technical factors; the economic factors being largely determined by a country's labor wages, per capita consumption of paper and degree of urbanization. It has been stated that a practical limit to waste paper use will be 40 percent of all fibrous materials used in paper and board manufacture. 3/ This proportion is, of course, also affected by the type of production. In the Philippines, more than 50 percent of the paper and paperboard produced is in grades which have used a very high proportion of secondary pulp - namely industrial papers and paperboard. For that reason, secondary fibre usages over the 10 years ending 1971 have often exceeded 50 percent of the total fibre used. With the development of large-scale wood and bagasse pulping facilities, and the production of a wider range of paper grades, it is probable that the proportion of secondary fibre used will decline. Other Raw Materials 6.39 With the exception of saltcake (sodium sulphate) and sodium chlorate, the major pulping and bleaching chemicals are produced within the country. The two mills producing bleached chemical woodpulp have electrolytic plants producing sodium hydroxide and chlorine for bleaching purposes. It seems likely that any future bleached pulp mills would also manufacture their own bleaching chemicals including sodium chlorate if the 1/ Source: Board of Investments. 2/ Sundelin, A. "The International Market for Chemical Paper Pulp to 1985." Report prepared for 1BRD, 1973. 3/ Slatin, B. "Fibre Requirements of the Paper Industry in the Seventies and Eighties," September 15, 1971.  - 60 - operation is large enough. Caustic soda sulphur stripping liquor is available to one mill from a neighboring oil refinery and proves to be a useful source of alkali and sulphur. The large number of minor chemicals used in pulping and paper-making will probably continue to be imported in the foreseeable future. D. Cost Competitiveness of the Industry 6.40 The cost competitiveness of the industry will depend on a number of factors, mainly mill size, fibrous raw material cost, labor and administra-- tion costs, and selling price of the product. 6.41 Mill size will affect the investment per ton of product as well as the labor and administration requirements. For example, it has been estimated 1/ that a non-integrated newsprint mill in Canada producing 450 MT/day would require an investment of $165,000 per daily ton and would have labor and administration costs of $20.90/ton. A mill double this size would require an investment of $150,000 per daily ton and would have the same labor and administration costs. Perhaps more relevant in the Philippines context is the estimate of investment requirement per ton for a 500 MT/day bleached pulp mill at only 55 percent of that for a 100 MT/day mill. Similarly, the unit cost of a 200 MT/day non-integrated paper mill would be less than 50 percent of that for a 25 MT/day mill. An extreme example is the recently commissioned 10 MT/day abaca pulp and paper mill which required an investment of the order of $700,000/daily ton. 6.42 It was noted in Section A that the emphasis in the country prior to 1966 was on the construction of small mills. Mills of the size built at that time, papermills of 1,000 to 5,000 MT/year could only be justified if labor costs are extremely low or if an unusually high-priced product is planned. 6.43 One comparison of efficiency is as follows for integrated pulp and paper mills: Labor Requirements for Pulp and Paper Production (Integrated mills) Country Approximate Man-hours/ton Product Canada 6 The Philippines - 20,000 MT/year 36 - 140,000 MT/year 11 1/ IBRD Pulp and Paper Industry Sub-Sector Study - First Draft, 1972.  - 61 - That the relatively low wage rates prevailing in the Philippines have riot improved the international competitiveness of the industry is evidenced by the fact that in 1969, wages paid in the pulp and paper industry amounted to over 13 percent of the total zost of materials and labor 1/. This is approximately the same as the proportion in non-integrated mills in developed countries where wage rates are 10 to 15 times higher, and costs of materials are, if anything lower. In the past, then, low wage rates have not resulted in any significant advantage to t:he Philippine consumer or export possibilities. However, as the data in the Table above show, economies of scale are resulting in a marked reduction in labor ccsts per unit of production. If the trend toward larger mills continues, export possibilities could improve significantly, as unit labor costs would then be 1/3 to 1/2 of those in North America. 6.44 Fibrous raw material ccists are compared below: Comparison of Fibrous Raw Material Costs (US$/ADMT bleached pulp) Country Raw Material Cost The Philippines - A mixed hardwood 47.85 /a - B mixed hardwood 37.30 - C excess bagasse 3.80 - D bagasse fuel replacement 25.00 /b Brazil plantation eucalypt 27.00 Sweden birch 42.00 softwood 65.00 Southern U.S. softwood 43.00 hardwood 38.00 /a Cost in an integrated forest industry operation contains some costs which probably shou-ld be assigned to paper production, not to wood production. /b Calculated on the basis of 1 ton fuel oil equivalent to 16 tons of bagasse with no allowance for new boiler equip- ment in the sugar mill. Source: Foreign data from IBRD Pulp and Paper Industry Sub-Sector Study, First Draft, 1972. Except in the case of bagasse, the Philippines at present has no real com- petitive cost advantage in fibrous raw materials. Nevertheless, if work proceeds on plantations of fast growing species close to mills, this picture 1/ "Annual Survey of Manufacturing, 1969" Bureau of Census and Statistics, Manila.  - 62 - could show a marked change with the wood cost approaching that of Brazil. In recent months the industry in the country with its dependence on imported pulp, particularly unbleached long fibre, has been paying a heavy penalty both in price and in irregular availability of supplies. Unbleached long- fibre pulp quoted at $156/short ton in mid-1972 is now priced at $230/short ton even to contract customers. Spot buyers are paying as high as $280/short ton. Unbleached sulphate pulp is becoming a scarce item on world markets and at present there are only three reliable suppliers. The Philippines is a relatively small bbyer of chemical pulp - 31,000 short tons in 1971, making it very susceptible to prIce increases and difficulty in obtaining supplies during times of high demand for pulp. In addition, the market is badly fragmented (20 buyers) and the country suffers in times of world shortages. Such a situation can only have an adverse effect on the competitiveness of the industry. E. Industry Efficiency 6.45 Observation of several mills in the country - both old and new leads one to believe that on the production side the mills operate as efficiently as those anywhere. While manning levels are high in total, manning in the production departments is on the same level as in more highly developed countries. Mills are well-maintained and houselkeeping is good. 6.46 In the past, there has been a problem of low utilization of paper machine production capacity, but this has been principally due to market conditions. On the other hand, there is at present in six mills a total of 22,300 MT/year idle pulping capacity. It is believed that this situation is due to the small size of the operation and the scarcity of raw materials - mainly abaca. It is doubtful that these pulp mills will be recommissioned, barring very exceptional circumstances. 6.47 One factor which has an adverse effect on mill efficiency is the practice of scheduling a one-month shutdown each year. In the Philippines, there is no legal obstacle to a 365-day per year operation. While shutdowns for routine maintenance are necessary, calculating rated capacity on 330 days leads to a false picture of industry possibilities. As far as could be determined, this is the practice in all except two integrated mills. Actual annual production capacity of the other mills could be increased by at least 5 percent through scheduling a 350-day operation, with one or two shutdowns during the year. 6.48 Industry efficiency in locations outside the Manila area is affected by serious turnover of supervisory personnel. The mills are in isolated localities and there is considerable difficulty in counteracting the attractions of city life. Absenteeism is reported to be a problem in some mills, with some difficulty in creating a sense of sufficient responsibility in workers. Paying higher than average wage rates does not seem to have solved this problem. One further adverse factor is the shortage of highly- skilled maintenance men. While there is no shortage of men with good  - 63 - general skills, it is the belief of managers of the larger mills that there is a country-wide shortage of specialists; to quote an example, welders are plentiful but welders who can do a good job on pressure vessels are scarce. Such a situation makes for longer interruptions of production due to equipment failure and/or a larger investment in spare parts. F. Development Plans 6.49 Firm plans for new mills and expansion of old mills are limited at present. The new mills are as follows: Estimated Ccmpa!ny Product Investment Abaca Pulp & Paper Abaca pulp US$50,000,000 Industries of the for export (1971 est.) Philippines 65,800 MT/year Isarog Pulp & Paper abaca pulp N.A. Company for export 6,600 MT/year Manila Paper Mills bagatsse pulp US$12,000,000 for own use 26,300 MT/year Paragon Paper Industries coated paperboard N.A. 23,900 MT/year It can be seen that even though the mills planned are much larger in general than those built in the past, the tendency is to think small. The abaca pulp mills are a special case, producing a high-priced specialty product. The larger mill is planned to be based on an abaca plantation using the new high yield variety and new abaca processing equipment to dewater and prepare the fibre for pulping. The Board of Investments has logically requested that pilot scale work be carried out before mill construction is begun. The 1971 investment estimates for this mill, at approximately $44,000,000 for direct capital, or $220,000/daily ton, appear to be high when it is considered that a 200 MT/day bleached wood pulp mill, with probably more complex equipment, would have required an investment of approximately $160,000/daily ton in 1971. The production of this mill is destined for export but it is not certain that adequate market studies have been carried out. At present, there is only one mill expansion being planned: PICOP, through addition of equipment, will increase production of both newsprint and kraft products by 15 percent.  - 64 - G. Development Potential 6.50 In addition to the foregoing, other new mills and expansions are being considered by some existing and new producers. (i) Bataan Pulp and Paper, through the installation of additional pulping and evaporation capacity for which the ori.ginal miLl was designed, can add about 10,000 MT/year to its production of bleached short-fibre pulp. If the project materializes, it would be with be the intention to sell the pulp to other local mills and thus offset some of bleached short-fibre pulp deficit in the country. However, the mill has space for the installation of a second paper machine and, as the Zine paper market in the country develops, it would be logical to utilize the additional pulp to obtain a share of the increased paper market. These developments and, indeed, the continued operation of the present mill depend on an assured wood supply, which at the time of the mission's visit in May was not in evidence. Bataan, at present, is producing pulp somewhat above its own requirements, 5 to 10 tons per day, and is installing equipment for wet-lapping the pulp for sale. (ii) PICOP which has forest concessions in excess of its immediate requirements, is considering several possibilities for expansion. The one favored at present is 100,000 MT/year of corrugating medium from semi-chemical pulp. Corrugating medium is not an attractive product for export unless wood costs are extremely low or a captive market is available. Preliminary discussions with Japanese interests have been held with a view to assuring the market. (iii) United Pulp and Paper now starting production of bagasse pulp and sack kraft for cement bags, has a mill which has been designed for easy installation of equipment to double capacity to 56,000 MT/year. With increasing production and export of cement, this expansion will undoubtedly take place. (iv) The Bureau of Forestry is accepting applications for a 100,000 ha. concession in the Davao area. The concession would support a medium to large short-fibre pulping operation. Extensive plantation work would be one of the conditions for granting the concession. It is under- stood that the applicant who will probably obtain the concession, intends to begin with a mechanical wood products industry. (v) The two existing concessions in the Luzon pine area are being cancelled and will be up for application. As has been noted earlier, this area presents some problems in accessibility and the scattered nature of the resource. Plantation work would also be required. 6.51 In the section on markets, it has been shown that the Philippines itself could absorb as much as 119,000 MT/year additional bleached short- fibre pulp if the required papermaking facilities were installed. In addition to this, there will be increasing requirements for such pulp in Japan and other Asian countries. With the short-fibre pulpwood and bagasse resources which exist within the country, the possibilities of market pulp mills cannot be ignored. It is doubtful that such a mill using wood could stand alone, but would have to be part of an overall forest industries complex. The present government policies of discouraging log exports and encouraging mechanical wood industries will make greater quantities of wood available. While uniformity of wood supply for market pulp is essential, as has been noted earlier, this problem is not as serious  - 65 - in the Philippines as in other tropical countries. Experience at PICOP, Bataan and Rustan has demonstrated that pulp from the dipterocarps can be successfully used in many paper grades. If market pulp for export is to be considered, this experience will be a useful background in a sales campaign. 6.52 In considering pulpwood, however, attention should not be diverted from bagasse. The concentration of this material on Negros greatly improves the possibilities of large-scale use for market pulp. Transportation and fuel substitution problems require examination, as do the problems of use of bagasse on a scale not hitherto encountered in the country. 6.53 At this time, a detailed study of the short-fibre pulp potential of the country is required, including economic and financial comparisons of bagasse and wood-based market pulp mills. H. Rationalization of the Industry 6.54 The number of small mills in the country has been mentioned previously. Not only are these mills small but they produce a variety of products to maintain their operation. Aside from the integrated mills at Bais and Bataan, there are 8 mills with 11 paper machines with a total capacity of 42,500 MT/year for producing printings and writings. In addition, 5 of these 8 mills, on the same machines, produce industrial papers such as wrapping, corrugating medium and bag paper. Four of the 8 produce tissue. Such a mixture of grades produced on a single machine would be reasonable in a country with a limited market, and perhaps one or two mills may have been justified in the Philippines market at the time these mills came Into production. However, with consumption of printings and writings in 1971 reaching 60,000 tons and of industrial papers at about 97,000 tons, it appears that steps should be taken to rationalize the production of mills and to improve the efficiency, thus reducing the cost of paper to the consumer. Rationalization could take place through consolidation of production of, say, printings and writings at some mills, industrial papers at others and tissue at those mills in which it is the primary product. I. Employment Potential 6.55 The pulp and paper industry is not noted as a large creator of direct employment although in integrated operations supporting workers in the wood supply area outnumber those employed in the mills. Nevertheless, if a pulp mill is associated with other wood-using industries, the additional employment in the woods operations will not be great. Mills using large amounts of waste paper create significant employment in the paper collection business. The largest waste paper user in the Philippines with 700 employees (including transport workers), each month disburses for waste paper an amount equal to the monthly wages of 4,01)0 people. It is possible that direct  - 66 - employment, therefore, in the waste paper collection business for this one mill would be in the range of 1,000 to 1,500 persons. 6.56 The developments listed in para 6.14 and described in the pre- ceding sections could create 1,500 to 2,000 new jobs by 1980 and a further 300 to 500 jobs by 1985. The developments based on the forest concessions near Davao and in the pine area of Luizon could create a further 1,500 jobs. These figures are for direct employment in the mills and do not include supporting workers in pulpwood, bagasse and abaca supply. The additional direct employment in the industry with the foreseeable development would, therefore, be of the order of 4,000. J. Investment 6.57 At the end of 1971, the total investment in the pulp and paper industry was P 1.03 billion (over US$150 million). The projects listed in para 6.14 would require a further investment of about $100 million, and an additional $50 million by 1985. Should pulp and paper mills be built on the concession near Davao and in the Luzon pine area, a further $100 million to $150 million would be required. The total investment envisaged for the industry is in the range of $150-300 million. K. Government Policies 6.58 The pulp and paper industry is covered by both the Investment Incentives Act and the Export Incentives Act. All the mills built within the past 5 years are registered with the Board of Investments, and applica- tions have been approved in principle for two new abaca pulp mills and the proposed bagasse pulp mill. The regulations governing incentives do not place any minimum limit on the size of mill for which incentives wi!ll be granted. While the Board of Investments has an unwritten standard of 50 MT/day for paper mills and 100 MT/day for pulp mills, the mission believes that the basis for these minima should be carefully examined and they should be raised, if necessary. Some variation will be required for specific products. It is recognized that establishment of universal standards would be difficult but some effort should be made to establish minimum sizes and active economies in unit capital cost. 6.59 Some applicants with export-oriented projects have in the past been deficient in the study of potential markets. It should not be BOI's responsibility to carry out market studies for the applicants. Market studies for pulp and paper products require considerable specialist skills and extensive knowledge of the industry. Applicants should be required to provide adequate market data, obtained through the use of experienced market consultants, particularly where export incentives are involved.  - 67 - 6.60 Earlier in this Annex mention has been made of the fragmentation of the Philippine pulp and paper industry. It should be noted that of the 4 mills started since 1968, and the 5 totally new projects which could be effective before 1980 (a total of 9 in all), six involve firms which were not earlier engaged in forest industries or in pulp and paper. Even eliminating the 2 abaca pulp mi]ls, the proportion is still 4 out of 7. It can only be emphasized again that small mills place an economic burden on the country and every attempt: should be made to encourage existing relatively efficient producers to expand to economic size, in preference to encouraging new investment in small mills. If at all possible, the incentives should be modified with this end in view. Tariffs 6.61 Prior to the tariff reforms introduced in 1973, imports of paper were subject to a wide range of customs duties. The new rates are more uniform and follow a relatively simple pattern. Waste paper and scrap materials for paper making pay 1i) percent ad valorem; mechanical and chemical pulps pay 20 percent. Most papers and paperboards pay 30 percent; and special products pay 50 percent or 70 percent. There is less scope for technical smuggling, which was widely prevalent earlier. Prices; of domestic products suggest that available protection is not fully availed of, which is not surprising in view of the capability of major producers to compete in export markets. A sample of domestic and import prices is given below: Prices of Domestic Products and Imports for Certain Paper Categories (US $/PT) Category Domestic Imports (FOB)/- Bondpaper .659 519 Kraft board 156 144 Kraft paper 147 117 /a Freight and insurance will add up to 30 percent to the cost of imports. Source: Board of Investments. To the extent that domestic paper manufacturers can export their products, they are eligible for rebates of customs duties paid on imported pulp. As there is some difficulty in accurately estimating the proportion of imported pulp used in exported papers, and delays in obtaining refunds are considerable, there is a demand for abolition of the import duty on long-fibre pulp, which is in short supply in any case. The implications of such abolition on the prospects for domestic manufacture of long-fibre pulp would have to be carefully examined. In the meantime, to help the export of papers for which production capacity may exceed domestic demand, the Government should examine the possibility of allowing refunds of customs duties paid on imported pulp in accordance with some simple formula related to unit value.  - 68 - L. Financing 6.62 The minimum share of equity in ar. investment required by DBP for consideratlon of a loan application is 25 percent, and, as would be expected, this minimum frequently becomes the target level and is not exceeded. With the large canital investment required in the pulp and paper industry, such a low level of equity participation can create problems. Debt service in the early years of operation can effectively erase any profit, even in those instances where no prolonged start-up problems occur. Where such problems do occur, as has happened in some cases, refinancing of start- up expenses (losses) is required, adding to the debt service load beyond prudent limits. 6.63 In approving applications, the Board of Investments should look critically at the cash-flow projections, particularly for the early years, and test project sensitivity to reduced sales, introductory price discounts and increased raw material prices. These items will be particularly critical if a major share of the production is to be exported. M. Sector Planning 6.64 The data presented in paragraphs 6.4 to 6.22 above have shown that over the next decade there will be a growing deficit, reaching 380,000 MT in 1985, of paper and paperboard in the Philippines market, even after accounting for all firms and potential plans for industry expansion. Additional facilities to produce a total of approximately-360,000 MT per year of pulp would be required to overcome this deficit. 6.65 Over the same period, there is expected to be a growing world shortage of chemical paper grade pulp supplies, and of special interest to the Philippines is the fact that this shortage will be particularly notice- able in Japan and South East Asia. With large natural short-fibre resources and apparently good growing conditions for plantation species for both long and short-fibre pulp, the country is in a favorable position not only to satisfy its own requirements but also to become a net exporter of pulp and paper products. The Philippines has a distinct advantage in this sphere over its near neighbors in already possessing a good basic pulp and paper industry and a work force with a level of education enabling it to easily master pulp and paper technology. 6.66 In the period being considered here, up to 1985, it is not likely that expansions to achieve net export status will be possible; the time is ripe, however, for a start in this direction. Factors requiring early attention are the following: (a) Rationalization of the existing industry to improve overall efficiency and competitive potential.  - 69 - (b) An organized program to develop low-cost, long-fibre pulp resources in areas carefully selected not only for suitability for tree growth but also for transport, water supply,.labor availability and environmental conditions for industrial developmient. (c) Forest concession policies designed to encourage the establishment of large forest-based industries, including mechanical wood products, and pulp and paper. At the same time, the policies should guarantee that existing mills have adequate supplies for present and future needs. (d) Investigation of means to reduce the cost of natural (as compared to plantation) wood delivered to the mills. Data in para 6.44 shows that present wood costs offer no advantage over similar woods in Europe and North America. Consideration should be given to tax concessions on waste wood used for pulp and paper even when not destined for export. (e) Increasing emphasis on plantations of short-fibre pulpwood species in areas which -meet the conditions as described above for long-fibre species. Such plantations should permit a reduction in the delivered wood cost. (f) Detailed investigation of the bagasse resource particularly on Negros with a view to examining its potential in com- parison to short-fibre pulpwood and to determining specific locations which would be suitable for the construction of large pulp mills. (g) Development of procedures to discourage further construction of small mills. Small mills built now will create a situation where excessive protection is required which, in turn, may lead to the constructiorL of further uneconomic units. (h) Development of procedures which will encourage existing producers to expand where this is economically advantageous and where adequate raw materials are available. (i) Encouragement of foreign investment in firms which have export potential, to reduce the burden on domestic foreign exchange resources, and also as a means of obtaining easier market entry.  - 70 - VII. TEXTILES AND GARMENTS 7.1 These two industries are at a challenging stage of development, with bright prospects for a rapid expansion of output to satisfy require- ments in domestic and export markets. Each industry has its own specific problems; but strong ir.ter-relationships bind them together for many purposes. A summary of the structure of the industry is given in Table VII-1. 7.2 The textile industry was classified as an "overcrowded" industry in 1970 and its access to the various concessions allowed under the Investment Incentives Act was restricted for about two years. This action followed a slump in domestic demand, considerable "technical" smuggling qf foreign textiles into the country, and poor export performance. Since 1970, however, the position has changed markedly. The floating of the Peso produced a de facto devaluation, which is now measured at about 72 percent against the U.S. Dollar. The devaluation of the U.S. Dollar itself against major trading currencies has further changed the position of the Peso relative to these; and the extent of the Peso's devaluation now ranges from 72 percent to about 120 percent in relation to various currencies. In comparison, the Indonesian and Korean currencies have been devalued only by about 25 percent and 30 percent against the U.S. Dollar; the Taiwan Yuan has remained stable, and the Singapore Dollar has been upvalued about 10%. The relative position of Philippine goods in export markets has, therefore, improved considerably. Difficulties in the domestic market have been successfully overcome, and the industry is now claiming exp2rt capability. A BOI study in 1972 supported this claim, and the industry was removed from the "overcrowded" list. Expansion of existing mills is now permitted, subject to the proviso that at least 50 percent of new capacity will be exported; and new mills are entitled to all benefits under the Investment Incentives Act if they are located outside the Greater Manila area. During 1972, BOI received applications for approval of 25 expansion projects and 11 new mills. These reflect the buoyancy of the domestic market for textiles as well as the export prospects. It should be mentioned, however, that the industry contemplates exports in the form of garments rather than of fabrics directly, emphasizing the link between the two. 7.3 The textile industry has complained of a number of handicaps. One complaint is about the quality of cotton received under PL 480 arrangements with the US; but this seems hard to uphold. The poor quality of cotton received perhaps reflects a lack of buying competence as much as the lack of choice associated with a tied supply. Another complaint is the shortage of skilled labor for machine maintenance; but the situation appears to vary from one plant to another, possibly indicating managerial shortcomings as much as inadequacy of skilled labor. Considering the trainability of Philippine labor, the concentration of the textile industry in the Greater Manila area, and the relatively small wage differential for skilled labor compared with ordinary labor - Pesos 12-18 vs. 8-12 - the problem does not appear intractable.  - 71 - 7.4 A problem could, however, arise with the supply of domestic synthetic fibres. BOI has approved the installation of two plants for the manufacture of polyester filament and staple fibre; one is in operation and the second is expected to start production in 1974-75. Protective tariffs at 50 percent for filament and 30 percent for staple fibre have been imposed on imports; concessional rates are applied to cases where textile mills first use domestic supplies to the extent of availability. Duty drawbacks are sanctioned for imports used in exported fabrics and garments, but: proof of such use is cumbersome, and refunds are consequently delayed. 1/ Expansion of the existing unit and competition from the second unit should, in due course, lead to some reduction in prices of domestic supplies; but internationally competitive prices are unlikely for some time to come. Administrative arrangements for sanction of duty drawbacks need to be improved to protect export performance and potential. 7.5 The textile industry his been sharply criticized in the past for many shortcomings; and some iweaknesses persist. The major criticisms appear to be: (a) product quality is often poor; (b) delivery commitments are not met; (c) mills do not extend even reasonable (sales) credit facilities; and (d) there is inadequate attention to technical problems and product improvement. Improvement will only be achieved with more competition, and there appears to be some good evidence now on the desirability of encouraging expansions of the better units and entry of new units into the industry. The extent to which the linkage of expansion of the industry with export performance and regional dispersal may be expected to succeed is not yet clear, and will need further examination by the BOI. Garments 7.6 Statistical data on the garments industry are inadequate and conflicting. The Annual Survey of Manufacturers (1969) placed the number of establishments with 20 or more workers under the headings (243) "wearing apparel" - (excluding footwear arid umbrellas), (244) "embroideries" and (245) "made-up textile goods" at 173, employing over 17,000 persons. A 1/ The administration of the duity drawback arrangement has been severely criticized. Discussions with many firms indicated considerable dis- satisfaction. Firms registered with BOI have been able in recent occasions to get reasonably prompt response; but most firms cannot treat the expected rebate in their cash flow estimates with any confidence.  - 72 - BOI survey for 1970 identified about 350 enterprises, of which only 14 units accounted for 12,000 factory employees and 44,000 out-workers (in "unor- ganized" units). The current position is confused in statistical terms; but there appears little doubt that the officially recognized number of workers in the "organized" sector is a gross underestimate of the real size and significance of the industry. A current BOI estimate places the number of employees in "organized" units at 54,000 and out-workers at about 160,000. 7.7 The garment industry is located mainly in the Greater Manila area. About 70 percent of the total number of establishments, and all the larger units, are located here. 7.8 The employment effects of the garments industry are particularly important in light of the relatively small fixed capital requirements per worker. The possibility of using domestic structures by small units at the sub-contracting level mean an even lesser capital commitment than would be the case with an industrial operation. Nevertheless, the role of the small firm or production unit cannot be divorced from the larger industrial firm, particularly in the export context. 7.9 The impact of the massive revision of the foreign exchange value of the Peso has been mentioned earlier. The effect on export market poten- tial for garments is especially significant, as there is an existing size- able industry, and skilled labor supply, poised for expansion at current money wage rates. 7.10 The garments industry has a dual character; there is an export group supervised by the "Embroidery and Apparel Control and Inspection Board", and another group historically geared to the domestic market but now exporting to some degree. The former group is referred to, somewhat inaccurately, as the embroidery firms; the latter as the clothing group. The embroidery firms have to meet certain requirements under the relevant Act (R.A. 3137) establishing the Embroidery Board. The main operating features are as follows: (a) The raw material is imported on consignment subject to bond requirements amounting to 1.5 times the value of duties, taxes and other sums payable should the material have been brought in for domestic use. The bond is discharged against exports. (b) The supervision of the industry by the Embroidery Board with respect to: (i) the examination of exports; (ii) the allocation of quotas to firms under United States - Philippines Bilateral Cotton Agreement; and  - 73 - (iii) the imposition of minimum mark-ups on labor costs being 25 percent for handkerchiefs and 30 percent for alL other items. 7,ll The embroidery firms have been dominant in the industry in past years, but are beginning to yield some ground to three new groups. Many new firms have been registered with BOI under the Export Incentives Act.. Some textile firms are see1;ing forward integration into garment mak:.ng for export markets; and ncw foreign firms are appearing on the scene to develop exports from the Philippines to their established markets. 7.12 In mid-1972, there were 57 firms registered with the Embroidery Board. Since the imposition of nartial lay ,the number of firms has been reduced as a result of inquiries made into their conduct with respect to misuse of imports on consignment and other features of corporate behavior. Forty-one of the 57 firms were controlled by Filipinos whereas the remain- ing 16 were owned by foreigners. The embroidery firms rely heavily upon links with overseas principals; these provide raw materials on consignment. Some 65 percent of these principals were in the United States, and 25 per- cent were Hong Kong based. It appears that the bulk of these principals are merchants dealing wholly or partly in the export/limport business. Compara- tively few - about 15 out of 135 principals recorded in mid-1972 - were manufacturers of garments in their country of origin. For many principals, the Philippines is not the only source of imported supplies. Indeed, the principals control the working of the embroidery firms' output inasmuch as the records on trade indicate some thirty countries as recipients of this output; the United States is the most important outlet taking some 90 percent or more of the total output. 7.13 The bulk of the output comes from American-owned or affiliated embroidery firms; they provide about two-thirds of total sales. The product lines and export performanice of the embroidery firms are shown in the Table below: Embroidery Firms' Exports (Unit: US$ millions) 1966 1968 1971 1972 1. Brassieres 5.13 9.19 8.36 5.15 2. Gloves 10.09 14.36 10.20 11.80 3. Handkerchiefs 3.64 3.06 0.98 0.72 4. Slips 0.19 0.41 0.24 0.38 5. Children's, ladies' and men's wear 2.17 2.97 4.31 6.78 6. Infants' wear 6.87 8.15 10.63 10.75 7. Other items 0.79 0.35 0.54 0.64 TOTAL 28.88 38.49 35.26 36.22 Source: Foreign Trade Statistics of the Philippines.  - 74 - 7.14 The disappointing export performance of the industry is a reflec- tion of the complex internal problems of the Philippines. The embroidery firms have been criticized severely in the past for involvement in smuggling, e.g. failure to export the materials imported free of duty on a consignment basis for further working and re-export. Undoubtedly, some of the firms have engaged in these practices. Yet there is no real evidence for thinking this was the case wit-4. t' e larg. fi-.,s actively conmitted to exports. Equally, there is no evidence to suggest that the firms prominent in ex- porting were operating at direct cost levels which placed them at a dis- advantage with respect to most other countries. The real handicaps appear to have been the inefficiencies and corrupt practices associated with customs and other administrative procedures. These shortcomings made it exceptionally difficult for plants to operate effectively as there were difficulties with clearing consignment imports into plants and their gaining approval for exports. Recent changes in administrative practices have improved greatly the working of the governmental structure. This helps explain the renewed confidence in the export growth prospects of the em- broidery group. 7.15 The inability or failure of the embroidery group to expand significantly during the latter part of the sixties has had important consequences: (a) The quota under the long-term Cotton Textile Bilateral Agreement with the United States has never been fully used, and the shortfalls have been very con- siderable. (b) The Embroidery Board is responsible for administering this quota; not all firms with quotas are embroidery firms, but the great bulk are. The Board has not attempted to foster an "active" policy towards the use of quotas. There were no attempts to penalize for failure and seek new firms willing to make the effort in export marketing. This situation probably reflects the administration shortcomings referred to earlier. (c) This circumstance provides a very weak bargaining position when negotiations for renewal of the Cotton Agreement take place late in 1973. 7.16 The production techniques employed in the garment embroidery firms reflect a variety of approaches. Some firms, such as those making brassieres, maintain the great bulk of their production within the plant. Many other activities, such as outerwear and handkerchief production, reflect differing combinations of factory labor and out-workers. Ten large firms dominate the industry. This evidence does suggest that there are significant economies of scale to be gained in both production and marketing. Long production runs on standardized items permit the filling  - 75 - of large export orders, the application of strict quality control techniques and the full use of specialized equipment. There is only very limited evidence available on production economies but this does suggest significant cost reduction per unit of output with size. 1/ 7.17 The degree to which the embroidery firms have provided a stimulus to the domestic textile industry through the purchase of locally-made materials is not great. In 1969 the embroidery firms bought P 8.7 million of local materials, excluding containers and packing materials; but firms bringing in items on consignment only used P 3.5 millions worth of local textiles. The explanations for this are straightforward: (a) the higher costs of many local materials - a situation that changed with devaluation early in 1970; (b) the poor quality of most local materials and yarns in terms of both dyeing and shrinking, as well as strength; and (c) the failure to deliver at contracted times. In recent years, there have been improvements, and local purchases have doubled since 1969. The criticisms of the embroidery firms in not providing a larger market for local mills have not been justified. The export firms have to meet international marketing requirements and cannot afford to substitute inferior products. However, the international market reflects differing quality standards. So the scope for further substitution of domestic materials - fabric and yarns - is considerable. The forward integration of many textile mills into garments should accelerate this trend. 7.18 The failure of the garment industry to expand in export markets during the late sixties raises a number of policy worries: (a) It meant the foregoing of substantial opportunities f or export earnings. (b) There was a loss of employment opportunities. With some 11,000 recorded factory workers in embroidery firms during 1969, according to official series, and this is probably an underestimate, at a time when the cotton quota with the United States was only half-filled, this could have meant the "loss" of a similar number of job opportunities. A cal- culation of the impact on out-workers is impossible. 1/ It should be possible for this evidence to be searched out by the Embroidery Board in light of the information available to them in the foreign trade statistics and exchange data of the Central Bank.  - 76 - (c, The domestically-oriented garment industry ,with few exceptions, had little interest in export marketing because: (i) the local market was profitable; (ii) there are significant barriers to entry into exporting such as meeting design requirements, product specifications and delivery schedules. (d) Only the large embroidery firms appeared capable of sustaining active participation in export market- ing; many, though not all, were foreign-owned or had close foreign ties. (e) The embroidery firms working on a consignment basis cannot be fully supervised with respect to earnings. The principals can take out profits in the location most suited to their needs. They can also adjust production between plants in different economies. 7.19 There are explanations for this failure which reflect on the structure of the industry rather than on just the attractions of the local market or the inadequacies of the government agencies. The embroidery firm importing materials on consignment has a distinct advantage in terms of financial capital commitments in comparison with a local firm initiating a market development. The real handicap seems to be the supply of working capital. This is a co mmn problem for much of Filipino industry. 1/ In Table VII-2, a series of calculations are provided for the capital require- ments of a firm employing about 100 production workers. There are three com- binations: the embroidery firm working on a consignment basis; the locally- owned firm relying upon domestic raw materials or paying for imports but oriented possibly to the export market; and the domestic firm concerned only with the local situation. In the first two cases, it is assumed that some six months will elapse from initial production to the receipt of payments, while, in the third instance, only three months will go by. Furthermore, within each category, three estimates are provided - high, medium and low - which attempt to reflect two features: 1/ Filipino firms have suffered frequently from an erosion of liquid assets. The devaluation of early 1970 caught many firms in the middle of expansion schemes and equipment costs rose dramatically. Even when the equipment was supplied on foreign credits, the Peso cost of repayments rose dramatically. More recently, high commodity prices have absorbed working capital.  - 77 - (a) Differences in the quality of the final product; this is partly reflected in the numbers of supervisory staff. 1/ (b) Alternate estimates of the cost of achieving a given output. 7.20 The main aim of the comparisons is to look at the financial capital required to initiate production. 2/ It could reflect the needs of a new firm or the likely challenge to a firm switching towards an export orientation. The calculations are based on two further assumptions about the existence or otherwise of trade credit. The recent past experience has been the lack of credit facilities for small and medium-sized firms. Finally, it is well to bear in mLnd that these calculations should be multiplied five or ten times or maore if one is thinking of the successful firms in the export trade. 3/ However, production, marketing and financial economies of scale do exist. 7.21 The following major points may be advanced in connection with the estimates appearing in Table VII-2. (a) The export consignment firm, usually foreign-owned among the large successful ones, has few worries about working capital. The fixed capital costs per worker are low comp,ared with other manufacturing activities. (b) The export consignment firm shifts inventory costs and financing onto the overseas principals. However, there is a cost associated with this in the form of relatively low added value per worker. Undoubtedly, the interest charges on this outlay are lower than in the Philippines. It is not possible to detect the extent to which this is reflected in price margins. (c) When a Filipino firm atitempts to enter export market- ing independently, the cost of inventories is very high compared to the embroidery firms. Indeed, the position shown in Table VII-2 may be an underestimate inasmuch as no allowance is made for the cost of capital in use, other than on 90-day bills, in this exercise. 1/ This evidence from factory visits and other discussions made explicit the link between product quality, supervisory staff, and the value of output. 2/ A further set of estimates could be provided illustrating the cash flow associated with the production assumptions. 3/ The largest embroidery firm had some 2,600 workers in its brassiere section by May 1973. Another had some 1,800 workers in this product line at that time.  - 78 - (d) There is a considerable advantage in concentrating solely on the domestic market. Capital needs appear to be much less and the scope for setting up a successful operation is more within bounds. 7.22 The implications of this appraisal and other evidence from the garments industry are substantial: (a) The relatively low fixed capital outlays per worker in the garments industry disguises the substantial working capital called for when export marketing is pursued. Such funding may come from autonomous garment firms not having associations with other segments of Filipino industry, but this will require substantial underpinning by financial institutions. In view of the common worry to most Filipino firms of the lack of sufficient working capital the possibilities for achieving successful entry into exporting garments independently of overseas prin- cipals does not appear to be bright. (b) Export marketing seems likely to be the function, in the main, of large firms. Existing companies engaged in textile manufacture are best placed to generate the resources needed for entry into foreign markets because they may better command the financial resources to ensure a successful start-up. In this respect, the decision of the 3oard of Investments to permit such forward in- tegration is correct, and most appropriate to the possibilities for expanding employment rapidly. (c) Assistance to the expansion of the industry might come in two ways: the provision of funding arrangements to help with working capital require- ments and the establishing of factory buildings for leasing to medium-sized firms. Both types of development support are directed towards entry problems whereas existing export incentives are linked mainly to subsequent production. 7.23 The appropriate role for the majority of smaller firms, say 50 workers or less, does not appear to be in direct exporting. The lesson of the embroidery firms is the dominance of the large company in this sphere. Some specialized smaller firms will have a role to play. But for the bulk of local firms, contracting arrangements with major exporters permits relatively easy entry because working capital require- ments are so much less.  - 79 - Conclusions 7.24 The importance of the textile and garment industries lies in the substantial level of employment offered in these industries in con- junction with very substantial increases in earnings of foreign exchange. The failure to pursue these advantages to the full in the past was mainly a reflection of ineffective and uncoordinated government policies and administration. This situation haas changed substantially since early 1970. 7.25 In sanctioning exparnsion of capacity of existing textile mills and installation of new mills in areas outside Greater Manila, the Govern- ment should keep a close watch on the costs and physical efficiencies of these export-oriented projects. At the same time, adequate measures should be taken to ensure: (i) efficiency of linkages with raw material supply - both domestic and imported; and (ii) proper utilization of export opportunities in markets limited by quotas as well as others. 7.26 For the export-oriented garment industry, help would be most useful in three spheres: (i) Financial credit to cover initial inventory needs of locally-owned firms not operating on a consignment basis for foreign principals; (ii) financial assistance for construction of factory buildings, especially in areas selected as nuclei for regional dispersal; and (iii) easier access to raw materials, which would either be supplied by domestic textile mills at internationally competitive prices or be imported. The current government policy would allow these facilities in export zones, e.g. Mariveles. There may be advantage in allowing large- scale in-bond operations in somie other areas also where considerable labor supply is available. Small-scale and sub-contracting arrangements would have to depend on domestic supplies.  - 80 - VIII. FOOTWEAR INDUSTRY Structure of the Industry 8.1 The footwear industry in the Philippines consists of two main parts, rubber/plastic and leather, which differ from one another in a number of significant ways. The rubber and plastic shoe industry consists mainly of rather large firms (in the local context), because of the process technology and machinery involved. About 35 firms - 21 for rubber shoes and 14 for plastic shoes - are reported to exist. The ASM, which classi- fies the rubber footwear industry separately (but not the plastic footwear industry) covers only 12 firms with 20 or more workers each for 1969. These included the largest firms and employed about 3,900 workers. Plastic shoe factories are rather smaller than rubber shoe plants in terms of employ- ment, and total employment in this section of the industry may not exceed 5,000. A sample survey conducted by the Central Bank in 1970 indicated that the output of rubber and plastic footwear grew at an average annual rate of about 26 percent from 1964 on. Exports, which accounted for only 200,000 pairs in 1967, grew fairly rapidly thereafter to exceed 1.2 million pairs in 1970; but the rate of growth could not be sustained thereafter. It appears that domestic demand has increased rapidly in the past two years and proved more profitable than exports. The level of utilization of installed capacity, which ranged 50-60 percent in the late 1960's, has improved considerably and may be around 80 percent now. The prospects for further growth appear to be good; domestic demand is growing at a healthy rate, and export demand should be even better than in 1970, because the changes in values of currencies of countries that provided the major competition, namely, Japan, Korea, Taiwan and Hong Kong, all favor Philippine exports. 8.2 The leather footwear section of the industry consists of a large number (about 800) of small-scale plants which employ over 8,000 workers, and a small number (about 15) of large plants which employ over 3,000 work- ers. More than 600 of the 800 small plants are concentrated in Marikina city, a satellite town in the Greater Manila area; and almost all the large plants are located in or around Manila. The industry as a whole is thus heavily concentrated in this one area. About 200 units located in other regions are relatively small and do not produce a significant part of total output. 8.3 A sample survey of the footwear industry in Marikina (1970), which did not cover the really large-scale factories, revealed that 75 percent of the firms in the city employed less than 20 workers each, about 20 percent employed more than 20 but less than 50 workers, and about 5 percent employed 50 or more workers. While reliable data for other areas are not available, it is likely that small units are even more preponderant for the country as a whole than in Marikina. 8.4 The Marikina sample survey also showed that about 90 percent of the firms had fixed assets worth less than P 50,000 each, while the largest firm had fixed assets exceeding P 7 million and two other large units had fixed assets exceeding P 1 million.  - 81 - Production 8.5 In small-scale units, leather shoes are manufactured by very labor-intensive methods. Only a few basic machines are used for sewing and trimming. In larger plants, operations are mechanized to the extent of about 70 percent of the steps constituting the total process. Handwork by shoemakers contributes efficiently to production under a piece-rate payment scheme. Over 65 percent of establishments have production capacity in the range of 200-500 pairs each per week, according to the 1970 survey of the Marikina shoe-industry, whereas the two largest firms can produce 5,000-6,000 pairs a week. 8.6 Capacity utilization for leather shoe manufacturing fluctuates seasonally; production peaks twice a year, for about two months at a time, before Easter and Christmas; and at those times factories are operated over their rated capacities. It is at the lowest level during the rainy season, when only about 20 percent of capacity is utilized. The average yearly capacity utilization was reported at 85 percent in 1970, and is probably somewhat higher now. It should-be noted, however, that production capacity in this industry is a flexible concept, as firms, particularly small ones, rely mostly on human labor rather than machinery, and the number of skilled workers available is likely to determine the production capacity. Small overhead expenses, semi-mechanized operations, and the piece-rate payment system appear to be the special characteristics of the leather footwear manufacturing industry, along with wide fluctuations in production. Exports 8.7 Although displaying irregularity, Philippine exports of footwear have reached a level of US$1.25 million in 1972. Canvas and rubber foot- wear constitute the majority of exports, accounting for about 90 percent of the total value until 1970. Ihereafter, exports of leather shoes and sandals have shown a marked increase, while rubber footwear exports have declined. In 1972 leather footwear accounted for 42 percent of the export earnings (see Table VIII-1). The United States is the major foot- wear market for the Philippines. Eighty-nine percent of the total leather footwear exports were directed to this market in 1972. Italy and Spain account for 95 percent of the leather footwear imports Qf the United States, but the Philippine leather footwear industry has made a small place for itself in the same market, and has bright prospects for a substantially larger share, if the problems which the industry is facing can be resolved speedily and effectively. Problems and Prospects 8.8 While foreign buyers are paying increasing attention to shoes from the Philippines, one of the major problems confronting them is the limited supply capability of loca:L manufacturers and wholesalers. Export orders can range from 150,000 to 5 million pairs per buyer, but the largest single plant can produce only about 350,000 pairs per year, and very few sellers would take responsibility for more than 50,000 pairs at a time.  - 82 - Manufacturers' cooperatives could be useful, but the task of developing such organizations has made little progress so far. As a result, some local investors and foreign importers have developed plans to establish new large-scale factories. An Australian firm has concluded a "consignment- processing agreement" with three local firms; a local firm has obtained a license to manufacture shoes under an American brand name on a large scale for export. Another has established a factory in the Export Process- ing Zone at Mariveles, exclusively for export. These developments, together with the p.ossiblle expansion of capacities of existing large-scale manu- facturers, may well change the present structure of the industry, wherein small-scale manufacturers dominate. Raw Materials 8.9 The leather footwear industry in the Philippines uses both im- ported (75 percent) and locally tanned leather (25 percent); but the raw materials for the latter, i.e. hides and chemicals and dyes, are mostly imported too. Not enough raw hides are available locally, and those avail- able are of inferior quality, due to poor handling of animals by domestic livestock raisers and processors. Local leathers are so poor in quality that they are generally accepted only for certain low quality shoes and sandals. It appears, moreover, that the actual footage of leather supplied is often 5-10 percent shorter than the amount of footage charged for by the leather suppliers. Hence, local leather is generally considered more expensive than imported leather, even though surface appearances indicate the contrary. Local leather is protected by customs duties: 50 percent for cow leather and 70 percent for other kinds of leather. Leather for export production can be imported duty free under bond. Im- provement of cattle slaughtering practices, and in leather curing and tanning procedures should have high priority for technical assistance. Marketing 8.10 In the past, shoe manufacturers have relied greatly on traders to supply raw materials and to market their products. However, small manufacturers also have found this arrangement unfavorable to them, as they had to pay high prices for their materials and allow large margins to the sellers of their products. Hence, the larger manufacturers have progressively established direct access to retailers, while smaller units have jointly created corporations or associations for marketing. The Marikina Shoe Marketing Corporation is the largest of these, with 127 mem- ber firms. These groups have created their own sales outlets in Manila and Quezon City. Concentration of manufacturers in Marikina city and the support of the Marikina Shoe Trade Commission of the municipality have contributed to the success of the organizations. However, these organiza- tions have not yet been able to extend their operation to other areas. Financing 8.11 The small equity base of most leather shoe factories has made it difficult for them to obtain bank financing for expansion. Limited access to borrowed funds for investment may affect adversely the small- and medium-  - 83 - scale manufacturers, who could otherwise benefit from the growing demand for their products. The needs of manufacturers for working capital are also increasing, as material and labor costs rise faster than profit margins. An easier financing scheme for both working and investment capital is needed to promote the development of these small- and medium-scale shoe manufacturers. Conclusion 8.12 The shoe industry has bright prospects, particularly for export. Development of the industry will contribute to: (i) greater foreign exchange earnings; (ii) greater employment, based on labor-intensive production methods; and (iii) further regional development, which can be promoted by development of sources of raw material supply and, possibly, raw-material oriented location of manufacturers. To realize these benefits to the economy, the Government should take positive steps to solve the problems of raw material supply, financing, and organization for marketing in domestic and export markets.   Table V(ii)-1 Shipyard and Ship Repair Facilities in the Philipines Name and Location Facility Capacity Nature of Work 1. National Shipyards & Steel Corp. Marine Slipway 500 GT Small ships drydocking and repair. Port Area, Manila 2. Engineering Equipment, Inc. Slipway 750 Gr Construction of barges and tugboat. Mandaluyong, Rizal 3. El Varadero de Manila Slipway 2,000 GT Structural hull and underwater repair Sangley Point, Cavite City work on service craft. 4. Dynamarine Shipyard Shipbuilding Way 1,000 GT Shipbuilding. Navotas, Rizal 5. Navotas Industrial Corp. Marine Slipway 500 GT Design and construction of tugboats, Navotas, Rizal steel barges, and fishing boats. Activation and overhaul of steel barges and diesel engines. 6. Bataan National Shipyard Graving Dock 10,000 GT Shipbuilding, ship conversion. Mariveles Slipway 2,300 GT Machinery overhaul and repair. 7. Cebu Shipyard & Engineering Marine Slipways 4,000 GT Shipbuilding and repair of ships, steel Docks, Inc., Cebu City, Cebu 2,000 GT barges, fishing vessels and tugboats. 8. Sandoval Slipway 1,500 GT Drydocking and repair Cebu 9. Luzon Stevedoring Corp. Graving dock 2,000 GT Overhaul and repair of LUSTEVMCO's fleet Iloilo Slipways 1,500 (T of barges (75 - 2,200 DWT) tugboats and inter-island tankers 10. Atlantic Gulf & Pacific Co. Marine Slipway 500 GT Shipbuilding and repair and overhaul Poro Point of engines for all types of cormercial vessels. Work accomplished is considered excellent. 11. Philippine Iron Construction & Marine Slipway 1,000 DWT Construction of tugboat, barges, fishig Marine Works, Misamis Oriental boats, equipment fabrication, shipbuilding and ship repairing.  Table V_(ii)-2 The Philippine Maritime Fleet (1971) - Ocean-Going Vessels - Tonnage 820,000 Gross Tons Nunber 130 ships Inter-Island Vessels Tonnage 390,000 Gross Tons Number 434 ships Ocean-Going Vessels Inter-Island Vessels Breakdown Breakdown Breakdown Breakdown Size Range by by by by (sT)-T Gross Tonnage Number Gross Tonnage Number Up to 500 0.01% 0.90 7.61% 40.17% 501 - 1,000 0.18 1.82 21.03 32.90 1,000 - 2,000 0.60 2.73 14.42 10.25 2,001 - 5,000 18.20 35.46 43.38 14.96 5,001 - 10,000 50.79 46.36 4.74 o.86 10,000 - 20,000 19.62 10.91 8.82 0.86 More than 20,000 10.60 1.82 Total 100.00% 100.00% 100.00% 100.00%  Table V(ii)-3 Distribution of Inter-Island and Ocean-Going Vessels According to Age (19-71T) Breakdown Breakdown by by Age Number Gross Tonnage Inter-Island 30 years and ovrer 17.09% 7.52% Vessels 20 - 29 years 50.85 46.78 10 - 19 years 15.39 32.64 Less than 10 years 16.66 23.06 Total 100.00 100.00% Ocean-Going 30 years and over 9.09% 5.64 Vessels 20 - 29 years 32.72 25.47 10 - 19 years 36.36 40.90 Less than 10 years 21.83 27.99 Total 100.00% 100.00%  Table- V(ii)-4 Imports of Ships and Boats Excluding Combat Vessels (Million US$, FOB) Vessels of 250 GT Other Vessels and over entering including Total Year under own power Ship and Boat Parts Import 1.972 16.1 2.8 18.9 1971 6.8 2.4 9.2 1970 19.3 1.0 20.3 1969 16.8 1.3 18.1 1968 20.3 2.1 22.4 1967 16.0 2.1 18.1 1966 20.6 2.7 23.3 1965 12.9 5.1 18.0 1964 17.2 1.4 18.6 1963 19.9 2.4 22.3 Source: Bureau of the Census and Statistics.  Table V(ii)-5 PROJECTS APPROVED AND REGISTERED BY THE BOI (May 1973) Name of Firm Site Status Approved Capacity 1. Free Port Shipyard Limay, Bataan NP 4200 GT - barges & Eng'g. Corp. 3500 GT - fishing vessels 2. Cebu Shipyard & Engineering Works, Inc. Lapu-lapu City P 6400 GT - interisland vessels NP 6000 DWT - barges 3. Simeon Policarpio Shipyard and Shipbuilding Corp. Navotas, Rizal NP 2400 GT - steel barges 2000 GT - fishing vessels 4. Capitol Snipping Lines, Inc. Mariveles, Bataan NP 18000 DWT - steel barges 3600 GT - fishing vessels 5. rhil. Iron Construction & Marine Works, Inc. Bo. Jasaan, Misamis Oriental P 15,000 DWT - interisland vessels NP 11,500 DWT - steel barges 1,200 GT - fishing vessels 6. San Diego Fishery Enterprises Navotas, Rizal NP 4800 DWT - steel barges 3465 GT - fishing vessels 7. Dynamarine Corp. Navotas, Rizal NP 12,000 GT - barges PROJECTS APPROVED BUT NIOT YET REGISTERED BY THE BOI 1. Jao & Co., Inc. Bunawan, Davao City NP 13,200 DWT - barges 2. David M. Consunji, Inc. Bo. Recodo, Zamboanga City NP 6,000 GT - steel barges 300 GT - fishing vessel 1ote: P: Pioneer NP: Non-pioneer  Table V(ii)-5 (Contd.) APPLICATIONS UNDE CONSIDERATION Name of Firm Site Capacity Applied For 1. Mantrade Industries, Inc. Batangas or Mariveles, Bataan Fishing Vessels - 1000 GT Barges/Tugboats - 8000 DWT 2. Sandoval Shipyards, Inc. Tangos, Navotas, Rizal Fishing Vessels - 1000 GT Barges/Tugboats - 5000 DWT 3. Shipbuilder Phil., Inc. Consolacion, Cebu Fishing Vessels - 800 GT Barges/Tugboats - 8000 DWT Interisland Vessel - 9000 DWT 4. Luzo-r Stevedoring Corp. San Miguel, Batangas Barges - 12,500 GT Interisland Vessel - 5000 GT 5. Republic Drydock Corporation Canao, Cebu 6. Guimba Shipping and Development Tacub, Kansuagan, Lanao del Fishing Vessels - 400 GT to 2000 GT Corp. Norte Barges/Tankers 1000 DWT to 8000 DWT Tugboat - 56 Ft.  Table V(ii)-6 Breakdown of Vessels by Age Over 1,000 GT only Type of Size Range 0 - 10 Yrs 11 -15 Yrs 16 - 20 Yrs Over 20 Yrs Uncertain T o t a 1 Vessel GT GT No. GT No GT \'o GT 1to. GT No GT Ocean '.00C - 2,000 - - - - 1,4oC 1 3,180 2 - - 4,580 0.5 3 1.7 - Going 2,001 - 5,000 45,620 13 28,470 8 7,260 2 38,550 12 - - 119,900 12.7 35 19.7 Vessels More than 5,000 174,000 12 255,740 24 6,180 1 173,980 28 12,)460 1 622,360 66.1 66 37.0 Sub Total 219,000 25 284,210 32 14,6840 4 215n,710 42 12,460 I 746,840 79.3 10)4 5844 Irter 1,0l1 - 2,o0o 16,500 11 9,340 6 5,130 3 9,850 7 11,980 8 52,800 5.6 35 19.7 - Island 2,001 - 5,000 37,900 11 12,280 4 11,050 4 36,380 13 9,540 3 10715C 11.4 35 19.7 Vessels More thar. 5,000 10,170 1 - - _ - 12,040 2 12,430 1 34,640 3.7 4 2.2 Sub Total 64,570 23 21,620 10 16,180 7 58,270 22 33,950 12 19)4,L9 20.7 74 41.6 TOTAL 284,190 48 305,830 42 31,020 11 273,980 64 46,410 13 941,430 100.0 178 100.0   Table V(ii)-7 Fleet P-nion Demand - Ocean-Going Vessels Case A: Philippine Flag Share Maintained at 10% Case B: Philippine Flag Share Increases to 20% by 1984 Total Freight Carried by Philippine Foreign Vessels Shipping Vessel Demand Year Trade Case A CaeB Efficiency Case A Case B 'G00 MT 000 MT (MT/GT-Yr '000 GT '000 GT 1971 29,600 2,490 8.4% 3.0 820 1972 28,485 2,490 8.7% 3.0 830 1973 30,200 2,720 9.0% 3.2 850 1974 33,060 3,306 10 3,306 lo 3.4 970 970 1975 36,200 3,620 10 3,980 11 3.6 1,000 1,100 1976 39,640 3,964 10 4,750 12 3.8 1,040 1,250 1977 43,400 4,340 10 5,65o 13 4.0 1,080 1,410 1978 47,520 4,752 10 6,650 14 4.5 i,o60 1,48c 1979 52,030 5,203 10 7,800 15 5.0 1,040 1,560 1980 56,980 5,698 10 9,100 16 5.5 1,040 1,650 1981 62,400 6,240 10 10,600 17 6.o 1,040 1,770 1982 68,210 6,821 10 12,270 18 6.5 1,050 1,890 1983 74,700 7,470 10 14,180 19 7.0 1,070 2,030 1984 81,800 8,180 10 16,350 20 7.5 1,090 2,180  Table V(ii)-7 Fletansion Demand - Ocean-Going Vessels Case A: Philippine Flag Share Maintained at 10% Case B: Philippine Flag Share Increases to 20% by 1984 Total Yreight Carried by Philippine Foreign Vessels Shipping Vessel Demand Year Trade Case A _ Case B Efficiency Case A Case B COO 1MT '000 MT % 'O0O MT % (MT/GT-Yr z000 GT '000 GT 1971 29,600 2,490 8.4% 3.0 820 1972 28,485 2,490 8.7% 3.0 830 1973 30,200 2,720 9.0% 3.2 850 1974 33,060 3,306 10 3,306 10 3.4 970 970 1975 36,200 3,620 10 3,980 11 3.6 1,000 1,100 1976 39,640 3,964 10 4,750 12 3.8 1,040 1,250 1977 43,400 4,340 10 5,650 13 4.0 1,080 1,410 1978 47,520 4,752 10 6,650 14 4.5 1,06C 1,48o 1979 52,030 5,203 10 7,800 15 5.0 1,010 1,560 19580 56,980 5,698 10 9,100 16 5.5 1,040 1,650 1981 62,400 6,240o 10 10,600 17 6.o 1,040 1,770 1982 68,210 6,821 10 12,270 18 6.5 1,050 1,890 1983 74,700 7,470 10 14,18o 19 7.o 1,070 2,030 1984 81 800 8,180 10 16,350 20 7.5 1,090 2,180  Table V(ii)-S- ShiP Cost vs. Steel Prices and Labor Production Cost of all Material Cost of Cost of Material Cost of all Labor Pro- & Labor Total Cost Steel Used Steel Steel (2.86 x C) Material ductivity Wage/Hr Wage/GT (E + H) Other Costs (I + .) Tons $/Ton '000 $ '000 $ $/GT Man-hrs./GT $ $/GT $/GT $/GT $/GT A B C D E F G H I J K 1800 150 270 770 257 40 .25 10 267 90 357 t\ 1800 200 360 1030 343 - - - 353 - 443 1800 250 45o 1280 427 - - - 437T - 527 .i 1800 150 270 770 257 80 .25 20 277 90 367 ffi 1800 200 360 1030 343 - - - 363 - 453 r4 1800 250 4450 1280 427 - - - 447 537 1800 150 270 770 257 160 .25 140 297 90 387 1800 200 360 1030 343 - - - 383 - 473 1800 250 450 1280 427 - _ _ 467 - 557 1800 150 270 770 257 40 1.50 60 317 90 407 Cd 1800 200 360 1030 343 - - - 403 -493 14 1 800 250 1450 1280 1427 --- 487 -577 4,-  V3dVd NOI133S SSOH3 5 ~~~~~ bL~~~~~~~~~~~ t- X ---. t P | - + @ X f - - + Wfe- T4 t F ..~ ~ ~~~~~~~~- .- ........ - ----W- ~~-- - -- a O=A - t - _ _- L 7- C O- T Ltt l~~ ~ ~~ iw a~- - ii ;3_ 5 .................... . X_ t - .......... t:, a - ~ ~ ~ ~ ~ ~ 2 -A- ----:-I:-7 ,+ -r A I--;,,-[ -i N t _l+t _: a -Wze_Wv + :1.8 H+-X - --A- 1-4 -- + -- + 1 1 W 4. 1 1I: - - It -jt L;~~~~~; . t l t ; : : --- -:t:J.;. .. \ \ :-: t:--$ t. t :- -- , t:Lt ............... r .........._-4-**-i _ '1 4__ . ...... _ i ,- :- ................:- 1': - 4I I_ t V F t . - . _~~~~~~ VN Ni-l-A- -- --:- -----1lj i _ < <- ---1:1-1:t It L IXt.:-I-:1:tt . t,-1-+ W .. .1-1 -q'- --I -1'1'- '' '1' -.. .----1- 1-- 11 ttt< < tXtt I fi X +1t - - 1- 1- 1 X _ nt -t--r X F..i _ . ..W. t .EH . _ Xt--~~~~~~~~~~~~~~~~~~~~~~~~~-1 -':'1 4It;- . 1 - F.,_ , ___. .~~~ ~ ~ 1 ' :- ;... - . ..1 1: -1 :1:4  Table VI-l Philippine Pulp and Paper Mills Kill Year on Rated Capacity Mr/Year No. Stream P Paper Paperboar Raw Materials Products 1 1911-45 9,500 10,000 3,00) Bagasse, imported bleaohed long Printings end writing, paperboard fibre pulp, waste paper 2 1956 - 18,000 - IDported unbleached long fibre Induatrial papers pulp, waste paper 3 1958 - - 12,000 Imported pulp, waste paper Paperboard 1. 1959 - 1,100 - Imported bleached long and Tissue aort fibre pulp 5 1959 - 8,000 - Imprted bleached and unbleached Printings and writings, indus- long and short fibre pulp, waste trial paper paper 6 1960 6,00 2 4,100 - Deported bleached and unbleached Printings and writings, indus- long and short fibre pulp, waste trial paper, towelling, tissue paper 7 1961 - 16,000 - Imported mechanical pulp, bleached Printings and writings, indus- and unbleached long and short fibre trial paper towelling, tissue Pulp 8 1962 1,800 2,700 - Imported bleached and unbleaohed Printings and writings, indus- long and short fibre pulp, waste trial paper paper 9 1962 16,000 20,000 - Short fibre pulpwood, iaported Printings and writings bleached long fibre pulp 10 1962 Sl-,000 2,700 - Imported mechanical pulp, bleached Printings and writings long and short-fibre pulp, waste paper 11 1962 5,1s00 2,200 11,000 Imported bleached and unbleached Printings and writings, indus- long- and short fibre pulp, waste trial paper, paperboard paper 12 1962 - 16,000 Iported pulp, waste paper Paperboard 13 1963 5,4OOV i,IA0 - Imported bleached long and short- Printings and writings, tissue fibre pulp, waste paper 14 1963 -2700 1,900V Imported bleached long and short- Industrial paper, printings and 2,700- S,900&' fibre pulp, waste paper and writings 15 1966 - 5,4o00 Imported bleached long end short- Printings and writings, tissue fibre pulp cigarette paper, cellulose vadding 16 1968 4/ 12,000 14,000 Imported bleached and unbleached Industrial paper, printing and long and short-fibre pulp vaste writings, paperboard paper 17 1970 5,500 20,000 4,500 Abaca fibre, short-fibre pulpwood, Industrial paper, paperboard, 19,000 imported unbleached long-fibre pulp, abaca pulp waste paper 18. 1972 127,000 137,000 - Short fibre pulpwood, imported Newsprint, industrial paper unbleached long-fibre pulp 19 1973 1,600 3,000 - Abaca fibre imported bleached Specialty printings and writings, long-fibre pulp abaca pulp 20 1973 16,000 28,000 - Bagasse, imported unbleached long- Sack kraft fibre pulp 21 n.-. 6.800 - - Abaca fibre Abac pulp TOTAL 223,700 323,500 60,500 1/ Idle pulp mill V Mill not operated since 1971 3/ Small pulp mill, 20 to 30 MT/day being recommIssioned for pulping waste rope rags etc. Sources Board of Investments  Table VI-2 Past Local Produition of Paper by Categories (1,000 MTI Industrial Printing Tissue Year Paper & writing Newsprint & others Paperboard Total 1962 19.9 22.5 2.3 3.0 16.2 63.9 1963 20.3 35.5 - 3.7 22.8 82.3 1964 20.8 29.0 - 9.9 20.8 80.5 1965 25.7 26.0 0.9 9.0 20.5 82.1 1966 17.3 40.9 - 6.8 27.3 92.3 1967 26.8 29.4 _ 13.3 32.5 102.0 1968 39.6 37.4 _ 15.0 32.6 124.6 1969 39.6 37.7 0.7 13.2 33.1 124.3 1970 35.0 142.3 0.7 13.4 34.8 126.2 1971 51.7 49.8 2.9 13.3 35.8 153.6 -2 Sou~rce: Board of Investmients Past Importation of Paper by Categories t~~1,00 Go M) - Industrial Printing Tissue Year Paper & writing Newsprint & others Paperboard Total 1962 21.2 11.3 38.4 3.7 4.6 79.2 1963 25.7 10.9 40.8 3.9 3.5 84.8 1964 40.0 17.8 43.8 5.3 104h 117.3 1965 38.0 14.7 50.14 4.6 12.8 120.5 1966 39.0 13.0 51.4 8.7 8.6 120.7 1967 40h.8 13.3 68.5 6.2 17.4 146.2 16a 146.6 11.7 59.3 6.6 20.9 145.1 1969 40.0 9.2 71.2 8.4 9.0 137.8 1970 45.2 11.1 45.6 8;5 15.2 125.6 1971 45.2 11.0 57.1 9.9 12.9 136.1 Source: Board of Investmnents rable VI-4 Past. Production of Pulp by Grade (1,0300 T) Chemical Secondary Year Fulp pulp 1962 14.4 18.6 1963 26.2 14.1 1964 20.8 22.8 1965 16.3 4214 1966 22.1 39.6 1967 19.3 49 1968 23. 7 1969 19.8 62.2 1970 20.9 52.1 1971 22.7 86.1 Source: Board of Investments  Table VI-5 Past Importation of PJa b Grades Secondary Mechanical Chemical Straw & Bagasse Year Pulp Pulp Woodpulp RagPul Pulp 1962 2.2 0.5 28.0 0.2 1963 7.4 0.. 2 34.2 0.2 1964 2.9 0.7 32.1 1.2 0.1 1965 7.2 0o5 15.5 - 0.1 1966 9.0 1.5 20.4 0.3 0.2 1967 6.7 7.0 28.6 0.1 - 1968 4.1 10. 4 29.3 0.2 - 1969 3.6 11.5 27.3 0.5 - 1970 7.8 12.1 39.2 0.8 - 1971 11.9 11.5 28.4 - Source: Board of Investments . Table VI-6 Projected Demand for Paper and Paperboard by Categories (1,000 MT) Industrial Printing Tissue Year Paper & writing Newsprint & Others Paperboard Total 1973 110.0 57.5 69.8 32.0 55.9 325.2 1974 118.4 59.1 72.8 34.2 58.3 342.8 1975 127.0 60.7 75.8 36.6 60.8 360.9 1976 137.1 62.5 79.0 39.1 63.4 381.1 1977 147.7 64.2 82.3 41.7 66.1 402.0 1978 158.9 66.o 85.8 44.6 68.9 424.2 1979 171.1 67.9 89.3 47.7 71.8 447.8 1980 184.1 69.8 93.1 51.0 74.9 472.9 Source: Board of Investments rable VI-7 Projected Local Production of Paper and Pa erbo ,rd by Categories Industrial Printing Tissue Year Paper & writing Newsprint & Others Paperboard Total 1973 122.0 68.7 58.3 13.8 51.2 314.0 1974 141.2 69.0 73.0 13.8 52.1 349.1 1975 144.9 69.6 73.0 13.8 68.9 370.2 1976 150.6 69.6 73.0 13.8 71.3 378.3 1977 150.6 69.6 73.0 13.8 76.1 383.1 1978 150.6 69.6 73.0 13.8 76.1 383.1 1979 150.6 69.6 73.0 13.8 76.1 383.1 1980 150.6 69.6 73.0 13.8 76.1 383.1 Source: Board of Investments   Table VI-8 Population Growth and Gross Domestic Product at Constant i967 Prices Populationl, Gross Domestic Prodmt/ Paper at July 1-t Million Per Capita Consumption Year 1000's Pesos Caita. US$ KG/Capita 1960 27,372 18,731 684 1714 3.58 1961 28,175 19,873 7014 179 4,69 1962 29,002 21,017 723 184 41,93 1963 29,855 22,551 753 192 5.58 19614 30,750 23,127 750 1g9 6.41 1965 31,674 214,1421 769 196 6.38 1966 32,633 25,909 792 202 6.51 1967 33,630 27,620 819 208 7.36 1968 34,665 29,208 841 214 7.77 1969 35,740 30,790 861 219 7.38 1970 36,852 32,598 860 219 6.81 1971 37,919 33,947 895 228 7.63 1975 42,678 144,497 1,043 265 9.8 1980 148,759 62,1410 1,280 326 lle4 1985 55,706 37,535 1,571 400 14.4 1/ Assuming an annual population groNth rate of 3.0% between 1971 and 1975. Assuming an annual population growth rate of 2.7% after 1975. 2/ Assuming an annual growth rate in GDP of 7.0% after 1971. T/ Using an exchange rate of US$1.00 = P. 3.93. Sources: Report No. 78-PH "Current Economic Position and Prospects of the. Philippines" April 20, 197i3. Board of Investmnents   Table VI-9 Fibre Furnish Proportions for Paper and Paperboard (Percent) Industrial Printing Tissue Paper (k writing Newsprint & Others Paperboard Lcng-fibre - bleached - 10 10 20 - - unbleached 25 - - 10 - Short-fibre - bleached - 85 15 30 5 - unbleached 4o - - 10 10 Mechanical - 5 75 15 - Secondarv 35 - 15 85  O | .. |.. .V ? , 0 ,or. . . M PJ . ._._._8t 4 i S &V L __ ~~A