Philippines - Small and Medium Industries Development Project (Vol. 2 of 2) : jA report on Philippine small and medium industries : Technical assistance programs for small and medium industries

Report No. 667a-PH Philippines Appraisal of a Small and Mediu Industries Development Project WITHINR (In Two Volumes) ONE vomEtlJ (4 Volume II-Part 1: A Report on Philippine Small a e In str Part 2: Technical Assistance Programs for Small and Medium April 18, 1975 Industries EAP Projects Department Not for Public Use E Dtxument of the International Bank ior Reconstruction and Development This report was prepared for official use orrly by thef Bank Group. It may not be published, quoted or cited wiithout Bank Gfoup authorization. The Bank Group does, not accept respnnNihilitv4ir th o acriiracy or completernesb of thfe report.  CURRENCY EQUIVALENTS US$1 P 7.00 P 1 = US$0.143 P 1 million US$143,000 FISCAL YEAR July 1 - June 30 ABBREVIATIONS ASM - Annual Survey of Manufactures BDT - Bureau of Domestic Trade, Department of Trade BOI - Board of Investments CB - Central Bank DLC/ILD - Department of Loans & Credits, Industrial Loans Division DRBSLA - Department of Rural Banks & Savings & Loan Associations CBCI - Central Bank Certificates of Indebtedness CCC - US Commodity Credit Corporation CWB - Canadian Wheat Board cSMI - Commission on Small and Medium Industry DAP - Development Academy of the Philippines DBP - Development Bank of the Philippines BAAD - Branches and Agencies Department IPD - Industrial Projects Department DCP - Design Center of the Philippines DOI - Department of Industry FTI - Food Terminal Incorporated GSIS - Government Services Insurance System IGLF - Industrial Guarantee and Loan Fund STD - Special Time Deposit CPA - Counterpart Project Agreement ISSI - Institute for Small-Scale Industries KfW - Kreditanstalt fur Wiederaufbau MASICAP - Medium and Small Industry Coordinated Action Program NACIDA - National Cottage Industries Development Authority NEA - National Electrification Administration NEDA - National Economic Development Authority NIDC - National Investment and Development Corporation NMYC - National Manpower and Youth Council NPC - National Power Corporation PDCP - Private Development Corporation of the Philippines PDB - Private Development Banks PFLGC - Philippine Foreign Loan Guarantee Corporation PITC - Philippine International Trading Corporation PNB - Philippine National Bank RFC - Rehabilitation Finance Corporation RTAC - Regional Technical Assistance Center SEC - Securities and Exchange Commission  PHILIPPINES APPRAISAL OF A SMALL AND MEDIUM INDUSTRY DEVELOPMENT PROJECT VOLUME II TABLE OF CONTENTS Page No. PART 1: PHILIPPINE SMALL AND MEDIUM INDUSTRIES ................... 1-25 A. THE ROLE OF SMALL AND MEDIUM INDUSTRIES IN THE MANUFACTURING SECTOR ............................... 1 B. CHANGING PATTERNS IN SMI GROWTH, 1962 TO 1971 ........ 9 C. FACTOR PROPORTIONS AND PRODUCTIVITY IN SMI ........... 18 D. CONSTRAINTS ON INCREASED PRODUCTIVITY IN SMI ......... 20 E. CONST-RAINTS ON THE FURTHER DEVELOPMENT OF SMI ........ 22 F. THE PROGRAM OF ASSISTANCE TO SMI ..................... 24 Tables (Incorporated in Text) Table 1: Total Manufacturing by Size Establishments, 1971 ASM.... 1 Table 2: Contribution to the Modern Manufacturing Sector by Size of Establishments, 1971 ............................... 2 Table 3: The Comparative Role of Manufacturing Establishments by Size in Selected Developing Countries ................. 4 Table 4: Some Indicators of Industrial Development ............... 5 Table 5: Percentage Distribution of Gross Regional Product by Industrial Origin, 1967 ........................., 6 Table 6: Regional Distribution of Number of Establishments based on Employment Size, 1967 ........................ 8 Table 7: A Comparison of Regional Distribution of Manufacturing Industries, 1967 and 1972........................ 10 Table 8: Comparison of SMI Output to Exports in Selected Major Industry Groups ...................... 11 Table 9: Average Annual Rates of Growth in Manufacturing, 1962-68 and 1968-71 ................... 12 Table 10: Distribution of Manufacturing by Product Groups ......... 14 Table 11: Share of Employment and Value Added in SMI by Major Industrial Sub-sector, 1971 ............................ 15 This volume of the appraisal report was prepared by Miss Kathleen Di Tullio and Mr. Percy Mistry with assistance from Miss Kathleen Jordon in the preparation of the Basic Data Tables.  Page No. Table 12: Share of Total Modern Manufacturing Employment and Gross Value Added in SMI by Major Product Group, 1962-71.... 17 Table 13: Ratio of Imports to Domestic Availability ............... 18 Table 14: Factor Intensity and Productivity in Manufacturing, 1971.. 19 Table 15: Wage Rates in Philippine Manufacturing, 1971 ............ 19 Table 16: Overall Growth Rates and Productivity in Selected Product Groups, 1962-71 ............................... 21 Basic Data Tables Table A: 1962 Basic Data for Large Manufacturing Industries by Size of Establishments Based on Employment (Current Prices). Table B: 1962 Basic Data for Large Manufacturing Industries by Major Industry Groups Based on Employment. Table C: 1968 Basic Data for Large Manufacturing Industries by Size of Establishments Based on Employment (Current Prices). Table D: 1968 Basic Data for Large Manufacturing Industries by Major Industry Groups Based on Employment. Table E: 1971 Basic Data for Large Manufacturing Industries by Size of Establishments Based on Employment (Current Prices). Table F: 1971 Basic Data for Major Industry Groups by Size of Establish- ments Based on Employment. Table G: Investment and Gross Output for Large Manufacturing Industries by Size of Establishment Based on Employment 1962, 1968, 1971 (Percentages). Table H: Investment and Gross Output for Major Industry Groups by Size of Establishments Based on Employment - 1962, 1968, 1971 (Percentages). Table J: Employment and Wages for Large Manufacturing Industries by Size of Establishments Based on Employment - 1962, 1968, 1971. Table K: Employment and Wages for Major Industry Groups by Size of Establishments Based on Employment - 1962, 1968, 1971. Table L: Contribution to Value Added, Factor Intensity and Productivity for Large Manufacturing Industries by Size of Establishments Based on Employment, 1962, 1968, 1971. Table M: Contribution to Value Added, Factor Intensity and Productivity for Major Industry Groups by Size of Establishment Based on Employment - 1962, 1968, 1971.  Page No. PART 2: TECHNICAL ASSISTANCE PROGRAMS FOR SMALL AND MEDIUM INDUSTRRIES A. Backgrod .. ............... 1 B. The Department of Industry (DOI) 1 C. The Commission on Small and Medium Industries (CSMI)..... 3 D. The Medium and Small Industry Co-ordinated Action Program (MAIAP A.............. A.......). 6 E. SMI Assistance Programs of Other Institutions. 8 Appendices Appendix 1: DOI - Expenditures and Budget Projections FY74-78 Appendix 2: DWI/PCI Industrial Desk Coverage Appendix 3: CSNI - Operating Budget for 1974-75 'Appendix 4: MASICAP - Characteristics and Progress of Projects Under- taken by MASICAP - November '73-October '74 Appendix 5: P.D. 488 - Creating a Department of Industry Charts No. 9315: DOI - Organization Chart. No. 9314: DOI/PCI - Joint Program Communication Chart. No. 9316: CSMI - Organization Chart. No. 9359: CSMI - Proposed Organization Chart. Nap No. 11420 Location of MASICAP Assistance Units.  PHILIPPINES APPRAISAL OF A SMALL AND MEDIUM INDUSTRY DEVELOPMENT PROJECT (Volume II, Part 1.) PHILIPPINE SMALL AND MEDIUM INDUSTRIES A. THE ROLE OF SMALL AND MEDIUM INDUSTRIES IN THE MANUFACTURING SECTOR 1.01 The Manufacturing Sector: Of the 10,248 establishments covered in the 1971 Annual Survey of Manufactures (Table 1), 8,203 (80%) were cottage industries made up largely of handicraft and traditional non- factory units. They employed 16% of the labor force and, with a notably low level of labor productivity, contributed slightly less than 5% to gross value added in manufacturing. The ASM data on this group however are not complete, and do not include the smallest, "unorganized" firms with 1 - 4 workers. Unofficial estimates 1/ indicate a far greater role of cottage units in manufacturing employment (75%) and value added (10%). However as the data are very weak for comparative purposes and cottage industries as a group (establishments with less than e 100,000 in fixed assets and with between 1 to 19 workers) are treated differently for government policy and program purposes, they are not covered extensively in the following analysis. The remaining 2,045 establishments, those with 20 or more workers, covered in the 1971 ASM make up what, in con- trast to cottage industries, is the "modern" manufacturing sector. Table 1: TOTAL MANUFACTURING BY SIZE ESTABLISHMENTS, 1971 ASM (Current Prices) Gross Labor Establish- Value Produc- Scale ments Employment Added tivity # of Workers Number % Number % f mil. % -eI Cottage 5-19 8,203 80.0 68,209 16.1 324 4.3 4,750 Small 20-99 1,363 13.3 56,489 13.4 693 9.3 12,270 Medium 100-199 291 2.8 40,222 9.5 790 10.6 19,650 Large 200 + 391 3.8 256,297 60.8 5,641 75.7 22,010 Total 18,248 100.0 421,217 100.0 7,448 100.0 17,680 1/ Estimated by Ranis Mission for the ILO Report, Sharing in Development, Geneva, 1974 (p. 142).  - 2 - 1.02 The Role of Small and Medium Industries: 1/ As Table 2 shows, approximately two-thirds (19363) of modern manufacturing firms are small scale. They employ 16% of labor, but with a comparatively lower level of labor productivity, contribute only 10% to gross value added. Medium scale establishments formed the smallest group, with 291 (14%) firms em- ploying 11% of labor and contributing 11% to gross value added. Only 19% of the number of firms were large scale, but they dominated in terms of employment (73%) and value added (79%). Small and medium industries to- gether accounted for 81% of modern manufacturing firms. They employed 27% of the labor force and contributed 21% to gross value added. Table 2: CONTRIBUTION TO THE MODERN MANUFACTURING SECTOR BY SIZE OF ESTABLISHMENTS, 1971 (Current Prices) Average Official Establish- Gross Fixed Assets Definition Scale ments Employment Value Added per Estab. Fixed No. of Pesos Book Value Assets Workers No. x__ No. % (million) % P million Small *-E100,000 to 1 million 20-99 1,363 67 56,489 16 693.2 10 0.47 Medium -1 to 4 million 100-199 291 14 40,222 11 790.3 11 1.93 Large P4 million 200 and plus above 391 19 256,297 73 5,640.6 79 14.59 Total 2,045 100 353,008 100 7,124.2 100 3.38 1/ For official administrative purposes in the Philippines manufacturing establishments are divided into four groups, according to size of fixed assets. From an analysis of census data the ntmber of workers employed per establishment, another commonly used index of scale, turns out to be a fairly good indicator of the "official" category the average firm would fall into. The target group for the proposed loan includes small industries, with between e- 100,000 - 1,000,000 in fixed assets and on average employing 20 to 99 workers, and medium industries, with between e- 1 - 4 million in fixed assets and 100 - 199 workers.  -3 - 1.03 Inter-Country Comparisons: Compared with other developing countries, small and medium industries in the Philippines play a less significant role in manufacturing. (Table 3) Whereas Philippine small industries employ approximately 13% of the total manufacturing labor force (including the "organized" cottage industries) and contribute 9% of value added, in Korea and Colombia, two countries at comparable levels of indus- trialization, they account for between 18% and 29% of labor employed in manufacturing and between 12% and 19% of value added. In less industrial- ized Malaysia, small industries contribute as much as 36% of employment and 28% of value added, and in Singapore, at a much higher level of in- dustrialization, small industries are also more prominent, with 27% of manufacturing employment and 20% of value added. The contrast is less striking for medium industries which account for approximately 10% of em- ployment and value added in the Philippines (and Korea), but in the other countries contribute between 13% and 16% of employment and 17% and 23% of value added. 1.04 The relatively underdeveloped role of small industries in the Philippines as compared to other countries emerges independent of general characteristics of industrialization. (Table 4) Industrial policies and incentives, on balance, favor large scale manufacturing in all of the other countries. It would appear however that over time the extent of the bias in favor of large scale manufacturing (with 200 and more workers) has been greater in the Philippines. The international comparison sug- gests that there are good possibilities for future growth in manufacturing on a small and medium scale in the Philippines. This conclusion is con- firmed by an analysis of manufacturing performance in the Philippines. There is no optimal scale of efficiency in manufacturing. It varies from small, to medium, to large depending on product. (See Basic Data Tables) The evidence available indicates several opportunities for entry of new small and medium firms and for their expansion in the manufacture of a wide variety of products, such as garments and wood furniture for both domestic and export markets and in agro-related industries, including food processing and small agricultural machinery. With appropriate policies (aimed more at neutralizing the bias against SMI rather than toward their active promotion) and access to the necessary financial and technical as- sistance, Philippine SMI could play a more significant role in future in- dustrialization. 1.05- Regional Distribution of SMI: An analysis of Gross Domestic Product by regional origin shows an overwhelming concentration of economic activity, except for agriculture and mining, in the Southern Tagalog Region (IV) which includes Metropolitan Manila (47.4% of total GDP). There is no other comparable concentration of activity. At a much lower level, between 6% and 9% of GDP originates in each of five other regions: Central Luzon (III); Western Visayas (VI); Central Visayas (VII); Northern Mindanao (X); and Southern Mindanao (XI). (Table 5) Small and medium industries, which tend to cluster in urban areas close to supply and de- mand and where infrastructure facilities and other services are more de- veloped, follow this pattern, but to an even higher degree of regional concentration. About 65% of SMI establishments are located in the  - 4- Table 3. THE COMPARATIVE ROLE OF MANUFACTURING ESTABLISHMENTS BY SIZE IN SELECTED DEVELOPING COUNTRIES (Percentages) Scale Philippines Colombia Korea Malaysia Singapore (Number of Workers) 1971 1969 1971 1968 1971 Cottage (5-19) Establishments 80.0 59.7 77.5 57.2 36.2/1 Employment 16.1 12.8 17.6 14.3 6.4 Gross Value Added 4.3 5.1 7.3 8.6 4.6 Small (20-99) Establishments 13.3 31.6 16.6 34.3 49.5 Employment 13.4 28.5 18.3 35.8 26.5 Gross Value Added 9.3 19.3 12.4 27.6 19.7 Medium (100-199) Establishments 2.8 4.6 2.6 4.5 7.1 Employment 9.5 14.4 10.3 16.2 12.6 Gross Value Added 10.6 18.3 8.3 22.7 17.2 Large (200 and above) Establishments 3.8 4.1 3.3 3.3 7.2 Employment 60.8 44.3 53.8 34.2 54.5 Gross Value Added 75.7 57.3 72.0 41.1 58.3 /1 -Cottage industries include units with 10 to 19 workers. Sources: For Colombia, Korea and Singapore see Country Annexes to Bank Staff Work- ing Paper No. 191, Financing the Development of Small Scale Industries, 1974. For Malaysia, see IBRD report on the Industrial Sector, 1971.  Table 4. SOME INDICATORS OF INDUSTRIAL DEVELOPMENT Gross Value Added in Manufacturing Per Capita _ Average Manufactured Labor As % of VA Annual Expoyi:G Value Added EsoLioates Labor Force Productivity in Comimodity Real Absolute Annual in Total of Total in in Productionll Growth Rate Level Growth Rate GNP Manufacturing Population Lahor Force Manufacturing Manufacturing Country 1968 1_960-69 1970 1960669 1970 1970 - 1970 -- _ 1970_ 1969 __ US$ mil. % US$ US$ mil. lo % us$ Industrializing Malaysia (West) 24.212 12.0/3 409 12.3 380/4 44.7 10.9/4 3.6 8.7 2,523 Philippines 32.0 4.3 1,145/2 14.0 210 31.0 36.9 15.3 11.4 2,225 Colombia 32.7 4.5 987 31.0 340 48.2 21.6 6.4 12.8 3,915 Korea 33.8 14.2 1,351 65.0 250 42.5 31.8 10.2 13.2 2,111 Industrialized Singapore 65.9 19.0 377 6.4 920 179.5 2.1 0.7 13.9 2,870 /1 Selected single indicator of level of industrialization. Countries are listed in ascending order on this basis. /2 1969. /3 1968. /4 East and West Malaysia combined. Sources: IBRD, Industry Sector Working Paper, April 1972, Annex 1, and Economics of Industry Division, "Statistical Indicators of Industrial Development: A Critique of the Basic Data", Oct. 1973 (Draft Report).  Table 5. Percentage Distribution of Gross Regional Product By Industrial Origin, 1967 E 3 I 0 N1 :f I LI. IE L 1VTv VI .VII VII. IX X XI Total Agricu1-tiure, Fishery a-rid torestlr 7.32 3.53 10.37 1L7.12 5.43 10.!63 5.67 5.149 5.314 9.56 19.514 100.00 'jinini and Qujarry-in,r Rr 37.0 0.6? o.5;j 6.77 5.146 9. 09 22.06 7142 0.78 1.39 1.52 100.00 dnuL oturin, i,3Q 1.07 X6-.72 o6 . *3,, 1.29 6.35 3.014 0.93 0.)2 5.914 . li9 100.00 ,;ons truc tion il*6. 2 .)K2 111-';37 29-,