Philippines - Agricultural Sector - Inputs Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-3860-PH REPORT AND RECOMbENDATTON OF THE PRESIDENT OF THE IERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$150.0 MILLION TO THE REPUBLIC OF THE PHILIPPINES FOR AN AGRICULTURAL SECTOR/INPUTS PROJECT July 17, 1984 This document has a restricted distribution and may be used bh recipients only in the performance of their official duties. Its cntents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit: Peso (P) USS1 = P 18.00 Pi = US$0.0556 GOVERNMENT OF THE PHILIPINES FISCAL YEAR January 1 - December 31 ACRONYMS ADB - Asian Development Bank FPA - Fertilizer and Pesticide Authority FSDC - Farm Systems Development Corporation MAF - Ministry of Agriculture and Food MOA - Ministry of Agriculture NACIAD - National Council on Integrated Area Development NASUTRA - National Sugar Trading Corporation NEDA - National Economic and Development Authority NFA - National Food Authority NIA - National Irrigation Administration PCA - Philippine Coconut Authority PHILPHOS - Philippine Phosphate Fertilizer Corporation PHILSUCOM - Philippine Sugar Commission UNICOM - United Coconut Oil Mills  FOR OFFICIL USE ONLY PHILIPPINES AGRICULTURAL SECTOR!INPUTS PROJECT Table of Contents Page No. Loan Snmmary . ......................................................... PART I - THE ECONOMY . . . ............ Performance in the 1970s ..................... Structural Problems and Adjustment ............ ..... ................. 2 The Current Economic Situation ...................................... 4 Medium-Term Prospects .... 6 PART II - WORLD BANK OPERATIONS ......................6.... .. ....... . 6 PART III - THE AGRICULTUR-AL SECTOR . . ........ ....... 8 Stutur ............ur .....e. 8 Organization . ..... .................................................. 9 Performance ............ ......................................... 10 Development Objectives and Constraints .............................. 11 The Government's Program of Sectoral Policy and Institutional Reform .......................................... 13 Policy Framework ................................................... 14 The Progiam of Institutional Reform ................................. 19 Investment Planning................................................. 20 PART IV - THE PROJECT ........ 20 Background ......................................................... 20 Project Objectives .. .. .. ............................................ 21 Project Description ...................... ._........... .. ...... 22 Project Implementation .......................................... ... 24 Evaluation ............. ............... .. 25 Procurement and Disbursement ........... ... ...... ....... . 25 Accounts and Audits ..................... . . ................. 27 Benefits and Risks ......... ...................s... 27 PART V - LEGAL INSTRUMENTS AND AUTIIORITY ....... ..... 28 PART VI - RECOMMENDATION ......................... .................... 29 ANNEXES I - Social Indicators Data Sheet and Economic Indicators ....... 30 II - Status of Bank Group Operations in the Philippines .......... 35 III - Supplementary Data Sheet .. .. ................................ 37 IV - Terms of Reference ........ ....... 39 V - Letter from the Borrower on Sectoral Development Policies... 62 Agenda for Action in Agricultural: 1984 - 8 8 ............... 67 This document has a restricted distribution and may be used by recipients only in the performance of their oficia duties. Its contents may not otherwise be discbsed without World Bank authorization.  - i - PHILIPPINES AGRICULTURAL SECTOR/INPUTS PROJECT LOAN SUMMARY Borrower: Republic of the Philippines Amount: US$150 million, including capitalized front-end fee. Terms: Payable over 20 years, including five years of grace, at standard variable interest rate. Loar flescription: The Loan would support the Government's short-term economic stabilization program and a medium-term program of agricultural policy and institutional reform. To support the stabilization program, the Loan would make available US$149 million to finance the importation of essential inputs (feedgrains, fertilizers, pesticides, veterinary products, and agricultural machinery and spare parts) required to meet the needs of the agricultural sector during the crop year 1984- 85. The program of sectoral policy and institutional reforms supported under the proposed operation provides, among other things, for specific actions concerning: (a) management and organization in the agricultural sector; (b) Government controls on prices of animal feeds, pork, poultry and eggs; (c) private sector participation in the trade of foodgrains and animal feeds; (d) rediscount rates on agricultural credit; and (e) policy related studies to help establish the base for future sectoral reforms. To support this program the loan would make available US$0.6 million equivalent for (i) studies on the operations of the National Food Authority, coconut, sugar, irrigation, fertilizer and agricultural credit and (ii) technical assistance services for implementing institutional reforms and improving sectoral investment planning. The main risks associated with the proposed project are that adverse changes in agricultural terms of trade may depress demand for the inputs financed and reduce the impact of the project on the short-term economic situation. Further, after the Loan is disbursed, some of the policy and institutional reforms may either be shelved or diluted because of major changes in Government or their limited impact on the pace of economic recovery. In view of the ongoing Bank policy dialogue with the Government, backed up by the prospect of future policy- related lending, and the technical support to be provided for institution building and planning, these risks would be reduced to acceptable levels.  - ii - Estimated USS million by quarter, IBRD FY85-86 Disbursements: 1 2 3 4 1 Annual 32.0 39.0 35.0 30.0 14.0 Cumulative 32.0 71.0 106.0 136.0 150.0 Rate of Return: Not applicable Appraisal Report: None Map:- IBRD 17234  REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF THE PHILIPPINES FOR THE AGRICULTURAL SECTOR/INPUTS PROJECT 1. I submit the following report and recommendation on a proposed loan to the Republic of the Philippines for the equivalent of $150 million, including the capitalized front-end fee of $0.4 million, to help finance the Agricultural Sector/Inputs Project. The loan would be repaid over 20 years, including five years of grace, at a standard variable interest rate. PART I - THE ECONOMY 1/ 2. An economic report, entitled "The Philippines: Selected Issues for the 1983-1987 Plan Period" (No. 3861-PH) was distributed to the Executive Directors under Sec. M82-542, dated June 16, 1982. A special report, "Aspects of Poverty in the Philippines: A Review and Assessment" (No. 2984-PH), was distributed to the Executive Directors on December 1, 1980 under Sec. M80-919. Country data are given in Annex 1. Performance in the 1970s 3. During the 1970s, the Philippines followed a much more dynamic, growth-oriented development strategy than in earlier decades. The growth rate of GDP rose from 5.1% in the 1960s to 6.22 in the 1970s, a rate well above that of lower middle-income oil importers (5.6%) but lower than that of conr- parable Asian countries. During the 1970s, the agricultural sector grew at about 4.5% p.a. and manufacturing industry at 7.2%. Manufacturing, however, did not play a leading role in the country's economic development. Although manufactured exports grew rapidly, the greater part of the sector remained oriented to the domestic market and was affected by severe inefficiencies. 4. Although economic performance was relatively good in the 1970s, structural weaknesses held it back below its full potential. GDP growth was achieved at a high investment cost - the incremental capital/output ratio (ICOR) was about 35% higher than those of comparable Asian countries. Although inherently capital-intensive infrastructure investments explain part of the high ICOR, inefficiency of industrial investment was the more important cause. Inappropriate trade, industrial, financial, and exchange rate policies designed to foster import substitution provided high protection for domestic manufacturers, and led to investments in which the Philippines did not have a clear comparative advantage. External borrowing and imports expanded rapidly while traditional exports and domestic resource mobilization lagged. This 1/ This section is substantially the same as that contained in the President's Report for the Municipal Development project which was dis- tributed to the Executive Directors on May 15, 1984.  resulted in a chronic shortage of foreign exchange and increasing external debt. 5. Despite satisfactory aggregate growth during the 1970s, the inci- dence of poverty remained around 40%, income distribution continued to be skewed, and regional disparities remained pronounced. The incidence of poverty reached 60-70% in the least developed regions. Large numbers of people, especially in the rural areas, still suffer from malnutrition and lack safe water, basic education, and health facilities. An increasingly unfavorable man/land ratio, the resulting expansion of cultivation into marginal lands, limited employment opportunities in the industrial sector, and the sharp deterioration in the external terms of trade put downward pressure on real incomes. Although the Government instituted several programs to improve directly living conditions of the poor, most of these were implemented on any significant scale only during the last few years and will require several years to achieve a marked impact. 6. Growth of productive employment, particularly in the industrial sector, has lagged behind the rapid expansion of the labor force, and consid- erable underemployment exists. During the 1970s, the agriculture and service sectors had to absorb an excessively high proportion of new entrants to the labor force. Manufacturing employment stagnated in the first half of the decade, and picked up only slightly thereafter as labor-intensive export pro- duction grew. Overseas employment, especially in the Middle East, increased rapidly, providing a temporary income opportunity. 7. Population growth in the Philippines was reduced from 3% in the 1960s to 2.5% in the early 1980s. There are indications, however, that it may have levelled off prematurely at that level. Thus, rapid population growth continues to strain available land resources, aggravate the already serious u.nemployment and poverty problems, and burden the public budget with a high growth in demand for basic public services. The Philippines has a family planning program which expanded rapidly during the 1970s; however, partici- pation in the program is still low by East Asian standards. Structural Problems and Adjustment 8. The structural weaknesses of the Philippine economy have become more apparent in recent years as unfavorable world economic conditions have exacer- bated the balance of payments, debt, and resource mobilization prnblems. In the late 1970s, the country's terms of trade deteriorated sharply due to oil price increases, accelerated international inflation, and depressed prices for major export commodities. The continued heavy reliance on export earnings from a few primary products (coconuts, sugar, copper, and timber) kept the Philippines extremely vulnerable to international commodity price fluctua- tions, while continued high dependence on imported oil further aggravated the balance of payments problem. 9. Excessive protection and an artificially low cost of capital led to low efficiency of investment and stagnant employment in industries producing for the domestic market. The industrial sector remained a net burden on the balance of payments; although manufactured exports grew rapidly, their net foreign exchange earnings were limited due to a high import content. Export promotion measures induced rapid growth in nontraditional manufactured  exports, e.g., garments, electronics and handicrafts, from $50 million in 1970 to $2.4 billion in 1982. However, export expansion was concentrated on a few items, and backward linkages were limited by high cost and low quality of domestic inputs. As part of an adjustment program supported by SAL lending, the Government has initiated major policy reforms designed to move towards an industrial structure utilizing more effectively the country's comparative advantage with respect to labor cost and raw material availability and which is internationally competitive. The program includes a major tariff reform, a liberalization of import controls, a realignment of industrial incentives and improved export incentives. The implementation of the program has been good, despite the international recession which has hampered the adjustment process in the manufacturing sector and slowed down the growth rate from around 4% in 1980-81 to an estimated 1% in 1982-83. 10. Financial Sector. Although well developed, the Philippine financial sector has not performed adequately in raising private sector savings and pro- viding investment financing. Among the main reasons have been the level and structure of interest rates which were not geared to mobilize sufficient sav- ings and encourage longer maturities; their low level contributed to rela- tively inefficient and capital-intensive investment. Further, the Central Bank's rediscounting scheme frequently resulted in encouraging over-investment in some sectors while others were relatively neglected. In 1981, the Govern- ment introduced far-reaching financial policy changes. The banking system was given greater flexibility, interest rates were deregulated, and the Central Bank was given a stronger position in its role as "lender-of-last-resort", all of which produced positive real interest rates (for the first time since 1978) and a significant increase in domestic savings. Government-owned lending institut.'ons have made less progress; as a result of insufficient autonomy in the selection of their portfolios plus a depressed domestic economy, loan collection rates continue to be very low and substantial government budgetary support is required. Rehabilitation of several government-owned institutions is necessary to reduce strains on the budget and to continue important development banking operations. 11. Agriculture and Rural Development. While the performance of the agricultural sector was satisfactory during the 1970s, some policy problems still remain unresolved. Although the sector has made commendable progress in food production in the last ten years, it could have made a stronger contribu- tion to the balance of payments under a more favorable policy environment. Trade policies have discriminated against agriculture. Similarly, pricing and exchange rate policies have had a negative impact on agricultural incomes. The institutional framework for agricultural policy formulation and implemen- tation suffers from serious fragmentation. Overall, there is a need to deal directly with the problem of the rural poor, particularly farmers engaged in rainfed agriculture, coconut growers, municipal fishermen, and landless sugar workers. Increasingly, investment programs will have to be directed towards rainfed agriculture and include innovative approaches to reaching smallholder farmers. 12. Energy. Since the 1973-74 oil price increase, the Philippines has made a considerable effort to reduce its dependence on imported oil. Through a combination of pricing, taxation, and conservation measures, the Government exerted downward pressure on commercial energy consumption. Steps to increase and diversify domestic energy supply, i.e., the development of hydroelectric,  - 4 - geothermal, nuclear and coal based power sources, have contributed to reducing import dependence. Limited domestic petroleum production also began in 1979. However, due to the long gestation period of energy projects, domestic energy production still constituted only 32% of total commercial energy supply in 1982. In response to the second oil crisis, the Government included in its adjustment program policy measures for the energy sector which aim at further reducing the country's dependence on oil imports through improving the effi- ciency of energy use and increasing the share of domestic sources to nearly 50% of commercial energy supply by 1987. Pricing policy will continue to sup,ort conservation and revenue objectives. 13. Public Sector Resource Management. The weak management of public sector resources has been a chronic problem in the Philippines, and has been further aggravated by the current recession. The fiscal stress generated by the growing imbalance between public investment and public sector resource mobilization has manifested itself in a number of ways. Government current expenditures (exclusive of interest payments) have been reduced to only 9% of GNP, as compared to an average of 14% of GNP in middle-income developing coun- tries. Implementation of projects has been stretched over longer periods than is economically efficient. The overall oublic sector deficit has become excessively high and has threatened the stability of the economy, particularly in 1981-1982. 1 rapidly rising level of public investment and an unsatisfac- tory financial performance of public corporations contributed towards increas- ing the fiscal deficit despite a reduction of recurrent expenditures. In 1982 the public sector deficit, which traditionally had been relatively small, increased to 5.4Z of GNP. 14. As a short-term response, the Government is now implementing a fis- cal austerity program. To reduce the national budgetary deficit to manageable levels, the Government has enacted revenue measures and reduced its investment program and equity contributions to public corporations. However, to improve the medium-term outlook for public finances, structural problems of the system need to be addressed. The Current Economic Situation 15. The economic situation of the Philippines has deteriorated seriously in the last three years. The global recession, with low commodity prices, high interest rates on external borrowing, and an increasingly unfavorable trading climate has stifled economic growth, slowed down export growth, depressed domestic demand and private investment activity and aggra- vated the fiscal and balance of payments problems. Real GDP growth fell to 3.S1 in 1981 to an estimated 2.9% in 1982 and is projected to have been only about 1% in 1983. 16. During 1979-82, the terms of tra:'e deteriorated, through a combina- tion of higher import prices, particularly for petroleum, and declining or stagnant prices for many primary exports, such as sugar, copper and copra products. Since 1981, the volume of exports has levelled off, reflecting the stagnation in the world's economy and a serious drought which reduced produc- tion of export commodities. Despite the severe external situation, the Government launched a major increase in its investment program in 1979, designed to make up for deficiencies in domestic infrastructure, expand industry, and reduce the dependence on imported petroleum. As a result the  - 5 - public sector investment program rose from less than 6% of GNP in 1979 to 9% by 1982. At the same time, public sector resource mobilization declined, producing a large and growing government budgetary deficit. This deficit was covered in large part by foreign borrowings; in 1982, foreign borrowing financed 70% of the Government's deficit and over 50% of the deficit of the public corporations. 17. The impact of all these factors has been a growing balance of payments deficit and an increasingly d'fficult debt service burden. The current account teficit rose from $2.1 billion in 1980, to $3.4 billion in 1982 (8Z of GDP) and $2.7 billion in 1983. The total debt service ratio, including interest on short term debt, increased from 21% in 1980 to 38% in 1982. During 1983, with growing economic problems, a mounting debt burden and major debt problems in other developing countries, foreign banks began reducing their expos-'re in the Philippines. The Government was increasingly forced to resort to short-term bo-rowings to finance the balance of payments gap, which further exacerbated the debt service problem. While the terms of trade improved in 1983 a severe drought rednced agricultural exports, and overall export earnings fell. By the middle of 1983 it became clear that the Government would not be able to meet the target set under an IMF standby agreement of reducing the overall deficit in the balance of payments from S1.2 billion to $600 million. In fact, for the first three quarters of the year, the overall deficit had already reached $1.3 billion. The situation was further exacerbated by political disruptions, a flight of capital out of the country, and a cessation of short-term lines of credit from the commercial banks. In October 1983, the Government announced a 90-day moratorium on debt repayments, a further 21% devaluation of the peso, and new controls over the allocation of foreign exchange for imports. Substantial reductions were made in the investment program, and some new tax measures were announced. As a result of these austerity measures, the national government deficit was reduced to 1.7% of GNP in 1983, compared with 4.2% in the previous year. However, because of the poor performance of the public corporations, the overall public sector deficit remained large at 4.5Z of GNP (compared to 5.4% in 1982). 18. Discussions with the IMF on a new standby agreement began in June 1983, as did discussions with the commercial banks on debt rescheduling. The agreement with the IMF has been delayed by problems involving the accuracy of some of the basic data, and Government difficulties in reaching agreed monetary and fiscal targets. The latter problems were caused, in turn, by the need to provide Central Bank support to weakened public and private financial institutions, slower than expected growth in Government revenues, and increased spending. As a result, the money supply increased 36% between September and March 1984, and inflation has been averaging about 40% (annual rate). In June 1984, the Government announced a series of steps designed to provide new sources of revenue through a series of taxes on imports and exports, and a 5% cut in the Government expenditures for 1984. In addition, the peso was further devalued by 22%, and prices of essential food, energy and consumer goods were adjusted upwards. Discussions with the IMF are contin- uing, and it is expected that once a new program is finalized it will be followed by debt reschedulings with the official and private creditors. In the meantime, private creditors have agreed to further extensions of the debt moratorium.  -6- Medium-Term Prospects 19. The medium-term outlook for the Philippines remains difficult. Even with a successful completion of the IMF standby agreement and debt resche- duling, there will be a need to make further cuts in government spending and to reduce imports. Except for those new inflows likely to come as part of the debt rescheduling exercise, the country is faced with little or no access to fresh private capital flows. As a consequence, the current account deficit will eed to be reduced from $2.7 billion in 1983 to $1.5 billion in 1984. Even with export growth of 5%, it will be necessary to reduce the real level of imports by over 20%. The overall result of constrained imports and government spending will be deflationary, resulting probably in negative growth in output during 1984, and increased unemployment. The unemployment problem is already severe, as several plants requiring substantial amounts of imported materials have had to close. 20. A period of low growth is likely to last for several years after 1984, particularly in view of current reductions in the investment program. The length of this period of slow growth, stabilization and adjustment can be shortened somewhat if the Government can take the necessary measures to accelerate exports, increase public and private savings, and use investment resources as efficiently as possible. The present crisis has increased the Government's awareness of the severity of the problems and increased its willingness to adopt the policies necessary to correct the situation. In the longer term, the combination of increased external assistance and Government actions should permit a resumption of growth close to the historical average of 6-7%. The country remains creditworthy, therefore, for new Bank borrowing on conventional terms. In the aftermath of the current recession while the country faces an exceptionally tight resource position, local cost financing for selected projects will continue to be justified. PART II - WORLD BANK OPERATIONS 21. As of March 31, 1984 the Philippines had received 93 Bank loans (of which two were on Third Window terms) amounting to $3,908.3 million and six IDA credits amounting to $122.2 million. IFC investments totalled $159.8 million. The share of the Bank Group in total debt disbursed and out- standing is currently about 14%, and its share in total debt service is about 13%. yhese ratios are expected to be about 19% and 16%, respectively, by 1988.- Annex II contains a summary of IDA credits, Bank loans, and IFC investments as of March 31, 1984. 22. Bank Group lending to the Philippines expanded from an average of about $90 million per year in FY71-75 to an average of $459 million in FY79-83. Although the Bank has financed projects in virtually all sectors of the economy, particular emphasis has been given to agriculture, which has accounted for almost one-third of total Bank/IDA lending. Lending for 2/ These projections are subject to revision following a debt rescheduling which is anticipated to occur later this year.  - 7 - industry, transportation, power, and social sectors followed in declining order of size. 23. In agriculture, lending initially focussed on expanding the irriga- tion system, credit programs, and other services to support rice production. More recently, efforts have been made to diversify agricultural production through loans for tree-crops, livestock, fisheries, and integrated rural development projects. Agriculture and rural development will continue to account for a substantial share of lending, with emphasis on poverty allevia- tion, food production, export promotion, policy reform and institution building. 24. In the industrial and financial sectors, lending has supported policy reforms under the Government's structural adjustment program. Struc- tural adjustment lending in 1980 and 1983 ($502.3 million, total) has supported a series of reforms of the tariff structure, the system of indus- trial incentives, energy pricing, and other important measures. An Industrial Finance Loan sought to bring about improvements in financial sector policies and introduced a new institutional concept to broaden the reach of Bank lending by channelling loans through an "apex" unit in the Central Bank. In addition, the Bank has continued to provide financial support and technical assistance to small and medium industries. 25. In the energy sector, sector work and the structural adjustment pro- gram initiated under SAL II provide the basis for future lending operations. While previous Bank lending focussed on the power subsector, the Bank now seeks to support a broader range of activities; in addition to recent energy exploration loans, the Bank plans to continue assisting the accelerated development of geothermal and coal, power generation and transmission, energy conservation, and rural electrification. 26. Implementation of Bank-financed projects in the Philippines has been satisfactory. Disbursements have, however, been slower than anticipated, particularly in the last three years. The disbursement ratio (amount disbursed during the fiscal year as compared to the total undisbursed at the beginglng of the fiscal year) declined from 18.7% in FY79 to 14.2. in FY83.- The East t7ia Regional average was 20.0Z and the Bank-wide average was 20.8% in FY83;- the comparable ratios for Pailand and Morocco were 16.9% and 13.7% respectively in the same fiscal year- Implementation problems increased in the last few years, reflecting in part problems caused by inflation, tight budget constraints, and changes in the scope of the Bank's lending operations (a substantial increase in the number of projects, new areas of lending, emphasis on institution-building, and efforts to reach spe- 3/ Excludes disbursements under the first and second Structural Adjustment Loan. If included, the ratio increases to 21.6%. 41 Regional and Bank-wide figures also exclude disbursements under SALs. 5/ Thailand and Morocco are useful as comparators as they have similar per capita income levels and Bank Group lending programs. Figures also exclude SALs.  cific target groups and lagging regions). In recognition of growing implemen- tation problems, the Government and the Bank have instituted a process of joint Country Implementation Reviews. Five reviews have been held since May 1980 and will be continued on a regular basis. A Special Action Program (SAP) for the Philippines was designed to assist the Government in implementing high priority projects which have been affected by the current shortage of counter- part funds. Under the Bank's SAP, selected projects have benefitted from increased cost sharing and disbursement ratios, the establishment of special accounts and in some cases, supplementary financing. These actions have facilitated project implementation and resulted in significant improvements in disbursement performance. 27. This will be the first loan to the Philippines to be presented to the Executive Directors this fiscal year. An export development fund project has been appraised and is scheduled fur Board presentation in the coming months. In addition, loans for coconut rehabilitation, land settlement, agri- cultural credit and geothermal development projects are now being processed for Board consideration this fiscal year. PART III - THE AGRICULTURAL SECTOR Structure 28. Agriculture is the dominant economic activity in the Philippines. It accounts for 30% of net domestic product, provides employment to about half of the labor force, and generates about 40Z of export earnings. The sector consists of four subsectors: (a) crops (mainly rice, corn, coconuts, and sugarcane), which account for 58% of gross sectoral value added; (b) livestock and poultry, 18%; (c) fisheries, 17Z; and (d) forestry, 7%. About three quar- ters of the poorest 40% live in rural areas and depend on agriculture for their livelihood. Rural income is low because of low productivity, the poor quality of land in some areas, and the limited availability of alternative, non-farm, jobs. 29. Philippine agriculture is characterized by small family-operated farms. In 1960, 80% of the namber of farms were under 5 ha averaging slightly over 3.5 ha per farm. Since then a further 1.2-1.3 million ha of land have probably been brought into cultivation. However, as a result of population growth and traditional inheritance customs, the average farm size has decreased to 2.7 ha. The distribution of cultivated land among Filipino households is highly skewed: 61Z of farmers have less than 3 ha and own only 24% of all farmland, while 5% of farmers have more than 10 ha in production and together account for 34% of farmland. 30. Since 1972 the Government has been implementing a program of agrarian reform designed to transfer land ownership to tenant farmers on rice and corn lands. The program consists of Operation Land Transfer, and the Leasehold Enforcement Program. Under the first, applicable to all landowners with over 7 ha, the Government distributes land to tenants, who pay for the land over 15 years. Under the second, for farms up to 7 ha, the Government gives tenants serurity of tenure on the land they cultivate. Some 730,000 ha and nearly 400,000 tenants were targeted for the Land Transfer Program, and about 1,460,000 ha and over 1 million tenant families under the Leasehold  - 9 - Enforcement Program. So far, the program has not yet fully achieved its targets: Operation Land Transfer has reached 80% of its intended beneficia- ries and the Leasehold Enforcement program some 70%. Organization 31. Both the public and private sectors are actively involved in Philippine agriculture. The public sector is primarily concerned with policy formulation and planning, research and extension, price control, marketing (particularly of imported food and foodgrains) and rural credit. The private sector, on the other hand, is primarily concerned with production and distribution of inputs and outputs. It produces, imports and distributes fertilizers, pesticides, feedstuffs and veterinary supplies; plays a major role in purchasing, processing and distributing marketed produce; and provides short-term credit to farmers. 32. Within the Government responsibility for the agricultural sector is divided among several ministries (mainly the ministries of Agriculture, Natural Resources and Agrarian Reform) and many institutions and agencies outside the direct control of the principal sector ministries. The Ministry of Agriculture (HOA) is nominally the lead agency in the sector. It is pri- marily responsible for policy and planning concerning crops and livestock; conducting applied research and providing extension services (some 15 agencies are involved in agricultural extension activities); producing improved seed, plant material and animal breeds; controlling plants and animal diseases; developing cooperatives; and soil testing. MOA also oversees the plans and programs of four Government-owned corporations and eight other agencies involved in crop production or regulatory activities. The Minister chairs a coordinating body, the National Food and Agricultural Council (NFAC), and has a role in policy formulation for the four supervised agencies. The Ministry of Natural Resources and its various agencies are responsible for fisheries, forestry, mining and lands. 1. fisheries, the Fisheries Industry Development Council is responsible for planning; the Bureau of Fisheries and Aquatic Resources for regulation, research, extension and statistics; and the Philippine Fisheries Development Authority for market.ng regulation and development. In forestry, the Bureau of Forest Development is responsible for reforestation and forest management. The Bureau of Lands is responsible for land surveying and titling. The Ministry of Agrarian Reform is responsible for the land reform program and land settlement activities. 33. The main institutions that operate largely independently of the principal sector ministries are The National Irrigation Administration (NIA), the National Food Authority (NFA), the Philippine Coconut Authority (PCA) and the Philippine Sugar Comission (PHILSUCOM). NIA, an agency under the Hinistry of Public Works and Highways, is responsible for the development, operation and maintenance of all national irrigation systems and for developing externally-funded communal irrigation systems, except for those handled by the Farm Systems Development Corporation (FSDC), an agency under the Ministry of Human Settlements. Altogether eight agencies have a role in irrigation development. NFA, an agency under the Ministry of Human Settlements, acts as buyer of last resort, mainly for grains, and, through Food Terminals Inc., its wholly-owned subsidiary for various other commodities (mainly, vegetables, poultry, eggs, fish, oil, sugar and milk.) Two other important bodies (both under the Office of the President) are the Philippine Coconut 'uthority and the Philippine Sugar Commission.  - 10 - Performance 34. Although there has been considerable variation by subsector, the trend growth rate of agriculture as a whole was a respectable 4.5% duiring the 1970s. Once a major importer of rice, the Philippines has exported small amounts in the last seven years and is likely to continue to do so for years to come. In physical terms, production of fish, pigs and poultry has also expanded rapidly. Based on the latest available data, root crop, vegetable and legume production grew at well above average rates through the 1970s and corn (used for food and feed) averaged about 4% a year. Both coffee and rubber production rose by over 10% a year from a small base, but among other internationally traded crops, cocoa production probably fell, abaca and tobacco production stagnated, and sugar production rose under 2.52 a year. Growth in coconut production, the country's major export crop, is difficult to assess because of inadequate data. However, the producing area grew at some 5% p.a. over the decade. The growth rate for the sector as a whole has been slower in the 1980s than it was in the 1970s. It reached a level of 3.5% in 1982 and, because of a prolonged drought, fell to an estimated 1% in 1983, a rate below that of population growth. 35. The contribution of agriculture to total export value has fallen from 73Z in 1970-72 to about 50% in 1978-80, and 38.3% in 1981-83. In 1969, forest products were the most important export group (30% of total), followed by coconut products, sugar and mineral products (each with about 19%). By 1978-80 coconut products were the most important agricultural group, accounc- ing for 20Z of total exports, while sugar accounted for 8X, forest products 10.3%, and fruits, vegetables and all other agricultural exports combined (fish, tobacco, abaca, coffee, rice) a total of 11%. 36. Bank Experience with Past Lending. A total of 39 loans and credits have been granted to the Philippines for investments in agriculture, fisheries and rural development. Of these loans, 12 were for irrigation development or rehabilitation and another 12 were for agricultural credit. The current rural portfolio comprised, by the end of 1983, 20 projects including seven in area development, five in irrigation, three in support services, two in agricul- tural credit, and three others in watershed management, fisheries and tree crops. The experience with lending for agriculture has been mixed. The Bank's Operations Evaluation Department Report (1982) on the agricultural and rural development program in the Philippines states that "the lending portfolio has reflected well the major objectives and priorities of national development plans." Developments in irrigation have been positive, including the establishment of a strong institution (the National Irrigation Administration) and an expansion of irrigated areas. In credit, operations have been largely successful in providing funds for onfarm investment, but serious institutional and loan recovery problems remain. Ongoing area development projects such as Mindoro Rural Development (Loan 1102-PH), Land Settlement I (Loan 1421-PH), Samar Island Rural Development (Loan 1772-PH), and Rainfed Agricultural Development (Loan 1815-PH) have encountered implementation delays due to problems of interagency coordination and lack of authority at the local level but, nevertheless, appear likely to attain their objectives. Institutional weaknesses in the Ministry of Agriculture and a shortage of local funds have hampered implementation of the ongoing National Extension and Agricultural Support Services projects.  Development Objectives and Consiraints 37. Development Objectives. The Government's development objectives, as set out in the current development plan, emphasize production, distribution, and environmental protection. In particular, the plan aims at: (i) reducing the unemployment rate by creating each year about 750,000 new jobs to absorb new entrants to the labor force; (ii) improving farm yields to increase farm income and export earnings; (iii) improving industrial productivity to make goods more competitive internationally; (iv) improving the lot of people living in depressed areas such as upland farming locations and fishing areas, and special groups such as landless workers and shifting cultivators (kaingineros); (v) reducing the country's dependence on imported oil; and (vi) establishing an adequate infrastructure to expand economic opportunities and facilitate the marketing of agricultural products. The plan also stresses the need to reduce the Government's involvement in those economic activities that car be more effectively carried out under private sector auspices. 38. Constraints. In the medium-term, the agricultural sector would have to grow at a rate of at least 5.0% to facilitate economic recovery and to absorb the rapidly growing labor force. To approach this growth rate it will be necessary to overcome various constraints and problems, particularly: (a) organization and management weaknesses that are affecting planning, resource management, and program implementation; (b) suboptimal pricing policies which dampen investment incentives; and (c) excessive and sometimes unjustifiable government interventions in crop marketing (including export) and input supply (including seed, feed and fertilizer), both of which could be undertaken by the private sector on a more efficient basis. These problems are discussed below. 39. Organization and Management Problems. The existing institutional framework is not conducive to an accelerated development of the agricultural sector. First, the organizational structure is complex and responsibilities for policy direction are dispersed among too many Ministries and agencies, as noted in paragraphs 31-33 above. As a result, conflicts occur and coordi- nation suffers. To deal with this problem, the Government has established a number of coordinating committees. This solution has not been too effective, however, because the number of committees is too large for nominal appointees to attend meetings regularly. There is therefore an urgent need to take appropriate measures to reduce the dispersion of authority and responsibility for policy formulation in the food and agriculture sector. 40. Second, there is a costly overlap of responsibilities and a duplica- tion of functions. Overlapping responsibilities cause confusion and, in the absence of viable coordination mechanisms, inefficiencies. For example, in area development programs, the National Economic and Development Authority (NEDA) and the National Council on Integrated Area Development (NACIAD) are involved in regional planning. Furthermore, Executive Order 803, issued in May 1982, also gives the Ministry of Agriculture authority for coordinating delivery of inputs and services in rural areas within the context of area development projects. Similar problems also characterize other critical aspects of agricultural development, most notably research and extension, irrigation services, land use, and forest resources. There is therefore a urgent need for carrying out a program of institutional reforms to reduce the duplication of functions and the overlapping of responsibilities.  - 12 - 41. Third, some important and powerful bodies have a level of autonomy which makes it difficult for the concerned Ministries to influence policies and programs with regard to key development activities. The most important among these are the Philippines Coconut Authority (PCA), which operates independently from the Ministry of Agriculture, and the National Food Authority. Similarly the Philippine Sugar Commission, the Philippine Crop Insurance Corporation and the National Nutrition Council - all important bodies in the agricultural sector - report directly to the Office of the President and do not even have MOA representation on their boards. Although coordinating mechanisms do exist, there is little incentive for agencies such as PCA, which have independent budgets, to be orgari'ationally linked to the principal agricultural Ministries. To deal with this problem, there is a need to take appropriate action to strengthen the role of the lead agency, to enable it to play a more effective role in the formulation of policies and programs in the food and agriculture sector. 42. The complex organizational and diffused management structure has also hindered government efforts to develop an effective sectoral planning mechanism. Although the National Economic and Development Authority is responsible for the sectoral plan, responsibility for planning and setting investment priorities is divided among several institutions which focus narrowly on their specific subsectoral or commodity problems. The current system leads to the formulation of sectoral investment plans which do not have well defined priorities. Appropriate action is therefore needed to strengthen the sectoral planning, and programming and budgeting systems. 43. Policy Deficiencies. Macro-economic and commodity-specific policies (export taxes, export quotas, and parastatal control of marketing) have on balance tended to favor industry and to penalize agriculture, thus reducing the relative incentives and rewards in the sector. The results have been to shift resources out of the sector faster than would otherwise have occurred, and to reduce the level of exports below their full potential. Under a more neutral set of policies, it should be possible to improve the productivity of the country's agricultural resources. 44. Public and Private Sector Roles. Although the 1983-87 Development Plan stated that the Government would withdraw progressively from those areas in the economy where the private sector can operate efficiently, the National Food Authority (NFA) has had a virtual monopoly to export rice and to import corn, soybean meal and wheat even though some of these activities could be carried out with equal or greater efficiency under private auspices. There is, therefore, a need to reduce NFA's market activities and to expand the role of the private sector, especially at a time when the Government needs to drastically reduce public expenditures. 45. Recent Sectoral Adjustments. The Government has begun to adopt several measures to stabilize the economy. Some of these actions have helped correct policy distortions that tended to turn the terms of trade against agriculture. The most important policy adjustments in this regard are the tariff reforms carried out under the structural adjustment program and, more recently, adjustments in the exchange rate and agricultural prices. Con- cerning tariff reform, a mid-term review of SAL II showed that the Government is making satisfactory progress towards the objective of lowering effective protection rates from 442 in 1980 to 282 in 1985. This should have positive  - 13 - effects on the agricultural sector by lowering industrial product prices. Similarly, recent devaluations have reduced a distortion in the exchange rate which until recently adversely affected incentives in the agricultural sector. Other important measures are the Government's decision to eliminate a controversial coconut levy, which for years dampened prices and investmient incentives in the coconut industry and to end the monopoly trading power of the National Sugar Trading Corporation. However, further adjustments are still needed to align domestic agricultural prices more closely to border prices and to establish more appropriate conditions to accelerate the sector's development. The Government's Program of Sectoral Policy and Institutional Reform 46. To arrest and reverse a recent deceleration in the rate of growth of agricultural production and exports and to build and sustain momentum in the process of economic recovery, the Government has formulated a program entitled "Agenda for Action in Agriculture: 1984-88," hereinafter referred to as the Agenda. This program aims at helping establish appropriate conditions for the development of the rural economy to generate an urgently needed supply response to the policy adjustment measures provided for in the Government's economic stabilization program. 47. To promote an orderly and sustained development of the rural economy, the Agenda provides for specific policy actions and institutional reforms to gradually Improve production and investment incentives, strengthen the institutional framework for sector management, mobilize an adequate level of financial resources to meet the sector's needs, and improve the allocation of scarce public resources. These measures are designed to address the key constraints that have impeded the full realization of the development poten- tial of the agricultural sector. Tne Agenda addresses, among others, the following issues: (a) government interventions that adversely affect pro- duction incentives; (b) institutional weaknesses that hinder the Government's ability to establish an appropriate policy framework favorable to sector development - in particular, a dispersion of responsibilities for policy for- mulation and implementation, an inefficient duplication of functions and programs, and a lack of a clear line of demarcation between regulatory and operating/trading functions of public corporations dealing with key agricultu- ral commodities and inputs; (c) land use policies; (d) irrigation; (e) the lack of a well-defined public investment program; and (f) agricultural credit policies and programs. The proposed project is designed to support the key elements of the Government's program (see Annex V - Letter from the Prime Minister outlining a Core Program). Policy Framework 48. Concerning policy reforms, the Agenda aims at phasing out Government controls and interventions that dampen production and investment incentives and that stifle private sector initiative. This strategy applies both to input and output prices, with partl'ular emphasis on rice, corn, animal feeds, coconut, sugar, pork, poultry, irrigation fees, fertilizer and agricultural credit. 49. The main thrust of the proposed policy reforms will be toward greater liberalization of domestic and foreign trade in agricultural products.  - 14 - Although the Government considers that same form of intervention is required in some cases, in general it acknowledges that there should be greater reliance on competitive market forces as the main determinant of prices and as the primary means of stimulating production. Table 1 summarizes the most important measures of the proposed program, which are discussed in more detail below. 50. Rice. Over the years, the Philippine Government has continually made significant efforts to improve efficiency in the production of rice. During the last decade, the development of high yielding varieties, the imple- mentation of comprehensive credit and extension programs, and the expansion of the area under irrigation enabled the country to achieve self-sufficiency and generate small exportable surpluses. To maintain self-sufficiency at least cost to the economy, the Agenda outlines various actions concerning the pro- duction and marketing of rice. These actions are designed to meet two key objectives: (a) improving production and marketing efficiency, including an efficient disposal of exportable surpluses when they occur; and (b) ensuring steady supplies to consumers. Consistent with these objectives, the Agenda stresses the need to sustain the momentum of the Government's rice production programs and to establish a higher, although gradual, degree of interaction between the domestic rice industry and the world market. It also stresses the need to manage strategic stocks effectively in order to dampen excessive price fluctuations. Concerning the latter problem, the Government has sought to stabilize both producer and consumer prices by buying from farmers at guaranteed prices, releasing stocks to dampen price increases and imposing controls on retail prices. Although Government efforts appear to have been successful at the consumer level, they have been relatively less successful at the producer level. 51. In particular, the Agenda provides for two specific policy actions: (a) the removal of restrictions that constrain the private sector from exporting rice, when there are exportable surpluses; and (b) the design and adoption of a system to moderate seasonal price fluctuations at the pro- ducer and consumer levels through market intervention (through buffer stock operations), rather than mandatory price ceilings. These actions are linked to an institutional reform program of the National Food Authority (para. 61) - the agency responsible for price stabilization - and to related studies on price support criteria for basic grains (rice and corn). 52. Yellow Corn. The Philippines has the potential for efficiently replacing imports and eventually for generating an exportable surplus of yellow corn, which is used entirely by a rapidly expanding livestock industry. However, the country has not yet been able fully to realize this potential because of inadequate production incentives and, until recently, the lack of viable technological packages. At present, the National Food Authority (NFA) has the sole responsibility for importing yellow corn, which it brings into the country free of duty. Also, under a price support program, NFA purchases a small proportion of domestic production from local farmers at a guaranteed price. It then sells both domestic and imported corn to com- pounders and millers. While effective in meeting domestic requirements, NFA trading operations have been costly to the Government and its price support system largely ineffective in improving farmgate prices. To address these problems, the Agenda provides for the following measures: (a) opening of the import and export trade in yellow corn to the private sector; and (b) aligning  PHILIlPPlNES AGRICULTURAL SECTOR/INPFLTS PRWJECT Table Ii At ion Program Policy are4 Mt1diLu-lter objectives Proposed action Timetable hatiolal Food Auithority Improve efficiency of (a) Commit to open usp within a raisonable period of time All Import Dec 194 N/A operation, and export trade in rice cor i 4nj other animal feedJ to the private sector. (b) LnJertake to mtabilise rice price. through biffer stock Dec [914 operations rather than n4idatory price ceilings. (c) SubstAntially complete .tudy of NrA operations. 9ic 19U4 Id) Reviev and begin implcuentation of the recomendstions of the tDac 1984 atudy Coconut Efficiency and equiity in (4) SubstAntially complete study of the coconut subsector, l Now 19S4 production, MArketinit lb) Adopt measurem to broaden the representation on the goveTning Jul 1SdA and consuepilon boArd of PCA. (c) Review and begin implementation of the ret'omuendAtlons of the Dec 1984 study. SugAr tfticitncy and equity In (a ) &,betant tlly complete tudly of the usuir suhsector. /s Dec I194 production, marketing (b) Adopt measures to brntdsn the representation on the governing Jul 19St and consLuption body of PHIlSl'CO. ec) Rvevew and begin implementation of the recosmendat tons of the Nov 19A4 study. Livestock Efficiency and equity tn (a) Remove price controls on poultry products. Dee 1984 production, marketing (b) Adopt phased reduction of the import tariff for poultry pro- Dec 1984 and conlatptioll Jucts, taking Into account the roaprlitivenesi of the domestic Industry. Cc) Remove price controls on pork. Dec 1984 Fertilizer Efficiency and equity In (a) Appoint separate chief operating executives for Philphks and Nov 1984 production, imrketing FrA. and consumption (b) Adopt specific meAsures and A timetable to retire G;overnment's Nov 1984 arrears to fertilizer fIrms. (c) Complete a review of this and other related Issues tn a study to Nov 1984 be undertaken In the content of the ADD Agricultural Inputs Progro IloAn. Ia Irrigation Achteve sufficient cost (a) Complete the atudy of NIA's cost recovery policies and resource Nov 19114 recovery, diversity requitrements /a Irrtiated cropping. (b) Review and begin iapleientation of the recoiendstions of the Dec 1984 above dtludy. Agricultural credit Improve effictency of (a) kvgin a phased progr,a of reducing the tnterest rate subsidy on Jun 1984 credit allocAtion and Government sponsored Agricultural credit programs in accordance collection with A timetable acceptable to the inok. Cb) Complete the study of agricultural credit mechantims, /a Oct 1984 (c) Revtew and begtn tsplementation of the recomendations of the study. Dec 1954 C'overnent institutions Improve planning, pro- (a) Isoue Appropriate lopleaenting docsuen:ation to make operationaI Jun 1914 gramming and coordina- the proposal of the PresIdential Comf.slon on Reorgantcacon on tion tnstttutional changes in the aSricultural sector. Cb) Initiate a long-term tnotitutlon-building program to mAke the new structure fully operational. Nov 1954 Sectoral Investment Establish system for (a) Prepare a prioritIzeJ Jdvelopment plan and corresponding Nov 1914 plannInS sectoral investment financinS plan for the agricultural sector. planning (b) Esabliah procedures And systems for updating the plan an a Nov 1954 regular basis. la Annen IV contains detailed terms of reference for the proposed studies,  - 16 - domestic prices with world prices through active trade but subject to a minimum level of tariff protection for local producers consistent with the Government's program of structural adjustment. 53. Animal Feeds and Livestock. Government policy in the industry has attempted to stabilize consumer prices by intervening in both output and input markets. Controlled output prices have not adequately reflected border prices and domestic inflation and thus have tended to dampen production incentives. Both pork and poultry producers have, however, reached a stage of development which would enable them to conduct their operations more efficiently under market determined prices than under controlled ones. In recent years, the private sector has been able to export small quantities of pork. Similarly, NFA regulates input prices and retains the exclusive right to import (duty free) and distribute animal feeds at controlled prices. These activities could also be handled more efficiently by the private sector. To address these problems, the Agenda provides for the gradual deregulation of the animal feed/livestock industry to increase its reliance on market forces. The specific actions proposed are as follows: (a) opening the import trade of yellow corn (see para. 52 above) and other animal feeds to the private sector, subject to an import tariff of not less than 10%, which is consistent with the tariff reform being carried out under the structural adjustment program; (b) removing price controls on poultry and eggs; (c) adopting a program to gradually reduce the import tariff for poultry, taking into account the competitiveness of the domestic industry; and (d) adopting a program to gradually remove price controls on pork. 54. Coconut. The coconut industry in the Philippines is one of the largest users of agricultural land and an important source of income for a large proportion of the country's population. It is a major source of foreign exchange earnings, accounting for about 20% of total exports. The Philippines is the world's major producer and exporter of coconut products, accounting for about 67% of world exports. Over the last decade government intervention in the industry has been in the form of export taxes, levies (abolished in 1982), a coconut replanting scheme, and a vertical integration of the processing industry. The latter was undertaken under private auspices, through the United Coconut Oil Mills. (UNICOM), the largest buyer of copra in the country (about two thirds of production) and virtually the only exporter of coconut oil. At present, one of the main issues facing the industry is that while PCA is intended to be the Government's vehicle for regulating and promoting the coconut industry, its Board consists mainly of large-scale producers and millers associated with COCOFED and UNICOM; hence there is a possible conflict of interest between PCA's regulatory functions and its Directors' private trading/manufacturing roles. Because of the critical role of the coconut industry in the overall economy, the strtucture of the industry, and the growers' perception that the Government's programs and policies have not adequately safeguarded their interests, it is important to ascertain how government interventions and existing marketing arrangements affect producers prices and incentives. To address this problem, the Agenda provides for a study to determine (a) the appropriate role of the Government in the coconut industry; (b) the most effective means of reducing costs and margins in domestic marketing and processing of copra; and (c) appropriate measures to ensure that farmers get a fair share of the proceeds of exports and domestic sales. The Agenda also calls for broadening the representation on PCA's board to ensure that the interests both of the participants in the coconut industry and the public are fully served.  - 17 - 55. Sugar. Sugar is a major source of foreign exchange earnings for the economy, accounting for about 8% of exports. In the past, Government has controlled sugar marketing to protect producers and consumers from excessive price fluctuations. From 1974 to 1984, the National Sugar Trading Corporation (NASUTRA) acted as the sole buyer of sugar from the mills and the sole exporter, under the principle that a single trading entity has greater marketing power in the global arena. In February of 1984, the Government adopted some measures to allow other private sector entities to participate in the sugar trade. These measures, however, are not yet effective. The policy making and regulatory body is the Philippine Sugar Commission (PRILSUCOM), which aliocates sugar production for export and domestic consumption. It also fixes the law sugar buying price on the basis of the average of liquidation price on thea domestic and export markets. As in the case of coconuts, there is a conflict between the regulatory interests of PHILSUCOM and the trading interests of NASUTRA: their Boards comprise largely the same individuals. To deal with these problems, the Agenda provides for a comprehensive study of the sugar industry to determine the scope and appropriateness of government intervention, and the relative efficiency of the current system by comparison with possible alternative approaches. The study will, inter alia, review and analyze the impact of current price setting, market allocation and revenue liquidation arrangements, the cost of PHILSUCOM's and NASUTRA's operations, the need for separating the regulatory from the trading functions and for establishing public financial accountability, and the factors affecting incentives to millers and growers. It will also recommend appropriate solutions to the other problems affecting the industry. As in the case of coconuts the Agenda provides for appropriate action to broaden the Government's representation on the Board of PHILSUCOM. 56. irrigation. While NIA collects irrigation fees to help defray the cost of developing, maintaining and operating irrigation systems, in practice the Government has subsidized irrigation services to farmers directly through low fee assessments and indirectly through poor collection performance. To minimize the burden on scarce public resources and spur NIA to undertake a more energetic collection effort, the Government has asked NIA to assume responsibility for servicing all its debt obligations, including repayment of principal. However, NIA's internal cash generation falls significantly short of its needs. To deal with these problems, the Agenda provides for the adoption of a policy of variable irrigation fees (a fee based on the volume of water used in the production of a particular crop), and for a study to assess NIA's financial requirements during che next decade for construction, opera- tion and mainten..nce of the national systems, and debt service. The study would evaluate whether NIA can realistically expect to generate the needed resources through irrigation fees. In the event that this is not deemed feasible, the study would examine (a) other possible ways of ensuring adequate resources for these purposes, including the accelerated transfer of respon- sibility for operations and maintenance to irrigators' associations, even in the case of national systems; (b) means for strengthening the rules and procedures for improving fee collections; and (c) further adjustments to a recently adopted policy of variable irrigation fees to encourage crop diver- sification and improve water use efficiency. 57. Fertilizer. The Government's approach to fertilizer policy is to achieve a balance between two conflicting objectives: maintaining low fertilizer prices to farmers and giving adequate incentives to domestic ferti-  - 18 - lizer producers. The Fertilizer aa. Pesticide Authority (FPA), formed in 1977, regulates the agro-chemical industry through a system of quota alloca- tion both for imports and domestic production and through adjustments of duties and taxes on raw materials used by local fertilizer producers. At present, FPA imports fertilizer on behalf of the private sector under a pool buying arrangement to minimize prices and handling costs. Several problems confront the industry. One of these is the high production cost of existing plants due to the use of outdated technologies. Another problem is the Government's arrears to the fertilizer industry. The arrears steLn from an arrangement under which the Government asked the fertilizer producers/ distributors to sell fertilizers to farmers at prices well below those pre- vailing in the world market with the assurance of compensating them. For various reasons these payments have not been made in full, and substantial claims have accumulated. To assist the producers to defray interest charges resulting from these outstanding payments, the Government has now allowed producers/distributors to add a financing charge. This has led to relatively high prices to farmers and possibly to reduced fertilizer use. There is also a potential conflict of interest between FPA and one of the companies, PHILPHOS, which will soon begin production, sin-e both organizations have the same top management personnel. To gain a better understanding of these problems and recommend appropriate measures to improve the marketing, pricing and use of fertilizers, the Agenda provides for (i) a comprehensive study of problems and issues concerning fertiizer trade, production and use (which will be carried out in the context of a recently approved ADB loan); and (ii) for a separation, in due course, of the management of PHILPHOS and FPA. In addition, within the context of an ADB loan (para. 68), the Government has agreed to take appropriate action to deal with the problem of arrearages. 58. Credit. Several problems affect the rural financial system in the Philippines. The most important among these are the large interest subsidy in government-sponsored agricultural credit programs and the regulations affect- ing formal rural lenders. Concerning interest subsidies, Government policies have led rural banks to depend on rediscounted Central Bank funds rather than on locally-mobilized savings and improved debt collection efforts. Subsidies have also encouraged borrowers to adopt capital-intensive production techniques, to divert funds to non-productive uses, and to feel little obligation to repay what they perceive to be government handouts. As for the regulation of rural lenders, the complex set of regulations governing rural banks has reduced the banks' ability to meet farmers' needs for timely and flexible credit. Informal lenders charging high interest rates have met a growing proportion cf the farmer's credit needs, but the cost of their loans may have discourage.i some otherwise viable investments. To address these problems, the Agenda provides for: (a) a timetable for phased reduction of interest subsidies on Government-sponsored agricultural credit through a pro- gressive reduction in the rediscount rate subsidy; and (b) a study of rural credit delivery mechanisms which would seek to (i) reduce, simplify or eliminate restrictions and regulations which reduce the competitiveness of formal lenders vis-a-vis informal lenders, (ii) explore the possibilities for utilizing informal lenders to channel public credit funds, and (iii) recommend ways of promoting rural credit programs based increasingly on mobilization of rural savings.  - 19 - The Program of Institutional Reform 59. The main objectives of the institutional reforms outlined in the Agenda are to reduce the dispersion of authority and responsibility for policy formulation, to establish a more effective coordination of food and crop pro- duction programs, and to improve the sectoral planning, programming, and budgeting systems. In particular, the Agenda provides for the integration of various agencies under a new ministry. 60. Organization and Management. Excessive fragmentation of ministries and parastatal institutions within the agricultural sector, and the lack of a clear and recognized mechanism for determining broad directions and for defin- ing needs and priorities inhibits the formulation of optimal agricultural policies and investment programs and complicates the implementation of sec- toral development programs. To address these problems, the Agenda outlines a proposal which provides, among other things, for the following: (a) redesignating the Ministry of Agriculture as the Ministry of Agriculture and Food (MAF); (b) designating the Minister of Agriculture and Food as the ex-officio Chairman of the National Food Authority and of the Philippine Fisheries Development Authority; (c) transferring the Bureau of Fisheries and Aquatic Resources from the Ministry of Natural Resources to the MAF and integrating it fully illto MAF's organizational structure and operating format; (d) transferring and attaching to the Ministry of Agriculture and Food the National Food Authority and the Philippine Fisheries Development Authority; (e) appointing the Minister of MAF as ex-officio member in the governing Boards of PHILSUCOM and PCA; and (f) revamping the responsibilities, membership, staffing and operational mode of the National Food and Agriculture Council (NFAC) to make it a more effective instrument for developing policy consensus and for implementing major agricultural programs which involve ministries and entities outside the formal boundaries of the MAF. The Bank has carefully reviewed the proposed institutional arrangements and considers them to be a significant improvement over the existing ones. They are practical and feasible and provtre a satisfactory basis for carrying out the policy reforms supported under the proposed project. In a second phase, the Government will begin a long-term program of institution-building to strengthen the capability of the proposed Ministry of Agriculture and Food to carry out its mandated functions. 61. National Food Authority (NFA). At present, NFA is entrusted with a multiplicity of functions which has tended to detract from its basic role of safeguarding the interests of producers and consumers through price support operations, distribution of vital cereals, and operation of a strategic food reserve. Moreover, the Government has had to commit a massive amount of  - 20 - scarce public resources for NFA's activities, some of which could be readily transferred to the private sector. The Agenda, therefore, provides for transfer of NFA's internaticonal trading activities in rice and animal feeds to the private sector and for a review of NFA's present role, organization and functions, including: (a) the extent to which some of its present activities could be scaled down or transferred to the private sector, to make it more efficient and viable; and (b) the financial results of each of the activities for which NFA is currently responsible and, in particular, the extent of cross subsidies which occur among these activities to identify opportunities for further efficiency improvements. The proposed study supplements another study on NFA being supported under the ongoing ADB Agricultural Input Program Loan; the Bank and ADB have agreed to a joint review of the findings of the two studies. Investment Planning 62. One of the main objectives of the Agenda is to channel an adequate level of resources for agricultural development purposes in accordance with well defined investment priorities. Consistent with this objective, the Agenda provides .or the formulation of a medium-term agricultural development plan (1985-88), and a corresponding consolidated budget for 1986. The proposed project would provide technical assistance for preparing this plan and budget and for building up the sectoral planning mechanism and budgeting systems. PART IV - THE PROJECT Background 63. The Government and the Bank formulated the propos-!d operation as a means of addressing in part the critical financial situation confronting the Philippine economy. It is part of the Bank's Special Action Program. An identification mission visited the country in November 1983 for detailed discussions concerning the objectives and principal thrusts of the project. The Government actively participated in its design and preparation. A mission appraised the project during February-March 1984. Negotiations with the Government were held in May 24 to 31, 1984. The Government delegation was led by H. E. Benjamin Romualdez, Philippine Ambassador to the United States and Mr. Arturo Tanco, Minister of Agriculture. 64. The project seeks to build on the recommendations of several sector studies completed in the last two years. These studies have laid the founda- tion for various reforms in the agricultural sector, now included in the Government's program of policy and institutional reforms. The studies are "Philippines: Irrigation Program Review" (Report No. 3545-PH, December 1982); "Philippines: Agricultural Sector Memorandum" (May 10, 1983); "Philippines: Agricultural Credit Sector Review" (Report No. 4117-PH, May 12, 1983); and "Philippines: Issues in Pricing Policy" (Report No. 4845-PH) to be distributed shortly).  - 21 - Project Objectives 65. The project has three objectives: first, to help maintain agricul- tural production by ensuring an adequate supply of inputs; second, to lay the foundation for future increases in agricultural production and productivity by introducing policies, or requiring studies leading to policy reforms, which would improve efficiency, restore incentives and mobilize financial resources for sectoral development; and third, to improve the institutional framework for the formulation and implementation of agricultural policies and programs. In particular, the project will support a program of policy and institutional reform outlined in the Government's "Agenda for Action in Agriculture: 1984- 88" as described in paras. 46 to 62 above. btz. While the proposed operation will support the overall program as a framework for longer-term action and policy dialogue, the Bank's immediate efforts will focus on a core program outlined in a letter from the Borrower dated June 4, 1984 (see Annex V). The Core Program consists of the following priority measures: (a) the adoption and implementation of organizational changes to improve the coordination of policies and programs in the food and agriculture sector, including the redesignation of the Ministry of Agriculture as the Ministry of Agriculture and Food and the change in composition of the governing Boards of the Philippine Coconut Authority and the Philippine Sugar Commission to provide for representation of the concerned Ministries and farmer interests (paras. 54 and 55); (b) the adjustment and gradual decontrol of prices of animal feeds, pork, poultry and eggs (paras. 52 and 53); Cc) the opening of all import and export trade in foodgrains and animal feeds to the private sector, with appropriate measures to facilitate the free entry of private firms into the trade (paras. 51-53); (d) the adoption of appropriate measures to align more closely rediscount rates on agricultural credit programs with those for other sectors, and a change from a fixed to a floating rediscounting rate based on prevailing market rates (para. 58); Ce) the implementation of a program of studies concerning NFA (para. 61), coconuts (para. 54), sugar (para. 55), irrigation (para. 56), fertilizer (para. 57), agricultural credit (para. 58); and (f) the adoption of appropriate measures to improve the sectoral plan- ning system, including appropriate mechanisms for the review of intrasectoral agricultural investment proposals and priorities (para. 62). 67. The Government has taken appropriate action to adopt and begin implementing the "Agenda for Action in Agriculture: 1984-1988," and the "Core Program." The Government has issued Executive Order No. 965 of June 30, 1984, implementing organizational changes in the Agricultural sector (para. 66(a)). It has adopted a three-phased program of price adjustment and decontrol which provides for the following (para. 66(b)): first, adjustments  - 22 - in the prices of poultry, eggs and pork to reflect increases in input costs - these adjustments were made on May 28, 1984; second, periodic review of the prices of poultry, eggs and pork, and adjustments as necessary during the remainder of calendar year 1984; and third, commencement of (i) a six month program to phase out price controls on poultry, eggs and pork, and (ii) a two year program to reduce import tariffs on poultry. In the area of trade liberalization, the Government has adopted specific measures to allow the private sector to export rice and corn (para. 66(c)). It expects to phase out controls on imports by the end of calendar year 1984. Concerning agricultural credit policies (para. 66(d)), the Government recently adopted specific measures to realign rediscount rates on agricultural credit more closely with those on credit programs for other sectors and to allow rediscount rates to vary in accordance with changes in prevailing market rates. Finally, the Government has confirmed that it has made all necessary arrangements to begin the policy related studies in accordance with the terms of reference agreed with the Bank (see Annex IV). The aforementioned actions, and others already being implemented, confirm the Government's commitment to the program of policy and institutional reforms supported under the proposed project. Project Description 68. The project is part of an overall program of financial assistance, estimated to cost about USS458 million, designed to ensure the availability of essential agricultural inputs for the 1984-85 agricultural year. On the basis of the policy and institutional reforms agreed with the Bank and ADB, the Government has sought other official development assistance to meet the estimated financing requirement. The Asian Development Bank approved in March a loan of US$130 million for these purposes following active consultations with the Bank on conditionality, the list of items to be financed, and the studies to be undertaken. Bilateral sources including the United States, japan, Australia, Canada, and the United Kingdom also have approved or are considering trade credits or grants to help finance the proposed import program. The estimated input needs and their proposed financing sources are shown in Table 2 below.  - 23 - Table 2: DMPORT REQUIREMENTS OF ESSENTIAL AGRICULTURE INPUTS, 1984, AND THEIR FINANCING/a (Millions of US$) Sources of financing IBRD as Z Input Total value IBRD ADB U.S.A. Others of total Fertilizer 150.0 40 105 - 5.0 26.7 Pesticides 33.0 15 10 - 8.0 45.5 Animal Feeds 194.9 60/b - 73 61.9 30.8 Biologics & Vet. Prod. 14.0 14 - - - 100.0 Breeding Stock 5.0 - - 5 - - Raw Mat. for bags 20.1 - 15 - 5.1 - Seeds 1.0 - - I - - Ag. Mach. & Spare Parts 40.0 20 - - 20.0 50.0 Total 458.0 149 130 79 100.0 32.5 /a Estimated on the basis of foreign exchange requirements and CIF prices. /b Bank financing would be applied to any item in the animal feed category. 69. The project would have two components: one designed to support production-oriented acrivities, and the other to support a program of policy and institutional reforms. Under the production component, the proposed Bank loan would make available $149 million to help finance the country's agricultural input needs in accordance with a well-defined financing plan. Extensive discussions have been held with ADB and the concerned Philippine agencies with regard to the items proposed for Bank financing. A considerable effort has been made to avoid possible overlaps with other potential donors. Items eligible for financing would comprise imported feedgrains, fertilizers, pesticides, veterinary products, breeding stock, and replacement machinery and spare parts. The amounts allocated to each item would be adjusted as needed depending on the assistance provided by other donors. The Government and the Bank will review from time to time the list of eligible items to be financed under the Loan. Some of these items, particularly pesticides, would need to meet sound environmental guidelines. Assurances were therefore obtained during negotiations that the Government would: (a) limit the importation of pesticides to those that comply with FPA guidelines; and (b) take well- identified steps to ensure the safe packaging, labelling, handling and storage of pesticides (Section 3.08 of the Loan Agreement). As for the technical assistance component, the loan would provide up to US$0.6 million for consulting services to: (a) carry out studies concerning NFA operations, coconuts, sugar, irrigation, fertilizer and credit as described in paras. 50- 58 and 61 above (see Annex IV for Terms of Reference); (b) help formulate policy reform proposals; tc) assist in strengthening the new proposed Ministry of Agriculture and Food; and (d) assiot in setting up a sectoral planning, programming and budgeting mechanism. During negotiations assurances were obtained that the Borrower would employ consultants on terms and conditions satisfactory to the Bank (Section 3.02 of the Loan Agreement).  - 24 - Financ'^ 70. The proposed loan of $150 million equivalent (including front-end fee of US$0.4 million). will finance about a third of the country's antici- pated needs for agricultural inputs in 1984-85. All production component costs and about 40% of the technical assistance component costs would be in foreign exchange. The Bank would finance the equivalent of US$0.3 million of local expenditures for technical assistance. Project Implementation 71. Coordination. To coordinate and oversee project implementation, the Government will designate a central project coordinator in the Office of the Prime Minister. He will be responsible for (a) monitoring all project related activities and ensuring that they are carried out in accordance with arrangements acceptable to the Bank (Section 3.09 of the Loan Agreement); (b) overseeing and monitoring the implementation of the policy and institutional reform program; and (c) regularly reporting to the Bank on progress in the implementation of the program. 72. Production Component. Under this component, it will be necessary to make appropriate arrangements to import various agricultural inputs that would be distributed to farmers through existing commercial channels. Several agencies, including the Fertilizer and Pesticide Authority, the National Food Authority, and the Bureau of Animal Industry, now oversee the importation of the items eligible for financing under the loan. Each of these agencies would be responsible for ensuring that importers comply with the Bank's procurement guidelines for the items under their respective jurisdiction. 73. Technical Assistance Component. The project coordinator would supervise all aspects of this component and would be responsible for ensuring that the responsible agencies assign all studies to competent consultants, that these agencies cooperate with the consultants, and that the studies are completed on schedule. The Director General of NEDA would be responsible for the project-financed technical assistance in agricultural sector planning, programming and budgeting, as well as for the studies dealing with coconuts and sugar. The NFA studies and those pertaining to irrigation and credit will be conducted under the auspices of t..c Office of the Prime Minister; and the technical assistance on institution strengthening would be executed under the direction of the Presidential Commission on Reorganization, and with the full cooperation of the proposed Ministry of Agriculture and Food. 74. For each of the studies to be carried out under this component, a steering committee would be appointed to oversee the work of study teams, periodically monitor progress, and review the draft and final reports. The steering committee will include the project coordinator, representatives of NEDA and the Ministry of Agriculture and Food, and an independent expert acceptable to the Bank. For the studies on NFA, coconut, sugar, irrigation, fertilizer and agricultural credit, the concerned government agencies would also appoint one member to the corresponding committee (Section 3.10 of the Loan Agreement).  - 25 - Evaluation 75. The National Economic and Development Authority (NEDA) would conduct, in consultation with the Bank, periodic evaluations of the effects of policy and institutional reforms associated with the project. During negotiations, assurances were obtained from the Government that NEDA will conduct the first evaluation at the conclusion of the project; two further evaluations at six-month intervals; and a final evaluation one-year thereafter (Section 3.07 of the Loan Agreement). The evaluations would establish an analytical framework for future Bank/Government dialogue on agricultural policy. Procurement and Disbursement 76. Procurement. Procurement arrangements would vary by class of item, as follows: (a) Animal Feeds. All animal feeds would be procured through inter- national competitive bidding (ICB) with suitable modification to reflect market practices for the commodity. (b) Fertilizer. Fertilizers will be procured following International Competitive Bidding procedures (ICB) in conformity with Bank guidelines. (e) Pesticides. Generic items shall be procured through International Competitive Bidding under Bank Guidelines, except for contracts below US$300,000 which will be procured following limited inter- national bidding (LIB) from a list of not less than three qualified firms. Pesticides which are proprietary and for which other generic or proprietary products are not available will be procured through direct negotiation on single source basis. For other pesticides for which alternatives are available procurement shall be through ICB under Bank guidelines, the selection being based on relative effec- tiveness and cost per unit area, according to criteria specified in advance. (d) Veterinary Products. The same procedures as for pesticides. (e) Machinery and Spare Parts. The actual import shall be handled by importers/distributors who shall be prequalified by open advertise- ment on the basis of agreed criteria in respect of capabilities for service, spare parts and maintenance. Items of machinery shall be grouped to the extent possible and contract packages in excess of US$500,000 shall be awarded on the basis of competition among the preselected firms. For other items, the amounts shall be allocated based on fleet size for the type of equipment handled by each of the importers and other similar criteria. (f) Consultant Services, Locally and internationally recruited consul- tants acceptable to the Bank will be selected following Bank guide- lines. Table 3 below summarizes the procurement arrangements.  - 26 - Table 3: PROCUREMENT OVERVIEW ($ millions) Type of procurement Project ICIB IS Other Totar cost Animal feeds 60 - - 60.0 Fertilizer 40 - - 40.0 Pesticide 3 3 9.0 15.0 Veterinary products 3 3 8.0 14.0 Agricultural machinery 4 6 10.0 20.0 Technical assistance - - 0.6 0.6 Total 110 12 27.6 149.6 77. Disbursements. Disbur3ements would be made against the CIF costs of eligible imports, subject to documentary evidence that expenditures have been incurred after July 1, 1984, and against statements of expenditure covering the costs of eligible consultant services. The loan would reimburse 100% of the foreign exchange cost of eligible imports procured in accordance with Bank guidelines, and 100% of the cost of consulting services. Both private and public sector imports would be eligible for financing. 78. Special Account. To facilitate project implementation, the Bank would make advance payments into a Special Account. The Special Account would be in US dollars in the Central Bank of the Philippines. The amount of the Special Account on deposit would at no time exceed US$25.0 million. Replenishment of the account by the Bank would be subject to review and approval of withdrawal applications justifying expenditures from the account (Section 2.02(b) of the Loan Agreement). 79. Tranching. The loan would be disbursed over a one-year period in two tranches of $75 million equivalent each. Disbursement of the first tranche would be released upon loan effectiveness. The second tranche would be available for disbursement after a review of performance in implementing the Government's "Agenda for Acticn in Agriculture: 1984-88" with particular attention to be paid to the following (Schedule 1, paragraph 3 and Schedule 4, of the Loan Agreement): (a) The adequacy of progress of NFA in opening up to private entities the import and export trade of animal feeds. (b) The adequacy of progress in phasing out price controls on poultry, eggs and pork. (c) The adequacy of progress in reforms of PCA and PHILSUCOM to broaden representation on their Boards to include concerned ministries of the Borrower and farmers' interests. (d) Satisfactory progress in preparing the policy-related studies.  - 27 - (e) Satisfactory progress in ra:ionalizing and consolidating the public investment plan for agricultural development (1985-88) and the consolidated budget therefor. (f) The adequacy of progress in reducing import tariffs on poultry. The mid-term review is expected to take place in December 1984. 80. Use of Peso Proceeds. The foreign exchange made available to the Borrower under the project would generate peso funds. These funds would be deposited in a special account at the Central Bank, and would be allocated to finance expenditures for development programs, including NFA's buffer stock operations. The funds will be made available to implementing agencies in accordance with local budget procedures (Section 3.01 of the Loan Agreament). Accounts and Audits 81. The Government will maintain financial records of all transactions under the loan in accordance with sound accounting practices. Implementing agencies will also maintain separate accounts of their respective transactions under the loan (Section 3.04(b) of the Loan Agreement). These accounts would be reviewed at the time of the mid-term review. Not later than six months after the end of each fiscal year of the Borrower, all accounts will be audited by independent auditors acceptable to the Bank (Section 3.04(d) of the Loan Agreement). Benefits and Risks 82. The project would generate two types of benefits: (i) short-term production benefits, and (ii) mediumr and long-term benefits derived from policy reforms, improved planning, and institutional arrangements. None of these benefits lend themselves to detailed and accurate quantification but all are vital to the process of economic recovery and development. 83. Short-term Production Benefits. The foreign exchange resources made available under the loan would have both direct and indirect production bene- fits. Directly, the loan would help maintain agricultural production and productivity by ensuring that imported inputs are available to farmer during a period of severe foreign exchange shortages. The inputs financed under the loan will help sustain the momentum of ongoing agricultural development programs, which are basically designed to improve production and productivity through a more intensive use of modern agricultural inputs. The indirect production benefits would derive from the generalized support which the loan would provide to meet the country's external financing needs in accordance with the Government's short-term economic stabilization program. 84. Long-term Benefits. More significant and more lasting benefits are expected from the policy and institutional reform package, based on specific actions as well as on studies designed to lay the groundwork for further reforas. The policy reforms implemented under the proposed program would improve production incentives and the efficiency of resource allocation by increasing the reliance on market mechanisms while moving to reduce the Government's role in areas where it is not necessary. Allowing private sector participation in rice and feedgrain trade, relying on selective Government  - 28 - market operations rather than price controls for rice, removing price controls on poultry and pork, reducing interest subsidies, providing a minimum level of effective protection for domestic animal feed production, and eliminating the burden on farmers imposed by the Government's arrears to fertilizer firms are all expected to enhance production incentives or improve resource allocation. Most of them would also help reduce government deficits by curtailing or eliminating costly activities being promoted under Government auspices, which could be performed equally well by the private sector. Substantial benefits are also expected frot the policy-related studies financed under the proposed loan; each of these is designed to recommend policy initiatives to be discussed with the Bank and implemented in the context of future Bank lending operations. As for the institutional re.orms, two kinds of benefits are expected. The first is an improvement in intrasectoral planning, policy formulation and coordination as a result of the integration of several sec- toral agencies under one Ministry and the institution-building program asso- ciated with MAF. The second is an improvement in public investment planning, programming and budgeting through a better mechanism for designing programs and allocating scarce investment funds in accordance with sectoral priori- ties. 85. Risks. Although the production component and the program of policy and institutional reforms supported under the proposed project are relatively straightforward, they involve risks. First, in the production component, there is a risk that input prices may increase faster than output prices and thus depress demand for project-financed inputs, thereby reducing the short- term production impact of the project. To deal with this possibility, the program of policy reforms provides for price adjustments and the removal of controls that may hold output prices artificially low. Second, the commitment to the policy and institutional reform package may be weakened over time because of organizational and sectoral management changes within the Government. This risk will be addressed through both a continuing Bank policy dialogue with the Government to maintain policymakers' awareness of the benefits of the reforms, as well as by linking Bank support for future operations to a satisfactory performance in the implementation of the agreed reforms. Third, the institutional reform benefits depend on more effective management of the new Ministry of Agriculture and Food and on a much more objective and practical interagency approach to sectoral planning and budgeting than has been the norm in the past. Neither condition can be guaranteed, but to minimize this risk the project would provide support for the institution-building of MAP and for strengthening sectoral planning and coordination among the various ministries and agencies. PART V - LEGAL INSTRUMENTS AND AUTHORITY 86. The draft Loan Agreement between the Republic of the Philippines and the Bank and the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement of the Bank are being distributed to the Executive Directors separately. In addition to the special conditions of this loan listed in Section III of Annex III, of this report, a condition of loan effectiveness would be: that the special account referred to in para. 78, above has been opened (Section 6.01 of the Loan Agreement).  - 29 - 87. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 88. I recommend that the Executive Directors approve the proposed loan. A. W. Clausen President Attachments July 17, 1984 Washington, D.C.  ANNEX I -30- Page I of 5 TABLE 3A NIILIPPINS - SOCIAL ZNICATIRS DATA SHET PHtIP"Mir RERPNCE GOUPS (ZIO4TED AVERAS) MOST (POST RECENT eSrmATE) /b I~~~ 96,f It 70-bkc b MIDLE, 1C NDDLLt INCW 1960- 197t ESTlfAT- ASIA P PACrFIC LAT. ANERICA