Philippines - Third Urban Development Project

Document of The World Bank FOR OFMICIAL USE ONLY E COpy Report No. P-2734-PH REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF THE PHILIPPINES FOR A THIRD URBAN DEVELOPMENT PROJECT March 5, 1980 This docment ia a resricted dtbutin and may be wed by reciplents only In the pefomnce of thdr eokdla dtits. t otunts may not oerwise be diwcosed witwo Worid Bk authrzIsn.  CURRENCY EQUIVALENTS Currency Unit - Peso (P) 1 Peso - US$0.1351 US$1 = P 7.4 WEIGHTS AND MEASURES 1 meter (m) - 39.37 inches (in) 1 square meter (sq m) = 10.8 square feet (sq ft) 1 cubic meter (cu m) = 35.3 cubic feet (eu ft) 1 kilometer (km) = 0.62 mile (mi) 1 square kilometer (sq km) = 0.386 square mile (sq mi) 1 hectare (ha) - 10,000 square meters (sq m or 2.47 acres (ac) 1 liter (1) = 1.057 quarts liquid or 0.26 US gallon (gal) or 0.908 quart dry (qt) 1 liter per capita per day (lpcd) - 0.26 US gallon per capita (gcd) ABBREVIATIONS AND ACRONYMS BLISS - Bagon Lipunan Improvement of Sites and Services CIF - Capital Improvement Folio ESC - Environmental Sanitation Commission MCB - Management Coordination Board MHS - Ministry of Human Settlements MMINUTE - Metro-Manila Infrastructure, Utilities and Engineering Program MMA - Metro Manila Area MMC - Metro Manila Commission MPH - Ministry of Public Highways MPW - Ministry of Public Works MWSS - Metropolitan Water and Sewerage System NEDA - National Economic and Development Authority NHA - National Housing Authority PROGRESS - Program for Removing Sewage from the Streets SIR = Slum Improvement and Resettlement TRC - Technology Resource Center ZIP - Zonal Improvement Program FISCAL YEAR January 1 to December 31  FOR OFFICIAL USE ONLY PHILIPPINES THIRD URBAN DEVELOPMENT PROJECT Loan and Project Summary Borrower: Republic of the Philippines Beneficiaries: National Housing Authority (NHA); Metro Manila Commission (MMC); and private developers. Amount: $72 million equivalent. Terms: The loan would be for a term of 20 years, including 5 years of grace, with interest at 8.25%. Relending Terms: The Government would relend $3.3 million to MMC, $26.3 mil- lion to NHA and $1.8 million to financial intermediaries for building material loans on the same terms and conditions as those of the Bank loan. The balance of the loan would be provided to various government agencies as equity contribu- tions and budgetary allocations. The Government would bear the foreign exchange risk. Project Description: The project would provide basic services and raise the productivity of low income groups in Metro Manila. It is designed to assist the Government in providing affordable solutions to the problems of shelter, environmental sanita- tion and employment generation. It includes: (a) provi- sion of tenure, basic services and home improvement loans to low income communities, benefitting about 160,000 persons; (b) provision of critical basic services benefit- ting about 300,000 persons; (c) provision of about 6,140 serviced plots, about one-half of which would be developed by NHA and the remaining by private developers; (d) employ- ment promotion through the development of commercial sites and small business loans, creating approximately 6,000 new jobs; (e) provision of equipment and facilities for refuse collection; and (f) technical assistance to strengthen national agencies and local governments. The primary risks are related to management and coordination of new programs which will require rapid expansion to improve the conditions of the urban poor. Measures proposed under the project to strengthen the institutions would minimize the risks. This document has a restricted distribution and may be used by recipients only in the performance of their omfcial duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - Estimated Costs:I1 Local Foreign Total ------ $ million ------ Zonal Improvement Program (ZIP) 21.68 7.08 28.76 Metro Manila Infrastructure, Utilities and Engineering Program (MMINUTE) 11.35 8.72 20.07 Sites and services 11.40 4.70 16.10 Solid wastes management 1.76 1.72 3.48 Livelihood 5.13 2.64 7.77 Technical assistance and training 1.88 4.70 6.58 Subtotal 53.20 29.56 82.76 Contingencies: physical 3.74 2.99 6.73 price 21.02 9.49 30.51 Total 77.96 42.04 120.00 Financing Plan: Local Foreign Total ------ million ------ Government appropriations 41.4 41.4 Beneficiary charges 6.6 - 6.6 World Bank 30.0 42.0 72.0 Total 78.0 42.0 120.0 Estimated Disbursements: Fiscal Year 1980 1981 1982 1983 1984 Annual 3.5 7.5 17.8 24.1 19.1 Cumulative 3.5 11.0 28.8 52.9 72.0 Rate of Return: 26% Staff Appraisal Report: No. 2703a-PH, dated February 26, 1980 /1 Excludes customs duties and taxes, which are reimbursable.  REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF THE PHILIPPINES FOR A THIRD URBAN DEVELOPMENT PROJECT 1. I submit the following report and recomrnendation on a proposed loan to the Republic of the Philippines for the equivalent of $72 million to help finance a Third Urban Development Project. The loan would have a term of 2CI years, including 5 years of grace, with interest at 8.25% per annum. The Government would relend $3.3 million to MMC, $26.3 million to NHA and $1.8 million to financial intermediaries for building material loans on the same terms and conditions as those of the Bank loan. The balance of the loan would be provided to various government agencies as equity contributions and budgetary allocations. The Govermnent would bear the foreign exchange risk. PART I - THE ECONC0MY /1 2. An economic mission visited the Philippines in July/August 1977 and iLts report, "The Philippines: Country Economic Memorandum" (No. 1765-PH of October 26, 1977), was distributed to the Executive Directors under HL-: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), was distributed to the Executive Directors under SecM79-822, dated November 16, 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. /1 This section of the report is substantially the same as that of the President's Report for the Medium-Scale Irrigation Project, distributed under R80-30, to be considered by the Executive Directors on March 13, 1980.  - 2 - 4. During the 1970s there have been significant improvements in econo- mic management. Public revenues have been increased substantially, public sector implementation capacity has been strengthened, and the ratio of public investment to GNP raised from 2% in the early 1970s to 5.5% in 1976-78. Private investment also increased, and the ratio of total fixed investment to GNP rose from 16% in the early 1970s to 25% in 1976-78. As a consequence 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 of the country's 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 Government 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  irrigation and high yielding varieties, irrigated rice production has increased rapidly. The Philippines, once a chronic importer of rice, actually exported 100,000 tons of rice in 1978. 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 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 July 1979, about 75% of land transfer beneficiaries had received Certificates of Land Transfer (the initial step in the process of establishing their claim to the land), but only about 18% had completed all steps necessary to begin amorti- zation payments. About 67% of leasehold beneficiaries cultivating rice and corn land had established written contracts with their landlords. 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, Employment ana Income Distribution 11. 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 fa-ily planning program registering approximately 650,000 new acceptors per year. Although the number 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 th- 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 auring 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 of 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  -3- irrigation and high yielding varieties, irrigated rice production has increased rapidly. The Philippines, once a chronic importer of rice, actually exported 100,000 tons of rice in 1978. 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 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 July 1979, about 75% of land transfer beneficiaries had received Certificates of Land Transfer (the initial step in the process of establishing their claim to the land), but only about 18% had completed all steps necessary to begin amorti- zation payments. About 67% of leasehold beneficiaries cultivating rice and corn land had established written contracts with their landlords. 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, Employment ana Income Distribution 11. 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 fa._ily planning program registering approximately 650,000 new acceptors per year. Although the number 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 tho 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 ouring 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 of 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  - 5 - 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 this situation and has raised both the overall level of expenditures and 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 transpor- 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 equitably 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- metnt, 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 efforts 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 Trade and Capital Flows 17. In response to the large balance of payments deficit in 1975 (see para. 5 above), 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. 18. The current account initially behaved as anticipated - averaging $1.0 billion per year but declining from 6.2% of GNP in 1976 to 4.1% of GNP in 1977. However, since then actual developments have deviated from the original scenario. First, the volume of commodity exports, particularly sugar, has increased less rapidly than expected. Second, real import growth has, on the other hand, been more rapid than anticipated, partly as a result of a recovery of private investment and partly because of speculative importing in 1979. Third, although prices for some commodity exports (coconut products, copper) have increased substantially, the terms of trade in 1979 were only marginally better than in 1976-77 due to the increased price of petroleum imports and the acceleration of inflation in the OECD countries which supply most of the Philippines' non-oil imports. The combined effect has been a widening of the current account deficit to an estimated $1.6 billion (5.7% of GNP) in 1979. 19. In order to maintain growth and investment rates in the face of the worsened external environment, major structural adjustment is necessary to improve the balance of payments position. Initial steps have already been taken with respect to export promotion, and major changes in trade, industrial and financial policies are currently under consideration. However, such adjustments will require a number of years to effect the needed structural improvement in the balance of payments. The medium-term outlook, therefore, is for high current account deficits although falling as a percentage of GNP from 5.8% in 1980 to 4.7% in 1982. 20. Net capital inflows doubled from the 1975 level of $580 million to an estimated $1.2 billion in 1979, leaving an overall deficit of about $500 million. Most of the capital inflows came from medium- and long-term loans, with about 40% from official sources. In 1980, a net capital inflow of at least $1.8 billion will be required, increasing to $2.2 billion per year in 1981 and 1982. The ratio of debt service payments to exports of goods and nonfactor services is expected to rise from an estimated 22% in 1979 to an average level of 23% during the 1980-82 period, and to decline thereafter. 21. In order to ensure that debt service obligations remain within reasonable limits, the Government sought commitments of official assistance of at least $1.0 billion in 1980 at the last meeting of the Consultative Group for the Philippines, held in Washington, D. C. in December 1979. 22. Satisfactory progress has been made in domestic resource mobiliza- tion (paras. 15-18). However, because of the increase in the Philippines' external financing requirements arising from the deterioration in the terms of trade, and the fact that many of the projects planned for official assistance  - 7 - have low foreign exchange costs, the necessary resource transfer can be achieved only with some financing of local costs of projects, or through non- project lending. PART II - WORLD BANK OPERATIONS /1 23. As of January 31, 1980, the Philippines had received 63 Bank loans (of which two were on Third Window terms) amounting to $1,970.9 million and six IDA credits amounting to $122.2 million. At that date, IFC investments totalled $93.7 million. The share of the Bank Group in total debt disbursed and outstanding is currently about 13% and its share in total debt service is about 6%. These ratios are expected to be about 23% and 16%, respectively, by 1985. Annex II contains a summary of IDA credits, Bank loans and IFC invest- ments as of January 31, 1980, as well as notes on the execution of ongoing projects. 24. 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 foodgrain 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 assis- tance 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. 25. 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. 26. 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. Agricultural and rural development will account for the largest part of future lending /1 This section is substantially the same as that contained in the President's Report for the Medium-Scale Irrigation Project (R80-30) to be considered by the Executive Directors on March 13, 1980.  - 8 - with continued emphasis on food production and programs to increase the productivity and incomes of small farmers. However, the program provides for several needed new initiatives, including support for strengthening the national agricultural extension service through Loan 1626-PH (December 1978) and an upcoming 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 policy reform and to expanding the development of labor-intensive, small and medium industries outside of the Metropolitan Manila area. A program loan to support major adjustments in industrial and trade policies is currently being appraised. 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. 27. This is the sixth loan to the Philippines to be presented to the Executive Directors this fiscal year. Loans for watershed management, livestock/fisheries, rural roads and ports projects have been appraised and are scheduled for Board presentation in the next several months. PART III - THE URBAN SECTOR Urban Background 28. The urban sector in the Philippines is characterized by a highly dominant capital, Metro Manila, together with a large number of small and medium size cities. About 33% of Filipinos live in urban areas; the urban population is growing at about 3.5% compared to 2.8% per year for the nation as a whole. By the turn of the century, the population of the Philippines is expected to grow to 75 or 80 million, and up to two-thirds of the added population may have to be absorbed in urban areas. 29. Most of the country's towns have been unable to keep pace with expanding demands for extension of basic infrastructure, partly because of financial constraints at the local level and competing demands for scarce Government resources. As a result, municipal infrastructure is generally inadequate to accommodate the basic needs of large segments of the urban population. A particularly serious problem has been the growth of squatter areas. Almost 25% of urban households in the Philippines and over 30%  - 9 - in Metro Manila live in squatter settlements or slums without secure tenure and basic services. Studies indicate that urban slum families suffer more from malnutrition and are in poorer health than their low-income counter- parts in rural areas. 30. The 1977 urban poverty income estimated for the Philippines was P 1,877 ($250) per person per year. Thirty-nine percent of families in urban areas and 80-90% of families in slum areas of major cities have per capita incomes below this level. In Metro Manila, 35% of the population, or about 2.1 million, people live below the poverty level; they account for 30% of the urban poor in the Philippines. Real income for unskilled urban workers has declined by one-third from 1970 to 1978. Urban unemployment was about 8% of the work force in 1976. In addition, the high proportion of household heads employed part-time indicates substantial underemployment. Urban Institutions 31. A number of new institutions are beginning to affect significantly the development of national urbanization policies. In July 1975, the National Housing Authority (NHA) was established to consolidate the Government's housing efforts, previously dispersed among six separate national bodies. The Ministry of Human Settlements (MHS) was established in July 1978 with responsibilities for national human settlements planning. Coordination of urban planning in the Metro Manila area has been enhanced recently with the establishment of the Metro Manila Commission (MMC). The Commission sets overall planning priorities, establishes budget guidelines and approves the budgets of the four cities and thirteen municipalities of the MMC area. Urban Issues 32. Provision of Basic Services and Shelter. The need to achieve a more equal distribution of basic infrastructure in urban centers is particularly urgent. For decades, a legal impasse over property rights in squatter areas has prevented the expansion of both private investment and public services. The National Housing Authority is addressing the problems of slum upgrading and expansion of low-cost sites and services, supported by the Bank's first two urban loans. The Slum Improvement and Resettlement (SIR) program for regional cities, and the Zonal Improvement Program (ZIP) for Metro Manila, which were initiated in 1977, provide for acquisition of squatter land from absentee landowners and resale to residents; they also include the legislative basis and support at the national level to provide services to the urban poor. The Ministry of Human Settlements has introduced a housing-cum-employment program called Bagon Lipunan Improvement of Sites and Services (BLISS), which develops land for mixed-income communities in urban and rural areas. The Government has recently committed substantial funds to BLISS. In Metro Manila, the program involves high unit costs and considerable subsidies and it is therefore doubtful whether this approach can provide shelter for low-income groups on an extensive scale. The Bank is continuing  - 10 - its discussions with the Government on the scope of this program in its housing strategy. 33. Employment and Productivity. Placing a high priority on increasing the employment and productivity of the poor, the Government has developed a number of programs to support the growth of labor-intensive small and medium industries, including credit programs implemented by the Development Bank of the Philippines and the Industrial Guarantee and Loan Fund. While these programs have been successful in assisting industries in the middle and upper size range, efforts are necessary to reach the smallest class of enterprises and the new measures proposed in this project represent a more integrated and comprehensive effort to reach this sector. 34. Urban Investment Planning and Resource Generation. Although the Government has recently placed emphasis on services for the urban poor, related expenditures still represent only a small proportion of public investment in Metro Manila, and there has been no system regularly to review priorities and monitor the impact of investment programs. The Capital Improvement Folio (CIF) review conducted by the Ministry of Public Works (MPW) is the first effort to make a comprehensive analysis of investments in Metro Manila and is proving useful for decision-making among the various Government agencies concerned. This approach will shortly be extended to other cities in the country. Local government finances also require strengthening in order to minimize reliance on central government investments and subsidies. Recent improvements in the collection of property taxes have begun to address this problem. 35. Regional Development and Urbanization Strategy. In the past, infrastructure and industrial needs of the intermediate and small cities have been relatively neglected. In recent years, the Government has established regional planning offices which are developing regional plans and investment programs, and has taken steps to strengthen municipal governments. The Bank has assisted in this process by serving as Executing Agency for the UNDP- financed Regional Planning Project and providing assistance to regional cities through the Bank-financed Second Urban Development Project. However, the development of effective budgeting and investment programming for regional bodies and local governments still remains a high priority need. The Prolect City - Metro Manila Area (MMA) 36. The Greater Manila area, with a population of about 6 million, exhibits some of the worst housing conditions in the country. About 1.8 million persons presently live in slum and squatter areas. Water networks do not extend into these areas and 40% of all families in the MMA do not have any type of sanitary toilet facilities. Another 1.5 million persons live in the so-called "grey" area neighborhoods which lack critical services but where tenure is established and housing quality is adequate. With little provision for new and affordable settlements, the trend over the past ten years has been towards increasing densification of up to 2,000 persons/hectare  - 11 - in slum and squatter areas; in some areas occupancy rates reach nine persons per room. Provision of land tenure to the settlers would help to minimize further subdivision. The treatment and rights of renter families would, however, become an important issue when the transfer of land title was planned. 37. The Capital Improvement Folio (CIF). In the light of implementing capacity and financial constraints, the Ministry of Public Works over the past eighteen months has made efforts to develop a more rational and integrated approach to public investment planning in the MMA. Investment packages have been developed and accorded priority for inclusion in the MMA investment program. As a result, the 1980 investment level for MMA has been reduced from P 4-5 billion budgeted to P 2.7 billion. A regular review of the CIF would henceforth be integrated with the MMC's planning and budgeting process. The Government has agreed to consult with the Bank prior to granting its annual approval of the proposed three-year rolling investment program for MMA (Section 4.06 of the draft Loan Agreement). 38. Community Upgrading and Development. The Government has developed four major programs to address the environmental needs of low income communi- ties in the MMA. The Zonal Improvement Program (ZIP) is designed to provide, with minimum relocation of slum residents, freehold ownership of land, water, sanitation, roads and footpaths, drainage, health and education facilities and building material loans. Initiated in 1977 by the NRA, it is a 15-year program building up to an output of 15,000 upgraded plots per year after 1983 eventually to serve 2.2 million people. The second program, the Metro-Manila Infrastructure, Utilities and Engineering Program (MIINUTE), conceived by the MPW in 1978, is designed to be complementary to ZIP. It is restricted to infrastructure improvements and maintenance in existing rights of way. As such, it provides fewer benefits than ZIP, but can be implemented more rapidly. The Program for Removing Sewage from Streets (PROGRESS) is the third upgrading program, designed by the Metropolitan Water and Sewerage System (MWSS) as a low-cost alternative to new central sewerage systems. It improves the collection and disposal of foul and surface water wastes from streets and is also simple and rapid to implement. The MMINUTE and PROGRESS programs are very similar. Together they would provide critical improvements in drainage, sanitation, water supply and access for about 4.8 million people over eight years. In order to accommodate the growth of low- and moderate-income groups in the MMA, the NHA initiated, in 1975, a long term program of low-cost new serviced sites. If all four programs are pursued as planned, the 3.3 million people living in both slums and poorly serviced areas today could be expected to be provided with a reasonable minimum level of service by 1995. Bank Lending for Urban Projects 39. The Manila Urban Development Project (Loans 1272-T and 1282-PH) assisted the Government in improving (a) the Tondo Foreshore slum area; (b) the traffic and transport system; and (c) the metropolitan tax administration. A full report on the status of the project was submitted to  - 12 - the Executive Directors under SecM77-871, dated December 13, 1977. After initial difficulties, implementation has improved significantly and progress is now satisfactory. In 1979, the upgraded area showed a remarkable improvement. The earlier atmosphere of tension has disappeared. The vast majority of families have invested considerable personal capital in transforming their homes from shacks into 2- and 3-story dwellings, thereby providing opportunities for subletting and more efficient use of the land. The open serviced sites at Tondo and nearby Dagat-Dagatan have been occupied and houses are being built rapidly. The achievement of the project to date strongly validates the concepts of issuing land titles and provision of basic services to stimulate community upgrading. The Government has learned from the experience and is now well prepared to undertake the more extensive Zonal Improvement Program. The progress of the employment component included in the project continues to be slow because of institutional difficulties. These difficulties are being addressed by restructuring the responsibilities of the implementing agencies for this component and by revising the project concept to suit local conditions. 40. The Second Urban Development Project (Loan 1647-PH), which became effective on April 26, 1979, finances a large sites and services project at Dagat-Dagatan, and slum upgrading in three regional cities. Bids have been received for the main infrastructure works at Dagat-Dagatan, and design work has been completed for the first contracts in the regional cities. PART IV - THE PROJECT Project Ob;ectives 41. The proposed project would be the third Bank-financed urban develop- ment project in the Philippines. It would address the problem of meeting basic needs and raising the productivity of low income families in Metro Manila. It is designed to assist the Government in providing affordable solutions to the problems of shelter, environmental sanitation and employment generation. Project Background 42. The Zonal Improvement Program and the Government-developed sites and services program were prepared by NHA, the MMINUTE program by MPW, with the assistance of consultants, the privately developed sites and services program by MHS, the solid waste component by MMC/Environmental Sanitation Commission (ESC) and the livelihood component by the Technology Resource Center (TRC). Appraisal took place in June 1979 and negotiations were held in Washington in February 1980. The Philippine delegation was led by Mr. Teodoro Encarnacion, Assistant Minister of Public Works. The Staff Appraisal Report (No. 2703-PH), dated February 26, 1980 is being distributed separately to the Executive Directors. Annex III of this report provides supplementary project data.  - 13 - Project Description /1 43. Zonal Improvement Program (ZIP): ($43.3 million). The project would provid- basic services including tenure, water supply, sanitation, roads and footpaths, community facilities and building material loans to about 160,000 people on 13 sites over a three-year period. The upgrading would be carried out in situ with minimum disturbance to existing dwellings. The cost of the land and services to be provided is estimated at $188 per capita. 44. Metro-Manila Infrastructure, Utilities and Engineering Program (MMINUTE): ($29.2 million). The project would finance a three year investment program to upgrade basic services including drainage, sanitation, water supply and street improvements to low-income communities in 15 priority areas. It is est-Lmated that about 300,000 persons will benefit at a cost of $31 per capita. 45. Sites and Services: ($23.8 million). The project would provide about 6,140 serviced plots on 79 hectares at the city fringe, at a per capita cost of $376. Each plot would be provided with individual water supply and sewerage connections. The development would also include home improvement loans, community facilities and serviced sites for small businesses and commerce. 46. Livelihood: ($11.4 million). A comprehensive effort would be made to improve the incomes, productivity and employment opportunities for the urban poor living in or close to ZIP and MMINUTE areas. Assistance would be extended to help develop small businesses and productive cooperatives and associations with marketing and management; credit for equipment, working capital, land and services; and manpower training. 47. Solid Waste Management: ($5.0 million). The project would provide equipment for a program of drain cleaning and door-to-door collection of household refuse from congested low-income areas. It would also support the waste recycling program of the MMC, improve waste collection from markets and provide assistance in management and organization. The three-year program would reach 120,000 households. 48. Technical Assistance: ($7.3 million). Technical assistance is designed to strengthen the capability of national agencies and local govern- ments. The proposed loan would finance about 551 man-months of foreign and 529 man-months of local technical assistance: (a) to MHC and local governments to develop their organizational structure, administrative and financial systems and to improve coordination in investment planning; (b) to the National Economic and Development Authority (NEDA), MHS and MPW to (i) improve investment programming and metropolitan management in the MMA, execute feasibility studies for infrastructure in selected regional cities, and initiate a national strategy for programming investments in sanitation, and (ii) analyze the capabilities of the construction industry; and (c) to the Ministry of Public Highways (MPH) to continue implementation of the Manila /I Costs include physical and price contingencies.  - 14 - traffic management program. In carrying out the technical assistance component, the Government would employ consultants whose qualifications, experience and terms and conditions of employment are satisfactory to the Bank (Section 3.05 of the draft Loan Agreement). Project Implementation 49. The proposed project assists five priority programs in Metro Manila, which are interrelated. A document covering the detailed implementation procedures has been agreed with the Government (Section 3.01(b) of the draft Loan Agreement). A Management Coordination Board (MCB) would be responsible for the overall coordination of the implementing agencies, and would review the proposed project's financial and physical programs. MCB would be chaired by the Deputy Governor of MMC and its members would be representatives of the implementing agencies. A Technical Secretariat would assist the MCB in supervising the management and accounting system at the operational level. Consultants would be attached to the Technical Secretariat to develop appropriate accounting and monitoring systems. The formal establishment of MCB would be a condition of effectiveness of the Loan (Sections 3.04(a) and 6.01 (c) of the draft Loan Agreement). 50. To guide and oversee the implementation of the ZIP component, a Program Office has been established. The Director of the Program Office would report to the head of NHA. Modeled on the recent consolidation of MMA's local government functions into four districts, four District Offices have been established, to be responsible for the implementation and supervision of ZIP on specific sites. 51. A comparable organizational structure applies to the IMINUTE com- ponent, for which MPW is the lead agency. MMINUTE would be implemented in conjunction with the similar PROGRESS (combined sewers) component of the Manila Sewerage and Sanitation Project to be implemented by MWSS. The joint MMINUTE/PROGRESS Program Office would be headed by a Director reporting to MPW for MMINUTE and to MWSS for PROGRESS through an Executive Committee com- prising key officials of MMC, MiPW and MWSS. A Project Manager would be appointed for MMINUTE, and another for PROGRESS in the Program Office. The District Offices would report to the Program Office, and would have separate teams to implement MMINUTE and PROGRESS. 52. The lead agency for the livelihood component, the Technology Resource Center (TRC), would be responsible for the overall planning and sectoral analyses, subproject identification and appraisal, selection, supervision and coordination of other executing agencies for this component. Under the project, TRC would receive funds as equity and on-lend those funds to other executing agencies on the same terms and conditions as the Bank loan plus TRC's costs. Six subprojects, appraised and approved by TRC, would form the first group of projects to commence execution in 1980. It has been agreed that all livelihood subprojects would be prepared and reviewed by TRC in accordance with eligibility and appraisal criteria agreed with the Bank (Section 3.10(b) of draft Loan Agreement).  - 15 - 53. Under the sites and services component, half of the plots would be developed by NHA and a Project Manager has already been appointed to head a Project Office. NHA would retain responsibility for maintenance of project facilities until the site is transferred to a municipal jurisdiction. The Metropolitan Planning Office of MHS would be responsible for the balance of the serviced plots to be provided by private developers. MHS would provide guidelines to promote the program, evaluate and arrange contracts with developers, supervise their operations and select beneficiaries. The Government would provide off-site infrastructure, community facilities, a loan for up to 35% of construction financing and guarantees for long-term mortgages to the beneficiaries. These incentives, which have not been available to the private sector before, are considered sufficient to attract the interest of private developers. The developers would provide feasibility studies, prepare the land, develop the sites and market the plots, all according to criteria and conditions laid down by the Government, including location, sale price of plots and distribution according to income percentiles of the target beneficiaries. The Government has agreed that private development would be in accordance with criteria acceptable to the Bank (Section 3.11 of the draft Loan Agreement). 54. The Environmental Sanitation Center (ESC) of the MMC would operate and supervise the solid wastes component. Overall planning and management of the component would be the responsibility of the central ESC office. The four district offices would manage the day-to-day operations of collection and maintainance of equipment. 55. Each of the principal executing agencies - NHA, MPW, MHS, MMC, ESC and TRC - would require additional staff to implement their respective project components. A Project Manager has been appointed for each of the ZIP, MMINUTE, NHA sites and services and livelihood components and the key initial staff have been recruited. The Government has agreed to appoint additional staff in accordance with a schedule agreed with the Bank (Section 4.04 of the draft Loan Agreement.) Key positions would carry supplementary remunera- tion to attract and hold skilled staff. Consultant assistance would supple- ment the staff in key technical areas. 56. Sites for the ZIP and MYINUTE programs and new serviced sites have been selected. The Government has agreed to prepare an overall 3-year rolling investment program for the development of sites and review said program annually with the Bank (Section 3.09(a) of the draft Loan Agreement). The ZIP sites to be developed do not have accurate valuations to reflect their present use. The Government would reassess the value of sites before starting construction, on the basis of existing land use and service conditions. Targets and variance standards developed by the implementing agencies for site planning, servicing and community facilities would be such as agreed with the Bank (Section 3.09(b) of the draft Loan Agreement.)  - 16 - Project Cost and Financing 57. The total cost of the project is estimated at $120.0 million, exclu- ding customs duties and taxes. Cost estimates include provision for physical contingencies of 10-15% depending on the level of engineering design. Price contingencies for foreign exchange costs are based on a projected inflation rate of 10.5% in 1980 declining to 7% over the project construction period. Contingencies for local costs are based on a projected inflation rate of 16% in 1980, declining to 7% over the project construction period. The cost of technical assistance has been based on an average of $8,000 per man-month for foreign assistance and $4,000 per man-month for local assistance. 58. The proposed Bank loan of $72 million would finance 60% of total costs, including 100% of the foreign exchange costs estimated at $42 million and about $30 million of local costs. The loan would be made to the Govern- ment who would bear the foreign exchange risk. Out of the proceeds of the loan, the Government would provide to NHA to finance project expenditures and building materials loans under ZIP and government sites and services programs a loan of $26.3 million on the same terms and conditions as the Bank loan, and $4.9 million as a budgetary allocation. The Government would pro- vide to MMC a loan of $3.3 million on the same terms and conditions as the Bank loan to finance project expenditures related to solid waste management, and about $1.5 million as a budgetary allocation for technical assistance. About $1.8 million would be onlent to financial intermediaries to finance building materials loans to beneficiaries of the privately developed sites and services. About $6.6 million would be provided as equity and $0.4 million as a budgetary allocation to TRC to finance loans to and investments in small businesses and credit unions. The balance would be provided as budgetary appropriations to MPW ($18.4 million) for works under the MMINUTE program; to MHS ($3.0 million) for the privately developed sites and services; and to various agencies ($5.9 million) for technical assistance. The execution of a Subsidiary Loan Agreement on behalf of the Government, NHA and MMC, and of a Subsidiary Investment Agreement between the Government and TRC would be conditions of effectiveness of the loan (Sections 6.01(a) and (b) of the draft Loan Agreement). On completion, ZIP sites would be transferred to local governments who would collect plot charges from project beneficiaries and, together with MMC, would assume responsibility for discharging debts incurred by NHA under the ZIP program. MMC would also assume debt liability for sanitation and minor street improvements and maintenance equipment provided under the IMINUTE program. MWSS would assume debt servicing responsibility for water supply and combined sewerage systems provided under the MMINUTE program. Loans to small-scale entrepreneurs would carry an interest rate of 14-16% except for seed capital to credit unions, to be consistent with existing procedures. Mortgages and building materials loans under ZIP and sites and services programs would be advanced to beneficiaries at 12% in accordance with existing practice.  - 17 - Procurement 59. Civil works contracts of more than $1.5 million each, estimated at a total of $9.0 million, would be awarded on the basis of international competi- tive bidding in accordance with the Bank's Guidelines. Because of the need to undertake the work in small areas on a block-by-block basis with participation of the residents of the project communities, civil works contracts of less than $1.5 million each, for a total of about $30.6 million, would not be suitable for international competitive bidding. These would be awarded on the basis of competitive bidding, advertised locally, in accordance with the borrower's procedures which are satisfactory to the Bank. Equipment and vehicles having a contract value of more than $10,000 under the MNINUTE and solid wastes management components, estimated at about $6.5 million would be awarded on the basis of international competitive bidding. For the purpose of bid comparison, local manufacturers would receive a preference of 15%, or the level of custom duties, whichever is lower. Items of less than $10,000 would be tendered on the basis of competitive bidding advertised locally in accord- ance with procedures satisfactory to the Bank. Disbursements 60. Disbursements for civil works would be made at the rate of 85% for ZIP and government-developed sites and services and at 60% against the other components upon submission of normal documentation. Disbursements for equip- ment and materials would be at the rate of 100% of foreign expenditures for direct imports; 100% of local expenditures ex-factory if locally manufactured; and 65% for other locally procured equipment and materials and 100% of the expenditures for technical assistance and training. Disbursements would be made against 60% of the small business loans and for building materials and construction loans, certified by the Project Director of the relevant agency against statements of expenditure. A maximum amount of $3.5 million is recommended for retroactive financing for payments made after June 30, 1979, for advance contracting for ongoing civil works in the ZIP and MMINUTE programs and for consultants' advisory services and subloans. Cost Recovery and Affordability 61. Cost recovery for the ZIP and sites and services components would follow the principles established tnder the Second Urban Loan, whereby the cost of land, on-site infrastructure, on-lot development, and building material loans would be recovered directly from beneficiaries. Land developed for industrial and commercial use would be marketed at prevailing values. Community health and education facilities and off-site infrastructure would be charged to the budgets of responsible agencies. Costs of communal water supply and environmental sanitation improvements provided in the MMINUTE program would be recovered indirectly through the MWSS tariff structure in accordance with existing procedures. Local street improvements would be undertaken following agreement with affected property owners on revision of assessed property values to recover capital costs involved. All costs of capital and finance for the livelihood component would be recovered except  - 18 - for direct technical assistance to TRC. The mini-industrial estates would be leased or sold to entrepreneurs. Direct technical assistance provided to individual entrepreneurs under the component would be capitalized into costs recovered from them, except in the case of micro-enterprises where cost recovery would be determined by affordability. Under the arrangements outlined above, some 70% of the project capital investment costs would be recovered by beneficiary charges and a further 8% through service tariffs, leaving some 22% to be borne by government appropriations and fiscal revenues generally. Arrangements were made whereby MMC would share with local govern- ments the responsibility for repaying the national government for the ZIP, MMINUTE and solid waste management programs. The Government has agreed to undertake a comprehensive nationwide review of the borrowing capacity of local governments in accordance with a timetable satisfactory to the Bank (Section 4.07 of draft Loan Agreement). 62. Assurances were also obtained that the beneficiaries of ZIP and the sites and services component would be offered a 25-year transferable lease which would include an option to purchase the freehold interest within five years (Sections 4.05 and 4.09 of the draft Loan Agreement.) 63. Affordability to beneficiaries is a principal design criterion. This would be measured on a per-plot basis including renters and multiple households and, in the case of ZIP, would relate to the community as a whole. In ZIP areas where family incomes range between P 300 and P 3,000 per month with a median of about P 500 per month, beneficiary charges would be designed to cover the land and servicing costs amortized at 12% over 25 years. At an average of P 68 per month, these payments would be affordable to families earning P 340 per month ($46) which is below the 10th percentile of the Metro-Manila income curve. The sites and services component provides for cross subsidization and a range of lot sizes and housing options to attract a social mix and, as such, plots would be affordable down to the 20th percentile. The eligibility criteria would be that the applicant would own no other residential property in the MMA, and have family income in the range specified for lots of a given size. The Government has agreed that prices of residential property and plot allocation methods would be determined in consultation with the Bank, and public announcement of said conditions and methodology would be made prior to the start of construction of each such development (Section 4.05 of the draft Loan Agreement). Benefits and Justification 64. The proposed project would support a first three-year phase of long-term complementary metro-wide programs to alleviate the deficiencies in urban services; regularize land tenure; and provide opportunities to increase incomes of the poverty group and make affordable shelter available to meet the needs of the growing low-income community. In addition, the project would increase the institutional capacity to design and execute these priority programs and to coordinate urban infrastructure planning.  - 19 - 65. Using the anticipated increase in property value resulting from the various investments as a proxy for the project benefits, the economic rate of return is estimated to be about 42% for ZIP, 15% for MMINUTE and 26% for sites and services. These rates of return are consistent with the results presently experienced in Tondo. The average weighted economic rate of return for ZIP, MMINUTE and sites and services components, which represent about 83% of total project costs, is estimated to be about 26%. It increases to 29%, if labor costs are shadow-priced at 84% of actual levels. The livelihood component would create approximately 6,000 jobs and the average economic rate of return of the subprojects already appraised is estimated to be about 48%. In addition, the project would generate 11,000 construction jobs of which 75% are expected to be for the poor. 66. The project is designed to initiate metrowide programs to service the basic needs and increase the incomes of the urban poor. Improvements provided through ZIP are designed to be affordable by the target group and by 1983, some 160,000 persons would have benefitted directly from upgrading, about 80% of whom would fall within the poverty group. The MMINUTE component would provide basic services to a further 300,000 persons, of whom some 75% fall below the poverty threshold. Over 80% of the new sites would be targeted for and would be affordable by families below the poverty income level. Taken together, these components would, during the project period, provide direct benefits to about 500,000 persons (28% of the projected poverty group). The livelihood component would augment the incomes of about 80% of the participants who are below the poverty threshold, primarily through secondary employment at a cost of $660 per job. The pilot program for solid waste - management would concentrate largely on improved collection from low income neighborhoods. Of the total cost of $120 million, some 74% (or $89 million) is directed to benefit the poverty group. Project Risks 67. Because the project envisages rapid expansion of upgrading programs, it necessarily entails risks related to management and coordination. The operating procedures and administrative relationships for ZIP and MMINUTE are not yet fully in operation. The local teams in each of the four districts are new but organized around competent engineering staff appointed from the local governments and national agencies. Additional staff would be hired as implementation proceeds. The Government has made a significant effort to establish institutional arrangements to implement these programs and, with continuing commitment, it should be possible to expand them effectively to reach larger numbers of the urban poor. 68. Other risks involve participation of private developers for part of the sites and services component which is a new initiative and as yet unproven. Their response to this initiative could prove to be less than anticipated. Particular attention to adequate incentives to developers, careful formulation of the guidelines for participation and periodic monitoring should minimize the risks.  - 20 - 69. Due in part to the fragmentation of agencies and also to the inherent complexity of the sector, assistance to small businesses in the Philippines in the past has been less than successful. The proposed project would endeavor to overcome this problem by using a dynamic agency to select and manage appropriate implementing agencies for employment subprojects in order to offer creative and comprehensive services to small businesses. Sufficient funds and staff would also be allocated to study the details of specific sectors and to prepare and appraise subprojects thoroughly. PART V - LEGAL INSTRUMENTS AND AUTHORITY 70. The draft Loan Agreement between the Republic of the Philippines and the Bank and the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement of the Bank are being distri- buted to the Executive Directors separately. 71. Special conditions of the project are listed in Section III of Annex III. Additional conditions of effectiveness are: (a) the execution of a Subsidiary Loan Agreement between the Government, IIMC and NHA, and of a Subsidiary Investment Agreement between the Government and TRC: and (b) the establishment of a Management Coordination Board (Section 6.01 of the draft Loan Agreement). 72. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 73. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments Washington, D.C. March 5, 1980  -Z1- ANNEX I Page 1 of 5 TABLE 3A PHILIPPINES - SOCIAL INDICATORS DATA SHEET RENRCZ GROUPS (ADJUSTED *ACES LAND ARUA (TIOUSAND SO. IN.) PILIPPIN S - 135T RUCENT ASTIDATE) S TOTAL 300.0 SAM SAME NEMT HIGRR AGRICMLTRAL 86.7 MOST RECENT GZOCAPIC 030011 03C0H 1fO /b 1970 / ESTIIATZ /b RZCI0 h GROUP d GROUP / CNP PEA CAPITA (CUS) 140.0 230.0 510.0 528.9 467.5 1097.7 ENERGY CONSUMPTION PZE CAPITA (KILOGRACS 0P COAL EQUIVALENT) 147.0 301.0 329.0 371.1 262.1 730.7 POPULATION AND VITAL STATISTICS POPULATION. MID-YEA (MILLIONS) 27.4 36.9 4.5 URAN POPULATION (PER5CUT OF TOTAL) 30.1 31.8 34.0 27.4 24.6 49.0 POPULATION PROJECTIONS POPULATION IN YEAR 2000 (MILLIONS) 76.0 STATIONARY POPULATIOW (MILLIONS) 128.0 TER STATIONARY POPULATION IS 8EAfED 2075 POPULATION DENSITY PER SQ. DM. 91.0 123.0 148.0 154.8 45.3 44.6 PER SQ. KM. AGRICULTURAL LAND 360.0 472.0 513.0 566.7 149.0 140.7 POPULATION AGE STRUCTUE (PERCENT) 0-14 TRS. 44.7 45.5 46.0 41.3 45.2 41.3 15-64 YR. 52.3 53.6 51.0 54.9 51.9 55.3 65 YRS. AND ABOVE 3.0 2.9 3.0 3.3 2.8 3.5 POPULATION GROWTH RATZ (PERCENT) TOTAL 2.7 3.0 2.7 2.4 2.7 2.4 UR3AN 4.0 3.8 3.5 4.3 4.3 4.5 CRUDE 3DIRT RATE (PMI TEOUSAND) 45.0 43.0 35.0 30.2 39.4 31.1 CRUDE DEAUT RATE (PE THOUSAND) 15.0 11.0 9.0 8.3 11.7 9.2 GCOSS REPRODUCTION RATE 3.5L 3.3 2.4 2.1 2.7 2.2 FAMILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) .. 191.7 643.0 USERS (PERCENT OF MARIED WOEN) .. 2.0 22.0 34.1 13.2 34.7 FOOD AND NUTRITION INDEX OF FOOD PRODUCTION PER CAPITA (1969-71-100) 100.1 101.0 111.0 106.2 99.6 104.4 PER CAPITA SUPPLY OF CALORIES (PERCENT OF REQUIREMENTS) 83.0 86.0 87.0 104.1 94.7 105.0 PROTEINS (GRAMS PER DAT) 44.0 45.0 50.0 57.4 54. 3 64.4 OF WHICH A.NIMAL AND PULSE t9.0A 22.0 19.2 6.9 17.4 23.5 CHILD (AGES 1-4) MORTALITY RATE 16.0 10.0 7.0 4.8 11.4 8.6 HEALTg LIFE EPECTANCY AT BIRTH (YEARS) 51.0 57.0 60.0 61.1 54.7 60.2 TNFANT MORTALITY RATE (PER ThOUSAND) 98.0 8Q.0 65.0 46.6 68.1 46.7 ACCESS TO SAFE WATER (PERCENT OF POPULATION) TOTAL .. .. 39.0 21.9 34.4 60.8 URBAN .. .. 51.0 46.2 57.9 75.7 aURAL .. .. 33.0 12.8 21.2 40.0 ACCESS TO EECEETA DISPOSAL (PERCENT OF POPULATION) TOTAL .. .. 56.0 28.4 40.8 46.0 URBAN .. .. 76.0 65.0 71.3 46.0 RURAL .. ,. 44.0 14.7 27.7 22.5 POPULATION PER PHYSICLIN .. .. 3150.0 3790.5 6799.4 2262.4 POPULATION PER NURSING PERSON .. 3840.0 4990.0 1107.4 L522.1 1195.4 POPULATION PER HOSPITAL BED TOTAL 1180.0 850.0 880.0 613.3 726.5 453.4 'MRAN .. .. .. 203.6 272.7 253.i RURAL .. .. .. 1110.3 1404.4 2732.4 ADMISSIONS PER HOSPITAL BED .. .. .. 23.9 27.5 22.1 HOUSING AVERAGE SIZE OF HOUSEHOLD -OTAL 5.8 5.9 .. 5.2 5.4 5.3 URBAN .. 6.2 .. .. 5.1 5.2 RURAL .. 5.8 .. .. 5.5 5.4 AVERAGE NUMBER OF PERSONS PER ROOM TOTAL .. 2.3 .. .. .. 1.9 URBAN .. 2. 1 .. .. .. 1.6 RURAL .. 2.4 .. .. .. 2.5 ACCESS :O ELECTRICITY (PERCENT JF DWELL.NGS) TOTAL 16.5 22.9h 31.0 *- 28.1 50.0 URBAN . 62.8/h .. .. .5.1 71. 7 RURAL 5.sT 10.7 9.9 17.3  "2 2 - ANNEX I Page 2 of 5 TABEU 3A P'ILIPPINES - SOCIAL INDICATORS DATA SHUT PIIILIPPINES REU NCE GROUPS (ADJUSTED A GjRAGES P- IOST RECENT ESTIMATE) SAME SAME NliXT IGHER MDST IECZNT GHOGPHIC INCQlt INCOMEZ 1960 Lb 1970 Lb ISTIATE /b REGION Le GROUP /d GROUP Le EDUCATION ADJUSTED 1aROLLMENT RATIOS PRIMARY: TOTAL 95.0 114.0 105.0 97.9 82.7 102.5 MALU 98.0 115.0 102.0 98.7 87.3 108.6 FEXALE 93.0 113.0 10..0 97.4 75.8 97.1 StCONDART: TOTAL 26.0 50.0 56.0 42.2 21.4 33.5 MALE 28.0 59.0 65.0 46.7 33.0 38.4 FEHALE 25.0 42.0 47.0 40.9 15.5 30.7 VOCATIONAL ENROL. (7 O SECONDART) 15.0 6.0 .. 12.5 9.8 11.5 PUPIL-TEACRER RATIO PRIMARY 36.0 29.0 29.0 32.5 34.1 35.8 SECONDARY 27.0 33.0 31.0 25.8 23.4 22.9 ADULT LITEACY RATE (PERCENT) 71.9 82.6 87.0 84.1 54.0 64.0 CONSUMPTION PASSENCER CARS PER THOUSAND POPULATION 3.0 8.0 8.9 6.1 9.3 13.5 RADIO RECEIVERS PER THOUSAND POPULATION 22.0 39.0 44.0 84.4 76.9 122.7 TV RECEIVERS PER THOUSAND POPULATION 1.4 10.0 17.0 22.4 13.5 38.3 NEWSPAPER ("DAILY GZNfLAL INTEREST") CIRCULATION PER THOUSAND POPULATION 17.0 14.0 18.0 24.2 18.3 40.0 CINEMA ANNUAL AITENDANCE PER CAPITA 0.6 .. 7.6 3.6 2.5 3.7 LABOR FORCE TOTAL LABOR FORCE (THOUSANDS) 10100.0 12400.0 16244.0 FEMALE (PERCENT) 34.4 33.1 35.3 36.7 29.2 25.0 AGRICULTURE (PERCENT) 61.0 55.0 50.9 54.6 62.7 43.5 INDUSTRY (PERCENT) 15.2 15.8 14.8 16.3 11.9 21.5 PARTICIPATION RATE (PERCENT) TOTAL 39.8 36.6 35.3 40.7 37.1 33.5 MALE 52.1 48.6 47.1 49.9 48.8 48.0 FEMALE 27.4 24.4 23.3 31.0 20.4 11.8 ECONQAIC DEPENDENCY RATIO 1.3 1.4 1.3 1.1 1.1 1.4 INCOME DISTRIBUTION PERCENT Of PRIVATE INCOME RECEIVED BY HIGHEST 5 PERCENT OF HOUSEHOLDS 28.8 .. .. 14.9 15.2 20.8 HIGHEST 20 PERCENT OF HOUSEHOLDS 56.2 53.9 53.3 46.8 48.2 52.1 LOWEST 20 PERCENT OF HOUSEHOLDS 4.2 3.7 5.5 6.2 6.3 3.9 LOWEST 40 PERCENT OF HOUSEHOLDS 11.9 11.9 14.7 16.8 16.3 12.6 POVERTY TARGET GROUPS ESTIKATED ABSOLUTE POVERTY INCOME LEVEL (USS PER CAPITA) URBAN .. .. 250.0 193.1 241.3 270.0 RURAL .. .. 190.0 128.7 136.6 183.3 ESTiATED RELATIVE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. 132.0 136.8 179.7 282.5 RURAL .. .. 87.0 96.8 103.7 248.9 ESTIMATED POPULATION BELOW ABSOLUTE POVERTY INCOME LEVEL (PERCENT) LRBAN .. .. 39.0 32.0 24.8 20.5 RURAL .. .. 44.0 52.5 37.5 35.3 Sot available NoE applicable. NOTES /a The adjusced group averages for each indicator are populacion-weighted geometric means, excluding the extreme values of the indicator and the most populated country in each group. Coverage of countries among Che indicators depends on availability of data and is not uniform. 'b Unless otherwise noted, data for 1960 refer to any year becween 1959 and 1961; for 1970, between 1969 and 1971; and for Most Recent Estimate, between 1974 and 1977. /C Lasc Asia s Pacific; /d Lower Middle Income (5281-550 per capita, 1976); e Intermediate Middle Income 1f51-1135 per capita. 1976); /f i950-55; Av. 1960-62; 'h 1967. households. Most aecent Estimate of GNP oer capita is for 1978. August. 1979  -23- AN~~~~~MNEX I DEMIMO-23-L_nICTR Page 3 of 5 Notes: Althoug the data -r dve fro sueseaalyJudged the meet thoritatie- sad reliable, It shou1d also he nted that they na not be inters- tioae. lay ooee-sl.e b-nz of the lad of standardised deiitio- and conce.pts used by different coutries In oieoting tbe dat.. The data ore ntels usfu to deoibe orders of magnitude, indicate treads, end oharaterie certain ea3o differece betnee cuatrie.. The ad.,eted -.rop aveage .for eac indicator or ppuatioa-eeigbted geometric -ea, excluding the entrem rlue of the indicator end the scat poplated outry .5 eah grop. lic to lak ofdata grop *reof aid indiotinr fee Capital Surplus Oil pErtere and of idio-tore of Aooe.. so Water nd E-reta Pipsl,Ouiog, L..oee Distributio andPovety for Otis oontry groups ar popuitioa-eignted geomtrio e-n cithoat exclusion of the .utreac veocee and the meet popso'lod -outry. Shn Hh ovrg f coutries -men the indicatne eenso at.l.bityj of da,ta end isant uni_for, -omtto mast be exerised on reltingaeae f oetdiont to anthr. -,ec verge aremotlyusflascroiaoaofeptd'vaeshnoprgtevlesfoe indicator oh a time amen the co-try and reeea -grus. ALM APOA )thoused sq.bm. Access in Exsoreta Dissm. pecn of pouain)-ttl.ubnen ua T.tul toa -ufoe ure o-pras-o lend area nd mind natra.Yndr of people (voa,oin en ua)srcdb .oetab dinposal an Agrioo.ual - RM.t reet estimate of agiutua rea osd teagorily perceatags of their respective popelaticas. Onorsta dispa.aI. sa inclde orpeeanetip, for crops, pasaure, mache end nitche grdena or to the -of1etion end diepoeai, nith or aithcut treatment, of home e-rte lefadlo. and eseetrby ester-bone system or the use of pit pro-tee and ,ilsr 1NP POP CAPITA (US$) - IMP Per capita eetimtos at -oret earitpece ooatoprPosian-ositosdvedboubrfpatcngpscan cat'lculatd OP osm --erion aetbd an World Pen Atlas (1976-78 bsn;qaifiedfo eha.oiola nvriyloi 1960, 175, and 1978 data. RPulnahonper StredingPoao -c osaiedvie ycme f rciigml ciNRGPY C IONSUMPTON PER COPITA - Annua ....anpti-o of - -mroua e-rgy end female1 graduate nures praticalure, and anoutantnus. (-clan linie paoia, ontuaL.- Wan andsoro-, enoler and go- Ponlstio pe Iconl _o -_total. -ro.ad -oa. RPsltia(tota.1 irto, thrai etarsicy) in kilogram of coal equivalent per apito; 19C, and rura) dvddb hi epstv uhro2opiaHoeaaibei 1970, and 1976 data. puhlih and private go-rl and speo-ili-d hostpital and retahclttitnlocetr -t- HoPitala ar estblishmets permanetly staffed by at le-r on phyocian. PcP