Philippines - Second Rural Development - Land Settlement Project

Document of T The World BankRTU I FILE COPY RETURNT | FOR OFFICIAL USE ONLY |REPORTS DESK Report No. P-2061-PH REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO rHE REPUBLIC OF THE PHILIPPINES FOR A SECOND RURAL DEVELOPMENT (LAND SETTLEMENT) PROJECT April 28, 1977 This document has a restrcted 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 = Pesos 7.50 US$133.00 = Pesos 1,000 US$133,000 = Pesos 1,000,000 ABBREVIATIONS DAR - Department of Agrarian Reform CPHU - Central.Project Management Unit in DAR DA - Department of Agriculture DH - Department of Health DLGCD - Department of Local Government and Community Development DNR - Department of Natural Resources DPH - Department of Public Highways NIA - National Irrigation Administration NGA - National Grains Authority NEDA - National Economic and Development Authority CB - Central Bank DRBSLA - Department of Rural Banks and Savings and Loan Associations in CB BC - Budget Commission ASC - Agricultural Service Center THE REPUBLIC OF THE PHILIPPINES FISCAL YEAR 1975: July 1, 1974 to June 30, 1975. 1976: July 1, 1975 to December 31, 1976. From 1977: January 1 to December 31, 1977.  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 SECOND RURAL DEVELOPMENT (LAND SETTLEMENT) PROJECT 1. I submit the following report and recommendation on a proposed loan to the Republic of the Philippines for the equivalent of $15.0 million to help finance a Second Rural Development (Land Settlement) Project. The loan would be made at an interest rate of 8.2% and for a term of 20 years including four and one-half years of grace. The Government would relend $900,000 of the proceeds of the loan to the Central Bank under a subsidiary loan agreement on the same terms as the Bank loan for term credit. PART I - THE ECONOMY /1 2. An economic mission visited the Philippines in April/May 1975 and its report, "The Philippines: Priorities and Prospects for Development, Basic Economic 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 I contains country economic data. 3. During the 1960s, the economy grew in real terms at an annual rate of about 5-6%. 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 invest- ment in necessary infrastructure and social services. A relatively weak export performance combined with a failure to reduce the import dependence of domestic industry resulted in a steady deterioration in the balance of payments position. 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% 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%. /1 This is the same discussion of the economy as that in the President's Report for the Fourth Rural Credit Project (P-2021-PH) of March 24, 1977. This document has a rtricted distribution and may be usd by recipients only in the perfomance of their omcial duties. Its contents may not otherwise be disclced without World Snk authoriaton.  - 2 - 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. 6. Like most countries, the Philippines was profoundly affected by the events in the world economy that began with the marked increase 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, 1975, and 1976, nevertheless, grew in real terms at an annual rate of about 6%. 7. Agricultural production has grown at an average rate of 3.2% per year during the 1970s, a period which has been characterized by unusually adverse weather conditions. Rice production increased by 25% in 1973/74, but because of damage by typhoons, grew by only 1% 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 due to favorable weather conditions and during this period the Philippines was vir- tually self-sufficient 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 credit. 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 September 30, 1976, the Government had issued Certificates of Land Transfer to 224,000 of the 424,000 tenants on holdings of over 7 hectares; thus, title to 390,000 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 com- 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% of net domestic product, one third of total fixed investment and 15% of total employment. Industrial production, which grew by 12% 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% in 1974 and 5% in 1975. Stepped-up public sector spending for infrastructure development and  - 3 - other priority projects 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. 10. The Government has made significant progress in increasing public investment. The ratio of public investment to GNP is currently over 4%, having risen from 1.8% 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% 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% in the early 1970s to about 12% during the period FY74-76. 11. Significant financial reforms have also been introduced. At the beginning of 1976, the Central Bank issued circulars designed to help ration- alize 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% to 19% 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% in 1974 to 8% in 1975 and 6% in 1976. 13. On the external side, Philippine's balance of payments benefited 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% 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 /1 Fiscal year July 1 to June 30.  - 4 - 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 about $900 million in 1975 and about $1,000 million in 1976 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 some short-term borrowing by the Central Bank. External reserves were about $1.2 billion at the end of 1976, 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 remain within reasonable limits, as the ratio of debt service payments to exports and nonfactor services would average about 16-17% during the rest of this decade. At present, the Bank/IDA share in total debt outstanding is about 17% and its share in debt-service is about 4%. These shares are expected to increase somewhat in the years ahead. 14. Substantial foreign assistance will be essential to help finance the large investment expenditures which will be necessary for the country's develop- ment. In order to ensure that disbursement of external assistance reaches levels commensurate with the level of development expenditures 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 15 and 16, 1976, agreed that it would be reasonable for the Philippine Government 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 are estimated to have reached $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 terms at a rate of about 7% 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% 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 investment in infrastructure to support the growth of the productive sectors. In support  of these objectives, the Government plans to continue its efforts to increase 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. The Government's development program will continue to require foreign resources in addition to the capital which would become available for the financing of the foreign exchange component of development projects. Some financing of local costs is justified, especially for projects of economic and social importance which need only limited amounts of foreign exchange. PART II - BANK GROUP OPERATIONS 17. By May 1, 1977, the Philippines had received 43 Bank loans /1 (of which two were on Third Window terms) and three IDA credits for a total of $1,113.7 million, net of cancellations. About 40% of Bank lending ($401 million) has been for infrastructure projects in power, transportation, and water supply and another third ($355 million) has been for agriculture. Of the remainder, about $250 million has been for industry and about $108 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 M4arch 31, 1977, 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 next few years would be for agricul- ture 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% 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 employment potential. The rapid growth /1 A loan of $50 million for the National Irrigation Systems Improvement Proj- ect, and a loan of $25 million for the Provincial Cities Water Supply Proj- ect are scheduled to be considered by the Executive Directors on May 3, 1977.  - 6 - 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 seventh loan to be presented to the Executive Directors in FY77. A loan for a power project may be ready for presentation within the next six weeks. 20. As of March 31, 1977, IFC had made commitments in the Philippines totalling $79 million for investment in 14 projects 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, $27.4 million had been sold, cancelled and repaid, leaving a net portfolio of $51.6 million, including $0.6 million undisbursed. A Regional Mission for East Asia was established by IFC in Manila on April 1, 1977. PART III - THE RURAL SECTOR AND LAND SETTLEMENT The Rural Sector in the Philippines 21. Agriculture is the predominant sector in the Philippine economy, accounting for about one-third of gross national product, one-half of total employment, and nearly three-quarters of commodity export earnings. Over 70% of the 9 million hectares of land under cultivation is currently used for the production of cereals, of which rice and corn are the most important. The remaining land is taken up by the major export crops: sugar, coconut, abaca, pineapple, and tobacco. 22. Although there has been a substantial change in the terms of trade in favor of agriculture in recent years, the problems of poverty and income distribution continue to be particularly acute in rural areas; of the 15 million people in the bottom 40% of the income scale, 12 million live in rural areas. The Government has initiated a number of programs designed to assist the rural poor. These include the Masagana 99 and Masaganang Maisan credit programs to support rice and corn production respectively, increased production of commercial crops for export, expanded irrigation, development of forest resources, and livestock and fisheries production programs to reduce imports and raise local nutrition levels. The success of many agricultural programs will depend on increased use of high yielding seed varieties, ferti- lizers and agro-chemicals, and the provision of adequate credit and other supporting services. An effective program to help overcome the agricultural  - 7 - problems in areas where mixed and upland farming are practiced would also contribute significantly to increasing and diversifying agricultural produc- tion and improving the living standards of low income people. The performance of the agricultural sector will be crucial in determining whether the drive towards rapid and more equitable income expansion succeeds. Land Resources and the Settlement Program 23. The rapid growth of the population during the past 25 years, com- bined with the gradual decline in the amount of new land available for cultivation, has created serious problems for the Philippines. Income dis- tribution among the rural population has been deteriorating, and the average farm size and value-added per laborer have been declining. By the end of the 1950s, most of the readily accessible land in major river basins and lowlands had been brought under cultivation, and as a result the overall rate of land expansion has slowed from 3% per annum in the 1950s to less than 1% per annum in the 1970s. The pressure on the agricultural land base of the Philippines is likely to increase for at least another 20 years and it is estimated that the population dependent on farming for their main source of income will increase from about 19.5 million in 1975 to about 22 million in 1995. This additional population will need about 2 million ha of new land. 24. Because the Philippines does not have a complete inventory of lands and mapping is inadequate, it is not possible to estimate with great accuracy the potential for future land development and settlement./l Most of the sites suitable for new settlement development on public lands are on the approximately 9.5 million ha of land that is yet to be classified, which is nearly one-third of the entire land area of the Philippines. Land and forestry resources in some of these areas have already been severely depleted as a result of logging operations and spontaneous settlement. Development of these lands for permanent settlement will require careful planning and land management, as well as improved and locally adapted agricultural technologies and improved infrastructure. 25. Historically, land was settled by unplanned spontaneous movements of landless migrants. Although there has been a government program of organized settlement and development of public lands since the 1930s, most of the present settlements were originally opened up in the mid-1950s. The program has been administered since 1971 by the Department of Agrarian Reform (DAR) and it presently has 34 settlements under its jurisdiction extending over about 700,000 ha of land with a population of about 400,000 people. /L The Agricultural Sector Survey of the Philippines (39a-PH), dated Mlay 2, 1973, concluded that up to 2.5 million ha could still be available for cultivation, including about 1 million ha of "imperata" grasslands that are difficult to rehabilitate. The International Labor Office (ILO) report, "Sharing in Development," 1974 indicates higher figures. Most of the remaining large tract of cultivable land appear to be in the Cagayan Valley in Northern Luzon, and in the Agusan Valley, and other parts of Mindanao Island.  8 - About two-thirds of this population are registered settlers, the remainder being either descendants of original spontaneous settlers or occupants of unclassified land. About 75% of 'he total land area is in settlements of 25,000 ha or more; the smallest is 1,000 ha and the largest 100,000 ha. 26. Progress has been slow because the land settlement program has suffered from inadequate management and resources. Few of the older settlements have been fully developed and work on newer areas has been delayed until the older areas have been completed. The program has lacked an overall planning framework, which would provide for the systematic utilization of new land and for effective development planning in each individual settlement. The work of the settlement field teams is largely confined to ongoing routine management and operations, while more substantial development work is seriously hampered by the lack of adequate budgets, poorly trained and inadequate numbers of personnel, and insufficient equipment and facilities. As a result adequate services and infrastructure have not been provided, the settlement areas operate well below their full productive potential and the conditions of life and income levels of the settlers are below acceptable minima. The Government is fully aware of these problems and has requested Bank assistance to help improve the settlement program. The Settlement Areas 27. Three existing settlement areas have been selected for development under the proposed project to demonstrate on a pilot basis the improvements which can be brought about in the design and implemenation of DAR's settlement program. These settlements were selected because they are representative in terms of the terrain, current subsistence farming practices and agronomic potential of many settlement areas in the Philippines. The approach to the agricultural problems of these settlement areas has the potential for wide application in large neighboring areas with similar problems. In two of the settlements, Bukidnon and Capiz, the objective of the project would be to lay the basis for full integration with the surrounding areas, thus closing the settlement phase of these two areas within the life of the project. In the third settlement area, Agusan del Sur, a considerably longer development period is required to achieve full integration, but techniques and solutions to the difficult problems to be faced in developing Agusan del Sur would have particularly wide application throughout the large area of the Agusan river basin. 28. The settlement in the province of Bukidnon in the northwestern quadrant of Mindanao, which was begun in 1955, is the largest of the three selected with over 7,000 families cultivating about 19,000 ha, or 55%, of the 36,000 ha settlement area. The vast majority of farms are between 4.5 and 9.5 ha in size, but many of these have been formally or informally subdivided. Corn is the principal crop grown; crop yields are low with substantial depletion of natural fertility occuring because continuous cropping is prac- tised without the use of fertilizer. Average annual farm family income in the area is about $375 equivalent, while non-farm families, living mainly in the two sizeable trading centers, have incomes about 50-100% greater than  - 9 - this. The road network in the settlement area remains very poor, the avail- ability of adequate inputs and extension is very limited and institutional credit only became available when a rural bank was established in the settle- ment area in 1976. 29. The settlement in the province of Capiz on the island of Panay in the Visayas was spontaneously settled in the 1930s and made a government settlement area in 1965; since then it has accommodated few new settlers. It covers 25,000 ha, of which about 10,000 ha are cultivated by 4,600 families. Average farm sizes vary from 5 ha to 24 ha, but as in Bukidnon many of the lots have been formally or informally subdivided, with second or third generation occupants now on the land. There are also 800 tenant farmers on 1,300 ha of land who have been identified as potential land reform beneficiaries. Yields and standards of crop husbandry for the principal crops, sugar cane and rice, are substantially below national norms. As in Bukidnon, roads are extremely poor and the settlement area does not have any financial institutions to serve the resident population. Incomes of farm families residing in the settlement area are about $375 equivalent, the same level as in Bukidnon. 30. The settlement in Agusan del Sur in the northeastern quadrant of Mindanao is the smallest and least developed of the three settlements selected. It was begun in 1968 with a total land area of about 16,500 ha, of which an estimated 4,000 ha are now cultivated by approximately 1,700 families. The average farm size of registered settlers is 4.6 ha. Farms of unregistered settlers are smaller, and some farm subdivided lots of registered settlers. The area is characteristically broken terrain, but there are some extensive lowland areas along the rivers on parts of which rice is grown. The lower slopes are covered mainly by secondary forest but some areas are planted with corn, abaca, upland rice, root and tree crops. Rainfall in the area is heavy, the soils drain poorly, and slopes erode easily once they are cleared. Consequently crop yields are very low and efforts to improve yields are further hampered by very poor communications and distance from main markets. Over 80% of the population live in the most primitive of housing without water supply or sanitation systems. Malaria and schistosomiasis are both endemic to the area. As a result, average gross family incomes are the lowest of the three settlement areas at about $220 a year. Implementation of First Rural Development Project 31. The proposed project would be the second Bank-financed rural develop- ment project in the Philippines. In 1975 the Bank'made a loan (1102-PH) of $25 million to support rural development on the island of Mindoro. The pro- ject is improving roads, irrigation systems, a port, and selected agricultural programs on the island, as well as carrying out a watershed protection pro- gram, schistosomiasis control and assistance to the Mangyan tribes. The road and irrigation works are progressing well, and work has also begun on Calapan port. Implementation of the other parts of the project had been delayed by lack of local funds, but adequate budgets for FY77 have already been approved and work on all parts of the project is now expected to proceed rapidly. The lessons learned so far from experience under this project, especially concerning budgetary arrangements, were fully considered while preparing the proposed project, and taken into account in its design.  - 10 - PART IV - THE PROJECT Background 32. The Government is now giving renewed emphasis to programs of organized land development and settlement in order to deal with the growing scarcity of new agricultural land, and the problems caused by spontaneous settlement of the remaining underdeveloped public lands. The proposed project is designed to strengthen both DAR's coordinating role and its specialist services in planning, land allocation and settlement design as well as to directly involve line agencies in developing agricultural services and infrastructure. To provide a practical and replicable frame of reference for a revitalized settlement program, three existing settlement areas in Agusan del Sur and Bukidnon in Mindanao, and Capiz in the Visayas would receive intensive assistance under the proposed project to upgrade their physical infrastructure and the existing level of agricultural and other services. The proposed project would be the first Bank-financed project in the Philippines to assist the Government's land settlement program and the first to focus on increasing agricultural productivity in rainfed areas. 33. The project was prepared by the Government with the assistance of the Bank. It was appraised in July/August 1976 and negotiations were held in April 1977. The leader of the Government negotiating team was His Excellency, Eduardo Z. Romualdez, the Philippines' ambassador to the United States. The Appraisal Report (No. 1441a-PH) on the project is being circulated separately to the Executive Directors. Annex III of this report contains a loan and project summary and Annex IV contains a supplementary project data sheet. Project Description 34. The project would include the following detailed components: A. Program Support (i) Preparation by DAR with the assistance of consultants of a 10-year program for settlement development, including recom- mendations on revised implementation procedures, agency responsibilities, and overall policy review standards and responsibilities. (ii) Preparation by DAR, with the assistance of the same consultants as above plus some additional consultants with special expertise, of feasibility studies and detailed settlement development programs for 200,000 ha of existing and new settlement areas. This study would be carried out in parallel with the ten year program, but would also draw on the results of that study as they became available. (iii) Provision of technical assistance and equipment for a Central Project Management Unit (CPMU) in the DAR which would be respon- sible for the programming, coordination and supervision of the project.  - 11 - (iv) Provision of technical assistance to upgrade the training programs and capability of DAR, with a principal focus on training staff in the three settlement areas selected for improvement; and provision of a small amount of overseas training. (v) Provision of technical assistance to assist with the monitoring and evaluation of progress in the three settlement areas selected for improvement. B. Settlement Development /1 (i) Roads. Construction rehabilitation or upgrading as appropriate of 140 km of national and provincial roads providing access into the three settlement areas, 290 km of village feeder roads, and in the Capiz settlement area construction of 100 km of low-grade tracks to improve the transport of sugarcane. (ii) Irrigation and Drainage. Construction, upgrading or rehabilitation as appropriate of 3,000 ha of communal irrigation systems and 2,100 ha of small systems in the three settlement areas. (iii) Erosion Control. Earthworks to inhibit erosion on 8,000 ha of land in the Bukidnon settlement area, and simple erosion control measures on about 2,000 ha in the three settlement areas. (iv) Forestry. Provision of equipment and technical services to enable forest development in Capiz and Bukidnon settlement areas for fuel wood and other purposes, and to encourage the growing of fruit and all purpose trees in all three settlement areas. (v) Health Units and Water Supply. Construction of two rural health units and 15 village (barrio) health stations, provision of equipment and staffing for the above and for one additional rural health unit, already constructed; strengthening of the malaria control and schistosomiasis control programs in the Agusan settlement area; and construction of village water supply systems in villages in the three settlement areas. (vi) Buildings and Facilities. Provision of required additional office space, office equipment, staff housing and transport facilities. (vii) Agricultural Services Center. Construction of an Agricultural Services Center in each of the three settlement areas and provision of equipment and staff for staff and farmer training, adaptive research and agricultural extension to be carried out in the three settlement areas. /1 No provision is made for the construction of schools because facilities are reasonably adequate in the three settlement areas.  - 12 - (viii) Marketing, Cooperative Development and Credit. Provision of seasonal and term credit in the three settlement areas, and establishment of a cooperative rural bank in the Capiz settle- ment. The development of cooperatives and the provision of adequate arrangements for marketing outlets in the three settle- ment areas would also be included in the project. Project Execution and Management 35. Up to the present, the Department of Agrarian Reform has been respon- sible for the planning and execution of all phases and activities of the settlement program. Under the proposed project, DAR would be directly responsible for settlement planning, land allocation, settler registration activities, the construction of all buildings and facilities, erosion control works and forestry, the minor irrigation systems and village water supplies, but for all other activities, the appropriate line agency would be directly responsible for execution under the coordinating authority of DAR. Thus the Department of Public Highways would be responsible for the roads component; the National Irrigation Administration for the communal irrigation and water control; the Department of Health for the rural health units; the Department of Agriculture for the operation of the Agricultural Services Centers (ASC) and related activities; the Department of Local Government and Community Development for cooperative development; and the Central Bank's Department of Rural Banks and Saving and Loan Associations for the credit component. The National Economic and Development Authority would assist DAR with policy planning for settlement programs on public lands. In order to attract qualified government agency staff to work in the three very isolated settlement areas, the Government and DAR have developed proposals for "hardship allowances" which are satisfctory to the Bank. The budget for these hardship allowances would be administered by DAR. DAR's detailed proposals for training of its senior staff were discussed at negotiations and are satisfactory to the Bank. 36. A senior representative from all these agencies, together with a senior representative of the Budget Commission, would sit on an Inter-Agency Project Coordinating Committee (IPCC), whose chairman would be an Assistant Secretary of the Department of Agrarian Reform. He would be designated Operations Coordinator for the project. The IPCC, as the coordinating body, would review the annual work plan and budgetary appropriations required to implement the project, would agree on the detailed responsibilities of the executing agencies and resolve inter-agency conflicts and disputes. The annual work plans and budgets for the project would be reviewed by the Bank before final Government approval (Section 3.06 [a] of the Loan Agreement). The Operations Coordinator would report directly to the Cabinet Coordinating Committee for Rural Development. The ratification of a Presidential Letter of Instruction (LOI) establishing the IPCC and spelling out the various res- ponsiblities of the Government agencies and departments executing the project would be a condition of effectiveness of the proposed loan (Section 6.01 [a] of the Loan Agreement).  - 13 - 37. A Central Project Management Unit (CPMU) headed by a project manager, who has been appointed and is satisfactory to the Bank, would be established within DAR to provide overall project management, to coordinate the detailed work programs of the executing agencies and departments, to coordinate and/or carry out DAR's line and staff functions relating to the project and to monitor and evaluate the progress of the project. The project manager and his staff would be drawn from the existing staff of the DAR, and would be assisted by an internationally recruited advisor, whose appointment would be a condition of effectiveness of the proposed loan (Section 6.01(c) of the Loan Agreement), and by short-term consultants and staff seconded from other government agencies as needed. The Project Manager and senior staff of the CPMU would be appointed in consultation with the Bank (Section 3.02 of the Loan Agreement). The CPMU would also be responsible for preparing a ten year program for settlement development and for the preparation of feasibility studies and detailed programs for 200,000 ha of existing and new settlement areas. DAR would retain consultants by May 31, 1978 to assist with this work; and would complete and make available to the Bank the ten year program for settlement development by December 31, 1980, and the feasibility studies and detailed settlement programs by December 31, 1979 (Section 3.10 of the Loan Agreement). DAR would also retain consultants by November 30, 1977 to assist with the monitoring and evaluation of the project. The qualifications and terms and conditions of all the consultants would be satisfactory to the Bank (Section 3.04 of the Loan Agreement). 38. At the provincial level, an advisory committee, chaired by the Provincial Governor would provide local coordination and advice. At the settlement level, an Area Manager in each of the three settlement areas would be responsible for project management and coordination. Their appointments, to be made in consultation with the Bank, would be a condition of effective- ness of the proposed loan (Sections 3.02 and 6.01(d) of the Loan Agreement). 39. A critically important component of the project would be the pro- vision of improved agricultural services in the three settlement areas. The Department of Agriculture would be responsible for staffing, equipping, and operating an Agricultural Services Center (ASC) in each settlement area to carry out staff and farmer training, adaptive research and a properly planned agricultural extension program. In addition, its Bureau of Soils would pro- vide technical assistance to DAR for erosion control works. Prior to procure- ment of equipment for the erosion control works, DAR would discuss and agree with the Bank the technical specifications of the equipment required and the detailed design of the works to be undertaken (Section 3.08 [b] of the Loan Agreement). Credit would be provided through a rural bank in each settlement area. In Bukidnon and Agusan del Sur, rural banks have already been established, but in Capiz steps are being taken to establish a cooperative rural bank. The Government and the Central Bank would endeavor to ensure that the Capiz rural bank is operational by June 30, 1979 (Section 4.04 of the Loan Agreement). To strengthen the management of the Capiz rural bank, the Department of Local Government would provide special assistance under its Management Training and Assistance Program. The managements of the other two rural banks in Bukidnon and Agusan del Sur are considered satisfactory. The Central Bank would however provide intensive training and supervision of all three rural banks during the first year of their operation under the project, and thereafter its normal training and supervison programs. Each of the three rural banks would have to  - 14 - meet the Central Bank's normal eligibility criteria /1 for access to its special time deposit and rediscounting facilities before it could draw on the proceeds of the Bank loan (Schedule 1(4) of the Loan Agreement). 40. The roads to be constructed in the settlement areas under the project were selected on the basis of preliminary surveys with the objective of providing improved roads to about 85% of the settlement farmers. Because of the nature of the improvements to be made, detailed designs would have to be flexible and situation specific. The irrigation works included in the project are similar in nature since they consist of small scattered systems. The Department of Public Highways and the National Irrigation Administration, for their respective components, would submit detailed plans and designs for specific works to be undertaken to the Bank for approval before construction would begin (Section 3.08 [a] of the draft Loan Agreement). 41. Land allocation poses particularly difficult problems in the three settlement areas. Few settlers have received title to their land, many continue to operate under usufruct systems, farm lots have been de facto subdivided, and in Capiz and Bukidnon illegal tenancy arrangements occur. In these circumstances, settlers find it difficult to obtain institutional credit and are inhibited from investing in permanent assets. Because of the central importance of satisfactory and effective land allocation procedures to the success of the project in the three settlement areas, the Government would implement revised land allocation guidelines including simplification and rationalization of procedures, and the delegation of more administrative authority to settlement land allocation officers by December 31, 1977. In order to obtain local settler participation in the process of land allocation it would also establish Land Committees by December 31, 1977 (Section 3.09 of the Loan Agreement). Project Cost and Financing 42. The estimated total cost of the project is $32.6 million, of which $11.8 million or 36% would be foreign exchange costs. The cost estimates include provision for physical contingency allowances of 15% for buildings and facilities and 20% for other civil works. The cost estimates also include an allowance for increases in domestic and foreign prices amounting to 19% of total project cost. The average man-month cost of foreign consultant services is estimated to be $5,500. The project is scheduled for completion by July 31, 1982. /1 These eligibility criteria include the time for which a rural bank has been in operation, various financial criteria including the arrears posi- tion and the condition of the portfolio, the competence of management and compliance with Central Bank circulars and memoranda. These criteria are set out in the Central Bank's Rules and Regulations governing the Fourth Rural Credit Project (Loan 1399-PH), approved by the Executive Directors on April 5, 1977 (SecM77-16).  - 15 - 43. The proposed Bank loan of $15 million for this project would finance 49% of total project costs, including about $4 million of local costs. The justification for local cost financing in the Philippines is set out in para 16. The loan would be made to the Government at an interest rate of 8.2% for a term of 20 years, including four and one half years of grace. The Government would finance $17.3 million of the balance of the project costs from budgetary resources. The balance of $300,000 included in the project would be provided by subborrowers and rural banks under the rural credit component (see para. 44). DAR would administer the proceeds of the loan (except for $900,000 for the term credit component) as well as the required amount of Government resources in a special project fund. This would be replenished by the Government at monthly intervals to a level equivalent to the estimated requirements for the next two months. The establishment of this special project fund by the Government would be a condition of effectiveness of the proposed loan (Section 6.01 [b] of the Loan Agreement). Funds would then be disbursed from the special project fund according to previously agreed budgets. 44. For the term credit component, the Government would relend $900,000 of the proceeds of the loan to the Central Bank under a subsidiary loan agreement on the same terms as the Bank loan, and with conditions satisfactory to the Bank (Section 3.01 [b] of the Loan Agreement). The Central Bank would re-lend these proceeds together with the equivalent of $700,000 of its own resources to the participating rural bank in each of the settlement areas in the form of special time deposits at an interest rate of 7% per annum and with amortization reflecting the repayment terms of subloans. The Bank loan would finance 50% and the Central Bank would finance 33% of the subproject costs. The rural banks and subborrowers would finance the balance of the subproject cost equally amounting in aggregate to $300,000. As is normal in lending to land reform beneficiaries in the Philippines /1 the rural banks would onlend at 12% per annum with repayment terms ranging from 3 to 10 years depending upon the purpose of the subproject, including an appropriate grace period. The terms and conditions under which credit funds would be disbursed are set out in the Central Bank's Rules and Regulations governing the Fourth Rural Credit Project (Loan 1399-PH), approved by to the Executive Directors on April 5, 1977 (Sec M77-16). Seasonal credit would be financed by the Central Bank under its existing agricultural credit programs. Procurement 45. Equipment and vehicles for force account construction, and operation and maintenance costing more than $20,000 would be bulked and procured through international competitive bidding in accordance with Bank Group Guidelines. /I Registered settlers under DAR's land settlement program are deemed to be land reform beneficiaries.  - 16 - For purposes of bid comparison, a preference limited to 15% of the c.i.f. price of imported goods, or the custom duty, whichever is lower, would be extended to qualified local manufacturers. Items not suitable for interna- tional competitive bidding and costing less than $20,000 but more than $10,000 would be procured on the basis of competitive bidding advertised locally in accordance with Government's normal procedures which are acceptable to the Bank. Items costing less than $10,000 would be procured through the Government's normal shopping procedures, which are acceptable to the Bank, up to an aggregate limit of $300,000. For term credit, equipment and civil works would be procured through normal commercial channels from local or foreign firms represented in the Philippines. Foreign firms are well repre- sented in the Philippines, competition is keen and repair facilities adequate. 46. Civil works required under the project for roads, irrigation and drainage systems, buildings, forestry and conservation works would generally be small, of varied design and geographically scattered. They would not be of sufficient size nor could they be bulked to attract international bidders and they would, therefore, be awarded on the basis of competitive bidding advertised locally in accordance with Government procedures which are satis- factory to the Bank. A limited amount of civil works would be done through force account because of the remoteness of the areas and the consequent difficulty of attracting bids from local contractors. In view of the limita- tions on the Government's capacity for such work, an assurance was obtained from the Government that the amount of work done by force account would not exceed 40% of the total cost of the civil works unless otherwise agreed by the Bank during implementation (Schedule 4B [i] of the Loan Agreement). Disbursements 47. The proposed loan would be disbursed for 100% of the c.i.f. cost of directly imported equipment and vehicles, 100% of the ex-factory cost of manufactured equipment and vehicles, and 65% of the cost of equipment and vehicles procured locally; for 100% of the foreign exchange cost of foreign consultants and training abroad or 65% of total cost of local consult- ants; for 45% of the cost of civil works, and project personnel and other operating expenses; and for 60% of the amounts disbursed by the Central Bank for term credit. No disbursements would be made for term credit until a subsidiary loan agreement, satisfactory to the Bank, was concluded between the Government and the Central Bank, and until the participating rural banks meet the Central Bank's normal eligibility criteria for access to its special time deposit and rediscounting facilities (Schedule 1 (4) of the Loan Agree- ment). Economic Justification and Project Risks 48. The principal objective of the project is to help define policies and develop programs and procedures that would enable the Government of the Philippines to make the best use of its remaining public land suitable for settlement by small farmers. To help achieve this, the proposed project would support policy studies, the improvement of management systems for settlement programs, and would, for the first time, involve line agencies and departments directly in the execution of the settlement program. It would  - 17 - also support the intensive development of three existing settlements to demonstrate what might be achieved by the overall program, as these settle- ments gradually become fully integrated into their surrounding area with acceptable standards of living and are formally declassified as settlements. Incremental project outlays per family over the five year period of the project are $2,200 in Agusan (the least developed settlement area), $1,200 in Bukidnon, and $800 in Capiz. Recurrent costs at full development would range from $140 per family in Agusan to $30 in Capiz. Prior to construction an Irrigator Service Association (ISA) would be established in each irrigation area under the Project. The ISA would be responsible for ensuring collection of dues for cost recovery purposes and for system maintenance. The Government has also agreed to consult annually with the Bank on the adequacy of these arrangements and the level of dues and water charges (Section 4.05 [b] and [c] of the Loan Agreement). Cost recovery would be in line with that obtained in government's larger national irrigation systems; the level of dues would also be reasonable in relation to the low income levels of project benefici- aries. 49. At the settlement level, a central purpose of the project is to raise farm incomes and living standards. Per capita incomes (including non- farm income) on typical size farms are expected to increase from about $40 to $160 at full development in Agusan, from $60 to $105 in Bukidnon, and from $60 to $150 in Capiz. Including some new settlement in Agusan del Sur during the project period,/1 the project would thus benefit directly some 15,000 poor farmers who, with their families, comprise about 90,000 people. It would also increase the demand for on-farm labor in the settlement areas, thereby providing employment opportunities for the unskilled, lowest income families. 50. Farm incomes would be raised by increasing farm production and productivity. The project would increase average yields and expand the area of cultivation of agronomically suitable crops which offer higher returns to the farmer. At full development, annual incremental rice production would be 37,000 tons, corn production 26,000 tons, sugar 15,000 tons, abaca fiber 4,400 tons. About 50% of the full increase should be attained by the end of the fifth year with full development being achieved between the tenth and fifteenth year, depending on the crop and area. In addition to raising farm incomes in the settlement areas, the project would improve the transportation system in and leading to the settlement areas, strengthen credit and marketing facilities, and provide health and village water supply facilities in the settlement areas. 51. The economic rate of return of the project, assuming a conservative land development build up is estimated at 17% in Agusan, which accounts for 30% of total project costs, 31% in Bukidnon, which accounts for 39%, and 41% in Capiz, which accounts for 23%. The overall weighted average economic rate of return for the three settlement areas is 28%. The relatively high rates of return in Bukidnon and Capiz reflect in part considerable sunk costs in /1 This new settlement is estimated to involve about 6,000 people. No other new settlement would be undertaken in the Project.  - 18 - physical infrastructure and on-farm development as well as minor differences in crop types to be produced in each settlement area and their relative profitabilities. Even if project benefits are only half those projected, the weighted average economic rate of return would still be 15%. 52. The proposed project would involve some risks, because of the need to ensure the effective coordination of the large number of agencies involved in the project, and because the Department of Agrarian Reform, which would serve as the lead agency, presently lacks strong managerial skills. At the settlement level, risks would be the introduction of new crops, the uncertain- ty of the settler's response to the improved agricultural programs, and the satisfactory resolution of land allocation problems. The project has been prepared with all these risks very much in mind and designed to reduce them to an acceptable level. The potential benefits to be gained from an improved settlement program and the development of more productive cropping systems for rainfed areas are sufficiently great to justify the risks involved in the project. PART V - LEGAL INSTRUMENTS AND AUTHORITY 53. The draft Loan Agreement between the Bank and the Republic of the Philippines, the report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement of the Bank and the text of a draft resolution approving the proposed loan are being distributed to the Executive Directors separately. Features of the Loan Agreement of particular interest are described in Section III, Annex IV of this report. 54. Special conditions of effectiveness of the Loan Agreement would be the ratification of a Presidential Letter of Instruction (LOI) estab- lishing the IPCC and spelling out the various responsibilities of the Govern- ment agencies and departments executing the project, the establishment of a special project fund by the Government, the appointment of the internationally recruited advisor, and the appointment of an Area Manager in each of the three settlement areas (Section 6.01 (a), (b), (c) and (d) of the Loan Agreement). 55. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank.  - 19 - PART VI - RECOMMENDATION 56. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments April 28, 1977   mA2W TABLE 5A Page 1 of 4 pages PHILIPPINES - SOCIAL INDICATORS DATA SHEET LAND AREA (THOU KN2)------------------------- ---- I---------- ~~~~PHILIPPINES REFERENCE COUNTRIES ( 1910) TOTAL 300.0 MUST RECENT AGRIC. U6.3 1 960 ....1970__ESTIMATE.. THAILAND- _TURKEY___ K ORE A.:Rl. W OF GNP PER CAPITA (USD) 1600 2300 30.0 210.0 4.80.0 210.0 POPULAT ION AND VITAL ST ATITSTIICS POPULATION (MID-YR. MILLION) 21.6 36.9 42.5 36.3 35.7 31.4 POPULATION DENSIT(Y PER SQUARE KR. 91.0 123.0 1 4 2. 0 71.0 4 6. 0 3 19. 0 PER SQ. KM. AGRICULTURAL. LAND . 279.0 326.O0 .d 61.0 I1320. 0 YIYRL STATISTICS AVERAGE BIRTH RATE C/THOU) 4 5. 1 4 4.-2 4 3. 8 44 .3 4 0.6 35. 0 AVERAGE DEATH RATE c/THOU) 11r. 9 13S.2 10. 5 1 3.71 1 4.4 11. 4 INFANT MORTALITY RATE C/THOU) . 80.0 68.0Li/ 80.0 145.0 LOTFE EXPECTANCY AT BIRTH (YRS) 4 9.4 5 5. 6 58. 4 55.5 5 4. 4 51.?7 uROSS REPRODUCIION RATE 3. 5/a 3. 3 3. 3 3.2 2.6 /a.b 2. 6 POPULATION GROWTH RATE (1) TOTAL 3 .0 3 .0 2. 9 A3.1 2 .5 2.3 URBAN 4 .0 4. 0 4. 0 4 .9 4*.2 6. 4 URBAN POPULATION CZ OF TOTAL) 2 5. 3 271.46 29.0 15.0 31.2 41. 2 AGE STRUCTURE (PERCENT) 10 1O4 YEARS 4 5.1 4 5.46 Id. / 45 .3 4 1.8 42. 1 IS TO 64 YEARS 51. 6 5 1.6 5I4O 0 52.3 5 3.9 54. 6 65 YEARS AND OVER 2.7 2. 8 2.0 a 3. 0 4 .3 3 .3 AGE UEPENDENCY RATIO 0.9 0.9 0. 9 0 .9 0. 9 0.8a ECUWNOMIC DEPENDENCY RATIO 1.3/b 1. 5 1.4 /b 1.1I 1.1I/c 1. 4 FAMILY PLANNING ACCEPTORS (CUMULATI[YE, T HOU) I 35 4. 0 28172. 5 410.0 USERS (I OF MARRIED WOMEN) . 2. 0 19. 0 1 0. 0 8.2 42.0 EMPL OYMENT TOTAL LABOR FORCE (THOUSAND) 10100. 0 1