Philippines - Second Fisheries Project

Report No. 110lb-PH FILE COPY Philippines: Appraisal of the Second Fisheries Project May 7, 1976 East Asia and Pacific Projects Department Agricultural Credit and DFC Division FOR OFFICIAL USE ONLY Document of the World Bank 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.  CURRENCY EQUIVALENTS _/ US$1.00 = 7.5 Philippine Pesos (P) P 1.00 = US$0.133 WEIGHT AND MEASURES (METRIC SYSTEM) 1 sq meter (m2) 10.8 sq feet 1 sq kilometer (km2)= 0.386 sq miles 1 hectare (ha) = 2.47 acres 1 millimeter (mm) = 0.0394 inches 1 centimeter (cm) = 0.394 inches 1 meter (m) = 3.28 feet 1 kilometer (km) = 0.62 mile 1 liter = 0.264 US gallons 1 kilogram (kg) = 2.205 pounds I metric ton (ton) = 2,205 pounds ABBREVIATIONS ADB - Asian Development Bank BFAR - Bureau of Fisheries and Aquatic Resources CB - Central Bank of the Philippines COA - Commission on Audit DBP - Development Bank of the Philippines FAO - Food and Agriculture Organization (of the United Nations) FG - Fisheries Group (of DBP) NIA - National Irrigation Administration SEAFDEC - South East Asia Fisheries Development Center UNDP - United Nations Development Programme UP - University of the Philippines UPCA - University of the Philippines, College of Agriculture USAID - United States Agency for International Development FISCAL YEAR July 1 through June 30 1/ Floating since 1970.  FOR OFFICIAL USE ONLY PHILIPPINES APPRAISAL OF THE SECOND FISHERIES PROJECT TABLE OF CONTENTS Page No. SUMMARY AND RECOMMENDATIONS ...... ..................... i-ii I. INTRODUCTION . .......................................... 1 II. THE FISHERIES SECTOR ........ .......................... 2 Contribution to the Economy ..... ................. 2 Fishing Industry ........ ......................... 2 Municipal Fisheries ............................... 3 Commercial Fisheries. 3 Inland Fisheries. 4 Shore Facilities. 4 Boat Building. 4 Marketing. 5 Extension, Education and Research. 5 Fisheries Credit. 6 Fisheries Administration. 6 Development Pol-icies. 6 III. THE FIRST FISHERIES CREDIT PROJECT. 6 Project Implementation. 7 IV. THE PROJECT. 9 General Description. 9 Detailed Features .10 Project Cost .12 Project Financing .13 Terms and Conditions of the Bank Loan .15 Terms and Conditions of Sub-loans .15 Free Limit .16 Procurement .16 Disbursement .17 Audit and Accounts .18 Reporting Requirements .18 New Features of the Project .18 V. ORGANIZATION AND MANAGEMENT .19 Development Bank of the Philippines .19 Fisheries Group .21 1/ This report is based on the findings of a mission composed of Messrs. D. Lee, S. Ettinger and L. Sprague (Bank) that visited the Philippines in August/September 1975. This document has a restricted distribution and may be used by recipients only in the performance of their offcial duties. Its contents may not otherwise be disclose without World Bank authorization.  -2- Page No. VI. MARKETS AND PRICES .................................. 21 VII. BENEFITS AND JUSTIFICATION ............................ 23 VIII. RECOMMENDATIONS ..................................... 25 ANNEXES 1. Marine Fisheries 2. Inland Fisheries 3. Fish Marketing and Prices 4. The First Fisheries Credit Project 5. Project Cost Estimates 6. Estimated Sub-project Cost by Component 7. Estimated Unit Investment Costs 8. Estimated Quarterly Schedule of Disbursements 9. Phasing of the Lending Program 10. Development Bank of the Philippines 11. Cash Flow Projections 12. Economic Analysis CHARTS 1. DBP Organization Chart, WB 9981 2. Agricultural Projects Department Organization Chart, WB 15328 3. Schematic Drawing of 90 Gross Ton Fishing Vessel, WB 15330 4. Schematic Drawing of 45 Gross Ton Fishing Vessel, WB 15329 MAP Second Fisheries Project, IBRD 11915  PHILIPPINES SECOND FISHERIES PROJECT SUMMARY AND RECOMMENDATIONS i. The Government of the Philippines (GOP) has requested a Bank loan of $12.0 million to finance the continuation of the ongoing Bank- financed (first) Fisheries Credit Project (Loan 891-PH, $11.6 million, 1973). The objective would be to assist the Philippine Government in its effort to increase fish production for domestic consumption and to build up an institutional base for financing investments in marine and inland fisheries. GOP would onlend the proceeds of the loan to the Development Bank of the Philippines (DBP) to support a three year lending program for fisheries facilities to be owned and operated by private entrepreneurs in the Philippines. ii. The first Fisheries Credit Project is progressing satisfactori- ly, and, as of April 30, 1976, Bank disbursement was $3.5 million, and DBP is expected fully to commit the remaining funds by December 1976. iii. The first project consisted of three major components; (i) fi- nancing of viable marine fisheries sub-projects, (ii) financing of inland fishpond development and rehabilitation, mainly for milkfish farming, and (iii) technical assistance required to support lending operations and to build up DBP's technical capability for providing medium and long-term fisheries development financing. iv. The proposed project would be the fifteenth Bank/IDA project for agricultural development in the Philippines, and the tenth Bank project involving on-lending through DBP. v. DBP, a wholly Government-owned development bank, is the single largest source of long-term funds in the Philippines. Since its inception, it has approved financial assistance totalling nearly $3 billion. About 25% of its long-term loan portfolio is in agriculture. In FY75, DBP's total lending reached $320 million, of which 23% was to agriculture. The volume and diversity of DBP's operations give it a prominent and unique role as the Government arm for financing economic development. vi. The project would provide credit to the private sector for the construction of about 380 new and rehabilitated milkfish ponds, construc- tion of 17 fishing boats in the 45 and 90 gross ton classes, refitting of 4 second-hand fishing vessels into fish carrier boats, construction of 3 ice plants with cold storage, and a marine slipway. vii. Although fisheries contribute only 4% of GNP, it is an important economic activity in the Philippines. The archipelago with over 7,000 islands provides excellent access to productive marine fisheries, and the coastline with its many estuarine areas is ideal for brackish water fish  - ii - farming. Fisheries employ directly about 700,000 persons (about 5% of total employment) mainly in the traditional sector. Fish is a staple in the Filipino diet and provides over one-third of animal protein. Fish im- ports for human consumption, mainly canned mackerel and sardines, stood in 1974 at about $32 million per annum, equivalent to about 120,000 tons of fresh fish, and the demand for marine products is growing rapidly. The Government aims at self-sufficiency in fish production, and the proposed project would help meet that objective. viii. The estimated total project cost is $23.5 million. The Bank would finance $12.0 million, representing 50% of the inland sector project cost, and the foreign exchange component of the marine sector. The Bank loan would be for 18 years including a five-year grace period. ix. Sub-loans would be for a maximum of 14 years including a three-year maximum grace period, at interest rates of 12% per annum for loans secured by land and 14% for others. Subloans in excess of $600,000 would be subject to prior Bank approval. x. Contracts for construction of ice plants or the slipway with an estimated cost of $200,000 or more would be awarded on the basis of inter- national competitive bidding, in accordance with Bank guidelines, and those of $100,000 or more but less than $200,000 would be let through local com- petitive bidding in accordance with procedures acceptable to the Bank. Contracts for ice plants or the slipway costing less than $100,000 would be let through ordinary commercial channels. Equipment for vessels, such as engines, winches, fishing gear and electronic instrument would be procured on the basis of quotations received from firms prequalified through international advertisement. Bulking of contracts would not be feasible because of the geographic and temporal spread of the sub-projects, and the need to take sub-borrowers' preferences into account, including compatibility with existing equipment. xi. The estimated financial rates of return range from 17% to 39%, with a weighted average of 27%. The estimated overall economic rate of return is 30%. The benefits consist primarily in increasing fish production and in strengthening DBP's capabilities for fisheries development financing. The project annual production would be about 26,000 tons of fish, with an estimated value of about $10.8 million. xii. The project would create about 1,000 new jobs directly required for the sub-projects. Virtually all of these would be filled by those in the rural poverty target group. In addition, the marketing of the project production of some 26,000 tons of fish per annum is expected to generate about 150,000 man-days of employment per year. xiii. The project is suitable for a Bank loan of $12.0 million repayable over 18 years including a five-year grace period.  PHILIPPINES SECOND FISHERIES PROJECT INTRODUCTION 1.01 The Government of the Philippines (GOP) has requested a Bank loan of $12.0 million to finance continuation of the ongoing Bank-financed Fish- eries Credit Project (Loan 891-PH), which loan is expected to be fully com- mitted by December 1976. 1.02 As under the first project, the loan would be made to GOP which would on-lend the proceeds to the Development Bank of the Philippines (DBP) under a subsidiary loan agreement, and DBP would, out of the loan proceeds and its counterpart funds, provide medium and long-term loans to private fish- eries operators for financing fisheries and related facilities. The loan would be the Bank's sixteenth project for the Philippine agricultural sec- tor, 1/ and it would finance about 17 fishing vessels, four fish carrier vessels, three ice plants, one slipway, and 380 fishpond sub-projects. The fishing vessels would be of the 45 to 90 gross ton classes, and the fishponds are expected to have an average size of 24 hectares. All of these elements are expected to make contributions to the modernization of marine fisheries and the expansion and rehabilitation of inland fisheries. 1.03 In April 1975, DBP sent the Bank a project proposal for the Second Fisheries Project. In August/September 1975, an appraisal mission composed of Messrs. D. Lee, S. Ettinger and L. Sprague (Bank) visited the Philippines. The report is based on the findings of the mission. 1/ Agricultural Education Project, 393-PH, $6.0 million, 1964, UPCA, (First) Rural Credit Project, 432-PH, $5.0 million. 1965, CB, Second Rural Credit Project, 607-PH, $12.5 million, 1969, CB, Third Rural Credit Project, 1010-PH, $22.0 million, 1974, CB, Upper Pampanga Irrigation Project, 637-PH, $34.0 million, 1969, NIA, Aurora-Penaranda Irrigation Project, 984-PH, $9.5 million, 1974, NIA (Aurora-Penaranda Irrigation Project, 462-PH, $9.5 million, 1974, NIA), (First) Rice Processing and Storage Project, 720-PH, $14.3 million, 1971, DBP, Second Grain Processing Project, $11.0 million, 1976, DBP, (First) Fisheries Credit Project, 891-PH, $11.6 million, 1973, DBP, (First) Livestock Development Project, 823-PH, $7.5 million, 1972, DBP, Second Livestock Development Project, 1225-PH, $20 million, 1976, DBP, Tarlac Irrigation Project, 1080-PH, $17 million, 1975, NIA, Rural Development Project, 1102-PH, $25 million, 1975, Government, Magat River Multi-purpose Project, 1154-PH, $42.0 million, 1976, NIA and Chico River Irrigation Project, 1227-PH, $50.0 million, 1976, NIA.  - 2 - II. THE FISHERIES SECTOR Contribution to the Economy 2.01 As in all other countries in the region, fisheries play a very important role in the national food economy of the Philippines. During the past decade, fish production in the Philippines more than doubled, from 550,000 tons in 1963 to 1,200,000 tons in 1973, and per capita consumption increased by 50%, from 20 kg to 30 kg. 2.02 Fish and other marine products are a staple in the Filipino diet. The estimated total fisheries production of 1.3 million tons for 1974 con- sisted of 684,000 tons (53%) from the municipal fisheries, 471,000 tons (38%) from the commercial, and 113,000 tons (9%) from the inland fisheries. The Government estimates that fisheries accounted for about 4% of gross national product in recent years and about 11% of the agricultural sector. Fisheries employment has been estimated to be about 700,000 (about 5% of total employ- ment), most of whom are subsistence fishermen. 2.03 The Philippines has been a net importer of fish and fish products but is expected to become a substantial net exporter during the coming decade. The estimated 1974 fish import of $32 million consisted of 42,000 tons of canned mackerel ($26 million), 3,500 tons of canned sardine ($2.5 million) and 10,500 tons of other processed fish products ($3.5 million), including 9,300 tons of fishmeal. The $18 million exports for the same year consisted of 1,700 tons of frozen shrimp (estimated $5 million) and 11,400 tons of frozen tuna ($7.0 million). These two export items appear to have potentials for substantial expansion. 2.04 With the estimated 1973 consumption of 1.2 million tons as the base, the demand for fish is estimated to increase by at least 6% per year, which is about the rate at which the marine fisheries production reportedly expanded during the 1968-73 period. Since the sustainable yields from the Philippine waters are estimated to be at least about 1.7 million tons, con- sisting of 0.7 million for the municipal (subsistence) and 1.0 million tons for the commercial fisheries, the resource base would not be a constraint for the industry in meeting the production requirement. Because the scope for further expansion of the municipal fisheries catch is now rather limited, however, much of the additional production would have to come from the commer- cial fisheries. Since the present scale of investment in the commercial fisheries appears to be grossly inadequate to meet the projected production requirement, however, an increasing fish deficit is anticipated for the coming years. Fishing Industry 2.05 The fishing industry of the Philippines is classified into two major categories, the marine and the inland fisheries. The marine fisheries are further sub-divided into the municipal and the commercial fisheries (Annex 1 discusses the marine fisheries and Annex 2 the inland).  -3- Municipal Fisheries 2.06 Although the municipal fisheries account for about 53% of the total fisheries production, not much is known about this subsector. It is made up largely of subsistence, artisanal, and part-time fishermen-farmers, timber workers, etc. It involves, by and large, unmotorized small boats (bancas) of not more than 3 gross tons. In 1974, these fisheries, engaging approxi- mately 500,000 subsistence fishermen, operated about 27,000 fishing boats and produced some 684,000 metric tons, 61% of the total marine fisheries production. 2.07 Despite the lack of reliable statistical information, it is clear that, in the more densely populated areas, the limits of fisheries resources available to municipal fishermen have been reached, and any significant in- crease in fishing effort in these areas would only serve to lessen the pro- ductivity per fisherman which is on the average thought to be already as low as one or two tons per year. In the less populated areas, on the other hand, there appears to be considerable scope for increasing the catch, but the lack of suitable transportation and marketing facilities tends to make it unprofitable to catch more than the isolated markets can absorb without depressing the prices unduly. Commercial Fisheries 2.08 The commercial fisheries fleet comprises an estimated 2,500 ves- sels with tonnage capacities ranging from 3 gross tons to over 100 (see Annex 1, Table 2). The fleet is operated by some 1,500 fishing operators, based mostly in Manila and around the Visayan Sea. In the last ten years, there has been a gradual reduction in the number of small vessels (less than 10 tons) and a substantial increase in the number of larger vessels (50 tons or more). Most fish are caught by trawl, purse seine, and bagnet. The reported 1974 catch of 471,000 tons by the commercial fisheries consisted of 65 major species, but five dominant species accounted for 60% of the total (round scad 35%, slipmouth 9%, sardines 3%, chub mackerel 7% and breams 6%). 2.09 The nature of the chief problem for the fishing industry has changed categorically during the past several years. Before the oil crisis of 1973, the most serious problem was over-fishing on the traditional fish- ing grounds, and the appropriate response to this was to build boats capable of reaching more distant grounds and equip them with more powerful engines and larger trawl fishing gear. The fishermen adopting this approach found it quite profitable. The situation changed fundamentally, however, because of the sharply increased oil prices. The larger trawls and more powerful engines proved to be a highly oil-intensive method of catching, and the tripling and quadrupling of the pump price of fuel oil made the more power- ful trawlers much less financially viable. The industry now has to adapt itself to fishing methods that are less oil-intensive, and many operators are in fact showing a tendency to prefer (i) smaller vessels, (ii) less oil- intensive methods of catching such as purse seining, and (iii) vessels which have more flexible capabilities (for example, trawling as well as purse seining).  -4- Inland Fisheries 2.10 The Philippines is among the leading countries in the region in developing brackish water culture, milkfish culture in particular. The milkfish, Chanos chanos, locally called "Bangus" is the main species culti- vated. The milkfish is found in the warm waters of the Indian and Pacific Ocean. Fully grown they may weigh up to 30 kg, but the commercially culti- vated milkfish are marketed at about 250-1,200 grams. 2.11 The estimated 1974 production of milkfish was 110,000 tons and ac- counted for more than 97% of the entire inland fisheries production, which includes some tilapia, mullet, shrimp and crab (these minor species are culti- vated as incidental products as they enter the ponds with the inflow of water). Although the average milkfish yield of 600 kg/ha/yr in the Philippines is considerably higher than the 300 kg/ha/yr average for Indonesia, it is far below the 1,700-2,000 kg/ha/yr average obtained in Taiwan. There are large production potentials to be achieved by enhancing the average yield. 2.12 In 1974, there were 176,000 ha of fishponds, including 6,000 ha of freshwater ponds. About half of the total fishpond areas is leased from the Government under long-term arrangements (up to 25 years, renewable for another 25 years) and the remainder is privately owned. Potentially the fishpond areas could be expanded about threefold, judging from the swampland classi- fied as suitable for fishpond development. However, lack of infrastructure (roads and distribution facilities), distance from major markets, and the marginal quality of much of the remaining swampland reduce the scope for immediate realization of this potential. Shore Facilities 2.13 Despite the importance of fisheries, there has been a surprising lack of specialized fishing port facilities. Even at Navotas at Manila, which handles the bulk of all Philippine landings, fish are brought in by amphibious trucks from vessels anchored over a mile offshore. Partly financed with a $5.7 million loan from the Asian Development Bank (ADB), a project is under- way to develop Navotas as a well equipped fishing port, involving dredging an approach channel, anchorage reclamation of the foreshore area, and construc- tion of breakwaters, piers, wharves, quay walls and a fish marketing building. The facility is expected to be operational in 1976. Existing ice-making fa- cilities, transport equipment, cold storage facilities, auction halls and the like, are inadequate and any large-scale increase in fish production would require expansion and provision of new facilities. Boat Building 2.14 The construction of fishing boats in the Philippines is carried out at shipyards near Navotas, and in many small private shipyards in the Visayas. In the Visayas, a considerable number of independent contractors capable of building wooden vessels have successfully developed methods of construction which require low fixed capital overhead in the form of ship- ways and conventional shipyard infrastructure. The quality of the vessels is satisfactory, boat building is usually well supervised by the owner, and  -5- the costs of the vessels are quite competitive with those of the comparable ones in other countries in the region. Marketing 2.15 Most of the fish is sold fresh, because of strong consumer prefer- ence. Where fish is iced for transport, the ice is usually removed before sale in order to give it a fresh appearance. Because of the limited storage and distribution capacity and the consumer resistance to chilled or iced fish, rural fresh fish markets are easily saturated, even where there is unsatisfied demand in the vicinity. The excess fish is sold for process- ing (drying and smoking), at greatly reduced prices. 2.16 Fish wholesale markets in the Manila area are located at Navotas, Malabon and Divisoria. Most fishing vessels discharge fish at Navotas. Sort- ing takes place on board and sales are by tubs. Auctioning takes place at all three markets by a method of secret oral bidding, the buyers whispering their bids to the broker who, on the basis of the prices offered and his assessment of the collectability, decides which bidder should be the buyer. This system of "whisper bid" appears to be functioning well in the Philippine context where the collectability is perhaps a more important factor than the bid price. A small number of brokers, probably 6 to 8, control the marketing at Navotas. The brokers charge a 3 to 6% commission depending on the services performed such as loading and unloading, provision of containers, supply of ice (especially for milkfish), and advances for working capital. The Malabon market handles most of the milkfish and milkfish fry arriving in Manila, but the Navotas market is rapidly increasing its milkfish trade. There are some minor wholesale markets in the larger cities in the provinces with access to the sea, but these are very small. Retailing in the Manila area takes place through some 100 central markets with special fish sections. In addition, there are a large number of door-to-door vendors. Retail of processed fish takes place in the grocery sections. There is a substantial demand for processed fish in the inland areas, and it is estimated that at least about 25% of the total catch is diverted to salting, drying, smoking and making of fish paste and fish sauce. Low value fish like anchovies, slipmouth and round scad are the usual raw materials for this processing. Freezing of tuna and shrimp for exports is increasing, and a few small fish canning plants are being established. Extension, Education and Research 2.17 Inland fisheries research and extension services are provided pri- marily by the Bureau of Fisheries and Aquatic Resources (BFAR). The College of Fisheries, University of the Philippines (UP), also conducts research. BFAR has a large staff and its facilities are reasonably well developed, and the quality and effectiveness of its service appear to be improving. The establishment of a marine Fisheries Training Center with UNDP assist- ance is presently under discussion. This center would provide on-the-job training for captains and fishermen in modern equipment and fishing gear. Further training is being provided by UP and numerous fisheries schools. BFAR operates four training vessels which are used to demonstrate improved  -6- fishing techniques, and to undertake experimental fishing surveys and ex- plorations. The recent addition of two more research vessels has provided the means to conduct test fishing programs to determine the marine resource base more accurately. Fisheries Credit 2.18 The most important institutional sources for medium and long-term credit for the fisheries sector are, in order of importance, DBP, commercial banks, rural banks, savings and loan associations and private development banks. DBP has been by far the most important source and is expected to play the leading role in financing the bulk of fisheries investments in the coming decade. Fisheries Administration 2.19 In November 1972, the Government issued a Presidential Decree No. 43 to provide policy guidance and to coordinate and delineate the various activi- ties of the participating agencies of the fishing industry. This was followed by another Presidential Decree (No. 704) in 1975 which further clarified fisheries administration and the laws regulating the fishing industry. The overall responsibility for policy coordination is vested in BFAR as a Direc- torate under the Department of Natural Resources. As a result, BFAR functions include coordination of training, research and extension as well as administra- tion and regulation. The only major function outside BFAR relates to extension of credit, although the decree envisages the establishment of a development fund to provide finance for special programs, which are yet to be defined in detail. In 1973, BFAR's staff totalled over 1,600. Of these, about 25% were employed on inland fisheries extension and 20% on the improvement of the marine fisheries sector. Development Policies 2.20 The Government attaches a high priority to increasing fish produc- tion. The program envisaged for the sector calls for (i) better knowledge of the resource base, (ii) improved extension and training services, (iii) provision of better infrastructure (ice plants and other shore facilities), and (iv) strengthening of financial institutions and credit resources. In addition, the Government seeks to reduce the fish deficit as rapidly as possible (para 6.01), and to promote the effects of income redistribution the commercial fisheries sub-projects facilitate in favor of the Visayan and other southern provinces. III. THE FIRST FISHERIES PROJECT 3.01 The Loan Agreement for the ongoing first Fisheries Credit Project (891-PH) was signed on May 21, 1973, and became effective September 25, 1973 (inland sector) and December 5, 1973 (marine sector). It provided for  -7- an $11.6 million loan to the Government of the Philippines to be on-lent to the Development Bank of the Philippines to carry out a program for development of marine and inland fisheries. 3.02 The project consisted of three major components; (i) financing of viable marine fisheries sub-projects, (ii) financing of inland fishpond development and rehabilitation mainly for milkfish-farming, and (iii) tech- nical assistance required to support the lending operation and to build up the technical capability of DBP for long-term fisheries development work. 3.03 The marine fisheries component envisaged financing of (a) construc- tion of 60 fully equipped fishing vessels of the 70 to 130 ton class, (b) importation of 10 second-hand fish carrier boats, (c) construction of 3 ice plants, and (d) 2 slipways. 3.04 The inland fisheries component was to provide credit to indi- viduals for rehabilitation of 4,500 ha of flood-damaged fishponds to restore full production and for improvement of existing ponds and construction of new ones with an aggregate area of 7,500 hectares. 3.05 The technical assistant component included provision for (a) a marine specialist and a naval architect to assist the Assistant Manager (Project Administrator), (b) a study of fish marketing and distribution to be carried out by consultants to aid future fisheries investment plans, (c) a feasibility study for a smallholder (milkfish) fishpond estate scheme, (d) an aquaculture extension specialist to assist the Government to orga- nize and execute an inland fisheries technical training program, and (e) a test fishing program to obtain marine fisheries resource data. Project Implementation 3.06 Marine Fisheries. There was a considerable delay in implementing this component. It took longer than expected to staff the Fisheries Group (FG) of DBP and prepare it to implement the rather complex project activities, such as selecting consultants for the two studies, evolving working procedures with the Bureau of Fisheries and with consultants, and developing suitable fishing vessel designs. As FG prepared itself for project implementation, the oil crisis came and seriously impaired the business outlook for marine fisheries. There was a sharp increase in the cost of vessels (from the appraisal estimate of about $60,000 for 70 gross ton vessel to an actual cost of about $200,000), and also in the operating cost for the oil intensive trawler operations. The designs of the fishing vessels had to be modified to reflect higher oil prices, so that the vessels had to have more flexible capabilities and be less dependent on oil-intensive techniques. Steel vessels became so costly that they were no longer financially and econo- mically viable (cost of steel vessels rose considerably more than these for comparable wooden vessels). Moreover, the sharply increased fuel cost associated with steel vessels, which are more fuel-intensive than wooden vessels, are expected to have operating costs greater than the net sales. As of February 1976, 19 wooden vessels had been approved, and the project is expected to finance about 25 wooden vessels, compared with the original target of 60 vessels (15 steel vessels and 45 wooden vessels). As of  -8- February 1976, all of the three ice plants originally projected had been approved. Because of the greatly increased investment cost, however, the rate of commitment has been higher than the number of sub-projects might suggest. As of February 1976, $2.9 million out of $5.9 million of the Bank loan allocated for the marine sector was committed. As most of the sub- projects are still in the gestation stage, it is still premature to deter- mine their productivity and financial and economic rates of return. It appears, however, that most of the sub-projects would be financially and economically viable. 3.07 Inland Fisheries. From the outset, the lending for the inland sec- tor maintained a fairly rapid pace. As of February 1976, 383 sub-projects covering a total of about 9,300 ha for total subloans of about P 46.5 million ($6.2 million) had been approved. The average fishpond financed was about 24 ha at an average cost of about P 5,000/ha. About 37% of the loans were in Luzon, 42% in the Visayas, 14% in Mindanao and 7% in other provinces. DBP experience shows that good fishpond management coupled with appropriate inputs can raise milkfish production to the levels of 2,500 kg/ha/yr achieved by successful commercial fish farmers in Taiwan. Milkfish production of well managed DBP fish-farms appears to be between about 1,600 kg and 2,100 kg/ha/yr, depending on the location of the ponds, the type of management system prac- ticed and the inputs used. FG has done well in organizing itself in the inland sector and has developed a capable technical and financial staff who have been active in investment colunciling, in loan preparation, and appraisal. There appears to be, however, a need to strengthen the loan supervision staff in order to derive better measures of the impact of the lending program on overall production and better measures of productivity. 3.08 Feasibility Studies. Consultants were retained by the Bureau of Fisheries and Aquatic Resources (BFAR) to carry out two studies, (i) Small- holder Fishpond Project Study, and (ii) Fish Marketing and Distribution Study. The Smallholder Fishpond Project Study was conducted jointly by Sino- tech Engineering Consultants, Inc., Taipei, Taiwan, and International Engi- neering Co. Inc., San Francisco, California, USA. The study was technically well done, but failed to demonstrate that the smallholder fishpond estate 1/ concept was technically, financially or economically sound. The Fish Mar- keting and Distribution Study was carried out by Norconsult, A.S., Norway. The study presents a large body of useful fisheries data and analyses. 3.09 Other Related Activities. The first project included components for (i) a test fishing program, and (ii) an inland fisheries training pro- gram to be carried out by the Bureau of Fisheries. For the test fishing 1/ The "estate concept" here is for a scheme contemplated by the Philippine government for development of large tracts of mangrove swampland, 1,500 to 3,000 ha, into fishpond estates to be sub-divided into hundreds of 3 to 5 ha plots to be farmed by local residents, mostly without previous fish farming experience.  program, three fishing vessels of BFAR have conducted purse seining, trawl- ing and longline cruises, primarily in trial fishing in the southern part of the Philippines. These activities have made a significant contribution towards a broader investigation of fisheries resources in the area. For the inland fisheries training program, the Pond Fishery Extension and Train- ing Group, under the BFAR direction, conducted training courses and field extension service demonstrations in five principal field extension units. This program, with courses in three subject areas, (i) general, (ii) exten- sion teaching methods, and (iii) technical, has developed into one of the best training programs of the kind in the region and has produced a number of highly qualified extension personnel and teaching aides. 3.10 Sub-loan disbursement. The rate of sub-loan processing in both the inland and marine sub-sectors was increasing rapidly at the time of the last supervision (February 1976). As of April 30, 1976, $3.5 million, out of a commitment of $6.4 million of the Bank loan had been disbursed, and it is expected that the Bank loan of $11.6 million would be fully committed by December 1976 (full commitment might take place by as early as October 1976). 3.11 DBP Fisheries Group. Although increased supervision staff is needed for proper monitoring and supervision of the rapidly expanding inland fisheries portfolio, and the technical staff in the marine sector needs to be strenghtened, the performance of FG has been good. While DBP lending in fisheries has not been a large part of the total lending activity in the fisheries sector in the Philippines in the past, the changes in the structure of the fishing industry which began about 1970, requiring a rapid expansion of the catches of commercial fleet, would call for DBP to play a far more import- ant role in financing fisheries investments. DBP is in a unique position to develop its institutional and technical capabilities to a greater degree by building on the experience gained in executing the first Fisheries Credit Project. IV. THE PROJECT General Description 4.01 The project would be a continuation of the first Fisheries Credit Project. The objective would be to assist the Philippine Government in its effort to (i) increase fish production for domestic consumption, and (ii) build up an institutional base for financing investments in marine and inland fisheries. The project would continue financing viable medium-sized com- mercial marine fisheries operations and the construction of new inland fish- ponds as well as improvements of existing ones. A greater emphasis would now be placed on upgrading of DBP's performance and standards for fisheries investment promotion, project appraisal and supervision. In the course of the project implementation, the Fisheries Group (FG) of DBP would be further strengthened and would prepare itself to play an important role in facilitating the greatly increased fisheries investments anticipated for the coming decade. At full development, the fishponds financed under the project would produce some 15,000 tons of additional milkfish per year and the 17 project fishing vessels would contribute an additional annual catch of about 10,000 tons.  - 10 - 4.02 Specifically, over a three-year investment period, the project would provide credit to individuals and private companies for the following: Inland Sector (i) Construction of 114 new fishponds for milkfish farming, (ii) Expansion and rehabilitation of 266 existing milkfish ponds, Marine Sector (iii) Construction of 14 90-gross ton fishing vessels, (iv) Construction of 3 45-gross ton fish vessels, (v) Conversion of 4 second-hand vessels into fish carrier boats, (vi) Construction of 3 ice plants with cold storage, and (vii) Construction of 1 slipway for repair of fishing vessels. Detailed Features 4.03 Construction of New Fishponds. The project would continue to fi- nance, among others, the construction of new fishponds for milkfish farming. Under the project, 114 new fishponds with a total of 2,700 hectares would be financed. The size of the fishpond would vary greatly, depending upon the nature of the land available and the operator's capacity for efficient manage- ment. There are considerable economies of scale in investment costs for fishponds up to about 30 hectares, and the standard commercial model adopted by DBP, on the basis of the typical size of the fishpond sub-loans processed (para 3.07 and Annex 4, para 8), involves a 24-hectare fishpond, with an average investment cost of about P 11,000 ($1,470) per hectare. Annex 2, paragraph 3 describes the essentials of fishpond construction. 4.04 Expansion and Rehabilitation of Existing Fishponds. The project would continue to finance expansion and rehabilitation of existing fishponds. There are generally two types of investment under this category; (i) re- habilitation of fishponds damaged by typhoons and flood and (ii) straight expansion of existing fishponds. The project would finance expansion and rehabilitation of 266 existing fishponds and facilitate full production from about 6,400 hectares. These investments usually have greater financial and economic viabilities than those for new fishponds. Unlike those for new fishponds, the operators of existing ponds usually have demonstrated pond management experience and skill. The investnient. cost per hectare is only about P 6,500 ($860), much lower than that for new fishponds ($1,470). More importantly, existing fishponds by and large have better natural conditions, i.e., soil, water quality, proximity to markets, accessibility, etc.  - 11 - 4.05 Fishing Vessels. The project would finance 17 fishing vessels, of which 14 would be of the 90-gross ton class and 3 would be of the 45-gross ton class. All of these vessels would have wooden hulls of a relatively simple design (See schematic drawings with outline specifications), be powered by diesel engines, equipped with trawl, and purse seine fishing gear, short- wave radios, fish finders, and mechanical net hauling gear. The larger ves- sel would have a crew of 25, and the smaller ones a crew of 17. DBP's naval architect would evaluate the final design and specifications in consultation with sub-borrowers. Because of the generally depressed state of the fishing industry, the number of vessels projected for financing under the project is only 17, very small relative to the existing fleet of about 1,000 vessels of comparable tonnages. The most important consideration has been to maintain continuity of DBP's lending operation in the marine sector, especially in view of the eventuality that recovery from the present economic recession would call for greatly expanded investments in the sector. 4.06 Conversion of Second-hand Vessels into Fish Carrier Boats. The project would finance acquisition of four second-hand vessels for conver- sion and refitting into fish carrier boats. These boats would deliver ice, fuel and other supplies to the vessels fishing on distant grounds and trans- port fish from there to the markets. As a result of the sharply increased oil prices, these specialized services have become one of the most effective means of reducing the cost of fish landed by commercial fishing vessels. There are dozens of second-hand vessel hulls on the market that are suitable for conversion into fish carrier boats, and the carrier boats refitted out of these inexpensive hulls appear to be at present the only way to provide the specialized fish carrier services on a financially viable basis. 4.07 Ice Plants. The project would finance three ice plants, each with a capacity to produce 20 tons of ice and to hold 40 tons of fish in cold storage. The plants would be located around the Visayan Sea, which would serve as an advance base for the vessels fishing primarily for the Manila market. Ice usage for marine fisheries has been rapidly increasing, and the supply seems to be already very short. These plants would provide the ice required for the vessels operating on the distant grounds and pro- vide cold storage facilities for fish being held for better prices or those to be collected by carrier boats for delivery to distant markets. Local consultants engaged by the sub-borrowers would prepare the detailed design, layout and engineering, if the estimated cost is $100,000 or more. 4.08 Slipway. The project would finance a slipway at a suitable location around the Visayan Sea to be used for repair and maintenance of fishing and carrier vessels. At present, there is no suitable slipway and vessels in need of repair are beached at high tide and repaired at low tide. The slipway would be capable of servicing practically all categories of fishing vessels. In the Philippines, there are a number of qualified consulting engineers available to prepare design and provide engineering services for the purpose. The sub-borrower would be required to hire such consultants for the prepara- tion and execution of the sub-project, if the estimated cost is $100,000 or more.  - 12 - Project Cost 4.09 Total project cost is estimated at $23.5 million (P 176.0 million), of which foreign exchange costs would be $6.3 million, or 27% of the total (Annex 5 gives detailed project cost estimates). The estimated costs for the different sub-project components are given in Annex 6 and summarized below: SUMMARY OF PROJECT COSTS Number of Units Local Foreign Total Local Foreign Total (P Million) ($ Million) I. Inland Fisheries New Fishponds 114 30.2 2.8 33.0 4.0 .4 4.4 Rehabilitation of Fishponds 266 40.8 7.2 48.0 5.4 1.0 6.4 Sub-total 380 71.0 10.0 81.0 9.5 1.3 10.8 II. Marine Fisheries 90-ton Boats 14 15.4 16.6 32.0 2.1 2.2 4.3 45-ton Boats 3 2.6 2.3 4.9 .3 .3 .7 Fish Carriers 4 1.8 2.0 3.8 .2 .3 .5 Ice Plants 3 2.6 5.4 8.0 .3 .7 1.1 Slipway 1 1.7 .6 2.3 .2 .1 .3 Sub-total 25 24.1 26.9 51.0 3.2 3.6 6.8 Base Cost Estimate 95.1 36.9 132.0 12.7 4.9 17.6 Expected Price Increases 1/ 33.7 10.3 44.0 4.5 1.4 5.9 Total Expected Cost of Project 128.8 47.2 176.0 17.2 6.3 23.5 1/ For annual rates of price increase applied, see Annex 6, Tables 1-7. 4.10 The composition of total project cost in terms of goods and services of domestic origin and of the foreign exchange component, contingencies and incremental working capital is given in detail in knnex 6, Tables 1 - 7 and summarized below:  - 13 - Domestic Foreign % of the Cost Exchange Total Total --