Philippines - Second Livestock Development Project

Document of The World Bank FOR OFFICIAL USE ONLY F\L COV'Y Report No. 4753 PROJECT PERFORMANCE AUDIT REPORT PHILIPPINES SECOND LIVESTOCK PROJECT (LOAN 1225-PH) October 21, 1983 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. ABBREVIATIONS BAI - Bureau of Animal Industry DBP - Development Bank of the Philippines MOA - Ministry of Agriculture NEDA - National Economic and Development Authority OED - Operations Evaluation Department PCR - Project Completion Report FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT PHILIPPINES SECOND LIVESTOCK PROJECT (LOAN 1225-PH) TABLE OF CONTENTS Page No. Preface ......................................... ................. i Basic Data Sheet ............................. ii Highlights ................................................ ........ iii PROJECT PERFORMANCE AUDIT MEMORANDUM I. PROJECT SUMMARY .......................................... 1 II. MAIN ISSUES ............................................... 5 A. DBP Loan Arrears .................................. 6 B. Monitoring and Evaluation ........ ......... 9 Table 1 - Philippines Second Livestock Project - Disbursements ........................................ 11 Annex I - Comments Received from the Development Bank of the Philippines ................... 13 Annex II- Comments Received from the National Economic and Development Authority ................................. 25 OVERVIEW OF PROJECT COMPLETION REPORT Ma - IBRD 17234 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. - 1 - PROJECT PERFORMANCE AUDIT REPORT PHILIPPINES SECOND LIVESTOCK PROJECT (LOAN 1225-PH) PREFACE This is a performance audit of the Second Livestock Project in the Philippines, for which Loan 1225-PH in the amount of US$20.5 million was approved in March 1976. Final disbursement was made and the Loan closed on October 21, 1981; the original Closing Date was June 30, 1982. The audit report consists of an audit memorandum prepared by the Operations Evaluation Department (OED) and an Overview of the Project Completion Report prepared by the Bank's East Asia and Pacific Regional Office. The Project Completion Report (PCR), dated October 30, 1982, was prepared by the Development Bank of the Philippines (DBP). Work on the PCR, which included field review of a large sample of farm enterprises by DBP staff, was carried out in the first semester of 1982. The PCR was submitted to the Bank directly by DBP, which was responsible for implementing the largest portion of the project (the credit component). Components for feed quality control and animal nutrition research were executed by the Bureau of Animal Industry (BAI) of the Ministry of Agriculture (MOA). The PCR represents the view of DBP and does not purport to reflect those of the BAI or the Government of the Philippines. Because it is too voluminous the PCR is not included in this report, but a copy is kept on file in OED. The audit memorandum is based on interviews with Bank staff associated with the project, and on a review of the PCR and Overview, the Appraisal Report (No. 1070-PH) dated February 20, 1976, the President's Report (P-1776-PH) dated March 4, 1976, the Loan Agreement of April 8, 1976, correspondence with the Borrower, and internal Bank memoranda on project issues as contained in relevant Bank files. A copy of the draft report was sent to the Borrower on June 30, 1983. Comments received from the Development Bank of the Philippines and the National Economic and Development Authority are attached as Annexes I and II, respectively, and have been taken into account in finalizing the text of the audit memorandum, or footnoted, as appropriate. The audit finds the PCR comprehensive and accurate with respect to the project's principal achievements and shortcomings and has no reason to question its conclusions. The audit memorandum deals with DBP's loan arrears problem because of its broader implications for the Bank's overall lending operations with DBP, and elaborates on the failure to establish a monitoring and evaluation system in order to draw lessons for future projects. The Bank wishes to acknowledge the careful and extensive work carried out by the staff of the Agri Plan Unit of DBP in preparing the PCR. DBP is to be commmended particularly for the careful technical analysis of the use of loan proceeds by 192 sub-borrowers. - ii - PROJECT PERFORMANCE AUDIT REPORT PHILIPPINES SECOND LIVESTOCK PROJECT (LOAF 1225-PH) BASIC DATA SHEET KEY PROJECT DATA Appraisal Actual or Actual as % of Item Estimate Estimated Actual Appraisal Estimate Total Project Costs (US$ millton) 41.3 56.0 135 Loan Amount (US$ million) 20.5 20.5 100 Date Board Approval - 03/16/76 - Loan Agreement Date - 04/08/76 - Date Effectiveness 06/30/76 09/13/76 171 /a Date Physical Components Completed 01/82 06/81 90 /a Proportion Then Completed (t) 100 176 b - Closing Date 06/30/82 10/21/81 89 /a Economic Rate of Return (%) 25 21 /c 84 Financial Rate of Return (%) 16-46 22-47 137-102 Agronomic Performance - Fair/Good - Institutional Performance - Fair - Number of Sub-Borrowers 2,950 5,463 185 Employment Impact 5,800 5,924 102 CUMULATIVE DISBURSEMENTS FY77 FY78 FY79 FY80 FY81 FY82 Appraisal estimate (US$ million) 2.9 7.3 13.9 18.3 20.1 20.5 Actual (USS million) 5.0 9.2 11.5 15.1 20.2 20.5 Actual as % of estimate 172.4 126.0 82.7 82.5 100.4 100.0 Date of final disbursement October 21, 1981 MISSION DATA Date No. of Manweeks Specializations Performance Types of Mission (mo/yr) Persons in Field Represented /d Rating /e Trend /f Problems Preparation (DBP) - - - - - - - Appraisal 05/75 6 4 - - - - Supervision 1 05/76 2 3 B,E 2 2 - Supervision 2 01/77 2 1 E,F 2 1 - Supervision 3 06/77 3 1 A,B,E 2 2 M,T Supervision 4 03/78 2 3 B,C 2 2 M,T Supervision 5 11/78 3 3 A,B,C 2 2 M,T Supervision 6 09/79 2 1 C,D 2 2 M,T Supervision 7 03/80 1 2 C 2 2 M,T Supervision 8 11/80 2 1 A,D 1 2 M,T Completion (DBP) 11/82 n.a. n.a. n.a. - - - OTHER PROJECT DATA Borrower Republic of the Philippines Executing Agency Development Bank of the Philippines Fiscal Year January 1 - December 31 Name of Currency (abbreviation) Philippine Peso (P) Currency Exchange Rate: Appraisal Year Average US$1.00 - P 7.44 Intervening Years Average US$1.00 - P 7.42 Completion Year Average US$1.00 - P 7.90 Follow-on Project: Third Livestock and Fisheries Project Loan Number 1894-PH Amount (US$ million) 45.0 Loan Agreement Date 08/04/80 la Calculated in terms of months from the date of Board approval. Tb Based on a weighted averago accomplishment of 185% for the credit component and 27% of the non-credit component. /c Weighted average (by value) of returns of seven enterprises for which estimates were provided; the enterprLse estimates ranged from 16% to 53%. /d A = Unspecified; B - Lives:ock Expert; C - Financial Analyst; D - Agriculture Credit Specialist; E = Economist; F = Architect. /e1 = Problem-free or minor oroblems; 2 - Moderate problems; 3 - Major problems. /f I = Improving; 2 = Stationary; 3 - Deteriorating. M Managerial; T = Technical. - iii - PROJECT PERFORMANCE AUDIT REPORT PHILHPPINES SECOND LIVESTOCK PROJECT (LOAN 1225-PH) HIGHLIGHTS The project, which was the Bank Group's seventh agricultural credit operation in the Philippines and its fourth agricultural credit loan to DBP, provided funds for onlending to livestock farmers. Also included in the project were funds for tEn municipal slaughterhouses, consultancies, and up- grading a livestock feed quality control laboratory. The thrust of Bank lending for agricultural credit in the Philippines during the 70s was to sup- port the Government's efforts in attaining food security, and in the case of this project, to continue efforts undertaken in the first livestock project to increase the availability of animal proteins. Project start-up was delayed slightly by two months in order to complete processing of the subsidiary loan agreement. Nevertheless, because of a solid pipeline of sub-projects and existing demand (especially for pig- gery loans) disbursements exceeded appraisal estimates and the Loan was closed eight months ahead of schedule. The number of subloans granted under the project exceeded appraisal estimates by 85%, and total output of animal proteins exceeded appraisal estimates by 115%. On the other hand, DBP as an institution was facing difficult financial problems after closing of the loan, and the objective of reaching large numbers of viable small borrowers has proven difficult to attain. The institution-building impact of the project was mixed. Rela- tions between DBP and the Ministry of Agriculture's Bureau of Animal Industry strengthened as a result of the project, as did DBP's capacity to review the technical aspects of livestock investments. DBP, nevertheless, generally did not pay adequate attention to subloan supervision, and the economic and fi- nancial analysis of investments has not been as strong as the technical. The project did not contribute to the financial or institutional development of DBP. The project's subloans did not perform significantly better in terms of recovery than DBP's portfolio as a whole, calling into question the project's replicability (PPAM, paras. 17-22). A project com- ponent to finance consultants to work with the DBP on project monitoring and evaluation was not successful because of inadequate definition of the com- ponent and poor performance of the consultants (PPAM, paras. 23-26). The following points may also be of interest: - Business failures among small farmers, particularly for pigs and chickens, have been proportionally greater than among large farmers (PPAM, para. 6; and PCR, para. 4.09.8); and - iv - - Subproject supervision is a critical necessity to ensure maximum success for the sub-borrowers and the financial viability of the development credit institution (PPAM, paras. 9 and 22; and PCR, paras. 3.10 and 6.04.13). PROJECT PERFORMANCE AUDIT MEMORANDUM PHILIPPINES - SECOND LIVESTOCK PROJECT (LOAN [225-PH) I. PROJECT SUMMARY 1/ 1. In Government's Agricultural Development Plan for 1972-75 special emphasis was placed on livestock development. The Bank supported this effort through the First Livestock Project, for which Loan 823-PH was approved in May 1972; the loan was closed in October 1976.2/ This project is a continu- ation of the first project. 2. The need for a second-phase project was anticipated early on, and an FAO/IBRD Cooperative Program mission visited the Philippines in May 1973 to advise on aspects of project preparation, which was subsequently under- taken by the Development Bank of the Philippines (DBP). The project, esti- mated to cost US$41.3 million, was appraised in 1975, and Loan 1225-PH in the amount of US$20.5 million was approved in March 1976. The loan, which became effective in September 1976, was closed fully disbursed in October 1981, eight months ahead of schedule. 3. The objective of the project was to increase livestock produc- tion in the Philippines. Smallholder producers were included but not the ex- clusive, or even primary, focus of the project. Funds were to be provided to DBP for onlending to pig and poultry enterprises, hill beef cattle breeding farms, integrated coconut/beef cattle breeding/fattening farms, integrated dairy farms, and backyard cattle breeding/fattening operations. In support of these activities the Bureau of Animal Industry (BAI) was to provide improved technical services to borrowers, undertake applied research and trials on production problems, and establish a livestock feed quality control program. In addition, ten municipal slaughterhouses were to be upgraded. DBP was expected to establish a monitoring and evaluation system for its livestock subloans. 4. Implementation of the project's credit components was on the whole successful. A total of 5,463 subloans was approved, compared with 2,890 ex- pected at appraisal. However, the orientation of lending shifted even more toward piggery and poultry enterprises than originally envisaged; the com- bined subloan share of the two was 90% compared with the target of 75%. Cattle development, with a share of 10% of subloans (531 actual loans vs. 720 target), was disappointing in view of the relative backwardness of this sub- sector and consequent need of development. Another shortfall concerns slaughterhouse improvement, where only one facility could be improved instead 1/ Adapted from the PCR. 2/ See Project Performance Audit Report No. 2128, OED, June 30, 1978. - 2 - of the anticipated ten because of lack of demand. A feed quality control laboratory was established, though much delayed. Consequently, the planned research activities could not be carried out under this project. An attempt to establish a monitoring and evaluation system also was not successful. 5. The cost of the project amounted to about US$56 million, or 36% more than appraised, because of the larger number of subloans granted. The share of DBP/Government in project financing increased, therefore, from US$15.5 million as projected at appraisal to US$28.7 million. Consequently, the IBRD loan covered only 37% of project costs compared with the original financing plan of 50%. The rate of loan disbursements far exceeded expec- tations during the first and second years of implementation, prompting the Bank to advise the Borrower to temporarily reduce the rate of subloan approval. The average size of subloans was as follows: Enterprise US$ /a Piggery 8,540 Poultry 9,900 Hill beef 17,400 Coco beef 8,140 Backyard cattle 6,240 Dairy 20,060 /a Calculated at an exchange rate of US$1.00 = P7.42. 6. Survey data revealed interesting details of the participating enterprises. One of the major findings was that where failures occurred, these tended to be more prevalent among smaller producers compared with larger ones, especially for pigs and poultry. Piggeries averaged 26 sows after financing, although about three-fourths of the borrowers had 20 sows or fewer. Management was unsatisfactory in about one-fourth of the piggeries surveyed. Feeding and breeding efficiency was relatively good, but record-keeping was almost non-existent. Even though demand for piggery loans was brisk, some 20% of one-time borrowers no longer kept any stock shortly after project completion. The layer farms surveyed averaged 5,860 hens after financing; 26% had 2,000 layers or less. Major disease problems were encountered only in very isolated cases. Management was fair to poor in about 40% of the sample layer farms. The main shortcomings were inadequate replacement of layers, and poor cage utilization. Broiler farms averaged 8,600 birds per farm; 41% had 3,000 birds or less. A high percentage - 41% - had ceased operation at the time of project completion for reasons of high cost of feeds, unstable supply of chicks, marketing difficulties, unstable broiler prices, and lack of operating capital. - 3 - 7. The hill beef breeding/fattening farms typically were large enter- prises averaging 50 financed breeding cows per farm. Two-thirds of these farms were operating on leased government lands. Most operators were absentee-farmers, some employing professional managers. Performance of these farms was generally good. Integrated coconut/cattle farming enterprises averaged about 17 heads per farm, the majority of which were managed by hired overseers or farm tenants. Because of the smaller herds and closer super- vision, the technical performance on these farms was superior to the hill beef farms. Backyard cattle farms tended to keep fewer feeder animals than anticipated because of lack of replacement feeder stock, and cow-calf opera- tions were prevalent. Despite minimal pasture improvement, these farms achieved very high calving rates. Because of the small number of animals in- volved, these operators encountered greater marketing difficulties than the other, more specialized and larger enterprises. The dairy farms supported by the project operated under atypical conditions as they were cooperating with the Dairy Training and Research Institute of the University of the Philippines, Los Banos. The original stock of these farms consisted of pure- bred Holstein/Friesians, and feeding., milking and husbandry practices were rather advanced, but the replicability of this enterprise model under purely commercial conditions in other parts of the country is doubtful. 8. While the project was under implementation, a number of organiza- tional changes were made in DBP, although these were not exclusively attributable to the project. The Agricultural Loans Department and Agri- cultural Supervision Department were created, and the Agricultural Plans and Programs Staff was organized. Technical reviews of branch subloans have been included in the management audit function of the Branches and Agencies Departments. Branch managers' authority to approve subloans has been in- creased. However, a monitoring and evaluation system could not be esta- blished, partly because the organization contracted for this purpose failed to produce satisfactory results. DBP's staffing related to lending for livestock development was improved, both through recruitment of additional staff and through training in cooperation with the Bureau of Animal Industry. But despite these improvements, one of DBP's persistent weaknesses, i.e., inadequate subloan supervision, continued under this project. 9. Another major shortcoming on DBP's part was the poor loan recovery performance. The recovery rate for project subloans averaged only 44% for the period 1978-81. While this rate tended to be stable, the past due ratios were on the increase, especially for piggery loans. As of mid-1981, more project accounts were in arrears than up-to-date (63% vs. 37%, respec- tively). Piggery and poultry producers tended to be somewhat more delinquent in servicing their debts than cattle producers. Resulting from the poor re- covery performance, the project adversely affected DBP's financial position, although the role played by this project in DBP's overall deterioration was minor. 10. The impact of the project on the national economy was positive. The estimated incremental production of meat, eggs and milk was estimated at over 50,000 tons, more than double the appraisal estimate. Employment was created for about 5,900 persons, as expected. Because the incremental output substituted for imports, the project generated substantial foreign ex- change savings. The net foreign exchange effect is difficult to determine, however, mainly because of the sizeable imports of supplementary commercial feeds. One of the effects of the commercialization of livestock production supported by this and other projects has been a growing strain on the domestic livestock feed base and, consequently, vastly expanded import requirements. The reestimated financial rates of return for the various enterprises ranged from 21% to 47%, on the whole roughly equal to or slightly above appraisal estimates. The reestimated weighted average economic rate of return was 21%, compared with 25% estimated at appraisal.3/ Broiler pro- duction was the best financial proposition, while hill beef enterprises generated highest economic returns. 11. A follow-on project, the Third Livestock and Fisheries Project (Loan 1894-PH), was approved in July 1980. That project broadened the scope for lending and provided for intensified institutional development. II. MAIN ISSUES 12. The project was a continuation of the First Livestock Project not only in its objectives but also with respect to accomplishments, shortcomings and trends. Just as under the preceding project, the rate of disbursements greatly exceeded appraisal estimates. The loan was closed eight months ahead of time compared with the early closing of 26 months for the previous loan. The lending pattern under the two projects deviated from appraisal expecta- tions nearly identically: the number of piggery and poultry loans exceeded the target by 119% (146% under the First Livestock Project), while cattle loans fell short of target by 26% (72% previously), and only one out of ten municipal slaughterhouses was improved (none of the three planned under Loan 823-PH was constructed).4/ 3/ The PCR economic analysis is basically a recast of appraisal estimates (PCR Overview, para. 12). OPS states that "... both the methodology and the results of the PCR economic analysis have serious shortcomings". The audit shares OPS' concern but concluded that this issue cannot be pursued productively, taking into account that the authors of the PCR satisfied themselves that the appraisal framework for the economic analysis was still valid, and that significant new information could only be obtained at considerable expense. The spending of an inordinate amount of'additional time and money was not deemed justified. 4/ DBP comments indicate persisting differing views on some nuances of project objectives and composition which are likely to have affected - or at least are reflected in - the project's outcome (Annex I, paras. 4.0-5.0). - 5 - 13. DBP's arrears situation was unsatisfactory at the end of the pre- ceding as well as this project, and attempts to introduce an effective sub- loan monitoring and evaluation system in DBP were successful in neither. However, DBP's institutional and managerial capacity to undertake lending for the livestock sector increased substantially between May 1972, the date of Board approval of the First Livestock Project, and October 1981, the Closing Date for the Second Livestock Project Loan. Organizational improvements were made, and staffing had become more adequate in terms of numbers and skills. 14. To a large extent, therefore, the second project succeeded in the same way that the first one had - in promoting pig and poultry production for which conditions were favorable - and was rather ineffective in making the intended developmental impact in the cattle subsector. This result is not surprising given the p-onounced similarity in project design and economic conditions. The third project in this series (Loan 1894-PH, approved in August 1980), broadened the scope of the credit components to include fisheries and other small stock and greatly expanded the non-credit component to intensify the pursuit: of institutional and infrastructural objectives. In retrospect, the three projects represented a basically sound and timely approach to livestock development in the Philippines, although several questionable elements, referred to below, can be identified. 15. Over this past decade, an imbalance has persisted, or even grown, between the development of livestock production on the one hand and the development of the feed subsector and of livestock marketing on the other. For example, imports of soybean meal increased from 46,000 t in 1970 to 227,000 t in 1980; toztal imports of feed ingredients in 1980 were about 557,000 t. These rapidly expanding imports aggravated problems of local distribution and absorbed increasing amounts of foreign exchange.5/ Concerning livestock marketing, the existing infrastructure has become in- creasingly inadequate in terms of transport capacity and in handling the growing commercial output in small quantities of a large number of small producers, threatening especially equitable returns to the latter. While these problems are recognized in the follow-on project through provision of some seed money for studies or other related activities, this effort was dis- proportionately small compared with the support given to livestock pro- duction. Given these constraints and a slackening demand for livestock 5/ DBP acknowledges the inadequate domestic production of feedgrains to have had adverse effects and points to its 1975 proposal to finance feedgrain development under this project (Annex I, paras. 4.0-5.0). NEDA, noting this problem, is of the view that there is good scope for encouraging and developing the local feeds industry (Annex II). The audit's response, as implied in para. 16, is that the development of the country's animal feed subsector assumes an importance and requires resources which cannot be accomodated within specific livestock development projects. While optimal policies and strategies in support of feed production are not identical to those for livestock development, they need to be harmonized. - 6 - products, there is a real possibility of an incipient oversupply of livestock production credit.6/ 16. While the feed and marketing concerns could not and should not have been addressed directly under this series of livestock loans, but rather separately under different arrangements, there are project-specific elements which, in the audit's view, need to be highlighted at this point, although mention of them has been made repeatedly over the years. These refer to DBP's arrears situation and lack of monitoring and evaluation capability. The following sections are devoted to these topics. A. DBP Loan Arrears 17. The annual loan recovery rate (ratio of collections to collecti- bles) for subloans under the project ranged from 42% to 45% for the period 1978-1981, averaging about 44% for the whole period. This rate is very similar to the recovery experience under the First Livestock Project; under that project, the recovery rate as of June 30, 1977 was reported to be 45%. As of June 30, 1981, 63% of the Second Livestock Project subloan accounts were in arrears, with piggery subloans representing a disproportionately larger share than the others. Moreover, all the loan recovery indicators have shown an adverse trend since 1979. 18. Poor loan recovery by DBP is not a new development. It was flagged in the appraisal of this project and the follow-on project (Loan 1894-PH) and was the special focus of a supervision mission in March 1979. The problem also was reported in the Bank-supported fisheries projects.7/ While DBP has been the main channel for Bank-supported credit to agriculture, other banks have also served as intermediaries. These banks, particularly rural banks, encountered the same arrearage problems.8/ The Philippine Government and banking community have been aware of poor loan repayment in the agricultural 6/ The Region states: "It is not the case in the Philippines that there is an oversupply of term credit for livestock. Indeed, although one may question whether or not subsectoral allocations have always been most appropriate, the continuing strong demand for livestock loans in the Philippines supports the contention that there is no significant oversupply". The audit's position is that, given the relatively slow growth of the domestic livestock feed base, the rising cost of imported feeds, and the possibility of a reduced growth in effective demand for livestock products, the demand for livestock credit could fall below potential supply, i.e., overdues, loans outstanding falling due plus new funds already allocated for credit. 7/ See Project Performance Audit Report No. 4222, First and Second Fisheries Projects (Loans 891-PH and 1270-PH), dated December 13, 1982. 8/ See Impact Evaluation Report, Philippines Second Rural Credit Project (Loan 607-PH), OED Report No. 4557 of June 17, 1983. - 7 - sector, as can be seen from a special study conducted in 1978.9/ While Bank-supported loans fared somewhat better than the financial institution's other portfolios, performance was less than satisfactory across the board.1 0/ 19. The immediate result of poor loan recovery under this project was further erosion of DBP's financial position, although erosion attributable to this project was minor compared to other operations. According to the PCR, DBP's accumulated loss from the project for the period 1977-81 was about US$1.1 million (P8.7 million). DBP's overall financial situation has further worsened since 1981. Since one of the subobjectives of lending through DBP has been to strengthen that institution financially, the project did not con- tribute toward meeting that objective. 20. The question presents itself whether the Bank acted forcefully enough in the face of DBP's loan recovery performance. There is ample evidence that the Bank was aware of the problem and that it frequently com- municated its concerns to the Philippine Government and to DBP. However, it is questionable whether the slow progress should have been tolerated by the Bank over such an extensive period. The Bank's experience with DBP was still relatively short when this loan was approved in 1976, although the arrears problem had been clearly identified by then. In retrospect, Bank staff were too optimistic about the prospects of improving the recovery per- formance.11/ This optimism was partially nurtured by Government's and DBP's efforts to address the problem, including the 1978 special study and various arrears reduction plans put into effect by DBP.12/ 21. The first Bank loan to DBP was made in 1971, and as of December 1982 a total of 16 loans with an aggregate amount of US$625.5 million had 9/ Presidential Committee on Agricultural Credit, A Study on the Nonrepay- ment of Agricultural Loans in the Philippines, Manila, 1978. 10/ The Region advises that while poor loan recovery in agriculture has been a difficult problem for DBP, the most significant recovery problems in the recent past have been in industry, mining and hotels. 11/ Regional staff feel that the Bank acted reasonably to improve the situation. 12/ DBP's arrears reduction plan included portfolio analysis and rehabili- tation/restructuring of loan accounts, foreclosure of distressed accounts, writing off of certain loans, hiring of collection agents, and establishing a subsidiary company to manage assets taken over by DBP. - 8 - been extended to that institution; eight loans (US$130.4 million) were for agriculture. Chronologically, lending activities to DBP were as follows: Loan Approval Number of Loans /a Loan Amount /a (Fiscal Year) (US$ millions) 1971 1 (1) 14.3 (14.3) 1972 1 (1) 7.5 ( 7.5) 1973 1 (1) 11.6 (11.6) 1974 1 50.0 1975 1 20.0 1976 5 (3) 135.7 (44.0) 1978 2 (1) 88.0 ( 8.0) 1981 2 (1) 93.0 (45.0) 1982 2 205.4 Total 16 (8) 625.5 (130.4) /a Agricultural loans in parenthesis. 22. The reasons for high arrears were manifold, including inadequate supervision of subloans by DBP, insufficient resources to meet borrowers' working capital requirements, difficulties in resolving borrowers' problems that had occurred subsequent to project completion, and borrowers' reluctance to repay their loans in hopes of unilaterally converting these public loan funds into grants.13/ With respect to small borrowers DBP has been handi- capped on structural grounds. As a development bank it has not been collect- ing deposits, thus lacking the day-to-day contact with clients that provides an effective monitoring opportunity for commercial banks. Furthermore, its restricted network of five regional offices and 56 branches/sub-branches also has been a logistical hindrance with respect to client contact. But in addition to these factors, a more forceful attitude on the part of DBP management and some public officials towards collection of outstanding debts would have benefitted this effort. The pressure to reduce arrearages was lessened through periodic injection of new equity and loan capital from government and external sources.14/ 23. The Bank's loans to DBP, while explicitly subscribing to the goal of improved loan recovery, are likely to have indirectly contributed to DBP's dependency and complacency by maintaining DBP's liquidity even though loan recovery was poor. It is discouraging that Bank involvement in DBP of over a decade has not been effective in stabilizing the financial base of that 13/ In addition to these aspects but not a significant contributing factor under the present project, deficient appraisal by DBP of subloans was given in the audit of another project as a decisive reason for disap- pointing operating performance and loan repayment by subborrowers (see Project Performance Audit Report, Rice Processing Project (Loan 720-PH), OED Report No. 4554, of June 15, 1983). 14/ DBP's comments on the arrears situation are in Annex I, paras. 7.0 - 11.0; NEDA's comments are in Annex II. - 9 - organization. There car be no argument that a perpetuated unsatisfactory collection rate and rising past due ratios are detrimental to an insti- tution's financial position. The key question is whether the Bank, over the past five to seven years, exhausted all means at its disposal to rectify an untenable situation, and whether continued lending and disbursement to DBP was justified.15/ In the audit's view, this question cannot be answered within the framework of a single audit. However, in the narrower context of lending for livestock development, i.e., Loans 823-PH, 1225-PH and 1894-PH, the experience to-date indicates that more drastic action would have been warranted at about the time of Board approval of Loan 1894-PH. Such action would have been easier to take had there been an agreed timetable for a realistic reduction of arrearages. 24. In conclusion, the audit considers that the Bank has been too tolerant with respect to such a key aspect of performance as loan recovery under this and, to-date, the follow-on project. Under similar circumstances in the future, it would be desirable for DBP to establish and follow a time- table for achieving agreed targets and, in case of significant deviations from the targets, the Bank should be prepared to take effective actions as necessary, including a sharp reduction or even discontinuation of lending. B. Monitoring and Evaluation 25. Under the project DBP was required to monitor annually a randomly selected sample of subloans (Loan Agreement Section 3.08) and evaluate the economic, financial and physical impact of livestock lending. An annual monitoring report was to be submitted to the Bank. Monitoring was to be the responsibility of DBP's former Plans and Programs Group. Funds were provided under the project to recruit a monitoring specialist for the purpose of assisting DBP in establishing a permanent monitoring system for Bank-assisted livestock projects. 26. As under the preceding project, DBP failed to monitor lending activities under this loan, although attempts to implement the provisions of the Loan Agreement were made. Guidelines for establishing a monitoring sys- tem for livestock projects were issued by DBP in 1978, and a contract with a local organization associated with the University of the Philippines to design such a system was approved in 1979. However, the contract was termi- nated more than two years later as no concrete results were forthcoming. 27. There are several reasons for this failure, a major one being that adequate guidelines were not prepared at appraisal.16/ The objectives of this component were vaguely defined, and no details were provided on methods 15/ NEDA points out that there has been no further development with respect to livestock insurance schemes to protect against losses which were mentioned in the audit of Loan 823-PH (Annex II). 16/ DBP agrees with this assessment and offers additional comments in Annex I, paras. 12.0 - 13.0. NEDA's comments are in Annex II. - 10 - and procedures. Consequently, there was a diversity of opinion during imple- mentation as to exactly what needed to be done. It was pointed out, for example, that a partial monitoring system just to cover Bank-assisted live- stock loans would be inefficient and difficult to operate given the way DBP was organized, especially in the branches. There was also disagreement on the complexity and cost of the system. Another major obstacle was DBP's in- efficient and unwieldy accounting system, which deserved priority attention. The Bank and DBP failed to resolve essential open issues and thus contributed to the unproductive consultancy engagement. Both the Bank and DBP should have been able to more closely supervise the work of the consultants and either provide clearer direction or terminate the contract sooner. More determination and resources are being devoted to this task under the follow-on project which, after some reformulation of the original concept, is currently supporting the computerization of DBP's accounts and the development of a comprehensive management information system. 28. In the audit's opinion, the effort to establish a monitoring and evaluation system was mishandled by both the Bank and DBP, causing un- necessary delays and expenses and depriving DBP of a useful management tool. This experience shows that where new features are to be introduced by a Bor- rower organization, these features ought to be clearly defined and fully adapted to the prevailing conditions. Furthermore, the Borrower must be con- vinced that the benefits derived from the introduction of these features must be substantial and clearly outweigh the costs. -11 - TABLE 1 PROJECT PERFORMANCE AUDIT REPORT PPILIPPINES SECOND LIVESTOCK PROJECT (LOAN 1225-PH) DISBURSEMENTS Category Loan Agreement Final Schedule 1 (04/08/76) Disbursement /a (US$ millions) (US$ millions) 1. Sub-loans for pig, poultry, backyard cattle, and dairy farm development 10.50 18.12 2. Sub-loans for coconut/ beef and hill beef farm development 4.00 1.94 3. Sub-loans for slaughterhouse construction 0.75 0.05 4. Consultants' services; equipment, livestock and materials for the research referred to in Section 3.07 /b and training outside the Philippines 0.50 /c 5. Equipment and material for a feed quality control laboratory 0.40 0.38 6. Unallocated 4.35 - Total 20.50 20.50 /a As of October 21, 1981, the date of final disbursement from the Loan. /b Section 3.07 refer3 to a program of applied research on pig and poultry nutrition. /c Actual disbursement under Category 4 was US$2,710.76.  - 13 - Annex I Page 1 COMMENTS RECEIVED FROM THE DEVELOPMENT BANK OF THE PHILIPPINES (DEVELOPMENT BANK OF THE PHILIPPINES) OFFICE OF THE CHAIRMAN 1 September 1983 SHIV S. KAPUR Acting Director General Operations Evaluation The World Bank 1818 H. Street, N. W. Washington, D. C. 20433 U. S. A. Dear Mr. Kapur: Subject: Project Performance Audit Report on Philippines Second Livestock Project (Loan 1225-PH) Thank you for your letter of June 30, 1983 soliciting our views and comments on the first draft of the above subject. While we find the present draft of said project performance audit report satisfactory on the whole, we are nevertheless sending the attached comments of our Agricultural Supervision Department for con- sideration in formulating the final conclusions concerning the cap- tioned Project. I will also be grateful if you can provide us a copy of the final report. Best regards. Very truly yours, AR C. ZALAMEA CCZ/rco Encl.: As stated 14L - Annex I Page 2 COMMENTS ON THE PROJECT PERFORMANCE AUDIT REPORT OF THE WORLD BANK-ASSISTED SECOND LIVESTOCK DEVELOPMENT PROJECT (Loan No. 1225-PH) Preparation of the PCR 1.0 The PCR was prepared by an ad hoc team organized by the Agriplan Unit (APU) with members drawn from other units of DBP. While PCR preparation was the responsibility of APU, it had to rely heavily on the assistance of certain staff from other departments because of the limited number of its regular staff. 2.0 Because APU had yet to recruit personnel from other units, actual work on the PCR started only in July 1982 with the deadline for its submission already set by management on October 31, 1982. With only 4 months to work on,including survey of randomly selected sub-projects, every- thing had to be rushed. It is probably for this reason that APU took the liberty of submitting the PCR directly to the World Bank without first soliciting the views of other concerned agencies in the government and other departments in DBP which were directly or indirectly involved in the implementation of the project such as the Agricultural Supervision Department, Agricultural Loans Department and the two Branches and Agencies Departments. Project Design Preparation Vs. Project Appraisal 3.0 The summary of the project components as originally envisioned by DBP in consultation with line agencies of the government such as NEDA, Ministry of Agriculture and the Bureau of Animal Industry appears in Annex A while the design and scope of the Second Livestock Development Project as appraised by the IBRD Mission in May 1975 is indicated in Annex 2. - 15 - Annex I Page 3 4.0 Some of the contrasting features on the two project designs are the following: a. the feedgrain component which proposes the development of 22,750 has. for corn, sorghum and soybean production with a proposed loan allocation of P72. 10M or 21.9% of the total project cost intended to assure adequate supply of feedgrains for the incremental stock to be generated by the Project was dropped by the IBRD Appra..sal Mission without adequate explanation and justi- fication; b. DBP recommended a fewer number (800) but relatively larger in scale for pig breeding/fattening farm development averaging P113,000 in amount ofsubloans and 20 in the number of sow units while the Appraisal Mission decided for a bigger number (1, 850) but smaller in sca..e, P59,000 each for every 10 sow unit. c. Only 2 slaughterhousesof commercial size to be equipped with refrigeration arid transport facilities and intended to provide a ready outlet for the livestock farms in the south were proposed in the preparation report while 10 municipal slaughterhouses were recommended by the IBRD Appraisal Mission. 5. 0 Viewed under the current situation, the deletion of the feedgrain component from the Second Livestock Project is,to say the least, ill- advised. Consequently, the country is now paying a toll for such a mistake since most swine and poultry farms financed under the Project, especially the smaller and medium sized ones, are in a very tight financial squeeze on account of the soaring prices of commercially - 16 - Annex I Page 4 mixed animal feeds brought about by limited domestic production and the high cost of imported feed ingredients. 6.0 During the conception of the two Livestock Projects the primary and immediate concern then of the government was to increase livestock production for domestic consumption in the most efficient and economical way. It is on this premise that , if given the choice, DBP would have catered mainly to the credit needs of the large commercial enterprises to take advantage of the economies of scale. However, the World Bank maintained the view that it is also possible to establish viable small scale modern livestock enterprises (Para. 2.20 LDP II Staff Appraisal Report, page 9), based supposedly on the good results under the First Livestock Project (Loan 823-PH). Apparently, the thinking of the World Bank staff was to mix the objective of increased animal pro- duction with that of social equity. Hence, the restriction in the granting of sub-loans beyond the equivalent of $100,000 was provided for in the Loan Agreement. DBP Loan Arrears 7.0 The reasons for high arrears and poor loan recovery rate in DBP are manifold, and it is therefore not entirely fair to say that DBP has given insufficient attention and inappropriate response to borrowers' problems. 8.0 The adverse global economic environment since the past few years, particularly the quantum increase in fuel cost, has not spared the Philippine economy from its adverse effects. Moreover, many agri- cultural projects financed by DBP have failed to come up to profitable operations not only as a result of the unfavorable business climate - 17 - Annex I Page 5 worldwide but also due to force majeure such as strong typhoons, long drought or other causes which the borrowers could not have anticipated or were beyond their capacity to control. 9.0 In the livestock/poultry sub-sector, the spiralling prices of animal feeds caused by shortage in the domestic production of some essential feed ingredients and the high cost of imported raw materials, particularly feedgrains, was among the major problems of the industry in the Philippines. This makes it very difficult for the smaller and medium sized commercial farms to cope up with the rising cost of farm inputs while the farm gate price of their produce tend to remain stagnant. It is therefore not surprising that the incidence of business failures and the level of arrears of swine and poultry borrowers is highest among the sub-loan beneficiaries under the Second Livestock Project. 10.0 But aside from these extraneous influences, there were also other factors which have contributed to high arrears on the LDP II accounts, some of which are the following: a) The World Bank-imposed policy of 36% penalty charge on delinquent accounts did not help in encouraging loan payments but rather became a deterrent and disincentive to most borrowers especially among groups of small sub-loan beneficiaries who in most cases depend so much on the financed projects for livelihood. Contrary then to what was anticipated, the arrears picture on agri-loans did not improve but even deterio:ated in 1978 (ASD paper on agri-loan arrearages, 1983) over the previous years, leaving so many small DBP borrowers buried in debt. After realizing the damaging effect of this seemingly onerous - 18 - Annex I Page 6 policy, the DBP on June 1978 with prior approval of the World Bank brought down the penalty charge for loans of P3.0M and below from 36 to 8 percent. In 1979, the penalty charged on loans above P3M was also reduced to 16 percent per annum. And finally, effective October 16, 1981, the penalty charge on all accounts was pegged at 8 percent p. a. b) The minimal equity contribution of sub-borrowers under the Project, requiring only 10% and 25% out of the total project cost for minor and major beneficiaries respectively could have likewise encouraged loan delinquency and partly contributed to high incidence of business failures. To remedy the situation and to encourage only those projects where the stake of the project proponent is relatively larger to provide greater assurance on the viability of the project, DBP adopted a policy limiting the amount of loan to only 50% of the total project cost for all loans except for those not more than P170,000. c) The idea of modern livestock production system as envisaged by IBRD Appraisal Mission was adopted without making distinction whatsoever between a smallholder and large-scale livestock enterprises and with- out fully taking into account the natural limitations of giving term loans to small borrowers. Apparently, the Appraisal Mission had hoped that both scales of operation be it big or small, would have performed with the same level of efficiency and profitability. 11.0 Quite aware of the positional disadvantage of agricultural enterprises and concerned with the predicament of small borrowers, DBP has not been lagging behind in providing relief and assistance to its clients. Various - 19 - Annex I Page 7 liberalized schemes and accommodations were made available by the bank such as restructuring of overdue accounts under soft terms, re- financing to iehabilitate moribund projects and providing short-term working capital to those which are temporarily distressed to nurse them back to remunerative level. On the other hand, DBP could not be accused of lax attitude towards collection of outstanding debt as this has always been among its major concerns. Monitoring and Evaluation 12.0 APU's inability to work out and operationalize a monitoring and evaluation system for the Livestock Projects, despite the hiring of outside consul- tants (GIRD), can be attributed to the fact that adequate guidelines from IBRD were not prepared at appraisal. And while the World Bank has continuously been admonishing DBP on the latter's alleged failure to implement this requirement, even the objectives of such an exercise were vaguely defined, and no details were provided on methods and procedures. Despite these setbacks, however, DBP has not completely abandoned the idea. Records are available to prove that monitoring and evaluation of randomly selected sub-projects has been one of the key terms of reference of various ASD missions which are periodically sent to DBP branches. Findings and observations of these supervision missions have always been a subject of intense but constructive delibe- ration between branch management and ASD staff during wrap-up sessions, results of which were the basis in adopting new and improved systems and procedures, as well as changes in policy. One concrete example was the suspension of lending for swine and poultry in some areas upon the advise of such ASD Missions. - 20 - Annex I Page 8 It has also to be recognized that DBP has a total of 154, 304 accounts in its agricultural loan portfolio as of December 31, 1982 which need to be monitored and served. Apparently, manpower constraint is one of the reasons for failure in the part of DBP to install and to operationalize an effective sub-project monitoring and evaluation system. Under the two IBRD-assisted Livestock Development Projects alone, a total of 8,155 accounts are being served. So far, 91 livestock appraisers have been trained under these two Projects, and of these, after promotions and transfers, 70 technical staff remain in the branches and at the head office to process and supervise sub-loans. Moreover, in the branches, livestock appraisers are also being utilized to process and supervise other projects other than livestock. 13.0 With the transfer in November, 1982 of functions of APU to ASD, top priority is now given to monitoring and evaluation activities. For this purpose, initial steps have already been undertaken to put the system at work. A conceptual framework of the monitoring and evaluation system was devised by ASD and sent to World Bank. For a start, guidelines and survey materials needed to monitor and evaluate the economic, financial and physical impact of the Third Livestock/Fishery Development Project are now being finalized. It is hoped that as the system progresses, all other agri-projects ,even those not financed by IBRD, shall also be included in the monitoring and evaluation exercise in conjunction with DBP's overall Management Information System (MIS). - 21 - Annex I Page 9 Attainment of the Project Objectives 14.0 As of December 31, 1982, the outstanding loans on livestock and poultry sub-sector stood at P903.04M, representing 28.83% of the total outstanding agricultural loan portfolio of P3.13B. The sub- sector registered a total arrears of P202.16 M or 20.25% arrears ratio so far the lowest in the agricultural sector, the highest being on crops (45.50%). 15.0 Despite this admittedly unhealthy arrears situation, the DBP, being the major source of medium and long-term loans for the livestock industry, can rightly claim the credit for having been largely responsible for the country's breakthrough in attaining self-sufficiency level in the production of poultry meat and pork. 16.0 The fact that 71% of sub-loan beneficiaries of the Second Livestock Development Project were in the category of P50,000 and below (PCR, Table 8-1) can indicate that the social equity issue as one of the Project's objectives, has been fully served. -22 - Annex I Page 10 ANNEX "A" DBP PROJECT PREPARATION REPORT Number of Project Cost % Total Components Loans (P Million ) Project Cost Integrated Coconut/Beef Breeding/Fattening 500 74.93 22.8 Hill Beef Cattle Breeding 50 9.06 2.8 Pig Breeding/Fattening 800 90.39 27.5 Poultry-Broilers 250 18.47 5.6 Poultry-Layers 150 29.06 8.8 Duck-Layers 200 5.00 1.5 Slaughter Houses 2 12.19 3.7 Feedgrain Development 22,750 Has. 72.10 21.9 Unallocated - 17.80 5.4 TOTAL 1,952 329.00 100.0 -23 - Annex I Page 11 ANNEX "B" IBRD PROJECT APPRAISAL REPORT Total Number of Project Cost Project Components Loans (P Million) (US$ Million) Cost (a) Farm Development Pig breeding/fattening 1,850 108.8 14.5 35 Poultry: Broiler 250 20.8 2.8 7 Layer 150 27.1 3.6 9 Cattle: Hill Farms 60 18.2 2.4 6 Integrated coconut/ beef breeding/ fattening 440 40.8 5.4 13 Small scale breed- ing/fattening 200 1.1 0.2 - Sub-total 2,950 216.8 28.9 70 (b) Municipal Slaughterhouses 10 11.6 1.5 4 Sub-total (a / b) 228.4 30.4 74 (c) Feed Quality Contfol Program 6.0 0.8 2 (d) Administrative Costs, Technical Services, Equipment and Research 11.9 1.6 4 Sub-total (a 7 b / c) 246.3 32.8 80 Expected price increases 63.2 8.5 20 TOTAL 309.5 41.3 100 Source: Philippine Appraisal of the Second Livestock Development Project, 1976 Report No. 1070-PH  - 25 - Annex II REPUBLIC OF THE PHILIPPINES Page 1 NATIONAL ECONOMIC AND DEVELOPMENT AUTHORITY NEDA sa Pasig, Amber Avenue Pasig, Metro Manila Comments Received from the National Economic and Cable Address: NEDAPHIL Development Autho:rity P.O. Box 419, Greenhills Tels. 673-50-31 to 50 13 September 1983 Mr. Shiv S. Kapur Director, Operations Evaluation Department International Bank for Reconstruction and Development 1818 H Street, N.W. Washington, D.C. 20433 U.S.A. Dear Mr. Kapur: We thank you for sending us a copy of the Draft Project Performance Audit Report on the Second Livestock Development Project (Loan No. 1225-PH) for our review and comments. We note with interest that the Audit Mission used the Project Completion Report (PCR) prepared by the Development Bank of the Philippines (DBP) as one of the main references in the preparation of the PPAR. Hereunder are our comments on the aforesaid Report: On DBP's Loan Arrears Discontinuance of Bank lending to DBP may be too drastic a measure to adopt with respect to the latter's loan arrears problem considering the benefits that the economy has derived from its credit relending activities over the years. Under Loan No. 1225-PH alone, the estimated incremental production of meat, eggs and milk has been placed at over 50, 000 tons (more than double the appraisal estimate); employment opportunities for over 5,900 persons have been generated; and there has been substantial foreign exchange savings (para. 8). Moreover, DBP's loan arrears problem are due to factors beyond its control, e.g. the overall economic downtrend during the recent years, high increase in prices of feeds, and natural adversities such as strong typhoons and long droughts. - 26 - Annex II Page 2 On Project Monitoring and Evaluation The monitoring problem could have been due to poor program preparation prior to implementation. At the time of appraisal, no adequate guidelines were formulated for the monitoring and evaluation system, the objectives were vaguely defined, and no details were provided on methods and procedures (paras. 26-27). The same problem has also been noted in the Rice Processing Project (Loan No, 720-PH) and which was mainly attributed to budgetary and staffing problems on the part of DBP. We note that the Third Livestock Project (Loan No. 1894-PH) has provided DBP with technical assistance for the continuation and expansion of its monitoring and evaluation system. We hope that the experience under the Second Livestock Project will help determine the appropriate measures to facilitate the system. On the Need to Develop the Local Feeds Industry The Audit Mission also concluded that sizeable import of supplementary comnercial feeds may have had adverse effects on the net foreign exchange savings under the Project and that the commer- cialization of livestock production has created a growing strain on tledomestic livestock feed base (para. 8). Having noted this problem, we think that there is good scope for encouraging and developing the local feeds industry to meet the growing demand of the livestock industry and to lessen foreign exchange costs in terms of import of commercial feeds. The Bank might, therefore, consider future assistance in this area. On Livestock Insurance Program The PPAR on the First Livestock Development Project (Loan No. 823-PH) recommended an insurance program to cover animal losses due to diseases or fire (para. 22). A livestock insurance scheme may be the best protection by a farmer against animal losses, in the same manner that the agricultural crop insurance program provided by the Government works. Unfortunately, no further step to pursue the issue on livestock insurance was undertaken both in the Second and Third Livestock Development Projects. In the preparation of future projects of similar nature, the feasibility of an insurance scheme should be looked into. - 27 - Annex I Page 3 We appreciate your giving us the opportunity to comment on the above-mentioned Report and we hope that our comments will be useful in its finalization. We would also welcome opportunities for us to assist you in your post-evaluation activities in the Philippines as part of our continuing liaison with your office. Best regards. Very truly yours, ANTONIO M. LOCSIN Deputy Director-General  - 29 - PHILIPPINES SECOND LIVESTOCK PROJECT (LOAN 1225-PH) Overview of Project Completion Report 1. The Project Completion Report (PCR), prepared by the staff of the Development Bank of the Philippines (DBP), is thoroughly done and appro- priately self critical. It was submitted by DBP to the Bank 14 months after the loan account was closed. Except for some information contained in Bank files, the report covers all relevant information concerning the project. Gaps in the analysis which have been filled by reference to documents unavailable in the Philippines are indicated in this overview, as are instances where the judgment of the Bank differs from that of the PCR. The information in this overview is, thus, a compendium of data in the PCR and those held in Bank files. 2. The project is a continuation of the First Livestock Credit Project (Loan 823-PH), which was approved by the Board on May 8, 1972 and for which a Completion Project was circulated on September 29, 1977. Subsequently, the Board approved a combined fisheries and livestock project (Loan 1894-PH) in the amount of $45.0 million. The latter is currently being implemented by DBP and the Bureau of Animal Industry (BAI) of the Ministry of Agriculture (MOA). Loan 1894-PH was about 50% committed and 37% disbursed as of December 31, 1982. The Bank has made a total of 17 lines of credit to DBP since 1971, of which 8 have been for industrial investment, 8 for agricultural investments and 1 for interisland shipping. Within the Bank, responsibility for broad institutional and financial supervision of DBP is assigned to the Industrial Development and Finance (IDF) Division. Agriculture supervision responsibilities, and this PCR prepared by DBP, center solely on the performance of the agricultural loan departments and the on-farm impact of such lending. Project Objectives and Achievements 3. The project was designed to: (a) increase domestic production of livestock products with a special emphasis on expanded beef and dairy output; (b) strengthen the delivery of DBP and BAI technical services; (c) carry out specific applied research; (d) construct 10 municipal slaughter houses; and (e) strengthen BAI's animal feed quality control program through the provision of scientific testing equipment. The estimated numbers of farm. enterprises financed, compared with the actual numbers financed under the project, are summarized below. - 30 - LOAN 1225-PH - APPRAISAL VS. ACTUAL LOAN APPROVALS Appraisal estimate /a Actual Approvals No. Amount Ave. No. Amount Ave. (P M) (P) (P M) (P) Piggery 1,850 94.76 51,221 3,658 231.87 63,389 Poultry Broilers 250 18.10 72,384 93.50 73,452 Layers 150 23.58 157,180 Cattle Hill beef 60 15.83 263,833 183 23.62 129,071 Coco beef/dairy 440 35.50 80,681 209 14.31 68,468 Fattening 200 0.96 4,800 139 6.40 46,043 Total 2,950 188.73 63,976 5,463 369.70 67,673 Slaughterhouses 10 8.7 870,000 1 .80 800,000 /a Excluding price and physical contingencies. Finance allocated to the livestock feed quality control program amounted to P 6.0 million ($900,000). Consultancies were provided for monitoring and evaluation (DBP) and applied research (BAI). - 31 - 4. In terms of numbers- and amounts of loan approvals, the project exceeded appraisal estimates by a considerable margin. The distribution of loan by category was also considerably different from that which had been anticipated. The number of subloans granted under the project was 5,463 compared to the 2,950 anticipated, and the total amount loaned (including DBP's internally generated funds) exceeded appraisal estimates by 96%. Although the PCR does not explain the increase in amounts loaned, it results from a combination of exchange rate changes, reallocation of proceeds from consultancies, and higher levels of participation by DBP than had been anticipated. Loan demand for swine and poultry was greater than projected, and that for beef (particularly for smaller operators) less than projected. Considering that a particular project thrust was to expand beef production, this was not successfully attained (see para. 11). Demand for municipal slaughterhouses had been extensively overestimated in the appraisal; the consultancies were largely ineffective and the livestock feed quality program successfully carried out. Project Implementation 5. The project became effective on September 13, 1976, two and one half months late. Disbursements began immediately and for approximately 24 months exceeded appraisal estimates. This resulted from existing demand carried over from the previous line of credit. Subsequently, disbursements slowed, largely at the behest of the Bank itself, which sought closer review of swine investments as allocations to this sector appeared to threaten a supply glut. Final disbursement was made on October 21, 1981, eight months ahead of schedule. Institutional Impact 6. The financial impact of the project has been negative for DBP, owing to poor loan recovery according to the PCR. The Region also believes that DBP-s operating overheads were too high. According to the PCR, the recovery rates for project subloans was 45% at the end of 1981. This probably includes both cash and noncash (i.e., reschedulings) collections, although these data are not provided in the PCR. Although far from good, loan collections under this loan surpassed the DBP average in 1982 (28.5%) and the average for all agriculture lending (34%). Accounts in arrears were above the total number of accounts up to date, and at June 30, 1981, only 36% of all loan accounts were up to date. Although problem loans were particularly concentrated in swine and poultry operations, all types of lending faced problems. The PCR does not analyze the reasons for these arrearages although it states DBP's own supervision efforts were less than desired. In the Region's view, additional factors are: a generalized perception in the Philippines that DBP loans are in fact grant programs, DBP's historic unwillingness to take clients to court and, as forecast by - 32 - the Bank, some overexpansion in piggery. Given an overall deterioration in DBP's financial situation and the country economic situation in 1983, it is likely that a greater number of accounts is now in arrears. Similarly, although not covered by the PCR, DBP's staff overheads have been high, partly owing to DBP's attempts to reach very small borrowers and to over- staffing at headquarters. The PCR calculates that as a result of this project, DBP had a negative net cash flow in 1981 of P 1.5 million, not counting overheads. The PCR also concludes that on the basis of exchange rates in effect in 1982 the foreign exchange loss on repayments to the Bank through 1990 would be $4.2 million. 7. In terms of institutional impact, the results of the project on DBP have been mixed. On the positive side, the DBP and BAI agreed under the project to a mutually beneficial cooperative agreement. This agreement has formed the basis of a continuing exchange of staff. Also DBP's own livestock staff was augmented during the project, rising by 58. This coincided with a reorganization of livestock units. As part of the project, DBP prepared a supervision manual for subborrowers. In the Region's view this manual is a good summary of subproject technical aspects, but has been insufficiently integrated into field work and project financial analysis. Impact of these changes is not commented upon by DBP's PCR, which is, in the Region-s view, a reflection of its overall inability to assess its internal procedure. 8. The project's most apparent shortcoming, described in the PCR, was the failure of outside consultants to perform satisfactorily in designing a monitoring and evaluation system for livestock projects. Short term consultants to be hired by the BAI to carry out animal nutrition studies were also never hired. The PCR does not adequately comment on these shortfalls. Certainly, the Monitoring and Evaluation consultants were not up to the mark, but DBP and the Bank were insufficiently precise about the outputs the system should deliver and should have reviewed more carefully a proposal put forward by a group of consultants joining together for just this one task. Moreover, the design of the system was faulty in that it was unrelated to DBP's overall management information requirements. Concerning the short-term consultants, the PCR states they were never recruited owing to slowness in bringing onstream the Livestock Quality Control Laboratory. A more apparent reason, in the Region's view, is that livestock research in the Philippines could be better managed on a national basis. This conclusion is supported by experience under Loan 1894-PH, where the animal nutrition research program under BAI is also moving slowly. 9. The environmental impact of the project was largely neutral except in the case of large commercial piggeries. The PCR quite properly identifies the problems of these piggeries as foul odor and voluminous animal wastes. At least in the Philippines, biogas production from animal wastes is not finan- cially attractive, and DBP could not apparently sell it to borrowers on such grounds. Moreover, though the country's pollution control laws are such that all piggeries would be required to dispose adequately of animal waste - 33 - products, enforcement is lax. DBP seeks to assure that project design meets national law, but the Region believes financial intermediaries should not be put in a position of enforcing a state's laws. Financial and Economic lapact 10. As part of the PCR, DBP carried out a field survey of 193 sub- projects actually financed. DBP also presented in the PCR seven updated farm models which had been presented in the original appraisal. These two exercises were apparently done separately with no attempt to use field survey data to calculate "real" farm budgets for cross checking against estimates. Typically, DBP's handling of technical and management issues of borrowers is much better than the financial or economic aspects. 11. The field survey results in the PCR present much useful information on technical practices among farmer borrowers. 20% of piggeries surveyed (mostly smaller ones) had gone out of business, pen utilization of remaining firms was low, feeding improper and overall management weak. Attrition among layer projects was negligible, but proper culling of layers was not practiced nor was night lighting. Among broiler projects 41% were out of business at that time of the survey (almost exclusively smaller ones), and only those which had associated themselves with integrators or produced their own feeds seemed to survive. Beef and dairy operation appeared much more successful from a technical standpoint with more owner operators, successful small operations and fewer failures. This would appear somewhat inconsistent with the PCRs finding (para. 3) that demand for cattle loans was far less than projected, although the PCR points out that there is an acute shortage of cattle breeder stock, indicating that many small growers who wish to raise cattle cannot do so and therefore do not request loans. The feed quality control program appears well underway and the PCR presents an impressive list of firms which have violated government norms. What is not clear is what then happened. The survey itself provides useful information on project appraisal norms which DBP has integrated into its appraisal criteria. 12. The PCR's analysis of economic and financial rates of return is methodologically sound, but ultimately difficult to interpret. - 34 - ECONOMIC AND FINANCIAL IMPACT (%) SAR PCR CHANGE Farm Model IRR /a ERR Tb IRR ERR IRR ERR 4,000 Broilers 46.0 } 47.16 28.99 2.5 15.9 4,000 Layers 25.0 } 27.11 17.39 8.4 (30.4) 20 Sows 23.0 } 23.97 19.00 4.2 (24.0) 400 ha hill beef 18.0 } 25.0 37.29 53.07 107.2 112.3 20 ha coco beef 16.0 } 35.33 33.27 120.8 33.1 10 dairy 23.0 } 21.60 16.24 (6.1) (35.0) 3 backyard cows 32.0 } 22.35 21.82 (30.2) (16.7) /a As presented in PCR. 7b SAR includes only one average ERR for whole project. It is worth underlining that these calculatiors are simply the appraisal estimates (1975) adjusted for inflation and not an actual representation of financial or economic flows. Moreover, based on information available in the PCR, it is not possible to state the project's actual overall economic rate of return. First, data are not available on the time phasing of subproject investments. Second, distribution of subproject types, other than by broad category, is unavailable. Third, overall failure rates by subproject type are not presented. The Region's view is that the range of rates of return calculated by DBP for the PCR is realistically representative, and appro- priately ignores the project's consulting and feed quality components. Taking account of these points and distributing rates of return on a weighted basis, the Region calculates the project's rate of return at 21%, compared with the appraisal estimate of 25%. 13. DBP collated basic output data expected at the time of each sub- project appraisal and compared it to appraisal report estimates. Owing to a larger number of borrowers with a higher average number of animal units per farm, overall meat production was expected to exceed appraisal estimates by 87%. The PCR estimates, and the region agrees, the project created 5,924 jobs, almost exactly the appraisal estimate of 5,800. The PCR also makes strong case for improvements in nutrition as a result of the animal protein produced under the project. Bank Supervision Efforts 14. The PCR states that Bank supervision was useful and cordial. According to the PCR the supervision missions served to focus attention on matters requiring immediate attention. Moreover, the PCR points out that Bank - 35 - supervision missions assisted DBP to look beyond some purely operational concern to broader issues. A case in point was the Bank-s counsel to slow down lending for piggeries at a time when it appeared a market glut could emerge. Bank missions included livestock specialists in the early years but not after 1978. This appears to have been justified as DBP-s technical staff are especially strong and it is on the financial and economic side on one finds weaknesses. Bank supervision missions correctly identified poor subproject supervision as a problem at DBP but were unsuccessful in persuading DBP to take significant corrective action. Finally, although not raised by the PCR, Bank supervision missions did not identify soon enough overall problems regarding the financial and institutional health of the DBP. Conclusion 15. DBP has prepared a useful PCR of the project. It is appropriately self-critical and covers adequately the project's salient aspects. In terms of the two major conclusion about its own operations, i.e., that subproject monitoring and supervision have been inadequate, and that the project has had a negative financial impact (para. 5), the Region is in agreement. The Bank also supports DBP's conclusion that the project's lending and production targets were substantially exceeded (para. 3), good relations with the BAI were established (para. 6) and that DBP improved its staffing and some procedures (para. 6). As a result of the PCR, DBP's headquarters agriculture supervision staff undertook a useful field review of subprojects which has resulted in new technical criteria for project appraisal. Although the PCR indicates that failures among smaller borrowers have been iore extensive than among larger ones, there is no final conclusion as to why this is so, nor what DBP proposes to do in the future. In the Region-s view it is likely that DBP is simply not the proper institution in the Philippines to do extensive .lending to small farmers. This view is to be taken up as part of future sector work.  IBRD 17234 1 I JUNE 1983 116' CLASSIFICATION OF PROVINCES 120* 124' BY GEOGRAPHICAL REGIONS NCR NATIONAL CAPITAL REGION I ILOCOS VI WESTERN VISAYAS 1 Ilocos Norte 38 Aklan , PHILIPPINES 2 Abra 39 Capiz 3 Ilocos Sur 40 Antique 2 20* Mountain 41 ' Io20o 4 MOUntain4NegrosOccidentil " 5 La Union V ENeR ViAYAS Airport 68 Benguet VII 'CENTRAL VISAY.AS ,43;Cebu oRoads 1jPangasman 44 Negros Oriental | CAGAYAN VALLEY 45jBohol Ro-Iways 8 Batanes 46Siquaqor 9 Cagayan Vill EASTERN VISAYAS - Bu ~0 Kalinga-Apayao -7 Nothr -Saar Provincial Boundaries aloga-payo 7!Northern Samar Babuyan Channel 1 'Isabela 48'Samar Regional Boundaries 2Ifgao 49 Eastern Samar Apar 13 NuevaViscaya SOtLeyte Log - - - - International Boundaries 14,Ouirimo 51jSouthern Leyte oog , CENTRAL LUZON IX WESTERN MINDANAO n D 15 lNueva Ecija 52] Zamboanga del Norte in s 16 Tarlac 53 Zamboanga del Sur 2 N 17 Zambales 541Bastilan 10 18 Pampanga 551Sulu ' 1 19 ulacan P6, Tawitawi n oC 4 S0 Bataan X NORTHERN MINDANAO 3 lagon IV SOUTHERN TAGALOG SurigaodelNone San 12 '21 Aurora 59ui Fernando 5 6 - - '22 Quezon 690 AM1isamnsOrienta 1B o 0 50 100 150 200 250 300 3 Rizal 14 KILOMETERS ' 1 16* 4Conite oMismi Occideral So MILESO 25j Lguna621 Bukidnon 7 15 0 10 S 0 :26 Batinoss I3gnnOia Son 21 27 Marinduque X1 EASTE RN M IN DA AO Jos 8 Mindo tal 64 Srgo del Sa rb atun 2 9 Mindoro Ociental. 6.51 Davao Oriental \16 - obotn 30 Romblon 66 Davao A geles 18 19 31 Palawan A7 Davao del Sur 17 I V BICOL 68Suth Cotabati '20 3k~ A2 V s)C m arines Norte XII N TA L MN A A O 33 Camarines Sur 691 Lanuo del Norte 34 jCatanduanes [701 LanadSu r '5 Albay 71 North Cotabato I'lPa I h6 Sorsogon Maguindano b7 asbg n Sultan Kudarat N SOUTH CHNAV 29 SIBUYANSE SEA o m 148 1VISA YANI SEA 49 % yuert 39 ViEtNT II 0o41 50 Leyte Gulf 80cold Panay Gulf Vo Ni 31 ertoC Couay n 4rag /. 3144 M/I ANVAO SEA 5 Bu 1/ 64 SULU SEACEEoS S 120' ooo20 1A16' v, ON SEA oO 8G PAIAI BRUNEt Ia e 1= 120'/ 53'12 *