Philippines - Third Highway Project

Document of ~~~~ ~~The 'World B~anik IFO]R OIC1FIFC]AL USE ONLY Report No. P-1960-PH REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF THE PHILIPPINES FOR A THIRD HIGHW4AY PROJECT December 13, 1976 This document has a restricted distrglbution nnd may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed wilhout World Bank authorization. |  CURRENCY EQUIVALENTS US$1.00 = Pesos 7.35 (August 1976) Pesos 1,000 US$136,00 Pesos 1 million = US$136,000 ABBREVIATIONS ADB - Asian Development Bank DPH - Department of Public Highways DPWTC - Department of Public Works, Transportation and Communications IATCTP - Inter-Agency Technical Committee on Transport Planning NEDA - National Planning and Development Authority' PPDO - Planning and Project Development Office THE REPUBLIC OF THE PHILIPPINES FISCAL YEAR 1975: July 1, 1974 - June 30, 1975 1976: July 1, 1975 - December 31, 1976 From 1977: January 1 - December 31  FOR OFFICIAL USE ONLY REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF THE PHILIPPINES FOR A THIRD HIGHWAY PROJECT 1. I submit the following report and recommendation on a proposed loan to the Republic of the Philippines for the equivalent of $95 million to help finance a Third Highway Project. The loan would have a term of 20 years, including 4.5 years of grace, with interest of 8.7 percent per annum. PART I - THE ECONOMY 2. An economic mission visited the Philippines in April/May 1975 and its report, "The Philippines: Priorities and Prospects for Development, Basic Economic Report" (Report No. 1095a-PH of May 5, 1976) was distributed to the Executive Directors on May 18, 1976 (SecM/76/366). Paragraphs 3-16 below are an updated summary of that report. Annex 1 contains country economic data./l 3. During the 1960s, the economy grew in real terms at an annual rate of about 5-6 percent. However, the rate of growth was less than the level that might have been achieved if the considerable natural and human resources of the Philippines had been exploited more effectively. Moreover, the benefits of growth were distributed relatively unevenly. As the population and labor force continued to grow rapidly, unemployment rose. Low levels of taxation accentuated these problems and resulted in inadequate public investment in necessary infrastructure and social services. A relatively weak export per- formance combined with a failure to reduce the import dependence of domestic industry resulted in a steady deterioration in the balance of payments posi- tion. 4. During 1970-72, the authorities adopted policies of monetary and fiscal restraint in order to lay a firm basis for future growth. With assistance from the Consultative Group for the Philippines, they succeeded in improving substantially the maturity structure of the external public debt. Real GNP during that period increased at about 5 percent a year. In 1972, the Government initiated a series of social and economic reforms including an agrarian reform program, tax reforms, and an administrative reorganiza- tion. 5. In 1973, there was a sharp increase in the level of economic activity in the Philippines and the growth in real GNP doubled to 10 percent. This upsurge was led by the international commodity boom, which resulted in higher export incomes, a strong recovery in agricultural and industrial production for the domestic market, and an expansion in public and private investment. /1 This is an updated version of the discussion of the economy in the President's Reports for the Second Fisheries and Second Grain Process- ing Projects (Report Nos. 1850-PH and 1851-PH of May 13, 1976). 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.  - 2 - 6. Like most countries, the Philippines was profoundly affected by the tumultuous events in the world economy that began with the jump in the prices for food and petroleum in late 1973. With international trade the equivalent of almost half of its GNP, the Philippines was quite vulnerable to the impact of world inflation, the increase in oil prices, and the pro- longed recession in the industrialized countries. While adverse effects of the recession were cushioned somewhat in 1974 by a modest improvement in the external terms of trade, the Philippines was more seriously affected in 1975 by the continued rise in import prices and reduced demand for Philippine exports. While the international economic situation has made it difficult for the Government to realize its objective of accelerating the rate of development, GNP in 1974 and 1975 has, nevertheless, grown in real term:s at an annual rate of about 6 percent and the same rate is expected in 1976. 7. Agricultural production has grown at an average rate of 3.2 per- cent per year during the 1970s, a period which has been characterized by unusually adverse weather conditions. Rice production increased by 25 per- cent in 1973/74, but because of damage by typhoons, grew by only 1 percent in 1974/75; the Government had to import 200,000 tons in the first half of 1975 to ensure adequate stocks. However, the rice harvest in 1975/76 was very good and during this period the Philippines was virtually self-sufEicient in rice. The Government continues to give the highest priority to further increasing agricultural production and has initiated a number of programs designed to expand the use of fertilizer, irrigation and supervised credlit. It has also intensified efforts to expand the social services needed in rural areas, including rural electrification, health and family planning services, and village road and small-scale irrigation projects. 8. Although progress has been slower than initially planned, the Government has made some progress with its agrarian reform for the nation's one million tenant farmers who grow rice and corn. By May 31, 1976, the Government had issued Certificates of Land Transfer to 216,000 of the 424,000 tenants on holdings of over 7 hectares; thus, title to 378,000 hectares of the total 825,000 hectares of farms occupied by such tenants has been transferred. The Government has raised the cash portion of the coin- pensation package to landlords to reduce their resistance to land reform, but strong administrative efforts will be necessary to ensure continued progress in the implementation of the program. 9. Industry accounts for almost 30 percent of net domestic product, one third of total fixed investment and 15 percent of total employment. Industrial production, which grew by 12 percent in 1973, was adversely affected in 1974 and 1975 by the worldwide economic slowdown and the depressed demand for Philippine exports. As a result, industrial production increased by only 4 percent in 1974 and 5 percent in 1975. Stepped-up public sector spending for infrastructure development and other priority projects and for the alleviation of recent flood and earthquake damages has contributed significantly to sustaining the higher level of domestic activity in 1976, especially in the construction industry. The longer term prospects for industrial growth are favorable because of the natural and human resource endowment of the Philippines and a very active private sector.  - 3 - 10. The Government has made significant progress in increasing public investment. The ratio of public investment to GNP is currently over 3 percent, having risen from 1.8 percent in FY72./1 The Government has also implemented a series of long needed tax reforms and improvements in tax administration. These reforms, aided by the increased economic activity, the boom in export incomes, and domestic inflation, resulted in a 36 percent increase in national government tax revenues in FY73, and an estimated 47 percent in FY74. The ratio of national government tax revenues to GNP has increased from an average of 9 percent in the early 1970s to about 12 percent in FY74 and FY75. 11. Significant financial reforms have also been enacted. At the begin- ning of 1976, the Central Bank issued circulars designed to help rationalize the level and structure of deposit and lending rates; deposit rates were raised for the second time in 18 months; long-standing statutory ceilings on the long- term lending rates of banking institutions were increased from 12-14 percent to 19 percent per annum; and the ceilings on short-term lending rates were raised. Efforts were also made to control short-term money market operations and to strengthen the organized banking institutions. These actions should help to improve the mobilization and allocation of domestic resources in the Philippines. 12. In the latter part of 1973, inflation emerged as a major problem in the Philippines. The increase in prices was caused by the large increase in liquidity that came with the export boom in 1973/74, and by a number of cost-push factors, including the higher rate of world inflation. To deal with this problem, the Government adopted contractionary monetary and fiscal policies, and attempted to reduce the impact of inflation on consumers by subsidizing such essential goods as wheat, imported rice, and cooking oil. The annual inflation rate fell from 35 percent in 1974 to 8 percent in 1975, and the authorities aim at keeping inflation below 7 percent in 1976. While monthly inflation rates have generally been lower in 1976 than in 1975, there have been moderate inflationary pressures in the last few months resulting from the damages of recent typhoons to food crops, a 25 percent increase in land transport fares, a significant though long overdue raise in the minimum wages, and an increase in the controlled prices for rice and corn. 13. On the external side, the Philippine balance of payments benefitted considerably from the international commodity price boom during 1973. High prices for the country's chief exports, including coconut products, sugar, copper and wood products, resulted in a 70 percent increase in export earnings and a current account surplus of about $550 million. Since mid-1974, the external trade position has deteriorated, due to the sharp increases in the prices of oil and other imports, less favorable prices for Philippine exports, and reduced volume of some exports resulting from the downturn in the econo- mies of the Philippines' main trading partners. As a result, current account deficits of $240 million in 1974 and about $900 million in 1975 were incurred. The current account deficits have been offset by direct foreign investment, inflows of medium- and long-term loan capital, the use of IMF facilities and /1 Fiscal year July I to June 30.  - 4 - some short-term borrowing by the Central Bank. During 1976, exports have been at a slightly lower level than 1975, because of continuing weakness in inter- national markets and, particularly, lower sugar prices; imports have also been smaller than last year because of relatively low rates of industrial investment and the excellent rice crop which made rice imports unnecessary. The outlook is for a current account deficit of about the same magnitude as in 1975, which will be largely offset by capital inflows; the overall deficit is expected to be about $200 million. In mid-1976, reserves stood at about $1.2 billion, equivalent to four months' imports. Assuming continued sound debt management and the maintenance of a reasonable maturity structure of foreign borrowings, the overall level of external debt of the Philippines is expected to remnain within reasonable limits, as the ratio of debt service payments to exports and nonfactor services would average about 16-17 percent during the rest of this decade. At present, the Bank/IDA share in total debt outstanding is about 17 percent and its share in debt-service is about 4 percent. These shares are expected to increase somewhat in the years ahead. 14. Foreign assistance on concessional terms will be essential to help finance the large investment expenditures which will be necessary For the country's development. In order to ensure that disbursement of external assistance reaches levels commensurate with the level of development expendi- tures which will be required during the latter part of the decade and that debt service obligations remain within reasonable limits, total commitments of official assistance will need to be maintained in real terms at least at the annual level of about $500 million which was achieved in 1974. The Consultative Group for the Philippines at its meeting in Paris on June L5 and 16, 1976, agreed that it would be reasonable for the Philippine Govern- ment to seek official aid commitments of about $600 million in 1976 and $700 million in 1977. Total new commitments of public and private medium- and long-term capital would reach $2 billion in 1976 and need to be maintained at approximately this level through 1980. 15. Despite the slowdown in the growth of the economy, which is pri- marily a result of worldwide economic conditions, the Government remains committed to regaining the growth momentum which began in 1973 to provide for a continued increase in incomes and employment. Both the Philippine Government and the Bank' s Basic Economic Report estimate that it should be possible in the longer term for the Philippine economy to grow in real t:erms at a rate of about 7 percent per annum provided that good economic management continues and international economic conditions improve. High priority must be accorded to expanding employment opportunities because unemployment and underemployment are still high, and the labor force continues to grow at 3 percent a year. Continued attention must also be given to expanding the Government's effective family planning program to reduce the rate of growth of the population and the labor force. 16. The Government is pursuing a development strategy which focuses on rural development with emphasis on food production; accelerated industriali- zation, both in capital-intensive resource based industries and labor-intensive export industries and a substantial expansion in public sector investmerLt in infrastructure to support the growth of the productive sectors. In support of these objectives, the Government plans to continue its efforts to increase  - 5 - public revenues, to strengthen the capacity of public sector agencies and to foster the growth of exports. The Government recognizes that the increased cost of petroleum and other imports cannot be financed indefinitely by borrow- ing abroad, and it is actively encouraging both local and foreign investors to expand productive investments. It will, however, take time for Government programs to have an impact on the balance of payments, and the Government is, therefore, seeking increased support from the international financial community to assist in the financing of its development effort. PART II - BANK GROUP OPERATIONS 17. By November 30, 1976, the Philippines had received 38 Bank loans (of which two were on Third Window terms) and 3 IDA credits for a total of $941.5 million, net of cancellations. About one third of Bank lending, $306 million, has been for infrastructure projects in power, transportation, and water supply and another third, $303 million, has been for agriculture. Of the remainder, about $250 million has been for industry and about $83 million has been for social sector projects in education, population and urban development. There has been a marked improvement in the execution of Bank-financed projects in the last four years compared with experience in the 1960s, when there were serious problems caused by a shortage of peso counterpart funds and poor administration. All ongoing projects are now being implemented reasonably well. Annex II contains a summary statement of Bank loans, IDA credits and IFC investments as of October 31, 1976, and notes on the execution of ongoing projects. 18. The Bank's lending program has been designed to continue to support the Philippine development effort with its emphasis on agriculture and infra- structure and its growing attention to the needs of lower income groups. About one third of Bank lending planned for the future would continue to be for agriculture and rural development projects and another third would be for needed basic infrastructure projects, mainly in the fields of transportation and power. The amount of lending for social sector projects, including education, population and urban development, is expected to continue to grow rapidly and account for nearly 20 percent of future lending. The balance of future lending would be for industrial development, where growing attention is being given to the needs of small and medium industries with high employ- ment potential. The rapid growth in public revenues during the past five years has allowed for a significant expansion in public investment and both the ambitious Philippine development program and the Bank's growing lending program have been designed to make good past neglect and to meet future needs. Bank lending totalled $165.1 million in FY74, $208 million in FY75 and $268 million in FY76 compared to about $30 million a year in the preceding five years. 19. This is the first loan to be presented to the Executive Directors in FY77. It is expected to be followed shortly by a loan for the Jalaur irrigation project. Other loans which may be ready for presentation to the Executive Directors later in FY77 are for agricultural credit, land settle- ment, education, power, irrigation and water supply projects. Projects for smallholder tree farming and forestry development and for inter-island shipping may be ready for presentation to the Executive Directors in early  - 6 - FY78. A number of these projects are designed to help the Government meet its objective of increasing the productivity and incomes of the poorer segments of the population. 20. As of October 31, 1976, IFC has made commitments in the Philippines totalling $78.9 million for investment in 14 companies in the fields of devel- opment banking, power, telecommunications, ceramic tiles, paper, petroleum products, nickel mining and refining, chemicals and synthetic fibres and edible oils. Of these investments, $18.1 million had been sold, $0.4 million cancelled and $6.9 million repaid, leaving a net portfolio of $53.5 million, including $2.8 million undisbursed. Preliminary proposals have been received for projects in the wood and mining industry. PART III - THE TRANSPORT SECTOR Background 21. Both sea and land transportation play a major role in the Philippine economy. Inter-island shipping provides an essential means of communication among the islands of the archipelago and accounts for about 53 percent of total freight traffic and about 10 percent of passenger traffic. In recent years, there has been a considerable expansion of the highway network to the interior of the main islands of Luzon and Mindanao. Highways today account for about 44 percent of freight traffic and 80 percent of passenger traffic on these islands. The role of the railway in the Philippine transport system has always been insignificant and may decline further with the development of the highway network. Domestic air traffic has, in recent years, been increas- ing and now accounts for about 6 percent of passenger traffic. 22. The transport system in the Philippines has for many years been inadequate for a number of reasons. Due to the overall lack of public resources in the past, investment in transport has been insufficient to provide for the expanding needs of a growing economy. Inadequate funding and weak administration have resulted in poor maintenance of existing facili- ties, and insufficient coordination and overlapping of responsibilities among transport agencies have hampered rational planning and effective project execution. 23. In order to help remedy these problems, the Government requested UNDP assistance to finance a transportation sector study, with the Bank as Executing Agency, which was completed in 1970. The study identified the main investment priorities and provided the basis for subsequent public investment in transportation which rose from about $40 million in FY68 to about $220 million in FY75. The Project Planning and Development Office in the Department of Public Works, Transportation and Communications has recently updated the investment plan and estimates that public investment in transportation will need to rise from $365 million in FY77 to about $500 mil- lion in FY80 in order to make up for the low levels of investment in the past and to provide for growing traffic levels. About 81 percent of funds under the investment program will be devoted to improving road transport, 9 percent for railways, 6 percent for airports and 4 percent for ports. Investment in inter-island shipping will come mainly from the private sector.  - 7 - 24. In order to improve administrative capability, the Government has, since 1972, been reorganizing and streamlining government agencies to provide for better planning and project execution. As a result, transport planning is now the joint responsibility of the National Economic and Development Authority and the Department of Public Works, Transportation and Communications. As the central planning agency, the former has the overall responsibility for planning public capital investments; its Infrastructure Program and Project Office reviews and approves investments proposed by the transport agencies. It is assisted in this task by the Inter-Agency Technical Committee on Transport Planning, staffed with representatives from each transport agency, which is responsible for helping to formulate long-term plans and policies in the transportation sector and to ensure appropriate coordination among the agencies involved. The Planning and Project Development Office under the Secretary of the Department of Public Works, Transportation and Communications has the responsibility for undertaking comprehensive regional planning studies and for formulating, on this basis, priorities for major infrastructure projects. The Planning and Project Development Office maintains liaison with the National Economic and Development Authority and provides the bulk of technical input to transport planning. The Board of Transportation, a semiautonomous unit of the Department of Public Works, Transportation and Communications, handles the quasijudicial function of granting routes to transport companies and prescribing rates, schedules and regulations for their operations. The Bureau of Transportation in the Department of Public Works, Transportation and Communications is responsible within the policy guidelines of the Board of Transportation for the enforcement of regulations concerning all modes of transportation, except for railways. The Philippine National Railway is responsible for the Government railroad and the Philippine Ports Authority was set up in 1975 to be responsible for port planning and administration of public ports. The role of the Department of Public Highways in the transport sector is described in para. 29. 25. These organizational developments have in practice improved the planning and coordination functions of the Government. However, there are still instances of overlapping or lack of coordination. A Bank sector report has recently reviewed transport planning in the Philippines and recommended a number of steps to improve coordination in transport planning, and substantial technical assistance to help the Government in improving the quality of its long-term investment program and in strengthening the planning capacity of the various agencies concerned with the transport sector (Bank Report No. 1017a-PH of May 4, 1976). This technical assistance for improving planning for the transportation sector in the Philippines is being financed under the loans for the Manila Urban Development Project (Loans 1272-T-PH and 1282-PH). 26. The proposed project would be the sixth Bank-financed project in the transportation sector in the Philippines. The previous five loans include two for ports (Loans 290-PH and 939-PH), two for highways (Loans 731-PH and 950-PH) and one for shipping (Loan 1048-PH). The First Highway Project was completed in 1975; work had been progressing satisfactorily until March 1973 when it was suspended for about two months due to civil disturbances which eventually led to the deletion of a section of the road accounting for about 20 percent of the project. None of the loan was cancelled, however, because of the need for funds to meet the increase in construction costs of the remaining works. The Second Highway Project is progessing about on schedule  - 8 - and to date about 60 percent of the civil works have been completed. The technical assistance which was included in the First Project and continued in the Second helped to improve DPH organization and operations, but further assistance is necessary. The Highway Network 27. The public highway network, totalling about 99,000 km, consists of about 23,000 km of national roads, 30,000 km of provincial roads, 27,000 km of city and municipal roads and 19,000 km of other roads (feeder, farm to market and other local roads). The road density is relatively high, but the condition of the highway network is inadequate to serve even existing transport needs. Due to inadequate investment in the past, only 38 percent of national highways and 13 percent of provincial roads are paved; the rest are either gravel or unsurfaced. Moreover, both paved and unpaved roads are in poor condition because of inappropriate initial design and construction, and inadequate maintenance. Existing roads are also frequently damaged by severe flooding in the rainy season, and overloading of trucks, which is common practice particularly in logging and mining areas. Since 1970, the Government has made a substantial effort to improve and develop the road system both through an expanded allocation of domestic budgetary resources and foreign assistance, mainly from Japan, the United States, IBRD and the Asian Development Bank. The achievement has been impressive during the last six years as more than 13,000 km of roads have been constructed or improved. 28. The motor vehicle fleet grew from about 325,000 units in 1966 to about 740,000 units in 1975, an annual rate of growth of about 9.6 percent. The vehicle fleet is fairly large with one vehicle per 60 inhabitants, com- pared to one per 120 in Thailand and one per 185 in Korea. The rate of growth in the vehicle fleet has slowed in the last two years due to higher gasoline prices; but road traffic is nevertheless expected to grow at a rate of 7 to 8 percent a year as economic activity picks up during the coming years. To rehabilitate the existing road system and to provide for growing land trans- portation requirements, the Government plans to invest about $1.5 billion (81 percent of total investment in the transport sector) for highway develop- ment during the period FY77-80, or three times the amount invested during the FY72-75 period. It is expected that $300 million would be financed from foreign assistance and the balance of $1.2 billion financed from domestic budgetary resources. The Department of Public Highways (DPH) 29. DPH has primary responsibility for planning, constructing and main- taining national roads. The Department is also responsible for the supervi- sion of the construction and maintenance of farm to market roads. Local authorities are responsible for the construction and maintenance of provin- cial, city and municipal roads except for the supervision of construction of these roads which is the responsibility of DPH when construction is financed from the National Government's funds. 30. The Bureau of Construction and Maintenance of DPH supervises 14 regional DPH offices, which are responsible for the construction and mainte- nance of national roads. There are also 149 district and city offices under  - 9 - the control of regional offices. The Bureau of Equipment in DPH is responsi- ble for the management, repair and maintenance of road construction and maintenance equipment which is rented mainly to DPH regional and district offices. The Bureau has its own regional equipment services organizations with direct control of 14 base workshops. The Bureau of Barangay (Village) Roads supervises the construction and maintenance of farm to market roads. 31. The Second Highway Project (Loan 950-PH) made provision for strengthening DPH to help it carry out the rapidly-growing road construction and maintenance program. Consultant services were provided for construction supervision, detailed design of future road projects and for assessment of maintenance and training requirements. While the Second Project is being successfully implemented, additional assistance is needed to enable DPH to improve its overall capacity to carry out a much larger program in the years ahead. In particular, attention needs to be given to improving the capacity of DPH to plan the future investment program, develop a more effective maintenance program and strengthen its staff training. (These needs are discussed in paras. 34-37). PART IV - THE PROJECT Background 32. The proposed project is designed to assist the Government to improve high priority major and minor roads which form part of its four-year invest- ment program and to strengthen DPH to enable it to carry out the much larger future road program. Both the program and the Bank-financed project appro- priately emphasize road improvement, restoration and maintenance rather than new construction. The road component of the project was prepared by the DPH with the help of consultants financed under a UNDP Project, for which the Bank was Executing Agency, and the road maintenance and training components were prepared with the help of consultants financed under the loans for the First and Second Highway Projects. A Bank mission appraised the project in April/May 1976 and negotiations were held in November 1976. The leader of the Government's negotiating team was the Honorable Baltazar Aquino, Secretary of the Department of Public Highways. The Appraisal Report (No. 1297a-PH) on the proposed project is being circulated separately to the Executive Directors. Annex III provides a loan and project summary. Description of the Project 33. The proposed project would provide for: (a) the construction and improvement of 10 sections of national roads totalling about 500 km and 16 sections of minor roads totalling about 230 km, mainly on Mindanao and the Visayan Islands; (b) implementation of the first phase of a road maintenance program comprising: (i) the construction or enlargement of 5 base and 23 area workshops in Luzon; (ii) procurement  - 10 - of road maintenance equipment including spares, hand tools, workshop tools and machinery; (iii) procurement of spares and components for existing equipment; and (iv) restoration of deteriorated sections of the national road network to a maintainable condition as provided for in the first two years of DPH's Five Year Road Restoration Program; and (c) consulting services for: (i) the supervision of construc- tion and improvement of the project roads; (ii) feasibility studies of about 1,400 km of national roads, 800 km of minor roads and seven ferry crossings, and detailed engineering of elements found to be justified; and (iii) technical assistance to help strengthen the capacity of DPH to implement the project and its future investment program, improve its road maintenance program, strengthen its planning capability and develop more effective training programs for its management and operational personnel. Institutional Objectives 34. A central focus of the project is to assist DPH to improve its over- all capacity to carry out a larger road program and, in particular, to remedy certain weaknesses which have adversely affected its performance in the past. Despite considerable improvement over the last several years, the two Bureaus of the DPH most directly responsible for carrying out the national highway program need support to upgrade their technical capacity. The project would therefore provide for four experts for two years each to advise the chiefs of the Construction, Maintenance, Design, and Soils and Materials Divisions of the Bureau of Construction and Maintenance. Two short-term experts would also be employed in the Maintenance Division to assist, respectively, with road maintenance and road restoration. In addition, one expert would be provided for a period of two years to advise the Director of the Bureau of Equipment in organizing a network of workshops. Two short-term experts would also assist the Bureau's Director, one in the reorganization of spare parts depots and procurement of spares, and the other with the procurement of equipment, tools and workshop machinery. 35. Road maintenance has been a chronic problem in the Philippines due to insufficient funds, lack of necessary equipment and ineffective planning, budgetary and operating procedures. Consultants, financed under previous Bank- financed highway projects, have made a number of recommendations for improving the existing road maintenance program and prepared a Five Year Maintenance Program, which has been accepted by the Government. In addition to the tech- nical assistance to the Maintenance Division described in the preceding para- graph, the project provides for the establishment of maintenance workshops and equipment needed to implement an improved maintenance program on Luzon. The Government has agreed that the procedures proposed in the Road Maintenance Program will be applied in 1977 and thereafter, and that sufficient funds will be made available to finance an effective maintenance program. Annual physical  - 11 - targets and budget allocations will be submitted to the Bank for its review and approval. As part of its Road Maintenance Program, the Government has also agreed to undertake a Road Restoration Program, as recommended by its consult- ants, which would provide for minimum improvements, prevent further deteriora- tion of the road network and reduce maintenance costs in the future (Section 4.03, draft Loan Agreement). The proposed Bank loan would help finance the first two years of the Road Restoration Program and disbursement for this purpose would be subject to the Bank's approval of the annual plans of the Road Restoration Program to be financed under the loan (para. 4 (ii) of Schedule 1 of the draft Loan Agreement). 36. A Planning and Development Service has been established in DPH with responsibility for planning the road investment program. It has undertaken planning of minor roads, but will need to upgrade its capacity greatly if it is to carry out fully its planning responsibilities and supervise a large program of feasibility studies. An expert has already been appointed to assist the Director of the Planning and Development Service for a period of two years in developing statistical data, including traffic counts for the purpose of improving the preparation of highway programs. Since the Service is presently entirely staffed by engineers, DPH has agreed to employ three economists; it has also agreed to endeavor to fill 15 vacant professional positions in this office by December 31, 1977 (Section 4.06, draft Loan Agreement). The Government is in the process of introducing improved pro- cedures for collection of the traffic data needed for better planning and has agreed to have the new system in full operation by December 31, 1977 (Section 4.04, draft Loan Agreement). 37. The improvement of the road network together with the technologi- cal advances experienced in highway maintenance, construction and equipment have accentuated the need for more comprehensive and organized programs of training for both existing and new personnel. Estimates of consultants and the Bank appraisal mission indicate that over the next five years DPH will need to train: 540 equipment operators, 860 equipment servicing mechanics, 1,200 maintenance field supervisors and 70 management staff. To assist DPH to carry out this program, three training advisors would be provided to the Department for a period of two years each. Execution of the Road Component 38. DPH, with assistance from consultants, would be responsible for executing the project. A special projects office for implementing Bank- assisted highway projects has been established in the DPH and an advisor to the head of this office would continue to be financed for two years under Loan 950-PH. All road construction would be carried out by contractors. Supervision of construction would be carried out by consultants, except for those roads engineered by DPH which would be supervised by its Regional Offices. In order to avoid possible delays in construction, it has been agreed that acquisition of the necessary right of way would be completed for each road section before contracts for improvement of the section are awarded (Section 3.07, draft Loan Agreement).  - 12 - Project Cost and Financing 39. The project is estimated to cost a total of $196 million, of which $95 million, or about 48 percent, would be in foreign exchange. The average construction cost per km (net of contingencies) is $160,000 for national roads and $40,000 for minor roads. The average man-month rate (including costs of international travel and local travel and housing allowance) for foreign consultants is estimated to be about $8,250. The cost estimates include provision for physical contingencies of 10 percent of the baseline cost of all items including consultants. The cost estimates also provide for price contingencies of 26 percent of the cost of civil works (12 percent per annum for 1977-79 and 10 percent for 1980), 21 percent of the cost of consul- tant services (8 percent per annum for 1977-79 and 7 percent for 1980) and 8 percent of the costs of equipment over a one-year period. The proposed Bank loan of $95 million would finance the foreign exchange cost of the project. The Government would finance the balance of project costs of $101 million from budgetary resources. Retroactive financing of about $50,000 is recommended to pay for the services of the expert who is assisting the Director of the Planning and Development Service in the Department of Public Highways (para. 4 of Schedule 1 of the draft Loan Agreement). This expert was urgently needed to assist in improving DPH's planning capacity, and his appointment and terms of reference were approved by the Bank. Procurement 40. Contracts for the construction and improvement of the national roads amounting to about $80 million (net of contingencies) would be awarded to prequalified contractors on the basis of international competitive bidding in accordance with the Bank's Guidelines. The majority of these contracts are expected to be awarded to local construction firms. Contracts for reconstruction of minor roads, averaging about $500,000 each and amounting to about $9 million, for construction of workshops, averaging about $150,000 each and amountir.g to $4.3 million, and for the restoration of the national road network, amounting to about $21 million, are small and are geographi- cally scattered and would therefore be awarded to qualified local contractors on the basis of competitive bidding advertised locally in accordance with Government procedures which are acceptable. Foreign contractors would be eligible to participate. 41. Workshop equipment, tools, road maintenance equipment, spare parts, and components, amounting to about $14.3 million, would be procured on the basis of international competitive bidding in accordance with the Bank's Guidelines. For purposes of bid comparison, a preference of 15 percent of the c.i.f. price of imported goods, or the customs duty, whichever is lower, would be extended to local manufacturers. Items costing less than $15,000 and hand tools for road maintenance would be procured under normal Government procurement procedures which are acceptable; the aggregate amount of such purchases would not exceed $500,000.  - 13 - Disbursement 42. The Bank loan would be disbursed for 50 percent of the total cost of construction and improvement of roads, 30 percent of the total cost of construction of workshops, 40 percent of costs of road restoration works, 100 percent of the c.i.f. cost of directly imported equipment, spare parts, tools and components, 100 percent of the ex-factory price of such items manufactured locally or 65 percent of such items which are imported but procured locally. For costs of consultants and technical assistance, the loan would be disbursed for 100 percent of the foreign exchange cost or 45 percent of the total cost. Environmental Impact 43. No significant environmental problems are expected. The recon- structed roads have improved drainage facilities and would thus benefit the immediate environment. As a result of road improvement, vehicle noise and dust would be considerably reduced. Wider and well constructed shoulders would contribute to road safety. The roads largely follow existing align- ments, thereby minimizing disturbances to persons and property. Benefits and Justification 44. The construction and improvement of national roads (500 km) and the reconstruction of minor roads (230 km) under the project will help the Government in its efforts to achieve the ambitious target of constructing and improving about 25,700 km of national, provincial and local roads during the next Investment Program (1977-80). This project supports the Government's present strategy of giving emphasis to reconstruction of low quality roads and to the paving of existing gravel roads, which still account for over half of the national network, rather than concentrating on the construction of new high-standard highways. Feasibility studies of roads have shown that for most sections, at the present time, the optimum first stage of improvement is to pave or gravel the road largely on the present alignment, with provision for widening and improvements in drainage. The present approach of minimizing and phasing investments makes it possible to meet a much larger total transport demand at lower cost. The direct benefits that would accrue from the project would be substantially reduced costs of moving goods and people and access to some isolated areas with high economic development potential. The savings of vehicle operating costs on the improved national roads would range from 15 to 53 percent and on minor roads from 27 to 56 percent. 45. The potential of the project for relieving unemployment in the country has been considered. Although the contractors are left to choose their own construction methods, employment is expected to be generated by the prospective award of most contracts to local contractors. Many local sub- contractors, using labor-intensive methods, particularly for the supply of materials, are also expected to be employed by both local and foreign contrac- tors. An ILO technical assistance team is now in the Philippines to advise the Government on labor-intensive techniques. The Bank plans to study the results of the work of this team and, if appropriate, will consider including  - 14 - a component in the next highway project to serve as a pilot program for more labor-intensive methods. 46. The major roads in the Visayas region would support mining activi- ties on Cebu island, sugarcane processing on Panay and Negros islands as well as other agriculture, trade and services activities. The national roads in Mindanao would serve one of the most rapidly growing areas of the Philippines, which has considerable potential for increasing production of rice, corn, sugarcane, livestock and timber. The minor roads, both in the Visayas and Mindanao, would help open up isolated areas with dense population or potential for new rural settlements. The areas served have potential for increasing production of rice, sugarcane, pineapple, corn and vegetables. 47. The economic rates of return for each national road section have been worked out separately and they vary between 18 and 36 percent. Sensi- tivity analyses indicate that even with a variety of unfavorable assumptions, the rates of return on the major roads would still range from 15 to 31 percent. The weighted overall average economic rate of return for the major roads is estimated to be 23 percent. The minor roads would open up potential develop- ment areas and connect local traffic to the national road system, but their full development impact is difficult to measure. Taking into account only the expected vehicle operating cost savings and reductions in passenger travel time, the first year benefits on the minor roads range between 10 and 60 percent. The weighted average first year benefit on these roads is estimated to be 16 percent. 48. The road maintenance program would cover some 22,500 km of graveled and paved national roads and would provide for considerable savings in vehicle operating costs. Based on expected vehicle operating cost savings, the maintenance program over the next five years is estimated to have a benefit cost ratio of 2.3. Sensitivity analyses indicate that under less favorable assumptions the benefit cost ratio would still be 1.5. In addition, the program would result in considerable savings in future public investment as additional resources would be required in a few years to rehabilitate the network if the maintenance program were not undertaken. 49. In addition to the quantifiable benefits described above, a central objective of the project is to strengthen the long-term capacity of DPH to carry out effectively a larger highway program in the future. The technical assistance and training provided under the project have been carefully designed to achieve this objective. 50. There are no unusual risks associated with the project. The risks normally associated with road projects have been accounted for in the estimates of traffic growth rate and savings in vehicle operating costs.  - 15 - PART V - LEGAL INSTRUMENTS AND AUTHORITY 51. 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 the resolutions approving the proposed loan are being distributed separately to the Executive Directors. 52. Features of the Loan Agreement of special interest are described in paragraphs 35, 36 and 39 of this report. 53. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATIONS 54. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments December 13, 1976   TABLE 3W Page I of I. pages PHILIPPINES - SOCIAL INDICATORS DATA SHEET LAND AREA (THOU KM2)---------------- --------- --------------- V~~~~~HILIPPINES REFERENCE COUN TR IES (1 90) I TTAL 30 0 .0 MiuST RECENT APRI C. 116.3 1 960 1 970 ESTIMATE THAILAND tURRET KOREA.Rff. OF * GAP PER CAPI TA 1USD) 14 0 .0 23 0 .0 3 70. 0 2 10. 0 48 0 .0 270.0 POPULATION AND VITAL STATISTICS POPULATION (MiDOTR. MILLION) 2 7. 4 36.9 42. 5 36 .3 i5.?7 31 .4 POPULATION OENSI TT PER SQUARE OR. 9 1. 0 1 23. 0 1 42.0 7 1 .0 4 6.0 3 19. 0 PER SQ. AM. AGRICULTURAL. LANGD . 2 790.0 326.0& .d 671. 0 1032 0. 0 VITAL STATISTICS AVERAGE VIRTH RATE I/tHDU) 6 5.1 4 4 .2 4 3. 8 64 . 3 60 .6 35. 0 AVERAGE DEATH RATE C/HOU) 17.9 13S.2 1 0. 5 1 3 .1 1 4 .4 1 1 .4 INFANT MORTALITY RATE (ITHUU) .. A.O 68.0 A 80. 0 14 5. 0 LYFE EXPECTANCT AT AIRTH (YRS 4 9.4 5 5. 6 58. 4 5 5 .5 5 4. 4 517.7I .ROSS REPRODUCTION AATE 3.5Lt 3 .3 0. 3 3.2 2.6 /ab 2. 6 POPULATION GROWTH RATE (1) TOTAL 3 .0 3.0 2. 9 3 .1 2 .5 2.3 uRBAN 4 .0 4. 0 4. 0 4 .9 4.2 6. 4 URBAN POPULATION 1Z UF TOrAL) 2 5 .3 2 7. 6 29 .0 1 5 .0 31.2 41i. 2 AGE STRUCTURE (PERCENT) 0 TO 14 YEARS 4 5 .7 145.6 44s.0 'I65.3a 41 .8 4 2.1I IS, TO 64 TEARS 5 1 .6 51L. 6 54 .0 52 .0 5 3. 9 5 4. 6 65 DEARS AND OVER 2.7 2.8a 2.0 3.0 4 .3 3. 3 AGE UEPEAUECAC RATIO 0.9 0 .9 0. 9 0. 9 0 .9 0. 8 LCGUNUIC UEPENOENCT RATTU 1.3ab 1.5 1 .4 b 1.1 1.1 /c 1. 4 FAMILT PLANNING ACCEPTORS (CUMAULAT IRE, [AO)U 35 4 .0 28 72. 5 4710 .0 USE RS T X OF OARR IEG W OME N). 2. 0 1 9. 0 1 0.3 8.2 42.0 E MPLOYMENTA TOTAL LAVOR FORCE IThITUSAND) 10103D.0 IOO.0 1 42 00. 0 1 67100 .0 14 50 0.Oa 10400. 0 LA&TR0 FOCR CE I N AGRAICJcTUR E (01 61L. 0 55 .0 /a 5 ./ 7 9 .0 67.0 5 o.s5 / OtN E4PLO YC E0T OF L AROR FLIR CE)b 6.0 7 .0 4. 0 .4 . 0 Le 5.oc / INCOmE ULSTRIAUTION X UF PRIRATE INCOME RECO0 AT- HIG6HES5T 50 OF HJUSEHOLOS 28.8 . . 2 4.ALi .d 32 .8 a 1 7.1I HIGHEST 200 OF HOUUEHOLDS 5 6. . 2 54.0 Id60. 6 4 4. 5 LOWEST 201 OF HOUSEHOLDS 4 .2 3. 9 2.94 7.1I LOWEST 431 Of HUUSEHOLDS 11I.9 I.11. 918. 9.:4 17I.7I DL~TRIRUTION OF LAND OWNERSHIP & UWNED AT TOT' 10% OF OWNERS ... . . 33. 0 26. 0 LJuWNED VY SMALLEST 101 OWNERS . .. 0. 9 2. 0 fIeALI ANAG NUTRITIUN PUPOLATION4 PER PHTSICIAN 3220.0 a7970.i 222 0.0 2210.Ou POUPULATOION PER URSING PERSON ... 20 0 650 1A 0. g 1176 0. 0 PUPULATIOUN PER HOSPITAL RED 1 180. 0 85 0.0 ..850.0 49 0 .0 1920. 0 /-ER CAPI TA SUPPLY OF - LRLORIlES IC OF REQUIREMENTS) 8 3 .0 100.0 97.04105.0 110.0 1 03.0 PRUTEIN (GRAMS PER DAY) 44.0 450 4 1.0 52.0478.0065. -OF WHICH ANIMAL AND PULUE 19.) 0/ 2 2. 0 17.0 L 22.OAi 1 9. 0 DEATH RRATE 1/HOU) AGES, 1-4 9.0/ 9 .0 9. . . is5. Ca/ EDUCAT ION ADjUs~TED ENACJLLMENT RATTO PRIMARY SCHUOL 91.0.e 108.0/b 1 10.0 82. 1 111 I.0A L I 104. 0 sECUNOAiVY SCHOOL 26.0Le 4A.O1k 4 8.0 z-16.0 28 .0 4 1 .0 TEARS OF SCHOOLING PROVIDED (rIRST AND SECOIND LEVEL) 10a. 0 1 0. 0 1 0. 0 12.3 11. 0 1 2 .0 VOCAT IONAL ENHOLLMENT It OF SECSNOAR 0) 14. Gr 6 .0IC 9.0414 .3 /c 14.0 16. 0 ADULT LDITEHACY RATE IS) .. 7 2.0 Oi 79.0 5 5.01 8 7.0 PROSPEA RuOM ( AVERAGE) . 2. 1 I ..19 2. 7 OCCUPIED DWELLINGS WITHOUT PIPED WATER (0) RO).0 7 6. 0 ... 6 4. 0 80. 01 ACCESS TO ELECTRICITY (C OF ALL DWELLINGS) 171.0 2 3.0... 4 1. 0 50. 0 AURAL OWELLINuS CONNECTED TO ELECTRICITT IX) . 7 . 0 IB.. 1. 0 30. 0 CONSUMPTI ON RAlUT RECEIVERS (PER THOU POP) 22.0 45.0 45.0 79.0 89.0 126.0 PASSENGER CARS (PER THOU POP) 3.0 8.0 9.A S.u 4.0 2.0 ELLECTkICIrT (RWH/TR PEAi CAP) 1)00. 0 /35.0 3 15.0G 12 4 .0 24 7. 0 3 07. 0 NE WSPRI NT (AKS/TY PER CAP) 1 .3 2.0 1 .5 1 .0 0i. 7 3. 4 SEE MUTES HAGD DEFINITIONS ON kEvErSE  Page 2 of L page. NM t'nee o.therejee noted, data for 1960 refer to em" year between 1959 end 1961, for 1970 between 1968 end 19,70, and for Moet Racent Retinal. bet,e,ea 1973 and 1975. s- Sor. ha. been Seslected ae an objeotbe coutry - the heels of It. vsteler popelotibo, location end i..ca. level end, lik the Philippines, it is c.opetod to gro eapidly In the noming yeare. PRHFIPPEU 1960 /a 1950-S55 A Ratio of populatio n oder 15 end 65 and ner to total labor forte; In 1960-621 ad 1962k a. 7-12 end 13-16 ye-ars or age respectively; If Rut including vocational short-tore coureaes. 1970 a Ac prcentgag of employaent; A~ 7-12 end 13-16 yeore of age reep.eti-ly; /C Rot inclodlog private vocational echoole or vocational chart-tencore. WI? PERCT UmTI uTE /a 1972; /b Ratio of populatlon, under 15 and 65 and over to total laebo force; perectage of Of employment; Id17;~ Icuigacis;If 1969-71 aeae 74T2 and 13-16 year of age reepeoti,ely. TR&IIAN 1970 a 1966-661 /b 7-11 end 16-18 yeare of age reepectlv-ly; /g Public echools which include technical e-tinalo at the poet-.oeodary level. TURM ~1920 /a Recludee 17 eaetern proincee; /b 1965467; / RAtio of population under 15 end 65 end over to labor for-ce 15 yere end Over; ad 15 yeare ad over, exolud.e unmployed; /a Registered only; LI DMepeable incoms; a In- cloding aecietant none. end .1h.w.; A 1966-66; & 7-11 yeare of ego; / Fersone 6 years old end over who tell the ceneue tkhere they can read end crite. Kam W.&a 1970 a. La percentage of osployeo-t; a Regitotad; IA Regietar,d, not oil practicing in the c.untr-y; /d Water piped inside. Rh, November 3, 1976 DEFENIoTIONS OF SOOLINOIZOATORS iAne th.ubk.) opuloticon p rcti' eson - Population divided by naber of practicing =otal. -totl a%rThac 1rcccprs - ad area coo inlaid otoro. vaeedfnlrdoer carso, "trained' or "ccrtlftod0 nuron, end. AEgin. - Moot rocnct stimate of agrioultu... are mo- d tcoporonily or auxiiarxy porsoncol vith tro,,inig or oxperteceo. permaneotly for .-oPe, pasturce, maket & kichebo g.rdoee or to i unoultecprhosital bed - Population dinidod by o-bhe of tonpital bode fallow. velbeopbiocdrivate go...ral end oeic hne onpital and COP er oeca (ls)- dP pt apin conoons o curen inchoprice, rohobolitatioc crtern; vclodon nurs,n homes and eotablisobnets for GNPcr e.ptod byS) GoecNPoPres method'. bon Allent (3itpc. cuotodial cod proe- otuovcars. 190 90an17 hrcnt upyo ouoio a(5of ro-ir-ontni - CnoputId frcn ocorgy Pocoletioc cod 01001 oturioroon avatlablo ou~.ppln-n onpr..c dootitoP prduction, mporte boo, onprto, _______________________________ ~~~~~~~~and changoe n .toci; not sappitno vunlujdo animal food, ocodo, qaoti- FPoputilln (nod-yr. oilli-)f - 00 of Joly hoot if cot anilbl, Us ned t food procen-ong and lossee tO dnotrlbtblno; ronu1rne-cts -sorege of two eod-yoor oattooceton; 1960, 1970 cod 1975 dote. were estiiated by FA0 cooed 00 py.oeloglia-l onoedo for nornal acti-uty and bealt onootdontig on-ro tal oporatnro, nody ovights, ego and iOootla~itloodeneity-_ I ooaro h - Mid-year Population per eqonro kilo- eon dintribetbone of PoPalat-oo n.dt al11c-r 10$