Philippines - Upper Pampanga River Irrigation Project

RESTRICTED FlLE COAPY Report No. P-736 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF THE PHILIPPINES FOR THE UPPER PAMPANGA RIVER IRRIGATION PROJECT July 30, 1969.  DITERNATIONAL BANK FOR RECONSTRUCTION AND DEVEIOPNENT REPORT AND REGOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPTJBLIC OF THE PHILIPPINES FOR THE UPPER PANPANGA RIVER IRRIGATION PROJECT 1. I submit the following report and recommendation on a proposed loan in various currencies equivalent to $34 million to the Republic of the Philippines. PART I - HISTORICAL 2. In September 1967 the Government applied to the Bank for a loan to help finance the Upper Pampanga River multi-purpose project. The project was prepared by the U.S. Bureau of Reclamation and included facilities for irrigation and power development and flood control. After reviewing the feasibility report and additional information submitted by the Government, the Bank suggested to the Government that further studies be carried out to confirm the justification for including power development in the project and offered to consider financing a project comprising only the irrigation and flood control facilities. we also advised the Government that if the studies showed that power development was justified, it would be the subject of a separate appraisal and possible loan. The Government agreed to these arrangements and the Upper Pampanga Irrigation Project was appraised in September/October 1968. 3. Following the completion of the appraisal report the Government was informed that the Bank would be unable to negotiate a loan until sat- isfactory arrangements had been made to meet the Bank's requirements in respect of international competitive bidding, preference for local supplies and to finance the local currency costs of the project. To comply with the Bank's requirements the Philippine Congress enacted special legislation for the project in June 1969 which included the appropriation of 12CO million,enough to cover the local currency of both the irrigation and power elements of the project. 4. Negotiations were held in Washington from July 7 to 18. The Government was represented by the Honorable Eduardo Romualdez, Secretary of Finance; Dr. Placido Mapa and Mr. Alfredo Pio de Roda, Director-General and Deputy Director-General of the Presidential Economic Staff; Mr. Alfredo L. Juinio, Administrator of the National Irrigation Administration (NIA) and Mr. Cesar Gonzales, Project Manager. 5. The proposed loan would be the thirteenth in the Philippines and it would increase the total amount lent to $217.2 million, net of cancel- lations. The following is a summary statement of Bank loans to the  -2- Philippines as at June 3C, 1969: Loan Amount (US $ million) No. Year Borrower Purpose Bank Undisbursed 183 PH 1957 National Power Corp. Power (Binga) 18.4 - (NPC) 290 PH 1961 Philippines Dredging 7.4 - 297 PH 1961 NPC Power (Angat) 33.5 - 325 PH 1962 NPC Power (Maria Christina) 3.1 - 331 PH 1963 Philippine National Relending to the Bank (PNB) Private Devel- opment Corpor- ation of the Philippines (PDCP) 114.8 - 386 PH 1964 National Waterworks & Sewerage Authority Manila Water (NWSA) Supply 20.2 4.1 393 PH 1964 Philippines Education (Col- lege of Agri- culture) 6.0 2.5 432 PH 1965 Central Bank (CBP) Agriculture 5.C - 467 PH 1965 PNB Relending to PDCP 25.0 11.6 491 PH 1967 NPC Power (Bataan) 12.C 9.2 607 PH 1969 CBP Agriculture 12.5 a/ 12.5 a/ 630 PH 1969 PNB Relending to PDCP 25.0 a/ 25.C a/ Total (net of cancellations) 183.2 of which has been repaid to Bank and others 17.0 Total now outstanding 166 .2 Amount sold 12.0 of which has been repaid 8.C 4.C Total now held by Bank 162.2 b/ Total undisbursed 64.9 b/ a/ Signed in June and July 1969; not yet effective. b/ Including $37.5 million not yet effective.  -3- 6. Although project implementation in the public sector has improved a number of difficulties still remain with Bank-financed projects. With regard to the Manila Water Supply Project (Loan No. 386-PH) water service has somewhat improved with the completion of the supply works in April and during the next nine to twelve months, as the distribution system is completed, improved service will gradually become available to most of NWSA's customers. NWSA now has adequate funds to meet the peso costs of construction and there has been some improvement in NWSA's revenues as a result of improved collections. Nonetheless, NWSA's financial position remains unsatisfactory and the Bank will continue to press NWSA to implement the necessary rate increases at the earliest opportunity. Construction of the Bataan Power Project (Loan No. 491-PH) is progressing resonably well, and progress is being made in the implementation of consultants' recommend- ations to improve National Power Corporation's (NPC) organization and admin- istration. However, NPC's transmission construction program has fallen behind because of a lack of funds. The Government has recently arranged some interim financing for NPC until NPC can sell a sufficient amount of its own bonds. 7. A Grain Storage Project requiring a loan of about $15 million is being appraised and is expected to be ready for the Executive Directors' consideration in the first half of 1970. 8. No IDA credits have been made to the Philippines. IFC's loans and investments in the Philippines consisted of an equity investment of 180C,CCC (equivalent to $205,CCC) in PDCP, which has since been sold to other investors; and an equity investment of $4 million equivalent and a loan of $8 million in the Manila Electric Company, of which IFC now holds $3.6 million and $5.6 million, respectively, for its own accounts. IFC is appraising two projects for loan and share investments - Philippine Long Distance Telephone Company ($4.5 million) and Mariwasa Manufacturing Inc., a ceramic tile plant ($1,20C,000) - and expects to submit these projects to the Executive Directors for consideration in August. PART II - DESCRIPTION OF THE PROPOSED LOAN 9. Borrower: Republic of the Philippines. Amount: In various currencies equivalent to US $3i million. Purpose: To assist in financing the construction of Pantabangan dam on the Upper Pampanga River in Central Luzon; the construction or rehabilitation of irrigation facilities serving in total about 77,0CO ha; the construction of about 1,00C km of feeder roads; the purchase of equipment, materials and supplies by National Irrigation Admin- istration for construction and for operation and maintenance; consulting services and interest during construction.  -14- Amortization: In 25 years including a seven year grace period through semi-annual instal- ments beginning December 15, 1976 and ending December 15, 1994. Interest Rate: 7% per annum. Commitment Charge: 3/4 of 1% per annum. Estimated Rate of Return of the Project: 13%. PART III - THE PROJECT 10. An appraisal report entitled "Philippines - Upper Pampanga Irrigation Project" (PA 2a) is attached. 11. Agriculture and related activities provide the livelihood for about two-thirds of the country's population and generate about one-third of national domestic product. Rice is the staple diet of the Philippines and rice production takes up almost 4C% of the total area under cultivation. Rice production is predominantly the occupation of small farmers whose incomes are among the lowest in the Philippines. In the six years prior to 1967 rice production had increased at an annual average rate of about 1.7% and the Philippines met part of its rice requirements through imports. During the last two years it has been demonstrated that with controlled year-round irrigation and other inputs the improved rice varieties can produce substantially larger yields. In 1967/68 rice production increased about 11% and there is a reasonable expectation that the Philippines will be self-sufficient in rice production on a sustained basis for the first time in the post-war period. However, to meet future demand additional facilities for rice production will be required if large quantities of imports are to be avoided in the years ahead. 12. The project is located on the Upper Pampanga river about 8C km north of Manila in the most important rice producing region in the Philippines and will make a significant contribution towards meeting future demand. It would provide year-round irrigation for the cultivation of 72,000 ha and irrigation through the wet season of an additional 5,000 ha, as well as flood protection. The project will be carried out by the NIA, a Government agency created in 1964 out of the Irrigation Division of the Bureau of Public Works. NIA is responsible for the construction and admin- istration of all national irrigation systems in the Philippines covering about 30C,CC0 ha. Overall responsibility for NIA is vested in a board of directors; fiveare members ex-officio by virtue of their positions as heads of other Government departments or agencies and two are appointed by the President. The management of NIA is vested in the Irrigation Administrator who is appointed by the NIA board with the approval of the President. NIA staff is technically competent in field irrigation works, but  -5- it has had no previous experience in the construction of large dams. NIA will employ engineering consultants to design the dam and supervise its construction. NIA's operating and administrative procedures will need to be strengthened and its internal organization improved. For this purpose NIA will employ management consultants to prepare a detailed program to remedy these deficiencies and help NIA carry it out. In addition a Coordinating Committee for the project under the Administrator of NIA has been established to provide NIA with technical support in power and agri- cultural development and road construction. These arrangements should provide NIA with sufficient technical assistance to carry out the project and improve its overall operations. 13. The Upper Pampanga River Irrigation Project includes the construction of an earth and rock-filled dam and reservoir at Pantabangan; the construction of a new irrigation system to serve about 31,000 ha; rehabilitation of the existing irrigation system serving about 46,0CC ha; the construction of about 1,000 km of feeder roads in the project area; the procurement of equipment for operation and maintenance of the project and engineering and management consulting services. The project also includes consulting services for a study to determine the justification for power development at the dam. The results of the power study will be known before the final design of the dam is completed. 14. The project would take six years to construct and is estimated to cost $67.5 million including interest on the Bank loan during construction. The proposed loan of $34 million would cover the estimated foreign exchange costs, $29 million, and interest during construction, $5 million. The local currency costs are estimated at 130 million ($33.5 million equivalent) and would be met out of Government revenues appropriated for the project under the special legislation or out of the sale of bonds. In order to ensure a regular flow of funds for the project a special fund has been established which would be adjusted and replenished monthly to a level equivalent to the estimated amount of payments to be made by NIA for the project for the following three-month period. NIA will levy and collect charges for the use of irrigation water which will provide it with revenues sufficient to cover all operating and maintenance costs of the project and to recover the capital invested in the project in a period of not less than 25 years. At full development, about 13 years after completion of the project, the incremental increase in rice production is estimated at 44C,oCc tons a year. After deducting all incremental production, operation and maintenance costs the increase in the net value of production would provide estimated foreign exchange savings of $14 million a year. The rate of return to the economy is estimated to exceed 13%. 15. Construction of the Pantabangan dam and reservoir, the new irrigation system and the feeder roads will be carried out by contractors under unit price contracts awarded after international competitive bidding. For bidding purposes contracts would be grouped so as to be of interest to  -6- contractors outside the Philippines. Rehabilitation of the existing irrigation scheme and the construction of farm ditches throughout the project is expected to be carried out by NIlA on force account. The proposed loan would finance the actual foreign exchange costs of contracts awarded to foreign contractors, 47,, of contracts awarded to local contractors, and 305 of the costs of work performed by NIA on force account. The loan would also finance the c.i.f. cost of equipment, materials and supplies imported directly by NIA and the c.i.f. costs of imported materials, supplies and components for goods purchased in the Philippines and the foreign exchange costs of consulting services. All major equipment and supply contracts will be awarded after international corpetitive bidding. All payments to be made to contractors, suppliers, or to NIA for force account work will be certified by NIA's consultants. iAny savings in the loan will be cancelled. 16. NIA is exempt from payment of all import duties on all equipment, supplies and materials imported for the project, but by law NIA is required to give equipment, materials and supplies of Philippine origin when offered by Philippine bidders a 15'5 preference in the evaluation of bids. These arrangements are reflected in the loan documents. 17. The proposed loan includes an amount of $150,0OCO to finance the foreign exchange costs of preconstruction work carried out by NIA since April 30, 1969. This work includes further exploration of the dam site, access roads and the construction of the power line to the site. Financing of these expenditures is justified because NIA needed to start preconstruction work during the present dry season if the proposed construction schedule is to be maintained. All items to be financed were procured in accordance with the procedures agreed for the project as a whole. PART IV - LEGAL INSTRIIENTS AID AUTHORITY 18. The draft Loan Agreement between the Republic of the Philippines and the Bank, the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement of the Bank and the text of a draft Resolution approving the proposed Loan are being distributed to the Executive Directors separately. 19. The draft Loan Agreement contains provisions normally used for other Bank irrigation projects. In addition, provisions are made in the draft Loan Agreement to require the Borrower to maintain a special fund established for the Project (Section 5.13) and to provide preference to domestic suppliers (Schedule 4). 20. The Borrower has enacted a special Act for the purposes of carrying out the Project. Under the Act peso funds required for the completion of the Project were appropriated and restrictions on inter- national competitive bidding imposed under other laws were removed.  -7- PART V - THE ECONOMY 21. An Economic Report on "The Current Economic Position and Prospects of the Philippines" (No. EAP-7a, dated July 24, 1969) is being distributed to the Executive Directors seporately. 22. Though the Philippines is encountering difficulties in respect of short-term balance of payments and foreign debt management, on the whole longer-term economic developments are favorable. There has been some acceleration in the rate of growth touched off by a production breakthrough in domestic agriculture, particularly rice. Private savings and investment remain high and the Government has improved its very inadequate revenue position through increased efficiency in tax administration and through the enactment of new tax measures. In addition to the tax measures passed in 1968, Congress enacted a further revenue measure in 1969 which is expected to increase Government revenues by about Y8C million a year. This has permitted a sizable increase in infrastructure investments. Steps have been taken to improve sectoral planning and project preparation and execution in the public sector, and to provide a sounder basis for actions taken by Government in support of investment decisions in the private sector. 23. The balance of payments problem stems from a significant rise in imports in 1967 and 1968, aggravated by the rather disappointing performance in exports. In net terms foreign exchange reserves are negligible. Monetary measures to deal with this situation have not met the problem fully and the Government has increased its short-term foreign borrowing. Attempts are now being made by the Government to convert into longer-term debt part of the $187 million Central Bank short- and medium-term debt maturing in 1969 and to roll over as much of the balance as possible. Because of the approaching election to be held in November, it is unlikely for the time being that basic action in foreign exchange management will be undertaken. 24. The longer-term growth prospects of the Philippines are reasonably good. Foreign capital obtained on a long term basis is required, however, to supplement domestic saving. In addition the Philippines needs to re- structure the short-term debt accumulated in recent years. In view of her limited long-term public debt and the consequently low debt service ratio (6.8% of current account receipts in 1968) the Philippines can incur considerable additional long-term debt on conventional terms. PART VI - COMPLIANCE WITH ARTICLES OF AGREEMENT 25. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank.  -8- PART VII - RECOMMENDATION 26. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachment Washington, D.C. July 28, 1969