Philippines - Samar Island Rural Development Project

Document of The World Bank FILE COPY FOR OMCIAL USE ONLY Report No. P-2647-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 THE SAMAR ISLAND RURAL DEVELOPMENT PROJECT November 13, 1979 This document ha a resticted dtbution sd may be and by reciplents only In the performance of their official duties. Its contents may not otherwise be disclsed without World Bfank athorization.  CURRENCY EQUIVALENTS US$1.00 - Pesos (P) 7.40 P 1.00 - US$0.135 WEIGHTS AND MEASURES 1 hectare (ha) - 2.47 acres 1 kilometer (km) - 0.62 miles 1 square kilometer (sq km) - 0.386 square miles 1 meter (m) - 39.37 inches 1 square meter (sq m) - 10.76 square feet 1 cubic meter (cu m) - 35.31 cubic feet 1 million cubic meters (MCM) - 810.7 acre feet 1 millimeter (mm) - 0.039 inches 1 kllogram (kg) X 2.2 pounds 1cavan (paddy) - 50 kgs 20 cavans 1 metric ton ABBREVIATIONS BWUA - Barangay Water Users' Association CCC - Cabinet Coordinating Committee FSDC - Farm Systems Development Corporation IAD - Integrated Area Development MPH - Ministry of Public Highways MPW - Ministry of Public Works NACIAD - National Council on Integrated Area Development cNEDA - National Economic Development Authority NIA - National Irrigation Administration PJFH - Philippines-Japan Friendship Highway PPDO - Project Preparation Development Office RHU - Rural Health Unit SCRS - Schistosomiasis Control and Research Service SIRDPO - Samar Integrated Rural Development Project Office GOVERNMENT OF THE PHILIPPINES FISCAL YEAR January 1-December 31  FOR OFFICIAL USE ONLY PHILIPPINES SAMAR ISLAND RURAL DEVELOPMENT PROJECT Loan and Pro_ject Summary Borrower: Republic of the Philippines Amount: $27.0 million Terms: The loan would be for a term of 20 years, including 5 years of grace, with interest at 7.95%. Project Description: The proposed project seeks to promote the accelerated development of the island of Samar, chosen because of its poverty, low level of infrastructure and development potential. It would include road and port rehabilitation, irrigation construction, provision and improvement of water supply facilities, schistosomiasis control and consulting services for a feasibility study of development in Northern Samar. The project would: (a) reduce transporit costs for farmers and improve road access to markets and lhealth and education facilities for some 40,500 rural fami:Lies; (b) improve port facilities for travel, import of food and construction materials, and export of agricultural products; (c) provide irrigation facilities which would benefit some 1,000 farm families and 500 landless laborers' families through increased production and employment; (d) provide safe water for about 118,000 rural fami:Lies, resulting in a reduction in waterborne disease, and (e) provide chemotherapy for about 41,000 people suffering from schistosomiasis and lay the groundwork for a wider control program. No unusual implementation problems are expected since most of the works are standard and would be carried out by agencies having considerable experience in similar works. This docufnent has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank aL  - ii - Estimated Cost! /a Local Foreign Total - ($ million) ------ Roads 7.2 8.8 16.0 Port 0.7 1.1 1.8 Irrigation 1.1 1.0 2.1 Water supply 1.3 6.9 8.2 Schistosomiasis control 0.2 0.9 1.1 Catubig Valley study 0.5 0.6 1.1 Engineering, administration and supervision 2.6 0.9 3.5 Base cost estimate 13.6 20.2 33.8 Physical contingencies 1.0 1.7 2.7 Expected price increases 4.4 4.1 8.5 Total project cost 19.0 26.0 45.0 /a Costs do not include taxes or duties as implementing agencies would be exempt therefrom. Financing Plan: IBRD Government Total --------- ($ million) --------- Foreign 26.0 - 26.0 Local 1.0 18.0 19.0 Total 27.0 18.0 45.0 Estimated Disbursements: Bank FY: FY80 FY81 FY82 FY83 FY84 FY85 ------------- (5 million) ------------ Annual 0.3 4.7 8.0 7.0 4.0 3.0 Cumulative 0.3 5.0 13.0 20.0 24.0 27.0 Rate of Return: 15% on roads, port and irrigation components, representing 67% of total project costs. Staff Appraisal Report: No. 2627-PH dated November 12, 1979.  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 THE SAMAR ISLAND RURAL DEVELOPMENT PROJECT 1. I submit the following report and recommendation on a proposed loan to the Republic of the Philippines for the equivalent of $27 million to help finance the Samar Island Rural Development Project. The loan would have a term of 20 years, including 5 years of grace, with interest at 7.95% per annum. 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 PHL-77-2, dated October 27, 1977. An updating economic mission visited the Philippines in May/June 1979, and its report, entitled "The Philippines - Domestic and External Resources for Development" (No. 2674-PH), will be distributed in November 1979. Macroeconomic Performance 3. During the 1960s, the Philippine economy grew in real terms at an annual rate of about 5-1/2%, but with more effective economic management the rate of growth could have been higher. The pattern of growth was also structurally unsatisfactory in a number of respects. The benefits of devel- opment were distributed relatively unevenly, with respect to both regions and income classes. While overall agricultural growth was reasonably satisfactory, repeated foodgrain 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. Finally, poor export performance combined with heavy import-dependence of domestic industry led to chronic weakness in the balance of payments. 4. During the 1970s there have been significant improvements in economic management. Public revenues have been increased substantially, /1 Except for paras. 17-21, this section of the report is substantially the same as that of the President's Report for the Second Small and Medium Industries Development Project, distributed under R79-137, and approved by the Executive Directors on June 12, 1979.  pu'blic sector implemantation capacity has been strengthened, and the ratio of publiir investment to GNP raised from 2%. in the early 1970s to 5.5% in 19 6-78. Private investmenlt also increased, and the ratio of total fixed in'.estiment to GNP rose from 16% in the early 1970s to 25% in 1976-78. As a coiisequence of higher levels of investment, the construction industry boomed. Agriculture has performed well in response to the spread of irrigation and higher yielding rice varieties, more favorable price policies, and some improvements in supporting services. Selective steps were taken to promote nontraditional manufactured exports, which have grown rapidly. On the other hand, the performance of that part of the manufacturing sector oriented to the domestic market has remained only "fair" in a comparative sense and has been inadequate in relation to the Philippines' need to generate productive employment opportunities. The net effect oF the above developments has been acceleration in the trend GNP growth rate by one percentage point to 6-1/2%. 5. An important constraint has been placed on Philippine development options by the sharp deterioration of its terms of trade since 1975, stemming from the increase in oil prices, acceleration of international inflation and depressed prices for some major Philippine commodity exports. As a result, real national income has been growing more slowly than real national product, and, with the higher level of investment, the dependence of the economy on foreign savings has increased. Although the terms of trade have recently stabilized, the current account deficit is still about 5.5% of GNP. Development Strategy 6. The Government's development objectives and policies, which were set out in a Five-Year Development Plan for the period 1978-82, call for further acceleration of economic growth, first to 7% and then to 8%. The development strategy focuses on an expansion of 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 of rural areas. In addition, the Plan includes growth strategies for each of the country's thirteen regions. In general, the Plan is an elaboration of the policy directions pursued by the Governmeiit in recent years. It is also broadly consistent with the Bank's assessment of priorities, although Plan projections for investment, manu- facturing output, and exports are somewhat higher than Bank staff estimates. In due course, it should, however, be feasible to accelerate the overall growth rate to 7%, but more rapid expansion of manufacturing is necessary to do so, and the efficiency of investment also needs to be improved. Agriculture and Rural Development 7. In recent years the trend growth rate of the agricultural sector has been about 5%, which by international standards is quite good. However, variations among subsectors have been considerable. Due to the spread of  - 3 - irrigation and high yielding varieties, irrigated rice production has increased rapidly. The Philippines, once a chronic importer of rLce, actually exported 100,000 tons of rice in 1977/78. With the compLetion of large irrigation projects now under implementation, continued rice self-sufficiency appears assured for the 1980s. On the other hand, locally adapted technologies for improving yields of rainfed grains, particularly corn, are still under development, and rainfed agricultural areas have a high incidence of poverty. Productivity in the coconut sector is relatively low because of a large number of overaged trees, but a major replanting program is scheduled for the early 1980s when a sufficient number of high yielding variety seedlings will become available. Increasing pressure of population on the land and inadequately controlled, commercial logging have led to soil erosion and deterioration of some forest areas. The Plan calls for a major reforestation effort, but this will require substantial upgrading of Government administrative capabilities in this area, development of new hill cropping technologies, and resolution of difficult land tenure problems. 8. As well as providing greater support for agricultural production, the Government has substantially expanded programs such as water supply electrification, and health in rural areas. An agrarian reform was also instituted in 1972 which provides for transfer of tenanted holdings of rice and corn land in excess of seven hectares and enforcement of leasehold instead of sharecropping on remaining tenanted holdings. As of March 1978, about 60% of land transfer beneficiaries had received Certificates of Land Transfer (the initial step in the process establishing their claim to the land), but only about 10% had completed all formalities. Industry 9. Manufacturing has grown at an average rate of about 6-1/2% during the 1970s. The greater part of the sector, oriented to the domestic market, has been promoted by high tariff protection and an incentive system which has favored the use of relatively capital-intensive production techniques. Relatively little employment has been generated in relation to Philippine factor endowments. Macro statistics such as the incremental capital-output ratio suggest that the efficiency of investment has been low, and most manu- facturing plants have located in the greater Manila area. Reforms of tariffs and other industrial incentives to bring these into line with development objectives are presently being considered by the Government. 10. Beginning in 1970, selective measures have been introduced to promote nontraditional manufactured exports, including various arrangements to permit firms in selected export industries to import needed goods free of duty. Entrepreneurs have responded to these opportunities, and receipts from nontraditional manufactured exports increased from just over $100 million in 1972 to an estimated $1.3 billion in 1979.  - 4 - Population Growth, Emplo mert e'nd Income Distribution .1. The 1979 population is estimated at 46.7 million. 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 iiuuber of new acceptors has reached a plateau as the program has faced the increasingly difficult problem of reaching rural areas, the estimated proportion of married women of reproductive age practicing family planning increased from 15% in 1973 to 27% in 1978. However, by East Asian standards, this index is still relatively low. 12. Employment increased by about 4.6% anually during 1973-78, a con- siderable improvement over the historical growth rate of 2.4%, and in recent years has kept pace with the rapid growth of the labor force. With the exhaustion of most new land resources suitable for cultivation and the exploitation of the most easily irrigable areas, industry will have to provide employment for about one half of the new entrants to the labor force in the next decade. Employment in manufacturing 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 still continue to function as residual sources of employment and accounted for most of the increase in total employment. 13. For historical reasons, income distribution has been highly skewed in the Philippines, and there is a small elite which is conspicuously wealthy. Owing to a structural improvement in agriculture's terms of trade, the growth of agricultural production, the decline in urban real wages following the devaluation in 1970, and subsequent acceleration of interna- tional inflation 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 has increased by about 2% annually. Hence, real incomes in rural areas, where most of the poor live, have probably increased somewhat, while real urban incomes have not improved substantially. Although accurate statistics are not available, the share cf family income received by the poorest 40% of families appears to have increased somewhat; the income share of the top 20% has remained about the same; and that of the middle-income families has declined correspondingly. Nevertheless, the incidence of poverty remains high, at 40-45%, in both rural and urban areas, and malnutrition is widespread. Public Finance 14. The public sector has 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 t-his situation and has raised both the overall level of expenditures arLd the shares going to economic services and public investment. By 1978, government expenditures reached an estimated 16% of GNP, and public investment equaled about 5.5% of GNP. This expansion of public expenditures has brought about badly needed improvement in basic infrastructure particularly in t:ranspor- tation, power and irrigation, as well as the development of more effective programs in the field of urban development, health and family planning. 15. Recognizing that a large increase in tax revenues would be required to finance expansion of the public investment program, the Government has undertaken a program of tax reform to raise the needed revenues ecquitably and efficiently. The overall tax ratio was raised by more than two percent- age points between 1975 and 1978 through a series of new tax measures and vigorous efforts to improve taxpayer compliance and collection performance. However, the recent rapid growth of the public investment program has made the Government's budget position quite tight in 1978-79. Continuation of a strong revenue effort, both by the Government and the government corporations, is necessary to allow for further expansion in infrastructure and social services. Private Savings and the Financial Sector 16. Aggregate savings performance has improved during the last decade and is comparable to that of other countries at a similar stage of- economic development. Gross domestic savings now finance about 85% of total invest- ment, 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 institutions 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. Further reforms are required to increase the availability of long-term domestic currency resources. 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. A deterioration of loan recovery rates was initially experienced by all government financial institutions and credit programs. The Government has taken a number of steps to improve collections; continued effort in this direction are necessary to improve financial discipline and ensure an adequate flow of credit to the productive sectors without burdening the public finances.  - 6- External Trad