Philippines - Small Coconut Farms Development Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-5198-PH MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$l21.8 MILLION TO THE REPUBLIC OF THE PHILIPPINES FOR A SMALL COCONUT FARMS DEVELOPMENT PROJECT MAY 1, 1990 This document has a restricted distribution and may be used by recipients only in the performance of the!r official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (July 1, 1989) US$1 = Philippine Peso P 22.00 P 1 = US$0.05 WEIGHTS AND MEASURES (metric system) 1 hectare (ha) 2.47 acres 1 metric ton (ton) = 2,205 lbs ABBREVIATIONS GOP - Government of the Philippines ODA - Overseas Development Administration (UK) PCA - Philippine Coconut Authority FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY PHILIPPINES SMALL COCONUT FARMS DEVELOPMENT PROJECT Loan and Project Summary Borrower: Republic of the Philippines Beneficiaries: Coconut smallholders and the Philippine Cocc!ut Authority (PCA) Loan Amount: US$121.8 million. Terms: Repayable in 20 years, including five years of grace, at the Bank's standard variable interest rate. Financing Plan: Farmers USS 21.9 million PCA/GOP USS 31.6 million ODA US$ 1.3 million Bank US$121.8 million Total US$176.6 million Economic Rate of Return: 402 Staff Appraisal Report: Report No. 8210-PH Map IBRD 21986 R This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF THE PHILIPPINES FOR A SMA,L COCONUT FARMS DEVELOPMENT PROJECT 1. The following Memorar.dum and Recommendation on a proposed loan to the Republic of the Philippines for US$121.8 million is submitted for approval. The proposed loan would be for 20 years, including 5 years of grace, at the Bank's standard variable interest rate and would help to finance a small coconut farms development project. The project would be cofinanced by a grant from the United Kingdom's Overseas Development Administration (ODA) for US$1.3 million. 2. Background. The Philippines accounts for over 70? of total international trade and 40Z of total world production of copra products. Some 925,000 coconut farms occupy about 3.0 million ha, or over 252 of total agricultural land in the country. They are mainly smallholdings (half of which are less than 1 ha each, and over 902 of which are less than 5 ha), and provide incomes for some 16 million people. With over 842 of the 2.2 million tons equivalent of annual copra production beinig exported, coconut-based products are the third largest contributor of foreign exchange, accounting for 10? of total merchandise export revenues and 402 of commodity exports in 1987. 3. Recent market studies by independent consultants for the Bank and the Philippine Government, have concluded that future demand for coconut products, both for industrial uses and as an edible oil, is good provided Philippines can sustain end-user confidenc.' in the continued availability of its supplies. Although Philippines is the dominant world producer of coconut-based products, its output could fall off over the coming 10-15 years because of declining yields from its aging tree stock, unless serious replanting efforts are undertaken. Coconut production is very much a smallholder operation in the Philippines and, because most coconut farmers are impoverished, there has been little private investment in replanting during the last decade. The Government launched a coconut replanting initiative in the late 1970s, but little was accomplished as funds collected from the farmers by a levy on copra sales, with an aggregate value of approximately US$1 billion, %-ere mostly diverted for unrelated pu oses. Since that time, the Government has been unable to implement an) meaningful coconut ;.eplanting or rehabilitation program, with the result that the Philippines' producing tree stock is now increasingly senile, much of it dating back to the 1940s. 4. On the other hand, while the Philippines' ability to supply is at some risk, world demand is quite favorable. Non-edible uses of coconut oil (mainly for soaps and detergents) have accounted for more than 502 of consumption in  - 2 - the US and close to 502 in Europe. Processing costs of coconut oil are lower than those of its main competitor, palm kernel oil, and producers of industrial chemicals have been showing an increasing preference for raw materials from renewable natural resources rather than petroleum-based synthetics. Overall, there are few economically attractive substitutes to the lauric oils for most industrial purposes. With regard to edible uses, the general demand for vegetable oils is expected to grow by about 32 p.a. over the medium-term, and coconut oil, which is a preferred cooking oil in many parts of the world, would certainly share in that growth. In other words, coconut oil's share of both the non-edible and edible vegetable oil markets is easily sustainable, with some room for modest expansion, unless end-users become convinced that they cannot rely on a stable supply from the Philippines. In that event, they would be prompted to make long-term investment decisions in favor of substitute products, especially for industrial purposes, and that would be a major setback for the Philippines itself and for other LDC coconut producers. Deterioration of this industry would have important macroeconomic consequences for the Philippines (particularly as regards loss of foreign exchange earnings) and would seriously undermine the Government's rural poverty alleviation efforts. 5. Rationale for Bank Involvement. The proposed project would assist the Government in launching a long-term development program for the smallholder coconut industry, while providing timely and necessary investments during a period of serious budgetary constraints. The Bank's broad expertise in this type of smallholder tree crop operation would be brought to bear in this program, which would eventually assist about one-third of the farm population, most of whom are well below the rural poverty line. This is consistent with the objective of poverty alleviation, which is accorded high priority in the Bank's country assistance strategy for the Philippines. 6. Project Objectives. These would be to support an appropriate long- term strategy for the coconut industry in the Philippines, which would increase the incomes of small coconut farmers by improving coconut yields and copra quality, and would boost foreign exchange earnings by ensuring a gradually increasing and reliable supply of higher quality copra for processing and export. 7. Project Description. To sustain these objectives, a long-term program of coconut replanting and productivity improvement, supported by the necessary infrastructure and strengthened Government services, would be set in place through the proposed project. The five-year project would constitute the critical first phase of a long-term small coconut farms development program which, over the next twenty years, would rehabilitate the coconut industry and ensure its continued contribution to the Philippine's export trade. The project would develop and apply improved technologies, establish the infrastructure and operating procedures and prepare the institutional and financial bases for the program. The project consists of: (a) establishment of seedgardens, nurseries and other infrastructure sufficient to sustain a  - 3 - replanting program of about 50,000 ha per year; (b) replanting of 25,000 ha and support for intercropping during the first three years of replanting; (c) rehabilitation of 348,000 ha of middle-aged palms and the development of 50,000 ha of immature palms; (d) equipping of laboratories for aflatoxin assay and research and demonstration of techniques, survey of aflatoxin origins and incidence, and a pilot program to introduce hot-air copra driers to smallholders in 2-3 major mill catchment areas; and (e) institutional strengthening of the Philippines Coconut Authority (PCA). The total cost of the project is estimated at US$176.6 million, with a foreign exchange component of US$91.1 (52Z). The latter includes US$1.3 million equivalent for technical assistance and equipment, which would be co-financed by a grant from ODA. A breakdown of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and of disbursements, and the disbursement schedule, are shown in Schedule B. A timetable of key project processing events and the status of Bank Group operations in the Philippines are given in Schedules C and D, respectively. IBRD Map No. 21986R is also attached. The Staff Appraisal Report No. 8210-PH dated May 1, 1990, is being distributed separately. 8. Agreed Actions. During negotiations, assurances were obtained from the Government on the following: (a) by March 31, 1991, PCA would obtain use of a suitable seedgarden site for 20 years; (b) PCA would contract only with agricultural enterprises agreed with the Bank to produce hybrid seed; (c) PCA would present to the Bank for comment annual project area coverage targets, related plans and budgets and nursery development plans for the succeeding year; (d) PCA would ensure that the posts of Head of the Central Project Operating Unit and of the the Operations Planning and Management Department would be filled by incumbents with training and experience agreed with the Bar.k; (e) Government would ensure that sufficient extensionists would be made available to enable PCA to undertake the project activities, and that such staff would be acceptably trained; (f) farmers participating in the project would be selected according to criteria agreeable to the Bank and would be limited to either 1 ha of replanting, 3 ha of rehabilitation, or 4 ha of nutrient support; (g) PCA would implement its new organizational structure by September 30, 1990; and, (h) Government would prepare a specific plan for financing the long-term coconut replanting program associated activities and staffing of PCA by June 30, 1993 and begin its implementation by January 1, 1995. Conditions of loan effectiveness would be that: (i) acceptal .e arrangements have been made for the establishment of at least one seedgarden; (ii) formal approval of the new organizational structure of PCA' and (iii) the establishment of the Central Project's Operating Unit. A condition of loan disbursement for copra quality improvement would be the presentation of a suitable plan for the implementation of a pilot scheme for improving drying practices. 9. Benefits. The main project benefits would be: (a) improved productivity and farm incomes for small coconut farmers, tenants and resident workers, who are a major poverty group in the country; (b) increased foreign exchange earnings from coconut product exports; and (c) development of  - 4- technical, financial and institutional bases for the long-term coconut replanting program. Some 275.000 coconut farms (about 302 of total coconut farms in the country) are expected to benefit from the project's replanting, rehabilitation and technical support activities and about 180,000 farms from the drying component. The project on-farm activities would generate about 12.3 million days of incremental work per year (equivalent to about 50,000 jobs) at full development. At the peak, incremental exports of coconut products would be about US$97 million per year. The project would provide the technical basis for improving planting material, cultural techniques and pest/disease control in future phases of the long-term program. The establishment of about 1,000 ha of seed gardenb would supply sufficient material by the year 1997 for replanting the national coconut stand at a rate of 50,000 ha per year, appropriate to the long run needs of the industry and would reestablish confidence among end-users in the future supply of better quality coconut-based products from the Philippines. The internal economic rate of return for the overall project is estimated at 40X. 10. Risks. The main technical risks would be inappropriate site selection, typhoon damage and possible reluctance or inability to continue the use of inputs. Very conservative yield assumptions have therefore been adopted and strict criteria for recipient selection have been devised. There is some possibility that, despite strong interest and fiscal incentives, private enterprises may be reluctant to invest sufficiently in hybrid seed production until the full replanting program is visibly underway. In that event, PCA ma) need to establish additional seedgardens itself and arrange for private commercial management contracts. The long-term coconut development program also depends on the willingness of the Government to eventually restore self- financing arrangements (such as the earlier cess). Project benefits should improve the climate for such action and the Government would prepare and implement a long-term financing plan by the time the new seedgardens reach full production. Finally, civil unrest could inhibit project activities in certain locations but, as the project supports a national program, sufficient flexibility exists to avoid such areas. 11. Recommendation. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve the proposed loan. Barber B. Conable President Attachments Vashington, D.C. May 1, 1990  -5- Schedule A PHILIPPINES SHALL COCONUT FARMS DWVELOPMENT PROJECT Estimated Costs and Financing Plan Estimated Costs la Local Foreign Total ------(U3$ million)----- Replanting 13.8 6.7 20.5 Rehabilitation/fertilization 28.3 40.0 68.3 Nutrient support/fertilization 8.5 10.5 19.0 Copra quality improvement 5.7 1.7 7.4 Research 3.3 1.4 4.7 Extension and training 4.0 1.3 5.3 Institutional strengthening 2.3 5.8 8.1 Total Baseline Costs 65.9 67.4 133.3 Physical contingencies 3.7 6.3 10.0 Price contingencies 15.9 17.4 33.3 Total Pro1ect Costs 85.5 91.1 176.6 Financing Plan Local Foreign Total ------(US$ million)------ Farmers 21.9 - 21.9 PCA/GOP 31.6 - 31.6 ODA - 1.3 1.3 Bank 32.0 89.8 121.8 Total 85.5 91.1 176.6 /a Including duties and taxes of US$12.5 million.  -6- Schedule B Page 1 of 3 PHILIPPINES SMALL COCONUT FARMS DEVELOPMENT PROJECT Procurement Method and Disbursement (US$ million) Procurement Method Total Project Element ICB LCB Other N.A. Cost Civil Works 2.7 0.8 0.7 - 4.2 (2.5) (0.7) (0.6) - (3.8) Equipment and 2.8 0.5 0.8 - 4.1 spare parts (2.6) (0.3) (0.6) - (3.5) Vehicles and 5.5 0.3 0.5 - 6.3 spare parts (4.7) (0.2) (0.2) - (5.1) Copra Improvement - - 5.5 - 5.5 - - (4.9) - (4.9) Research - - 0.3 - 0.3 - - (0.3) - (0.3) Extension and - - 5.5 - 5.5 Training - - (5.5) - (5.5) Technical assistance - - 1.4 - 1.4 - - (0.4) - (0.4) Farm Inputs 96.8 - 3.1 - 99.9 (87.4) - (2.5) - (89.9) Farmers' hired - - 21.9 - 21.9 labor Incremental Operating - - 2.5 25.0 27.5 Costs - - (1.9) (6.5) (8.4) Total 107.8 1.6 42.2 25.0 176.6 (97.2) (1.2) (16.9) (6.5) (121.8) Note: Figures in parenthesis are the respective amounts to be financed by the Bank.  -7- Schedule B Page 2 of 3 Category Amount of the Loan Allocated I of (Expressed in Expenditures Dollar Equivalent) to be Financed (1) Works 3,400,000 90? (2) Vehicles and 4,600,000 100! of foreign expendi- spare parts tures, 100? of local expenditures (ex-factory cost) and 802 of local expenditures for other items procured locally (3) Equipment and 3,200,000 100? of foreign expendi- spare ?arts tures, 100? of local expenditures (ov-factory cost) and 85? cf 'l'al expenditures r<r orh- items procured locally (4) Coiusultants' services, 5,300,000 100X training, studies and extension (5) Research 300,000 100? (6) Copra driers 4,400,000 90X (7) Farm inputs 80,900,000 90? (8) incremental operating costs (a) 2,000,000 602 (b) 2,100,000 452 (c) 1,700,000 301 (d) 1,800,000 25? (9) Unallocated 12,100,000 TOTAL 121,800,000  -8- Schedule B Page 3 of 3 Estimated Bank Disbursements /a FY91 FY92 FY93 FY94 FY95 FY96 FY97 --------------------(US$ million)--------------------- Annual 9.8 14.3 17.4 23.1 29.5 22.2 5.5 Cumulative 9.8 24.1 41.5 64.6 94.1 116.3 121.8 La Project start-up is planned for September 1990, corresponding to the first quarter of FY91. The project would be completed on September 30, 1995 and the loan would close on June 30, 1996, at the end of FY96.  -9- Schedule C PHILIPPINES SMALL COCONUT FARMS DEVELOPMENT PROJECT Timetable of Key Project Processing Events (a) Time taken to prepare: One year (b) Prepared by: PCA with consultants (c) First Bank missiont February 1988 (d) Appraisal mission departure: June 1989 (e) Negotiations: April 3, 1990 6f) Planned date of effectiveness: August 31, 1990 (g) List of relevant PCRs and PPARs: None applicable  - 10 - ScheduloF THE STATUS OF BANW GR1UP OPERATIONS IN THE PHILIPPINES A. STATEMENT OF BAW( LOANS AND IDA CREDITS /! usrch 81, 1990 Loan or Credit Fiscal Amount (lece concel letionsj Number Year Borrower Purpose Bank IDA UndFsbursed Eighty-nine loans and six credits fully disbur8ed 3,661.77 106.19 Of which SECALs, SALs, and Pro-om Loans 2469 1986 Rep. of the Philippines Agriculture Sector Inputs 160.00 2787 1987 Rep, of the Philippines Economic Recovery Program 300.00 Sub-Total 460.00 1809 1980 Rep. of the Philippines Medium-Scale Irrigation 32.98 3.30 2040 1982 Rep. of the Philippines Agric. Support Services 22.00 3.45 2173 1982 Rep, of the Philippines Communal Irrigation 38.60 9.61 2200 1983 Rep. of the Philippines Education VIII 18.40 4.89 2206 1983 Rep, of the Philippines Water Supply and Sanitation 29.00 1.27 2267 1988 Rep, of the Philippines Regional Cities Development 42.08 20.72 2360 1984 Rep. of the Philippines Central Visayas Regional Development 24,97 9.68 2418 1984 Rep, of the Philippines Highways V 102.00 76.26 2436 1984 Rep. of the Philippines Municipal Development 40.00 29.72 2495 198S Rep. of the Philippines Telecom. Tech. Assistance 4.00 0.77 267e 1986 Rep. of the Philippines Manila Water Distribution 38.00 18.20 2718 1986 Rep. of the Philippines Rural Roads II 82.00 73.74 2823 1987 Rep. of the Philippines Provincial Ports 32.00 18.21 2948 1988 Rep, of the Philippines Irrigation Operations Support 23.50 18.94 2968 1988 Rep, of the Philippines Program for Government Reform 200.00 125.00 2989 1988 Philippine Nat'l Oil Co. Bacon-Manito Goothermal Power 41.00 26.60 2969-1 1988 Phil. Nat'l Power Corp. Bacon-Manito Geothermal Power 69.00 66.34 2974 1988 Rep. of the Philippines Housing Sector 160.00 66.76 3038 1989 Rep. of the Philippines SMI IV 80.00 48.06 3049 1989 Rep. of the Phflippineo Financial Sector 300.00 160.00 3084 1989 Dev. Bank of the Phil. Manila Power Distribution 65.60 86.60 3099 1989 Rep. of the Philippines Health Development 70.10 88.10 3123 1990 Dev. Bank of the Phil. Industrial Investment Credit 66.00 66.47 3124 1990 Metro. Waterworks A Sew. Angst Water Supply 40.00 33.10 *3146 1990 Rep, of the Philippines Municpal Development II 40.00 40.00 3149 1990 Rep, of the Philippines Debt Manegement Loan 200.00 60.00 @3183 1990 Phil. National Power Corp. Energy Sector Loan 200.00 200.00 3164 1990 Phil. National Oil Co. Energy Sector Loan 160.00 150.00 *3166 1990 Rep. of the Philippines Energy Sector Loan 40.00 40.00 Total 6,789.75 106.18 1,446.47 of which has been repaid 13e4 .29 _.53 Total now held by Bank and IDA t.406.47 102.65 Amount sold 31.36 of which repaid 31.36 Total undisbursed 1,448.47 - 1,446.47 /a The status of the projects listed in Part A is desc ribed in a separate report on all Bank/IDA-financed proje cts in execution, which is updated twice yearly and circulated to the Executive Directors on April 30 and October 31. SAL, SECAL or Program Loan.  Schedule D - 11 - Page 2 of 2 B. STATEMENT OF IFC INVESTMENTS (As ioWf 4ch 31 1990) Investment Fiscal Loon Equity Total number year Obligor Type of business (US2 million) --- 57/233 1983/1973 Private Dev. Corp. of the Philippines Development finance 16.0 4.4 19.4 118/1088 1967/1989 Meralco Securities Corporation Utilities 33.2 4.0 37.2 167/899/ 1970/92/87/ Phil. Long Distance Telephone Co. Utilities 127.7 0.8 128.6 1091/1191 88/90 169/219 1970/1972 Marlwasa Manufacturing, Inc. Cment A constr. met. 0.8 0.4 1.2 186 1970 Paper Industries Corp. of the Phil. Pulp A paper prc1ucts - 2.2 2.2 1888/39 1971/1977 Philippine Petroleum Corporation Chemicals A petrochem. 6.2 2.1 8.3 207 1972 Marinduque Mining & Industrial Corp. Mining 16.0 - 16.0 241 1973 Victorian Chemical Corporation Chemicals A petrochem. 1.9 0.3 2.2 267 1974 Fillpinas Synthetic Fiber Corp. Textiles A fibers 1.6 - 1.6 272/464 1974/1979 Marl Christina Chem. Ind. Inc. Iron A steel 1.6 0.8 2.2 288 1974 Republic Flour Mills Corp. (RFM) Food A food processing 1.2 - 1.2 300 1976 Philippine Polysmide Industrial Corp. Textiles A fiber 7.0 - 7.0 329 1976/1980 Philegro Edible Oils, Inc. Coconut oil A copra 2.6 0.2 2.8 379/756 1977/1986 Acoje Mining Company, Inc. Mining 2.5 1.2 3.7 374 1977 Sarmiento Industries, Inc. Plywood 3.6 - 3.6 423 1978 Cebu Shipyard & Eng. Works, Inc. Ship repairing 2.1 - 2.1 489 1979 General Milling Corporation Food A food processing 4.0 1.1 6.1 481/686/ 1990/83/ PISO Leasing Corp. (All Asia capital) Money A capital rarket 11.1 0.6 11.8 1148 86/89 480 1990 Ventures in Industry & Business Money & capital market - 0.3 0.3 Enterprises, Inc. 519 1980 Consolidated Industrial Geses, Inc. Chemicals A petrochem. 4.5 - 4.5 682 1991 Loans to Seven Corp. for SMSE Money A capital market 18.6 0.8 19.1 663 1981 Phil. Assoc. Smelting A Refin. Corp. Mining - 6.0 6.0 572 1981 Davao Union Cement Corp. Cement A constr. met. 16.0 - 18.0 627 1982 NOC-Outhrie Plantations Palm oil 11.0 - 11.0 841 1986 Pure Foods Food A food processing - 1.4 1.4 948 1988 BPI Agricultural Development Bank Development finance - 1.0 1.0 1061 1988 Philifund Money A capital morkets - 4.2 4.2 1126 1989 Hambrect and Quist Money A capital markets - 2.3 2.3 1192 1990 Manila Fund Money A capital markets - 7.0 7.0 1194 1990 TFPF Money A Capitol Market _ 29.7 29.7 Total Gross Commitment 266.9 89.3 366.2 Less cancellations, terminations, repayments and sales 159.8 67.6 217.4 Total Commitment Now Held by IFC 127.1 11.7 138.8 Total Undisbursed (including participants' portion) 98.8 1.4 90.2  IBRD 21986R 11t6