Document of FILE COPY The World Bank FOR OFFICIAL USE ONLY Report No. P-2429-PH REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF THE PHILIPPINES FOR A SMALL FARMER DEVELOPMENT PROJECT: LAND BANK OF THE PHILIPPINES December 6, 1978 This document has a restricted distribution and may be used by recipients only In the performance of their officisl duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (At the time of Appraisal and Used in this Report) US$ 1 = Pesos 7.25 US$ 1 million = Pesos 7.25 million Peso 1 = US$0.14 Peso 1 million - US$137,931 WEIGHTS AND MEASURES All in metric system PRINCIPAL ABBREVIATIONS EDC - Estates Development Coordinator CIDARE - Committee on Infrastructural Development for Agrarian Reform Estates FMG - Farm Management Groups LBP - Land Bank of the Philippines MAR - Ministry of Agrarian Reform GOVERNMENT OF THE PHILIPPINES FISCAL YEAR January 1 to December 31 FOR OFFICIAL USE ONLY PHILIPPINES SMALL FARMER DEVELOPMENT PROJECT: LAND BANK OF THE PHILIPPINES Loan and Project Summary Borrower: Republic of the Philippines Beneficiary: Land Bank of the Philippines (LBP) and various executing agencies for infrastructural works. Amount: $16.5 million Terms: 20 years, including 5 years of grace, with interest at 7.35% p.a. Relending Terms: $12.5 million of the proposed loan would be relent to LBP on the same terms and conditions as those of the Bank loan. Project Description: The project is designed to increase agricultural productiv- ity and expand rural employment opportunities among the small-scale farmers, most of whom are beneficiaries of Government's ongoing agrarian reform program. It would be implemented primarily by LBP, would benefit about 28,000 rural families, and would include: (i) production and marketing credit mainly for rice, corn and vegetables; (ii) term credit for light farm mechanization, post-harvest facilities, backyard livestock and poultry and cottage industries; (iii) strengthening of LBP's field operations; (iv) minor infrastructural works in selected agrarian reform areas; and (v) studies aimed at better understand- ing of the socio-economic conditions of small-scale agriculture. Incremental employment is estimated at 11,900 man-years and additional production of goods and services at $15.4 million at full development, resulting in foreign exchange savings of $8.8 million annually. Attainment of higher crop yields, loan repayment, and LBP's limited experience in agricultural credit are the main risk factors. Against these risks, strengthened field level technical assistance and organizational measures adequate to promote higher yields and ensure satisfactory loan collections have been incorporated in the project design, and the scope of the project kept modest. This document has a restricted distribution and may be used by recipients only in the performance of their offcial duties. Its contents may not otherwise be disclosed without World Bank authorization. - ii - Estimated Cost: Local Foreign Total --- - --- ($ million) Seasonal credit 4.1 3.7 7.8 Term credit 13.6 4.4 18.0 Field support services 1.2 0.1 1.3 Minor infrastructure 2.9 2.5 5.4 Studies 0.1 - 0.1 Total base costs 21.9 10.7 32.6 Physical contingencies 0.4 0.4 0.8 Expected price increases 2.5 1.1 3.6 Total project costs 24.8 12.2 37.0 Financing Plan ($ million): Subborrowers LBP GOP IBRD Total Seasonal credit - 7.8 - - 7.8 Term credit 1.8 7.0 - 12.3 21.1 Field support services - 1.1 - 0.1 1.2 Infrastructure - 2.8 3.9 6.7 Studies - - - 0.2 0.2 Total 1.8 15.9 2.8 16.5 37.0 Estimated Disbursement /1 - ------ ($ million) -------- -- Bank fiscal year 79 80 81 82 Annual 1.0 4.0 6.5 5.0 Cumulative 1.0 5.0 11.5 16.5 Rates of Return: The weighted average economic rate of return for the project as a whole is estimated at 47%. Staff Appraisal Report: No. 2189-PH, dated November 27, 1978 REPORT AND RECOMMENDATION OF THF P'?ESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF THE PHILIPPINES FOR A SMALL FARMER DEVELOPMENT PROJECT: LAND BANK OF THE PHILIPPINES 1. I submit the following report and recommendation on a proposed loan to the Republic of the Philippines for the equivalent of $16.5 million to finance a project aimed at providing credit, infrastructure and support services to small-scale farmers, most of whom are beneficiaries of Government's ongoing agrarian reform program, and to small rural enterprises. The loan would be for a period of 20 years, including 5 years of grace, with interest at 7.35% p.a. About $12.5 million of the proceeds of the proposed loan would be on-lent to the Land Bank of the Philippines for the credit and support services components of the project on the same terms and conditions as those of the Bank loan. The Government would bear the foreign exchange risk. The remaining $4.0 million would be used by the Government for infra- structure. PART I - THE ECONOMY /1 2. An economic mission visited the Philippines in July/August 1977 and its report, "The Philippines: Country Economic Memorandum" (No. 1765-PH of October 26, 1977), was distributed to the Executive Directors under SecM-PHL77-2 dated October 27, 1977. A basic economic report, entitled The Philippines: Priorities and Prospects for Development (SecM-76/366), was previously distributed to the Executive Directors on May 18, 1976. Macroeconomic Performance 3. During the 1960s, the Philippine economy grew in real terms at an annual rate of about 5-1/2%. However, with more effective economic management the rate of growth could have been higher. The benefits of growth were also distributed relatively unevenly, both with respect to regions and income classes. While overall agricultural growth was reasonably satisfactory, repeated food deficits were experienced. The growth of productive employment opportunities failed to keep pace with the expansion of the labor force. Low levels of taxation resulted in inadequate public expenditure for necessary infrastructure and social services. Poor export performance combined with heavy import dependence of domestic industry led to chronic weakness in the balance of payments. 4. The growth of the Philippine economy accelerated to an average annual rate of 6.5% in the 1970s. Fluctuations, however, have been signifi- cant. In the period 1970-72, when the effects of a balance of payments stabilization program initiated in 1970 were being felt, the economy grew less rapidly. Economic growth was unusually good in 1973 as sharply higher prices for traditional export commodities stimulated demand. The export-led /1 This section of the report is substantially the same as that contained in the President's Report for the National Extension Project (Sec M/R78-237) which was approved by the Executive Directors on November 7, 1978. income boom of 1973 was followed by an investment boom, which, together with favorable sugar prices, temporarily sheltered the economy from the world recession, and real GNP growth was maintained at 6% in 1974-75. The first half of the 1970s also saw favorable structural changes in the economy, the most important of which were an increase in the level of public investment, financed in large part by a greater tax effort, an acceleration of export growth, the achievement of self-sufficiency in foodgrains, a shift of the domestic terms of trade in favor of agriculture, and the slowing of the population growth rate. 5. The collapse of sugar prices in late 1975, following earlier declines in the prices of other major export commodities, altered the external situation dramatically. The terms of trade dropped by 23% in 1975 and, as a result, the current account deficit rose to 6% of GNP. To maintain the momentum of growth and investment, the Government adopted a policy of increasing capital inflows in the near term to finance the expanded current account deficits while accelerating export growth in the longer term. In 1976-78, the economy - led by non-traditional exports, agriculture and construction - has continued to grow at 6% per year. Unfortunately, much of the stimulus from an expansion in export volume was offset by further deterioration in the terms of trade. Total fixed capital formation increased only marginally due to sluggish private investment activity and the conservative monetary-fiscal policy adopted by the government. Development Strategy 6. The Government's development objectives and policies, which were recently set out in a Five-Year Development Plan for the period 1978-82, call for acceleration of economic growth, first to 7% and then to 8%. The development strategy focuses on an expansion of more productive employment opportunities at a rate of 3.6% per annum, reduction of income disparities, greater self-sufficiency in food and energy, a strengthening of the balance of payments, and increased development in rural areas. In addition, the Plan includes strategies for development in each of the country's thirteen regions. In general, the Plan is an elaboration of the policy directions pursued by the Government in recent years. It is also broadly consistent with the Bank's basic economic report, although investment, manufacturing output and exports are projected to grow more rapidly than visualized therein. It should be feasible to accelerate the overall growth rate to 7% as the terms of trade stabilize, but more rapid expansion of manufacturing is necessary to do so, and efforts need to focus on improving the efficiency of investment. Agriculture 7. During the early 1970s agricultural production grew at an average rate of 4-1/2% per year. In the grains subsector, the Government's policy has been to end rice imports through irrigation development and the improvement of supporting services. During the past three years, the Philippines has been self-sufficient in foodgrains and actually has exported over 100,000 tons of rice. The overall performance of the agricultural sector was exceptionally strong in 1976 as production increased by 8%. In 1977 and 1978, rice and corn production continued to grow at a satisfactory rate; however, the major traditional export crops, particularly sugar, experienced a slowing down of - 3 - production because of low world prices. Overall, the output of the sector increased at a rate of 5% in 1977-78. 8. Despite the recent successes in foodgrain production, which are partly attributable to good weather, rice and corn yields remain well below the potentials of modern farming technologies. This is largely die to land tenure patterns (discussed in Part III), weak extension services and insuffi- cient production credit. The Government, however, gives high priority to agriculture and rural development. It has undertaken a number of steps to increase the availability of irrigation and supporting services, and it has also expanded programs to improve living conditions in rural areas, including rural electrification, health and family planning, and rural roads. Industry 9. During the 1960s, Philippine industrialization was promoted by high tariff protection and subsidized finance, and consequently industrial growth was primarily in the area of import-substitution with a high capital intensity. Performance was disappointing with respect to employment, exports, and the overall rate of growth of output. In the early 1970s the Government floated the exchange rate, which then depreciated significantly, and started correcting tariff distortions by simultaneously reducing the number of items subject to the highest protective rates and also limiting the granting of tariff exemptions. Further efforts to reduce remaining biases in favor of import-substitution and capital intensity will still be needed, however, to accelerate the rate of industrial growth as projected in the Five-Year Development Plan. 10. Manufacturing industry has grown at a relatively slow average rate of about 6% in the 1970s. Moreover, due to the slow increase in national income and demand because of the decline in the terms of trade in the last three years, manufacturing growth has also slowed, and investment has stagnated. On the other hand, industries producing nontraditional exports have expanded rapidly from a very low base, as their exports increased more than fivefold in the five-year period 1973-77, in response to exchange rate adjustment and special measures designed to alleviate existing restrictions on imports and thus reduce the bias towards production for the domestic market. As noted above, further efforts in this direction will be needed if industrial exports are to continue to grow at a rapid rate. The construction industry which expanded rapidly between 1972-1976 as a result of relatively construction- intensive public investment and large tourism investments in the Manila area, grew at a rate of only 6% during 1977-78 due to the slower pace of private and public investment activity. Employment, Incomes and Population 11. Employment increased by about 4.6% annually during 1973-77, a considerable improvement over the historical growth rate of 2.4%, and was able to keep pace with the rapid growth of the labor force. Particularly noteworthy was the growth of employment in manufacturing, which essentially stagnated during 1970-74, but grew by 7% annually during 1975/77, resulting in part from the growth of labor-intensive production for export. However, because manufacturing's share of total employment is small, agriculture and services continue to function as residual sources of employment and accounted for most of the growth in total employment. - 4 - 12. Recent trends in income distribution are mixed but, on balance, positive. Due to the improvement in agriculture's terms of trade, the growth of agricultural production, the decline in urban real wages following the devaluation in 1970, and the stagnation of industrial employment until 1975, the ratio of the average rural income to the average urban income rose from 0.48 in 1971 to 0.57 in 1975. Real per capita consumption increased by about 2% annually in 1971-75. Hence, real incomes in rural areas, where most of the poor live, have probably increased somewhat, while real urban incomes have remained about the same. Household budget data, which are probably not entirely accurate, indicate that the share of family incomes received by the poorest 40% of families, who are primarily rural, increased from 12% in 1971 to 15% in 1975. The income share of the top 20% have remained about the same, while that of the middle income families declined correspondingly. Although the magnitude of these trends may be overstated by these data, the general direction of the trends is consistent with other information. 13. The population is estimated at 45.5 million in 1978. The population growth rate fell from 3.0% in the intercensal period 1960-70 to 2.8% in the intercensal period 1970-75. The Philippines has an active family planning program registering approximately 650,000 new acceptors per year. Although the number of new acceptors has reached a plateau as the program faces the increasingly difficult problem of reaching rural areas, the estimated propor- tion of married women of reproductive age practicing family planning increased from 20% in 1974 to 27% in 1977. However, by East Asian standards, this index should still be considered as relatively low. Investment and Savings 14. Due largely to the buoyant export performance in 1973 and the subsequent increase in incomes, investment boomed in 1974-75. Private investment rose from 14% of GNP in the early 1970s to 20% in 1975. Public investment was raised from 2% to 4% of GNP with the growth in revenue from international trade taxes, improvements in tax administration, and improved project implementation capacity. Subsequently, public investment has been raised further to an estimated level of 6.3% of GNP in 1978. The private investment rate, on the other hand, has fallen somewhat to an estimated 18% of GNP, and its revival has been an important short-term problem. Furthermore, the high incremental capital-output ratio, the relatively modest growth of manufacturing output and employment, and the structural underutilization of capacity in some industries suggest that the efficiency of investment also needs to be improved. 15. Aggregate savings performance has improved during the last decade and is comparable to that of other countries at a similar stage of economic development. In 1977-78, gross domestic savings reached a level of 26% of GNP and financed about 85% of total investment, with the balance coming from foreign savings. In order to increase the efficiency of financial markets in intermediating between savers and investors, the Government has made significant improvements in financial policy. Organized banking institu- tions have been strengthened. Interest rates were realigned in 1976 and, again, in 1977 to encourage a greater flow of financial savings into time and savings deposits relative to short-term deposit substitutes, and to reduce the spread between borrowing and lending rates. However, further reforms are required to increase the availability of long-term domestic currency resources and to alleviate the bias of the present interest rate structure towards investments with a relatively high capital intensity and a low capital efficiency. Special credit programs have been adopted to expand lending to the credit-short agricultural sector and rural areas and to serve the needs of medium- and small-scale industries. However, a deterioration of loan recovery rates has been experienced by all government financial institutions and credit programs. The Government has already taken a number of steps to improve collections; however, further efforts in this direction are !ecessary to improve financial discipline and ensure an adequate flow of credit to the productive sectors without burdening the public finances. Government Expenditures and Revenues 16. Public expenditures and revenues have historically claimed a much smaller share of national resources in the Philippines than in many other developing countries. In the early 1970s, general government expenditure averaged only 12% of GNP, public investment was strikingly low at about 2% of GNP, and tax revenues stood at 11% of GNP. Government expenditures were dominated by general administration and social services, particularly education. This situation had resulted from a variety of factors including difficulties in raising tax revenue and weak implementation capacity in the public sector. Since the early 1970s, the Government has taken steps to correct the situation and has raised both the overall level of expenditures and the shares going to economic services and public investment. By 1978 government expenditures had reached an estimated 16% of GNP, and public investment, which has risen rapidly in the last three years, equaled about 6% of GNP. 17. Recognizing that a large increase in tax revenues would be required to finance expansion of the public investment program, the Government has undertaken a comprehensive program of tax reform to raise the needed revenues equitably and efficiently. In the short term, needed revenues have been raised through revisions in indirect taxes. In the long term, structural changes are to be made to raise the built-in elasticity of the tax system, to reduce distor- tions in economic incentives and dependence on cyclically volatile taxes on international trade, and to improve equity by increasing the proportion of revenues coming from direct taxes. The Government has increased the ratio of domestic taxes to GNP through new tax measures and vigorous efforts to improve taxpayer compliance and collection performance, but much of the success in mobilizing revenue from domestic sources has been offset by a sharp decline in the yield of export taxes and import duties due to cyclical fluctuations. Total tax revenues, which had been raised to 13.6% by 1975, fell to 12.8% in 1977 and increased only slightly, to an estimated 13%, in 1978. Greater resource mobilization by government financial institutions and government corporations, whose investment programs have grown rapidly, is also needed. -6- External Trade and Capital Flows 18. To meet the acute balance of payments problem in 1975, which largely resulted from the decline in terms of trade, the Government drew down its international reserves, obtained loans under various IMF facilities, and expanded its borrowing program to finance necessary imports. For the longer term, the Government adopted a strategy of accelerating export growth both to hold the current account deficit about constant in absolute terms, while letting it decline gradually relative to GNP, and to meet the debt service payments on the higher level of external borrowing. 19. In spite of a further deterioration in the terms of trade, the current account deficit has behaved as anticipated over the last three years - averaging $1.0 billion per year but declining from 6% of GNP in 1976 to an estimated 4% in 1978. Export volume, although constrained in 1978 by the depressed sugar market, increased substantially over the three-year period as a whole. Import payments, after growing slowly in 1976 and 1977, accelerated with the recovery of private investments in 1978. To finance the current account deficits, net capital inflows were nearly doubled from the 1975 level of $580 million to an average of $1.1 billion per year in 1976-78. Most of the inflow came from medium- and long-term loans. About two thirds of this was from public loans, a reflection in part of increased disbursements from official sources. Recently, the Government has also taken advantage of liquid conditions in international capital markets to prepay some commercial debts and obtain new loans with longer maturities and lower interest rates. As a result of increased borrowing, the debt service ratio has risen from 16% in 1975 to 18% in 1977. 20. To achieve a 7% growth rate in real GNP, as projected for the initial years of the Plan period, import volume will have to grow at a similar rate, and a net capital inflow of at least $1 billion per year will be required. Assuming continued efforts to promote exports and sound debt management, the overall level of external debt of the Philippines is expected to remain within reasonable limits. The ratio of debt service payments to exports of goods and nonfactor services is expected to average around 20%, of which half would be public debt service, during the Plan period (1978-82) and to decline thereafter. 21. In order to ensure that the long-term capital transfer is commensu- rate with the level of development expenditures required during 1978-82 and that debt service obligations remain within reasonable limits, the Government sought commitments of official assistance of $750-800 million in 1978 at the last meeting of the Consultative Group for the Philippines, held in Tokyo in December of 1977. This amount has been made available. However, since many of the projects planned for financing from external sources have a low foreign exchange component, some local cost financing is necessary, in appropriate cases, to meet the Philippines' external financing requirements. -7- PART II - WORLD BANK OPERATIONS /1 22. As of September 30, 1978, the Philippines had received 56 Bank loans (of which two were on Third Window terms) amounting to $1,725.4 million and four IDA credits amounting to $60.2 million. At that date, IFC investments totalled $88.4 million. The share of the Bank Group in total debt disbursed and outstanding is about 11% and its share in total debt service is about 5%. These ratios are expected to increase to about 12% and 5%, respectively, by the end of the present decade. Annex II contains a summary of IDA credits, Bank loans and IFC investments as of September 30, 1978, as well as notes on the execution of ongoing projects. 23. The Bank Group has financed projects in virtually all sectors of the economy with particular emphasis on agriculture and basic infrastructure which have each accounted for about one third of total Bank Group lending. In agriculture, emphasis has been given to expanding the irrigation system to increase food production and to credit programs to support food grain produc- tion and processing and livestock, fisheries and tree farming production. Support has also been provided for integrated rural development projects in low income areas. The Bank Group has also provided large amounts of assistance in developing power and transportation to provide the basis for future growth of the productive sectors. Substantial improvement in basic infrastructure has been needed to compensate for many years of past neglect due to low levels of public expenditure. In the industrial sector, the Bank's main thrust has been on strengthening the capacity of public and private development finance institutions with increasing attention given to meeting the needs of small and medium industries. In the social sectors, the Bank Group has provided support for education programs designed to improve the quality of primary and secondary education and to meet trained manpower requirements in agriculture and industry. In urban areas, assistance has been provided for water supply projects and for programs to upgrade slum living conditions and to develop low-cost sites and services. Support has also been provided to the Philippines population program through assistance for the construction of multipurpose rural health units and for training of family planning staff. 24. There has been a marked improvement in the execution of Bank- financed projects in the last five years compared with the experience in the late 1960s, when there were serious problems caused by a shortage of peso counterpart funds and weak administration. Almost all ongoing projects are now being implemented reasonably well and the supervision and project comple- tion reports indicate that the economic benefits for most projects are likely to be in line with appraisal estimates. However, the overall rate of disburse- ment is marginally below what would be expected given the generally good /1 This section is substantially the same as that contained in the President's Report for the National Extension Project (Sec M/R78-237) which ws approved by the Executive Directors on November 7, 1978. - 8 - project implementation, and the Government is currently reviewing disbursement performance on an agency-by-agency basis to identify possible reasons for disbursement lags and to find appropriate solutions. 25. As noted in Part I of this report, the Government's Five-Year Development Plan highlights a strategy which focuses on the expansion of production and employment in agriculture and industry, reduction in income disparities, greater self-sufficiency in food and energy, and increased development in rural areas. The Bank's future lending program has been designed to assist the Government in achieving these objectives. Agricul- tural and rural development will account for the largest part of future lending with continued emphasis on food production and programs to increase the productivity and incomes of small farmers. However, the program also provides for several needed new initiatives, including support for strength- ening the national agricultural extension service through the recently approved loan and a first loan for developing multiple cropping systems in rainfed areas, where there is substantial rural poverty. Increased assistance will also be provided for integrated rural development projects which will support the Government's objectives of redressing regional imbalances in income. Substantial assistance will also continue to be given to industry with considerable attention given to expanding the development of labor-inten- sive, small and medium industries outside of the Metropolitan Manila area. The share of lending for social sector projects is expected to continue to increase primarily as a result of greater emphasis on construction of urban water supply and sewerage systems and further assistance for slum upgrading and low-cost sites and services projects. The Bank Group will continue to provide support for improving the quality of education and for expanding the Government's population program in rural areas. While the Bank Group will continue to provide support for transportation and power infrastructure needed to support the Philippine development effort, the share of Bank lending for these sectors will decline somewhat in the years ahead primarily because alternative sources of financing are available to finance a large part of the power generation program. 26. As noted in Part I, the Philippines has experienced a serious deterioration in its international terms of trade in the last several years which has necessitated substantial foreign borrowing. While the overall level of debt remains manageable, the Philippines will need to obtain some foreign assistance on concessional terms in the near term to support its expanding development program. In view of this consideration, the per capita income of the country and the generally good management of the economy, a limited amount of IDA financing has been included in the Bank Group's overall lending to the Philippines. 27. This is the fourth loan to be presented to the Executive Directors this fiscal year. Loans for urban development, small-scale industry, popu- lation and highway projects are expected to be ready for presentation in the next several months. -9-_ PART III: THE AGRICULTURAL SECTOR General 28. Agriculture is the predominant sector in the Philippine economy; it accounts for about one third of GDP, slightly more than one half of total employment, and nearly two thirds of foreign exchange earnings. About 70% of the population lives in the rural areas, with 60% directly dependent on agriculture. 29. Structurally, Philippine agriculture is overwhelmingly small-scale, the average land holding being about 3.6 ha. Nearly three quarters of [he cultivated area is devoted to cereals, notably rice and corn; other principal crops are sugar, coconuts, abaca, pineapple and tobacco. Livestock are widely kept, commonly as backyard enterprises, while fruit and vegetables are a significant source of income in areas close to urban centers. 30. As stated in Part I, agricultural production has grown at an average rate of 4-1/2% p.a. in the 1970s. After recovering from severely adverse weather conditions during 1970-73, the sector grew at over 5% p.a. since 1974. The high growth rate resulted particularly from record rice and corn harvests, reflecting increased use of production inputs under Government-sponsored credit and technical assistance programs, better weather conditions, improved irrigation facilities, and more favorable producer prices. Over the past three years the Philippines has been self-sufficient in foodgrains and has actually exported over 100,000 tons of rice. The sector's performance has also contributed to a more favorable growth rate of the rural family's income compared to that of the urban family. Nonetheless, the majority of the Filipino poor remain in the rural areas. 31. Agricultural development in the Philippines depends critically on increasing productivity of the already cultivated lands. The available technology has considerably raised production potential of the irrigated lands and appreciable progress has been made towards full exploitation of this potential. No comparable technological base exists for improving crop yields in the non-irrigated and upland areas where corn predominates. But some opportunities exist in such areas and elsewhere for diversification into livestock and poultry, fruit and vegetables, and cottage industries. Increases in corn production have hitherto depended on expanding cropped area; however, the long-run development will be determined by the development of high-yielding and disease-resistant hybrids. Government Objectives and Strategies 32. The Philippines Five Year Development Plan (1978-82) places emphasis on food production, agricultural diversification, reforestation, and more rigorous linkage between agriculture and industries. The major national objective is to increase rice and corn production. Based on a growth rate of 3.8% p.a., rice production is projected to reach a sustained self-sufficiency level by 1982 and to provide a substantial exportable surplus by 1990. But corn production will remain in deficit relative to domestic consumption for a much longer period. The Government is particularly concerned about improving the conditions of smallholders. To achieve these objectives the Government has - 10 - intensified its efforts in agrarian reform, construction of rural infra- structure, including irrigation, and in the provision of supervised credit programs and improved extension services. Agrarian Reform and Project's Target Group 33. About 53% of the rice and corn farms in the Philippines are under tenancy cultivation. Since 1972, Government policy has aimed at establishing family-owned smallholdings as the foundation of Philippine agriculture, primarily as a way to increase equity and productivity, and all rice and corn lands were declared subject to agrarian reform under Presidential Decree No. 27 of October 1972. The reform consists of two parts: Operation Land Transfer, covering 759,000 ha and 393,000 tenants; and the Leasehold Enforce- ment Program, covering 664,000 ha and 521,600 tenants. Operation Land Transfer applies to all tenanted rice and corn farms of more than 7 ha; the tenant becomes owner-cultivator upon agreeing to purchase and amortize the land over a period of 15 years. Leasehold Enforcement involves rental payment as opposed to sharecropping, and better tenure security for the tenant. 34. The Ministry of Agrarian Reform (MAR) is responsible for the over- all administration and implementation of the program, while the Land Bank of the Philippines (LBP) is concerned with the financing of land acquisition relating to the Operation Land Transfer in addition to assisting the reform beneficiaries through seasonal and term credit. 35. Completion of the land transfer was originally expected to require only five years from October 1972. But after a brief rapid pace during 1973, the implementation slowed considerably, principally due to: poor land survey and records causing long delays in title documentation; prolonged haggling over land valuation; inadequate institutional framework and resources within MAR; and opposition by the landlords. The progress has, however, improved since mid-1977. 36. As of March 1978, the farms compensated by LBP amounted to 96,200 ha involving 49,900 tenants. Of these, 37,600 tenants have signed undertakings to amortize the purchase of their lands signifying completion of the transfer process, although actual title is given to the new landowner only upon completion of his payment to LBP. Thus, while the implementation may continue to be slow, a significant number of farmers have already become owner-cultivators. Their average landholding is 1.9 ha, devoted mainly to rice production, and their average per capita income is about P 800 ($110) compared to the estimated poverty line income of P 1,124 ($155) for the rural Philippines. These farmers need specialized attention to move them to the point where they can be self-sustaining after the severance from the landlords upon whom they previously depended for a wide range of assistance, which included credit and farm management advice. Agricultural Credit and the Debt Problem 37. The period 1970-73 was one of severely adverse weather conditions, causing a substantial fall in rice production. To counteract the decline in crop production, the Government launched massive supervised credit programs in 1973, notably Masagana 99 for rice and Masaganang Maisan for corn. The programs succeeded in reaching a vast number of small-scale farmers as well as in boosting total production. However, after only a brief period, these programs experienced a sharply declining trend with regard to the number of borrowers and loans granted. For example, Masagana 99 fell from the peak of 468,000 borrowers and P 716 million ($99 million) loans granted in the 1974 main cropping season to about 73,000 borrowers and P 135 million ($19 mil- lion) of loans in the 1977 main cropping season. 38. Poor loan repayment has been the major problem facing these credit programs. The causes thereof are many and diverse but they include inability to repay due to crop losses and, generally, the over-stretching of the credit delivery and recovery system in pursuit of emergency production targets. Several hundred thousand farmers are now carrying past due debts, in some cases well beyond expected annual income and correspondingly large numbers of farmers have been disqualified from receiving further formal credit. Now that rice production is no longer a crisis issue, the Government policy is shifting to more selective lending based primarily on the debt repayment capacity of the would-be borrowers, coupled with more rigorous technical and supervisory support. The proposed project would be guided by this new policy. Farm Mechanization and Post-Harvest Facilities 39. Animal traction (carabaos) and manual labor, upon which the majority of the small-scale farmers in the Philippines depend, entail several drawbacks. Although under-employment is widely spread in rural areas, labor bottlenecks are a constraint during the land preparation, planting and harvesting seasons - especially in areas where multiple cropping is practiced. The carabaos (water buffaloes) are disadvantaged by inability to work for long hours without prolonged rest intervals, susceptibility to diseases which may strike in a critical period of the cropping cycle, and inability to cope with dryland tillage. An increasing proportion of farmers is therefore turning to light mechanization (power tillers), either self-owned or on the basis of custom service. 40. While estimates vary considerably, a significant share of grain production in the Philippines is lost annually due to improper handling and inadequate post-harvest facilities - especially for drying, threshing, storing and transporting the produce. The heaviest losses are attributed to poor drying, particularly during the wet season. In addition to physical losses, insufficiently dried grains fetch lower prices. While at the national level the milling capacity is underutilized, its geographical distribution leaves some areas without conveniently located facilities. Farm and Off-farm Diversification 41. The prevailing overwhelming dependence on rice cultivation may not be an immediately serious issue in areas with adequate irrigation which facili- tates more or less continuous employment. But in the rainfed areas and those - 12 - with inadequate irrigation, notably the upland areas, the need for diversifi- cation is urgent and imperative. Various diversification opportunities exist, especially the cultivation of high value crops such as vegetables, development of backyard livestock and expansion of cottage industries. 42. Provided credit and technical advice are made available, backyard piggeries, poultry keeping and to some extent beef cattle, offer ample opportunities for additional farm incomes among small-scale farmers in the Philippines. Pigs are widely kept, with 80-90% of the pork consumed in the country coming from small backyard pig enterprises; experience in pig husbandry is correspondingly widespread. A range of farm by-products is available which, with supplementary feed, provide an adequate diet. Backyard beef cattle account for 70% of the national cattle population but development has been constrained by insufficient supply of fattening stock, poor husbandry and management regimes, and deficient marketing facilities in the more remote rural areas. 43. Development constraints are less binding for poultry compared to other livestock, particularly since it is much easier to import foundation stock for which local multiplication facilities are well established. While the usual poultry diseases are prevalent, preventive measures are readily available and widely used. Feed supply is not a major problem and would progressively become less so as the country moves towards self-sufficiency in feedgrains production. The number of large-scale poultry producers, fully vertically integrated and using modern production techniques, has been rising steadily. In some cases, these large producers provide marketing outlets for the backyard enterprises aimed at the more sophisticated urban markets. 44. The need for expanding cottage industries in the Philippines is underscored by the mounting number of landless people and the high growth rate of the labor force (2.6% p.a.). The country has a long tradition of a variety of cottage industries, the most important ones being needlecraft, woodwork, fibercraft and embroidery. The National Cottage Industries Development Authority provides the required training and general promotional activities. The majority of these enterprises are based on locally available materials and produce mostly for the domestic market. However, exports have grown rapidly from P 129,000 (about $17,000) in 1970 to P 1.1 million (about $150,000) by 1975. Infrastructure 45. Some of the agrarian reform areas (about 15-20% of the areas selected for assistance under the proposed project) are seriously handicapped by infrastructural deficiencies, particularly with regard to irrigation, feeder roads and flood control. Most of these deficiencies can be alleviated with minor civil works. Although inadequate groundwater surveys and poorly defined water rights inhibit expansion of pump irrigation, there is good scope for increasing low lift pumps tapping surface water sources. While such works may be crucial to the well-being of affected communities, they are typically so small and scattered that they have not been included in the national programs of the responsible line agencies. - 13 - Experience with Past Lending 46. This would be the first project financed by the Bank through the Land Bank of the Philippines. However, agricultural credit and infrastructural works are being assisted by several Bank-financed projects, notably the Fourth Rural Credit Project (Loan 1399-PH) and the Rural Infrastructure Project (Credit 790-PH). Implementation of the Fourth Rural Credit Project was slower than anticipated in the first nine months after it became effective on June 2, 1977 due to difficulties in supplier accreditation and qualifica- tion of on-lending banks. Although demand for tractors under the project is still slower than expected, the overall performance has improved significantly. Credit 790-PH became effective on July 21, 1978 and the project is in the initial stages of implementation. The proposed project would be complementary to these projects in that the credit components would be geared to the lower strata of small-scale farmers who are not adequately served by ongoing credit programs, while the infrastructural components would cover areas hitherto consisting of privately owned estates and therefore not sufficiently pene- trated by the network of public infrastructural facilities. PART IV - THE PROJECT General 47. The objective of the proposed project is to increase rural incomes by enhancing the productivity of small farms and generating off-farm employment opportunites. A key feature would be the coordinated delivery of technical assistance, improved infrastructure and credit to beneficiaries of the agrarian reform program. Development efforts in the selected project areas would be based on a careful assessment of needs by farmers and the field staff of concerned agencies. While the project would be small in relation to need, the complexity of issues to be addressed, the poor financial condition of most potential beneficiaries, and the limited field capacity of the Land Bank require cautious initial efforts. However, the project scope, which was determined after a preliminary survey of the farmers' needs, has been designed to reflect the current and planned capability of the Land Bank and the absorptive capacity of the beneficiaries while the manpower and financial commitments have been kept to levels which are replicable on a wider scale as experience and proficiency increase. Support would also be provided for the Land Bank's ongoing traditional small-scale credit activities wherein credit is extended for investments not constrained by infrastructural or managerial deficiencies. 48. The project was prepared by the Land Bank, with the assistance of Bank staff. It was appraised in May-June 1978 and negotiations took place in Washington, D.C. in November 1978. The Philippine negotiating team was led by His Excellency Eduardo Z. Romualdez, the Philippine Ambassador to the United States, and the Honorable Basilio Estanislao, the President of the Land Bank. The Staff Appraisal Report (No. 2189-PH dated November 27, 1978) is being distributed separately. Supplementary Project data are given in Annex III. - 14 - Project Area 49. The project would be spread virtually throughout the country but concentrated in some areas, notably Central Luzon, in keeping with the geographical distribution of the agrarian reform program. On the basis of development potential, existing infrastructure, contiguity and closeness to existing or planned Land Bank field offices, 60 areas have been selected for concentrated development support. Project Components 50. These would include: production and marketing credit; term credit for light farm mechanization, post-harvest facilities, livestock development and cottage industries; and financing of minor infrastructural works, Land Bank's field support activities, and action-oriented studies on the socio- economic conditions of small-scale farmers. 51. Production Credit. In many cases, short-term credit for fertilizers, agro-chemicals, seeds and labor is the most critical need of the small-scale farmers. The project would provide such credit primarily for rice, corn and vegetables over an area expected to grow to about 30,000 ha in the third year. Individual loans would be based on a farm plan and budget, and limited to the repayment capacity of the borrower. 52. Marketing Credit. This would aim at expanding the modest marketing credit now provided by Land Bank (LBP) to cooperatives and private dealers handling small farmers' produce, mostly rice. The practice of advancing funds to farmers against deposit of stocks would be encouraged, thus enabling farmers to postpone sales pending better seasonal prices. 53. Light Farm Mechanization. The project would finance locally manufactured power tillers of 7-10 hp, as well as small irrigation pumps of 4-inch diameter. Other minor items, such as sprayers and hand tools, would also be included as needed. 54. Post-harvest Facilities. These would include: portable rice threshers powered by a 10 hp engine; portable rice driers equipped with a 3 hp engine; and small rice mills and warehouses in areas not serviced by existing facilities. The project would also finance light cargo trucks of 0.5 to 1.5 tons, and agricultural, machinery repair and maintenance workshops. 55. Backyard Livestock. This would include backyard piggeries, broilers, layers, ducks, and beef cattle. The actual size and type mix of these sub-projects would vary considerably but typical investments would be for: two sows and 15 fatteners for piggeries; 200 layers and 100 broilers for chicken sub-projects; 200 ducks; and one breeding cow and three fatteners for beef cattle. 56. Cottage Industries. The indicative sub-projects envisaged are: concrete products; embroidery and garments; fibercraft; and charcoal making. - 15 - 57. Minor Infrastructure. Although there are a number of ongoing infrastructural programs, some of which are Bank-supported, the component is provided for in this project to facilitate the execution of works which are too small and scattered and have not been included to date in the budget of implementing agencies. It is estimated that the works calling for attention under the proposed project would involve about 120 km of feeder roads, flood control structures covering about 2,700 ha, and rehabilitation of irrigation systems on about 4,100 ha. 58. Strengthening LBP Field Operations. It is considered essential for LBP to strengthen its presence in the field to ensure the effectiveness of its credit delivery and recovery operations. The number of field represen- tatives, to be known as Estates Development Coordinators (EDCs), would be increased under the project, and one EDC assigned to each project area covering 300-500 farmers. Their responsibility would be primarily in finan- cial supervision and management but would also include coordinating the activities of the various field agencies serving the farmer. The project would also provide for the strengthening of ancillary staff such as loan appraisers and examiners. Because of the lead time necessary to ensure staff availability at the commencement of the project, LBP recruited and trained 30 EDCs with effect from April 1978. The costs thereof are essential prepara- tory expenses and retroactive financing of up to $120,000 is, therefore, proposed to cover the costs primarily of training and service vehicles (Paragraph 4 of Schedule 1 to the draft Loan Agreement). 59. Socio-economic Research. Improvement in the implementation of small farmer development programs in general and credit programs in particular calls for a better understanding of the social and economic circumstances of the beneficiaries which determine their decisions with respect to credit and technology. The project would, therefore, finance action-oriented studies to be undertaken by the University of the Philippines, in order to identify measures to improve small holder credit and extension effectiveness. This would include: credit development mechanisms, marketing arrangements and the role of local institutions in the development of agrarian reform estates. Cost Estimates and Financing 60. The total project cost is estimated at $37 million, with a foreign exchange component of $12.2 million. The total cost estimates include physical contingencies at about 2% (mainly for infrastructural works) and price contingencies at 9% of the base costs. The proposed Bank loan of $16.5 million, would finance about 46% of total cost, including $4.3 million of local costs. Justification for local cost financing is given in para 21 above. The balance of the costs would be financed by sub-borrowers, the Land Bank, and the Government. 61. The proposed loan would be made to the Republic of the Philippines and would have a term of 20 years, including a grace period of 5 years, at an interest rate of 7.35%. The Government would on-lend the equivalent of $12.5 million of the proceeds of the loan to LBP for the same term and at the same rate as the Bank loan for use in the term credit and supporting activities - 16 - of the project for which LBP is responsible. Onlending by LBP would be not less than 12% p.a. Term loans would carry an additional 2% service charge on outstanding balances. Considering an average inflation rate of about 7% during the past three years and the fact that the rate of inflation is not expected to exceed this within the next three years, the onlending rate represents a positive real rate of interest. Eligibility criteria, categor- ies of lending, and subloan terms and conditions are set out in a document entitled "Credit Terms and Condition." This document has been approved by LBP Board and would not be amended without prior consultation with the Bank (Section 3.02 of the draft Project Agreement). The balance of the proceeds of the loan ($4.0 million) would be provided by the Government to its line agencies responsible for the execution of infrastructure works under the project. Subloans and other project expenditures would be committed over a period of three years and disbursed over three and one half years. Procurement 62. Goods and services under the credit component of the project and equipment for LBP field offices would be purchased through normal commercial channels from responsible suppliers with adequate service facilities. For all such contracts costing above P 10,000, three price quotations would be solicited. Procurement of these items would not be suitable for international competitive bidding as individual contracts would be small and bulking of contracts would not be practicable because they would be widely dispersed geographically and phased over time. Service vehicles for LBP field staff would be procured through local competitive bidding procedures satisfactory to the Bank. Foreign suppliers are well represented in the Philippines and parts and service facilities are satisfactory. Civil works pertaining to infrastructure, which would be small (usually less than $100,000) and scat- tered, would be executed either by force account by the responsible line agency, or where possible by contract awarded under local procurement pro- cedures acceptable to the Bank. Training, research and consultant studies would be carried out by the University of the Philippines at Los Banos, subject to Bank approval of curricula, terms of reference, and conditions of employment. Disbursement 63. Disbursement would be made against (a) 65% of LBP's term loans disbursed; (b) 100% of foreign exchange cost if vehicles and equipment are directly imported, 100% of ex-factory price if they are locally manufac- tured, and 60% if locally procured; (c) 55% of civil works expenditures; and (d) 100% of consulting services for training and research. Organization and Management 64. Except for the infrastructural works to be executed by the appro- priate line agencies, the project would be implemented by the Land Bank of the Philippines (LBP), which was established by Republic Act No. 3844 in 1964; its authority and mandate were considerably broadened by Presidential Decree No. 251 in 1973. In addition to the general powers vested in it under the Corporation Law and the Central Banking Act, LBP is specifically authorized - 17 - to accept deposits, issue debt investments, extend loans and guarantees, invest in commercial paper, and act as trustee. Its credit activities may -e "for the establishment, development or expansion of agricultural, industrial, home building or home financing projects or other productive enterprises." Its primary responsibility is to serve as the financial arm of agrarian reform, to make cash payments and to issue bonds to former landlords, to effect and hold farmers' amortization agreements and to provide credit in support of the productive activities of beneficiaries. Its commercial banking activities are intended to generate revenue to offset a portion of the public sector cost of agrarian reform. 65. At the end of 1977, LBP had financed land transfer covering 96,000 ha with about 50,000 tenants, of which 38,000 had legally committed themselves to purchase their lands, at a total cost of P 663 million ($91 million). Efforts to pursue agrarian reform and commercial banking objectives through a common network of branches have proven unsatisfactory. LBP has therefore begun to establish low-cost field offices in rural areas to serve the credit needs of small-scale farmers in contrast to Bank branches which are located in urban centers where commercial banking opportunities are more available. 66. LBP's lending operations are guided by three orders of preference: first are agrarian reform farmers and former landlords/LBP bondholders; second are borrowers engaged in businesses beneficial to agrarian reform farmers; while the third consist of commercial and industrial clients (prime borrowers to whom LBP lends for the purpose of generating regular income to offset part of the agrarian reform costs). Nearly 76% of loans granted in 1977 went to the third group, but, as LBP's field strength increases, the portfolio is expected to shift to a target ratio of 35:35:30. 67. LBP's lending to agriculture started in 1974 but has grown rapidly from P 1.2 million ($0.2 million) in 1975 to P 79.3 million ($11 million) in 1977, reflecting LBP's commitment to expand its agricultural lending. While this remains relatively small compared to the total agricultural credit in the country, its significance is enhanced by the fact that it is directed primarily to the lower strata of small-scale farmers. Loan repayments have been satisfactory, especially for agricultural loans in respect of which the delinquency rate fell from 9.5% in 1976 to 7.5% in 1977; this compares most favorably with the prevailing situation in the Philippines where the delinquency rate is generally greater than 25%. 68. Financial Structure and Performance: LBP's authorized capital is P 3 billion ($414 million) of which paid-in capital, wholly govermental, was P 1.1 billion ($152 million) at the end of 1977. The other major source of funds is deposits, which amounted to P 963 million ($133 million) at that date, of which about 95% were deposits of various government agencies. Total - 18 - assets of P 3.2 billion ($441 million) are held primarily in marketable securities (44%), loans and advances (25%), and government bonds (12%). LBP's overall financal condition is satisfactory with a debt-equity ratio of 1.6:1, debt-servicing ratio of 1.8:1 and liquidity ratio of 2.2:1 at the end of 1977. The high liquidity ratio reflects LBP's policy of maintaining a substantial reserve against an upsurge in land transfer operations. Net earnings dropped slightly to P 58 million in 1976 but rose to P 64 million in 1977. 69. Organization, Structure and Staffing. LBP's governing body con- sists of the Minister of Finance (Chairman), LBP's President, the Minister of Agrarian Reform, and the Minister of Labor. Following a period of rapid expansion since 1974, LBP reorganized its structure during 1977/78 for the purpose of consolidating its position and reorienting its operations more rigorously to the needs of the small-scale farmers. In addition to improved delineation of functional responsibilities, provision was made for establish- ing low-cost field offices to serve farmers and a new department (Field Operations Development, headed by a Vice President) has been created for the purpose of administering the expanded agricultural lending program, and supervising the growing portfolio of farmers' undertaking to amortize land purchases. 70. LBP's staff numbers 700 people, including a sizeable cadre of well qualified, experienced and well motivated personnel. However, the rapid expansion since 1974 resulted in critical staff shortages at all levels. Of particular importance to the proposed project are the posts of field represen- tatives (Estates Development Coordinators), project appraisers and loan examiners. LBP has recently succeeded in increasing the number of EDCs and other critical staff to a level that would ensure efficient launching of the proposed project. Efforts are continuing to fill all the major vacancies. 71. Project Management. The Field Operations Group (FOG) would imple- ment the project, with Estate Development Coordinators (EDC) taking charge of the day-to-day operations at the field level. An assurance has been obtained from LBP that its organizational structure with respect to the Field Operations Group would not be materially altered without prior consultation with the Bank (Section 3.03 (c) of the draft Project Agreement). 72. EDCs would constitute the most critical link between LBP and the farmers. In addition to being responsible for financial management and the day-to-day operations of the project, they would play a vital role in coordinating the activities of the other field agencies. An assurance was obtained from LBP, during negotiations, that LBP would adequately staff its field offices in accordance with a staffing plan acceptable to the Bank (Section 3.03(a) of the draft Project Agreement. The Ministry of Agriculture would be wholly responsible for substantive technical extension duties. It would provide the required extension staff in project areas in accordance with the Memorandum of Understanding signed between the Ministry and the Land Bank on July 5, 1978 (Section 3.05 of the draft Loan Agreement). - 19 - 73. The overall planning and coordination of the infrastructure works would be carried out by the Committee on Infrastructural Development for Agrarian Reform Estates (CIDARE) which consists of LBP (secretariat), and representatives of the Ministry of Agrarian Reform, Ministry of Local Government and Community Development, National Irrigation Administration, Ministry of Public Works, Bureau of Public Highways and the Ministry of the Budget. Detailed planning and implementation would be the responsibility of the relevant line agencies. A memorandum of agreement among members has been signed, which sets the specific responsibility of member agencies. 74. Staff training, research and studies would be undertaken by the University of the Philippines at Los Banos (Centre for Policy and Development Studies) under terms of reference and employment of consultants satisfactory to the Bank. 75. Project Monitoring and Evaluation. In addition to routine report- ing of project progress, LBP would conduct baseline surveys on economic and financial conditions of the beneficiaries and would undertake periodic assess- ment of incremental benefits to subborrowers. An assurance was obtained from LBP that this will be done in accordance with a program acceptable to the Bank (Section 2.09 of the draft Project Agreement). Benefits and Justifications 76. The project would directly benefit about 28,000 rural families, the majority of whom live below the established poverty threshold. It would generate additional production of goods and services, valued at P 111.5 mil- lion p.a. ($15.4 million) at full development, the nature of which is well in keeping with the national objectives for self-sufficiency in basic food commodities and increased rural employment. Incremental employment would reach the equivalent of 11,900 man-years in the sixth year and thereafter, consisting of unskilled jobs and, therefore, providing employment opportuni- ties suited to the rural poor and the landless. The incremental rice and corn production would result in foreign exchange savings of about P 64 mil- lion ($8.8 million) annually. 77. With the exception of an 8.5% rate of return for power tillers, some important benefits of which have not been quantified, subprojects show financial returns in excess of 22% and economic rates of return, aggregated for the various major subprojects categories, in excess of 14%, and, in some cases, over 100%. The weighted average economic rate of return of the project is estimated at 47%. 78. One institutional impact of the project would be the strengthening and expansion of LBP's agricultural credit delivery and recovery operations; it is expected that this would result in improved collection of payments due not only in respect of the loans under the project, but also of the land amortization receivables in connection with the agrarian reform. The - 20 - project's direct impact on LBP's financial condition would also be favorable, with positive net earnings from the third year, while the cash flow, assuming the recent debt collection rate continues, would be cumulatively positive after the fourth year. Risks 79. The main factors which would entail significant risks are loan collection, the difficulties encountered by extension officers in stimulating increased crop yields, and LBP's limited experience in agricultural credit. The first two factors are interrelated as actual yields would affect the ability to repay loans. This underlines the critical importance of the field extension services and the timeliness of financial support; it is therefore expected that the risks associated with these factors would be substantially reduced by the proposed measures to strengthen LBP's field support staff in coordination with the other field agencies especially the Ministry of Agricul- ture's technical extension staff. The scope of the project has been intention- ally kept modest in recognition of LBP's limited experience, the inherent complexities of small farmer development programs, and the prevailing credit conditions in the rural Philippines. It is well within LBP's existing and planned capabilities. PART V - LEGAL INSTRUMENTS AND AUTHORITY 80. The draft Loan Agreement between the Republic of the Philippines and the Bank, the draft Project Agreement between the Bank and LBP, and the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement of the Bank are being distributed to the Executive Directors separately. Special conditions of the loan are referred to in Section III of Annex III. The signing of a Subsidiary Loan Agreement between the Republic of the Philippines and LBP is an additional condition of effec- tiveness of the proposed loan (Section 6.02 (b) of the draft Loan Agreement). 81. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 82. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachment December 6, 1978 ANNEX I Page 1 of 4 pages TABLE 3A PHILIPPINES - SOCIAL INfl'.ATORS DATA SHEET REFERENCE GROUPS (ADJUSTED AVERAGES PHILIPPINES /a LAND AREA (THOUSAND SQ. Xlt.) - MOST RECENT ESTIMATE) TOTAL 300.0 SAME SANE NEXT HIGHER AGRICULTURAL 85.6 MOST RECENT GEOGRAPHIC INCOME INCOME 1960 lb 1970 Lb ESTIMATE /b REGION /c GROUP /d GROUP /e GNP PER CAPITA (US$) 140.0 230.0 450.0 616.0 432.3 867.2 ENERGY CONSUMPTION PER CAPITA (KILOGRAMS OF COAL EQUIVALENT) 147.0 301.0 326.0 522.0 251.7 578.3 POPULATION AND VITAL STATISTICS TOTAL POPULATION, MID-YEAR (MILLIONS) 27.4 36.9 44.5 URBAN POPULATION (PERCENT OF TOTAL) 25.3 27.6 29.8 30.1 24.2 46.2 POPULATION DENSITY PER SQ. EM. 91.0 123.0 148.0 156.8 42.7 50.8 PER SQ. KM. AGRICULTURAL LAND 360.0 472.0 520.0 794.8 95.0 93.3 POPULATION AGE STRUCTURE (PERCENT) 0-14 YRS. 45.7 45.6 42.9 40.8 44.9 42.9 15-64 YRS. 51.6 51.6 54.2 55.4 52.8 53.5 65 YRS. AND ABOVE 2.7 2.8 2.9 3.2 3.0 3.5 POPULATION GROWTH RATE (PERCENT) TOTAL 3.0 3.0 2.8 2.3 2.7 2.5 URBAN 4.0 4.0 3.9 5.1 8.8 4.7 CRUDE BIRTH RATE (PER THOUSAND) 45.1 44.2 43.8 34.6 42.2 37.8 CRUDE DEATH RATE (PER THOUSAND) 17.9 13.2 10.5 8.7 12.4 10.8 GROSS REPRODUCTION RATE 3.5 /f 3.3 3.1 2.6 3.2 2.5 FAMILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) .. 191.7 750.8 USERS (PERCENT OF MARRIED WOMEN) .. 2.0 25.0 22.1 14.2 20.0 FOOD AND NUTRITION INDEX OF FOOD PRODUCTION PER CAPITA (1970-100) 99.1 100.0 110.8 106.8 104.3 107.3 PER CAPITA SUPPLY OF CALORIES (PERCENT OF REQUIREMENTS) 83.0 86.0 87.0 108.7 99.5 105.3 PROTEINS (GRAMS PER DAY) 44.0 45.0 50.0 57.7 56.8 63.0 OF WHICH ANIMAL AND PULSE 19.0 /R 22.0 19.2 17.0 17.5 21.7 CHILD (AGES 1-4) MORTALITY RATE 9.0 6.6 7.5 4.0 7.5 8.0 HEALTH LIFE EXPECTANCY AT BIRTH (YEARS) 49.4 55.6 58.5 59.0 53.3 57.2 INFANT MORTALITY RATE (PER THOUSAND) 84.6 81.0 72.0 44.0 82.5 53.9 ACCESS TO SAFE WATER (PERCENT OF POPULATION) TOTAL *- 36.0 50.0 21.9 31.1 56.8 URBAN .. 67.0 82.0 58.3 68.5 79.0 RURAL .. 20.0 31.0 9.8 18.2 31.8 ACCESS TO EXCRETA DISPOSAL (PERCENT OF POPULATION) TOTAL .. 57.0 56.0 28.6 37.5 30.9 URBAN .. 90.0 76.0 66.6 69.5 45.4 RURAL .. 40.0 44.0 14.8 25.4 16.1 POPULATION PER PHYSICIAN .. .. 3130.0 4103.1 9359.2 2706.8 POPULATION PER NURSING PERSON .. 3840.0 2180.0 1520.2 2762.5 1462.0 POPULATION PER HOSPITAL BED TOTAL 1180.0 850.0 640.0 657.1 786.5 493.9 URBAN .. .. .. 145.5 278.4 229.6 RURAL .. .. .. 1011.8 1358.4 2947.9 ADMISSIONS PER HOSPITAL BED .. .. .. 19.0 19.2 22.1 HOUSING AVERAGE SIZE OF HOUSEHOLD TOTAL 5.8 5.9 .. 5.2 .. 5.2 URBAN .. 6.2 .. 5.2 .. 5.0 RURAL .. 5.8 .. 5.4 .. 5.4 AVERAGE NUMBER OF PERSONS PER ROOM TOTAL .. 2.3 .. .. .. 2.0 URBAN 2.1 .. .. 2.3 1.5 RURAL . 2.4 .. .. .. 2.7 ACCESS TO ELECTRICITY (PERCENT OF DWELLINGS) TOTAL 17.0 23.0 31.0 39.1 28.3 64.1 URBAN .. 60.4 .. .. .. 67.8 RURAL .. 7.0 10.0 .. 10.3 34.1 ANNEX I Page 2 of 4 pages TABLE 3A PHILIPPINES - SOCIAL INDICATORS DATA SHEET REFERENCE GROUPS (ADJUSTED AVERAGES ?EILIPPINES - MOST RECENT ESTIMATE) La SAME SAME NEXT HIGHER MOST RECENT GEOGRAPHIC INCOME INCOME 1960 /b 1970 /b ESTIMATE /b REGION Ic GROUP /d GROUP /e EDUCATION ADJUSTED ENROLLMENT RATIOS PRIMARY: TOTAL 95.0 114.0 105.0 95.6 75.8 99.8 FEMALE 93.0 113.0 103.0 93.7 67.9 93.3 SECONDARY: TOTAL 26.0 50.0 56.0 43.3 17.7 33.8 FEMALE 25.0 50.0 57.0 38.6 12.9 29.8 VOCATIONAL (PERCENT OF SECONDARY) 14.0 .. .. 11.3 7.4 12.8 PUPIL-TEACHER RATIO PRIMARY 36.0 29.0 29.0 30.0 34.3 34.9 SECONDARY 27.0 33.0 31.0 25.4 23.5 22.2 ADULT LITERACY RATE (PERCENT) 71.9 82.6 87.0 84.0 63.7 71.8 CONSUMPTION PASSENGER CARS PER TRDUSAND POPULATION 3.0 8.0 8.0 9.3 7.2 12.4 RADIO RECEIVERS PER THOUSAND POPULATION 22.0 72.0 *- 97.6 71.1 104.5 TV RECEIVERS PER THOUSAND POPULATION 1.4 10.0 17.0 21.8 14.1 28.1 NEWSPAPER ("DAILY GENERAL INTEREST") CIRCULATION PER THOUSAND POPULATION 17.0 14.0 18.0 25.9 16.3 45.2 CINEMA ANNUAL ArTENDANCE PER CAPITA 0.6 .. 7.6 4.6 1.6 4.6 EMPLOYMENT TOTAL LABOR FORCE (THOUSANDS) 10100.0 12400.0 15400.0 FEMALE (PERCENT) 34.4 33.1 32.7 33.2 28.0 25.7 AGRICULTURE (PERCENT) 61.0 55.0 52.6 48.4 54.1 46.2 INDUSTRY (PERCENT) 15.2 15.8 PARTICIPATION RATE (PERCENT) TOTAL 39.8 36.6 35.3 38.9 37.8 33.8 MALE 52.1 48.6 47.1 48.6 50.3 48.1 FEMALE 27.4 24.4 23.3 28.4 20.9 17.3 ECONOMIC DEPENDENCY RATIO 1.3 1.5 1.3 1.2 1.3 1.4 INCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY HIGHEST 5 PERCENT OF HOUSEHOLDS 28.8 .. .. 17.3 19.5 23.6 HIGHEST 20 PERCENT OF HOUSEHOLDS 56.2 54.0 53.3 45.6 48.9 52.3 LOWEST 20 PERCENT OF HOUSEHOLDS 4.2 3.6 5.5 6.5 5.9 4.3 LOWEST 40 PERCENT OF HOUSEHOLDS 11.9 11.7 14.7 17.3 15.7 13.1 POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. 180.0 140.8 155.9 191.9 RURAL .. .. 155.0 112.8 97.9 193.1 ESTIMATED RELATIVE POVERTY INCOME LEVEL (USS PER CAPITA) URBAN .. .. .. .. 143.7 319.8 RURAL .. .. 87.0 76.8 87.3 197.7 ESTIMATED POPULATION BELOW POVERTY INCOME LEVEL (PERCENT) URBAN .. .. 26.0 27.7 22.9 19.8 RIURAL .. .. 40.0 40.4 36.7 35.1 Not available Not applicable. NOTES /a The adjusted group averages for each indicator are population-weighted geometric means, excluding the extreme values of the indicator and the most populated country in each group. Coverage of countries among the indicators depends on availability of data and is not uniform. /b Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969 and 1971; and for Most Recent Estimate, between 1973 and 1977. /c East Asia & Pacific; /d Lower Middle Income ($281-550 per capita, 1976); /e Intermediate Middle Income ($551-1135 per capita, 1976); /f 1950-55; /g Av. 1960-62. September 1978 ANNEX I Page 3 of 4 pages ECONOMIC INDICATORS GROSS NATIONAL PRODUCT IN 1977 ANNUAL RATE OF GROWTH (%, constant prices) US$ million _ 1966-71 1971-76 1977 GNP at Market Prices 20,596 100.0 5.1 . 6.6 6.3 Gross Domestic Investment 6,220 30.2 5.9 12.5 2.7 -. Gross National Saving 5,393 26.2 2.4 10.8 12.4 Current Account Balance -827 -4.0 Exports of Goods, NFS 4,021 19.5 -0.5 5.6 20.9 Imports of Goods, NFS 4,788 23.3 4.1 6.5 3.5 OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 1977 Value Added Labor Force V. A. per worker US$ million % Million % US$ % Agriculture 5,826 28.1 7.7 48.1 757 58.4 Industry 7,195 34.7 2.2 13.8 3,270 252.2 Services 7,724 37.2 5.4 33.7 1,430 110.3 Unemployed . . 0.7 4.4 Total/Average 20,745 100.0 16.0 100.0 1,297 100.0 GOVERNMENT FINANCE General Government Central Government (P billion) X of GDP (P billion) % of GDP 1977 1977 1971 1977 1977 1971 Current Receipts 22.7 14.8 11.3 20.0 13.1 9.2 Current Expenditure 19.3 12.6 10.1 16.9 11.0 7.6 Current Surplus 3.4 2.2 1.2 3.1 2.0 ,1.6 Capital Expenditures 5.4 3.5 1.6 5.1 3.3 1.3 MONEY, CREDIT AND PRICES 1972 1973 1974 1975 1976 1977 (P billion outstanding end period) Money Supply 6.5 7.3 9.0 10.3 12.1 14.9 Bank Credit to Public Sector 3.9 2.4 2.0 5.8 8.9 11.0 Bank Credit to Private Sector 12.6 16.2 24.2 28.5 33.6 38.0 (Percentage or Index Numbers) Money as % of GDP 11.5 10.1 9.0 8.9 9.2 9.7 General Price Index (1972 = 100) 100.0 117.8 155.3 167.6 180.1 196.2 Annual percentage changes in: General Price Index 6.8 17.8 31.8 7.9 7.5 8.9 Bank Credit to Public Sector -2.1 -38.5 -16.7 190.0 53.4 23.6 Bank Credit to Private Sector 21.7 28.6 49.4 17.8 17.9 13.1 /a All conversions to dollars in this table are at the average exchange rate prevailing during the period covered. not applicable ANNEX I Page 4 of 4 pages TRADE PAYMENTS AND CAPITAL FLOWS BALANCE OF PAYMENTS MERCHANDISE EXPORTS (AVEKAGE 1975-77) 1975 1976 1977 US$ million % (US$ million) Coconut Products 591 22.1 Exports of Goods, NFS 3,076 3,330 4,021 Sugar Products 536 20.0 Imports of Goods, NFS 4,116 4,383 4,788 Forest Products 288 10.8 Resource Gap (deficit = -) -1,040 -1,053 -767 Mineral Products 438 16.4 Fruits & Other Agric. Products 196 7.4 Interest Payments (net) -53 -185 -320 Other Manufacturers 622 23.3 Other Factor Payments (net) -149 -138 Total 2,673 100.0 Net Transfers 318 269 260 Balance on Current Account -924 -1,107 -827 EXTERNAL DEBT, DECEMBER 31, 1977 /c US$ million Direct Foreign Investment 125 144 216 Net MLT Borrowing Public Debt, including Guaranteed 3,656 Disbursements 677 1,407 1,229 Nonguaranteed Private Debt 2,907 Amortization 318 368 544 Total Outstanding and Disbursed 6,563 Subtotal 359 1,039 685 Other Capital (net) /a -80 -236 +90 DEBT SERVICE RATIO FOR 1977 /d Increase in Reserves (+) -521 -160 164 Public Debt, including Guaranteed 7.8 Gross Reserves Nonguaranteed Private Debt 9.8 (end year) /b 2,080 2,206 2,263 Total Outstanding and Disbursed 17.6 Net Reserves (end year) /b 265 105 269 Petroleum Imports 710 801 859 IBRD/IDA LENDING, September 30, 1978 (US$ million) RATE OF EXCHANGE IBRD IDA Annual Averages End Period Outstanding and Disbursed 499.3 29.4 1976 1977 1978/e Aug. 1978 Undisbursed 1,105.0 30.8 Outstanding, incl. Undisbursed 1,604.3 60.2 US$1.00 = P 7.446 7.407 7.375 7.371 P 1.00 = US$ 0.134 0.135 0.136 0.136 /a Includes SDRs, short-term private loans, Central Bank liabilities, use of IMF credit, and errorg and omissions. /b Reserves of the Central Bank and commercial banking system. /c Excludes short-term debt and IMF standby credit and is on a disbursement basis. /d Ratio of Debt-Service to Exports of Goods and Nonfactor Services. le Eight months only. ANNEX II Page I of 14 pages THE STATIIS oF BANK (GROUP OPERATIONS TN THE " -APPIIES A. STATEMENT OF BANK LOANS AND IDA CREDITS As of October 31, 1978 Loan or Credit Amounts ($ million) Number Year Borrower Purpose Bank IDA Undisbursed Sixteen loans and two credits fully disbursed 252.4 19.5 720-PH 1971 Rice Processing '' and Storage 14.3 2.3 809-PH 1972 National Power Corporation Power 22.0 3.9 349-PH 1973 Republic of the Philippines Education II 12.7 2.7 B91-PH 1973 " Fisheries 11.6 0.7 939-PH 1973 Ports 6.1 1.3 950-PH 1973 Second Highways 68.0 6.9 984-PH 1974 Aurora-Penaranda Irrigation 9.5 4.7 998-PH 1974 " DFC-DBP I 50.0 4.6 1034-PH 1974 National Power Corporation Power 61.0 8.3 1035-PH 1974 Republic of the Philippines Population 25.0 16.4 1048-PH 1974 " Shipping 20.0 13.8 1052-PH 1974 Philippine Natjonal Bank DFC 30.0 15.1 1080-PH 1975 Republic of the Tarlac Philippines Irrigation 17.0 9.2 1102-PH 1975 Rural Development 25.0 19.4 1120-PH 1975 Small and Medium Industries 30.0 6.8 1154-PH 1976 Magat Irrigation 42.0 27.4 1190-PH 1976 DFC-DBP II 75.0 43.7 1224-T-PH 1976 " Education III 25.0 19.3 1225-PH 1976 Livestock II 20.5 10.6 1227-PH 1976 Chico Irrigation 50.0 46.9 1272-T-PH 1976 Manila Urban 10.0 7.8 1282-PH 1976 " Manila Urban 22.0 17.2 1269-PH 1976 Second Grain Processing 11.5 11.5 1270-PH 1976 " Second Fisheries 12.0 9.0 1353-PH 1977 " Third Highways 95.0 87.9 1367-PH 1977 " Jalaur Irrigation 15.0 11.9 1374-PH 1977 " Fourth Education 25.0 22.2 1399-PH 1977 Central Bank of Fourth Rural the Philippines Credit 36.5 29.0 1414-PH 1977 Republic of the National Irriga- Philippines tion Systems Improvement 50.0 42.9 1415-PH 1977 Provincial Cities Water Supply 23.0 21.4 1421-PH 1977 Second Rural Development- Land Settlement 15.0 14.8 1460-PH 1977 National Power Corporation Seventh Power 58.0 57.7 1506-PH 1978 Republic of the Smallholder Tree Philippines Farming 8.0 8.0 1514-PH 1978 Philippine National Bank DFC (PDCP) 30.0 30.0 1526-PH 1978 Republic of the Second National Philippines Irrigation Systems Improvement 65.0 65.0 790-PH 1978 Republic of the Rural Infra- Philippines structure 28.0 28.0 S.8-PH 1978 Republic of the Philippines Education 2.0 2.0 1547-PH 1978 Republic of the Rural Electri- Philippines fication 60.0 60.0 1555-PH 1978 Philippine National Bank DFC-PIS0 15.0 15.0 1567-PH 1978 Republic of the Philippines MAGAT II 150.0 150.0 1572-PH 1978 Republic of the Industrial Philippines Investment III 80.0 80.0 1615-PH * 1978 Republic of the Manila Water Philippines Water Supply-II 88.0 88.0 Total 1,725.4 60.2 1,123.4 of which has been repaid (Bank and third parties) 121.2 - Total now outstanding 1,604.2 60.2 Amount sold 22.3 of which has been repaid (third parties) 13.1 9.2 - Total now held by Bank and IDA (prior to exchange rate adjustments) 1,595.0 60.2 Total undisbursed 1,092.7 30.7 1,123.4 a Not yet effective. ANNEX II Page 2 of 14 pages B. STATEMENT OF IFC INVESTMENTS As of September 30, 1978 Fiscal Amounts ($ million) Year Company Loan Equity Total 1963 & 1973 Private Development Corporation of the Philippines 15.0 4.4 19.4 1967 Manila Electric Company 8.0 - 8.0 1967 Meralco Securities Corporation - 4.0 4.0 1970 Philippine Long Distance Telephone Company 4.5 - 4.5 1970 & 1972 Mariwasa Manufacturing, Inc. 0.8 0.4 1.2 1970 Paper Industries Corporation of the Philippines - 2.2 2.2 1971 & 1977 Philippine Petroleum Corporation 6.2 2.1 8.3 1972 Marinduque Mining and Industrial Corporation 15.0 - 15.0 1973 Victorias Chemical Corporation 1.9 0.3 2.2 1974 Filipinas Synthetic Fiber Corporation 1.5 - 1.5 1974 Maria Christina Chemical Industries, Inc. 1.5 0.5 2.0 1974 Republic Flour Mills Corporation 1.2 - 1.2 1975 Philippine Polyamide Industrial Corporation 7.0 - 7.0 1976 Philagro Edible Oils, Inc. 2.6 0.2 2.8 1977 Acoje Mining Company, Inc. 2.3 1.2 3.5 1977 Sarmiento Industries, Inc. 3.5 - 3.5 1978 Cebu Shipyard and Engineering Works, Inc. 2.1 - 2.1 Total gross commitments 73.1 15.3 88.4 Less sold, acquired by others, repaid or cancelled 27.7 12.0 39.7 Total commitments now held by IFC 45.4 3.3 48.7 Undisbursed 5.1 - 5.1 ANNEX II Page 3 of 14 pages C. PROJECTS IN EXECUTION /1 Agricultural Sector Loan No. 720 Rice Processing and Storage; $14.3 Million Loan of February 4, 1971; Date of Effectiveness: May 10, 1971; Closing Date: June 30, 1979 This project is providing long-term credit through the Development Bank of the Philippines to finance a program for the development and modern- ization of the rice and corn processing industry. Originally the project was restricted to rice and to the private sector, and the emphasis was on the construction of new integrated large capacity rice mills. Due in part to poor harvests and in part to large cost increases for rice mills, the demand for subloans for new integrated rice mills turned out to be small and, as explained in the President's Memorandum, dated June 8, 1972 (R72-40), the Loan Agreement was amended to shift the project emphasis to rehabilita- tion of existing rice milling facilities. The Loan Agreement was further amended in April 1974 to: (a) expand the scope of the project to include corn in addition to rice, (b) enable local governments and the National Grains Authority to borrow funds under the project, and (c) streamline procurement procedures (President's Memorandum SecM74-244 of April 15, 1974). As a result of these amendments, the project is now generally progressing satis- factorily, although mounting arrears are a source of concern and DBP is now stepping up its supervision and collection efforts to deal with this. Bank loans for subloans have been fully committed; however, because of the long construction period of the large subprojects, full disbursement will be delayed until mid-1978 and the Closing Date has been postponed to June 30, 1979. Credit No. 472 Aurora-Penaranda Irrigation; $9.5 Million Credit and Loan No. 984 $9.5 Million Loan of May 14, 1974; Date of Effectiveness: August 22, 1974; Closing Date: June 30, 1980 The project is financing the diversion of water from the Aurora basin into the Pantabangan reservoir to provide year-round irrigation for 30,000 ha of rice land in Central Luzon. Although the need for foundation and abutment area grouting on the two diversion dams was more extensive than originally expected, progress on the transbasin diversion has been excellent. Diversion of 75% of Aurora water, on closure of the first dam in July 1975, was an early benefit for the Central Luzon rice growing area. The second dam /1 These notes are designed to inform the Executive Directors regarding the progress of projects in execution, and in particular to report any problems which are being encountered, and the action being taken to remedy them. They should be read in this sense, and with the understanding that they do not purport to present a balanced evalua- tion of strengths and weaknesses in project execution. ANNEX II Page 4 of 14 pages was closed on April 1, 1976, about one year ahead of schedule. In the service area, lack of competition and high bids delayed awarding of contracts, but five small local construction firms are now at work. Urgent work is being done by government forces. Project costs have increased about 54% over appraisal estimates, largely as a result of rapid inflation. Although there are added benefits from early diversion resulting in additional water for irrigation sooner than planned, and nearly 5,000 ha have been added to the project, the rate of return is expected to fall from 17% at appraisal to around 14%. The Credit has been fully disbursed and disbursement on the Loan has begun. Because of delays in completion of civil works in the Penaranda service area, full disbursement is not likely to be completed until mid-1979 and the Closing Date has been postponed to June 30, 1980. Loan No. 891 Fisheries; $11.6 Million Loan of May 21, 1973; Date of Effectiveness: December 5, 1973; Closing Date: June 30, 1979 This project is providing long-term credit to the private sector through the Development Bank of the Philippines (DBP) for marine and inland fisheries development. The Loan became effective on December 5, 1973. It is fully committed, and is expected to be fully disbursed before the Closing Date (June 30, 1979). DBP has had difficulty in setting up a benefit monitoring/ evaluation system on its own, but it is now seeking local consultancy assistance. Although not entirely satisfactory, loan collections have been considerably better than for most of DBP's agricultural operations. Loan No. 1080 Tarlac Irrigation; $17.0 Million Loan of January 27, 1975; Date of Effectiveness: April 27, 1975; Closing Date: December 31, 1980 The project is assisting the Government to improve 21,000 ha of land under three existing national irrigation systems and to extend irrigation to 13,000 ha of additional land in Central Luzon. Upgrading of project roads and construction of new roads also are included. In addition, the project provides for a groundwater irrigation pilot project, a National Irrigation Systems Improvement Study (NISIS), and a water management training program. All major civil works contracts are in progress and the remaining work is under way. General progress, although slower than originally estimated, is improving. Progress on the groundwater, water management training and NISIS components of the project is satisfactory. Due to the necessity of adding drainage systems not included originally, completion of the project is now expected to be delayed until the end of 1980. Loan No. 1102 Rural Development; $25.0 Million Loan of April 16, 1975; Date of Effectiveness: July 28, 1975; Closing Date: June 30, 1981 The project is assisting the Government to carry out rural devel- opment on the island of Mindoro. Progress in the implementation of irrigation ANNEX II Page 5 of 14 pages systems and on the improvement of the port of Calapan is now accelerating. Progress has also been made on the Mangyan (Minority) Assistance Progur.r, reforestation of watersheds and drainage of schistosomiasis affected areas. The construction of roads has now begun after delays caused by the unsatisfac- tory performance of a number of contractors. Disbursements, which currently stand at 39% of projections, are lagging behind physical accomplishment due to difficulties encountered in prompt processing of force account work and in coordinating disbursement requests between agencies. Steps are now being taken to streamline disbursement procedures. Loan No. 1154 Magat Multipurpose Project; $42.0 Million Loan of August 7, 1975; Date of Effectiveness: November 4, 1975; Closing Date: June 30, 1982 The project is assisting the Government to improve and expand irrigation on 35,000 ha of land in the Cagayan Valley of Northern Luzon. Consultant's work on engineering and economic evaluation studies of the proposed Magat dam and reservoir has been completed. Civil works by local contract and force account for rehabilitation and new construction of canals, drains and access roads is progressing well. The water management training is continuing satisfactorily. Loan No. 1225 Second Livestock; $20.5 Million Loan of April 8, 1976; Date of Effectiveness: September 13, 1976; Closing Date: June 30, 1982 The project is designed to increase domestic production of livestock products. Despite a relative slowdown in lending over the past year, the project remains several months ahead of schedule and would be fully disbursed well before the Closing Date of June 30, 1982. The demand for piggery and poultry subloans has exceeded appraisal estimates, but lending for beef cattle development lags behind due to problems of land tenure, financial incentives, technical knowledge and pasture development. The Development Bank of the Philippines (DBP), the project executing agency, has strengthened its technical supervision of subloans, but further improvements are required in its management information system and loan collection performance. Loan No. 1227 Chico River Irrigation Project; $50.0 Million Loan of April 8, 1976; Date of Effectiveness: July 19, 1976; Closing Date: June 30, 1981 The Erosion Control Study and input-output monitoring program are progressing satisfactorily. Although construction is nearly a year behind schedule, sufficient equipment has been delivered so that force account work can now proceed rapidly. Also bids have been opened for the first major construction contract, and this construction should soon be started. ANNEX II Page 6 of 14 pages Loan No. 1269 Second Grain Processing Project; $11.5 Million Loan of July 2, 1976; Date of Effectiveness: November 12, 1976; Closing Date: June 30, 1981 The project is providing long-term credit through the Development Bank of the Philippines to assist in modernizing and expanding the Philippine grain processing industry. Initial progress under the project is satisfactory. Subloan commitments are expected to begin shortly, now that Loan No. 720 is fully commiLted. Loan No. 1270 Second Fisheries Project; $12.0 Million Loan of July 2, 1976; Date of Effectiveness: November 12, 1976; Closing Date: June 30, 1981 The project is providing long-term credit through the Development Bank of the Philippines (DBP) to assist in increasing fish production for domestic consumption. Fishing vessels, iceplants with cold storage, a slipway, and new and rehabilitated milkfish ponds are being financed under the project. The loan became effective on November 15, 1976. Subloan approvals by DBP were ahead of schedule in the first half of 1977, but have slowed down considerably, due to problems in procurement procedures for fishing vessels, and DBP's increased emphasis on loan collection. The procurement issue has been resolved and the project is expected to be completed by the Closing Date. Loan No. 1367 Jalaur Irrigation Project; $15.0 Million Loan of February 14, 1977; Date of Effectiveness: May 12, 1977; Closing Date: December 31, 1982 Detailed design for a major part of the works has been completed. Contracts have been awarded for the procurement of equipment and vehicles. Contracts for the improvement and enlargement of existing main canals of the four systems are being awarded and construction has begun. The overall progress of the project is satisfactory. Loan No. 1399 Fourth Rural Credit Project; $36.5 Million Loan of April 11, 1977; Date of Effectiveness: June 2, 1977; Closing Date: December 31, 1980 The project provides medium- and long-term credit through partici- pating banks to finance farmers and local entrepreneurs for farm mechanization, livestock, fisheries, and cottage and agro-industries. The project became effective on June 2, 1977. With the recent increased participation of many rural banks, commitments have recovered from an initial low rate. However, a shortfall in commitments of as much as 20% may still be experienced because of a decline in demand for four-wheel tractors without compensating growth in demand in other subloan categories. In order to determine what changes in project design or duration may be needed to ensure effective use of project resources unlikely to be committed to this category of subloan, the Central Bank is conducting a comprehensive reassessment of the lending program to be reviewed with the next supervision mission. ANNEX II Page 7 of 14 pages Loan No. 1414 National Irrigation Systems Improvement Project; $50 Million Loan of May 13, 1977; Date of Effectiveness: August 9, 1977; Closing Date: December 31, 1981 Topographic surveys and mapping have been completed ahead of schedule. Project works are slightly behind schedule; however, with strengthening of design teams in the regional offices, a major part of the design would be completed before the end of 1978. Construction activities during 1977/78 dry season are limited to the improvement of secondary laterals and the construc- tion of service roads along these laterals in the Ilocos subproject. Loan No. 1421 Second Rural Development (Land Settlement) Project; $15.0 Million Loan of June 10, 1977; Date of Effectiveness: October 27, 1977; Closing Date: December 31, 1982 The project is assisting the Government to improve its National Resettlement Program through technical assistance, organizational changes and pilot programs to provide infrastructure and agricultural support services in three settlement areas. The loan became effective on October 27, 1977. Proce- dural problems concerning budget releases and staff appointments have adversely affected progress in project implementation and have resulted in the execution of most scheduled events being about a year behind schedule. However, progress in detailed planning and design is generally satisfactory and the Government has taken steps to resolve budgetary difficulties. Loan No. 1506 Smallholder Tree Farming and Forestry Project; $8.0 Million Loan of January 23, 1978; Date of Effectiveness: May 11, 1978; Closing Date: December 31, 1982 The project is a continuation of the US$2 million Bank-financed Tree- farming Pilot Project (Loan 998-PH), with additional project components in large-scale plantations, forestry research and planning. Operations have begun for most project components. Although the large-scale plantation component is below target because of insufficient seed supply and managerial constraints, no delaying effect on project completion is anticipated. Initial budgetary deficiencies are expected to be overcome at the latest by the second year. Due to the early stage of the project, disbursements have not yet begun. Loan No. 1526 Second National Irrigation Systems Improvement Project: $65 Million Loan of March 15, 1978; Date of Effectiveness: June 20, 1978; Closing Date: December 31, 1984 The project is assisting the Government to improve and develop irri- gation systems on 80,900 ha, control schistosomiasis and strengthen the National Irrigation Administration regional offices. The Loan Agreement was signed on March 15, 1978 and became effective on June 12, 1978. The project is in its initial stages of mobilization and preconstruction activities. Topographic surveys and mapping are ahead of schedule. Improvement of main and secondary canals is expected to start in November 1978. ANNEX II Page 8 of 14 pages Credit No. 790 Rural Infrastructure; $28 Million Credit of April 21, 1978; Date of Effectiveness: Date of Effectiveness: July 21, 1978; Closing Date: December 31, 1983 The credit is financing the construction and improvement of basic infrastructure in six provinces chosen on the basis of low level of per capita income and inadequate infrastructure. The infrastructure funded includes communal irrigation systems, improvement of ports, health stations, rural water supply and village roads. The credit was signed on April 21, 1978. The Project is in its initial stages of mobilization and preconstruction activities. Construction work on communal irrigation systems and village roads has started. Loan No. 1563-PH The Magat River Multipurpose Project-Stage II; $150 Million Loan of May 23, 1978; Date of Effectiveness: August 24, 1978; Closing Date: December 31, 1983 The project will assist the Government through completion of Stage II of this project, to provide water to irrigation systems and improve systems operation on 102,000 ha. Preconstruction works have been completed and works on dam foundation grouting, drainage gallery tunneling and river diversion tunnels are underway and expected to be completed by 1979. The civil works contract for the main dam has been awarded and the contractor is in the process of mobilizing staff and equipment. Transportation Sector Loan No. 939 Second Ports Project; $6.1 Million Loan of October 24, 1973; Date of Effectiveness: December 19, 1973; Closing Date: July 15, 1979 Progress has improved on civil works construction for both General Santos and Cagayan de Oro, and the delays reduced to two and five months respectively behind schedule. Work is now 65% completed at General Santos and 40% at Cagayan de Oro. About 180 m of the new quay at General Santos and 60 m at Cagayan de Oro, have been turned over to the Philippine Ports Authority (PPA) and are now in use. Loan No. 950 Second Highway; $68.0 Million Loan of December 12, 1973; Date of Effectiveness: February 27, 1974; Closing Date: June 30, 1979 While over 95% of the construction program has been successfully completed, one of nine national roads is behind schedule due to difficulties experienced by the contractors in prosecuting the work. For this reason, project completion is expected to be delayed 24 months beyond the appraisal schedule. UNDP-financed road feasibility studies were completed in June 1975, detailed engineering for the Third Highway Project (Loan 1353-PH) in August 1976, and detailed engineering for the proposed Fourth Highway Project in October 1977. Weighbridges for axle load control has been procured, civil ANNEX II Page 9 of 14 pages works for permanent weigh stations are underway and the axle load control program is scheduled for initial implementation by August 1978. The total cost of the project has increased substantially (about 32% above the appraisal estimate) due to the oil price increases in late 1973, delays in project execution, and continuing inflation. Loan No. 1048 Inter-island Shipping; $20 Million Loan of October 29, 1974; Date of Effectiveness: January 15, 1975; Closing Date: June 30, 1980 The Government is relending the proceeds of the Loan to the Develop- ment Bank of the Philippines (DBP) for onlending to beneficiaries for the acquisition of new and used ships and for major repairs and conversions. Commitments were initially slow because of lack of demand from the private sector due to the lengthy period required for the processing of loans, restric- tive collateral requirements by DBP, and unfavorable lending terms offered by DBP in comparison with those extended by other lending institutions in the Philippines. However, these problems have now been resolved and subloan commitments are expected to be fully made within the next six months. Loan No. 1353 Third Highway Project; $95.0 Million Loan of January 12, 1977; Date of Effectiveness: March 30, 1977; Closing Date: June 30, 1981 Contracts have been awarded for all national roads and contractor mobilization is underway. Consultants for supervision of construction have been appointed and have established themselves in the field. The technical assistance advisors for maintenance improvement and road restoration have been appointed and took up their duties beginning in September 1977. The training advisors were appointed and began work in July 1977. The consul- tants for the road and ferry feasibility studies have been appointed and began work in November 1977. Consultants for workshop design and construc- tion supervision have been appointed and began work in May 1977. After a delay of about 12 months, the road maintenance and road restoration program is now beginning to be implemented with planning of road restoration proj- ects underway, contracts for 8 out of 28 workshops awarded, procurement con- tracts for maintenance equipment, spare parts, tools and machinery being prepared and normal maintenance activities being organized. Overall, project costs are expected to remain close to appraisal estimates but indications are that project execution will be delayed by about 12 months due to late start of some critical activities. Education Sector Credit No. 349 Second Education; $12.7 Million Credit of January 5, 1973; Date of Effectiveness: April 11, 1973; Closing Date: December 31, 1978 The Credit provides $12.7 million to finance improvements to existing middle and higher level agricultural education institutions, curric- ulum development, and new technical and vocational institutions in rural ANNEX II Page 10 of 14 pages areas. Physical progress is now good under the project and disbursements have reached 75% of planned levels. All of the 32 project institutions have been completed and three fourths of the technical assistance program has been completed. Cost overruns of 13% are expected in dollar terms because of inflation and earlier lack of cost control over civil works; the amount of equipment purchased has been reduced to compensate for cost overruns. The fellowship program is behind schedule, and will extend two years beyond the Closing Date. Savings in the Third Education Project will finance the balance of the program. Loan No. 1224 Third Education Project; $25 Million Loan of April 8, 1976; Date of Effectiveness: July 29, 1976; Closing Date: June 30, 1981 The project covers the first phase (1976-80) of the Government's eight-year textbook program and provides for the development, production and distribution of 27 million textbooks. It also provides for curriculum development, teacher training and technical assistance. Implementation is proceeding on schedule, and project costs are well within appraisal estimates. Loan No. 1374 Fourth Education Project; $25.0 Million Loan of March 25, 1977; Date of Effectiveness: June 9, 1977; Closing Date: December 31, 1981 This project is assisting the Government in developing agricultural education and training. It includes assistance for: specialized facilities for forestry, animal science, and veterinary medicine; a regional agricultural college in the Visayas; and training for extension workers and farmer leaders. Implementation of the project is generally on schedule, with the exception of civil works contract awards which have been delayed by about four months because of delayed government clearances. Project costs are within the appraisal estimates. Loan No. S-8-PH Educational Radio Technical Assistance; $2 million loan of April 21, 1978; Date of Effectiveness: August 22, 1978; Closing Date: December 31, 1981 The proposed project is assisting the Government to develop and evalu- ate the cost effectiveness of educational radio in inservice teacher training and primary classroom teaching. The loan became effective on August 22, 1978. Urban Sector Loan No. 1272T Manila Urban Development Project; $10.0 Million and Loan No. 1282 $22.0 Million Loans of June 9, 1976; Date of Effectiveness: December 9, 1976; Closing Date: September 30, 1981 The loan is financing: (a) improvements in basic sanitary services for families living in the Tondo Foreshore and Dagat Dagatan areas, and (b) improve- ments in transportation and traffic in the Greater Manila Area. Construction ANNEX II Page 11 of 14 pages on 1,500 of 2,000 serviced lots at Dagat Dagatan is nearing completion. The high school and health clinic in Tondo have been constructed and the subdivision of lots in the Tondo priority area is also nearing completion. The progress of the project is generally satisfactory. A paper on the status of this project was submitted to the Executive Directors in December 1977. Loan No. 1415 Provincial Cities Water Supply Project; $23 Million Loan of May 13, 1977; Date of Effectiveness: September 9, 1977; Closing Date: March 31, 1982 This loan is financing: (a) water supply improvement and expansion in six provincial cities; (b) feasibility studies for water supply improve- ment in ten additional cities; and (c) feasibility studies for Manila sewerage. There has been a delay of about 2 months in the preparation of detailed designs for the construction of water supplies to six cities. This loss of time is expected to be made up in the coming months. The preparation of feasibility studies for 10 cities is on schedule as is also the Manila Sewerage Design Study. The Government is also taking action for the training of staff in the design of small community water supplies. Loan No. 1615 Second Manila Water Supply Project; $88 Million Loan of July 26, 1978; Date of Effectiveness: Not Yet Effective; Closing Date: December 31, 1983 This loan is assisting the Government to provide safe water for an additional four million people in Metropolitan Manila, as well as improve the service to some 3 million who are inadequately served at present. The Loan Agreement was signed July 26, 1978. It is not yet effective. Power Sector Loan No. 809 Fifth Power; $22.0 Million Loan and $10.0 Million Credit Credit No. 296 of April 3, 1972; Date of Effectiveness: July 1, 1972; Closing Date: December 31, 1978 The project is helping the National Power Corporation to finance the second unit of 150 MW at the Bataan thermal power plant, expansion of the transmission system in Luzon and consultants' services. The project was completed in mid-1977, two years behind schedule. Due to cost overruns, a part of the transmission project was transferred to the Sixth Power Project. The actual project cost as finally constructed is about US$59.3 million - an increase of about US$11.0 million over the original estimates. The closing date of the loan has been postponed from June 30, 1978 to December 31, 1978 to allow full disbursement of committed funds. Credit 296-PH was fully disbursed in April 1975. ANNEX II Page 12 of 14 pages Loan No. 1034 Sixth Power; $61.0 Million Loan of July 31, 1974: Date of Effectiveness: November 15, 1974; Closing Date: June 30, 1981 The project consists of a 100 MW hydropower plant at Pantabangan, Luzon, transmission lines for the expansion of the Luzon grid and consultants' services. The generating plant was commissioned in April 1977. The trans- mission facilities will now be completed late in 1980, more than two years behind schedule. The revised cost of the project is estimated at US$113.8 million, an increase of about 24% over the original estimate (US$92.0 million). The cost overrun for the foreign exchange component is US$4.3 million (7%). The closing date of the loan has been postponed from December 31, 1978 to June 30, 1981 to allow additional time for completion of the transmission systems and payment of the retention money. Loan No. 1460 Seventh Power Project; $58.0 Million Loan of August 9, 1977; Date of Effectiveness: January 6, 1978; Closing Date: June 30, 1982 The project will include the expansion of the transmission system in Luzon, a load dispatching center, consultants' services for manage- ment improvement and a tariff study. The loan became effective on January 6, 1978. Progress on works is generally satisfactory, but, because of each action by Government and the National Power Corporation (NPC) with regard to tariff increases, the rate of return covenant is unlikely to be met. Loan No. 1547 Rural Electrification; $60.0 Million Loan of April 4, 1978; Date of Effectiveness: August 17, 1978; Closing Date: December 31, 1981 The project will help finance the 1979/80 rural electrification program of the National Electrification Administration. The loan became effective on August 17, 1978. Procurement action is under way. Industrial Sector Loan No. 998 Industrial Investment and Smallholder Tree-Farming; $50.0 Million Loan of June 12, 1974; Date of Effectiveness: September 9, 1974; Closing Date: December 31, 1981 The proceeds of the loan were relent to the Development Bank of the Philippines (DBP). The industrial portion of the Loan ($48 million) has been used by DBP to finance direct imports for medium and relatively large industrial projects. DBP is using the balance ($2 million) to finance about 1,300 smallholders in a pilot tree-farming project in Mindanao. Loan No. 1052 Private Development Corporation of the Philippines; $30 Million Loan of November 12, 1974; Date of Effectiveness: February 7, 1975; Closing Date: June 30, 1979 The proceeds of the loan are on-lent by PDCP to financially and economically viable industrial subprojects. As of November 2, 1978, ANNEX II Page 13 of 14 pages total commitments reached US$25.28 million. Commitments and disbursements have been slower than originally expected because of the poor investment climate which prevailed until 1977 in the Philippines. Business activities have picked up in 1978 and the loan is expected to be fully committed by early 1979. Overall progress is satisfactory. Loan No. 1120 Small and Medium Industries Development; $30.0 Million Loan of June 5, 1975; Date of Effectiveness: August 20, 1975; Closing Date: August 31, 1979 The DBP portion of the funds has been fully disbursed. After a slow start, commitment and disbursement of funds under the Industrial Guarantee Loan Fund are now proceeding well. However, the Rural Industrial Cooperative Program ($2.3 million) which is being implemented by the National Electrifica- tion Administration is, because of its experimental nature, facing management and staffing problems. Disbursements on this component have therefore been slow. Overall progress of the project is, however, satisfactory. Loan No. 1190 Industrial Investment; $75.0 Million Loan of January 28, 1975; Date of Effectiveness: April 6, 1976; Closing Date: March 31, 1980 The proceeds of the loan are relent by the Development Bank of the Philippines for subloans to finance the foreign exchange component of medium and relatively large industrial projects. Commitments of funds, which were initially much slower than expected due to a slowdown of investment in the industrial sector as a whole, have recently improved. The Executive Directors approved a proposal to reallocate $25 million of the funds for small and medium industries on February 25, 1977, and an amendment to the Loan Agreement to this effect was signed on March 16, 1977. As of October 13, 1978, the allocation of $50 million for medium- and large-scale industry had been fully committed. In addition, $13.9 million had been disbursed against the allocation for small- and medium-scale industries. Loan No. 1514 Private Development Corporation of the Philippines; $30 Million Loan of February 9, 1978; Date of Effectiveness: June 23, 1978; Closing Date: March 31, 1982 This loan was signed on February 9, 1978, and became effective June 23, 1978. Loan No. 1555 Philippine Investments Systems Organization (PISO); $15 Million Loan of May 8, 1978; Date of Effectiveness: May 12 1978 Closing Date: December 31, 1982 Proceeds of the loan are relent by PISO for financing the foreign exchange component of imported capital goods and services for eligible productive enterprises in the Philippine private sector. As of October 31, 1978, commitments for subloans totalling US$8.05 million had been made. Since the pace of commitment is much faster than anticipated during loan appraisal, the loan is expected to be fully committed by early 1979. Overall progress of the project is satisfactory. ANNEX II Page 14 of 14 pages Loan No. 1572 Third Industrial Investment Credit Project through the Development Bank of the Philippines; $80 Million Loan of June 6, 1978; Date of Effectiveness: September 15, 1978; Closing Date: June 30,_1982 This loan was signed on June 6, 1978. It became effective September 15, 1978. Population Loan No. 1035 Population; $25.0 Million Loan of July 31, 1974; Date of Effectiveness: November 13, 1974; Closing Date: December 31, 1979 The project is assisting the Government in expanding rural health infrastructure, and in providing staff training facilities and technical assistance for the development of a management information system and for training. Under the direction of the Project Management Staff in the Depart- mnent of Health, overall project implementation is progressing well. Training activities are ahead of schedule in all 12 regions. The civil works component is behind schedule but is expected to be completed ahead of the appraisal report timetable due to simplification of construction design. Progress under the project is satisfactory. ANNEX III PHILIPPINES SMALL FARMER DEVELOPMENT PROJECT LAND BANK OF THE PHILIPPINES Supplementary Project Data Sheet Section I - Timetable of Key Events (a) Time taken to prepare the project About ten months (b) The agency that prepared the project : Land Bank of the Philippines (LBP) (c) Date of the first presentation to the Bank and date of the first Bank mission to consider the project July 1977 (d) Date of departure of appraisal mission : May 5, 1977 (e) Date of completion of negotiations November 21, 1978 (f) Planned date of effectiveness March 1978 Section II - Special Bank Implementation Action None. Section III - Special Conditions Assurances were obtained from the Government that the Ministry of Agriculture (MA) will provide technical field staff to project areas in accordance with the Memorandum of Agreement signed between LBP and MA on July 5, 1978 (para. 72). Assurances were obtained from LBP that: (a) terms and conditions of credit and investment subloans would not be materially altered or abrogated without approval by the Bank (para. 61); (b) LBP will not materially alter its organizational unit responsible for project implementation without prior consultation with the Bank (para. 71); (c) LBP will adequately staff its field offices in accordance with a staff plan acceptable to the Bank (para. 72); and (d) LBP will carry out with monitoring and evaluation of the project activities in accordance with a program agreed to by the Bank. (para. 75). .l8R 13740 1160 t20
Группа Всемирного банка · Memorandum & Recommendation of the President
Philippines - Small Farmer Development - Land Bank - Project
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Memorandum & Recommendation of the President
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