Philippines - Agricultural Credit Project

-:-- ::-:~.- - ~ - Document of The WorldBin-nk FOR OFmFCIAL USE ONLY -:=~&, . p ;at X Rpert No. 5514-PH STAFF APPRAISAL REPORT PHILIPPINES AGRICULTURAL CREDIT PROJECT May 10, 1985 Projects Department East Asia and Pacific Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank autborization.  CURRENCY EQUIVALENTS -US$1.0 =Pesos (P) 20.0 1.00 , US$0.05 P1 million = US$50,0000 (as of September 1984) FISCAL YEAR January 1 to December 31 WEIGHTS AND MEASURES ha = hectare (2.47 acres) Mt = metric tons (2,204 pounds) t = ton (2,000 pounds) PRINCIPAL ABBREVIATIONS AND ACRONYMS USED ALF - Agricultural Loan Fund ALFPAG - Agricultural Loan Fund Policy Advisory Group AMDAC - Agricultural Machinery Manufacturers/Distributors Accreditation Committee AMMDA - Agricultural Machinery Manufacturers and Dealers Association AMTEC - Agricultural Machinery Testing and Evaluation Center CB - Central Bank CBI - Central Bank Institute DBP - Development Bank of the Philippines DLC - Department of Loans and Credit (CB) LBP - Land Bank of the Philippines MAF - Ministry of Agriculture and Food NEDA - National Economic and Development Authority NFA - National Food Authority PCAC - Presidential Committee on Agricultural Credit PNB - Philippine National Bank RPB - Republic Planters Bank SES - Supervision and Examination Sector (CB) SRO - Supervisory Reports Office (CB) STD Special Time Deposit TBAC - Technical Board for Agricultural Credit UCPB - United Coconut Planters Bank  FOR OMCIAL USE ONLY PHILIPPINES AGRICULTURAL CREDIT PROJECT Table of Contents Page No. Loan and Project Summary .................. .... ............... iv I. Background ..... .... *......... ....... *... ...... * * .... I A. Introduction .... I............................***** *9. 1 B. Economic Outlook ......... ....... ***..**.............. I C. The Agricultural Sector ......... ........... . ............ . 2 D. World Bank Experience with Past Lending ................... 4 II. Agricultural Credit and Agricultural Credit Institutions ...... 5 A. Financial Sector Background .. *...... . ..... .... *. ..* 5 B. Trends in Agricultural Credit ........ ..................... 7 C. Agricultural Credit Institutions ...o ............ 8 = Central Bank of the Philippines ......................... 8 = Private Commercial Banks .. ............ ..... .. .. . 9 = Thrift Banks ....o ... .o.o. ......... ..... ...o*.... 10 - Rural Banks o .......s................. . 11 G Government Banks ... ............. . o.. ... a ........ O.... 12 D. Problems in Agricultural Credit .... 0 ....................... 13 E. Policy and Institutional Reforms ............................ 16 III. The Project ... ... .o ................ . ....... .... .. ...... .**.. 19 A. Project Formulation ....................................... 19 B. Project Objectives ....... ....... 19 C. Detailed Features ............ 00 *00......... O..*... 20 D. Project Cost and Financing . ......... ................. . 24 E. Procurement . .............. .......... . .. ............. 26 F. Disbursements ***********************.*********........ 28 G. Accounts and Audit .... o....................... ............. 29 This report is based on the findings of an appraisal mission in October 1984 composed of Messrs. R. Deshpand-e, D.B. Argyle and Ms. S. Kulsrethsiri (Bank) and Messrs. K. Selvavinayagam (FAO/CP) and G. Grasel (Consultant). Ms. P. Brereton provided editorial assistance. This docnuent has a resictdoditbution and my be ued by rfepint only in the prformaneof. Ilhi offxid duti Its contents qmy not oerwie be dicosed without World Bank autborian.  : | ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ . - ii - Page go. IV. Project Implementation .....*****o........................... 29 A. Credit Operations ......................................... 30 - Central Bank of the Philippines ......................... 30 - Participating Banks .... ...... 31 - Lending Procedures and Terms ............................ 32 B. Other Project Components .................... ...... ..... .... 35 C. Monitoring and Evaluation ....asse.... ....... ..*. 36 V. Benefits, Justification and Risks ............................. 37 A. Benefits and Justification .......... ................. 37 B. Risks ................................................................ 41 VI. Agreements Reached and Recommendation ......................... 41 TABLES IN THE TEXT 2.1 Agricultural Loans Granted, 1979-83 ........................... 8 2.2 Seasonal Production Loans Granted for Agriculture, 1980-83 .... 14 3.1 Project Cost Snmmary .......................................... 25 3.2 Project Financing Plan ............. ........................... 26 5.1 Benefit-Cost Ratios, 1985-86 Crops ............................* 38 5.2 Rates of Return on Longer-Term Subloans ........ ............... 39 TABLES 1. Industrial Origin of Domestic Product at 1972 Constant Prices, Growth Rates 2. Gross Value Added in Agriculture, Fishery and Forestry by Subsector at 1972 Constant Prices 3. Structure and Growth of the Financial System 4. Total Assets of the Financial System 5. Number of Financial Institutions, 1980-83 6. Agricultural Loans Granted, Summary by Institution 7. Agricultural Loans Granted and Outstanding, by Institution 8. Agricultural Loans Granted and Outstanding, by Commodity 9. Commercial Banks: Assets and Liabilities, 1981-84 10. Savings and Mortgage Banks: Assets and Liabilities, 1981-84 11. Private Development Banks: Assets and Liabilities, 1981-83 12. Stock Savings and Loan Associations, 1981-84 13. Rural Banking System: Financial Condition, 1979-83 14. Central Bank Rediscounting of Agricultural Subloans by Institution, 1983-84 15. Estimated Disbursements  - iii- ANNEXES 1. Policy and Institutional Reforms 2. Indicative Project Lending Program 3. Project Related Training Component 4. Qualifying Criteria for Retail Bank Access to Project Funds 5. Lending Terms and Conditions 6. Project Monitoring and Evaluation 7. Financial and Economic Analysis 8. Documents and Data Available in the Project File CHARTS 1. Implementation Schedule 2. Flow of Project Funds 3. Central Bank Organization 4. Central Bank Organization for the Project MAP Network of Bank Offices (December 1983) (IBRD18786)  - iv - PHILIPPINES AGRICULTURAL CREDIT PROJECT Loan and Project Summary Borrower: Central Bank of the Philippines Guarantor: Government of the Philippines Amount: US$100 million equivalent Terms: The loan would be for a term of 20 years, including five years of grace, at the standard variable interest rate. Relending Terms: The Central Bank of the Philippines (CB) would onlend the equivalent in pesos of US$99.5 million of the loan proceeds to qualified participating banks at market-oriented interest rates consistent with criteria agreed with the Bank. The foreign exchange risk would be reflected in CB's rediscount rates. Participating banks would onlend the CB funds blended with their own deposit funds at market-oriented interest rates. The project departs from previous credit programs in the Philippines which generally had below market interest rates and regulated spreads to the intermediate banks. US$500,000 of the loan proceeds would be used by CB to finance technical assistance for project-related policy studies, training and institutional development. Project Description: The project would help foster the country's economic recovery by: providing the agricultural sector with seasonal production and investment credit which has been in increasingly short supply in recent years; establishing an appropriate institu- tional and policy framework to promote development of a finan- cially sound rural credit system; and strengthening the capacity of rural credit institutions to mobilize rural savings and improve the efficiency of farm credit operations. The project would also help increase the effectiveness of CB policies with regard to rural financial market development. Specifically, the project would provide funds for (a) short- and longer-term credit for the agricultural sector, (b) policy- related studies and preparation of a future project, and (c) training of project-related staff and technical assis- tance. The project responds to policy and institutional issues identified by the Bank's 1982 Agricultural Credit Sector Review. Project credit is expected to finance a wide range of investments including annual crops; poultry, livestock and fishery development; plantation crops; agroprocessing and post- harvest faciLities; and farm mechanization.  w~~~~~~~~~~~~ The main project risk is that the agriculture sector may recover from its present crisis at a slower pace than expected despite the introduction of policies aimed at providing incen- tives for private sector investment, causing demand for project investment credit to be less than anticipated. However, a continuing review of the Government's agricultural policies is planned under the Bank-assisted Agricultural Sector/Inputs Project (Ln. 2469-PH). There is also an institutional risk associated with CB's channeling of funds through a banking system which has been financially impaired by the recent economic crisis. This risk would be addressed by applying qualifying criteria to select financially viable banks for participation in the project, extending CB assistance to strengthen the capacity of participating banks to undertake agricultural lending, and establishing lending terms which would allow banks to determine spreads on interest rates that would be sufficient to cover transaction costs, including the risk of subloan default. Training in project-related skills would also be provided to the staff of CB and participating banks to facilitate project implementation. Estimated cost: Local Foreign Total -- (US$ million) Seasonal Production Credit 50.0 33.4 83.4 Medium- and Long-term Credit 69.2 29.9 99.1 Policy Studies 0.2 0.1 0.3 Project-related Training and Technical Assistance 0.1 0.1 0.2 Total Project Cost /a 119.5 63.5 183.0 Financing Plan: /b IBRD 36.5 63.5 100.0 CB 13.7 - 13.7 Participating banks 36.5 - 36.5 Subborrowers 32.8 - 32.8 Total 119.5 63.5 183.0 /a Including US$16.6 million equivalent in taxes and duties. 7i USAID may provide financing for this project at a later stage in parallel with the Bank loan (para. 3.24).  - vi - Estimated Disbursements: Bank FY FY86 FY87 FY88 FY89 FY90 --