Philippines - Ports and Harbors Dredge Project

R E S T R I C T E D FILE COPY Report No. P-257 This report was prepared for use within the Bank. It moy not be published nor may it be quoted as representing the Bank's views. The Bank accepts no responsibility for the accuracy or completeness of the contents of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF THE PHILIPPINES FOR THE DREDGING PROJECT July 12, 1961  1NTEFLRNTIONA',L BANK F'OIR RE CO1iSThUCI ION AND DEVLLOP'4I;iiT REPORT AND RECO1vINDATIONS OF THE- P?ESIDENT TO THE E12CUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF THE PHILIPPINES FOR THE DRED _NG PROJECT 1. I submit the following report and recommendations on a proposed loan ir various currencies equivalent to $8.5 million to the Government of the Philippines for the dredging of its public ports. P.RT I - HISTORICAL 2. In January 1960 the Government applied to the Bank for a loan to finance the purchase of Live dredges and auxiliary equipment to be used for the improvement and maintenance of ship channels and turning areas in its public ports. In discussions in Washington in June 1961 this request was increased to include an additional large dredge, and a slipway with a workshop, bringing the total foreign exchange cost to about $8.5 million. 3. The project was appraised by a Bank mission to the Philippines during December 1960. On request of the Bank the Government engaged an expert in dredge design who reviewed the suitability of the proposed dredging equipment and recently submitted his report to the Government. 1. On the basis of the Bank's appraisal and the dredge design ex- pert's report, negotiations with representatives of the Government were held in Washington in June and July 1961. 5. If the proposed loan is made, it would be the Bank's second loan to the Philippines and would increase the total amount lent by the Bank to about $27.0 million net of cancellations. The first loan of originally $21 million, later reduced to $18.5 million, was made in November 19f7 to the National Power Corporation for the Binga Hydro Electric Project.-/ PART II - DESCRIPTION OF THE PROPOSED LOAN 6. Borrower: Republic of the Philippines. Amount: $8.5 million equivalent. Amortization: 31 semi-annual instalments from September 15, 1963 to September 15, 1978. Interest Rate: 5 3/4% per annum, including 1% commission. Commitment Charse: 3/4 of 1% per annum. Purpose: Dredging of the Philippine public ports to provide depths of water adequate for the navigational needs of inter-island and ocean-going shipping, and dredging there- after to maintain such depths. 1/ Of this $987,000 has been sold and about $1,250,000 was not disbursed as of June 30, 1961.  - 2 - PART III - LECAL INSR'JI1NTTS ANID LEGAL AUTHORITY 7. Attached are drafts of the following documents: (a) Loan .igreement between the Bank and Republic of the Philippines (No. 1) (b) Report of the Statutory Loan Committee as provided in Article III, Section 4, (iii) of the Articles of Agreement (No. 2) (c) A letter addressed to the Bank containing various undertakings by the Borrower agreed upon during loan negotiations (No. 3). 8. The Loan Agreement conforms generally to the pattern of loan agreements with member governments. PAPT IV - APPRAISAL OF THE PROPOSED PROJECT 9. The project is described in the attached report "s.ppraisal of Ports and Harbors Dredge Project, Philippines" (No. TO-273b) (No. 4). 10. The project is the implementation of the Government's dredging program designed to remove the backlog of dredging in the Philippine public ports; carry out improvement dredging; and thereafter, to maintain depths of water adequate for the navigational requirements of inter-island and ocean--going shipping. 11. The proceeds of the loan will be used to cover the foreign exchange cost of: 1) One 1,000 cu.yd. hopper dredge; 2) One 20 in. cutter suction dredge; 3) Four smaller dredges and a-uxiliary equipment; 4) One 40 ton floating crane; 5) Construction and equipment of a slipway and workshop. 12. The total cost of this equipment is estimated at P 29.7 million (US $9.9 million equivalent). Local currency and foreign exchange costs are as follows: (in US $ million equivalent) Local Foreign Currency Exchange Total Dredges and Auxiliary Equipment .5 7.4 7.9 Slipway, Workshop and miscellaneous .9 1.1 2.0 1.4 8.5 9.9  - 3 - 13. The foreign exchange cost would be fully covered by the proposed loan while local currency expenditures will be provided from the Port Works und. Jus tif i cation 14. The project is needed to meet the requirements of ocean-going and inter-island shipping at the Philippine ports. Arrears of maintenance dredging have to be made good, deeper charnels are needed because of larger ships now in use and recurring natural siltation has to be offset. The carrying out of the proposed dredging program is urgent and necessary to safeguard Philippine exports and to facilitate inter-island trade on which the development of the Philippine island-economyr depends to a great extent. 15. Att present a Bank mission is appraising a project for possible Bank financing of inter-island shipping in the Philippines which is closely connected with the dredge project proposed here. This loan would be for expansion and modernization of the inter-island and coastal fleet owned and operated by various private firms. The results of the appraisal of this inter-island shipping project are not yet known, but the improvement of many of the public ports in which the equiDment covered by the proposed dredge loan will be used would be a necessary prerequisite to consideration of any substantial new investments in inter-island vessels. 16. Procurement of the additional dredging capacity to be financed from the loan will allow carrying out the Government's dredging program within a reasonable time at reasonable cost. Procurement of the equipment is done by international competitive bidding in accordance with the Bank's policies. Five dredges have already been ordered. The purchase contract provided originally for credit payment terms which have since then been sub- stituted by cash payment terms. Economic Situation 1Y. A report "Economic Position and Prospects of the Philippines" (r.60-52) of ivay 2, 1960 described the favorable trend of the Philippine economic growth during the 1950's. It also noted the stable fiscal and monetary situation since l958 and the achievement of a surplus balance of payments position in 1959. Economic growth prospects were assessed at a rate well in excess of population increase, and an acceleration of recent growth trends was considered probable provided measures were taken to liber- alize trade and exchange controls under a more realistic exchange rate. The export outlook suggested average expansion in the order of 3% a year and the creditworthiness assessment indicated an ample margin for additional borrow- ing. is. jbIore recent economic developments in the Philippines are describei in an attached memorandum (No. 5). They do not suggest modification of these conclusions. In 1960 fiscal balance and monetary stability were main- tained, and a program was undertaken to decontrol trade and exchange and to devalue the currency and unify the exchange rate in progressive stages.  Liberalization of trade under this program resulted in a small exchange deficit on current account in 1960 but this was less than net capital inflow and there was a consequent further rise in reserves. 19. Developments have been somewhat less favorable so far this year with a decline in reserves by 1i;34 million during January-June to a level of l153 million (equivalent to three months' imports). '1lost of the decline reflected settlement of U.S. claims. In addition, terms of trade have probably been less favorable this year because of a drop in copra prices. Adverse payment effects are also attributable to some withholding or under- reporting of exports in anticipation of further decontrol to a more favor- able export rate, and to a moderate relaxation of monetary restraint probably associated with the campaign for general elections in November. In these circumstances some further exchange losses are probable in the second half of the year. Present indications are, however, that such losses will be small, and likely to be checked upon termination of election year influences and completion of the decontrol programs IWith the latter, a more certain and stable basis for further economic expansion should be established. 20o Philippine external debt rose rapidly in 1958 and 1959 to a level of t:1300 million (including private debt with an exchangae guarantee) lcrgely as a result of substantial reliance on suppliers' credits. The more recent rise in external obligations has been much slower. By mid-1961 debt out- standing had reached 0306 million, carrying a service burden averaging 6.5% of 19&0 exchange earnings during the next four years. The Philippines is now negotiating additional loans - including the proposed IBRD dredge loan - which may result in new external indebtedness of Z)150 million in the next twelve months. Formalities are being concluded in the sale of sJanila's U.S.- owned electric utility company to private Philippine interests, a trans- action which involves an external debt of $41 million. U.S. Eximbank loans currently authorized or under negotiation total '100 million, including '1i62 million for an integrated steel mill and loans for a copper refinery and for harbor and civil aviation improvements. Allowing for some increase in suppliers' credits during this period, peak debt service in 1965 would then be around 8% of 1960 foreign exchange earnings. Prospects f'or Fulfillment of Obligations 21. The Division of Ports and Harbors (DPH) of the Bureau of Public Works is the governmental entity responsible for navigational dredging,. D?H is competent to carry out the project. In order to strengthen the Division's staff for the new task qualified engineers and other experienced personnel will be engaged to advise on maintenance and operations of the dred-es, the dredging program, the design of the slipway, equipment of the workshops, and the manufacturing of the dredging equipment. 22. Financial forecasts of the operations of the Division of Ports and Harbors, particularly of the revenues and expenditures of the Port Works Fund show that sufficient funds should be available to cover all operating expenses including adequate provision for maintenance, depreciation and debt service.  - 5 - 23. The service on existing Philippine external debt is not a serious burden on its foreign exchange earnings. In view of this and of favorable prospects for further export expansion and economic growth the Bank can proceed with this loan to the Philippines without undue risk. PhRT V - CO LI1ANCE WITHi THE ARTICLES OF AGPEE.LBE1!T 24. I am satisfied that the proposed loan complies with the require- ments of the .rticles of Agreement of the Bank. PART VI - RECOivEiiNDATIOMS 25. I recommend that the Bank grant a loan to the Republic of the Philippines in various currencies equivalent to $8.5 million for a term of 17 years including a grace period of 2 years at a rate of 5 3/4% and on such other terms and conditions as are speci.fied in the draft Loan Agreement attached, and that the Executive Directors adopt a resolution to that effect in the form attached (No. 6). Washington, D.C. Eugene P. Black July 12, 1961