Philippines - Leyte - Cebu Geothermal Project

Document of The World Bank FOR OFFICIAL USE ONLY LAl - 3 702- Repoit No. P-5967-PH MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON TWO PROPOSED LOANS IN AN AMOUNT EQUIVALENT TO US$211 MILLION TO THE NATIONAL POWER CORPORATION AND THE PHILIPPINE NATIONAL OIL COMPANY WITH THE GUARANTEE OF THE REPUBLIC OF THE PHILIPPINES FOR THE LEYTE-CEBU GEOTHERMAL PROJECT JANUARY 6, 1994 FA-t This document has a restricted distribution and ' their official duties. Its contents may not othel  CURRENCY EQUIVALENTS (as of May 31, 1993) Currency Unit Pesos (P) p 1 = US$0.038 US$1 F26.0 WEIGHTS AND MEASURES GWh = Gigawatt hour (1,000,000 kwh) kWh - Kilowatt-hour (860 kilo-calories) TWh = Tera watt hour (109 watt-hours) ABBREVIATIONS AND ACRONYMS BOT Build-Operate-Transfer BTO Build-Transfer-Operate DOE Department of Energy ERB Energy Regulatory Board ESP Energy Sector Plan ESMAP Energy Sector Management Assistance Program NPC National Power Corporation OPSF Oil Price Stabilization Fund PNOC Philippine National OiJ Company RECs Rural Electrification Cooperatives ROL Rehabilitate-Operate-Lease FISCAL YEAR January 1 to December 31  FOR OFMICIAL USE ONLY PHILIPPINES LEYTE-CEBU GEOTHERMAL PROJECT Loan and Project Summary Borrowers: National Power Corporation (NPC) and Philippine National Oil Company (PNOC). Guarantor: Republic of the Ihilippines. Amounts: US$211 million equivalent, of which US$147 million to NPC and US$64 million to PNOC. Terms: 20 years, including five years of grace, at the Bank's standard variable interest rate Financing Plan: Local Foreign Total --- US$ million - World Bank - NPC 0.0 147.0 147.0 World Bank - PNOC 0.0 64.0 64.0 BOT for Power Generation 21.0 153.7 174.7 National Power Corporacion 29.5 16.5 46.0 Philippine National Oil Company 17.2 10.0 27.2 TOTAL 67.7 391.2 458.9 Economic Rate of Return: 16% Poverty Category: Not applicable Staff Appraisal Report: Report No. 11449-PH Map: IBRD No. 24925 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 IBRD TO THE EXECUTIVE DIRECTORS ON TWO PROPOSED LOANS TO THE NATIONAL POWER CORPORATION AND THE PHILIPPINE NATIONAL OIL COMPANY WITH THE GUARANTEE OF THE REPUBLIC OF PHILIPPINES FOR A LEYTE-CEBU GEOTHERMAL PROJECT 1. I submit for your approval the following memorandum and recommendation on two proposed loans to the National Power Cotperation (NPC) and the Philippine National Oil Company (PNOC) with the guarantee of the Republic of the Philippines for the equivalent of US$211 million (US$147 million to NPC and US$64 million to PNOC' to help finance a Leyte-Cebu Geothermal Project. The loans would be at the Bank's standard variable interest rate, with a maturity of 20 years, including five years of grace. The Government of the Philippines would charge a guarantee fee of 1% per annum on the outstanding amount of the Bank loan. I. COUNTRY POLICIES AND BANK GROUP ASSISTANCE STRATEGY A. Recen;. Economic and Social Performance 2. Background. The Philippines was an early adjustor, with one of the first Structural Adjustment Loans from the Bank in 1980. Since then, and particularly since 1986, the authorities have made concerted efforts to correct a wide array of structural problems, comparable in scope to reforms undertaken in successful adjustment countries such as Mexico and Indonesia. Reforms in agricultural pricing and marketing, the financial sector, trade policy, the tax system, investment incentives, and energy pricing have been undertaken, along with privatization and procedures to set priorities for public investments. Sugar and coconut monopolies have been disbanded, interest rates are determined by market forces, the bias towards capital intensity in investment incentives has been effectively removed, a value added tax and improved income tax measures have substantially reduced tax distortions, trade reform has been pursued, and the Board of Investments has streamlined procedures and is in the process of taking on a more promotional role. 3. Desp4.te these structural reforms, the goal of sustained growth has eluded the Philippines; growth has often been interrupted by periods of stagnation. The Philippine economy, for example, enjoyed relatively high growth of above 5 percent a year during 1986-89, recovering from the devastating crisis of 1984-85 (when real GNP fell by 15 percent), only to be interrupted by a period of stagnation (1990-92) when income grew by an average of 0.7 percent a year, much below the population growth rate. In fact, real GDP per capita in 1992 was lower than that in 1976. This performance stands in sharp contrast to that of neighboring East Asian countries where so-called "economic miracles" have spread from the original "tigers" to Malaysia, Thailand and Indonesia. 4. The Philippines already enjoys a high adult literacy rate, and the level of human capital does not appear to lag behind its neighbors. What distinguishes the Philippines most clearly from the successful neighbors, then, is its low fixed capital formation. Its ratio to GDP in the Philippines averaged 22 percent in the 1980s, while most competitor countries in the region invested 30 percent or higher. While the domestic political turmoil of the 1980s and persistent law and order problems acted as an additional damper on  -2- investment, the low private investor response to the reformed incentive structure in the Philippines can be traced to the negative investor perception regarding sustainability of reform efforts arid, more recently, poor conditions of infrastructural services. Although the accumulated impact of reforms taken so far has been significant, slow and piecemeal impl.-mentation, at times aggravated by interventions by the judiciary, has created a persistent perception among potential investors that reforms in the Philippines might not have been owned by the Government and thus could not be effectively implemented and might even be reversed. Also, frequent macroeconomic problems have led to a squeeze on maintenance and new investment spending on infrastructure reducing the quality of service. In particular, in the power sector, not only existing stocks were poorly maintained but also no new investment was completed during the second half of the 1980s largely because of institutional weakness and cumbersome government procedures in planning and selecting projects. 5. Recent Economic Developments. The Government has been making efforts to improve policy implementation and remove infrastrmcture bottlenecks. Regarding macroeconomic management, the Government successfully completed the Fund's stand-by arrangement in March 1993 although they have met with some difficulties since then (para 8). Under the program, the consolidated public sector deficit was reduced to manageable levels in 1992 (2.4% of GNP), inflation was reduced to single digit, the current account was reduced to under 2% of GNP and gross reserves rose to over 3 months of imports. In addition, the Government liberalized foreign exchange markets for both current and capital transactions. Together with the earlier liberalization of interest rates, this has reduced th- scope for discretionary Government actions; market determined exchange and interest rates now provide a litmus test for judging the adequacy of macroeconomic policies. Other reforms to improve and depoliticize macroeconomic management include removal of two previously significant sources of public sector deficit: the financial restructuring of the Central Bank and the implementation of automatic linkage between domestic and international energy prices. Reform of the Central Bank has also strengthened the independence of monetary management. 6. Similarly, progress has been made in three other areas. First the completion of a Brady-type debt agreement in December 1992 has done much to ensure a viable balance of payments consistent with sustained medium-term growth, both by reducing external interest and principal obligations and by restoring access of the Government to international capital markets. The "debt overhang", one of the country risk elements in lending to the Philippines in the past, has been reduced, allowing private domestic corporations and muwltinationals easier access to international financing for Philippine-based projects and providing the conditions for greater private sector participation in medium-term growth. Second, reforms have been undertaken to encourage greater domestic and foreign competition and regain external competitiveness; measured in terms of unit labor cost or real effective exchange rates, the Philippine competitiveness vis-a-vis East Asian neighbors has eroded since early 1980s. In particular, with the liberalization of foreign investment in 1991 and continued trade liberalization efforts, external competition facing the traditional oligopolists has increased substantially. At the same time, there are already indications that small and medium enterprises have expanded their share of value added and employment in manufacturing. There are other encouraging signs as well: the real return on assets and sales of the industrial sector has increased; corporate debt/equity ratios have fallen; and the real wage in manufacturing has fallen in the last few years. Third,  efforts are being made to increase the level and efficiency of public investment in infrastructure although limited fiscal revenues often constrain them. For example, power interruptions have decreased substantially and should be eliminated in the first half of 1994 as new public and private BOT plants come on stream. 7. However even with these recent efforts to improve the policy environment and infrastructure, output has continued to stagnate. CNP growth for 1992 was only 1.0 percent. Weakness in global trade, and, in 1992, the appreciated exchange rate that resulted from sterilizing large inflows of remittances have reduced export growth. Positive growth was attributable to increased remittances from abroad, attracted by high Philippine real interest rates. In 1993, continued remittance flows and the recovery of agriculture helped boost GNP growth to 1.8 pe-cent durinig the first half of the year. With the near-resolution of the power crisis, a depreciated exchange rate (the nominal exchange rate depreciated from P23/US$ in August 1992 to P29/US$ in October 1993), and emerging improvement in private sector confidence, further recovery of economic growth is projectad; overall growth for the year may reach 2.5 percent. 8. This emerging recovery in 1993 has already started to put pressures on macroeconomic management. Inflation edged up in the last quarter to above 8 percent from about 7 percent earlier in the year, reflecting demand pressures and adjustments in the exchange rate and some food prices. Throughout 1993, the authorities attempted to enhance fiscal revenues through improving tax administration and introducing new taxes (e.g., energy tax, cigarette tax, documentary stamp tax) to finance the needed increase in infrastructure and other spending. But, difficulties in implementation of many of the new revenue measures caused revenue shortfalls, and contributed an increase in the preliminary estimate of the consolidated public sector deficit, which could be as high as 4.5 percent of GNP. While exports have grown at 12 percent (nominal dollar), imports also increased at 18 percent and the current account deficit is projected to exceed 5 percent of GNP. A significant portion of this is financed by Eurobonds issuanca, other portfolio investments by foreigners and a drawdown of reserves. Given that there are continued strong pressures from labor unions for substantial wage increases, maintenance of sound macroeconomic management has become an increasing challenge for the Government. 9. In short, while recent efforts in both policy implementation and other areas necessary for business confidence and investment are noteworthy, the results remain modest and tentative. These efforts need to be intensified within a medium term framework set out in Section C below. B. The External Environment 10. The Philippines' exports have grown from 21 percent of GDP average in 1979-81 to 26 percent in 1989-91, and manufactured goods now account for close to 80 percent of the dollar value of commodity exports. The country's major trading partners remain the United States (35 percent of Philippine exports) and Japan (20 percent). The recent slowdown in OECD growth dampen the prospects for robust growth over the next few years; however, the recent GATT agreement under the Uruguay Round is likely to improve the prospects for the Philippines' exports over the medium to long term.  -4- ll. The prospects for a significant part of Philippine exports are also directly affected by trading partner policies. Three important foreign exchange sources--garments, sugar, and worker remittances--are subject to bilateral negotiations. In garments, there is considerable uncertainty as to the level and scope of future agreements. While quota arrangements will be replaced by the recent GATT agreement after a transition period, unfavorable arrangements, in the meantime, would adversely affect garment export growth, particularly for the mass market garment products where Philippine weaknesses in technological and marketin% efforts are evident. The Philippine sugar quota in the US also faces bleak prospects. It was sharply reduced in 1991/92, because of high domestic stocks and the need to accommodate higher quotas for other countries. And while the quota increased somewhat to 157,422 metric tons for 1992/93, the 1993/94 global quota is expected to decline again. Last, the Philippines needs to be assured of stable arrangements in the volume and treatment of workers abroad, especially in the Middle East and Japan. 12. The largest single class of imports in the Philippines is oil, ($2 billion, about 12 percent of total in 1993) and the balance of payments remains vulnerable to oil price increases. Each dollar per barrel increase in the price of oil represents a US$79 million (0.2 percent of GDP) increase in the trade deficit. The country imports almost all its crude oil, which accounts for 75 percent of total energy consumption. The strategy for the country, endorsed by the Bank, is to reduce oil dependency to 70 percent by the end of the decade through greater exploitation of geothermal, local coal, and hydroelectric resources, but the target for dependency may be lowered further in light of recently discovered off-shore oil and gas fields which should begin commercial production in about five years. 13. One significant development in the Philippines has been the hand-over of U.S. military bases at Clark and Subic in 1992 and reduction in the Economic Support Fund from the US and other military base-related spending. While such dislocations have had substantial short-term local effects, they also provide new opportunities for private sector development. The facilities at Subic are in excellent condition, and there is considerable foreign investor interest in the site. The development of Subic as a freeport is well underway. 14. As in other countries, it is difficult to deliver an unambiguous verdict on the effects of the external environment on the prospects for the Philippine economy. The uncertainties inherent in the situation point to the need to monitor the situation closely and to integrate the Philippine economy with global trade and capital flows to allow it to respond flexibly to a volatile external environment. The recent GATT agreement is expected to reduce these uncertainties, increase trade and thus benefit developing countries in general. While its specific impact on the Philippines is being analyzed, the GATT agreement, along with parallel efforts to enhance intra ASEAN trade, would support the Philippines' goal of promoting export-led growth. Meanwhile, domestic economic policies--such as price reform, better investment allocations, privatization, the establishment of a realistic exchange rate, and financial sector reform--as well as efficient project implementation are together likely to contribute more to the success of the economy than fluctuations in the external environment.  C. The Philippines' Developmant Obiectives and Policies 15. The Government has prepared a Medium Term Development Plan (MTDP), 1993-98, and an accompanving Public Investment Plan (PIP), which reflect the country's aspirations to achieve sustainpd economic growth and poverty reduction. The MTDP has two broad goals: (i) to strive for international competitiveness of the Philippine economy; and (ii) to "empower people" through broad-based job creation and income growth ce sustain the development process. In particular, the country wants to regain the competitiveness, vis-a-vis its Asian neighbors, that has been eroded during the 1980s. To achieve these goals, the COP's agenda consists of the following five core objectives: (i) maintaining a prudent macroeconomic framework through, in particular, sounad fiscal management; (ii) improving the quality of infrastructure services; (iii) improving the business environment for both domestic and foreign investors through appropriate competition policy and further deregulation; (iv) alleviating poverty; and (v) protecting the environment. 16. The Bank agrees that attention to these areas is critical to helping the country regain its competitiveness, especially vis-a-vis its neighbors. The actual success in these areas will depend on two key questions: on the Philippines' capacity to implement the necessary projects especially in infrastructure in a timely manner, so as to enhance its standing in the perceptions of investors; and on its ability to overcome the fragmented and at times piecemeal approach to policy-making and implementation. 17. The authorities realize that sound macroeconomic management is essential for private investment and improved external competitiveness. The most critical area of macroeconomic management has become fiscal management, in particular, management of the national budget. In this connection, there is an emphasis on increased tax revenues through: improving administration of and expanding coverage of VAT; and improving tax administration through, for example, computerization of the Bureau of Internal Revenue and Bureau of Customs. The national government tax/CDP ratio has risen from 10.7 percent in 1986 to 14-15 percent in the 1990s. These tax efforts have brought the Philippines closer to the regional average: its tax/GDP ratio is about those of Singapore, Korea, and Indonesia, but lags behind Malaysia and Thailand, who collect about 16 percent of GDP as taxes. In view of the relatively weak fiscal outcome of 1993, the Government needs to continue to make vigorous tax efforts to contain the deficit to a level consistent with lowering interest rates and inflation, while at the same time increasing public investment, dismantling distortionary taxes (such as taxes on financial intermediation), and continuing with trade liberalization. In addition, continued discipline in setting public sector wages and minimum wages is critical. The Government is also improving expenditure monitoring to identify and adequately fund priority activities. 18. The country's deteriorated infrastructure is a serious deterrent to private investment. In particular, electricity shortages r3ached a crisis situation in 1992-93 with brown-outs of 6-12 hours a day disrupting productive activity across all sectors. While brown-outs have been reduced to 2-3 hours a day, it remains critical that shortages be eliminated by enhancing the supply capacity in an orderly manner. The GOP's has adapted an Energy Sector Plan which outlines policy, pricing and institutional reforms along with an investment and financing program for the sector. It also emphasis demand management. It is estimated that to mcct elect-ricity demand over the next four  years, the Philippines will need about 3,500 megawatts of additional capacity, which together with required transmission investment is estimated to cost about $7.5 billion, about 60 percent of which is supposed to be met by BOT arrangements with the private sector. Otber parts of infrastructure are also in a serious condition (water, roads, urban transport and sanitation), and significaitt increases in public and private investments in these sectors are required and anticipated. Put together, these needs will place a heavy burden on public finance and require that the GOP address institutional constraints to improve efficiency. 19. The third aspect to which the authorities are giving emphasis is improvement in the private business environment through increased scope for foreign and domestic competition. The GOP has largely discarded past efforts based on discretionazy fiscal incenUives and subsidized credit. Current policy is to implement measures to quicken the supply response to changes in market conditions by: liberalizing entry to and exit from markets and improving the regulatory framework, especially in transport, banking and telecommunications; promoting export development; adopting improved energy pricing policies; following through with trade liberalization; and reducing the power of large monopolies and oligopolies. The GOP is also encouraging private sector activity through privatization, even in areas that have traditionally been dominated by the public sector such as infrastructure and social services. Progress has been made on most of these areas of competition policy, but the GOP needs to convince investors, who have shown renewed but cautious interest, that it has the vision and determination for vigorous implementation. 20. Another important Government goal is to reduce ipoverty incidence from the current 40 percent (according to official criteria)V" to 30 percent by 1998. The poor are overwhelmingly in the rural areas, and families with many young children are particuiarly at risk. While recognizing that economic growth is the most effective means for poverty alleviation, the GOP has adopted a three-pronged strategy for poverty alleviation: human resource development; service delivery improvement through decentralization; and targeting of assistance to the most vulnerable. First, education remains the Government's priority long-term means for reducing poverty. The public education system suffers from low quality and the Government intends to give priority to quality improvement at all levels to increase retention rates and to supply the skills needed in the labor market. Second, the Government recognizes the need to improve the access of the poor to social services by restructuring the institutional set-up of service provision and reallocating funds to priority activities. Decentralization is one mechanism being advanced to better match public services with local needs. Third, the GOP is making efforts to target direct assistance to the most vulnerable segments of the society, such as preschoolers younger than five years old and pregnant and lactating mothers. Programs such as women's health and family planning, nutrition, and control of environmental degradation are oriented towards those at risk. These programs would also contribute to further deceleration of population growth, a critical factor for accelerating sustainable income growth. 1/ The Philippine poverty threshold is defined at the consumption level that is higher than, say, in Thailand or Malaysia. If the Thai definition is used, the poverty incidence in the Philippines is now at about a third.  -7- 21. The need for active preservation of the Philippines, rich biodiversity and fragile environment has been a major concern of the Government in the past few years and has strong and broad based support among the country's very large NGO community and the population generally. Th3 GOP has broadened its attention from natural resource management and establishment and protection of a national park system to issues of industrial pollution and control of toxic waste management. In 1989, the Cab'-net approved "The Philippine rrogram for Sustainable Development" (PPSD). Based on the PPSD, the Government is moving ahead with: (i) strengthening the preservation of natural resources and biodiversity, especially forests and national parks through legislating the Integrated Protected Area System; (ii) controlling industrial air pollution; (iii) reducing urban degradation through better systems of human and industrial waste management, including the eradication of toxic wastes; and (iv) strengthening the protection of coastal waters and fisheries. The Government has also banned logging of old-growth virgin forests and strengthened enforcement. D. Medium-Term Prospects 22. The Bank's overall assessment is that there is now a window of opportunity for the Philippines to achieve sustained growth (see The Philipgines: An ORening for Sustained Growth, Report No. 11061-PH, 1993). Key structural reforms a;^e in place--liberalized interest and exchange rates, reduced effective protection rates, an openness to foreign trade and investment, and tax and incentive systems that are in line with other East Asian countries. if the authorities move decisively to sustain these improvements and deepen structural reforms and if they successfully conclude current discussions for a new economic program with the IMF, then key elements will be in place and medium-term growth of around 5 percent should be feasible and sustainable (Table 1). Table 1: Major Macroeconomic Indicators 1993 1994 1995 1996 GDP Growth 2.0% 3.5% 4.2% 5.0% Fiscal Revenues/GDP 17.3% 18.7% 19.1% 18.9% Fiscal Expenditures/GDP 19.8% 20./% 21.1% 20.5% Budget Deficit/GDP 2.5% 2.0% 2.0% 1.6% Inv/GDP 23.0% 24.4% 25.1% 26.6% Current Account Deficit/GDP 4.8% 3.9% 3.3% 3.4% 23. This base-case growth would be supported by increased investments and labor-intensive manufacturing exports. For agricuiture, modest growth of 2-3 percent a year is projected based on the assumption that non-traditional agricultural exports--e.g., aquaculture, cut-flowers--will respond to the improved incentive structure. This has important implications for poverty alleviation and broad-based growth. Investments would increase from 22 percent of GDP to about 26 percent in 1996. Initially, investments in improvement of infrastructure services would be required by both private and public sectors to  - 8 - enhance returns to other directly productive private investments. Foreign direct investments are expected to play an active role. As the national savings is expected to be around 23 percent of GDP, a current account deficit of about 3 percent of GNP is projected. This means, with a conservative assumptions on the foreign portfolio investments, that external borrowing needs would amount to $1.3 billion a year. From the past and expected aid commitments, $800 million of net aid flows a year would be forthcoming. If the country utilizes prudently the recently regained access to international -apital markets, the remaining gap is expected to be manageable. 24. This base-case scenario rests upon a number of external and policy assumptions: (a) reasonably stable external environment free of significant price, exchange rate or other external shocks such as growing protectionism in internatiortal trade; and (b) the authorities, consistent implementation of policy refcrms, including following through with and fine-tuning ongoing reforms; and (c) strengthening managerial and technical capacity of the public sector for policy and project implementation. If the Government could not maintain the reform momentum and sound macroeconomic management, required investments (both public and private) would not be forthcoming and the economy would continue to suffer from high fiscal and balance-of-payments gaps. Export and investment growth would be substantially lower and the growth would be barely above the rate of population expansion. Reduction in poverty incidence in this low case scenario would be minimal. On the other hand, under certain circumstances a higher growth rate than that in the base-case would be possible if the Government accelerated implementation of its reform program and infrastructure projects, and if a rapidly rising private sector response was evidenced. E. Creditworthiness and Exoosure 25. Overall creditworthiness in the Philippines has steadily improved in recent years as a result of debt and debt service reduction, limited new borrowing, and some growth. After the last Brady-type debt restructuring in 1992, the debt service ratio (excluding resources devoted to buybacks and collateral purchases) fell to 18 percent from 31 percent in 1988; and external debt to GNP was reduced to 61 percent. This has also enabled the country to regain some access to voluntary international capital markets. However, the country needs to avoid an imprudent rush to international markets by private and public sector entities that could endanger these recent improvements in country risk. Successive efforts to reschedule and restructure debts, however, drove the Philippines to the threshold of some IBRD exposure guidelines. In particular, the share of preferred creditor debt service is likely to be high until the rescheduling hump is over. This is in part because preferred creditors have opted to assist the Philippines through greater disbursements (increasing the numerator) and others have opted to assist the country through rescheduling (decreasing the denominator). 26. Over the next few years, creditworthiness is expected to continue to improve. The debt service ratio is expected to be around 18-19 percent for the next two-three years reflecting the need to finance high infrastructure investment, but is projected to fall to 16 percenc in the medium-term. In November 1993, the price of the Philippines' new money bonds on the secondary market was 88 cents on the dollar, up from 50 cents in 1991 and well above the investment threshold of 70 cents. The overall inflexibility of Philippine debt will likely continue to rise, not because of an increase in the country's  - 9 . indebtedness, but rather because of the reduced share of debt service due by the Philippines to, in particular, commercial banks resulting from the last Brady deal. F. Main Objectives of the Bank's Assistance Program 27. The starting point of our assistance strategy is that the immediate issues facing the Philippines have shifted between the 1980's and the 1990's. Macroeconomic stabilization compounded by the debt overhang was a major concern in the 1980's; today the debt overhang has been dealt with and significant progress has been achieved on the stabilization front although this will require continuing attention. Major structural reforms have been undertaken and the economy today is free of serious distortions and has been opened up and integrated with the global economy through substantial trade and foreign investment liberalization. Basic political stability including improved law and order have been restored. What appears to be missing is the business confidence necessary for a competitive private sector to lead the economy into a higheL growth path. This is in part the result of past institutional weaknesses in implementing policy/projects consistently and effectively and the deterioration in the quality and reliability of required infrastructure services. The Bank's primary objective for the period ahead therefore is to assist the Philippines regain a sustainable high growth path led by the expansion of an internationally competitive private sector. To achieve this the Bank will focus on macroeconomic management and improved policy implementation, provision of infrastructure through improved project implementation, and general improvement in the private business climate. With improved business confidence and more robust growth, the Government's capacity to address poverty alleviation and environmental protection would be enhanced and the Bank's proposed assistance in these key areas would be more effective. 28. It is important to emphasize, however, that the recent gains in stabilization do not lessen the importance of macroeconomic management; sound macroeconomic management is a neither easy nor automatic outcome as seen in the recent history of the Philippines. Yet, it is a prerequisite of our strategy. Together with the IMF, therefore, our dialogue will continue to be driven by concerns on the maintenance of sound macroeconomic management, in particular in the fiscal areas. 29. Economic and Sector Work (ESW) and Aid Coordination. The Bank's strategy is to assist by providing a mix of financing with significant institutional support, especially in key infrastructure and social sectors. While it may be clear that total spending in these sectors must be increased, before this can be done efficiently, public/private roles need to be defined, spending priorities sharpened, and the implementation capacity of the public sector improved. The planned public expenditure review (PER) beginning in FY94 would assist the Government in these areas and help them better manage the limited fiscal resources. Specifically, the PER would discuss: sector spending priorities given the overall resource constraint; public/private sector interface; civil service structure and emoluments; devolution of fiscal authorities to the local governments; and liability management. 30. Sector dialogue must be based on adequate ESW, followed up by lending operations to provide the leverage to ensure that the recommended policy changes are implemented. We currently have an excellent dialogue with GOP officials, which has been instrumental in shaping this strategy, and much of  - 10 - the ESW underpinning this approach is now in place. During FY93, we completed work on Decentralization, a Basic Economic Report, and assessments of Infrastructure, Health, and Industrial Pollution. ESW in power, education, private sector assessment and agriculture is ongoing. 31. In this strategy, aid coordination plays an important role. In some areas, such as Family Planning, where the GOP is interested in grant funding, our ESW has put us in an important role of coordinating concessional aid resources. Similarly, in the energy area, where several large donors are active, it has been important to ensure that there is an agreement among donors and the Government on the underlying policy thrusts developed in our ESW and the Energy Sector Plan. Since the size of our lending program will not allow us to have a meaningful, comprehensive presence in all sectors, aid coordination will become one of the prime mechanisms for translating Bank policy recommendations into GOP actions, even where we do not have a significant lending presence. The coordination of donor views on sectoral and macroeconomic issues is undertaken in a formal way through Consultative Group meetings which the Bank chairs and in an ongoing and less formal way through local aid group meetings led by the Bank's field office in Manila. 32. Lendire Instruments. Macroeconomic developments di -ussed above also indicate that the role of adiustment lending should be much reduced in our lendirg strategy. The case for adjustment lending, which fundamentally rests on the need to provide exceptional support for the balance of payments, has become weaker beca:se present levels of reserves are healthy, because mechanisms have been adopted to ensure market solutions to balance of payments crises (i.e., exchange rate adjustments), and because most of the key reforms with significant implications for the balance of payments have been undertaken. Our strategy accordingly does not envisage any adjustment loans in the near future. However, the strategy may need to be revisited should conditions change, particularly if adverse global conditions temporarily threatened to derail the recovery and the transition to a high-growth path. The Bank's lending program, therefore, focusses on investment lending. 33. Lending Levels and Trigger Points. Given Bank exposure concerns balanced by the outlook of cautious optimism, proposed base case lending would be about $500 million a year with an emphasis on energy and other infrastructure (see Annex A for relative sector shares). The annual average lending may be increased to $700 million in the high case and to less than $300 million in the low case. 34. The high case scenario would be reached if the Government: (i) considerably accelerates and deepens structural reforms so that there are rising levels of private sector confidence and investment; (ii) maintains sound economic management through increased revenue e-forts to finance priority public investments, especially in infrastructure; and (iii) undertakes new initiatives in areas such as family planning and environmental protection. Under this scenario creditworthiness can be expected to improve considerably. On the other hand, the low case would be reached if the macroeconomy unravels, political instability sets in and the Government reverses structural reforms. In this case creditworthiness would substantially deteriorate and the Bank's lending would comprise selective basic infrastructure projects and projects that benefit specified target groups.  - 11 - Lending by Sector 35. The chief focus of Bank lending will be infrastructure. In numerical terms, infrastructure lending will be dominated by power, where significant generation, transmission and efficiency programs have been identified. The key constraint in expanding power rapidly is the absorptive capacity of the major agencies. The adoption of the National Energy Sector Plan is an important development in addressing this institutional weakness. The plan contains details to strengthen planning in the sector, define privatization targets, increase private sector participation, depoliticize energy pricing and improve demand management, and identify key projects and financing requirements. The Bank has several loans planned for the sector which will depend on satisfactory implementation of the Energy Plan. Through sector work, the Bank is also assisting the Government to define the pricing, regulatory and institutional arrangements needed to improve the interface between the private and public sectors. 36. In transport, the Bank's strategy is to build on the progress made under the Highway Management Project (FY92) and to formulate a road network management program and increase expenditure for road maintenance to 1980 levels in real terms. The Bank is preparing a Maritime Sector project to improve service levels, correct price distortions and increase competition on inter- island shipping and improve efficiency at ports. To enhance competitiveness of agriculture, the Bank is also preparing a project on rural infrastructure. In other areas of infrastructure such as sewerage, sanitation, and solid waste management, the Bank will focus on improving institutional effectiveness by increasing resource mobilization, reducing the unit cost of investments and services to help cost recovery and meet affordability constraints of lower income groups, and assuring maintenance of existing systems. The Bank is also supporting application of more stringent criteria in restructuring national irrigation investment programs to emphasize low-cost communal and run-of-the- river systems, while transferring management responsibilities and O&M costs to user groups. 37. In the agricultural sector, production and marketing are mainly private sector activities. Thus, lending for the agricultural sector would be largely directed at support for the private sector, concentrating on development of necessary public infrastructure, improved means of delivery of credit to small scale farmers and rural enterprises, and upgraded support services including research and extension. Beneficiary participation through user groups and NGO collaboration will be key features of the approach. Policy dialogue will continue to press for continued and consistent liberalization of trade for agricultural products involving reduced use of protection and subsidies. No less important will be the need to reduce uncertainties associated with agrarian reform in order to facilitate increased investment in agriculture. 38. Attention to the social sectors will remain important as a means of improving skills as well as tackling poverty (see para. 39 below). In education and training the Bank has lent significant amounts to the education sector in the past but now a change in approach is warranted away from physical construction towards emphasis on improved quality and greater economies. On the education sector's role in supporting growth, emphasis will be on improving the adaptability of the labor force through provision of a broad foundation emphasizing mathematics, science and technology. At the higher education  - 12 - level, there is a need to correct the present qualitative and quantitative mismatch as seen in the oversupply of poorly equipped graduates. In health the Bank is emphasizing and developing a series of projects to provide basic services to low income groups identified as most at-risk from specific health hazards: urban slum dwellers; women of reproductive age; and children under five years of age. Reduction of the high fertility levels that currently erode the benefits of economic growth will also be high on the agenda. In both education and health, collaboration with NGOs will receive special attention. 39. Cutting across the sectoral priorities outlined above are a number of thematic areas that the Bank strategy is addressing including poverty, gender, and environment. On goverty, Bank assistance consists of a series of projects in health that provide basic services to slum dwellers, reproductive women and preschoolers. A possible Child Development Project, which could catalyze large scale donor support, could include reallocating funds from inefficient food subsidies to a targeted child nutrition program. Most of the agricultural and natural resource management lending will continue to include poverty eradication as a major objective, based on the recognition that overall rural development is the best way to end poverty. In Second Agricultural Support Services, a shift of extension responsibility to the private sector and/or mass media would be encouraged for the better-off areas (mainly irrigated paddy rice areas), freeing public resources for application to poverty areas. 40. The Bank's focus on maternal health arose from findings of a 1989 Bank assessment of women in development in the Philippines. Despite reasonably good access to education and employment opportunities, the assessment identified maternal health and family planning services as key areas in need of improvement. High maternal mortality and morbidity levels are partly due to the fact that health care for women has long taken second place to interventions targeted at infants and children. Under the GOP's new health policy, family planning is to become a core intervention because of its potential in improving women's health; reducing child mortality; and reducing the high fertility levels that currently erode the benefits of economic growth. 41. Through a sector adjustment operation (FY92) the Bank focussed upon natural resource management. and environmental degradation in the uplands which has a poverty orientation. As a follow-up to this successful effort, an investment project is under prepazation. Initiatives to be supported include promotion of community-based sustainable management of natural resources and biodiversity, and strengthening the national agencies in conducting environmental impact assessments. Lending in this area will continue to take into account the close link between appropriate resource management at the grass roots and poverty alleviation. 42. A recent Bank study, Towards Improved Environmental Policies and Management (Report No.11852-PH), focussed upon industrial, energy, and transport-induced pollution in the Philippines. On this basis, projects to reduce industrial pollution and improve solid waste management are planned which would address the inadequacy of collective treatment facilities for industrial waste, support the financing and purchase of pollution control equipment by manufacturing firms, and provide technical assistance to line agencies for implementing more efficiently pollution control standards and regulations.  - 13 - 43. Portfolio Mana&ement. As of November 30, 1993, the Bank had 32 loans under implementation withi an undisbursed amount of around $1.7 billion. The portfolio continues to be rated moderate with a slight improvement over the last year--projects with major problems declined from 5 perccnt to 3 percent, and projects with no or minor problems increased their share from 29 percent to 31 percent. All projects with major problems are being addressed satisfactorily. 44. Selected performance indicators over the last four years are shown below: Table 2: Selected Indicators of Portfolio Performance and Management Indicator FY91 FY92 FY93 FY94 (Current) Portfolia Performance Number of projects under implementation 35 36 38 34 Average implementation period (years) 6.5 - 6.3 6.2 6.1 Average ratings Development objectives 1.4 1.3 1.3 1.2 Overall status 1.7 1.6 1.8 1.7 Cancelled during FY ($ milion) 8 4 6 n.a. Disbursement ratio (%) a/ 22.2 20.7 26.1 26.2 Disbursement lag (%) 24.4 2.3 21.8 n.a. Memorandum item: % completed projects rated unsatisfactory b/ 26.0 Po(folio Management Supervision resources (total staff weeks) 487.8 518.4 545.0 519.0 Average supervision (staff weeks/project) 11.9 12.6 11.4 11.9 Supervision resources by location (in %) Percent headquarters 100.0 100.0 98.7 98.1 Percent resident mission 0.0 0.0 1.3 1.9 Supervision resources by rating category (staffweeks/project) Projects rated I or 2 12.0 12.6 10.3 12.6 Projects rated 3 or 4 8.5 - 15.8 12.0 Memorandum item: date of last CPPR: November 1993 a/ Investment projects only. b/ Cumulative from the OED database. 45. Past efforts in implementation are being intensified. For example, the Bank's Portfolio Review and Restructuring Report (January 1993) concluded that the GOP budgetary process (particularly budgeting and cash releases) was having a major adverse impact on Bank-assisted projects and on those of other donors. The report stressed the need to separate allocations for donor- assisted capital projects from those for operating expenses and for locally- financed capital projects to avoid shortfalls in planned financing flows. The GOP has agreed to ensure that project implementing agencies do not shift funds among the various projects handled by their departments. 46. The necessary restructuring/modifications to projects were found to be minor in the Portfolio Review, and one loan (the Housing Sector Loan) has been canceled. The Bank's analysis of its portfolio has been shared with major donors (such as JEXIM, OECF, USAID). The Government has also completed a review of all externally-funded projects. The portfolio review will continue to be repeated annually to ensure that limited resources are used in accordance  - 14 - with the agreed priority. The 1994 review is now in progress. In general, project implementation efforts at the local level will be strengthened, with the Bank field office employing both headquarters and local staff to support implementation of projects. 47. IFC/MIGA Activities. IFC's strategy for the Philippines focuses on addressing the most pressing needs of the country's economic development, which at the present moment are reflected in power shortages and other infrastructure constraints. In FY93, IFC approved five projects totalling over $1 billion (IFC's own investments were about $120 million), of which two were in the power sector. In capital markets, IFC's activities have focused on institution building in the financial sector and support of the industrial sector through venture capital funds. The country's business activities in the near future will likely be buoyed by the improved political stability and the Government's continued efforts with respect to structural reforms and privatization. In this respect, the Corporation's joint effort with the Bank on assessing Philippines' private sector development, a draft report of which is at an advanced stage, would make a timely contribution. Regarding MICA, the Congress has ratified the Convention in November 1993, making the country eligible for the offering of MIGA services to investors, and exploratory discussions are expected soon. 48. Co2oeration with Other Multilateral and Bilateral Institutions. There is substantial agreement between IMF and the Bank on issues and the priorities for economic reform in the Philippines. Staff frequently participate in each other's missions. The IMF is currently discussing a new program with the Government, with the objective of raising the economy onto a sustainable, higher growth path while maintaining a stable macroeconomic environment. Broad agreement has been reached with the authorities on key issues and objectives. The discussions have been protracted partly because of the shortfall in fiscal revenues the Government experienced in 1993 which reduced resources for financing infrastructure investment for future growth. In the interim between programs, the Government has resumed all payments on its Paris Club debt (amounting to about $400 million per quarter). We also maintain a continuing dialogue with the staff of Asian Development Bank. Collaboration with bilateral donors is strong and has been carried out through cofinancing, the Consultative Group meeting (CG) and other informal coordinating mechanisms. In the areas of human resources and the environment, we are working closely with the NGO community to solicit opinions and encourage participation from the grassroots level. G. Key Policy Issues for Board Consideration 49. In summary, key development issues in the Philippines have evolved from a phase of stabilization and structural policy reform to a phase of investment/policy implementation and encouragement of the private sector. The Bank's country assistance strategy has also evolved in response. The CAS agenda can be summarized as follows:  - 15- SUMMARY OF CAS AREAS OF FOCUS AND OBJECTIVES Area of Focus Principal Objectives Select Bank Instruments A. Maintaining Sound Macroeconomic Management (i) Fiscal revenue enhancement * improve fiscal perfornance * econonic work *raise public sector savings for investment * projects that strengthen revenue in infrastructure collection (Tax computerization) v facilitate private investment (domestic * collaboration with Govt./IMF on a and foreign) growth oriented medium-term economic program (ii) Expenditure management * protect essential capital investments * public expenditure review through identification and implementa- tion of a CORE Investment Program * other analytical work or lending in especially in infrastructure areas such as civil service, domestic -- debt management o address inflexibility of budget due to high ratio of wages and interest payments B. Strengthening Infrastructure e expand/maintain infrastructure (power, e lending especially in power, transport transport, water, sanitation) and water, paying attention to centers outside Manila while upgrading 3 create well serviced centers outside infrastructure in Manila metro Manila (Subic, Cebu) that can attract FDI * sector review reports focusing on im- proved public sector management and * provide rural infrastructure to promote incentives for private sector provision agriculture and other non-farm economic of infrastructure activities * rural infrastructure projects including community based irrigation C. Improving Private Business e strengthen competition policy and * sector work on private investment in Envirornent regulatory system to promote private other sectors such as agriculture investment * greater use of BOT/BOO, ECO, etc. * attract foreign investment through a more in conjunction with Bank financed open foreign investment and trading system projects * encourage a larger role for private * strengthened Bank/IFC collaboration provision of public services e.g., PSA  - 16 - Area of Focus Prncipal Objectives Select Bank Instuments D. Reducng Poverty * achieve broad-based reduction in poverty * Bank ESW and lending in the social incidence and reduction of dispatities sectors: women's health and family between urban/rural areas and between planning; child development and income groups nutrition; and education quality improvement agriculture and rural development through targeted rural and co- operative credit, commnunity based water development, targeted rural infrastructure * assist the government to improve service delivery through decentralization by carrying out analytical work and pilot operations E. Sustaining Development e consolidate and extend recent progress on e follow-up to the successfully the green aspects of environment implemented Environmental SECAL; extend grass roots based resource - make a determined start on the grey/brown management pioneered in the Central aspects of environment which tend to be Visayas Regional Projects neglected * build on recently completed ESW on * strengthen institutional capacity and industrial pollution, solid waste, processes in the Department of Environment urban transport etc. and Natural Resources (DENR) a technical assistance to DENR F. Strengthening Policy/Project * assist key line agencies and selected * ESW in public sector management Inplementation Government corporations in achieving broad issues including civil service based improvements in implementation reform * improve aid utilization * technical assistance components in projects * support for information technology joint annual reviews of portfolio 50. There are three key criteria for judging progress and success. First, a key determinant of success will be the Government's ability to manage its fiscal affairs in a manner in which revenues continue to rise and investment levels are lifted within a sustainable budget deficit. Second will be the degree to which infrastructure bottlenecks are effectively addressed through effective project implementation and relevant sector reforms in power, transport, water supply and sanitation. Third will be the extent to which the economy will remain open and competitive globally; for example no reversals in trade and foreign investment liberalization. The above, together with continued political stability should lead to increased foreign direct  - 17 - investment and more robust growth, making it possible fur the Philippines to tackle poverty and environmental protection. Lack of progress in these areas will imply that the economy would continue to "muddle through" with consequent adjustment in the Bank's strategy to manage the resulting risks. 51. Risk Management. We see two main risks. The first is that policy and project implementation remains weak despite recent efforts by the Government, thus weakening the attractiveness of the Philippines in the eyes of investors. Delays in the completion of infrastructure projects would be doubly harmful, because they would prevent the existing productive base from performing to its capacity. The second risk is that resource mobilization does not pick up. By not making adequate domestic finance available, this would inhibit the use of aid resources and lead to low investment and keep the infrastructure weak. 52. The riskiness of the Bank's portfolio in the Philippines is manageable. If growth and foreign investment do not materialize (or if political stability deteriorates), clear triggers would reduce Bank lending substantially and limit it to selected areas of basic infrastructure and targeted poverty alleviation. The Bank would manage its risks by intensifying portfolio supervision and increasing donor liaison on portfolio issues. II. THE PROJECT 53. Sector Background. Power demand growth in the Philippines has been uneven, and that is not surprising given variations in GDP growth. In the last two years, it was severely restricted due to supply constraints; still, power sales increased 6.2% p.a. between 1986-92. Once adequate power supply is restored early in 1994, sales are expected to rise by an average of 9% p.a. until the year 2000. In absolute terms, the annual per capita consumption for power is very low (371 kWh)--equal to just a couple of weeks of per capita use in developed countries. Even after the effects of ongoing or proposed energy conservation programs are considered and conservative estimates of GDP growth are applied, peak demand is expected to double by the year 2000 to 8,260 MW. This will require substantial investments, sound financial policies to mobilize required resources, and increased private sector participation. 54. The Government's present strategy of steadily increasing the private sector role in power generation and operational management is appropriate and should be supported. The private sector has emerged as a principal player in the energy sector: exploration for hydrocarbons is exclusively with the private sector; oil refining and distribution are carried out by two private companies (CALTEX and Pilipinas Shell Petroleum Corporation) in addition to Petron (the oil subsidiary of state-owned PNOC). However, the Government has decided that Petron will be privatized by 1994 and the process is now underway. In the power sector, practically i11 distribution is with the private sector, which includes the following: (a) MERALCO (Manila Electricity Company), a private utility in Metro Manila that distributes about 60% of the total electricity in the country; (b) 12 private utilities that retail electricity in different cities; and (c) about 120 member-owned rural electrification cooperatives (RECs), which distribute power and manage retail sales in rural areas. There are, however, two state owned corporations in the sector: (i) the National Power Corporation (NPC), which sells power in bulk to power utilities and is responsible for power generation and transmission, and (ii) the National  - 18 - Electrification Admlinistration (NEA), responsible for financing and providing related technical support to the RECs. As agreed under the Energy Sector Plan (ESP), the Government is studying options for NPC's privatization, which is likely to require se-reral years, given constitutional, regulatory, commercial and financial constraints and the need to analyze options broadly identified by an USAID-funded study. It is in this context that the Bank is currently conducting an overall review of the sector structure. This will be completed by early 1994 and would serve as an input to detailed studies that would follow. 55. NPC's Board of Directors already decided that all new generation plants (except multipurpose hydro) will be bid out as private BOT projects. In fact, over the last few years, Philippines has entered into large number of contracts with the private sector to construct, finance and operate power plants, as Build-Operate-Transfer (BOT), Build-Transfer-Operate (BTO) and Rehabilitate-Operate-Lease (ROL) schemes. About 20 of these projects are under implementation and a significant number under bid or negotiations. Total power generation contracted with the private sector amounts to more than 60% of the present reliable capacity, of which more than 1,000 MW will be operating by the end of 1993. In the interim, ways and means are needed to support such vast private sector program, reduce the uncertainties and risks investors are likely to face, and establish improved planning systems for an optimal integration of private and public efforts in the power sector. 56. The Power Crisis and the Proiect. Over the period 1991-93, the Philippines experienced ani acute power shortage; this posed a grave threat to its economic recovery, because it translated into prolonged outages that hampered industrial and commercial activities. As a result, unemployment increased and economic losses may have reached almost one billion dollars per year. Conventional power supply projects (coal, geothermal and hydro) require construction times of three to six years. and cannot provide relief in the short term. Thus, the Government launched a "fast-track' generation expansion program based on combustion turbine or diesel-engine driven systems which were contracted as BOT/BTO projects with the private sector. WhLile these plants are operationally more expensive than base load plants, they were the only power sources that could be commissioned within one or two years. These plants played a critical role in meeting the Philippines power deficiencies and in the future will provide peaking system requirements. They are, however, not cost effective means to meet the base load power needs, and the proposed project by using geothermal energy in Leyte provides a more cost effective option as a base load plant for Cebu and the Visayas region (and in a near future for Luzon). In addition, it is environmentally preferable to other thermal options. 57. It is also important to continue ongoi-ng efforts to improve energy efficiency and demand side management. These efforts have already succeeded in implementing efficient lighting, rating of electrical appliances, energy audits, applying strict conservation measures at public offices and, given the high price of electricity (more than twice the average in Washington D.C.) in promoting other energy conservation measures. Power demand charges to reduce peak load will be introduced by the project and further actions for discussion with Government are being studied by the Bank's Energy Sector Management Assistance Program (ESNAP).  - 19 - 58. Institutional Issues. While a severe three-year drought, which seriously curtailed hydro capacity, was in large part responsible for the power shortages, poor institutional performance also contributed to the crisis: Environmental approvals for new power projects were substantially delayed and financial and institutional weaknesses in NPC prevented it from making the needed investments. Moreover, NPC's finances deteriorated severely in 1991 when costs rose sharply due to a large currency devaluation and higher oil prices (resulting from the Gulf War). A Supreme Court decision to stay a pari passu increase in tariffs added to NPC's financial difficulties and required then a Government contribution of about US$135 million to NPC. In 1991-92 the Corporation's cash situation was also impaired because of the payment of oil taxes which were not included in its tariffs (pending an appeal to the Supreme Court). The final Court decision (May 1993) reconfirmed that NPC is exempt from such taxes and will allow to recover about US$360 million in overdue tax refunds. NPC's equity was also increased by the Congress in 1993, mainly by a P3 billion equity infusion from the surplus in the Oil Price Stabilization Fund (OPSF). NPC also agreed to a reform program; its implementation has since resulted in considerable institutional and operational improvements that have streamlined its structure, reduced the number of vice-presidencies from 26 to nine between 1991-93, and eliminated more than 2,000 staff. NPC is also establishing targets for improving project implementation, internal audits and control, and rationalizing and decentralizing functions (including a plan for establishing separate units for Luzon, Visayas and Mindanao). Under the "Electric Power Crisis Act of 1993," the President has been given special powers to solve the power crisis; these include facilitating tariff increases, speeding-up project approvals and increasing technical salaries in the sector. A comprehensive management audit ("Efficiency and Operational Improvement Study") was completed in October 1993 and its recommendations would be implemented under the project (para. 67). 59. The Energy Sector Plan (ESP). Sector reform is the highest priority of the new administration. As a result of its dialogue with the Bank, in January 1993, the Government prepared and approved the ESP, which charts a course of action to improve the operations of the energy sector as a whole. The ESP sets out measures and implementation schedules in all areas of concern, particularly for sector coordination, regulatory development, private sector participation, power and oil pricing, environmental management, energy conservation, operational efficiency and project implementation. The Government, NPC and the Bank will discuss annually the implementation progress envisioned. Some of the plan's key measures have already been introduced, such as establishing the Department of Energy (DOE) and initiating actions to improve NPC's finances: For example, tariffs were increased that tripled NPC's rate of return between 1991-92, from 2% to 7%. In fact, although NPC's situation in the last two years was unusually difficult due to the drought and power outages, its net income surged from a deficit of US$135 million in 1991 to a surplus of US$184 million in 1992. In addition, NPC critical power investments doubled in 1993 and it will achieve the covenanted 8% rate of return on revalued assets. Under the project, other tariff improvements include the recent approval by the Energy Regulatory Board (ERB) of an adjustment scheme that will compensate for variations in the costs of fuel and purchased energy and make future tariff adjustments largely automatic. These measures would ensure an adequate financial performance in future years. 60. Lessons Learned from Previous Bank Operations. From 1957-75, the Bank financed three hydro projects, two thermal plants, one transmission  - 20 - project and a rural electrification scheme. Three loans were also approved for coal, oil and geothermal exploration. Project Performance Audit Reports (PPARs) were prepared for two projects with NPC (the fourth and seventh projects, PPAR No. 0980 and PPAR No. 8574). The major problems identified in the PPARs were implementation delays and cost overruns due to project design changes, cumbersome contract award procedures, and weak project management. Because of a disagreement on policies, the Bank discontinued lending until 1988 when it approved a geothermal generation project, Bacon Manito Geothermal (Loan 2969-PH). This followed improvements in the sector policy environment. In 1988-89, two other projects were approved for the Manila Power Distribution System (Loan 3083-PH) and for the Energy Sector (Loans 3163-PH, 3164-PH and 3165-PH). These projects financed sector investments and supported improved sectoral policies regarding investment strategy, financing and coordination. They are generally being implemented satisfactorily, but NPC had problems achieving the covenanted rate of return in 1991 and in the Bacon Manito project, although the power generation started satisfactorily in October 1993, the completion of other transmission lines required the extension for one year of the closing date. We have endeavored to resolve these problems by establishing an improved regulatory framework, by implementing automatic tariff increases and by NPC placing the responsibility for each project under a project director. Satisfactory progress is being made on these issues. 61. Rationale for Bank Involvement. Developing adequate infrastructure, particularly power supply, is among the highest priorities in the Bank's country assistance strategy; the lack of it is the most constraining factor in the country's economic development. The proposed project would help alleviate the power crisis, expand base load power capacity (financed by the private sector) and assist the NPC to expand and reinforce the required transmission system. Already, the Government has implemented far-reaching reforms in the power sector, as it has adopted policies and strategies and made institutional improvements which conform with Bank policy. Bank intervention in the sector has been critical in helping define the improved policies and actions in the Energy Sector Action Plan, establishing the DOE, strengthening NPC's finances, improving its efficiency, promoting private sector generation of power and preparing the sector for a robust implementation of its power program. By completing the sector study "Toward Improved Environmental Policies and Management" the Bank has also supported a balance between the country's energy development and sound environmental practices. 62. The Government's energy strategy closely follows recommendations in the Bank's policy paper for the power sector. First, NPC is transferring almost all its responsibility for incremental power generation to the private sector (requiring investments of about US$1.2 billion per year for power generation). Second, the basis for future tariff adjustments has been established, which will ensure NPC's long-term financial viability, including the indexing of its tariffs with fuel costs and purchased energy. Third, a transparent regulatory framework that covers the entire energy sector and provides adequate protection for producers, distributors and consumers %Tas created under an independent, quasi-judicial regulator (ERB). Fourth, NPC is substantially improving its corporate policies and commercializing its operations, such as entering into management contracts with the private sector. Finally, the Energy Sector Action Plan provides for measures that, along with demand charges, will further improve demand-side management and energy conservation. As a result of these actions, the sector can now grow vigorously  - 21 - and attract resources from the private sector, the Bank Group and other bilateral and multilateral agencies. 63. Project Objectives. The objectives of the proposed project are to: (i) meet the rapidly increasing demand for power in Cebu and the Visayas region using indigenous and environmentally superior geothermal energy; (ii) strengthen the institutional, planning and financial systems of NPC and PNOC; (iii) promote private sector participation in power generation; (iv) improve the performance of the energy sector through better policies and implementing mechanisms and (v) ensure the financial viability of NPC and PNOC to undertake a long-overdue investment program. 64. Proiect Description. The project includes the following components: PNOC would (a) develop a 185 MW geothermal energy field which would also include steam collection and power subtransmission systems; (b) enter into a BOT contract with private sector companies to construct and operate a 185 MW geothermal power plant; and (c) carry out technical assistance for project implementation. For its part, NPC would (a) construct an overhead transmission line in Leyte (about 77 km at 230 kV) and another in Cebu (about 93 km at 230 kV, and about 110 km at 138 kV); (b) install a submarine cable (about 32 km) linking the Leyte-Cebu lines; (c) upgrade its existing 138 kV and 69 kV power transmission facilities in Cebu; (d) carry out technical assistance consultancies for the design and preparation of tender documents for two hydro- electric projects (totalling about 400 MW); and (e) carry out institutional support consultancies to implement the project, its power development program and the recommendations of the Efficiency and Operational Improvement Study. The project would also finance US$5 million to cover the impact of the Yen revaluation under the Bank's special commitment for irrevocable letters of credit extended under the Energy Sector Project (Loan 3163-PH). 65. Project Implementation. NPC will implement the transmission component and PNOC will undertake the geothermal development component. BOT contracts have been signed between PNOC and Ormat (for Upper Mahiao, 118.5 MW) and Magma (for Malitbog, 66.5 MW) and a BOO (build-own-operate) contract has also been signed between NPC and PNOC to supply electricity. The project cost is estimated at US$434.8 million equivalent, with a foreign exchange component of US$367 million equivalent (84% of total). The total financing required, including interest during construction, is US$458.9 million, of which the Bank would finance US$211 million equivalent (57% of the foreign exchange cost and 49% of the total project cost, excluding interest during construction). Retroactive financing of up to US$18 million would be provided for project expenditures incurred after April 1, 1993. A breakdown of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and disbursements, and the disbursement schedule are shown in Schedule B. A timetable of key processing events and the status of Bank Group operations in the Philippines are given in Schedules C and D, respectively. A map is also attached. The Staff Appraisal Report, No. 11449-PH dated January 6, 1994, is being distributed separately. 66. Project Sustainability. In developing and implementing the ESP, the Government has provided a sound environment in which the sector can grow and strengthen its organization, planning and finances. NPC has already taken important steps that will require greater responsibility and accountability from regional managers; in turn, these actions will improve project implementation and plant maintenance. NPC's revised tariff structure will  - 22 - provide it with enough resources to cover its operation and debt service and help finance the huge investments needed in the power sector. PNOC's operation and maintenance of renewable geothermal resources (under previous projects) is satisfactory and is expected to continue as such. The joint action envisioned between PNOC and private contractors will ensure that the power supply will be reliable. 67. Agreed Actions. Considerable progress has been achieved in the sector through the implementation of the ESP and reforms actions by NPC. In addition, the following actions have already been completed: (i) tariffs were raised to achieve a rate of return of 8% in 1993 and 1994; (ii) an automatic fuel and purchase cost-adjustment system for NPC's tariffs has been approved (indexing about 82% of NPC costs); (iii) energy conversion contracts between PNOC and the BOT contractors have been signed; (iv) a power supply BOO contract between PNOC and NPC has been signed, and (v) NPC and PNOC have appointed project directors. The effectiveness of the BOT contracts is a condition of disbursements for goods under the PNOC loan. Agreement was reached at negotiations on the following: (a) the Government will certify by June 30, 1994 as an Administrative Bill the anti-pilferage legislation; (b) the Government, NPC and the Bank will exchange views on implementing the ESP; (c) NPC will: (i) annually review with the Bank the power development plan and would review by April 30, 1994 and implement thereafter the recommendations of the Efficiency and Operational Improvement Study; (ii) achieve an after-tax rate of return on its net revalued fixed assets in operation not lower than 8% and a debt service ratio higher than 1.3; (iii) introduce demand charges (as a condition for disbursements of goods); (iv) implement in a timely fashion an Action Plan that includes project and institutional improvements; (v) conduct a satisfactory valuation of its fixed assets and update them annually and (vi) complete by June 30, 1994 a study on the economic contracting and dispatch of private power generating plants; (d) PNOC Energy Development Corporation (PNOC-EDC) will maintain: (i) a debt-equity ratio that does not exceed 70:30; (ii) a current ratio not lower than 1.0 and (iii) a debt service ratio not lower than 1.25. 68. Environmental Aspects. After the agreed mitigation measures are implemented the project will only have minor environmental impact; it will however yield considerable benefits in reducing local pollution and global warming. This is because the CO2, SO4 and particulate emissions from the project will be small, only a minor fraction of what would otherwise be emitted by alternative coal or oil plants. Environmental impacts include minor deforestation at the site of the geothermal plants and near the transmission lines (an Environmental Summary for Leyte Geothermal was circulated to the Board on June 30, 1992 and an update--to expand the capacity from 350 Kw to 700 MW--was circulated on June 22, 1993). The geothermal component is expected to displace some 127 families (mainly as a result of H2S odors), which PNOC would resettle within a short distance from their existing residences. The resettlement plan prepared by PNOC is satisfactory and is expected to increase the income and living standards of the families affected. Transmission lines will be routed along existing roadways and have been designed to avoid any environmentally sensitive areas and minimize the impact of the right-of-way on houses or crops. Nevertheless, some relocation (within a few meters) and compensation will be needed for about 250 families. NPC's compensation and relocation plan was reviewed by the Bank and the principles for a fair reimbursement have been agreed upon. Adequate mechanisms are also in place to ensure the smooth implementation of these plans.  - 23 - 69. Project Benefits. The project would establish a reliable, environmentally superior power supply for the Visayas isiands (para. 12), which include Cebu, the region with the fastest economic growth in the Philippines. It would lay the foundation for ultimately connecting the total country through the Leyte system, which would dispatch power in an optimal manner and reduce the reserve capacity required in the individual systems. Also, the project would establish a sound basis for sector development by restructuring and strengthening it, improving NPC's corporate efficiency, policies and finances and increasing the participation of the private sector in power generation. In addition, it would reduce power shortages in the Visayas region, providing base geothermal energy and decreasing or eliminating economic losses resulting from outages in Cebu. The project economic rate of return is 16%, which is satisfactory. 70. Risks. NPC's tardy procurement procedures have often resulted in implementation delays; however, NPC has reorganized its procurement system and all key bids are underway. Further, in order to minimize such delays, NPC and PNOC have appointed high-level project directors (supported by staff and consultants) to coordinate all project activities. Another risk is that the financing of the BOT could be delayed; however, the BOT contracts have already been signed and their cost is relatively small in relation with other BOT prcjects in the Philippines. Moreover, these contracts will be guaranteed by large performance bonds as a condition of disbursements for the PNOC loan. A third risk is that the geothermal capacity will be lower than estimated, but the Leyte-Cebu project will only use about one third of the capacity certified by independent consultants. Finally, there is a risk that tariffs will not be increased, but this risk is reduzed because of recent decisions taken by the Energy Regulatory Board that approve principles for NPC tariffs and because of the automatic tariff adjustments to be implemented. The new Government has targeted the energy problem as a top priority and has successfully restored NPC's financial viability. 71. Recommendation. I am satisfied that the proposed loans would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve them. Lewis T. Preston President Attachments Washington, D.C. January 6, 1994  - 24 - Schedule A PHILIPPINES LEYTE-CEBU GEOTHERMAL PROJECT Estimated Costs and Financing Plan (US$ million) Estimated Cost Local Foreign Total ---- (US$ million)--- Geothermal development 15.8 58.9 74.7 Power station (BOT) 19.2 138.6 157.8 Leyte-Cebu transmission 26.4 124.2 150.6 Contracts Energy Sector Loan 3163-PH 4.9 4.9 Base Cost (June 1993) 61.4 326.6 3880. Physical contingencies 3.8 20.9 24.6 Price contingencies 2.4 19.7 22.2 Total Proiect Cost 67.6 367.2 434.8 Interest during construction 0.1 24.0 24.1 Total Financing Reguired 67.7 391.2 458.9 Financing Plan: World Bank - PNOC - 64.0 64.0 World Bank - NPC - 147.0 147.0 BOT Contractor 21.0 153.7 174.7 PNOC Internal Cash Generation 17.2 10.0 27.2 NPC Internal Cash Generation 29.5 16.5 46.0 TOTAL Ll 67.7 391.2 458.9 /1 Totals may not add, due to rounding.  - 25 - Schedule B Page 1 of 2 PHILjIPPINES LEYTE-CEBU GEOTHERMAL PROJECT Summary of Proposed Procurement Arrangements (US$ Milion equivalent) Procuremt Method ICE LID LCD Other IBF Total 1A.WQRXS (PHOC) 31.0 5.0 3.3 39.3 (24.8) (0.0) (2.0) (0.0) (0.0) (26.8) Civil, Structural 27.1 5.0 3.3 35.4 (22.3) (0.0) (2.0) (0.0) (0.0) (24.3) Insulation, Tech. Services 4.0 4.0 (2.4) (0.0) (0.0) (0.0) (0.0) (2.4) lB.GOODS (PNOC) 21.7 16.5 38.2 (18.9) (15.0) (0.0) (0.0) (0.0) (34.0) Drilling MateriaLs 2.1 3.5 5.6 (2.6) (3.0) (0.0) (0.0) (0.0) (5.6) Steam Gathering 13.4 13.0 26.4 (10.8) (12.0) (0.0) (0.0) (0.0) (22.8) Power Tranam. & Switch. 6.2 6.2 (5.5) (0.0) (0.0) (0.0) (0.0) (5.5) 1C.CONSULTANCIES & OTHER 4.7 1.5 6.2 (0.0) CO.0) (0.0) (3.3) (0.0) (3.3) Technical Assist. (PNOC) 4.7 4.7 (0.0) (0.0) (0.0) (3.3) (0.0) (3.3) Compensation & Administration 1.5 1.5 (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) TOTAL PNOC 52.7 16.5 5.0 4.7 4.8 83.7 (43.7) (15.0) (2.0) (3.3) (0.0) (64.0) 2. BOT POWER STATION 174.7 174.7 (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) 3A.CIVIL WORKS (NPC) Rehab. 138 and 69 kV lines 5.0 5.0 (0.0) (0.0) (2.0) (0.0) (0.0) (2.0) 3B.GOODS & INSTALLATION (NPC) 153.7 153.7 (131.3) (0.0) (0.0) (0.0) (0.0) (131.3) Transm. & Substations 148.7 148.7 (126.3) (0.0) (0.0) (0.0) (0.0) (126.3) Comnit.Sector Loan-3163-PH 5.0 5.0 (5.0) (0.0) (0.0) (0.0) (0.0) (5.0) 3C.CONSULTANCIES & OTHER 13.7 4.1 17.8 (0.0) (0.0) (0.0) (13.7) (0.0) (13.7) Technical Assist. (NPC) 13.7 13.7 (0.0) (0.0) (0.0) (13.7) (0.0) (13.7) Compensation & Admin. 4.1 4.1 (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) TOTAL NPC 153.7 5.0 13.7 4.1 176.4 (131.3) (0.0) (2.0) (13.7) (0.0) (147.0) TOTAL PROJECT 206.4 16.5 10.0 18.4 183.5 434.8 (175.0) (15.0) (4.0) (17.0) (0.0) (211.0) Note: Figures in parenthesis are the respective amounts financed by the Bank loan. ICB: Inernational competitive bidding. LIB: Limited international bidding. Other: Other includes consultancies. NBF: Not Bank financed include taxes, admninistration and compensation expenditures and the BOT contract for the power generation plant.  - 26 - Shedule B Page 2 of 2 Disbursements Category Amount % of Expenditures to be Financed US$ Million Philippine National O1 Company: Works 28.0 100% of foreign expenditures. Goods 32.7 100% of foreign expenditures, 100% of local expen- ditures (ex-factory cost) and 70% of local expenditures for other items procured locally. Consultant's Services 3.3 100% Subtotal PNOC 64.0 National Power Corporation: Works 2.0 60% Equipment, material and related 126.2 100% of foreign expenditures. 100% of local expen- installation ditures (ex-factory cost) and 70% of local expenditures for other items procured locally. Equipment related to Energy Sector 5.0 100% of foreign expenditures. Project Loan 3163-PH Consultant services 13.8 100% Subtotal NPC 147.0 Total 211.0 _ Estimated Disbursements: Bank Fiscal Year FY94 FY95 FY96 FY97 FY98 ------- (US$ million) -------- Annual 15.3 43.6 80.6 56.5 15.0 Cumulative 1 31;R Q 139.5 196.0 211.0  - 27 - Schedule C PHILIPPINES LEYTE-CEBU GEOTHERMAL PROJECT Timetable of Key Project Processing Events (a) Time taken to prepare the project: 2 years (b) Prepared by: PNOC and NPC (c) First Bank mission: January 1992 (d) Completion of the appraisal: April 23, 1993 (e) Negotiations: August 9-13, 1993 (f) Planned date of effectiveness: March 31, 1994 (g) List of relevant PCRs and PPARs: Fourth Power Project (PPAR P-0980); Fifth Power Project (PCR P-4388); Six Power Project (PCR P-4847) Rural Electrification Project (PPAR P-5732); Coal Exploration Project (PCR P-6960) Seven Power Project (PPAR No. P-8574) This report is based on the findings of an appraisal mission consisting of Claudio Fernandez (Principal Financial Analyst), John Irving (Senior Power Engineer), Moiffak Hassan (Petroleum Specialist Engineer), Enrique Crousillat (Energy Specialist) and P. T. Venugopal (Financial Consultant) who visited the Philippines in April 1993. The report was edited by Mrs. Barbara Koeppel. Peer reviewers were Messrs. Rafael Moscote, Albert B. Gulstone and Jamil Sopher. The project was cleared by Mr. Callisto E. Madavo, Director EAI, and Mr. Vineet Nayyar, Chief, EA1IE.  - 28 - Schedule D Page 1 of 2 STATUS OF BANK GROUP OPERATIONS IN PHILIPPINES A. STATEMENT OF BANK LOANS AND IDA CREDITS /a (As of September 30, 1993) Amount (USS million) Loan or ihess cancellations) Credit Fiscal Undis- Number Year Borrower Purpose IBRD IDA bursed One hundred and forty-five loans and seven credits heve been fully disbursed 4,423.66 171.18 Of which SALs, SECALs and Program Loans 1903 1981 Republic of the Philippines SAL 199.96 2266 1983 Republic of the Philippines SAL )) 302.25 2469 1985 Republic of the Philippines Agriculture Sector Inputs 150.00 2787 1987 Republic of the Philippines Economic Recovery Program 300.00 2956 1988 Republic of the Philippines Program for Govt. Reform 200.00 2277 1991 Republic of the Philippines Environment & Natural Res. Mgt. 66.00 1.152.21 66.00 2418 1984 Republic of the Philippines Highways V 95.00 16.06 2435 1984 Republic of the Philippines Municipal Development 40.00 7.17 2676 1986 Republic of the Philippines Manila Water Distribution 38.00 4.10 2716 1986 Republic of the Philippines Rural Roads Improvement il 82.00 30.35 2823 1987 Republic of the Philippines Provincial Ports 32.00 3.48 2969 1988 Philippines National Oil Co. Bacon-Manito Geothermal Power 41.00 .24 2969-1 1988 Republic of the Philippines Bacon-Manito Geothermal Power 59.00 23.55 3049' 1989 Republic of the Philippines Financial Sector 300,00 150.00 3084 1989 Dev. Bank of the Philippines Manila Power Distribution 65.50 35.01 3099 1989 Republic of the Philippines Health Development 70.10 35.33 3124 1990 Metro. Waterworks & Sew. Angat Water Supply 40.00 4.42 3146 1990 Republic of the Philippines Municipal Development II 40.00 22.56 3163 1990 Philippines National Power Corp. Energy Sector Loan 200.00 18.08 3164 1990 Philippines National Oil Co. Energy Sector Loan 150.00 92.80 3165 1990 Republic of the Philippines Energy Sector Loan 40.00 17.32 3204 1990 Republic of the Philippines Coconut Farms Development 121.80 97.66 3242 1990 Republic of the Philippines WS/SewerlSanitation I 85.00 69.92 3244 1991 Republic of the Philippines Second Elementary Education 200.00 128.72 3261 1991 Republic of the Philippines Communal Irrigation II 46.20 40.56 3263 1991 Republic of the Philippines Earthquake Reconstruction 125.00 43.31 3287 1991 Republic of the Philippines Industrial Restructuring 175.00 21.96 3356 1991 Republic of the Philippines Rural Finance 150.00 27.90 3360" 1991 Republic of the Philippines Env. & Natural Res. Mgt. 158.00 53.72 3430 1992 Republic of the Philippines Highway Management 150.00 149.45 3435 1992 Republic of the Philippines Engineering & Science Educ. 85.00 82.50 3439 1992 National Electrif. Adm. Rural Electrification 91.30 85.89 3455 1992 Republic of the Philippines Municipal Development II[ 68.00 68.00 2392 1992 Republic of the Philippines Second Vocational Training 36.00 37.18 2506 1993 Republic of the Philippines Urban Health & Nutrition 70.00 71.38 3523 1993 Dev. Bank of the Philippines Telephone System Expansion 134.00 134.00 3539" 1993 Republic of the Philippines Economic Integration 200.00 80.00 3603 1993 Republic of the Philippines Tax Computerization 63.00 63.00 3607 1993 Republic of the Philippines Irrigation Operation Support II 51.30 51.30 3626 1993 Philippines National Power Corp. Power Transmission & Rehab. 110.00 110,00 Total 7,729.86 277.18 1768.17 of which has been repaid 2778 7.30 Total now held by Bank and IDA 5,553.08 269.88 Amount sold 31.35 Of which repaid 31.35 Total Undisbursed 108-57 1.,876.74 L The status of the projects listed in Part A is described in a separate report on all IBROIIOA-financed projects in execution, which is updated twice yearly and circulated to the Executive Directors on April 30 and October 31. Amounts are presented net of cancellations. * Indicates SALISECAL Loan and Credits.  - 29 - Schedule D Page 2 of 3 B. STATEMENT OF IFC INVESTMENTS (As of September 30, 1993) Total Undisbursed held including Original Commitments by IFC participants' Fiscal Loan Equity Total (at cost) portion Year Obligor Type of Business -.---....------ USS million ---------------- 1963/73 Private Dev. Corp. of the Phi. Development Finance 15.0 4.4 19.4 1967189 Manila Electric Co. Utilities 33.2 4.0 37.2 28.3 1970/86/ Philippine Long Distance Tel. Co. Utilities 127.7 0.8 128.5 74.4 19.7 88/90 1970/72 Mariwasa Manufacturing Co. Construction Materials 0.8 0.4 1 .2 1970 Paper Industries Corp. Pulp & Paper - 2.2 2.2 1971/77 Philippine Petroleum ChemicalslPetrochem. 6.2 2.1 8.3 1972 Marinduque Mining & Ind. Corp. Mining 15.0 - 15.0 1973 Victorias Chemical Corp. Chemical 1.9 0.3 2.2 1974 Filipinas Synthetic Fiber Corp. Textiles & Fibers 1.5 - 1.5 1974/79 Maria Cristina Chemical Ind. Electro-chemicals 1.6 0.6 2.2 0.4 1974 RFM Corporation Food & Food Processing 1.2 - 1.2 - 1975 Phil. Polyamide Ind. Corp. Textiles & Fibers 7.0 7.0 1976 Philagro Edible Oils, Inc. Coconut Oil & Copra 2.7 0.2 2.9 1977 Sarmiento Ind. Plywood 3.5 - 3.5 - 1977 Acoje Mining Co. Inc. Mining 3.2 0.5 3.7 1.3 1978 Cebu Shipyard & Engineering Works Ship-repairing 2.1 - 2.1 1979/90 General Milling Corporation Food & Food Processing 4.0 1.7 5.7 1.7 1980 Ventures in Industry & Business Venture Capital - 0.2 0.2 - Enterprise, Inc. (VIBES) 1980/83/85 All Asia Capital & Leasing Equipment Leasing 11.1 0.8 11.9 1.3 1980 Consolidated Ind. Gas, Inc. a/ Industrial Gases 4.5 - 4.5 - 1981 Philippines Associated Smelting Copper Smelting - 5.0 5.0 .5 and Refining Corp. (PASAR) 1981 Davao Union Cement Corporation Cement 16.0 .8 16.8 1.4 1981 Loans to Small & Medium Scale Capital Markets 18.0 1.1 19.1 - Ent. (SMSE) aI/ 1983 NDC-Guthrie Plantations, Inc. Agribusiness 11.0 - 11.0 4.6 1985 Philippine Overseas Contractors Construction 38.0 - 38.0 - - 1986/91 Purefoods Food Processing - 4.2 4.2 4.5 1988 BPI Agribank Financial Institution 1.0 1.0 1.0 1988 Philfund Debt Conversion Fund - 4.2 4.2 1989 Kewalram Phil. Inc. b/ Textiles & Fibers 3.0 - 3.0 1989 AG & P Construction 10.0 - 10.0 1989 Hambrecht & Quist Capital Fund - 2.2 2.2 2.3 1990 Hopewell Energy Power 10.0 1.1 11.1 7.6 1990 Manila Fund Money & Capital Markets - 7.0 7.0 - 1990 First Phil. Fund Money & Capital Markets - 29.7 29.7 1990 Avantex Mill Corp. Textiles 11.3 2.3 13.6 12.5 1990 Makati Shangri-La Tourism 59.0 - 59.0 29.5 7.7 1991 Best Chemicals Chemicals 6.5 2.3 8.8 7.8 - 1991 Automated Microelectronics Electronics 9.0 2.8 11.8 11.3 9.0 1991 PCI Bank b/ Financial Institution 20.0 - 20.0 1991 Mactan Shangri-La Tourism 24.0 - 24.0 12.0 5.2 1992 Bacnotan Cement Corp. Cement 18.0 5.3 23.3 26.7 21.1 1992 Pilipinas Shell Petrochemicals 120.0 15.0 135.0 50.0 135.0 1993 Hopewell Power Power 100.0 10.0 110.0 70.0 70.0 1993 Northern Mindanao Power 38.5 9.5 48.0 17.0 13.4 Subtotal 754.3 121.9 876.2 366.1 281.1  - 30 - Schedule D Page 3 of 3 Total Undisbursed held including Oriainal Commitments by IFC participants' Fiscal Loan Equity Total (at cost) portion Year Obligor Type of Business ------------- US$ million .------------- Approved but not yet signed 1991 Philnico Nickel Mining 90.0 15.0 105.0 60.0 105.0 1992 Universal Robina Food Processing 16.7 16.7 16.7 16.7 1992 Filsyn 11 Textiles & Fibers 40.0 5.0 45.0 25.0 45.0 1993 H & QPV-2 Capital Fund 2.5 2.5 2.5 2.5 1994 Walden Management Capital Markets .1 .1 .1 .1 1994 Walden Ventures Capital Markets - 3.8 3.8 3.8 3.8 Total Gross Commitments 884.3 164.9 09 4.1 454.1 a/ Subsequently cancelled. g/ Guarantees. .. Less than USS0.5 million.  - 31 - Annex A Page 1 of 2 Philippines-- Bank Group Fact Sheet, FY91-97 IBRD Lending Program, FY91-97 Past Current Planned al Category FY91 FY92 FY93 FY94 FY95 FY96 FY97 Commitments (US$m) 935.2 430.3 628.3 448.0 460.0 480.0 640.0 Sector (%M b/ Agriculture/irrigation 7.0 8.0 47.0 10.0 22.0 Industry and finance 35.0 Power/Energy 21.0 18.0 91.0 21.0 39.0 Public sector management 10.0 Infrastructure &urban dev. 51.0 32.0 9.0 48.0 29.0 23.0 Human resources 21.0 28.0 5.0 19.0 16.0 Environment 37.0 21.0 Mining & other extractive Multisector 32.0 TOTAL 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Lending instrument (%) Adjustment loans cl 13.0 32.0 Specific investment loans and others 87.0 100.0 68.0 100.0 100.0 100.0 100.0 TOTAL 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Disbursements (US$m) 358.9 537.6 672.8 543.8 444.4 488.3 487.2 Adjustment loans cl 75.0 185.0 208.3 98.3 Specific investment loans and others 283.9 352.6 464.5 445.5 444.4 488.3 487.2 Interest (US$m) 315.2 307.8 327.1 350.0 358.9 359.2 358.7 a/ Use ranges to reflect most likely scenario presented in the CSP. b/ For future lending, round to nearest 0 to 5%. c/ Program and Structural Adjustment Loans, Sector Adjustment Loans, and Debt Adjustment Loans.  - 32 - Annex A Page 2 of 2 Philippines-- IFC and MIGA Program, FY91 -FY94 Past Current Category FY91 FY92 FY93 FY94 IFC Approvals (US Sm) 103.1 92.4 118.5 57.0 Sector (%) Agri-business 3.0 Cap.Markets 20.0 2.0 6.7 Chem-Fertilizer 64.0 21.0 Infrastructure 76.0 93.3 Manufacturing 32.0 43.0 1.0 Oil- mining 48.0 TOTAL 100.0 100.0 100.0 100.0 Investment Instrument (%) Loans 61 57 76 44 Equity 20 10 16 56 Quasi-equity a/ 33 8 Other 19 TOTAL 100 100 100 100 MIGA Guarantees (US$rm) 0 0 0 0 MIGA Commitments (US$rm) 0 0 0 0 a. Includes quasi-equity types of both loan and equity instruments.  - 33 - Annex B Phllppiaor Priority Poverty ICMM Page 1 of 2 m~~~~~~~~~~~~~~~o UwI pv as.. _ u1 A 6334,., _ 1bmimm_m %dpap. - .. 62 12 LIs._apWvy Iamia .. 3.072 HZ_&dsu S W%*p - *- 24 10 ONPpwcnn US 180 340 730 650 1.610 3,o SNORtT TERM INCOME JNDICATORS Uu,2libmwsm bmAw.| .. -. *.. .. 3.1iva _ ' - -. Umu1mofva* .. _. ...._. Cmm,,im 1987-100 t 21 165..._ 1._d _ - ..57_ Lh_ * . .. _ aw .. ..- sLOWA NDICTORS Pubbsimwem k~~uee~a1we %efODp - Pz~y %