Philippines - Fifth Highway Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No- P-3604-PH REPORT AhND RECOMMENDATION OF THE PRESIDENT OF THE INTERNAIONAL BAo K FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTI - DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$102.0 MMLLION TO THE REPUBLIC OF THE PHILIPPINES FOR A FIFTH HIGHWAY PROJECT April 30, 1984 This document bus a restricted distrbution and may be used by recipients only- in the performance uf| their offici2t duties- Its eontents may- not othlerwise be disclosed wfithoDut Worid Bank autborization -  CURRENCr EQUIVALENTS Currency Unit = Pesos (C) US$1.00 = P 14.00 P 1.00 = US$0.07 FISCAL YEAR January 1 to December 31 ABBREVIATIONS AA - Advice of Allotment ADT - Average Daily Traffic ADB - Asian Development Bank CDC - Cash Disbursement Ceiling ClAP - Construction Industry Authority of the Philippines co - City Office of MPIJH COA - Commission on Audit DBCC - Development Budget Coordinating Committee DO - District OffLce of Y PW EKK - Equivalent Maintenance Kilometer ERR - Economic Rate of Return GRT - Gross Registered Tonnage INLG - Ministry of Local Government MOB - Ministry of Budget MOTC - Ministry of Transport and Communications 'MPH - Ministry of Public Highways MNP - Ministry of Public Works bPwH - Ministry of Public Works and Highways NEDA - National Economic and Development Authority NTPP - National Transportation Planning Project PCA - Philippi-e Contractors Association P1O - Projects Management Office of IPWH PNR - Philippine National Railways PPA - Philippine Ports Authority PTS - Philippine Transport Survey RO - Regional Office of MPWH SOE - Statements of Expenditure TOR - Terms of Reference USAID - United States Agency for International Development vpd - vehicles per day  FOR OMCAL USE ONLY PHILIPPINES FIFTH HIGHWAY PROJECT Loan and Project Summary Borrower: Republic of the Philippines Beneficiaries: Ministry of Public Works and Highways (MPWH), Ministry of Transport and Communications (MOTC) and the Construction Industry Authority of the Philippines (CIAP). Amount: US$102.0 million (including capitalized front-end fee). Terms: 20 years, including five years of grace, at the standard variable interest rate. Project Description: The project seeks to (a) improve the existing network of national highways and bridges; (b) raise maintenance to adequate levels and remove the backlog of restoration works; (c) improve highway management, particularly main- tenance, and thus further strengthen the MPWH institu- tional framework. The project also aims to assist in deregulating interisland shipping, developing the domestic construction industry, and improving the road transport industry. To accomplish these aims, the project provides for reconstruction of bridges, improvement and restoration of national highways, consulting and technicaL assistance services, and training. The project benefits are mainly savings in vehicle operating costs and in highway mainte- nance costs. The main project risk is in higher construc- tion costs than estimated; this risk has been reduced by a thorough preparation of the bridge reconstruction and highway improvement programs. Two measures proposed under the Special Action Program and included in this project are a higher cost-sharing ratio and the establishment of a Special Account. I This document has a restricted distribution and may be used by recipients only in the performance of their official duties. 1t contents may not otherwise be disclosed without World Bank authorization|  - ii - Local Taxes Foreign Total Project Costs: m(US$ million) Reconstruction of bridges 13.0 3.7 20.4 37.1 Improvement of national highway 6.3 1.8 9.8 17.9 Restoration of national highways 24.1 6.2 31.5 61.8 Consulting services 7.1 0.8 3.4 11.3 Technical assistance 0.4 0.1 1.9 2.4 Training - - 0.4 0.4 Land acquisition 1.4 - - 1.4 Base Costs (Hay '84 prices) 52.3 12.6 67.4 132.3 Price Contingencies Physical 5.2 1.3 6.7 13.2 Price 21.0 5.1 17.6 43.7 Total Project Cost 78.5 19.0 91.7 189.2 Front-end fee - - 0.3 0.3 Total Financing Required 78.5 19.0 92.0 189.5 Financing Plan: Local Taxes Foreign Total - C(USS million) IBRD 10.0 - 92.0 102.0 Government 68.5 19.0 - 87.5 Total 78.5 19.0 92.0 189.5 Estimated Disbursements: Bank FY 1985 1986 1987 1988 1989 1990 (US$ million equivalent) Annual 12.0 16.0 22.0 24.0 20.0 8.0 Cumulative 12.0 28.0 50.0 74.0 94.0 102.0 Rate of Return: Weighted ERR on the project as a whole is over 40% Staff Appraisal Report: No. 4535-PH dated May 1, 1984 Map: IBRD Map No. 17014R  REPORT AND RECOFMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANqK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF THE PHILIPPINES FOR A FIFTH HIGHWAY PROJECT 1. I submit the following report and recommendation on a proposed loan to the Republic of the Philippines for the equi--alent of $102.0 million including the capitalized front-end fee of $0.3 million, to help finance the Fifth Highway project. The loan would be repaid over 20 years, including 5 years of grace, at the standard variable interest rate. PART I - THE F-ONOMY 2. An economic report, entitled "The Thilippines: 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. N80-919. 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 6.3% in the 1970s, a rate well above that of lower middle-income oil importers (5.4%) but lower than that of com- parable Asian countries. Expansion of the agricultural sector was rapid at about 4.5% p.a. during the decade. Manufacturing industry, growing at the same rate as GNP, did not play a leading role in the Philippines' economic development. Although manufactured exports grew dramatically, 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 in the economy 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 invest- ments 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 activities 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 resulted in a chronic shortage of foreign exchange and increasing external debt.  - 2 - 5. Despite satisfactory aggregate growth during the 1970s, the inci- dence of poverty remained around 40Z, income distribution continued to be skewed, and regional disparities remained pronounced. The incidence of poverty reached 60-70X 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 3960s to 2.5Z 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 already serious employment 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, participa- tion 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 problems. 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 42 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 institutions 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-Gf 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. The Philippines, once a major importer of rice, eliminated rice deficits in the late 1970s and expanded fish and meat produc- tion. There is, however, a need for further diversification and promotion of commercial crops to improve the balance of payments position either through expansion of agricultural exports or through efficient import substitution. Trade policies in the Philippines have discriminated against agriculture. Pricing and exchange rate policies have also had a negative impact on incomes in the agricultural sector. The institutional framework for agricultural policy formulation and implementation suffers from serious fragmentation. Overall, there is a need to deal directly jith 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, 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 support conservation and revenue objectives. 13. Public Sector Resource Management. The management of public sector resources has been a chronic problem in the Philippines, which has been fur- ther aggravated by the current recession. The fiscal stress generated by the growing imbalance between public investment and public sector resource mobilization has manifeAted 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 countries. Implementation of projects has been stretched over longer periods of time than is economically efficient. The overall public sector deficit has become excessively high and has threatened the stability of the economy, particularly in 1981-1982. A rapidly rising level of public investment and an unsatisfactory financial performance of public corporations contributed towards increasing the fiscal deficit despite a reduction of recurrent expen- ditures. In 1982 the public sector deficit, which traditionally had been relatively small, increased to 5.5% of GNP. 14. As a short-term response, the Government is now implementing a fis-- cal austerity program designed to reduce the national budgetary deficit to manageable levels. The Government has reduced equity contributions and investment programs and enacted revenue measures which will improve the cur- rent imbalance. 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 serious- ly in the last three years. The global recession, with low commodity prices, high interest races 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 aggravated the fiscal and balance of payments problems. Real GDP growth fell to 3.8% in 1981 to an estimated 2.9% in 1982 and is estimated to have been only about 1% in 1983. 16. During 1979-82, the terms of trade deteriorated, through a combina- tion of higher import prices, particularly for petroleum, and declining or  stable prices for many primary exports, such as sugar, copper and copra products. Since 1981, the volume of exports has leveled off, reflecting the stagnation in the world's economy and a serious drought which reduced agricul- tural exports. 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 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 Govern- ment'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 arn" an increasingly difficult debt service burden. The current account deficit rosc from $2.1 billion in 1980, to $3.4 billion in 1982 (8Z of GDP) and $2.7 billion in 1Ia3 The total debt service ratio, including interest on short-term debt, increased from 21Z in 1980 to 38Z in 1982. During 1983, with growing economic problems, a mounting debt burden and major debt problems in other developing countries, foreign banks began reduc- ing their exposure in the Philippines. The Government increasingly was forced to resort to increased short-term borrowings to finance the balance of pay- ments gap, which further exacerbated the debt service problem. While the terms of trade improved in 1983 a severe drought reduced 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 under the IMF Standby of reducing the overall deficit in the balance of payments from $1.2 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 exacer- bated by political disruptions, a flight of capital out of the country, and a cessation of short-term lines of credit from che 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 invest- ment 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 4.5% of GNP (compared to 5.1% in 1982). 18. Discussions with the IMF on a new standby agreement began in June 1983, as were discussions with the commercial banks on a debt rescheduling. The agreement with tbe IMF has been delayed by problems involving the accuracy of some of the basic data, and a sudden increase in the money supply during the last quarter of the year, which threatened to undercut the agreed tar- gets. The rapid growth of the money supply reflected Government attempts to provide assistance to several commercial banks which were facing financial difficulties because of depressed economic conditions. As a result, money supply increased 32% between September and December of 1983, and the consumer price index increased by 15%. Negotiations with the IMF are continuing, 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 additional 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 mdke further cuts in government spending and to reduce imports. Except for those new inflows like'ly 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 balance will need to be reduced from $2.7 billion in 1983 to $1.5 billion in 1984. 'Even if export volume growth of 6% can be attained, it will be necessary to reduce the real level of imports by 18%. To meet the fiscal targets agreed with the IMF, the Government will have to either increase taxes or reduce government spending, or some combination of both. The overall result of constrained imports and government spending will be deflationary, resulting probably in negative growth in output during 1984, and increased unemploy- ment. The unemployment problem is already severe, as several plants requiring substantial amounts of imported materials, such as automobile assembly, have had to close. Increased unemployment will make the problem of a sustained recovery more difficult. 20. A period of low growth is likely to be sustained for several years after 1984 as well, particularly as the impact of current reductions in the investment program begin to be felt. 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 pub lc 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 it's willingness to adopt the policies necessary to correct the situation. 1u 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. Local cost financing for some projects continues to be justified particularly in the aftermath of the current recession when the country faces an exceptionally tight resource position. 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 mil- lion. The share of the Bank Group in total debt disbursed and outstanding, excluding short-term debt, is currently about 14%, and its share in total debt service is about 13%. These ratios are expected to be about 19% and 16%,  respectively, by 1988 2/ Annex II contains a summary of IDA credits, Bank loans, and IFC investments as of March 31, 1984. 22. Bank Group lendtig 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 alwrst one-third of total Bank/IDA lending. Lending for 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 the largest share of lending, with emphasis on food production, poverty alleviation, policy reform and institutional building. 24. In the industrial and financial sectors, lending has supported policy reforms under the Government's structural adjustment program. Structural 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 deffelopment of geothermal and coal, power generation and transmission, energy conservation, and rural electrification. 26. By and large implementation of Bank-financed projects in the Philippines has been satisfactory. Disbursements, however, have been slower than anticipated, particularly in the last three years. The disbursement ratio (amount disbursed during the fiscal year as compared to the total undis- bursed at the b7ginning of the fiscal year) declined from 18.7Z in FY79 to 14.2% in FY83. The East Asia Regional average was 20.0% and the Bank-wide 2/ These projections are subject to revision following a debt rescheduling which is anticipated to take place later this year. 3/ Excludes disbursements under the first and second Structural Adjustment Loan. If included, the ratio increases to 21.6%.  average was 20.8% in FY83,4/ the comparable ratios for ThaO and 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- cific target groups and deprived regions). In recognition of growing imple- mentation 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 substantial improvements in disbursement performance. 27. This will be the fourth loan, including two supplemental loans, to the Philippines to be presented to the Executive Directors this fiscal year. A municipal development project, an export development fund project and an agriculture sector inputs loan have been appraised and are scheduled for Board presentation in the coming months. PART III - THE TRANSPORT SECTOR The Transport System 28. The Philippines economy grew at 6% a year between 1970 and 1980, thereby generating a strong and growing demand for transport services. To meet this demand, the Government undertook investments totalling about P 20 billion (US$1.4 billion) principally in highways. With the majority of the national highways improved, the Government has now turned its attention to improving maintenance, while limiting investments to strengthening bridges and high priority highway sections. During the 1980s, the transport sector is expected to continue to grow but at a somewhat reduced pace in line with the slower growth rate of the economy. For the period 1983-87, the 'overument has tentatively allocated P 40 billion (US$2.9 billion) for ongoing and new projects in the sector. 29. The Philippines transport system is a predominantly bimodal system, with road and water transport generally complementing, rather than competing 4/ 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.  - 9 - with each other. Road transport handles 80X of the country's passenger movements and 60Z of freight movements, but the Philippines depends to a great extent on interisland shipping services. The railways and air transport handle only relatively small volumes of passenger and freight traffic. Policy Planning and Coordination 30. The Ministry of Transport and Communications (MOTC) is responsible for transport policy, regulation and adminastratioa. Planning for the transport sector is, however, the joint re-sponsibility of MOTC (for all modes other than highways), and the Ministry of Public Works and Highways (MPWI) for highways, with the National Economic and Development Authority (NEDA) having a coordinating role. MOTC undertakes overall sectoral planning through the National Transportation Plawinng Project (NTPP), which completed a five year investment plan for the transport sector in July 1982. Sector Issues 31. The most important issue facing the transport sector is inadequate maintenance. The second is institutional weaknesses, particularly in MOTC and MPWH -h.:re the major problem is attracting staff of adequate caliber and experience. A third issue concerns Government regulations relating to route licensing and tariff setting, particularly in iaterisland shipping and road transport. The fourth issue relates to the distinction between trucks licensed for hire (TH) and trucks licensed for owner use CT), but with many T trucks operating illegally for hire and thus depriving the Government of substantial revenues. The final iss-ue cuncerns the future of the Philippines National Railway (PNR). 32. Government is aware of these problems and is dealing with most of them. Governrment now gives the highest priority to highway maintenance. The troblem of attracting government staff is, however, more intractable because of low government salaries, and the techntcal agencies may have to continue using consultants (local and expatriate) for some years to come. On the third issue, MOTC has requested technical assistance to help in deregulation of interisland shipping (para. 61); and the Government intends to begin a similar effort later in road transport. On the fourth, MOTC has indicated that it has tighter'ed up procedures for the issue and renewal of licenses for T trucks. As regards PNR, the Government has decided against closure of the railway and to retain it for other than economic reasons, but has taken steps to strengthen the management in order to improve operations. Bank Involvement in the Transport Sector 33. The Bank Group has assisted the transport sector through four high- way projects, one rural road project, three port projects and one shipping project. The Bank has been involved in the road sector since the First High- way Project (Loan 731-PH). Three larger Highway Projects (Loans 950-PH, 1353- PR and 1661-PH) and one Rural Roads Improvement Project (Loan 1860-PH) follow- ed, The total lending for these projects has been US$333 million. Two of the highway projects have been satisfactorily completed. The Project Performance Audit Report (No. 2449, of April 4, 1979) for the First Highway Project found  - 10 - that problems during implementation were largely caused by civil disturbances in the project area. The project' reestimated economic return, however, was satisfactory. The Project Performance Audit Report (No. 4757, October 25, 1983) for the Second Highway Project noted that significant difficulties and delays on one road construction contract coincided with variations from the Bank's procurement procedures. This was corrected in subsequent projects. The report estimates that the project's economic return will be satisfactory despite some loss in benefits caused by imposition of tolls and ban on truck traffic on one of the project roads. 34. Implementation of the ongoing Third and Fourth Highway Projects has been seriously delayed because of slow procurement, poor performance of con- tractors, and inadequate budgetary planning. To improve project implementa- tion, MPWH agreed with the Bank on action programs in 1981 and 1982, and has adhered to these programs. As a result, project implementation has improved significantly over the last two years, and is now satisfactory. It is expec- ted that the Third Highway Project would be completed by August 1984 and the Fourth Highway Project by March 1985. 35. The Bank has also supported the Government's effort to improve rural roads (Loan 1860-PH) and ports (Loans 290-PH, 939-PH and 1855-PH) and shipping subsectors (Loans 1048-PH). Two port projects have been completed and the Third Ports Project is ongoing. The Bank's first shipping project assisted the Government in modernizing the interisland fleet of vessels. The project was completed in 1981 with a two-year delay. 36. A principal objective of the Bank with regard to transport sector lending in the Philippines has been to strengthen the institutions dealing with the sector and to help in the establishment of an appropriate framework for planning and policy development. As a result, a major component in recent lending has been technical assistance for national transport planning, a task completed in July 1982. Assistance in the future will be for policy formulation and implementation, with a gradual phasing out of foreign experts. Highways Subsector 37. The Philippines has an extensive road network of some 154,800 km (1982), of which 24,000 km are national, 30,000 km provincial, 15,600 city and municipal, and 85,200 barangay roads. The network is, in general, quite adequate in location and extent, but suffers from many deficiencies. Only about 13% of the total network is paved. The condition of many roads is poor because of lack of maintenance and damage from overloaded vehicles. Missing or weak bridges diminish the usefulness of existing roads, and in some remote areas access roads are scarce. Road classification is often arbitrary as it is not always based on function. The proposed project would include an overall road classification study (para. 59). 38. Major road improvement activities began in 1969 following completion of the Philippine Transport Survey (PTS). Most of the priority roads identified in the PTS have been improved with local resources, supplemented by assistance from Japan, USAID, ADB and the Bank. Some 10,400 km of national highways are paved, but the rate of road improvement work has not been  - 11 - sufficient to keep up with the need for repairing or replacing deteriorating bridges. The National Transport Planning Project study has concluded that the deteriorating condition of the national highway network is a critical issue, and that inadequate maintenance is the main reason. 39. In 1980, there were some 942,000 motor vehicles in the Philip- pines. Between 1970 and 1980, the fleet grew by 6.8% per year, but there has been very little change in its composition, with cars and trucks constituting 50% and 30% of the fleet, respectively. Heavy overloading of trucks is quite common and is thus a cause of concern. The Government is carrying out a study of the existing regulations on vehicle weights and dimensions, with Bank financing under the Fourth Highway Project. 40. Traffic accidents constitute a growing and recognized socioeconomic problem in the Philippines. However, accidents are noc accurately recorded and effective measures to prevent them are not being tak.eu. Speeding is quite common, driving behavior is often not in conformity with the traffic laws, and driver education is unsatisfactory. At the Government's request, the proposed project would include a traffic safety study to review traffic laws and regu- lations, accident reporting procedures, and highway police activities and recommend improvements (para. 59). Road Transport Industry 41. The intercity passenger transport industry consists of a small group of large firms with fleets of 150-450 vehicles offering a range of efficient long-distance services, and a large number of small operators. In addition there are a vast number of jeepney operators offering short-distance urban and interurban services, mostly owner-operated. Both truck and bus operations suffers from a lack of conmon terminal faciliti-s in the main towns. To review and help improve the efficiency of road transport operations, the pro- posed project would include technical assistance to MOTC to revies rhe trans- port industry (para. 60). Road User Charges and Highway Expenditure 42. Highway expenditures in the Philippines have increased from P 573 million in 1970 to P 4.5 billion in 1981. During this period, maintenance expenditures increased elevenfold to P 1.2 billion. During the same period revenues from road user charges (fuel taxes and motor vehicle fees) rose from under P 300 million to over P 5.1 billion. Currently, road user charges generate more revenues than all highway outlays - maintenance, administration and new construction - which is a satisfactory situation. Despite this, highway maintenance is still inadequate principally because of poor planning, diversion of resources, and insufficient monitoring of maintenance (para. 49). 43. There are also minor problems with the structure of road user charges. The first is the lower taxes on diesel fuel compared with petrol (P 0.59 vs. P 1.80 per liter). The Government has agreed to eliminate this differential gradually by raising the tax on diesel fuel (as part of the SAL operation, Loan 2266-PH). The second is the inadequate license fees charged  - 12 - for three-axle trucks. This would be reviewed as part of the vehicle dimen- sions and weights study financed under the Fourth Highway Project (para. 39). Administration Staff and Training 44. Responsibility for the public road network in the Philippines is divided, with some overlap, between the national government and local govern- ment agencies. In the national governmenC., MPIH is responsible for national highways. At the local government level, provincial governments and cities, municipalities and barangay councils, under the overall supervision of the Ministry of Local Government (MLG), are respectively responsible for the provincial, city, municipal and barangay roads in their area. MPWE is headed by a Minister who is assisted by three Deputy Ministers. Its field organiza- tion consists of 14 Regional Offices (ROs), '4 District Offices (DOs) and 55 City Offices (COs). 45. There is a shortage of experienced middle-level technical staff at MPWH. headquarters and in the field, particularly in the maintenance organiza- tion. To handle its staffing problems and help improve implementation, MPWH engaged in 1981 a local management and engineering consulting firm to provide a team of some 20 "in-house" consultants. However, despite the priority MPWH has given to maintenance over the last two years, its maintenance organization remains weak. Raising MPWH maintenance capabilities to a satisfactory level may take several years, and the proposed project, therefore, provides for continuation of foreign technical assistance services in highway mainte- nance. MPWH should be able to phase out foreign technical assistance in highway management after 1986. 46. MPWH has conducted training programs for technical and administra- tive staff for many years: it has a number of internal training programs and external training opportunities are also available for its staff. Bank sup- port has been provided for advanced technical training overseas for NPWH/MLG staff, this program has been quite successful, and the present project would continue this assistance. Planning, Design and Construction 47. Planning for national highways is initiated in MPWH, and the design and supervision of their construction are also carried out by MPWH, either directly or through consultants. The role and responsibilities of local consultants for both highway design and construction supervision have increased considerably over the last ten years vis-a-vis foreign consultants; and the Bank assisted this development particularly under the Second Highway Project. 48. Most of the construction work for national and provincial roads is carried out by contract. Some minor projects, particularly for barangay roads, are executed by force account, in many cases utilizing village labor. Local contractors are quite competitive with foreign contractors and have succeeded in getting most of the contracts under ICB. The Government has recognized that the present contract documents favor it unduly, for example in contract conditions, administrative procedures, and contract implementation rules, and  - 13 - that its relationship with contractors should be placed on a more equitable footing. Therefore, in 1980 it established the Construction Industry Authority of the Phlilippines (CIAP) which represents both Government and private sector interests to evolve an overall strategy for the development of the construction industry. Initial Bank assistance for measures to improve the Government/contractor relationship was provided under the Second Urban Development Project (Ln. 1647-PH). The Bank is also providing technical assistance to CIAP under the Fourth Highway Project and this would be continued under the proposed project. Maintenance 49. The greatest weakness in the Philippine highway sector has been inadequate maintenance. Since the Bank's involvement in the highway sector in the early 1970s, it has observed a serious lack of attention to road maintenance in the field. The reasons were many, ranging from inadequate organizational setup to shortages of funds and equipment. Years of neglected road maintenance have thus resulted in the deterioration of a large part of the network to a point where it cannot be maintained by normal methods; restoration works are needed to put the roads in a maintainable condition. 50. The Bank has provided assistance to strengthen the maintenance in previous road projects with some success. In general, routine maintenance operations on national highways are now usually being carried out to a reasonable extent, but periodic maintenance is neglected in most regions. Over the last two years, MPWH has emphasized the importance of efficient maintenance operations. In 1982, it began implementing highway maintenance programs in four pilot regions which established physical targets and resource requirements. MPWH is now introducing this system in all 14 regions. These changes, however, will take several years to produce results in the form of improved maintenance operations. 51. In 1971, MPWH developed a system for the allocation of maintenance funds for national highways based on the concept of an equivalent maintenance kilometer (EMK), and has been using this formula since. However, the basic EMK norm was last increased for price escalation in 1976. Based on its experience with implementing the 1982 waintenance programs in the four pilot regions, MPWH has tentatively concluded that the present EMK allocation may be approximately sufficient to cover routine maintenance expenditures, but little funds would remain for periodic maintenance. Consequently, MPWH has prepared * a proposal for a revised EMK formula which would increase the basic EMK norm and would thus provide adequate funds for both routine and periodic mainte- nance; MPWH submitted this proposal for Bank review in March 1984. During negotiations the Bank reached agreement with the Government on a revised ENK formula and its biannual review in consultation with the Bank (Section 4.03 (a) and (b) of the draft Loan Agreement). Government would make specific amounts (from P 435 million in 1984 to P 650 million in 1988) available annually for maintenance activities on national highways and bridges. Twenty percent of these funds would be earmarked for periodic maintenance in 1984 and 25% would be earmarked from 1985 onwards. The share of funds allocated for maintenance out of total expenditures for national highways would increase from i1Z in 1983 to 18% in 1988.  - 14 - Accounts and Audit 52. MPWH's accounting and auditing procedures are satisfactory. Accoun- ting and auditing staff are well qualified, and MPWH has had no problems recruicing qualified accountants. Several accounting functions are fully or almost fully computerized. The Government's Commission on Audit (COA) conducts a continuous external audit. PART IV - THE PROJECT 53. The proposed project was identified in January 1981 and was origi- nally intended to assist both national and rural roads. However, after a careful assessment of the implementation capacity of both MPWH and MLG, it was agreed with Government that the proposed program would be split into separate highways and rural roads projects. The national highway component would be further split into two stages, with the proposed project assisting the first stage of the upgrading program. Appraisal took pVace in February/March 1983, and negotiations were completed on April 6, 1984.- The Philippine delegation was led by NEDA Deputy Director General A. Locsin. The Staff Appraisal Report No. 4535-PH, dated May 1, 1984 is being distributed separately to the Executive Directors. Annex III of the report provides supplementary project data. Project Objectives and Description 54. The main objectives of the proposed project, which is consistent with the Government's objectives for the highways subsector stated in the Development Plan (1983-87), are to: -(a) improve the existing network of national highways and bridges; (b) raise maintenance to adequate levels and in the process remove the backlog of restoration works on national highways; (c) improve general highway management, particularly execution of maintenance, and thus further strengthen the institutional framework of MPWK and its field organization. This project would also assist in formulating a proposal for deregulation of interisland shipping, in developing the domestic construction industry and in preparing a future road transport industry project which would introduce some of the much needed measures to improve the road transport industry. 55. Specifically, the project would include the following components: L (a) reconstruction program for some 435 bridges and culverts on national highways with an estimated total sran length of 9,282 m; (b) improvement of a national highway section totalling about 83 km; 6/ Processing was delayed a few months at the Government's request because of financial constraints.  - 15 - (c) restoration program for some 1,223 km of national highways; (d) consulting services for: Ci) detailed engineering and construction supervision; (ii) preparation of future projects; and (iii) studies related to highway management, traffic safety, and the domestic construction industry; (e) technical assistance to: (i) strengthen MPWH highway maintenance capabilities; (ii) help MOTC in carrying out a review of the road t'ensport industry in order to improve its operations and develop a plar for the deregulation of road transport and interisland sbipping; and (iii) help CIAP develop further the domestic construction industry; and (f) training of MPWH and CIAP staff. The links on national highways on which bridges would be reconstructed, and the national highway to be improved under the project are shown in IBRD Map No. 17014R. Reconstruction Program for Bridges on National Highways 56. The project would include the first four-year phase (1985-88) of the MPWH's eight-year bridge reconstruction program. This phase would include about 435 structures on some 40 national highway links with a total length of about 9,282 linear meters. Most of the bridges to be reconstructed are existing single lane timber or Bailey bridges which will be upgraded to a two- lane standard in reinforced concrete. Some of the bridges will be widened and strengthened and only bridges with an ERR of 15Z and higher would be included in the program. During appraisal, agreement was reached with MPWH on the first year (1985) program. During negotiations, the Government agreed to sub- mit for Bank review and approval before February 1, 1985, February 1, 1986, and February 1, 1987, its proposed list of bridges for reconstruction in the following fiscal year and an update of their economic evaluation. (Section 3.06 (a)(i) of the draft Loan Agreement). Improvement of National Highway Baguio - Mt. Data 57. The national highway, Baguio (Acop)- Mt. Data, (83 km) in Central Luzon, would be improved to Class 1 of the NPWH design standards for national highways and would include a 6.0 m wide cement concrete pavement. This will be adequate to accommodate the projected traffic for the next 20 years. The improved highway would generally follow the existing alignment and land acquisition requirements will thus be limited to short sections which need to be realigned. Restoration Program of National Highways 58. The restoration program includes the balance of the restoration works on national highways started under the Third Highway Project. Over the four year period, it would complete the restoration works needed to bring the national road network to a maintainable condition. The restoration works  - 16 - would include road regravelling, bituminous sealing and asphalt concrete over- lays, shaping of shoulders and improving of drainage. At appraisal, HPWH had identified the national highway sections to be restored in the first year (1985) of this program. During negotiations, the Government agreed to submit for Bank review and approval, before July 1, 1985, July 1, 1986, and July 1, 1987, its proposed list of national highway sections to be restored in the following year's program (Section 3.06 (a)(ii) of the draft Loan Agreement). Consulting Services and Technical Assistance 59. The project would provide consulting services required for the implementation of the project (detailed engineering and construction super- vision). In addition, about 1,990 man-months is provided for studies and '-he preparation of future projects. Of the total, only 5% of the services would be provided by foreign consultants. Terms of reference for all the consulting services have been agreed with tne Government. These services include: (i) Detailed Engineering and Constriction Supervision for the Bridge Reconstruction Program. Detailed engineering of bridges and culverts for the 1985-88 programs would be carried out by ten local consulting firms, each covering design work for about 40 structures. Standard bridge designs satis- factory to the Bank would be used to the maximum possible extent. The work is coordinated by one expatriate expert from Lyon Associates, the firm which carried out the bridge reconstruction feasibility study and detailed engineer- ing of ten typical bridges, representative of the entire range of bridge designs to be used in the program. The same firms, local as well as foreign, would be responsible for construction supervision. Some 1,600 man-months of consultant services for detailed engineering of bridges and culverts for the 1989-92 nr gram is also included in the project. (ii) Construction Super- vision ior Improvement of National Highway Baguio-Mt. Data. For the improve- ment of the national highway Baguio-Mt. Data, construction supervision would be undertaken by the same local consultants who carried out detailed engineer- ing of this road. To strengthen their supervision staff, the local firms will engage experienced expatriate experts for key positions (Chief Resident Engineer, Chief Materials/Soil Engineer) if experienced local sta.Zf are not available. (iii) Studies. The project would provide for the following studies: (i) feasibility studies and detailed engineering for future national highway projects (250 man-months); (ii) road classification study (18 man- months); (iii) traffic safety study (50 man-months); and (iv) construction industry studies (72 man-months). 60. The project also provides, in total, about 242 man-months of techni- cal assistance services, of which about 72 man-months would be by local and about 170 man-months by foreign consultants. The technical assistance includes: (i) Technical Assistance to MPWH. As continuing shortages of local staff experienced in modern highway management impede its efforts to improve highway maintenance, the project would include continuation of the foreign technical assistance (72 man-months) provided in this field under the ongoing Fourth Highway Project. (ii) Technical Assistance to MOTC. To review the transport industry and to help make a start in gradually eliminating regulations governing entry and route licensing, freight rates and passenger fares in the transport industry (para. 31), the project would continue to finance the ongoing technical assistance services to MOTC (98 man-months).  - 17 - The technical assistance team would review the road transport industry and make proposals for deregulation of the road transport industry, assist in preparation of a plan for the deregulation of interisland shipping, and determine the feasibility of freight and passenger terminals throughout the country (iii) Technical Assistance to the Constru,tion Industry Authority of the Philippines (CLAP). To assist the Government in its long-term objective of further developing the domestic construction industry, the project would provide 72 -an-months of local technical asristance services to CIAP in order to continue the ongoing services financed under the Fourth Highway Project. Advanced Technical Training to MPWH and CIAP Staff 61. MPWH staff requiring advanced technical training in specialized sub- jects, including highway maintenance and construction and contract management, are usually sent overseas to educational institutions or on study tours, and such a program is now underway under the Fourth Highway Project. This project would provide for continuation of the MPWR overseas training program. Altoge- ther, about 30 permanent MPWH staff members would benefit from the proposed program. MPWH has regulations which ensure that staff receiving overseas training would return to work for at least three years upon return. In CIAP, short study tours have been provided for two permanent staff members under the Fourth Highway Project. Under this project, two CIAP staff members would undertake 8 to 12 weeks study tours covering financial management and building research. Project Cost and Financing 62. The total project cost, including contingency allowances, about US$19.0 million of taxes and the US$0.3 million capitalized front-end fee on the Bank loan, is ectimated at about P 2,652.5 million or US$189.5 million. The foreign exchange component is estimated at US$92.0 million. The total cost includes: (a) physical contingencies of 10% of base costs on all items; and (b) price contingencies amounting to about 30% of base costs on all items, including physical contingencies, (estimated for foreign costs at 3.5% for 1984, 8.0% for 1985, and 9.0% for 1986, 1987, and 1988, and for local costs at 20.0% for 1984, 12% for 1985, 10.0% for 1986, and 7.0% for 1987 and 1988. Cost estimates are based on May 1984 prices. 63. The proposed Bank loan of US$102.0 million would finance the pro- ject's full 75oreign exchange cost (US$92.0 million) and US$10.0 million of local cost 7 or 60% of the total estimated project cost without taxes. The loan includes US$0.3 million for the capitalized front-end fee on the Bank loan and will be for 20 years with five years grace at the standard variable interest rate. The Government would finance the remaining US$87.5 million equivalent, through annual budgetary allocations to MPWH. Retroactive financing of US$500,000 is recommended for expenditures incurred after October 31, 1933 for the detailed engineering for the first year bridge reconstruction program undertaken by MPWH through consultants (Lyon Assoc./USA, Transasia, Phil. Int. Cons., Certeza Dev. Corp., Techniks, A. Lazaro, Philnor Cons., Technosphere, F.F. Cruz, R.C. Gaite, and DCCD/all Philippines) (Schedule 1, para. 3 of the draft Loan Agreement). 7/ For justification of local cost financing see para. 20.  - 18 - 64. For the bridge reconstruction program, the base cost for a rein- forced concrete bridge averages about US$4,000 per linear meter. For the improvement of the national highway, Baguio-Mt. Data, the base costs per kilometer amounts to US$215,000. For the national highway restoration program, the base costs per kilometer range from US$20,000 to US$70,000. All these cost estimates are reasonable. Status of Preparation 65. Detailed engineering for ten bridges, representative of the entire range of bridge designs has been completed. Final detailed engineering for the first year program would be completed by May 31, 1984. Land acquisition for the first year would begin in July 1984. The feasibility study and detailed engineering for the Baguio--Mt. Data highway are completed and land acquisition has started. Engineering for the first year of the restoration program has begun and is scheduled for completion by July 1984. No land acquisition is required for restoration activities. Implementation 66. MPWH, assisted by qualified consultants, will be responsible for implementation of the project. MOTC will be responsible for execution of its technical assistance, and CIAP will be responsible for execution of the construction industry studies and its technical assistance. In view of the experience gained in implementing the Third and Fourth Highway Projects the implementation capacity of MPWH and its Regional Offices was carefully assess- ed at appraisal, and the scope and size of this project has been designed accordingly. The project would be implemented over a four-year period and should be completed by December 31, 1988. Procurement 67. Civil works (totalling US$68.33 million) for the improvement of the Baguio-Mt. Data highway and for larger contract packages for the bridge recon- struction program and of the restoration program asphalt concrete overlays of national highways would be awarded under international competitive bidding (ICB) in accordance with the Bank's Guidelines for Procurement (July 1980). Civil works (totalling US$100.52 million) for smaller contract packages for reconstruction of bridges on national highways and for restoration of national highways would be awarded through local competitive bidding (LCB) procedures satisfactory to the Bank (value of each package not exceeding US$2.5 million for bridge works and US$1.0 million for restoration works). During the review of each year's program (para. 56), agreement would be reached concerning the specific packages to be used for bridge reconstruction contracts. Inter- national contractors represented in the country will be allowed to participate in all LCB for Bank-financed projects. 68. All bidding packages for civil works estimated to cost US$1.0 mil- lion equivalent or more (50Z of the total civil works financed under the pro- ject) would be subject to the Bank's prior review of procurement documenta- tion. The bidding packages for civil works estimated to cost less than US$1.0 million equivalent would not be reviewed routinely by the Bank but MPWH  - 19 - would maintain copies of the bid evaluation and send final contracts to the Bank prior to submission of the first withdrawal application. Consultant services for detailed engineering/construction supervision, studies and tech- nical assistance would be obtained in accordance with the relevant Bank Guide- lines (August 1981). It was agreed during negotiations that the Government would take action to make available the right-of-way on each highway section or bridge site before awarding the contract for its improvement or reconstruc- tion. During negotiations it was also agreed that the Government would con- sult with the Bank prior to award of contracts in cases where other considera- tions make it desirable to begin work before all right-of-way has been acquired (Sections 3.05 (a) and (b) of the draft Loan Agreement). Disbursements 69. Disbursements would be made for: (a) 50% of total expenditures for civil works; and (b) 100% of total expenditures for consulting and technical assistance services, whether expatriate or local, and for training. All expenditures would be fully documented except expenditures (a) under civil works contracts whose value is less than US$100,000; (b) under consultant's services contracts whose value is less than US$50,000, and under training programs. Disbursements for these expenditures will be made on the basis of statements of expenditure (SOE) certified by the Deputy Minister of MPWH. Supporting documentation would be retained by MPWH and made available for review by Bank staff. During negotiations it was agreed that MPWH would submit detailed audit reports of SOE to the Bank within a reasonable time. 70. In order to facilitate implementation of the project, the Bank would make advance payments into a Special Account to cover the estimated Bank share of expenditures. 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$7.0 million which is the estimated quarterly share of Bank expenditures including a margin of 20%. 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) and Schedule 5 of the draft Loan Agreement). Benefits and Risks 71. The bridge program involves the construction or reconstruction of some 435 structures that have outlived their useful economic and, in many instances, technical lives. The average daily traffic (ADT) on these is over 300, with a low of 30 and a high of over 6,000. Cars and jeepneys comprise about 50% of the traffic and truck and buses 50% on the average. The benefits of this component are reductions in vehicle operating costs, the elimination of the need for diversions (up to 50 km) in the event of failure or floods, and improving truck load factors and reducing trucking costs by removing low load limits on weak bridges. For the bridge program as a whole the ERR is estimated at 23%. The principal benefits of the project from the improvement of the national highway Baguio-Mt. Data are savings in vehicle operating costs and road maintenance costs. The ERR on this component is 30%. The proposed road restoration program will cover 1,223 km of badly deteriorated national highways. As a result of the project, vehicle operating costs are expected to  - 20 - be reduced between 15% to 35% for different types of vehicles on the different categories of roads. Assuming a projected growth in traffic of 6% p.a., the ERR for gravel and bituminous roads is estimated to be 32% and the ERR for asphalt overlaid roads included in the project is estimateA to be over 100%. The weighted ERR on the project as a whole is estimated at over 40%. 72. The population served by the project works will be the main bene- ficiaries of the investments. Because of the de facto free market in the trucking industry and the intense competition for freight among truckers, reductions in truck operating costs will be reflected in reductions in freight charges. This will also apply to a substantial extent for passenger transport by jeepneys and, to a lesser extent, by buses. Private car-owners will reap the full benefit of all savings in vehicle operating costs resulting from the project. The construction activities that the project would generate will give direct employment to some 1,500 workers over a period of four years. Moreover, the domestic construction industry would benefit from the project in both work availability and construction experience. 73. The principal project risk is that the construction cost of the project components would be higher than estimated. However, several factors minimize the possibility and consequences of such a risk. With respect to the bridge reconstruction program, nearly all of the new structures will replace existing structures, soil conditions at all sites will, nevertheless, be thoroughly investigated and standard designs employed for superstructures. On the national highway Baguio-Mt..Data, improvement works are relatively simple. On the highways restoration program, the works proposed are relatively small-scale and their costs are based on experience in implementing previous restoration work. Another major risk is that improvement work carried out under the project may not be adequately maintained after comple- tion. Some measures for improving highway maintenance have already been initiated by MPWH. This is to be further dealt with through the provision of technical assistance to strengthen MPWH's maintenance capabilities. 74. Sensitivity tests carried out to assess the impact of a 10% increase in costs found that this would reduce the return on the project only margin- ally. The returns were also tested to assess their sensitivity to smaller benefits caused by slower traffic growth than those assumed. For a 10% drop in traffic, the returns would also decline only marginally, and the project would still be acceptable. PART V - LEGAL INSTRUMENTS AND AUTHORITY 75. 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, are being distributed to the Executive Directors separately. Special conditions are listed in Section III of Annex III. 76. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank.  - 21 - PART VI - RECOMMENDATION 77. I recommend the Executive Directors approve the proposed loan. A. W. Clausen President By Ernest Stern Attachments April 30, 1984 Washington, D.C. q.  ANNEX I - 22 - Page 1 of 5 T A B L C 3A PHIL IP?7NES - SOCIAl. INIIICATORE DATA SImET PHLXPXK KrRtFt,K aRvps (w.lilTi.I- hVykCN - MOST (03ST RIECrT EPTINATP) /h 'bz lb EeERNT NIlDOLE INCOMP IOLDDLE INeCIH. I 080h1S,, 1970- ESTTNATHI!! ASTA & PACIFIC LAT. AMREICA A CARNI AREA (TUOUSAI SQ. KM) TOTAL. 0 nn.0 100.0 300.0 AGRICULTURAL 9R.R 104.0 109.2 GNP PER CAPITA (USS) 16n.0 260.0 790.0 1028.6 20h8.2 lmEC? COISUUNPION PEE CAPITA (EILOGHANS OF COAL EQUIVALENT) 1s5.n 333.0 380.0 792.8 1407.6 IoPULATION AND ITAL STATISTICS POPULATlnOH.MD-YEAR (THOUSANtJI) 27394.0 31684.0 49535.0 URBAN POPUILATION Ct OP TOTAL) 30.3 32.9 36.7 32.9 65.9 P'OPULATION PROWECTIONS POPULATION IN YEAR 2nnO (MILL) 7h.4 STATIONARY POPIULATION (MTLL) 137.2 YEAR STATIONARY POP. REACIIEID 213D POPULATION VERNITY PFR SQ. KM. 91.3 122.8 16l.0 260.7 35.6 PER SO. KM. ACRI. LAND 277.3 354.3 442.3 1696.5 93.2 POPULATION ACE STRIICTUEr CZ) 0-14 YRS 44.6 45.5 46.6 39.6 40.1 1s66 YRS 52.4 51.6 51.3 57.2 55.R 65 AND AIOW. 3.0 2.9 3.1 3.3 4.1 POPULATION CROwrf RATE (2) TOTAL. 3.0 3.0 2.7 2.3 2.1 UIRBAN 4.1 3.8 3.7 3.9 3.7 CRUDE BIRTH RATE (PER THOUS) 46.7 44.0 33.9 31.3 31.S CRUDE DFATH RATE (PER THOUS) 14.6 9.5 7.3 9.6 8.L GROSS REPROOUCTIONL RATE 3.4 3.1 2.3 2.0 2.0 FAMILY PLANNING ACCEPTORS, ANNUAL (THOUS) .. 191.7 375.0 USERS (: OF HARRIED WOMEN) .. 2.0 68.0 46.6 FOOD AND NDnulTILON INDEX OF FOOD PROD. PER CAPITA (1969-71-100) 102.0 101.0 124.0 12z.2 113.0 PER CAPITA SUPPLY OF CALORIES (2 OF REDUIRFMENrS) 99.0 99.0 116.0 114.2 111.3 PROTEINS (GRAMS PER DAY) 46.0 r8.0 53.0 57.9 67.9 OF WHNICH ANLMAL AND PULSE 17.0 19.0 21.0/c 14.1 34.1 CHILD (ACES 1-4) DEATH RATE 13.8 7.9 4.3 7.6 5.3 HALTt LtFE EXPECT. AT SIRTH (YEARS) 52.8 59.0 63.2 60.2 64.6 INFANT MORT. RATE (PER THOUS) 105.8 75.0 53.0 68.1 62.6 ACCESS TO SAFE WATER (rDrP) TOTAL .. 36.0 43.0/d 37.1 64.5 UREAN .. .. 66.07 54.8 77.5 RURAL .. .. 33.075 26.4 66. CCESS TO EXCRETA DISPOSAL (Z OF POPULATION) TOTAL *- 57.0 56.0/d 41.4 54.6 URBAN .. .. 76.07i 47.5 69.8 ) RURAL .. .. 44.07i 33.4 29.8 POPULATION PER PHYSICIAN 6940.0 9100.0 7970.0 777l.9 1776.0 POP. PER NtURSING PERSON .. 5390.0 6000.0 2462.6 1012.2 POP. PER HOSPITAL BED TOTAL 1210.0 820.0 560.0/e 1047.2 477.0 URAIL 560.0 390.0 . 651.1 667.5 RURAL .. .. .. 2591.9 1921.6 ADMIS/ONS PER HOSPIrAL BED . 30.0 .. 27.0 27.2 StW85 TNC AVERAGE SIZE OF HOUSENHD TOTAL 5.8 5.9 UinAN .. 6.2 RURAL . 5.8 AVERACE NO. OF PERSONS/ROON TOTAL .. 2.3 URBAN .. 2.1 RURAL 2.4 ACCESS TO ELECT. (Z OF DWELLINCS) TOTAL 16.5 22.7 36.0 URBAN .. 59.9 82.6 RURA .. 6.7 10.0  ANNEX I - 23- Page 2 of 5 T A JL E 3A ml.Pplh5 -SOCIA! ISrATORS DATA S,RRY pINLIPprrES REFEREICE GROrPS (EIGrED AVERAtZS) I !5ST (19ST RECEST ESTl4AITE) lb RECE5T , rmD iCGMa MrDtLE IIC!EE 196tl I97ffl iSblTE z ASIA & PACIFIC LAT_ A'RaCA & CARIB ADfJSTED ESRU.LEgr RATIOS PRLtJff: TUIAL 95.0 108I0 110.0 101_2 105_0 MMLE 98.0 115_0 111_0 106.0 106_3 FEWALE 93.0 113.0 IO8O 97-5 103.6 SECONDARY: TO17AL 26.0 46.0 63_0 44.9 40.0 UtPLE 28.0 520n 580 50_0 38.6 FELALE 25.0 49.0 68S0 44.6 41.2 VOCATIONADL ( OF SECOSDARY) 15.3 8.9/f 33.9/c L8.5 34.0 POPIL-TEACHER RATIO PR LARY 36.0 29.0 30.0 32.7 30.7 SECORCDARY 27._Of& 33.0 34.0 23.4 16.7 ADMLT LITERACY RATE CZ) 71.9 S2.6 75.0 72.9 79.5 ?ASSENMP CARSITHOUISASD POP 3.Z 7.6 10.2le 9.7 4556 RADIO RCEIVERS1THOUSASD POP 21.9 40.7 43_5 113.7 2ZS.2 TV IMCELVERS1TAISAPD Pop 1.4 10.9 20.7 50.1 108.3 SEwSPAPElt CDAry GEERmL IrEREsT) CIRCULATIOS FEZ THOUSAND POPtXATIOR 17.7 13.6 20.7 54.0 65.1 CIPMIA A.NSUAL ATTESDA.CEICAPITA 0.6/h __ 7-4fd 3.4 2.9 LABOR ?ORCE TOTAL LABOR FORCE (TReS) 10915.0 13577.0 17667.0 FEMALE (PERCEST) 3452 33.1 32.3 33.6 24.8 ACEICCLTERE (PERCEST) 61.0 53.0 46.0 50.9 31.3 ISOVSTRY (PERCEST) 15.0 16.0 17.0 19.2 23.9 PARTICIPATION RATE (PERCEST) TOTAL 39-8 36.6 35.6 18.6 31.3 "ALE 52.1 48.6 *7.8 50.7 59.8 MALE 27.4 2LC4 23.2 26.6 14_8 EC5OOT1C ,EPrEDESCY RATIO 1.2 1.3 t.3 1.1 1_4 3Niz DISTRIBUrIOl PERCEEr OF PRIVATE INCWIE RECEIVED BY RIOIEST 5 OF HOUSEHOLDS 30.1 23.1 __ 22.2 WICREST 20- OF HOUSEIDLDS 56.3 54. 0 ._ 48.0 LOWEST 20: OF liOUSEHOLDS 4.2 5.2 __ 6.4 LOWEST 4r OF ROUSEIIOLDS 12.0 14.2 *- 15.5 PVERT TA ET QOUS EST-IATED ABSQUTE POVERTY ISCOQE LEVEL (CUSS PER CAPITA) URBAY 260.0 194.5 289.8 RURAL 195.0 155.0 1t4.5 ESTIMATED RELATIVE POVERTT IICOME LEVEL. USS PER CAPITA) URBAX *- * 266.0 178.0 519.8 RURAL .. .. 200.0 164.8 372.1 ESTIMATED POP. BEL.rL ABS4LUTE POVERTY ICOFE LEVEL CZ) LRBAN .. 32.0 24.6 RUIRAL . 41.0 41.1 SOT AVAILAa.E 'MT APPLICAPLE /a The group -rerges for each Indicator are popitation-elghted arlthmetic emus- Coverre of con,tries anon the Indicators depends on aailability of data and Is not nniforu. /b Unle-n otherwxse noted. Data for 1960- refer to any year betwen 1959 and 1961; D-ta for 1970 beteeen 1969 and 1971; and data for -lout Recent Estite betwen 1979 and 1981. /e 1977: /d 1975; /e 1978; Jf 1972; LI 1962: Jh 1958. way 1983  BEST COPY AVAILABLE 24 - ANNEX I Page 3 of 5 .sre.dcie - A the :a.h t cca.edardesd d.t hetlec -edb reerte ddsIAttceetetere It et! ttitti.- dat- Th Set. ate.. ttic A,,me,ia -1L Lecattee .ef.tar .t e-LLt.d'% f.cdt.etee tees'.. ...s eherectentee ant-tn eel.. dli ftp.ec.e het.' i..S,t*5t5.~ ~ ~ ~ ~~ -1-1 F E, -I tet-'.earcr.ar ltth *na aeit a... e ti- hjtt attt a' () reetv rep .tc settt iger eegelie fea ti etr crepatth .el.~ ee''eetis itnr 'tti.pr.vCcre .'ee ttde eve.behdm. - idi c-f I hecai.aeaoretagt niareatC ac.cttc 3 t ne t.ac- rc. ..