Philippines - Livestock Development Project

Document of The World Bank FILE COPY FOR OFFICIAL USE ONLY Report No. 2128 Project Performance Audit Report PHILIPPINES FIRST LIVESTOCK PROJECT (Loan 823-PH) June 30, 1978 Operations Evaluation Department This document has a restricted distribution ad may be used by reciplents only in the performance of their oft1cial duties. Its contents may not otherwise be disclosed without World Bank authorization. EXCHANGE RATES Name of Currency Peso (P) Exchange Rate: - Appraisal Year US$1 = P 6.4 - Average implementation years = P 6.9 - Completion year = P 7.4 ABBREVIATIONS DBP - Development Bank of the Philippines APD - DBP's Agricultural Projects Department LPG - DBP's Livestock and Poultry Group PDB - Private Development Banks PNB - Philippines National Bank PDCP - Private Development Corporation of the Philippines NIDBP - National Investment Development Bank of the Philippines NIA - National Irrigation Authority CP - IBRD/FAO Cooperative Program UP - University of Philippines BAI - Bureau of Animal Industry FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT PHILIPPINES FIRST LIVESTOCK PROJECT (Loan 823-PH) Table of Contents Page PREFACE BASIC DATA SHEET HIGHLIGHTS PROJECT PERFORMANCE AUDIT MEMORANDUM I. Project Summary ............................. .... 1 II. OED Comments ............... ..................... 4 A. Features of Project Lending .................. 4 B. Project Costs and Schedules .. ........ 6 C. The Risks of Small Stock Production .......... 6 D. Some Shortcomings in Project Design .......... 7 E. Arrears and Collections ...................... 9 F. Other Problems in DBP ....................... 10 Attachment - Comments from the Gov6rnment Annex I - DBP: Report of the October 1977 Agricultural Review Mission Annex 2 - DBP's Project Completion Report PROJECT COMPLETION REPORT 1. Project Background ............................... ...... A. 1 2. Project Formulation .................................... A. 2 3. Objectives and Results ................................. A. 6 4. Specific Project Elements ..................... A.17 5. Bank's Performance ..................... A.21 6. Conclusions and Lessons Learned ........ ......... A.22 Annexes Map This document has a seatricted distribution and may be ued by recipients only in the performance of their official dutio. Its contents may not otheriise be disclosed without WorM Bank authoriastion.  Project Performance Audit Report PHILIPPINES FIRST LIVESTOCK PROJECT (Loan 823-PH) PREFACE Loan 823-PH, for US$7.5 million, was signed in May 1972 and closed, fulLy disbursed, in October 1976. It was followed by a second livestock project partly financed by Loan 1225-PH, for US$20.5 million, signed in April 1976, and which is currently being implemented. A project completion report (PCR) was issued by the East Asia and Pacific Regional Office in September 1977. An OED mission to the Philippines was undertaken in November 1977. DBP management and staff, as well as officials in the Ministry of Agriculture, were interviewed. Project piggery, broiler, and layer farms were visited. IBRD/FAO Cooperative Program staff who had been involved in project identi- fication and preparation were interviewed in Rome. The audit foun. the PCR comprehensive and accurate with respect to the project's principal achievements, and candid in discussing its main short- comings. The memorandum draws on the results of the OED mission and, based also on an examination of the project files and on discussions with Bank staff, analyzes only some issues which are not adequately reflected in the PCR. A project completion report, which was prepared by DBP at the Bank's request is included as an Annex to the memorandum. Further comments received from Government were taken into account when preparing the final version of the report and are attached to the memo. The valuable assistance provided by the Government of the Philip- pines and the farmers visited by the completion as well as the audit missions is gratefully acknowledged.  PROJECT PERFORMANCE AUDIT BASIC DATA SHEET PHILIPPINES FIRST LIVESTOCK PROJECT (Loan 823-PH) A. Amounts (in US$ m1n) As of 31 Dec. 1977 Original Disbursed Repaid Outstanding 7.5 7.5 /1 B. Project Data Actual or Original Plan Revisions Re-estimate First Mention in Bank Files FEB 65 Government Application 01 MAY 71 Appraisal Mission JUN/JUL 71 Negotiations JAN 72 Board Approval 21 MAR 72 9 MAY 72 Loan Agreement 7 APR 72 25 MAY 72 E2 Loan Effectiveness 26 SEP 72 9 NOV 72 Closing Date 31 DEC 78 13 OCT 76 Physical Completion: - Date JUN 78 27 SEP 76 - Number of Sub-loans 1475 2705 - Physical Assets Financed, as % of Appraisal Targets 100% 65% Total Project Cost (US$ m1n) 15.5 15.5 Economic Rate of Return 36% 24% C. Mission Data Month, No. of No. of Date of Year Persons Weeks Manweeks Report Identification I (CP) APR 67 Identification II (CP) MAY 69 2 4 8 5 AUG 69 Preparation DEC 70 5 4 20 10 MAY 71 Appraisal JUL 71 5 4 20 6 APR 72 Sub Total 48+ Supervision 1 /3 SEP 72 1 2 2 29 SEP 72 Supervision II JUN 73 2 1 2 3 JUL 73 Supervision III MAR 74 2 1.5 3 16 MAY 74 Supervision IV NOV 74 2 2 4 29 JAN 75 Supervision VLA MAY 75 4 1 4 11 JUL 75 Supervision VI DEC 75 2 1 2 ? Supervision VII MAY 76 3 2 6 2 DEC 76 Supervision VIII DEC 76 1 1 1 9 MAR 77 Sub Total 24 Completion JUN 77 3 3 3 29 SEP 77 TOTAL 75+ D. Follow-on Project Second Livestock Project, Loan 1225-PH for US$ 20.5, signed 8 APR 76. /1 1First installment is due in 1979. /2 Amended 4 APR 73, 11 J TL 74, 12 FEB 75, and 3 OCT 75. /3 Additional field supervision by missions primarily on other work occurred as follows: September 1974, JEnuary 1975, July 1975 and December 1975. /4 This mission also appraised the Second Livestock project.  Project Performance Audit Report PHILIPPINES FIRST LIVESTOCK PROJECT (Loan 823-PH) HIGHLIGHTS The loan provided funds through the Development Bank of Philippines for supporting the establishment and development of small stock farms (pig and poultry) and beef cattle ranches, and for building three slaughterhouses. It also aimed at developing DBP's capability to handle such lending. Initial delays in implementation were rapidly overcome and on-lending accelerated;. the loan was fully disbursed two years ahead of schedule. Lending shifted from beef to pork production, which was, by far, the most successful project component. Because of cost escalations, only two-thirds of the physical investments targeted at appraisal could be financed under the project. But due to the shift towards pork, the quantity of meat produced under the project is only 7% below appraisal estimates. The project's rate of return has been reestimated at about 24%, lower than the appraisal estimate (36%). The project succeeded in introducing medium and long-term livestock financing in the country. It also succeeded - beyond expectations - in helping smallholders: 2700 farmers, instead of the 1475 originally envisaLged, were financed; the average project sub-loan was much smaller than anticipated (43% of the appraisal estimate, in real terms). Some project: institutional aspects were insufficiently analyzed at appraisal and inadequately covered during supervision. There was inadequate communication between different Bank divisions that were handling loans to DBP. The following points may be of special interest: - inflation contributed to shortening project implementation time (PPAM, para. 19); - the project's arrears situation gives reason for concern; measures are being taken to correct it (PPAM, paras. 27 to 29; PCR, para. 3.30); - technical assistance to farmers, although not particularly crucial to the project's success was minimal (PCR, paras. 3.27, 3.35 and 5.07); - no monitoring was carried out under the project; but eval- uation surveys were conducted (PCR, paras. 3.28, 5.07 and 6.07); - supervision was biased towards technical aspects; only the penultimate mission paid attention to project administra- tion (PPAM, para. 32; PCR, para. 5.06); - no provision was made for insuring farmer assets financed under the project (PPAM, paras. 20 and 21); - the expatriate technical specialists and consultants per- formed satisfactorily; however, their impact on technical assistance at farm level was not significant due to their other responsibilities (PCR, paras. 3.16-3.20 and Annex 6). Project Performance Audit Memorandum PHILIPPINES FIRST LIVESTOCK PROJECT (Loan 823-PH) 1. PROJECT SUMMARY 1/ 1. Although the agricultural sector performed well in general, the livestock subsector performed poorly in the period 1960-1975 and the Philip- pines were faced with the problem of stagnating or only slowly growing beef, pork and poultry production in the face of population increases and continued urbanization which maintained continuously increasing demand for meats. Increased production thus became a major goal of the Four-Year Development Plan 1972-75. Other major goals were helping the rural poor, rural employment generation and rehabilitation of coconut areas. The project was closely integrated with the above main agricultural development goals of the country and was part of a substantial and increasing IBRD commitment to the Sector. 2. The project was well defined and oriented. During preparation the following steps were taken: (a) to include pig and poultry financing; (b) to eliminate dairy cattle; (c) to concentrate on specific project areas; (d) to enhance the importance of profitability of investments and downgrade collateral as a criterion for making sub-- loans; and (e) to select DBP as executing agency. These decisions proved to be either essential (inclusion of pigs and poultry) or extremely beneficial to the success of the project. 3. During appraisal and negotiations it was agreed to concentrate lend- ing on medium size and small farmers; to reorganize agricultural lending by commodity groups and to establish the livestock and poultry group to manage not only the project but also all other DBP financing for livestock; to recruit three livestock specialists to improve technical standards and for training;,to recruit a special body of staff to appraise and supervise sub- loans; and to include incremental operating costs (mainly feeds) in the financing. All of these measures proved extremely beneficial to project performance and enlarged the scope of the project. 1/ Adapted from the Project Completion Report. - 2 - 4. The Bank took a calculated risk in accepting DBP as executing agency. At the time of appraisal DBP was in the midst of important management and administrative changes affecting lines of authority, staffing and procedures. Identifiable arrears were 25% to 30% of collectibles, but there was a strong possibility of a much more serious arrears situation. There was a backlog of agricultural loans; and last, but not least, staff were few in number and required training. The Bank agreed to proceed with DBP because its top management structure had been reorganized, arrears were being reduced, profit- ability had improved with higher rates of interest charged to customers, and advances made by DBP started being repaid on a large scale. In these still serious conditions both DBP and the Bank undertook to expand livestock oper- ations substantially (in comparison with previous levels) over a short time period, to improve (correspondingly increasing the complexity of, and time required for,) appraisal and supervision and additionally to concentrate on lending to traditional and semi-commercial smallholders who needed more technical assistance and supervision than commercial farmers. This was a large order indeed in the circumstances. 5. Project implementation was delayed initially because of delays in staff recruitment, cumbersome administrative procedures and delayed avail- ability of instructions for project lending. These were largely overcome in time. However, beginning in mid-1974 and extending through end-1976 DBP was asked by Government to undertake massive lending to small fishermen all over the country to help this important segment of the rural poor. As a result DBP increased its agricultural loans by 37% to 64,700 from mid-1975 to mid- 1976 alone. This higher priority goal inevitably resulted in a high concen- tration of DBP's attention and resources on these priority lines of credit to the detriment of other lending activities, including the livestock project. Lending to small fishermen was substantially reduced in late 1976. 6. In spite of the above circumstances and the effects of inflation which led to an increase of costs of about 50%, the project's main goal of helping increase animal protein production rapidly to meet pent up and increasing demand will be fulfilled mainly through the financing of piggeries, and to a lesser extent of broiler development. Due to the shift of project emphasis from beef to port production the project's meat production is only 7% below appraisal estimates. Financing of layers, and especially of cattle, was less successful with egg production 68% below appraisal estimates and no beef production as yet. However, these two sub-components were of secondary importance in absolute and relative terms (see below). 7. Estimated profits of project participants appear to be highly satisfactory for pigs and poultry, less satisfactory for coconut/beef producers and unsatisfactory for hill beef ranchers. Given that pigs and poultry represented 94% of the total volume of investments the economic return is estimated to be relatively high at about 24%. However, there is evidence, although inconclusive, pointing to possible wide ranges of performance among participants. This indicates the need for adequate technical assistance in future. - 3 - 8. The project's institutional goal was largely fulfilled. DBP was legally empowered to lend to individuals (and not only to corporations or associations as in the past). This was a major project benefit. DBP estab- lished the Livestock and Poultry Group (LPG) and invested it with respon- sibility for all livestock lending. LPG was organized into three specialized divisions for piggeries, poultry and cattle. Specialists, staff and short- term consultants were recruited as planned. Their training and appraisal duties were carried out well. Appraisal reports were standardized and made more technical and comprehensive. Lending policies were changed to channel resources to smallholders and to downgrade the importance of collateral in approving subloans. 9. Action on subloan processing, recording, reporting, supervision, farm records, and monitoring and collections was inadequate under the project due to DBP's poor initial condition and the operating constraints referred to above, and also because of DBP's concentration of effort on rapid commit- ments and disbursements, which were more relevant in this first phase of livestock development. Improvements on the above are already being made under Livestock II, but the Bank and DBP have agreed that these problems affect all of DBP's agricultural lending and, therefore, they should be tackled at the level of DBP transcending the sphere of any one individual project. 10. The project's sectoral goal was also fulfilled. The project intro- duced medium and long-term financing of livestock for small farmers in the country. Project funding did not substitute credit which would otherwise have been available from other sources for the above purposes. Slaughter- houses were not built as planned, but in retrospect this did not prove detrimental to the project's contribution to the sector. 11. The project's social goal of helping smallholders was reached beyond expectations at appraisal. The project financed about 2,700 farmers instead of the 1,475 originally envisaged, with a consequent reduction to US$5,100 in average investment per piggeries farm (where three-fourths of the investments occurred) from about US$9,300 as appraised. However, the Project did not finance as much physically as intended at appraisal since the appraisal report did not allow for inflation which was unexpectedly high during the implementation period. 12. Bank's performance was good in preparation, appraisal and negotia- tions. Performance was generally fair during implementation. Staff and other constraints, such as inadequate DBP accounting and reporting, were partly responsible for limiting supervision effectiveness, but it is doubtful whether much better results could have been obtained given DBP's difficult original condition and constraints during 1972-76 (para. 5 above). 13. DBP is concentrating under Livestock II on redressing its serious arrears situation, helping provide technical assistance to beneficiaries, and on monitoring of farm investments and of DBP performance. Improvement on these should carry DBP a long way towards becoming an efficient and important agent of agricultural development in the Philippines on a sustained basis. Private development banks should be allowed to participate in medium-term livestock lending. II. ADDITIONAL COMMENTS 14. Most project issues have been properly analyzed in the PCR. This chapter comments on other important issues and lessons offered by this suc- cessful project. A. Analysis of Some Features of Project Lending (i) Reasons for the Successful Implementation of the Piggery Component 15. On-lending for piggery development was, by far, the most successful project component. More than two thousand sub-loans were made (3.7 times the number anticipated at appraisal), amounting to US$11.5 million (twice as much as anticipated); its share rose from 43% envisaged at appraisal to 74% of total on-lending.1/ The audit mission paid special attention to exploring the factors that contributed to such remarkable success and identified three major sets of factors which were responsible for the strong demand for piggery sub-loans: (i) the economic factors: pork is a very important component of the Filipino diet; demand for pork is strong and prices are high; financial returns on piggeries are very attractive, and they can be realized within a short period after the investment; (ii) the technical factors: pigs are easy to raise and the relevant technology is widely known; a minimum amount of land is required for either starting or expanding pig farms; and (iii) the loca- tional factors: most of the prospective sub-borrowers lived in small towns, suburban areas, and rural areas near cities, with easy access to pig markets as well as to the credit made available through the project. (ii) Reasons for Including a Beef Cattle Component in the Project 16. On-lending for beef cattle development, on the other hand, proved to move at a much slower pace. Eventually 117 sub-loans totalling US$0.95 million were made, as compared to 425 that had been anticipated at appraisal; only 43% of the amount allocated for this purpose was used. Several factors contributed to this disappointing performance: long gestation period of in- vestments, large tracts of land required, land tenure problems, remoteness of areas favorable for cattle development, scarcity of feeder steers, lack of understanding by potential sub-borrowers that coconut and beef can be comple- mentary undertakings, etc. (PCR, Annex 5 These factors had been properly anticipated in the early project stages.!/ Nevertheless, the project was 1/ Some DBP officials indicated to the mission that the concept of a "shift towards piggery sub-loans" did not appropriately describe what actually happened. According to them, the demand for piggery sub-loans has always been quite strong. Assuming that only 43% of the amount sub-lent under the project would go to piggeries, and thus "allocating" this percentage in the project description, was an arbitrary decision of the appraisal mission. Demand remained as before, and the "shift" the project attempted towards other kinds of livestock development did not materialize to the degree assumed. 2/ There are explicit references to some of them in the Bank's as well as CP's project files. - 5 - identified and prepared by the IBRD/FAO Cooperative Program (CP) basically as a beef cattle project, because CP found that several sources of credit for pig and poultry raising existed. Following recommendations of the Economic Mission and its own analysis, the appraisal mission shifted project emphasis from cattle to small stock. The difference in project emphasis originated from the different views held by CP and the appraisal mission on the role of the Bank in financing livestock development in the Philippines. C? took note that credit to finance beef development was in short supply. Assuming the Bank would be the "lender of last resort", CP prepared a project concentrating on beef cattle. On the basis of the same information, the economic mission reached a different conclusion and recommended - and the appraisal mission concurred with - expanding pig and poultry lending under the project. This decision assumed that the Bank would play a different role, that it would provide additional finance to support an already dynamic sub- sector. No information could be found in the project files or obtained through interviews on the reasons why the Bank did not accept the CP recommendation. (iii) The small size of average sub-loans 17. Contrary to Bank experience in most livestock projects, sub-loans were much smaller than anticipated, and hence much more people - mainly sinallholders - could be served by the-project. 1/ Overall, the average project sub-loan was US$5,700, as compared with the appraisal estimate of US$8,800. The most important reductions in average loan amounts are found in piggery sub-loans, which amounted to US$5,100 per individual application, as compared with the US$9,300 assumed at appraisal. However, average sub- loans for coconut/beef cattle farms increased by 80%, from US$3,500 at appraisal to US$6,350. 2/ The audit mission found that more, and conse- quently smaller sub-loans had been caused mainly by three factors: (i) the appraisal mission strongly suggested to DBP that sub-loans smaller than those usually granted should be considered; (ii) there was a much stronger demand for these loans among smallholders and small entrepreneurs than anticipated; applicants asking for sub-loans to finance purchase of 6 to 10 sows were quite numerous, while few requests for financing of sub-projects with 50 sows or more were received. Moreover, people asking for "large projects" (over 50 sows in the case of piggeries) had to contribute 50% of the total sub-project costs while those asking for "small projects" (under 50 sows) had to contribute only 10%; and (iii) DBP changed its policies and rules during project implementation: initially, only sub-loans above R 10,000 1/ It must be noted that these data refer to number of sub-loans and not to number of sub-borrowers. More than one sub-loan may have been given to the same farmer in a number of instances (PCR, footnote b to table in para. 4.06). 2/ Unit costs increased noticeably during project implementation (see para. 20). This means that sub-loans were actually even smaller than what the nominal figures mentioned in this paragraph show. In real terms, the average project sub-loan was US$3,800 (deflated to appraisal levels using the average increase in investment costs from appraisal throughout the commitment period), equivalent to 43% of the appraisal estimate of US$8,800, and the average piggery sub-loan was US$3,400, that is 37% of the US$9,300 anticipated at appraisal. - 6 - (US$1,500) were considered by DBP for financing out of the proceeds of the Loan; this floor was later removed and every application that fit the relevant technical requirement was accepted under the project. B. ProJect Costs and Schedule 18. Loan 823 was disbursed within 3.75 years, instead of the 5.75 years anticipated at appraisal (see Basic Data Sheet, and PCR, para. 4.03). Sev- eral factors contributed to this fast rate of disbursement. Demand for sub- loans was stronger than expected and project activities were expanded to cover additional areas in mid-1974. I/ DBP was an established lending agency, with an existing organization, staff, branches, and clientele; financing livestock development constituted only an expansion of DBP's activities into a new sector. In addition, DBP hired and trained for its Livestock and Poultry Group (LPG) more staff than anticipated at appraisal (91 as compared with 25 in total; 55 and 25, respectively, taking staff turnover into account) as a consequence of the increasing demand for sub-loans. DBP procedures were streamlined during project implementation. 19. These factors contributed to maintaining the planned implementation schedule, preventing the slippages most livestock projects show. However, it was the effect of inflation that actually determined the shorter implementation period and the reduced physical developments. Unit costs increased noticeably during project implementation. Supervision reports mentioned price increases of 50% for feedstuffs, 100% for capital investments, and 200% for fencing. The PCR estimates that on average investment costs increased by about 50% from appraisal throughout the commitment period (PCR, para. 3.02). Due to the cost escalation, only two-thirds of the physical investments targeted at appraisal could be financed under the project; the project's incremental volume of production reached only 64% of the appraisal target mainly due to reduced egg production. 2/ Therefore, the project's physical scope was reduced by one-third, and so was the Implementation period. C. The Risks of Small Stock Production 20. By expanding its lending into pig, broiler and egg production, the Bank entered a field which entails higher risks than the more traditional livestock projects dealing mainly with milk and beef cattle. The higher risk involved in small stock financing is a consequence of several factors. One is the concentration of large numbers of animals confined in a rather small area. There is little chance of separating sick from healthy animals and once a disease strikes it usually spreads rapidly, sometimes destroying flocks or herds within days. Another factor is the difficulty in providing adequate veterinary care to small animals. While vaccination 1/ The new areas included under the project are listed in the PCR, paragraph 4.02. Project "areas" were expanded to cover the whole country under the Second Livestock project. 2/ Meat production, however, is only 7% below appraisal forecast (PCR, table in para. 3.02). - 7 - of pigs is a standard practice as part of prophylactic treatments, possi- bilities of treating diseased pigs are limited. Treatment of poultry is in most cas'es not practicable. It should be noted that the susceptibility to diseaseicot ebe tJommensunatet1y with thegir perform- ance : liUY. ,tahw hf gfier,athe4r yields/4productivityf-the greate olhe.losse .due to diseases.j 21.6se i Aniriist financedungddothde p'toj*ebtgconst4tutej0t5q 'rap i tal investmentfp gpecilizeddfaretspatheyreatheafayriers7I mot, importantv'4d '1-6i4eprodidttre assetfueldidases' qf_epird.mis*ddis:far,-fe. capital log' seouJtdfblhugq:f.the'farmchadabbened&ve1pd-oodctedit, disease or fire will mean bankruptey,sf'rLth4dopattidipants kkiJh best protection against these hEzards would be insurance coverage. Some Bank- fitfdaddA.bja Jha gi&oteddasoch schemes sf a ~castle ct 4. zidhe uditmission found th&tShthoge didto'Sub-"borrwersishduld havesibeeoneqdir@dite take out sJ4§f&ddAfid*U f-irheaidlossad;6f animaseaduedtobdiseases;:iif suchianur n PhiIippinesr,sthe.bpdoj etecshould,thave'requkred igoprBVikihalndsthbaBanketbaduhavel.piodidbdiguidanceafn settingaup%a simple a gf i (I". ltdhaedchmc Iti.didedogs!Y anfdathev Second LiVeasth-;pr-e.t- did not Y id ithe n8UrAtcoissue either.tllAdintereagencyneommitte,eds prebiin1tlsiidyingithe feaibiity bfzetabIishingpsugho scheie- SinceoBank leiigRgf8 1 sktl tokipidgi ec tso)iight:expahd; esoeciallyvin ithe-South -Asia andE]HKl addaPacif ic.-,egiohs;I thedinsurance problemoshoiaNd zietetve: more Athditlonl D. Some Unsatisfactory Features in Project DesignM 22. -d. s au Incaddittl6h to,note,piovidingoa4 insuranceeycoveragse r97proj nct partig.i- pants4 thespoj ietwwronklya ificluded ;the privateLdevelopmenhtyab,L %t,P) 18 pote-httildiedit outlets'; f,,iledeqtu_odeludemage o-venantL,poilde- O.q-Al4ty7l,npd providhdl.fuLndifot thei-inadhquatelyp tutudie. lu.uw p gg M oe the ri.Rafinvo'lvedl ino:seet4IgDBries eActiahdEDEr 4%:op f,Laggpd the appri-il report..4IaThesbndpoints zaeifur_thlexyzekkeow,. 23. At praisdi\ ten:PDBs@ereninblueqp.as'po.tet$4Amp:T9390g 0449 out418ts4, 7KtQ thbit:wei , <hrerr<ey wbrearlegallyz harrred ontxlWimAok d;e lend ini'fbt jr, a'ymtenhtp--pwrkh st ped ing .thr:e yeaps ,[ har AY MAp ri g, qeP project of a potentially useful institution govirli( AA 19L v medium-term credit channel. for smallholders) and increasing DBP's administra- tive burdens (PCR, para. 3.32). 3/ It is the mission-s view tnat a more ,tho rough rkhillystislof Cheateg&stittb.atefguI atinggathef Pogga,l credit diret15' shouVd ,avve: been rddnelldur,ingsp Mar,to ar l a 1/ It must be noted that DBP, as lending agency for the project funds, did :nc!7panynt! k ndhbyAonJamAe Leg?M 4 YI p5414p 9bThYx lAnd. qAIfI thehwuneiq.qeKsntxqtjgs ffkpMq tp hpuJjgpgrI1 e aftlx vaAueof ,tlie liabj gLe 4rh P q Dcqiy.lT-pu -- rower to buy fire insurance f cr1Gpet .301111e a R:* aoll w 2/ i.e., Malawi Lilongwe II: Credit 244-MAI - Lesotho, Rural Development: Credit 369-LSO. 3/ A Presidential Decree was recently issued (March 1978) authorizing the Monetary Board to allow longer maturities for livestock loans. 24. The appraisal report correctly identified the reliability of quality feed supplies as a prerequisite for project success (AR, para. viii). However, no covenant was included in the Loan Agreement requiring the Borrower to ensure that high quality feeds would be made available to the participants;i/ a covenant regarding the feedstuff prices was included instead, although quality was at least as important - if not more - than prices. Controlling feed quality may be difficult and require some minimal infra- structure. Therefore, the Second Livestock project provides funds for a laboratory for quality control of animal feeds. 25. The project provided for.constructing and equipping three slaughter- houses, which, however,.were not:built. The.mission appraising the Second Livestock project concluded that-some.benefits credited to the slaughterhouse component in the first project had been overstated (mainly, liveweight shrinkage had been estimated on the basis.tof.doubtful assumptions, and its effect on loss of carcass weight had been.overestimated),'while some costs had been understated (mainly, the processing costs of chilling, the cost of wrapping materials,. and the cost of cold storage.at.,the plant.and in Manila). More detailed stud- ies during project identification and-preparation might.,have led to the conclu- sion that making this component part-of the first project was not warranted 2/ Instead of financing new large slaughterhouses, the second project provided for the improvement of ten much smaller municipal facilities, which are expected to be more profitable. 26. As mentioned above,-when the project was started DBP was an estab- lished lending agency. Nevertheless, it had several serious weaknesses: lack of leadership due to frequent management changes; high arrears; a substantial backlog of loans; understaffing, and a low quality of staff. A calculated risk was taken by the Bank in asking DBP to undertake project.implementation (PCR, para. 2.05). However, the audit finds that this risk was not high- lighted - not even mentioned - in the appraisal report. On the contrary, the appraisal report commendedDBP's Agricultural Department (AR, para. 1.01), although it acknowledged that it had not been possible to appraise DBP in all its operations, and internal Bank documents explicitly.mentioned the staff reservations about the institution. 1/ Minimum standards for feedstuff quality had been established in the Philippines. 'Perhaps the appraisal-mission was satisfied that they were adequate, but it did neither confirm that the Government had the capacity to enforce them nor require it to do so. 2/ In retrospect, including the slaughterhouse component under the.project did not produce any negative effect. Once the feasibility studies prepared by the applicants proved that they were not feasible, the unused funds were reallocated to the lending category. -9- E. Arrears and Collections 27. DBP's arrears situation is serious. The PCR reports quite a low rate of collection (27% of repayment due during the first quarter of 1977 in the Head Office; PCR, para. 3.30). More recent information, covering also 12 branches, was prepared by DBP for the audit mission. It shows better col- lections in the second quarter (see Table 1), but they are still at very low levels (45%). DBP has reported that it continues to undertake massive col- lection activities. Given staff constraints, however, DBP is giving priority to the most urgent cases, and these are not exclusively Bank-financed sub-loans. 28. The arrears problem is not an exclusive feature of the livestock project: high arrears have been mentioned as a serious problem in the PCR on another agricultural credit project in the Philippines: the III Rural Credit Project. 1/ A review of the reasons that lead to low collection rates in the Philippines is being carried out by the Government, as agreed under the Fourth Rural Credit Project (Loan 1399-PH). A comparison between the reasons listed in each PCR sheds some light on the factors that might be contributing to such widespread arrearages. 29. If the two PCRs properly identify the factors that contributed to low collection rates and high arrears in each project - and the audit mission found no reasons to challenge them - two factors should be carefully scru- tinized. One of them refers to the executing agencies' recovery policy; the other, to the legal dispositions regarding guarantees and other institutional problems related to money recovery through the auctioning or repossessing of the securities. (i) The PCRs mention the "lack of DBP determination to recover loans", and the "reluctance of rural banks to take proper actions for collections" (PCRs, para.s. 3.30 and 8.03, c, respectively). The reasons for such lack of interest on collection are not made explicit in either PCR and were not easily obtainable during the audit visit to the Philippines; they would merit a detailed search. 2/ Both PCRs also list the inadequate number of properly qualified collection staff, poor sub-loan supervision, and improper collection procedures (including lack of an adequate information system on arrears, no issuance of notices to farmers that an instalment would 1/ PCR on the Philippines Rural Credit Project, Loan 1010-PH, January 23, 1978, paras. 8.01-8.04, which will be included with the PPAR now under preparation. 2/ The PCR on the livestock project mentions that "DBP's" management has recently appointed special collection task forces in an effort to improve the situation." They might indicate that, at least in the case of DBP, "lack of determination" might be a past problem. The improvement shown in the more recent figures on arrears (Table 1) might have resulted from this new "determination". The information presented in the PCR also shows that the loans in arrears are almost twice as large as those whose instalments have been timely paid. It would be worth investigating the detailed size distribution of both the "healthy" and delinquent sub-loan accounts and whether any relation can be estab- lished between it and DBP's "lack of determination to recover" them. - 10 - become due, inflexible annual or semi-annual instalment plans that ignore the seasonal flow of cash income, etc.). Whether these are either independent factors, and, as such, susceptible to being solved through better management and planning, and a new procedure design, or are just a consequence of the lack of commitment, remains to be learned. (ii) Both DBP and the rural banks found problems when they tried to recover defaulted money by auctioning off the land secured or repossessing tractors financed through sub-loans. In the case of property auctions after foreclosure, "the former owner has one year from the date of registry of the sale certificate for repossessing it (five years if it is a homestead). This ... discourages third parties from buying and burdens DBP with property management". In the case of tractor repossession, "borrowers were found to use their tractors for custom work while defaulting on repayment. As a result, the resale value at the time of repossession was substantially reduced. Another problem was the lack of a market for second hand tractors, which also discouraged timely repossession. One rural bank had to pool tractors belonging to defaulters..." (PCRs, paras. 3.30, and 8.04, d, respectively). In the mission's view this calls for a review of the relevant Filipino legislation and for discussions with Government on the required amendments. In the case of the tractors financed under the Rural Credit project, the mission agrees with the relevant PCR which recommends "to review the possibility of organizing a market for second hand tractors and power tillers". 30. On the other hand, two factors would not require additional studies: (i) adequacy of the project-generated incomes. Had the projects generated insufficient incomes, farmers could have been expected not to have enough cash to pay their instalments. This was not the case in either project. The financial results for most participants in the livestock,project are deemed to be good. Natural calamities and temporarily low product prices might have had some effect among the rural credit participants, but the extent of arrears due to such factors is not known. As a further indicator of the success, participants were found to be spending cash income from custom works on house improvement, purchase of land and farm implements, and children's schooling; and (ii) rescheduling policy. DBP and the rural banks were found to have com- pletely different rescheduling,policies. DBP allowed participants "generous repayment conditions, e.g. extending repayment periods, not charging penalties for delays, rolling over loans". In doing so, DBP eliminated "most of the incentives for prompt and adequate sub-loan repayment". "Rollovers, on the one hand, may hide (an even) worse arrears situation". On the other hand, the rural banks hesitated "to reschedule arrears ... for fear of establishing precedents for lenient repayment" (PCRs, paras. 3.30 and 8.03, d, respectively). F. Other Problems in DBP 31. DBP's structure and performance show substantial improvements in several areas: project organization, staffing, training, and lending policies. But besides arrears, already analyzed, other areas remain in which DBP pertormance is still inadequate: appraisal procedures; sub-loan processing, recording, and supervision; reporting to the Bank; technical assistance; farm records, monitoring and evaluation; and accounting and auditing (PCR, paras. 3.10 and 3.12-3.29). These problems are not project specific. They - 11 - affect all of DBP's agricultural lending, and therefore they should be tackled at the level of DBP as a whole (see para. 9 above).l/ 32. However, the Bank failed to notice that these problems, some of which had been mentioned years ago by staff members participating in the appraisal of the project, continued to affect DBP operations. The supervision missions that were monitoring performance under the First Livestock project should have contributed to making the Bank aware of these problems. However, they did not for supervision missions dealt mainly with technical issues.2/ It was not until mid-1976, after almost four years of project implementation, when a supervision mission, the penultimate to visit the project, paid careful attention to the Agricultural Department of DBP as the credit channel. The findings (those mentioned above) were startling and called the attention of the Bank to DBP weaknesses. Another contributing factor was the lack of coordi- nation and cross-information between the different divisions in the Bank that were handling the different loans to DBP. 33. Most DBP problems and the Bank deficiencies in handling lending to DBP seem to be on the way to be solved. Now, only one agricultural division handles Bank lending to DBP: the livestock projects were transferred from the General Agriculture Division to the Rural Credit and Agro-Business Division 3/. Moreover, communication between the agricultural divisions and the former DFC division has improved. Agriculture and IDF missions visited DBP at the same time in late 1977 to examine in depth problems common to the various Bank-financed projects and to develop a concept for future Bank lending to DBP. The missions found DBP responsive and reported an improvement of the shortcomings mentioned above, and a basic agreement with DBP management on the ways to overcome the problems still persisting. A/ DBP has since reported that an Ad Hoc Committee has been formed to improve the reporting system to the Bank. Also, that steps towards the strengthening of its opera- tions are gradually being taken: pre-loan counselling is being given greater attention; loan processing time is targeted to be reduced substantially; application of profitability tests aside from cash flow analysis, an improve- ment in appraisal procedures that has long been implemented for fishery projects, has been started for livestock; 40 BAI technicians will work with 1/ It must be noted that the Bank has provided finance to six agricultural projects through DBP (plus a tree crop component in the First DFC project); five of them are still being implemented. In addition, four non-agricultural Bank-financed projects are being implemented by DBP. In all loans accounting for US$237.4 million have been channelled through DBP. 21 The fact that the appraisal report had presented DBP as a satisfactory outlet for project: funds might have contributed to mislead the attention of the supervision missions (see para., 26). 3/ The Bank is also financing rural credit projects through the Central Bank and the Rural Banks. No evidence of conceptual or practical coordination between these rural credit projects and the agricultural credit projects channeled through DBP was found on either the project files or the inter- views conducted by the mission. 4/ The "Summary and Conclusions" of the Agricultural Review Mission Report is presented as an Annex. - 12 - DBP for at least one year in technical assistance to poultry and livestock projects. DBP is also studying the possibility of varying delegated lending authorities to branches (indiscriminate increase in lending authority is criticized in the PCR, para. 3.24) according to branch capabilities. Local consultants were retained, as suggested by the Bank, to set up a continuing farm-level monitoring system for livestock projects. - 13 - Table 1 LIVESTOCK PROJECT I - COLLECTION RECORD FOR THE QUARTER ENDING JUNE 30, 19771/ (P 000) Interest and Principal other charges Total Arrears at beginning of quarter 2.962 5.229 8.191 Installments due during quarter 3.582 4.055 7.637 Subtotal 6.544 9.284 15.829 Collections during quarter 3.153 3.901 7.054 Arrears at end of quarter .3.391 5.383 8.774 Collection ratio 48% 42% 45% Period in arrears: less than 6 months: 30%; 6 to 12 months: 40% 13 to 24 months: 21%; over 2 years: 9% Source: DBP, Agricultural Plans and Programs Staff (APPS) 1/ Includes Head Office, plus branches at Butuan, Cagayan de Oro, Calapan, Cebu, Dagupan, Davao, General Santos, Iligan, Iloilo, Legaspi, Ozamiz, and Tarlac. It does not include branches at Cabanatuan and Lucena.  Attachment Page 1 BANGKO SA PAGPAPAUNLAD NG.PILIPINAS May 17, 1978 Mr. Shiv. S. Kapur Director Operations Evaluation Department World Bank, 1818 H. Street, N. W. Washington, D. C. 20433 U. S. A. Dear Mr. Kapur: Thank you for your letter dated April 21, 1978 and the enclosed copy of the first draft of the Project Performance Audit Report on the First Livestock Project. We found the draft report comprehensive andanalytical and on the whole, an objectively-written paper. Following are our comments and observations regarding some issues that were raised in the report: 1. On the Involvement of Private Development Banks in Long-term Financing of Livestock Projects An issue raised in the Project Completion Report and .amplified in the Project Audit Report (OED Memo) is the need to involve PDBs in medium and long-term lending for livestock projects and thus, the necessity to review the existing General Banking regulations concerning the operation of potential credit outlets. In this regard, we would like to inform you that the Development Bankers'Assochtion of the Philippines has approached the Department of Development and Rural Banks (DBP) for assistance in making repre- sentation with the Central Bank on the possibility of amending the the General Bank Act, specifically Section 31, to allow PDBs to participate in :he livestock production program. The DBP endorsed the request to the Central Bank favorably and recently, a Presidential Decree was issued authorizing the Monetary Board to allow longer maturities for Livestock loans. Before, the General Banking Act limited livestock loans to only three years, which did not allow the PDB to participate in the 1st World Bank livestock loan. We are attaching a copy of Presidential Decree 1317 with this letter. DEVELOPMENT BANK OF THE PHILIPPINES TELEX. DBPHIL 7222197 HEAD OPFICE MAKATI, RIZAL. PHILIPPINES CABLES PHILDEBANK MANILA P. 0 BOX OO, MAKATI COMMERCIAL CENTER D-708 TELEPHONE 89-10-11 Attachment Page 2 2. On the Possibility of Establishing a Livestock Insurance Scheme The report noted the failure of the LDP I and II to provide for insurance requirement for livestock against diseases and fire. We, of course, recognize the need for some kind of protection against these hazards, considering that the stock financed under the project constitute the major capital investment of sub-borrowers. Along this line, you may be interested to know that an inter-agency committee is presently studying the feasibility of establishing such a scheme. The mechanics of implementation of a similar undertaking i.e. crop insurance scheme, are also being studied. 3. On the Present Financial Reporting System to the World Bank There are at present coordinated efforts to improve the reporting system to the World Bank. An Ad Hoc Committee composed of accounting personnel and other staff concerned, has been formed. This group is presently working on the revision and standardization of the chart of accounts as well as reporting procedures and formats for all IBRD- assisted projects, including livestock projects. Also, simpler and standardized formats for semi-annual progress reports to the World Bank have been devised. Once implemented, the reporting system for livestock projects will hopefully speed up since the data will be computerized. Presently, only the data for fishery projects are processed by the EDP. 4. On Monitoring of Livestock Projects The APPS has lined up, as a major activity, the setting up of a continuing farm-level monitoring system for livestock projects. Realizing that such work involving collection of reliable farm-level data is a difficult and highly specialized area, we are availing of professional services of local consultants as suggested by the World Bank. We are presently awaiting the concept paper being prepared by the GIRD (Generator of Integrated Resource Development), the consult- ancy group that has been identified to do the work for the DBP. 5. On Arrears and Collection The DBP continues to undertake massive collection activities to improve the repayment performance of loans. Given the constraint of inadequate personnel, however, we have to give priority to cases which need more urgent attention in terms of the magnitude of arrears, and these are not exclusively IBRD-financed projects. With regards to your observation that a review of the reasons for the high arrearages situation in several agricultural credit projects, including those financed under the CB-IBRD credit lines, should be carried out, we would like to inform you that the Technical Board for Agricultural Credit, in coordination with other agencies (DBP included) is preparing a nationwide study on agricultural loan arrearages. We understand that this project is being funded under the 4th CB-IBAR) Rural Credit Line. Also, there have been several studies on arrearages problems conducted Attachment Page 3 in the past, but these were mostly on crops, particularly on the Masagana 99. 6. On the Need to Review the Lending Authority of Branches and the Rate of Subloan Processing The Project Completion Report noted the excessive granting of lending authority up to r150,000 to branches given the observed inefficiencies in branch administration, and suggested the exercise of selectivity in delegating authority and in fixing ceilings for loan approvals by branches based on the competence of the branch staff and the type of projects involved. We have earlier realized the advisability of doing this, and are in fact currently studying the possibility of varying delegated lending authorities according to branch capabilities. Furthermore, to some extent, selectivity is already, in effect, being exercised in some types of projects. Recommendations for fishery loans under IBRD-assisted Fishery Projects, for instance,are required to be forwarded to the head office in cases where branches are not staffed with fishery personnel capable of evaluating fishery projects. 7. On Other DBP Efforts to Improve Appraisal Procedures, Subloan Processing, Supervision and Technical Assistance The DBP is gradually taking steps towards the strengthening of its opera- tions. Pre-loan counselling is given greater attention. Loan processing time is targetted to be reduced substantially. Application of profitability tests aside from cash flow analysis, an improvement in appraisal procedures which has long been implemented for fishery projects, has been started for livestock. Also, as you may already know, the DBP has signed an agreement with the Bureau of Animal Industry for the latter to detail 40 technicians with us for at least a year to assist in the supervision and extension of technical assistance to poultry and livestock projects. Recently, the Agricultural Projects Departments have been reorganized to strengthen supervision functions. In addition to the above, we observed that there are several points in the ?roject Completion Report which need to be checked, e.g. that the DBP does not charge penalties for delays as one of the generous repayment conditions to avoid foreclosures, which of course is not an accurate statement. We would welcome a wrap-up session before finalization of the report, for the purpose of threshing out several small, but nonetheless, important details contained in the PCR. We take this opportunity to express our appreciation for the informative and fruitful dialogues conducted between the OED audit mission and some senior officials of DBP, duri:ng the short visit here of the Mission in November, 1977. Attachment Page 4 It was during this visit that the possibility of undertaking joint post- evaluation studies of WB-financed projects by the DBP and other government agencies, specifically, the NEDA was opened up. We are presently exploring this area. Our kindest regards. Very truly yours, PIAC 0 L. MA . Chai n Encl.: a/s USE PUREBRED SIRES FOI BREEDING-RAISE MORE AND BETTER LIVESTOCK AND POULTRY REPUBLIC OF THE PHILIPPTNES In REPLY. PLrASE EPARTmiETr OFAGCULT".Z Attachment aW= To No. BUREAU OF ANIMAL INDUSTRY Page 5 MANMA June 15, 197 PIA AIIMIUL Mr. Shiu S. Kapur Director Operations Evaluation Deparment The World Bank 1817 H. Street N. W. Washington, D.C. 20433 U.S.A. Be: Project Performance Audit Report - Philippines First Livestock Project (Loan 823 - PH) Dear Mr. Kapur: We are pleased to acknowledge your letter of April 21 197, requesting for comments on the Project Performance Audit Re ort - Philippines First Livestock Project (Loan 823 - PH . The Audit Report seems vivid, exhaustive, and candid in its details. In support to the Second Livestock Project, tTe Bureau of Animal Industry has a modest role - that of rendering tecnical assistance to livestock loan borrowers in accordance with the memorandum of agreement of September, 1977 between the Department of Agriculture and the Develop- ment Bank of the Philippines (DEP). The Bureau of Animal Industry has detailed 37 extensionmen and a Central Coordi- nator to work with DEP. Thank yoa and best wishes. Very truly yours, DrII ESCtoDERO III Director 4  ANNEX 1 Page 1 PHILIPPINES: DEVELOPMENT BANK OF PHILIPPINES (DBP) REPORT OF THE OCTOBER 1977 AGRICULTURAL REVIEW MISSION SUMMARY AND CONCLUSIONS 1. In October 1977, a three-man mission from the East Asia Rural Credit and Agro-Business Division visited the Philippines 1/, in conjunction with an appraisal mission from the Industrial Development and Finance (IDF) Division. The Rural Credit staff conducted a general review of DBP's agricultural operations, including but not limited to the IBRD-financed projects. The visit had two main purposes: -(i) to examine in depth the problems common to the various IBRD-financed DBP agricultural projects, most of which had been identified by previous sui:ervision missions, and to come up with proposals for deaLing with these, particularly by strengthening DBP; and (ii) to develop preliminary ideas for future IBRD agricultural lending to DBP, including the steps both DBP and the IBRD should take in preparation. The mission discussed its findings extensively with DBP's management, and reached basic agreement on all major matters. The conclusion under 2(c) below resulted from the mission's subsequent deliberations. 2. The general conclusion of the mission is that while the main problems identified by earlier missions, particularly as regards arrears, still exist, they are being tackled energetically by management and staff. In particular: (a) DBP's vigorous loan collection drive, started in May 1977, has had significant success for large industrial loans, although so far not for agriculture or small- and medium- scale industries; (b) DBP's accounting system, and the related financial reporting system, are generally in better condition than was thought earlier, and are being further improved; the recent estab- lishment of an internal audit unit should help in this regard; however, the management information system, including the portfolio review now being carried out, needs to be better organized on a program basis for agricultural operations; (c) With regard to DBP's lending operations, the mechanization of accounts at the branches and the extension of the head office computer capacity, both planned to be completed within the next two years, offer an opportunity of a global integration of accounting, audit, reporting and focusing on individual programs to enhance DBP's function as a development institution. The I/ The mission visited the Philippines between October 3 and 28, 1977. The report is dated January 26, 1978. ANNEX I Page 2 coordination of these four elements to be integrated calls for high caliber expertise for which DBP may wish to engage con- sultants; (d) the head office administrative and financial supervision of branches is generally satisfactory, and the technical supervision and support should improve due to strengthening of the head office technical department staff, coupled with a reduction in the number of Manila-area loans they routinely handle; (e) DBP has obtained additional technical staff in livestock, fisheries and grain processing, and has stepped up its recruitment efforts in the universities; however, improved salaries and pro- motion opportunities for technical staff are still needed; (f) DBP has agreed in principle to use part-time local consultants to assist the Agricultural Plans and Programs Staff (APPS) in setting up adequate monitoring and evaluation systems; (g) procedures manuals for appraisal and supervision are being prepared, and DBP has agreed to pay much greater attention to loan supervision. 3. Many of these measures should ultimately be reflected, inter alia, in improved collection. In the meanwhile, however, DBP's collection of agri- cultural loans remains poor; collections for calendar year 1977 are expected to reach only about 30% of total collectables (down from 34% in 1976) and 60% of DBP's own collections budget. As of June 30, 1977, agricultural arrears had reached 25% of the outstanding portfolio; for agricultural "social loans" the rate was 48%, and for other agricultural loans 20%. 4. The division of responsibility for DBP's agricultural operations among two Agricultural Projects Departments under two separate Governors inevitably creates some problems at the branch level. Although APPS reports to the Governor who is responsible also for APD II, it is very important that it is able to operate as a common service facility and be equally responsive to the needs of both APDs. 5. The transfer of responsibility for all IBRD/DBP agricultural pro- jects to the Rural Credit Division, and the continued close coordination between the IDF and Rural Credit Divisions, should prove helpful in developing a uniform and coordinated approach to future Bank lending through DBP. The supervision of the DBP agricultural projects over the next twelve months should consist of three missions, with two,missions focusing on technical issues besides the more routine updating of information on project implementa- tion, while the third mission would review institutional and organizational matters along the lines of the present mission. The latter type of mission would be planned, whenever feasible, in conjunction with a mission from the IDF Division in view of our shared concerns. ANNEX 1 Page 3 6. In the future, as in the past, DBP's agricultural lending will be a combination of normal banking operations, based on exogenous loan demand, and support for other Government efforts to achieve particular targets, especially within the framework of the new five-year national plan and the derivative agricultural credit plan. This support will continue to involve DBP deeply in programs to assist small farmers and fishermen, to develop the less advanced regions of the Philippines, and to promote specific crops. Such programs, particularly the so-called "social loans," have in the past created serious loan repayment and administrative problems for DBP, and may have failed to achieve their economic objectives as well. However, having learned from these experiences, and now having the staff (APPS) to more carefully evaluate agricultural programs proposed by Government, DBP believes that it will be able to make its future programs financially and economically sound. 7. Previous IBRD agricultural lending to DBP has focused almost exclusively on the particular commodities being financed, leaving broader institutional concerns for the IDF industrial projects. As a result, DBP institutional issues peculiar to, or with particular importance to agricul- ture, have received relatively little IBRD attention. The most important of such issues are DBP's organizational structure for agricultural lending in the head office and branches,, the agricultural arrears problem, the need for more technical expertise in DBP, and the need for more head office support for the branches. Future IBRD agricultural lending to DBP would have to address these problems, as well as specific problems of the subsectors involved, especially the need to coordinate credit with technical and marketing support. 8. The planning and the design of future IBRD operations through DBP will need to take note of the highly informative study completed in January 1977 by the Presidential Committee on Agricultural Credit and the Technical Board on Agricultural Credit entitled "Financing Agricultural Development: The Action Program." The Integrated Agricultural Credit Plan, which is a part of the above Program, outlines a five year plan for the period 1977-82 and endeavors, inter alia, to define the role of various financial institutions in the PhilLppines, including DBP.  ANNEX 2 13ANGKO SA PAGPAPAUNLAD NG PILIPINAS April 25, 1977 Mr. Owen T. Price Chief, General Agriculture Division Projects Department East Asia and Pacific Regional Office The World Bank 1818 H. Street, N.W. Washington, D.C. 20433, U.S.A. Dear Mr. Price: We are submitting herewith the Completion Report for the First Livestock Development Project (Loan 823-PH), together with three (3) sets of drawings and general specifications for slaughterhouses provided by Director Salvador H. Escudero III. We shall be sending the quarterly reports for Loan 1225-PH and a review of IBRD loan accounts transferred to the DBP account before December 31, 1975 under separate cover. Very truly yours, JOSE R. TENXGCO, JR. Go v er nor Encl; a/s  ANNEX 2 Page 1 FIRST LIVESTOCK DEVELOPMENT PROJECT (Loan 823 PH) - Completion Report On May 25, 1972, the International Bank for Reconstruction and Development approved in favor of the Republic of the Fhilippines a loan of US$7.5 million for the development of the livestock industry. Said loan was administered by the Development Bank of the Philippines and relent to livestock and poultry producers. a) Major Problems During the initial stage of implementation, processing of loan application was considered slow and the applicants had to wait too long for loan approval. This was due primarily to: () lack of technically trained personnel to process such applications; (2) too much involvement of the Specialists Group in evaluating the techrical arid financial viability of livest6ck projects which were largely duplication of the work of the Chiefs of Divisions in the Livestock and Poultry Group (3) lack of suitable format to follow in report preparation; (4) unfamiliarity of Specialists on the appropriate technical parameters as they apply to local conditions; and (5) lack of calculators for faster computation's: In order to cushion the effects of this, especially on cost and timing forecasts, the following measures were undertaken: 1) In-service training of livestock technicians and pre--service training of livestock appraisers in the preparation of farm/ ranch investment projects, centered basically on the technical and financial aspects; 2) Dialogue with Specialists on appropriate technical parameters to use; 3) Preparation of designs and specifications for poultry and piggery buildings; 4) Adoption of layout and report formats; 5) Introduction of Technical Bulletins; 6) Provision of calculators to the technical staff; and ANNEX 2 Page 2 7) Delegation of the review and recommendatory powers of the Technical Specialist and Production Specialists to the Chiefs of the Investment Project Development Division in the Branches and to the Chiefs'of Division in the Livestock and Poultry Group in the Head Office concerning sub-loans, the approval of which falls within the discretionary power of the Branch/Department Manager. Another major problem that arose in the implementation of the project was the lack of qualified beneficiaries for the establishment of slaughterhouse due to serious technical and costing problems. To be able to meet the commitment target, and in view of the above problems, a request for the reallocation of funds for the establishment of slaughterhouses to the development of poultry, piggery and cattle farms/ranches was requested and subsequently approved by the International Bank for Reconstruction ard Development. b) Cost or time overrruns There was no significant cost or time overruns as theban was fully. committed on December 31, 1975 and disbursed on October 6, 1976, or about two (2) years ahead of schedule, as follows: Category 1 - Development of integrated beef cattle and coconut farms, hill beef cattle ranches, pig breeding and fattening farms and poultry broiler and egg farms US$7,492,318.31 Category 2 - Technical services for the improvement of livestock production 7,681.69 TOTAL US$7,500,000.00 ANNEX 2 Page 3 c. Significant amendments in the project In the course of I mplementation, the significant amendments in the project.are: 1) The inclusion of individual and partnerships as among the qualified beneficiaries of the loan; 2) Delegation of authority by the Technical Specialist to the Chiefs of the Investment Project and Development Division in the Branches and Chiefs of Division in the Livestock and Poultry Group in the Head Office. 3) Expansion of the project area to include the provinces of Cebu, Iloilo, Agusan del Norte, Agusan del Sur, Bukidnon, Misamis Occidental, Negros: Occidental, Negros Oriental, Surigao del Sur, Surigao del Norte and Quezon; 4) Reallocation of part of Technical Assistance Fund to Category .1; and 5) Allocation for slaughterhouse was reallocated to Category I Owing to changes in costing of slaughterhouse projects and considering the time target of December 1975 to commit the entire US$7.5 million, no slaughterhouse project was financed under Loan 823 PH. The funds originally earmarked for such projects was, therefore, reallocated for the development of integrated beef cattle and coconut farms, hill beef cattle ranches, pig breeding and fattening farms and poultry-broiler and egg farms. The inclusion of individuals and partnEr ship as among the beneficiaries of the loan was biought about by the promulgation of PD No. 81 which authorizes the relending of foreign loans to individuals, partner.zhips, cooperative, associations or private corporations. The review and recommendatory powers of the Technical Specialist for loans, comes into two stages: i.e. for loans, the approval of which falls within the discrtMtionary power of the Branch/Department Manager and later for loans, which require approval of the DBP Board of Governors. ANNEX 2 Page 4 The project area was expanded to include some provinces which are active in the development of the livestock industry. d) The response of the.IBRD on the requests of the Development Bank of the Philippines for informationt amendments, technical assistance and disbursement of fund is commendable and proves the genuine concern of the former in the development of the livestock industry in the Philippines. The DBP, on the other hand, is believed to have carried out the objectives of the project satisfactorily, considering the span of time within which the loan was relent to beneficiaries. The consultants or specialist s have contributed much in improving the processing of loan applications for poultry, piggery and cattle projects. e) Unusual features of procurement and disbursement - Two (2) investment projects for piggery, Tan P in the amount of P1.980 million and Red Meadows, Inc. in the amount of P1.446 million were forwarded to the IBRD Offices in Washington, D.C. in accordance with the operbting policy and procedures serforth in the Loan Agreement. The former was denied as the World Bark believed that the rapid large expansion of the proponent is "financially, technic ally and adminstratively imprudent". The latter, on the other hand, was approved by the Bank but was with- drawn from the IBRD projects due to the inability of the proponent to push'through with the approved program of development. f) Agreements or procedures which have given rise to problems The review and recommendatory function of the Technical Specialist and Production Specialist, as provided for in Sec. 3 of Schedule 5 of the Loan Agreement, was given more emphasis by the Specialists during th e early stage of implementation such that other Terms of Reference were not given due attention. Such Thrms of Reference include, among others, the establishment of an adequate sample of farm/ranch records as needed for Project Evaluation; advising farmers on pig, poultry, and cattle production and management, providing such supervision and technkcal assistance as needed to ensure successfully completion of pig, poultry and cattle investment projects; and assisting in establishing a farm/ranch records system for sub-loan beneficiaries and for Project Evaluation. ANNEX 2 Page 5 To enable the Specialist to comply fully with the Terms of Reference and devote more time to other phases of work that were not stressed properly, an agreement with the Technical Specialist was arrived at to delegate the loar processing functions to the Chiefs of the Investment Projects Development Division in the Branches and Chiefs of the Poultry, Piggery and Cattle Division in the Head Officet the approval-of which requires the action of the Board of Governors. g. The training aspects of the project In order to successfully implement the project, an in-srrvice training for DBP livestock Technicians was conducted in May 7-23, 1973. To be able to provide additional technical men the DBP conducted three (3) more pre-service training programs for Livestock Appraisers in 1973 and 1974. The first training was'conducted from Nov. 5 to December 7, 1973. CE the twenty (20) trainees, fourteen (14) were employed by the DBP. The second training was from August 26 to September 23, 1974 where twenty (20) out of the twenty five (25) trainees were taken in and the last was from October 28 to December 6, 1974 where fifteen (15) out of the twenty (20) trainees qualified for employment in the DBP. h. Instituticn Building aspects The Livestock and Poultry Group in the Development Bank of the Philippines was organized under the First Livestock Development Project. Staffed with forty-six (46) personnel, of which forth- three (43) are professionals, the Group is functioning efficiently. Sound financia fnd technical appraisal procedures have been adopted.So fa;l Ivestock appraisers have been trained under the Project. On the whole, DEP has demonstrated its ability to handle medium and long term financing of mainly small to medium sized livestock enterprises, which is one of the project objectives. ANNEX 2 Page 6 I J. There was no event of default. Investment projects for farm/ranch development were implemented in accordance with the plans duly approved by the Development Bank of the Philippines under the guidelines setforth in the Loan Agreement. j. A review of the financial aspects of sub-project operations is still being undertaken by the Plans and Programs Unit under the direction of the Farm Develcpment Monitoring S-pecialist employed under the Second Livestock Project and no concrete findings or results can as yet be presented until sometime before the end of May 1977. k. The only significant deviation from the original financing plan was. the deletion of the provision for the establishment of slaughterhouses and the reallocation of funds therefore for the development of p oultry, piggery and cattle farms/ranches. 1. Assumptions In the course of implementation, some basic assumptions have to be revised as a result of surveys, and: studies made on projects financed by the DBP and actual expetiences of sub-borrowers. Specifically, the changes made include: 1) The brooding-growing'period for layers was reduced from 6 to 5 months but the laying period was extended from 12 to 16 months. 2) The number of broiler batches raised per year during normal operation was reduced from 5 to 4 1/2. 3) Investment costs for all projects increased in view of price Increases of inputs. However, said increase was relatively counterbala nced by increase of price of the produce. m. There were no problems on changes of environmental, sociological or authropelogical nature. n. In order to maximize the benefits from the project, it is necessary that the Technical Service Scheme as envisioned in the Memorandum of the Head, Livestock & Poultry Group to the Technical Specialist dated May 29, 1975 be strengthened. AiNEX 2 Page 7 Said scheme has the following objectives: 1) To ensure that sub-loan proceeds are used in accordance with the approved purposes; 2) To provide feed back to DBP Offices concerned regarding weakness in the preparation of Investment Plans; 3)1 To provide constant, although informal advice to DBP Managers relative to the execution of the Project; 4) To have consultation with borrowers on new and improved techniques in daily management and operation of sub- projects financed; and 5) To strengthen the DBP's monitoring system for a meaningful Project Evaluation..  PHILIPPINES FIRST LIVESTOCK PROJECT (LOAN 823-PH) COMPLETION REPORT TABLE OF CONTENTS Page No. SU101ARY1/.... .. . . . . . . . . . . . . . . . . . . . . 1. PROJECT BACKGROUND........... ..... . . . . . . A.1 Sector Setting . . . . . . . . . . . . . ... ....... A.1 IBRD Lending to Agriculture . . . . . ........ . . . A.2 2. PROJECT FORMULATION. ................. . . . . A.2 Preappraisal Stage........ ..... . . . . . . . . A.2 Negotiations ..... t.. . . . . . . . . . A.4 Basic Project Description . . .... . .. A.5 3. OBJECTIVES AND RESULTS.......... ...... . . . . A.6 Background . . . ............... . . . . . . . . A.6 Project Production Objectives . .*............. - A.6 Financial and Economic Objectives. . ........ . . . . A.6 (a) Summary. . . . . . . . . . . . . . . . . . . . . . . . . A.6 (b) Piggeries. . . ... . . . . . . . . . . . . . . . . . . . A.7 (c) Broilers . . . . . . . . . . . . . . . . . . . . . . . . A.8 (d) Layers . . . . . . . . . . . . . . . . . . . . . . . . . A.8 (e) Cattle . . . . . . . . . . . . . . . . . . . . . . . . . A.8 Institutional and Sectoral Objectives......... . . . . A.9 (a) Legal Aspects . . . . . . . . . . . . . . . . . . . . . . A.9 (b) Development Bank of the Philippines . . . . . . . . . . . A.9 (c) Private Development Banks . . . . . . . . . . . . . . . . A.15 (d) Contribution of the Project to Agricultural Credit - Resources . . . . . . .* *. .. . .. . . . . . '. * * . . A.16 (e) Summary and Overall Remarks . . . . . . . . . . . . . . . A.16 Social Objective............ . . . . . . . . . . . A.17 1/ Included in the Project Performance Audit Memorandum PaRe No. 4. SPECIFIC PROJECT ELEMENTS . . . . . . . . . . . . . . . . . . . A.17 Effectiveness . . . . . . . . . . . . . A.17 Project Areas . . . . . . .. ...... . . . .. . A.17 Disbursements . . ... . . .. ....... . . . . A.18 Allocation of Loan Proceeds . . . A.18 Lending to Farms and Ranches . . . . . . . . .. . . . . . . . . A.19 Fulfillment of the Aain Loan Covenants . . . . . . .. . . . . . A.20 5. BANK'S PERFORMANCE . . . . . . . . . . . . . . . . . . . * A.21 6. CONCLUSIONS AND'LESSONS LEARNED . . . . . . . . . . . . . . A.22 ANNEXES 1. DBP-Conducted Evaluation and Konitoring Efforts -/ 2. Pigs 3. Broilers 4. Layers 5. Cattle 6. Speciali ys and Advisors - 7. Auditing- MAP - IBRD No. 3602R 1/ Supplementary Data .Volume. GNot,.included in-this-report. It is:available from the General Agriculture 'Division of the East Asia and Pacific Regional Office. 1. PROJECT BACKGROUND Sector Setting 1.01 Agriculture represented 36% of GNP, 54% of employment and 90% of commodity exports in 1976. Its relative importance slowly declined through 1970 and has remained stable since then. These overall figures, however, do not reveal differing production trends among the subsectors, e.g. while crop and forestry production increased by an average 8% p.a. and fisheries by 6% p.a. from 1965 through 1975, livestock production performed poorly since 1960 and its share of agri:ultural output declined from 23% to 17% through 1975 as a result. 1.02 Demand for meat, however, continued to increase due to population growth, increasing urbanization and urban incomes, and as a result of this and insufficient livestock supplies demand for fish increased substantially, increasing overall per capita meat consumption in spite of a decline in pork consumption and unchanged per capita consumption levels for beef and poultry as shown below. Table 1: MEAT CONSUMPTION PER CAPITA (kg) 1960 1975 Pork 11.0 8.0 Beef 2.7 3.0 Poultry 2.0 2.5 Subtotal 15.7 1 q Fish 16.0 31.0 Total 31.7 44.5 Source: Bureau of Agricultural Economics Even though total consumption per capita of all meats increased during the period fish prices also began to rise in 1975 and 1976 reflecting limited supplies and still unsatisfied overall demand for meat. 1.03 In 1970 this situation was already apparent and called for drastic efforts to increase meat productivity and production not only to re-establish previous per capita consumption and protein intake levels, but also to meet the expected 80% demand increase forecast for 1970-1980. Given the relevance of this issue it became the second most important goal of the Four-Year Development Plan 1972-75 (immediately behind self-sufficency in rice). Other Plan goals were increasing the income of the rural poor, rural employment generation and rehabilitation of coconut areas. The Livestock - A.2 - Project was formulated in response to these needs and therefore had a very close relationship with the main agricultural development objectives of the Philippines during the decade. IBRD Lending to Agriculture 1.04 As of September 1977, the Bank had 13 agricultural projects (for a total loan volume of US$265 million) under implementation in the Philippines. Of these, five (Rice Processing and Storage, Loans 720 and 1269; Fisheries, Loans 891 and 1270; and Livestock, Loan 1225) are being executed by the Development Bank of the Philippines (DBP), which was also the executing agency for the First Livestock Project. Project implementation is satisfactory in general, but management and administrative bottlenecks have been identified recently in all of them. Other important lending channels are the National Irrigation Authority (NIA) with five projects under execution, and the Central Bank/rural banks, mainly used for channeling mechanization, small irrigation, storage and processing loans, and presently managing the Fourth Agricultural Credit Project. A Rural Development and a Land Settlement Project are also being implemented. In summary, Bank participation in agricultural development in the Philippines has been substantial in the last few years in support of the Government's ambitious development plans. 1.05 The project under study represented the first instance of Bank lending for livestock development in the Philippines and was part of the substantial and increasing IBRD commitment to the agricultural sector at the time of its inception and during implementation. The Development Bank of the Philippines (DBP) was chosen to manage the project for reasons given below (para. 2.04). 2. PROJECT FORMULATION Preappraisal Stage 2.01 In August 1965, Government requested from the Bank technical assistance for agricultural development./l The earliest direct antecedent of the First Livestock Project is found in a proposed livestock development program submitted for Bank review and possible future financing by the National Investment Development Bank of the Philippines (NIDBP) in December 1965. The Bank's first reaction was favorable to the beef cattle component, unfavorable to dairy and one of doubt as to whether such a program should be executed by NIDBP or by DBP, which had experience in livestock lending, and technical staff to support its livestock loans. The need to assess DBP's capabilities was identified. /l This was due to the urgent need for readjusting production and exports in view of the impending termination of the Laurel-Langley Agreement, which had allowed free entry of Philippine agricultural commodities into the US market. - A.3 - 2.02 At Government's request a CP mission visited the country in April 1967. It recommended follow up of beef cattle possibilities and elimination of dairy from further consideration on technical and financial grounds. 2.03 Bank guidance on project preparation was given to the Philippines' Private Development Corporation (PDCP) beginning in June 1968. An FAO/Bank livestock project identification mission visited the Philippines in May 1969. Two beef cattle projects were identified: one involving 100 coconut plantations (average investment US$25,000) and another 100 marginal open savanna hill ranches (average investment US$50,000). Project cost was estimated at US$8 million and DBP, PDCP and NIDBP were identified as possible credit channels under a system of supervised credit. Salient points of the identification report were that: (a) DBP should play an important role under a trust fund arrangement; (b) the need for loan collateral should be greatly de-emphasized to provide more opportunity for onlending; and (c) marketing aspects should be closely studied. 2.04 A Bank economic mission which also visited the country in May 1969 recommended giving primary importance to pig and poultry production (not to beef cattle) to raise rapidly the average nutritional level of the population, and in view of their relatively more favorable price cost relationships. However, DBP and Government manifested interest only in financing large cattle enterprises at the time. The prevalent views in the Bank at this stage were that: (a) breeding/fattening operations for pigs, poultry and beef should be contemplated; (b) the projlect should not be country-wide, but confined to the most favorable areas to increase profitability and to improve management; and (c) in view of DBP's exclusive interest in beef financing and given DBP's poor management and financial condition a thorough analysis of other credit institu- tions should be made before choosing the project operating agency. Bank staff constraints at the time appeared to preclude appraisal before FY73 and this inl. turn delayed project preparation. A CP preparation mission was fielded in November/December 1970 with TOR reflecting past Bank views on the scope of the project. The mission's final recommendations were: (a) to have DBP as executing agency given their expertise, technical staffing, and existing agencies in potential project areas (PDCP was disqualified on all these grounds) and in spite of its unsound financial position and high degree of susceptibility to political influence at that time; (b) to include IBRD financing for pigs and poultry (besides cattle); and (c) to include a slaughterhouse component. Total project cost was estimated at US$11 million (or US$3 million more than at identification) reflecting (b) and (c) above. The Bank, after reviewing the preparation report, noted the following needs: (a) to extend Government leaseholds on pasture-lands from 10 to 50 years and to have leases accepted as loan collateral; (b) for legislation to permit importation into Manila of chilled and frozen meat from the other islands to lower transportation costs and eliminate live-weight losses; and (c) development of feedgrain production to cover the expected increased demand from expanded pig and poultry breeding. During May 1971 the possibility of using Central Bank as executing agency was - A.4 - finally discarded given legal and other impediments and DBP was chosen instead. DBP, then under new management, and after passing a financial crisis in 1970/71, began to improve collections, increased its lending rate from 9% to 12% to improve profitability and obtained substantial repayments of advances made under its guarantee program. All of these were steps leading to an improved financial condition. The need to amend Republic Act 6142 to enable DBP to lend to individuals (and not only to corporations or groups) was identified. In summary, by the time of project appraisal -the following basic decisions had been taken: (a) to include pigs and poultry; (b) to eliminate dairy cat'tle; (c) to concentrate on specific project areas; (d) to downgrade the importance of collateral in obtaining loans; (e) to include financing for incremental operating costs (mainly feeds) and improve beef marketing; (f) to remove legal impediments to develop grazing lands; and (g) last, but not least, to select DBP as project agency. In retrospect, these findings and decisions proved by and large to be correct. Negotiations 2.05 Filipino representatives at negotiations argued strongly against: (a) the creation of a special project unit which would disrupt DBP's structure and staffing patterns; (b) the appointment of an expatriate project director, because it was against government policy to have foreigners hold positions of line responsibility; and (c) the appointment of specialists for piggeries, poultry and coconut beef as unnecessary. Eventually it was agreed to: (a) establish a livestock and poultry group (LPG) within DBP's Agriculture Department to manage all (and not only the project's) livestock loans; (b) organize LPG into three divisions (poultry, pigs and beef); (c) appoint a technical specialist to assist LPG's chief and to approve subloans; and (d) appoint two technical advisors to the divisions. It was also agreed that: (a) the Bank would approve the appointments of the specialists; (b) a modification of Republic Act 6142 would be necessary to allow DBP to lend to individuals and not only to groups or corporations; (c) emphasis would be placed on lending to medium- and small-sized producers. This was done at Bank's insistence, and after overcoming serious government doubts as to the financial viability of small enterprise financing. As an example, Government believed that the smallest piggeries' unit to be financed should have 100 sows, which in reality corresponded to large producers in any other less developed country; (d) the Bank would not directly finance grain imports, but it would do so indirectly by financing a percentage of incremental working capital; (e) project areas would be as specified and, as a compromise with the Filipinos, it was agreed that additional areas would be considered if advisable during implementation; (f) DBP would study the advisability for DBP's Board to delegate to the Loan Committee loan approval below US$15,000 equivalent; (g) DBP would have IBRD make a general survey to help ascertain the former's true financial and management condition; and (h) private development banks would be included as credit channels. In retrospect all of these agreements proved very useful to project implementation. A calculated risk was taken by IBRD in asking DBP to - A.5 - discharge its project responsibilities in spite of its following serious weaknesses: (a) recent and ongoing management changes (affecting staffing and -rocedures) at all levels; (b) a minimum level of indentifiable arrears and Eoreclosures of 25-30% of collectibles; (c) a substantial backlog of agricultural loans; and (d) overall understaffing and low quality of staff. Additionally, it was the first instance of IBRD financing for livestock development in the country. In these conditions DBP was being asked not only to expand livestock operations substantially over a short time period, but additionally to concentrate on lending to traditional and semicommercial smallholders who needed much more technical assistance and supervision than commercial farmers. Basic Project Description 2.06 The Borrower was the Republic of the Philippines. Total project cost was US$15.5 million of which US$7.5 million equivalent was in the form of a Bank loan. 2.07 The purpose of che loan was to assist the Government in carrying out its livestock development program through supervised agricultural credit administered by DBP, assisted by consultants. Credit was originally to be provided to:/1 (a) about 200 farmers owning less than 10 ha each for coconut and beef fattening operations in North and South Mindanao; (b) about 200 farmers owning 10 to 50 ha each for coconut and beef fattening and breeding operations also in the above areas; (c) 25 hill beef cattle ranches in Mindoro and Masbate islands; (d) 600 pig farms for breeding and fattening in Central Luzon, Southern Tagalog, and Mindanao; (e) 250 poultry-broiler farmers, in Central Luzon and Southern Tagalog; (f) 200 poultry layer farmers as in (e); and (g) three producer associations to enable each to construct a slaughterhouse in Mindanao (Davao, General Santos and Cagayan de Oro provinces). 2.08 DBP was to onlend to prodqcers either directly or through partici- pating Private Developmen:: Banks. Emphasis would be placed on lending to small- and medium-sized producers./2 The LPG (to be established) within DBP's Agriculture Department would manage the project. 2.09 The main cost i-em would be incremental working capital, amounting to US$6.1 million or about 40% of total project costs., Such a substantial alloca- tion was made to ensure that smalholder participants would have all the financ- ing necessary over and above their own resources to carry out their development plans. Another important investment category was farm buildings and equipment (US$4.9 million or 32% of total costs),, most of which was represented by pig and poultry pens. /1 See map for project areas. /2 Large producers were those having at the time of subloan application over: (a) 50 ha of coconuts; (b) 50 sows; (c) 60,000 broiler output p.a.; (d) 10,000 laying hen capacity; and (e) US$50,000 loans for hill beef ranchers. - A.6 - 3. OBJECTIVES AND RESULTS Background 3.01 The most important project objective was to help increase rapidly livestock and poultry production in line with strong projected demand increases and protein needs of the population. Related to this were savings in foreign exchange. A second goal was sectoral and institutional: to provide incre- mental medium-term credit to the livestock subsector, to improve DBP's credit and technical services, and to incorporate private banks into medium-term lending. A third goal was to make medium- and small-sized producers the beneficiaries of the financing (as opposed to previous heavy DBP emphasis on large producers). DBP satisfied the main project objectives in spite of its poor initial condition (para. 2.05) and the severe strains under which it worked deriving from a government request (carried out) to expand substanti- ally "social" lending to small fishermen all over the country (para. 3.24). Project Production Objectives 3.02 Given that the appraisal report estimates did not allow for physical contingencies, project size diminished through inflation, (investment costs increased by about 50% from appraisal through commitment). The project's total production performance is satisfactory (see Table below). The number of participants financed, however, greatly exceeded appraisal expectation and therefore project benefits have been spread more widely than originally proposed. Incremental Project Production ('000 tons) Appraisal Revised Achievement estimate Actual Year 5 projection to date % Year 5 Year 10 (1977 estimate) Year 10 Year 5 Pork 7.74 7.74 8.60 8.60 111 Poultry meat 4.55 4.55 3.17 3.17 70 Eggs 9.34 9.34 2.95 2.95 32 Beef 0.35 1.39 n.a. 0.30 - Subtotal 21.98 23.02 14.72 15.03 64 Copra 0.76 2.46 0.15 0.76 20 Financial and Economic Objectives (a) Summary 3.03 Fulfillment of these is difficult to verify accurately given the dearth of historical data at farm level. DBP-conducted surveys, (even though of limited value, see Annex 1), subloan appraisals and sampling, however, - A.7 - indicate that the project will fulfill its economic objective regarding pigs and broilers; to a lesser extent regarding layers and very little regard- ing cattle, especially in bill ranching. Given that pig and broiler invest- ments represented 86% of the total (as opposed to 50% estimated at appraisal, para. 4.06,-Table), the overall economic return of the project is projected to be about 24%, below expectations at appraisal (36%), but still highly satisfactory. (b) Piggeries (Annex 2) 3.04 Financial rates of return to producers on the basis of an incremental 6 sows per herd are estimated at 20% in Central Luzon/Southern Tagalog and at 35% in other areas, the difference originating in meat price and feed cost differentials. In the absence of farm records and given the large numbers of beneficiaries operating in different circumstances, these estimates can only be considered tentative. They are confirmed by DBP-prepared farm development models (which closely paralleled appraisal estimates) adjusted to reflect more accurately the smaller than projected sales weight of fattened pigs, due to lower feed quality (although no accurate measurement of this is possible). The overall economic rate of return for this component is estimated at 25%, which is only slightly lower than the 29% projected at appraisal.jL Evidence gathered by a survey, although inconclusive, shows that there may be an inordin- ately wide range of performance among project beneficiaries. This points to the need for adequate technical assistance to farmers in future projects. 3.05 By and large the most important contribution of the project to the subsector was in providing a package of medium- and short-term financing for pen-building, and sow and feed purchases. Concrete-floored and partitioned pens permitted increasing the number of sows per farm without adverse effects on health and avoiding feed waste. Sows financed are estimated at 14,000, which was roughly one third of the incremental sows needed to maintain per capita pork consumption levels and, therefore, represented a substantial con- tribution to present and future pork production in the country. The impact of the project among average and above average producers seems to have gone beyond project-financed investments. Sampling and PC mission visits show that beneficiaries in these categories did not stop at a new, higher level of pro- duction, but continued expanding their herds using profits generated by project investments. Price cost trends reflected in the financial analysis indicate more lavorable economic conditions for pig breeding and fattening in Iloilo and Mindanao as-compared to areas around Manila. This should be taken into account in future lending. /1 Appraisal estimates for project components'are of financial returns, but these are deemed sufficiently close to economic returns to make their comparison valid. - A.8 - (c) Broilers (Annex 3) 3.06 Financial return to producers in Luzon (where the large majority of farm investments were made) on the basis of an incremental 5,000 broiler flock base is estimated at about 31%. This estimate is also based on DBP- prepared farm development models adjusted on the basis of evidence (although inconclusive in itself) gathered by a field survey, and by other field observations to reflect a lower (4.4 instead of 5) number of batches per year and a higher (3:1 instead of 2.5:1) feed conversion ratio. The overall economic return of this component is estimated at 32%, which is somewhat below the 42% return estimated at appraisal, but still very satisfactory. There are indica- tions, however, that there is a very wide range of performance among producers, which calls for technical assistance to the subsector in future. Proportion- ately more lending should be made in future in outlying areas to profit from more favorable price/cost relationships. (d) Layers (Annex 4) 3.07 Average layer returns are more difficult to estimate because of the unreliability of DBP's farm models which did not record many seasonal price/ cost fluctuations experienced from 1974 through 1976. From analysis of individual files, however, the economic rate of return is estimated at 18%, based on an average 17% financial return in Central Luzon, where most of the investments were made. This is substantially below the appraisal estimate of 47% but still acceptable. The main reasons for the lower return seem to have been low egg prices and high feed costs in the Central Luzon and Southern Tagalog areas (where most of the investments were made) in 1975 and 1976,/1 compared to the outlying areas (Annex 4, Table 3). Very wide variations in efficiency at farm level point to the need for technical assistance to producers. In spite of the above constraints it is estimated that project- generated production represented about one third of incremental demand in Lhe period 1973-1976. In future lending should be channelled mainly to the more economically attractive areas outside of Central Luzon, which were included under the project and are included under Livestock II. (e) Cattle (Annex 5) 3.08 Coconut/beef breeding/fattening investments are projected to yield an average 13% financial rate of return at farm level based on DBP farm appraisal models adjusted to reflect 60% (instead of 80%) weaning rate and understocking. On this basis the economic rate of return is estimated at 14%. This is very low when compared to the appraisal estimates of 19% for breeding/fattening, and of 36% for fattening. The main reasons for this are: (a) low domestic copra prices; (b) higher than projected fencing wire costs; (c) scarcity of breeding, and of fattening stock, which resulted in understocking; and (d) overoptimistic assumptions made at appraisal. Important obstacles (Annex 5, para. 1) will have to be surmounted before expansion of production can be brought about. /1 Prices picked up in 1977 (Annex 4, para. 4). - A.9 - 3.09 Analysis of investments in hill beef ranching (Annex 5) made on the basis of PC mission observations (given that appraisal projections and DB models were found unrealistically optimistic) are estimated to yield financial retu:cns of the order of 5% to 10%, far below the 21% estimated at appraisal. Factors similar to those affecting breeding under coconuts prevailed here. Institutional and Sectoral Obiectives These are grouped under four headings: legal aspects, DBP, Private Development Banks (PDBs) and project's contribution to agricultural credit resources. (a) Legal Aspects 3.10 In response to findings made at appraisal Presidential Decree 81 of January 1973 enabled DBP to relend the proceeds of foreign loans not only to cooperatives, associations and private corporations as in the past, but also to individuals and partnerships (a prerequisite to project implementation), thus clearing the way for satisfying a substantial potential loan demand for farm/ranch development. This represented an important contribution of the project in view of the substantial difficulties encountered in setting up farmers' associations. 3.11 Also in response to recommendations made at appraisal a Presidential Decree of October 1972 regularized and stabilized leasing of grazing lands. The Decree established that: old leases would be extended from the previous 10-year to a new 25-year limit; new leases would also be for 25 years and renewable for an additional 25 years; and leases could be used as collateral for loans. The Decree was intended to set the basis for sustained and major improvements of ranch lands by providing the leaseholders with security and permanence, as well as with the possibility of borrowing for ranch development purposes. However, restrictive lease covenants and continued land tenure dis- putes with neighboring small farmers and with squatters (foreseen at appraisal) limited incentives for hill beef ranch investments by medium-sized and larger lessees. Given high and increasing population pressure on grazing lands this situation may worsen steadily in future. (b) DBP 3.12 Project impact on DBP will be analyzed in the following sequence: project organization, staffing, and training; lending policies; appraisal standards; subloan processing; recording; reporting; supervision, farm records, monitoring and evaluation; accounting and auditing; arrears; and operating results. The project fulfilled its organization, staffing, train- ing and lending policy goals, which were the basic ones in this first phase of development. Performance was inadequate in the others, but this was largely due to prevailing circumstances. Action is being taken on most of these under Livestock II and other Bank-supported projects. - A.10 - 3.13 Project Organization, Staffing, and Training. Improvements in these were substantial. At the time of appraisal the Agriculture Department served only as an administrative unit which processed documents for the chairman's and the Board's consideration. The Department's staff consisted of only 26 professionals (of whom 19 were at headquarters) and a handful of typists, which forced professionals to carry out many extraneous tasks. Contact with the field was weak and erratic. The Department's five divisions, e.g. appraisal, supervision, loans, branches and agencies, and loan releases and records had overlapping responsibilities. Appraisal and supervision reports were not standardized, were largely narrative and did not include financial statements. Value of collateral was the basis for lending but even then its usefulness was further restricted because asset valuation was often outdated. 3.14 During project implementation, DBP: (a) reorganized its agricultural lending by commodity groups; (b) established the Livestock and Poultry Group (LPG); and (c) established a planning and evaluation group. 3.15 The LPG was staffed initially with 11 technicians, and subsequently with an additional 15 (January, 1974), 18 (August, 1974) and 11 (December, 1974). Staffing should have been more than adequate for appraisals and supervision of farm investments during, and one year after, disbursement at farm level./1 Lack of vehicles and typists, transfer of staff to other lines of credit (para. 3.24)/2 and possible DBP lack of commitment to, technical assistance /3 limited the latter. 3.16 Staff (46 at LPG and a similar number outside LPG) were well trained and received good technical support from the full time specialists hired, who were attached to the LPG's head office, the Cattle Division, and the Pig and Poultry divisions. (Their terms of reference are given in Annex 6.) 3.17 By the time of arrival of the specialists in the country the DBP had accepted some 200 loan applications. In spite of the pressure of pro:- cessing loan requests (which had to be approved by the specialists) the latter: /I Subloans were approved as follows: 200 in 1973, 580 in 1974 and 1,900 in 1975. We assume an additional 30% of loan requests denied, plus 3 visits during disbursement and 3 additional visits in the year following to provide adequate initial technical assistance in conditions of good access to farms, which was the case for more than 90% of subloans which were made in the areas surrounding Manila and other main population centers. /2 These, as well as cumbersome procedures (para. 3.23) and lack of specific administrative guidance for the project (para. 4.04) delayed subloan processing and disbursements. /3 DBP insisted all along that this should be the responsibility of the Bureau of Animal Industry (BAI) as arranged eventually under Livestock II. - A.11 - (a) designed an appraisal format and tables of production coefficients for each project component; (b) provided the technical field input in six eight-week-in- service training courses conducted by management for 40 staff and six-week (later expanded to nine-week) preservice training courses for 122 graduates of agricultural schools, many of whom were recruited by DBP (Annex 6, Appendix A); (c) published 32 technical bulletins which were distributed to headquarters and field staff (Annex 6, Appendix B); (d) conducted three implementation surveys, one each for broilers, layers and pigs (Annex 1), and four minor specialized surveys. Staff recruitment and training, which were basic project aims under this first phase of livestock development, were carried out satisfactorily. 3.18 Given the above workload and that their terms of reference required the specialists' approval for all individual loans, and because of the pressure of lending (para. 3.14 footnote 1) technical advice to beneficiaries, assistance in introducing farm records, and work on feeds (all of which planned at apraisal) were very limited. In June 1974 it was decided that the specialists would delegate their subloan review and recommendation functions for loans up to P 20,000 (US$3,000) and the following year without limitation to LPG's division chiefs and to the field branches which by then were felt to be in a position to assume these responsibilities. This was a sensible decision but its impact on technical assistance at farm level was not significant due to specialists' other responsibilities, (e.g. field surveys). 3.19 Additionally, and also as agreed at the'negotiations, two short- term consultants were appointed, one for pig breeding, and another on the use of sugarcane byproducts for livestock production. (Their Terms of Reference are given in Annex 6.) The former visited the Philippines in March 1974 and the latter in February and October 1974; July 1975; and January and July 1976. 3.20 The review and recommendations of the short term consultants (Annex 6, Appendices C and D) should help with the introduction of technical improvements at farm level under Livestock II. 3.21 Lending Policies. Lending to smallholders was greatly emphasized and financial viability of investments (as opposed to value of collateral) became the main basis for subloan approval. These were important achievements. 3.22 Appraisal reports were largely standardized and made much more meaningful and comprehensive. This was an important improvement. However, they still lack consistency in their review of farmers' equity, sources of finance and projected sales prices, (costs and prices should be updated more reguLarly)./1 All of these increase lending risks, especially among small- holders. Much closer supervision by head office is needed to avoid these. 3.23 Subloan processing was slow. The time it took from loan request to the first release of funds to beneficiaries increased from about 4-1/2 months before the project to more than 6 months by February 1976. The main reasons /1 See Livestock II June 1977 Supervision Report, Annex 1, Appendix 1. -- A.12 - for this during 1972-74 were lack of supporting administrative staff and the delayed instructions to branches, (para. 4.04) as well as cumbersome procedures, and in 1975 also the strong subloan demand under the project, which contributed to a sustained 300 subloan application backlog in 1975 and 1976. These weaknesses apply to all DBP agricultural loans. 3.24 From mid-1974 to end-1976 an additional major factor in slowing subloan processing was the phenomenal increase in DBP lending outside the project, under direct orders from the Board of Governors, especially to finance small fishermen.I1 The increased lending overwhelmed DBP's administrative and manpower resprces (staff increased by only 20% that year) spilling over into the livestock project's implementation and resulting in project staff being taken off their duties often to work on credit lines of higher priority to DBP. This situation should improve in future with the discontinuation of fishermen's loans and with the increase in lending authority to branches./2 3.25 Subloan recording. This was inadequate initially and remained inade- quate at branches during project implementation. (See Annex 7 of the April/May, 1976 Supervision Mission report, the findings of which were confirmed by the PC mission.) Branch reporting to headquarters and head office "official" recording remained erratic, which resulted in slow recording and "bunching."/3 Head office, while better organized than branches, still exhibits major weak- nesses, e.g. the electronic data processing monthly priqtqts were found to be inaccurate as recently as eqd-May 1977. This is a DBP-wide problem. 3.26 Reporting to IBRD on progress 9f the project wg@ in4qWgate, Reports for the period Septgebr 1973 to June 1974 wtre nt acqiv#d by the Bank until September 3, 1974. Similag 4elays qccugde4 wih 1975 a4 N4pph 1976 reports. These problems Priginated in DBP's poor regrdig pystem. Quarterly reports did not contain analysis of loans by geographic areas, /1 Agricultural loans increased by 37% to 64,700 from mid-1975 to mi4-976. /2 Although this may have been overdone. Branch managers' loan authorization capability was increased from F 59,000 to P 159,QQQ (US$20,QOQ) in August, 1976. This means that practically 41 1,Kqultural loan; (ip and outside of the project) are approved by branches 419 * Tn view of weak- nesses observed in the mapagement of branches y!s,itq4 gqd qth@r@, it might be advisable to set leroing limits based gn indivial uni p formance and subloan types. /3 The April/May 1976 supervision mission noted this "bupchiqg" of loans approved (paga. 6.03 of December 2, 1976 Supegy iqg Report). Tbis reflected dating based on formal Board confiringtipp of loans approved as opposed to actual approals (leading to immediate disbursements) by head office and branches, which were made in a gradually increasing fashion (March 9, 1977 Supervision Repprt, Annex 13). - A.13 - records of arrears, or references to staffing, procurement, response of farme:cs/ranchers, outstanding problems and project evaluation, as suggested by IBRD in the proforma report given to LPG's manager in September 1972. Reports should have also contained information on loans restructured and rescheduled. (This was requested by IBRD in 1976.)/l The same weaknesses explained above made it very difficult for DBP to prepare a project completion report. 3.27 Supervision, farm records, monitoring and evaluation. Subloan supervision and technical assistance to farmers were minimal in spite of adequate project staffing (para. 3.14) because staff were put to work on other jobs (para. 3.24). They would have contributed to increasing efficiency at fairm level./2 3.28 Recording at farm level was not introduced as planned at appraisal. Three surveys were conducted by the specialists, but the lack of farm data, scientific method and continuity make many of their findings question- able. Random sampling, requested by IBRD in February 1975 was not started until November 1976. As a result of the delay no monitoring was possible. DBP conducted an evaluation survey November 1976-April 1977 based on an outline provided by IBRD. The survey was not completed as planned in time for the PCR mission but preliminary results indicate deficiencies which will require attention in future monitoring surveys (Annex 1). The planning and evaluation group (which is in charge of monitoring) reports to a governor who is in charge of only one of the two agriculture departments. This is unsatisfactory, inasmuch as the group has to evaluate both agriculture depart- ment's activities, and also because it cannot have the necessary freedom to criticize past performance when its supervisor is also the chief of one of the line departments being criticized. Farm records and monitoring remain areas of high priority. 3.29 Accounting and auditing were also deficient. Accounting suffered from incomplete filing in branches and erroneous monthly printouts in head office. The only audit report made (for FY75) was delayed, was excessively concise and erroneous, e.g. prorated overhead costs, commitment charges and interest payments to IBRD were not included in the financial statements and substantial income was wrongly allocated to the project when it belonged, to livestock loans made under DBP ordinary lines of credit. The audit information in turn was mainly descriptive, not analytical or critical and was otherwise inadequate .(Annex 7). Action on DBP's overall auditing is being taken under IBRD-sponsored industrial lending. /1 As recommended by IBRD the support of DBP's controller in preparation of accurate portfolio data and analysis, and of quarterly reports is essentia4.L at this stage. /2 The magnitude of this is difficult to ascertain, but there was certainly negative impact as indicated by the three field surveys (see paras. 3.03 through 3.08 above and Annexes 1, 2, 3, 4 and 5). Nonetheless, some improvements were obtained in critical areas, such as housing for pigs. - A.14 - 3.30 Arrears. The arrears situation is symptomatic of DBP's main manage- ment and administrative problems. Information on arrears for all DBP agricul- tural loans is clearly inadequate. Accurate information on project arrears by the branches is lacking but the situation is believed to be serious because of poor record keeping and collection methods./l Although data on head office project arrears were not altogether satisfactory they provide a useful indicator. They show arrears increasing up to June 20, 1976 and slowly decreasing there- after, but still being at a critical level as shown below: LIVESTOCK I - HEAD OFFICE ARREARS SITUATION (March 31, 1977) (P thousand) Principal Interest Total Arrears at beginning of quarter 1,559 1,839 3,398 Installments due during quarter 1,302 1,107 2,409 Subtotal 2,861 2,946 5,807 Collections during quarter 680 897 1,577 Arrears at end of quarter 2,180 2,049 4,230 Collections as % of collectibles 24 30 27 Period in arrears: less than 6 months: 40%; 6 to 12 months: 33%; 12 to 24 months: 22%; over 2 years: 5%. The above table shows arrears at 73% of collectibles by loan volume at the latest recorded quarter. Arrears represented 60% of collectibles by number at the same date distributed as follows: Total Collectibles In Arrears % Piggery Subloans 485 267 55 Poultry Subloans 204 149 73 Cattle Subloans 14 4 29 .Total 703 420 60 /1 The PC Mission obtained data directly from the Iloilo, Cebu, Iligan, and Davao City branches. Project arrears were found to be of the order of 45% to 70% of collectibles by number and between 60% and 80% of collect- ibles by volume. - A.15 - As shown by the above table the project arrears situation at head office (where about 75% of the volume of lending originated) is very serious, requiring corrective action under Livestock II (payments of Interest on Subloans under this loan are beginning to fall due) (see Annex 1, Appendix 1 of Livestock II, June, 1977 Supervision Report for action recommended on this). Given that the project-induced financial results for the majority of project beneficiaries are deemed to be good (paras. 3.02 through 3.07), the lack of subloan collection originates largely in lack of collection staff, proper procedures and most importantly (and until recently) lack of DBP determination to recover loans. The situation is even worse for all other livestock lending. At March 31, 1977, 9,611 of the 10,446 APD II head office agricultural loans (most of which were for fisheries) were in arrears and a significant proportion of these may have to be written off. DBP's management has recently appointed special collection task forces in an effort to improve the situation. However, much more complete data on arrears are needed to ascertain their true status. Also a thorough review of loan processing and collection should be made concomitantly to determine more accurately causes and possible remedies. As an example, when a property is auctioned after foreclosure the former owner has one year from the date of registry of the sale certificate for repossessing it (five years if it is a homestead). This in effect discourages third parties from buying and burdens DBP with property management, which is first of all extraneous to its banking activities; second, a money-losing proposition; and third, absorbs substantial manpower and administrative resources. Given this difficult situation DBP leans over backward to avoid foreclosures by granting generous repayment conditions,e.g. extending repayment periods, not charging penalties for delays,l/ rolling over loans, and in so doing eliminating most of the incentive for prompt and adequate subloan repayment. At December 31, 1976 less than 10% of the loans in arrears had been passed on to the DBP's Legal Department for legal action. Rollovers, on the other hand, may hide a worse arrears situation and should be analyzed exhaustively. Substantial improvements in collections should be obtained before major new lending is resumed, preferably on a branch-to-branch and head-office basis and based on past performance. (See June 1977 Live- stock II Supervision mission report). 3.31 Operating Results. Given the arrears situation described above, project-derived operating results for DBP may be poor in spite of the 4-3/4 point spread (7-1/4% interest rate charged to DBP and 12% interest rate charged to farmers) provided to DBP under the project, which should have been adequate to cover costs and risks. (c) PDBs 3.32 The participation of PDBs (para. 2.08) should have never been expected at appraisal, because PDBs were and still are legally barred from lending for livestock for longer than three-year repayment periods (Section 31, para. B of the General Banking Act of 1949 and 1956 Circular regulating PDBs). PDB's lack of participat.on: (a) deprived the project of a potentially useful institutional goal, that of creating an additional medium-term credit channel for smallholders; and (b) increased DBP's administrative burdens. 1/ DBP has indicated that: this is not an accurate statement. - A.16 - (d) Contribution of the Project to Agricultural Credit Resources 3.33 The Bank loan did not substitute for credit which would otherwise have been available from other sources. Rural banks, private development banks, the Private Development Corporation of the Philippines, the Philippine National Bank and DBP alone would not have financed project beneficiaries because of: (a) unacceptably low loan limits per borrower and the policy of not financing incremental operating expenditures (rural banks); (b) excessive limitation of repayment periods (PDBs); (c) concentration on big borrowers (PDCP); (d) concentration on short-term lending (PNB); and (e) limited funding (DBP). The loan, therefore, was instrumental in channeling additional funds to the credit system, and in satisfying substantial needs of beneficiary smallholders for long-term purposes. (e) Summary and Overall Remarks 3.34 The project's institutional and sectoral goal as spelled out in the appraisal report was "to improve the effectiveness of DBP's agricultural credit services" [para 3.01 (b)]. Specific measures taken greatly improved DBP's ability to lend to livestock farmers, plus DBP's organization, staffing, lending policies and appraisal standards, all of which were basic prerequisites during a first phase. DBP fulfilled the objectives successfully in spite of its poor initial condition and subsequent operating constraints. 3.35 The project was not successful in introducing technical assistance and monitoring, which were specific (albeit less important during a first phase) institutional goals. Here again DBP's constraints and the emphasis placed on rapid disbursements under Livestock I had a major bearing. Given their future relevance DBP should be made to understand the great benefits to itself originating in technical assistance, farm record keeping, close monitoring and evaluation as means to improve its investment criteria, to diminish lending risks, and to enhance economic benefits of investments. IBRD is providing more guidance and technical support for these under Livestock II. 3.36 Subloan processing, recording, reporting, accounting, auditing and collections were inadequate but the heavy burden thrust on DBP had a major bearing on those too. "Social" lending to small fisheries was discontinued in late 1976 and improvements are being made in subloan processing, recording and reporting under the Second Livestock Project following supervision recommendations made in the second half of 1976. Action on arrears is being undertaken on a DBP-wide scale (collection task forces have been established and quarterly reporting on arrears is now obligatory) but analysis of data, and of causes of arrears and possible remedies need to be made concomitantly to increase the effectiveness of collection efforts. The above are problems affecting all of DBP's agricultural lending and can only be solved on an institutional (and not on a project) basis. - A.17 - 3.37 In summary, the main project institutional goals were reached, in spite of DBP's poor initial condition, and the heavy, social lending respon- sibilities thrust upon it by Government. Action on continued administrative improvements is being taken at present. Social Objective 3.38 The project was successful beyond expectations in channeling credit to smallholders. This was most evident in the case of pigs, where 2,237 pro- ducers (or 82% of the total) benefited instead of the 600 originally planned, with the average investment per farm (US$5,140) much lower than estimated at appraisal (US$9,333) (para. 4.06) resulting from financing smaller individual herds. Experience under the project, therefore, ran contrary to experience under most projects, where concentration in fewer beneficiaries is the rule. The reasons for these were the very large numbers of piggery smallholders in Central Luzon and Southern Tagalog (where 85% of investments were made and which in effect made smallholders the typical farmers), and DBP's commitment to lending to poor farmers. 4. SPECIFIC PROJECT ELEMENTS Effectiveness 4.01 Effectiveness was delayed from September 26, 1972 to November 9, 1972 to finalize and approve the appointment and terms of reference of the Technical Specialist. This short delay was of little consequence. Project Areas (see map) 4.02 The original project areas were well chosen. Only Mindoro (hill beef) had to be abandoned. for technical reasons. Project areas were expanded (as allowed during negotiations) in mid-1974 regarding: coconut/beef to include Misamis Occidental and Southern Cotabato in Mindanao; hill beef to include Bukidnon, Agusan del Norte and del Sur, Surigao del Norte and del Sur, all in Mindanao; pigs and poultry to include Cebu, Iloilo, and Mindanao, (Misamis Oriental, Davao City, Davao del Sur, del Norte and Oriental). The inclusion of these new project areas was warranted because it was made in response to a strong demand for subloans and to favorable location of DBP branches, input supplies and consumption centers (paras. 3.03 to 3.06). - A.18 - Disbursements 4.03 Cumulative disbursements compared to appraisal estimates were as follows: --------US$ million--- ----- 1973 1974 1975 1976 1977 1978 Appraisal 1.8 4.3 6.5 7.0 7.3 7.5 Actual 0.2 1.5 5.2 7.5 - - Note: Figures rounded. 4.04 As shown above, disbursements were much slower than planned in the beginning, but they accelerated dramatically from 1974 on to end 15 months ahead of schedule. The basic reasons for the slow start were the lack of office staff to support subloan appraisal work, the delayed instructions to branches on the project's-nature, opportunities and procedures (Circular 704 on these came out only in March 1973 or ten months after the Loan Agreement) and cumbersome loan processing. These were remedied to some extent. Another reason was that applications for IBRD reimbursements were made much later than field loan releases due to initial slow branch reporting to headquarters, and slow Board approval. Subsequent speed up resulted in 1975/76 "bunching" (para. 3.25, footnote 3). The extension of project areas, increased discretion- ary lending authority to branch managers, and the increases in the number of DBP branches and staff involved contributed to accelerated disbursements. Allocation of Loan Proceeds 4.05 The following table compares allocations at appraisal and actual: Category At appraisal Actual I Subloans for equipment, materials, supplies and working capital for development of farms and ranches 6,000,000 7,492,318.31 II Subloans for equipment, materials, supplies, working capital and civil works for slaughterhouses 600,000 - III Technical assistance 550,000 7,681.69 IV Unallocated 350,000 - Total 7,500,000 7,500,000.00 - A.19 - The major shift of funds from Categories II and III to Category I was due to: (a) the lack of suitable slaughterhouse proposals; and (b) the financing of the technical experts under a New Zealand Government grant. As to the former, sev- eral proposals were made, but unrealistic investment costs, as well as inade- quate financial arangements and liquidity position of the prospective bene- ficiaries, precluded approval. A study conducted in May 1975 (see July 1975 Supervision Report, Annex 7) shed doubt on the strategy and financial viability of the slaughterhouse component. Lending to Farms and Ranches 4.06 This compared with appraisal estimates as follows: --------------Appraisal---------------------------Actual--------------- Volume Unit cost Volume Unit cost No. (%) (US$ mln) (%) (US$) No.b (%) (US$ mln) (%) (US$) Poultry Broiler 250 (17) 2,.1 (16) 8,400 267 (10) 1.9 (12) 7,100 Layer 200 (14) 3,.1 (24) 15,500 84 (3) 1.2 (8) 14,200 Pigs 600 (40) 5.6 (43) 9,333 2,237 (82) 11.5 (74) 5,140 Hill Beef 25 (1) 0.8 (6) 32,000 46 (2) 0.5 (3) 11,170 Coconut/beef fattening 200 ) (14) 0.3 (2) 1,500 ) breeding/ ) ) 71 (3) 0.45 (3) 6,360 fattening 200 ) (14) 1.1 (9) 5,500 ) 1,475 13.0 /a (100) 2,705 15.5 (100) /a The balance was for slaughterhouses and for technical services, which were reallocated. /b This figure is tentative and reflects the best available estimate. It may be too high regarding number of beneficiaries and/or farms, since more than one loan may have been given to the same farmer in a number of instances. 4.07 The discrepancies between planned and actual distribution of invest- ments reflected economic conditions prevailing in the subsectors which favored piggery development. The relatively greater share of pig financing in turn increased the proportion of loans made by head office and in the Manila area (75% and 85% respectively of project investment) compared to appraisal (65% and 56%). Economic conditions prevailing in other areas are likely to increase the relative size of investments in selected provinces under Livestock II. - A.20 - Fulfillment of the Main Loan Covenants 4.08 Section 3.02 (a): "the Borrower shall cause DBP to relend the proceeds of the Loan ... to beneficiaries for investment projects either directly or by relending to private development banks for further relending to beneficiaries." This clause was complied with, although no lending through private development banks took place. 4.09 Section 3.02 (b) and (c): "the Borrower shall cause DBP to establish and maintain a separate project account to be used exclusively for the Project and specify what should go into the account." This was complied with. 4.10 Section 3.03: "the Borrower shall cause DBP ... to make all subloans on terms and conditions satisfactory to the Bank." A small number of subloans (amounting to less than US$200,000, of which most was represented by one subloan) were made on different terms and conditions to those agreed withIBRD due to misunderstandings at the branch level. This was corrected (although not before late 1975) by transferring all these subloans from the project,account to normal DBP credit lines. 4.11 Section 3.04: DBP established a Livestock and Poultry Group (within the Agriculture Department) satisfactory to the Bank. The group was headed by a qualified senior officer who was appointed in consultation with the Bank. 4.12 Section 3.05: The Technical Specialist, the two production specialists (pigs/poultry and coconut/beef) and the short-term consultants on pig breeding and on the use of sugar cane byproducts for livestock production were appointed within the specified time periods after the experts and their terms of reference were approved by the Bank. 4.13 Sections 3.06, 3.08 (b) and 4.03 were inoperative since no slaughter- houses were financed. 4.14 Section 3.09: "The Borrower shall take all necessary measures to ensure that the feed grain required for the Project shall be made available to the beneficiaries at reasonable prices as needed." This clause was complied with as it referred to making imported grain available to individual producers (and not only to feed millers), which was the intention at appraisal. 4.15 Section 4.02: Only one certified set of project financial accounts and the copy of one audit were sent to the Bank (para. 4.09). This was clearly inadequate. 4.16 Section 8.01: (a) as a condition of effectiveness the execution and delivery of the Subsidiary Loan Agreement of May 5, 1972 on behalf of the Borrower and DBP was duly authorized by all necessary corporate and governmental bodies in time; (b) DBP established the Livestock and Poultry Group also in time; and (c) although the Technical Specialist was appointed as agreed this was done later than specified, which delayed effectiveness from September 26, 19721to November 9, 1972. The latter was inconsequential. - A.21 - 4.117 Schedule 5, para. 7.1: DBP supplied to the Bank a standard form of subloan agreement. 4.1.8 In summary, Government and DBP complied with the loan agreements except for auditing. 5. BANK'S PERFORMANCE 5.01 Bank's performance must be analyzed in three phases: (a) during preparation; (b) at appraisal and negotiations; and (c) during implementation. 5.02 During prepara:ion Bank performance was good in defining the problems and in orienting the project towards their solution. A major decision to include pigs and poultry proved crucial to the success of the project (para. 2.04). 5.03 At appraisal and negotiations additional improvements in project design were made, including emphasizing lending to smallholders, establishing the LPG, and appointing the specialists (para. 2.05). A calculated risk was taken by IBRD in proceeding to make a loan to DBP, which at the time was in poor management and financial condition. This decision was correct. 5.04 Although the project's slaughterhouse component had to be dropped for lack of suitable proposals, this was not detrimental to the project given that the funds thereby freed were used to meet the main goal of increased meat production. 5.05 On the negative side: (a) loan demand and productivity coefficients for cattle development proved overoptimistic; and (b) it should have been evident to DBP and to the Bank that PDBs were legally barred from lending for livestock with repayment periods above three years. This resulted in a loss of project's institutional impact and further burdening of DBP's administrative capability. 5.06 During implementation: The interval between the first four super- vision visits was nine months on average. Bank full supervision missions could with advantage have been more frequent, but staff constraints prevented this. The paucity of supervision visits and changes in supervision staff (five sets of staff for eight supervisions, partly due to the Bank's reorgan- ization), together with inadequate quarterly reporting (para. 3.26), and auditing (para. 3.29) resulted in an unsatisfactory condition until mid-1976 when the first thorough review of project administration took place. This situation, however, was not basically detrimental to project performance, e.g. farm appraisals and investments were made as planned, for the intended types of beneficiaries and for the right purposes. It is difficult to see how, given the above limitations, supervision could have been made more effective: (a) Missions through 1975 concentrated on technical and organizational matters. - A.22 - References were made in supervision reports to (i) the serious problem posed by insufficient supplies and high prices of concentrate feeds for poultry (mainly due to the influence of millers); the need to strengthen technical support to piggeries to maximize returns; the disappointing progress of the beef cattle component; and the need for DBP to encourage project beneficiaries to form farmers' associations and establish small feed-milling operations to counterbalance the growing control of large integrated feed millers (July 1973); (ii) the shortage of feeds for poultry development, and the scarcity of feeder cattle, which was affecting the coconut/beef component (May 1974); and (iii) the excessively long average subloan processing time at 190 days, and the need to reduce it to 60 days as a prerequisite for the appraisal of Livestock II (January 1975); (b) the April/May 1976 supervision mission made a thorough review of project administration, and flagged the problems of subloan processing and reporting, and of arrears./l Bank staff reviewed nine large subloan requests (Schedule 5, clause 5 of the Loan Agreement) and in so doing helped improve DBP appraisal standards. 5.07 More attention might have been given by the Bank to the provision of technical assistance to beneficiaries, which was important to smallholders. However, given the constraints under which DBP was operating (para. 3.23) and the emphasis on lending, it is doubtful whether more action could have been obtained on these during this first phase of development. IBRD tried several times to persuade DBP to improve their monitoring and evaluation procedures including the provision of a monitoring specialist ,under the second livestock loan, but this was rejected by :DBP -at gggt4ong 4otthe grounds that DBP already had -the necessary expertise and *that fpreign consult:- ants were not acceptable to DBP. 5.08 References in supervision reports (e.g. July ;1973 and May 1,9-7,) tp PDB's not participating in the project because of their ,eluct nce,to submit to DBP's supervision, or because of 1the unacceptable risk -and p.rof-itabil-!ty leeis of lending under the project were not accurate. 5.09 Granting lending authority up to P 150,000 to branches is excessive in the case of agricultural loans, most of which fell below -this dimit, ,&given the inefficiencies observed (in MarchiApril, 1976) in -branch .admi-istrat-ion. In delegating authority and fixing ceilings for loan approvals by branches, there should be selectivity, taking into account -the type of -projects involved and the competence of the branch staff .concerned. 6. CONCLUSIONS AND LESSONS LEARNED 6.01 The project's economic, -sectoral/institutional and social pbjectiyges were fulfilled in difficult circumstances given DBP's ,ppoy init,ial copdition and difficult operating circumstances. The bases were set for further improye!- ments and expansion of livestock development under the Second Livestock ,Project. /1 The latter could not have been spotted before, since the bulk of lending took place in late 1974/75. - A.23 - 6.02 The basic lesson learned should be that more attention should be paid to institutional. and credit aspects of livestock projects in the Philippines in future. DBP and the Bank have agreed, however, that this should be done by dealing with DBP's agricultural lending as a whole. Other lessons learned and resulting improvements introduced under Livestock II refer to: (a) quarterly reporting; (b) improving the arrears situation; (c) new systems and procedures; (d) need for technical assistance to producers; (e) a feed quality control laboratory; (f) establishment of broiler producer associations; (g) improving existing municipal slaughterhouses; (h) more emphasis on cattle breeding; and (i) more adequate repayment and grace periods for hill beef ranch development. 6.03 DBP should review its policy for granting loan approval powers to branch managers by making it more selective (see para. 5.09). 6.04 DPB's support staff must be strengthened to free appraisers and supervisors to do more field work and subject matter specialists should be appointed to keep up technical standards of field staff. 6.05 An audit requirements list should be sent to DBP by IBRD based on the findings made by the April/May 1976 supervision, the PC and other Bank missions (Annex 7, Appendix) to ensure that future audit reports will be adequate. 6.06 DBP has indicated to IBRD that lending under Livestock II has been slowed down until the necessary improvements in processing and loan recovery have been made. DBP should now proceed cautiously taking into account its overall capacity for loan approval, processing, execution and recovery. 6.07 IBRD is helping DBP in establishing project monitoring by providing specific guidance and technical assistance. A farm recording/monitoring proposal (Annex 9 of Livestock II's June 1977 Supervision Report) applicable to all future DBP agricultural lending should be discussed with DBP management in the light of the recent establishment of a Plans and Programs Unit within DBP, which, among other matters, is expected to undertake a monitoring func- tion. 6.08 Steps should be taken, possibly through a resolution of the Monetary Board, to enable PDBs (which are extremely interested) to participate in future livestock development.  ANNEX 2 Page 1 PHILIPPINES FIRST LIVESTOCK PROJECT Pigs 1. The technical coefficients for the pig model projected at appraisal agree well with the average from a DBP pig survey (Annex 1) and those used in the DBP development models (Table 1). The survey shows that the number of pigs sold per sow per year ranges from about 8 /1 to 17.9 with the weighted average at about 11. Based on calculations from DBP investment models which include actual prices and costs (Table 2) it can be shown that a production Level of about eight pigs/sow/year must be realized to enable the borrower to repay the loan out of funds generated by the investments. It would appear, therefore, that production in the Philippines is a very profitable business. However, it is clear that management is a serious problem (para. 2) and in the absence of careful monitoring it is not possible to establish the percentage of farmers whose production is inadequate to enable them to meet repayments out of funds generated. 2. The DBP survey shows that there is a broad range in the level of performance of pig farms financed under the Project and that serious husbandry and management problems are prevalent. The main husbandry/management weaknesses Identified include: (a) poor utilization of pen space although some improvement is being made; (b) low sow productivity arising mainly from a long farrowing interval (average 222 days); (c) creep feeding of suckling pigs is not practised by about 60% of producers; (d) fifty percent of farmers do not keep records and only about 30% keep records that are useful as an aid to husbandry and management; (e) poor quality rations were being widely used, e.g. 24% of projects surveyed were feedling totally unbalanced "traditional" diets based mainly on rice-bran/husks, broken rice and corn meal; and (f) high weaning ages and low weaning weights. /1 Calculated by multiplying the lowest weaning rate recorded by the average number of farrowings per female. However, it is possible that this figure is .less than eight if a low weaning rate is combined with .a lower than average number of farrowings per female. The reliability of the survey is questionable in principle, but findings agree with farm model projections made separately. ANNEX 2 Page 2 3. The survey also identified the following main points: (a) management was considered very poor for 33% of projects, weak for 24%, good with some weaknesses for 24%, and very good for 19%; (b) odly 11% of projects were using straight commercial feeds, a high proportion were using 50% comiercial feeds with 50% rice bran; (c) twehty-four percent were home mixing their own rations but all were hot availing of the cheapest materials -and prices; better ratiuns could have been mixed with the available raw materials; (d) profitability of pig production varied matkedly by region due to large differentials in feed costs; the least profitable regions are Central Luzon and Southern Tagalog and the most profitable are -South Cotabato, Misamis Oriental, Iloilo and Ofieftal Mindoro; the question of channelling a higher propor- t-ion of funds to the more profitable regions is raised; and (e) Animal health and mortality ate not a major constraint on production. ANNEX 2 Table 1 PHILIPPINES FIRST LIVESTOCK PROJECT Comparison of the Appraisal ReDort Technical Coefficients Used for PLg Production with DBP Survey and Model Appraisal DBP DBP estimate survey /a model Average No. of farrowing,s/femalep.a 1.67 1.64 1.6 Number born/farrowing 10 9.66 9 Average age at weaning (weeks) 42 46 42 Number weaned/litters 8 8.13 8 Number produced/sow/year 12.3 12.0 12.28 /a DBP survey - conducted by DBP staff under the guidance of the pig and.poultry production specialist on 42 randomly selected farms (Nov. 1975-Feb. 1976). ANNEX 2 Table 2 PHILIPPINES FIRST LIVESTOCK PROJECT Pig Price/kg Liveweight and Fattening Ration Price/kg (1972-77) (Central Luzon) Fattening Pig price/kg % of ration. %of Ratio. liveweight (A) base year price/kg (B) base year A/B P P 1972 (Appraisal estimate) 3.90 100 0.60 100 6.5 1973 (DBP estimate) 5.00 154 0.71 118 7.75 1974 ( " ) 7.00 179 0.81 135 8.64 1975 ( " ) 7.30 187 0.91 152 8.02 1976 ( " ) 8.00 205 1.00 167 8.00 1977 ( " ) 8.80 225 1.10 183 8.00 Table- 3 PHILIPPINES FIRST LIVESTOCK. PROJECT Piggeries: Average. Farm Cash Flow Proj:ectiori (1975 investents) Central Luzon. (P'1000) Yearý -1 2 4/11 Inflows Incremental Sales: Culed, soys at. B 4.80. e. 1.0 1.0 Culled, boars: at, P- 620. e. - -* 0.6 Fat-t en:ers. at. P: 440 e: 36.3.8 361.86 36.8 Total 37.8 38.4 37.8 Out flows; Incremental Operat-ing. Costs: Feed_ 5.05 2 28O0 2,8. 0 MSV 09f 19) 2¢3Y 2 .3 Labor-, 1.1 1r-, n"9 05ý 9 Utilit ies, 0C' ä.li 012 0.2, Boar- - - 0 4v - Repairs and Maintenance- -0 , 08 O.8 Sb,tcta 7KI. ä,9 32-. 63. 32;. 2 Investments- 2 Hoghouse (70m, .at. P140)' Shed Stock, (6 7-mo.old- gilts, and- r 4hxy409 S ubitot a 158 Ne-t FLo.ws, -»22t9$ 5 8% 5. 6 Internal: Financial·. Rate of Return:C 2'0%å ANNEX 3 Page 1 PHILIPPINES FIRST LIVESTOCK PROJECT Broilers 1. The average number of broiler spaces financed per subborrower was about 3,500 compared with 4,000 at appraisal. Total annual output of broilers at full development is estimated at 4.1 million compared with 5 million at appraisal. Total project output per batch is estimated at 0.935 million com- pared with 1 million at appraisal, but the number of batches per year is estimated at 4.4/1 compared with 5 batches at appraisal. 2. The demand for DBP broiler loans reflects the strong consumer demand for poultry in the Philippines. The average number of broilers produced per year under the Project (about 3.5 to 4 million at full development) represents 25% to 30% of incremental demand (based on 2.8 kg per caput consumption and a population growth rate of 2.8% p.a.). 3. Price/cost relationships since appraisal seem to have favored produ- cers (Table 1). However, the data available do not adequately reflect seasonal price/cost changes and as a result may not be representative of actual condi- tions. The technical coefficients for the broiler model projected at appraisal differ substantially from the average from a DBP survey in two important factors, namely feed conversion efficiency and number of batches per year. The main technical coefficients used in appraisal and DBP models and obtained from a DBP survey are compared in Table 2. The DBP survey indicates an average feed conversion of about 3.1 compared with 2.5 used in the DBP models and 2.77 in the appraisal model. The DBP used a conversion of 2.5 because this was the figure obtained at the University of the Philippines, Los Banos and was also established by DBP from records submitted by a small number of producers. It is probable that this figure was a reasonable one when the Project started in 1973. There is considerable evidence from commercial producers that the quality of broiler feeds (sold by the five large feed mills which together account for about 80% of broiler production in the Philippines either on their own broiler farms or with contract producers) deteriorated substantially over the project period. The reason for this deterioration in quality is generally attributed to the Government's control of feed prices. The Government could not, however, control quality and given this it was inevitable that downward adjustments in the value of feed would take place. 4. A reduction in feed conversion efficiency from 2.5 to 2.77 is about 11% and a reduction to 3.00 is 20%. Therefore, subborrowers achieving these conversions would use 11% and 20% more feed and their costs of production would increase accordingly. Increases of this magnitude would have a substan- tial effect on profitability since feed costs account for about 60% of operating /1 Average from DBP survey. ANNEX 3 Page 2 costs (appraisal model). Even with the adjustments broiler production is still a profitable business for a reasonably efficient producer, when con- sidering that the estimates contained in the table include a 10% cost contin- gency, whereas 20% would have been much more realistic and would have raised the scale of rates of return by a factor of 1.3 to 1.5. Even so and given the wide dispersion appearing in the survey (para. 5 below), it is reasonable to assume that 20-25% of beneficiaries may not have been able to repay loans from profit-generated funds. The lack of technical assistance to producers in a highly risky type of business had a strong negative impact on this subproject's financial and economic justification. 5. The main findings from the DBP survey include: (a) a considerable range in the costs of inputs (day-old chicks - 50%; starter meal - 11%; broiler meal - 9%; broiler finisher meal - 13%; medicines and vaccines per bird - 390%) and in the utilities per bird - 450%; (b) a 36% range in price received for broilers (kg liveweight) excluding contract growers; (c) the best price was received by producers selling to the public at the farm gate; (d) feed conversion efficiency ranged from 2.71 to 3.7 with 3.1 weighted average and weight at sale varied from 0.7 kg to 1.52 kg with 1.34 kg average; (e) mortality varied from 1.6% to 18.7% with 4.9% weighted average; (f) age at sale varied from 49 to 63 days with 57 days weighted average; and (g) 80% of producers purchased chicks from integrators and 74% purchased feeds from integrators., but only 32% sold broilers to integrators. 6. The comments and discussion in relation to the project failing to establish monitoring and technical supervision for the pig component are equally applicable for broilers. Apart from this, DBP's performance in executing this component has been good. As for pigs, good appraisal procedures were followed. The quality of loans based on an examination of a fairly large sample of loan files and checked against on-farm development indicates a satisfactory standard of appraisal. The technical and financial coefficients have been reasonable, in the light of available information at that time (before the DBP survey) although the coefficients for feed conversion efficiency and number of batches per year were too optimistic. ANNEX 3 Table 1 PHILIPPINES FIRST LIVESTOCK PROJECT Broiler (Liveweight) and Broiler Feed Price/kg and Chick Price!Head (1972-77) Central Luoon Broilers/kg Cost/chick Investment per liveweight Feed/kg (day-old) broiler space P (A). P (B) P P Appraisal (1972) 3.50 (100%) 0.65 (100%) 1.25 (100%) 13.25 (100%) DBP 1973 5.15 (147) 1.01 (155) 1.62 (130) 13.56 (103) DBP 1974 7.00 (200) 1.31 (202) 1.80 (144) 14.40 (109) DBP 1975 7.20 (206) 1.34 (206) 2.20 (176) 15.20 (115) DBP 1976 8.00 (229) 1.37 (211) 2.40 (192) 18.60 (140) DBP 1977 8.80 (251) 1.57 (242) 2.50 (200) 21.80 (165) ANNEX 3 Table 2 PHILIPPINES FIRST LIVESTOCK PROJECT Comparison of the Appraisal Report Technical Coefficients Used for Broiler Production with DBP Survey and Model Central Luzon Appraisal estimate DBP survey /a DBP model Efficiency of feed conversion 2.77 3.1 2.5 Average liveweight at sale (kg) 1.3 1.34 1.3 Number of batches per year 5 4.4 5 Mortality % 5 4.9 5 Age at sale (days) 56 57 56 /a DBP survey - conducted by DBP staff under the guidance of the pig and poultry production specialists on 20 randomly selected farms (Oct. 1975-July 1976). Annex 3 Table 3 PHILIPPINES FIRST LIVESTOCK PROJECT Broilers Average Farm Cashflow Projection (1974/75 investments) Central Luzon .(1,9000) Year 1 2 3/11 Inflows Incremental Sales 160.0 196.6 196.6 (21,100 birds p.a) Outflows Incremental Operating Costs Stock (5,000 chicks, 35.0 44.0 44.0 4.4 batches p.a) Feeds 100.0 114.8 114.8 MSV 6.0 6.9 6.9 Labor 5.1 5.1 5.1 Utilities 2.3 2.3 2.3 Repairs and maintenance 5.0 6.0 7.0 Subtotal 153.4 179.1 180.1 Investments Housing (at P170/m ) 40.0 Water System 8.0 Subtotal 48.0 Total 201.4 179.1 180.1 Net Flows 41.4 17.5 16.5 Internal Financial Rate of Return: 31% ANNEX 4 Page 1 PHILIPPINES FIRST LIVESTOCK PROJECT Layers 1. Project output is estimated at about 53 million eggs per year or about 34% of the appraisal estimate (157 million). Incremental project produc- tion accounted for about one fourth of incremental demand over the project period based on the assumption of constant per capita consumption and a popu- lation growth rate of 2.8% p.a. 2. The technical coefficients used at appraisal are very similar to those used in the DBP model for.layers. They are compared to the average tech- nical coefficients derived from the DBP layer survey (Annex 1) in Table 1. The main difference is in the utilization of the layer house space (90% appraisal estimate compared with 74% in the survey) which is directly controlled by management; the low average rate is attributed to the absence of a regular replacement schedule. 3. Other main findings of the DBP survey include: (a) a 74% variation in'the price range paid for day-old chicks and a 17% variation ior layer mash; (b) a 41% variation in the price range received for eggs and a 20% variation for culled layers; (c) 65% of producers did'not oper-te a regular planned replacement schedule; (d) 94% of producers purchased chicks from the major integrators (but were not contract producers); (e) 25% had adequate artificial lighting in their day houses (provision of light to extend the daylight period is estimated to increase laying rate by about 15%); a further 31% had an ineffective lighting program and 44% had no lighting program; and (f) -31% of farmers sold eggs to dealers, 25% sold at farm gate (partly to dealers), 25% sold to retail outlets and 6% sold to producers' cooperatives. 4. An important survey finding was that & marked variation in the profitability of egg production existed because of large regional variations in the price received for eggs (Table 2) and paid for feed. The survey concluded that "projects in most of Luzon and Cebu are marginal" but "outside these areas projects are operating at satisfactory profit levels." The survey further states that "based on the average survey figures the cost of producing one egg ANNEX 4 Page 2 would be 30.4 centavos before debt service and 37.7 ceitavos after debt service (compared with 36 centavos average received per egg)." The inference is that borrowers could not repay their loans completely out of funds generated from the investments because of a shortfall of 1.7 centavos/egg. The survey, however, covered a period (Nov. 75 to Feb. 76) when the price of eggs was relatively low. The price received for eggs at the time of the PC mission was about 42 to 45 centavos/egg in Luzon and producers considered egg production profitable. Without continuous monitoring based on well conducted farm management surveys, it is not possible to make meaningful comments on profitability or o-. the number of borrowers that could not meet repayments out of funds generated from investments. 5. Nevertheless, it is clear that the profitability of egg product4.on was not as high as for pigs and broilers, particularly in the Luzon region (the main project region by far). Based on the experience under this Proiect -lending should-be-channelled-in-greater measure to .the provincial areas where price/cost relationships-are-more-favo-rable. 6. The discussion and comments in relation to DBP's performance for pig and broiler subcomponents are equally applicable in the case of layers. DBP's performance in appraising layer loans was considered good, on-farm investments were sound and generally well executed. However, neither technical/management supervision nor adequate monitoring was established under the Project and this was a serious failure. Given this the following tables only have a very relative value. Annex 4 Table 1 COMPARISON OF THE 'APPRAISAL REPORT TECHNICAL COEFFICIENTS USED FOR'LAYERS WITH DBP SURVEY Appraisal estimate DBP survey /a DBP model Average % of hens laying/clay 60 58 60- Age at sale (months) 18 20.5 24 Layer space utilization (%) 90 74 85 Feed/layer/year (kg) 40 39.5 40 Mortality - Chicks and growers (%) 11 - 11 Layers 20 23.5 /a DBP Survey - conducted by DBP staff under the guidance of the pig and poultry production specialist (Nov. 1975-Feb..1976). Annex 4 Table 2 REGIONAL PRICE RECEIVED FOR UI;GRADED EGGS Price Region (centavos/egg) Central Luzon/Southern,Tagalog 35.9 Dagupa.n, 35. 3 Cebu 36.5 !loilo 45 Calapan, Mindoro 42.5 General Santos 41 Cagayan de Oro 46 Damao 42 Source: DBP Layer- Surve-Y; November,, 19'74ebruary,, I96 Annex 4 Table 3 PHILIPPINES FIRST LIVESTOCK PROJECT Layers Average Farm Cashflow Projection (1975/76 investments) Central Luzon (P'000) Years 1 2/11 Inflows Incremental Sale of !Eggs (1820 x 200days) 123.0 153.0 xPO.42 e) Culls (1320 x 70% x P 8 e.) 8.0 10.2 131.0 163.2 Outflows Incremental Operating Costs Stock (2,000 pullets) 34.0 43.5 Feeds 80.0 104.0 MSV 1.0 2.0 Labor 3.7 6.0 Utilities 1.0 1.5 Repairs, Maintenance 0.6 1.5 Sub-total 120.3 158.5 Investments Layinghouse 36.0 - Total 156.3 158.5 Net Cashflow - 25.3 4.7 Internal Financial Rate of Return: 17% ANNEX 5 Page 1 PHILIPPINES FIRST LIVESTOCK PROJECT Cattle 1. The appraisal mission overestimated loan demand for coconut/beef. The reasons for a shortfall in demand include: (a) a greater proportion of coconut farms than anticipated are now on a sharecropping arrangement and sharecroppers are not prepared to make long-term investments; (b) a scarcity of "feeder" steers militated against the small coconut/ fattening farms and a scarcity of breeding stock militated against coconut/breeding/fattening farms; (c) the DBP promotional program was inadequate particularly when it is realized that the traditional coconut producer does not think in terms of coconut and beef production combined; (d) the profitability of usi-ng fertilizers is not generally appreciated by traditional producers; (e) coconut producers sometimes feel that cattle and coconut yields are antagonistic rather than supportive and there is a need for good survey data to clearly demonstrate that this is not so; and (f) in periods when copra prices and profits are high (as in 1977) the extra benefits associated with cattle, although attractive in themselves, seem scarcely worthwhile obtaining. 2. The coconut producing regions .(about 1.4 million ha) can still be regarded as the main resource for further and substantial beef development in the Philippines. However, it is clear that although progress is being made it will be much slower (at least in the short term) than anticipated. The greatest need is for DBP to start a promotion campaign and to assign staff to concentrate solely on this. Farm visits undertaken by the PC mission and by supervision missions indicate that farm developments are generally sound, but that pasture improvement has lagged, and some grazing areas are understocked (para. 1, b). Additionally, a weaning rate of about 60% would be more appropri- ate than the 80% rate estimated at appraisal. 3. It is important to keep in mind that although the main aim of the project was to encourage beef production on an unused resource (land under coconuts), the main benefit to the farmer would accrue through an increase of 113% in copra production and receipts (Appraisal Report, Annex 4, Table 3) resulting mainly from a response to annual fertilizer applications. The evolution in the main prices and costs are given in the table below. ANNEX 5 Page 2 Comparison of Coconut/Beef Input/Output Prices for 1973 and 1976 1973 197Q77 Items ------- - ---- Increase % Fencing/km 1,600 3,500 118 Copra drier (rebuilt) 1,500 2,000 33 Improved pasture (grass and legume)(per ha) 300 500 66 Improved pasture (legume only) 83 165 99 Heifers (2 years old) 615 1,845 200 Steers (9-12 months old) 412 1,027 149 Fertilizer/kg 2.9 2.8 -3 Beef per kg 2.85 5 75 Copra/kg 0.95 2 110 Hill Beef Ranching 4. Supervision and PC missions' observations indicate that weaqing rates of the order of 55-60% are likely to be reached as opposed to the 75% projected at appraisal. Because of the lack of pasture improvement ant pf breeding stock, the appraisal target of 0.71 AU/ha may have to be 1Wered to between 0.35 and 0.40 AU/ba for future projections. 5. The PC missgn b lieves that very small liveweight gains will be obtained under the Proj@ct tn Makate, one of the main investment areas. The lack of proper hrd management was also evident, e.g. little seasonal calving or catil4 qve g were noted during the mission's visitsto ranches. 6. Taking the aggye into caqi44rag , as well as the price/ cpst data in para. 3 above, the ftnancial rge of return of hill beef is projected at 5-19% cqrpar-ed t 21to estimated at appraisal. Annex 5 Table 1 PHILIPPINES FIRST LIVESTOCK PROJECT Coconut/Beef (Average 15 ha-Farm Cashflow Projection (1976 Investments) (P'000) Years 1 2 3 4 5 6 7/20 Inflows Incremental copra sales (@ P 21/kg) - 1.3 2.9 6.2 8.8 12.0 15.0 Incremental beef sales - - - 4.0 10.5 10.5 11.5 Total - 1.3 2.9 10.2 19.3 22.5 26.5 Outflows Incremental Operating Costs Copra - 0.3 0.6 1.3 1.7 2.4 3.0 Vaccines, other 0.3 0.5 0.5 0.6 0.6 0.7 0.8 Feeds 0.9 1.6 1.6 1.9 1.9 2.2 2.2 Fertilizer 3.3 3.5 3.5 3.5 3.5 3.5 3.5 Subtotal 4.5 5.9 6.2 7.3 7.7 8.8 9.5 Investments Fencing 7.3 2.4 Corrals - 3.0 Water facilities 2.8 - Improved pasture 7.5 - Rebuilt copra drier - - 2.0 Heifers 18.0 9.0 Bulls 1.2 Others 3.2 0.9 Subtotal 40.0 15.3 2.0 - - - - Total 44.5 21.2 8.2 7.3 7.7 8.8 9.5 Net Cashflow - 44.5 - 19.9 -5.3 2.9 11.6 13.7 17.0 Internal Financial Rate of Return: 13% 120° 122' 124- KOREA t'eA* trme oAsuh boundDhes _ *TAIWAN ro1C OF CACOD-- HIONG KOf T PA CIFIC CAGAYAN VALLEY TuguegaraoOCEAN IOCOS AND #PHILIPPINES MOUNTAIN PkOVINCE Ll Iogn SOUTH HI A'0 . PAPUA CHI/NA (8°"h~ o °NEW GUINEA SA N D O N E CENTRAL LUZON RIZAL, BULACAN, - PiGS ond POULTRY PAMPANGA, TARLAC, NUEVA ECUA -nd I,k- PANGASINAN PROVINCES \P H N E SOUTHERN TAGALOG C PIGS nd POULTRY BcIE NAP N C HiLL BEEF RANCHES ( MINDORA ISLAND / Nag DBP BRANCHES ··· PROJECT AREAS y- HILL BEEF RANCHES) MASBATE ISLAND DBP AGENCIES - PROJECT AREAS Sn. EASTERN VISAYA REGIONAL BOUNDARIES r..TN. 12° PRIMARY HIGHWAYS - RAILROADS N PROJECT AREAS SEA PIGS AND POULTRY j WESTERN VISAYAS T j- Hi EYT HIL EEF RANCHESr G/ Lt.LZJ Bcolod INTEGRATED COCONUT BEEF CATTLE -10. -/ND NA0 NORTH MINDANAO MISAMIS ORIENTAL PROVINCE 4 INTEGRATED COCONUT/ BEEF CATTLE gy_n d. 0ro PHILIPPINES LIVESTOCK DEVELOPMENT PROJECT C b C SOUTH MINDANAO - M O 0 DAVAO CiTy, OAVAO DEL SUR, Zamboongo D OAVAO DEL NORTE an DAVAO ORIENTAL PROVINCES G U i F D0go. 40 80 12 1;0 INTEGRATED COCONUT/ SOUTHI M1INDANA , r EFATE _________________ BEEF CAMTE KILOMETERS PIGS ( lOUTHERN COTABATO PROVINCE 6 0 20 4 O 8O O 100 MILES 120* 122' 124, 126'UN 17 o' JUNE 1978 MARCH 1972 IBRD 3602R (P P A)