Philippines - Second Magat River Multipurpose - Stage Two - Project

Document of O"- The World Bank FILE Copy FOR OFFICIAL USE ONLY Report No. 2150a-PH PHILIPPINES MAGAT RIVER MULTIPURPOSE PROJECT: STAGE II IRRIGATION STAFF APPRAISAL REPORT November 17, 1978 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS US$ 1.00 = Pesos (P) 7.40 P 1.00 = US$0.135 WEIGHTS AND MEASURES 1 hectare (ha) = 2.47 acres 1 kilometer (km) = 0.62 miles 1 square kilometer (sq km) = 0.386 square miles -1 meter (m) = 39.37 inches 1 square meter (sq m) = 10.76 square feet 1 cubic meter (cu m) = 35.31 cubic feet 1 million cubic meters (MCM) = 810.7 acre feet 1 millimeter (mm) = 0.039 inches 1 kilogram (kg) = 2.2 pounds 1 cavan (paddy) = 50 kg 20 cavans = 1 metric ton 1 megawatt (MW) = 1,000 (kW) Kilowatts ABBREVIATIONS ADB - Asian Development Bank ADCC - Agricultural Development Coordinating Council BAE - Bureau of Agricultural Extension BPI - Bureau of Plant Industry IFAD - International Fund for Agricultural Development MAR - Ministry of Agrarian Reform MLGCD - Ministry of Local Government and Community Development MARIS - Magat River Irrigation System MCM - Million cubic meters of water MRMP - Magat River Multipurpose Project NGA - National Grains Authority NIA - National Irrigation Administration SIFRIS - Siffu River Irrigation System SPO - Special Projects Organization WMT - Water Management Technician GOVERNMENT OF THE PHILIPPINES Fiscal Year January 1-December 31  FOR OFFICIAL USE ONLY PHILIPPINES MAGAT RIVER MULTIPURPOSE PROJECT: STAGE II IRRIGATION STAFF APPRAISAL REPORT TABLE OF CONTENTS Page No. 1. BACKGROUND .... . . . . . . . . . . . . . . . . . . . . . . 1 Generalglr Sector . . . . . . . . . . . . . . . . . . 1 The Agricultural Sector ... o 1 Project Formulation . . . . . . . . . . . . . . . . . . 3 2. THE PROJECT AREA . . . . . . . . . . . . . o . . . . . *.. . . 4 General . . . . . . . . . . . . .. .. . * . . * * * * . . 4 Climate . . . . . . . . . . . . . . . . a. . . * * * *. * 4 Topography, Drainage and Soils . . . . . . . . . . . . . 6 Land Tenure and Farm Size . . . . . 6 . . . . . . . . . 6 Existing Irrigation Facilities . . . . . . . . . . . . . . . 8 Transportation . . . . . . . . . . . . . . . . . . g . . 9 3. THE PROJECT . . . . . . . . . . . . . . . . . . . . . . . . . 10 Project Description . . . . . ... . . . . . 10 Project Works . . . . . . . . . . . . . . . . 10 Water Supply Demand and Quality . . . . . . . . . . 12 Status of Engineering . . . . . * . 14 Cost Estimates * * * * . . . * . 17 Financing . . . . . . . . . . . . . . . . . . . . . . . . 19 Procurement . . . . . . . . . . . . . . . . . . . . . . . 19 Disbursements . . **** * * . . . . . . . * * . . . 20 Accounts and Audit . . . . . . . . . . . . . . . . . . . 20 Input-Output Monitoring . . .........* . 20 Environmental Effects . . . * * *.. . 20 4. ORGANIZATION AND MANAGEMENT . . . . . . . * . ** . . . . . . 22 Project Management . . . . . . . . . . . . . . . . . . . . . 22 Consulting Services . . . . . . . . . . . . . * . . . . . . 23 Agricultural Supporting Services . . . . . . . . . . . . . . 23 5. AGRICULTURAL PRODUCTION . . . . . . . . . . . . . . . . . . . 26 Present Cropping Pattern . . . . . . . . . . . . . * . . * . 26 Future Cropping Patterns . . . . . . . . . . . . . . . . . . 26 Yields and Production . . . . . . . . . . . . . . o . . . . 27 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Page No. Cropping Calendar .. ...........28 Farm Mechanization . . . . . . . 28 Drying, Storage and Processing ... . . . . . . . . . . . . . 29 6. MARKET PROSPECTS, PRICES, FARM INCOMES AND PROJECT CHARGES . . . 30 Market Prospects .... . . . . . . . . . ........ . . 30 Prices.. ... . 30 Farm Incomes . . . . . . . . . . . . . . . . . . . . . . . . . 32 Cost and Rent Recovery ... . . . . . . . . . ....... . 34 7. BENEFITS, JUSTIFICATION AND RISKS . . . . . . . . . . . . . . . 36 Stage II Irrigation .... . . . . ..... . . . . . . . . 36 Stages I and II .... . . . . . . . . . . . . ..44 8. AGREEMENTS REACHED AND RECOMMENDATION . . . . . . . . . . . . . 49 ANNEXES 1. Project Features, Equipment List, Price Increases, Expenditures, Disbursements and Allocation of Loan Proceeds ......... . 50 2. Input Prices, Production Costs, Labor Costs, Farm Budgets, Allocation of Dam Costs, Net Values of Production. . . . . . . . 57 3. Schedule of Early Events ... . . . . . . . . . . . . . . . . . 79 4. Related Documents and Data Available in the Project File . . . . 80 LIST OF TABLES IN MAIN TEXT Table No. 2.1 Summary of Climatological Data . . . . . . . . . . . . . . 5 2.2 Land Tenure . . . . . . . 8 3.1 Proposed Cropping Calendar, Estimated Water Requirement and Supply . . . . . . . . . . . . . . . . . . . . . . . 15 3.2 Project Water Requirements Summary . . . . . . . . . . . . 16 3.3 Cost Estimate ... .18 5.1 Present and Projected Paddy Yields. . . . . . . . . . . 26 5.2 Present and Projected Crop Production . . . . . . . . . . 27 6.1 Price Structure for Rice ..31 6.2 Fertilizer Prices ..32 6.3 Farm Incomes ..32 6.4 Cost and Rent Recovery . . . . . . . . . . . . . . . . . . 35 7.1 Net Value of Production - Project Area . . . . . . . . . . 38 7.2 Net Value of Production - Dry Season Area of Stage I . . . 39 7.3 Economic Costs and Benefits . . . . . . . . . . . . . . . 41  Page No. 7.4 Sensitivity Analysis . . . . . . . . . . . . . . . . . . . . 42 7.5 Net Value of Production Stages I and II. . . . . . . . . . . 46 7.6 Economic Costs and Benefits of Combined Stages I and II . . 47 7.7 Sensitivity Analysis Stages I and II. . . . . . . . . . . . 48 LIST OF FIGURES Figure 3.1 - Implementation Schedule . . . . . . . . . . . . . . . . . 81 Figure 4.1 - NIA Organization for Special Projects . . . . . . . . . . 82 Figure 4.2 - Proposed Organization for Project Construction . . . . . 83 Figure 4.3 - Proposed Organization for Operation and Maintenance . . . 84 LIST OF MAPS IBRD 13283R - Magat River Multipurpose Project   PHILIPPINES MAGAT RIVER MULTIPURPOSE PROJECT: STAGE II IRRIGATION STAFF APPRAISAL REPORT 1. BACKGROUND General 1.01 The Government of the Philippines has requested the Bank and the International Fund for Agricultural Development (IFAD) to assist in financing the irrigation component of the second stage of development of the Magat River Multipurpose Project in Northern Luzon. The first stage of development consists of the provision of water distribution systems to irrigate a total of 75,000 ha of rice in the wet season and 29,000 ha in the dry season. The Asian Development Bank (ADB) extended a loan in 1973 to assist in the rehabi- litation of 40,000 ha of existing irrigation systems under Stage IA of the project. The Bank provided financial assistance for the development of irrigation facilities in the remaining 35,000 ha of land in Stage IB in 1975 (Loan 1154-PH). The loan also provided for engineering studies to review the technical and economic feasibility of implementing the Stage TI development of the Magat river consisting of the construction of a storage dam, a hydroelectric station and additional irrigation facilities for about 27,000 ha of rainfed land. The Bank provided assistance for construction of the Magat river dam in 1978 (Loan 1567-PH) and the Government is obtaining supplier finance to build the hydroelectric component of the project. 1.02 A feasibility study of the Stage II irrigation development of the Magat river was prepared under the provisions of Loan 1154-PH by the National Irrigation Administration with assistance of the associated consulting firms, Engineering Consultants Inc. of Denver, Colorado; Shawinigan Engineering Co. Ltd. of Montreal, Canada; Engineering and Development Corporation of the Philippines and DCCD Engineering Corporation of Manila. This report is based on that study and the findings of a Bank appraisal mission which visited the Philippines in April 1978, composed of Messrs. E. G. Giglioli and V. Talvadkar. Mr. A. N. Khan also assisted with the report. The Agricultural Sector 1.03 Agriculture is the predominant sector in the Philippine economy, accounting for about one third of net domestic product, over one half of total employment, and nearly three quarters of export earnings. Over 70% of the 9 million ha of land under cultivation is used for the production of cereals, of which rice and corn are the most important. The remaining land is taken up by the major export crops: sugar, coconuts, abaca, pineapples, and tobacco. 1.04 The performance of the agricultural sector will be crucial in determining whether the Philippines can increase incomes both rapidly and equitably. At present, the domestic market for industrial products is limited by relatively low rural incomes. Although in recent years there has been a substantial change in the terms of trade in favor of agriculture, the problems of poverty and income distribution continue to be particularly acute in rural areas; of the 15 million people in the lowest 40% of the income scale, 12 million live in rural areas. The Government is aware of these  - 2 - problems and has initiated a number of programs designed to assist the rural poor. 1.05 A major Government objective is to increase rice and corn produc- tion as a means of raising the incomes of small farmers and of attaining national self-sufficiency in food grains. After experiencing substantial deficits in the early 1970s, rice production grew by 5% p.a. during crop years 1974-77 and the Philippines was able to provide for consumption solely from domestic production during the crop years 1975-77. In 1977, the Govern- ment exported 90,000 tons and built up a supply of about three months. The major factors contributing to the recent sharp rise in production appear to be the continued expansion of irrigated area and high yielding varieties on both irrigated and rainfed land and, more significantly, a run of particularly favorable weather. With the continued growth in population and incomes, the demand for rice is expected to rise by about 3.0% annually over the period 1978-90. Based on a projected annual growth of 3.7% in production, under average weather conditions, the Philippines is expected to reach a balance between production and consumption no later than 1982 and to be by 1985 in a position to export between 100,000 and 125,000 tons annually. By 1990 the Philippines could export from 350,000 to 375,000 tons. Exports of this magnitude, about 3% of projected world rice trade in 1990, could be accomodated without adversely affecting prices. This would require an increase in irrigated harvested area of about 425,000 ha between 1977 and 1985 and an increase of about 200,000 ha between 1985 and 1990. World Bank-assisted projects for which financing has been arranged or is contemplated would provide about 240,000 ha of irrigated harvested area. 1.06 The Government recognizes that in order to increase production in both irrigated and nonirrigated areas further improvements in the quality of supporting services will be necessary beyond those initiated in recent years. In 1973, the Government instituted a national program for supervised credit for rice production, Masagana 99, which greatly increased the provision of production credit and technical assistance, mainly to smaller farmers. However, the levels of arrears under the program have been very high in the last several years and as a result the credit coverage of the program has declined sharply. The Government is aware of this problem and the Technical Board for Agricultural Credit has undertaken a study of the causes of the high arrears under Loan 1399-PH. This study is to be discussed with Bank staff in early 1979 with a view to developing steps necessary to reduce arrears and maintain an adequate flow of production credit. In the meantime, efforts are continuing to enable farmers to make the most effective use of the lower level of inputs they are able to afford using their own cash and from non-institutional sources of credit. 1.07 The Government is also considering the steps necessary to bring about needed improvements in the national extension service. A Bank technical assistance mission visited the Philippines in April 1977 and a report was given to the Government suggesting a number of organizational improvements and better logistical support in the form of training, vehicles and other facilities. The Bank is providing assistance to the recently initiated national extension project. A sector mission also visited the Philippines to help the Government prepare a comprehensive program for strengthening support services (extension, fertilizer, seeds, and crop protection).  1.08 Since 1969 the Bank Group has financed ten irrigation projects designed to increase rice production in the country. These projects - three in Central Luzon, three in the Cagayan valley of Northern Luzon, one on Mindoro Island, one in the Visayas and two for smaller systems throughout Northern Luzon, the Visayas and Mindanao /1 - have set the pattern for the type of irrigation rehabilitation, new construction, and operations needed for increasing rice production. The projects are providing improved irrigation and drainage facilities, better road systems for efficiency of operations and maintenance and for the marketing of farm products, stronger supporting services to assist farmers in adopting the new irrigation techniques needed to increase production, and technical assistance and training to help the National Irrigation Administration (NIA) expand and improve its irrigation program. These projects would bring about substantial increases in rice production on about 370,000 ha and would benefit nearly 190,000 farmer families, most of whom are smallholders. 1.09 Work on the first Bank-assisted project, the Upper Pampanga River Project (Loan 637-PH), is completed. Progress on all the irrigation projects has been generally satisfactory and the NIA has proved itself to be a well managed and technically competent organization. The total cost of the first two projects was about 70% over appraisal estimates in the case of the Pampanga project (Loan 637-PH) and 55% in the case of the Aurora-Penaranda Irrigation Project (Loan 984-PH and Credit 472-PH) largely because of rapid inflation following the oil price increase in 1973. However, as a result of considerable increases in the projected world market price of rice and earlier than anticipated irrigation benefits the rates of return on both projects have not changed significantly. Project Formulation 1.10 Magat River Development. In 1973 the National Irrigation Adminis- tration (NIA), with US Bureau of Reclamation assistance, completed a feasi- bility study of the Magat river project, and recommended the development of a multipurpose project on the river. Because of the physical size, large esti- mated cost and long construction period, NIA divided implementation of the project into two stages. Stage I consists of the rehabilitation and upgrad- ing of the existing Magat River Irrigation System (MARIS) and Siffu River Irrigation System (SIFRIS) and construction of new facilities for a total of 75,000 ha that can be served by run-of-river diversion in the wet season. The Asian Development Bank (ADB) assisted NIA to rehabilitate 40,000 ha of Stage IA under the Angat-Magat Integrated Agricultural Development Project. /1 The Upper Pampanga River Irrigation Project (Loan 637-PH), Aurora- Penaranda Irrigation Project (Loan 984-PH, Credit 472-PH), Tarlac Irri- gation Systems Improvement Project (Loan 1080-PH), Mindoro Rural Develop- ment Project (Loan 1102-PH), Magat River Multipurpose Project Stage I (Loan 1154-PH), Chico River Irrigation Project Stage I (Loan 1227-PH), Jalaur Irrigation Project (Loan 1367-PH), National Irrigation Systems Improvement Project I (Loan 1414-PH), National Irrigation Systems Improvement Project II (Loan 1526-PH) and Magat River Multipurpose Project Stage II (Loan 1567-PH).  - 4 - The remaining 35,000 ha of Stage IB are being developed with Bank assistance under Loan 1154-PH. Provision was also made under the loan for engineering studies (Part A) to evaluate the economic feasibility of Stage II development and, if justified, to prepare (Part B) final designs, specifications and bid documents for construction of the dam and appurtenant works. Part A of the study, completed in September 1976, confirmed the technical feasibility and economic viability of Stage II, which consists of construction of the storage dam and of additional irrigation facilities, to increase the service area to 102,000 ha, together with construction of a power station with an installed capacity of 360 MW and the provision of generating and transmission equipment. 1.11 NIA began an extensive program of pre-construction work on the Magat dam in 1976 with Government funding. Considerable progress has been made on such items as construction of access roads, permanent camp facilities and dam foundation grouting, and work on drainage gallery tunneling has begun. The diversion tunnels are being built by a Philippines contractor. The main civil works contract for the Magat dam was awarded in June 1978 after inter- national competitive bidding to the same firm under the provisions of Loan 1567-PH. Construction of the dam and appurtenant work is expected to be completed by the end of 1982. The power component, consisting of the civil works together with the supply and installation of penstocks, turbines, generators, electrical and mechanical equipment, is expected to take four years to implement (1979-1982). The development of the Stage II irrigation potential, consisting of construction of the Baligatan diversion dam and irrigation drainage and access facilities for about 26,770 ha of mostly rainfed land, is the subject of the present report and the proposed Bank loan. Implementation is scheduled to take four years (1979-82). 2. THE PROJECT AREA General 2.01 The project is located in the Cagayan valley of Northern Luzon, about 350 km northeast of Manila (Map No. 13283R). Stage I of the project lies entirely in Isabela province and, even with the full development of Stage II, the province would remain the principal beneficiary of the irri- gation, as only a small portion of the irrigated area would touch Quirino province. There are several small towns with populations between 5,000 and 10,000 people scattered throughout the area. The larger towns, including the provincial capital of Ilagan which lies just outside the project area, provide banking, storage and processing facilities as well as supplies of inputs to the surrounding agricultural area. The project area is connected by national highway to Central Luzon and Manila in the south and to the port of Aparri on the Babuyan channel in the north. Climate 2.02 The climate in the project area is tropical and monsoonal. Warm temperatures throughout the year, with minimum change from month-to-month, allow a 12-month growing season with irrigation. Mean monthly temperatures in the project service area range from 23.3 degrees centigrade in January  Table 2.1: SUMMARY OF CLIMATOLOGICAL DATA Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Total Ilagan, Isabela Rainfall /a Average (mm) 65 41 44 63 123 160 184 191 222 309 356 188 1,946 Maximum (mm) 262 157 147 218 350 359 493 790 486 922 916 504 Minimum (mm) 3 0 0 0 8 34 21 41 55 58 52 43 No. of rainy days /b 11 7 6 6 10 11 13 13 14 16 17 15 139 Tuguegarao. Cagavan Relative humidity (%) /c 80 76 72 68 69 75 77 79 81 81 84 84 Temperature /d Mean (OC) 23.8 24.7 26.6 27.7 29.3 29.1 28.5 28.1 27.7 27.3 25.4 24.1 Mean maximum (OC) 29.1 31.1 33.2 35.6 36.4 35.6 34.7 33.1 33.5 31.8 29.9 28.8 Mean minimum (OC) 19.4 19.7 21.0 22.9 23.8 24.2 23.7 23.0 23.6 22.7 21.8 20.5 Evaporation (mm) /e 138 152 198 222 221 188 174 168 164 162 133 133 2,053 Prevailing wind direction /f NNW NW N N S S S S NNW N NNW N Wind velocity (km/hr) 4 3 3 3 3 3 3 3 3 4 3 4 No. of typhoons /K (Cagayan and Ilocos) 0 0 0 2 2 5 14 13 18 10 11 3 78 /a Period of observation 1926-1975. /b Petiod of observation 1940-1965. /c Period of observation 1949-1974. /d Period of observation 1903-1939, 1947-1975 /e Period of observation 1957-1973. /f Period of observation 1958-1970. /g Period of observation 1948-1972.  - 6 - to 29.3 degrees centigrade in May. The hottest months are April, May and June and the coldest months December and January. About 75% of the average annual rainfall of 1,900 mm falls in the six-month period of July through December with the heaviest precipitation in November and the least in February. The occurrence of typhoons is also centered within the July- December period with the highest frequency in September. Over a 24-year period between 1948 and 1972 the area was struck by an annual average of 3.25 typhoons. No typhoons have been recorded for the months January through March. The rainfall, together with river flows in the wet season, is gener- ally adequate for a single rice crop. Dry-season cropping, however, entails considerably more risk and irrigation is essential for an assured crop. Topography, Drainage and Soils 2.03 The service area is located on alluvial terraces in the flood plains of the Cagayan and Magat rivers and tributary streams. It is bounded on the north by the Mallig river, on the east by the Cagayan river and on the south and west by the foothills of the Caraballo mountains and the Cordillera Central respectively. The general slope of the land is from west to north- east. The proposed Stage II areas lie around the edges of the Stage I development, with roughly half of the Stage II area curling along the south- western border of the Stage I area, and the balance running along the north- eastern edge of the Stage I development. The southeastern portion, or South High Canal area, is intersected by a number of small tributaries of the Cagayan river and shows gently rolling topography. About half of the north- eastern section of the Stage II development is situated in flat land along the left bank of the Cagayan river and the right bank of the Magat river. The other half is located on the eroded watershed between the Siffu and Magat rivers and is higher than the surrounding areas. Surface drainage is good in all sections. 2.04 The predominant soil type in the South High Canal area fed from the Baligatan diversion dam is a clay of the Cauayan series. Soils of this series are located on the older alluvial terraces close to and running parallel to the Cagayan river. The soil is a very dark grayish brown clay, with a weak angular blocky structure, sticky when wet and friable when dry. It has a slightly acidic reaction, poor internal drainage, and good cation holding capacity. In the Cauayan East, Luna-Reina Mercedes and Siffu East areas the most common soil is a clay loam of the Bago series. The soil is a dark brown sandy clay loam, with a subangular blocky structure, friable when dry and nonsticky when wet. The soil is slightly acidic, has poor internal drainage and cation holding capacity. The soils are well suited to rice which has been grown on them in the project area for many years without problems. Land Tenure and Farm Size 2.05 Since 1972 the Government has pursued a program of agrarian reform aimed at the transfer of land ownership to tenant farmers on rice and corn lands. Presidential Decree No. 27 (PD 27), the basic legislation of the new  program, provides for the transfer to the tenant, whether sharecropper or leaseholder, of up to 3 ha in an irrigated area and 5 ha in a rainfed area. According to PD 27, the landlord may retain up to 7 ha if he tills the land himself. Since there are some 2 million rice and corn farmers on about 4 million ha, of which less than 1 million ha are irrigated, there is little prospect of achieving the 5 ha rainfed and 3 ha irrigated family farms nationwide. The Ministry of Agrarian Reform (MAR) completed the issue of land transfer certificates to tenants for all lands in holdings over 24 ha in 1975. In November 1974, the Government decided to proceed with the transfer of land in holdings between 24 and 7 ha. In October 1976, the Government extended the provision of PD 27 to holdings of less than 7 ha, belonging to landowners with more than 7 ha of other agricultural land, or belonging to landowners with residential, commercial or urban land from which they derive adequate incomes to support themselves. At present it is not known how many landlords and tenants would be affected by the new legislation. 2.06 NIA surveys show that some 8,000 farm families, averaging six mem- bers for a total of about 48,000 people, live in the Stage II area. The average farm unit is 3.4 ha, but there is an unusually high degree of varia- tion from the mean. Nearly one third of the farms are under 1.5 ha and cover 10% of the land, while at the other end of the range some 8% of the farms are larger than 7.5 ha and occupy 31% of the area. In the more densely populated and better developed Stage I area, the average farm size is 3.2 ha and there is little divergence from the mean. The Stage II area is more backward and largely rainfed. The farm size distribution is as follows! Farm size Farm holdings Cultivated area (ha)