Philippines - Industrial Finance Project

Document of FILE COPY The World Bank FOR OFFICIAL USE ONLY Report No. P-3028-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 CENTRAL BANK OF THE PHILIPPINES WITH THE GUARANTEE OF THE REPUBLIC OF THE PHILIPPINES FOR AN INDUSTRIAL FINANCE PROJECT April 13, 1981 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = Peso (P) US$1.00 = P 7.50 P 1 US$0.133 ABBREVIATIONS ADB = Asian Development Bank ADFU = Apex Development Finance Unit Central Bank = Central Bank of the Philippines CEO = Chief Executive Officer DBP = Development Bank of the Philippines DFCs = Development Finance Companies IGLF = Industrial Guarantee and Loan Fund PDCP = Private Development Corporation of the Philippines PFIs = Participating Financial Institutions PISO = Private Investments Systems Organization SMI = Small and Medium Industries UNDP = United Nations Development Programne FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY PHILIPPINES INDUSTRIAL FINANCE PROJECT Loan and Project Summary Borrower: Central Bank of the Philippines Guarantor: Republic of the Philippines Beneficiary: Participating financial institutions (PFIs) Amount: $150 million equivalent Terms: The loan would be for 20 years, including 5 years of grace, with interest at 9.6% p.a. Relending Terms: The proceeds of the loan would be relent by the Central Bank to PFIs at an interest rate at least equal to the interest rate charged by the Bank on the proposed loan, plus a service fee of not less than 3/4 of 1% p.a. The PFIs would, in turn, relend to end users at their borrowing cost plus a margin not exceeding 4.5%; the final subborrowers would bear the foreign exchange risk. Based on the Bank's present lending rate of 9.6%, the cost to the final subborrowers would be close to 15%, which is in line with the current market rate for such funds. The Central Bank's lending rate to PFIs would be reviewed every six months and, if neces- sary, revised to keep the ultimate cost to the final subbor- rowers in line with the market rate; the maximum margin of 4.5% allowed to PFIs would, however, remain unchanged. The Central Bank would charge PFIs a commitment charge of not less than 3/4 of 1% p.a. on the undisbursed portion of PFI loans; the PFIs would pass on the commitment charge to their subborrowers. Project Description: The proceeds of the loan would be onlent, through a specially created Apex Development Finance Unit (ADFU) in the Central Bank, to accredited financial institutions, PFIs, to finance economically and financially viable projects in the industrial sector. Apart from resource transfer, the project would support the Government's financial and industrial reforms and would assist a wider number of financial institutions, including commercial banks, to participate in development projects and provide term financing. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - The capacity of ADFU to carry out its intended functions and to evolve into a strong, development-oriented institution would be critical to the success of the project. The possibility of ADFU's failure to develop reasonable standards constitutes the principal risk. However, the Government-s commitment to industrial and financial sector reforms, ADFU's reasonably strong management, staff training and technical assistance included in the project, together with other safeguards built into the project would help ensure ADFU's effectiveness and help minimize these risks. Financing Plan: $ million Total foreign exchange resource requirement for relending; 250 of which: Bank loan 150 Commercial borrowings 100 Estimated Bank FY: 1982 1983 1984 1985 Disbursements: ----------- $ million -------- Annual 2.5 48.0 84.5 15.0 Cumulative 2.5 50.5 135.0 150.0 Staff Appraisal Report: No. 3331-PH, dated April 7, 1981.  REPORT AND RECOIMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN FOR AN INDUSTRIAL FINANCE PROJECT TO THE CENTRAL BANK OF THE PHILIPPINES WITH THE GUARANTEE OF THE REPUBLIC OF THE PHILIPPINES 1. I submit the following report and recommendation on a proposed loan to the Central Bank of the Philippines with the guarantee of the Republic of the Philippines for the equivalent of $150.0 million to support the Government's financial sector reforms and the Philippines industrial development. The loan proceeds would be channelled through a broad range of participating financial institutions (PFIs) by a newly-established Apex Development Finance Unit (AFDU) in the Central Bank. The loan would have a term of 20 years, including 5 years of grace, with interest at 9.6% p.a. The proceeds of the proposed loan would be relent by the Central Bank (ADFU) at an interest rate at least equal to the interest rate charged under this loan plus a service fee of not less than 3/4 of 1% p.a. The PFIs would in turn relend to end users at their borrowing cost plus a margin not exceeding 4.5%; the final subborrowers would bear the foreign exchange risk. The Central Bank-s lending rate to PFIs would be reviewed every six months and, if necessary, revised to keep the ultimate cost to the final subborrowers close to the market rate. The Central Bank would charge PFIs a commitment charge of not less than 3/4 of 1% p.a. on the undisbursed portion of PFI loans; PFIs would pass on the commitment charge to their subborrowers. An additional amount of about $100 million would be raised from international commercial sources. UNDP has agreed to provide $0.4 million for technical assistance purposes to the project. PART I - THE ECONOMY 2. An 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 Sec-M79-822 dated November 16, 1979. An industrial sector report, entitled "Industrial Development Strategy and Policies in the Philippines" (No. 2513- PH) was distributed on the same date. A related financial sector report, entitled "The Philippines: Aspects of the Financial Sector" (No. 2546-PH), was distributed to the Executive Directors on October 12, 1979. Introduction 3. Despite the deterioration in the Philippines' terms of trade and the sharp cyclical fluctuations in the international economy during the 1970s, better economic management made possible considerable improvements in the rate and structure of the country-s economic growth. The trend growth rate of GNP  was accelerated from 5% to 6%. The ratio of fixed investment to GNP was raised from 16% in the early 1970s to nearly 25% at the end of the decade, and the export growth rate increased. Although the level of domestic savings rose substantially, high foreign borrowing was still necessary to help finance the acceleration of growth and investment and to provide time for orderly adjustments to reduce the large balance of payments deficits experienced after the 1973-74 energy crisis. The public sector played a much more dynamic role in stimulating development in the 1970s, and the performance of the agriculture sector was also quite good. 4. However, some difficult longstanding problems remain to be tackled more intensely in the 1980s, and new development issues are emerging. The most important of these are further slowing of the population growth rate, acceleration of employment creation, and alleviation of widespread poverty. In addition, the 1979 oil price increase and international recession have significantly tightened the balance of payments constraint facing the Philippines. Hence, a major structural adjustment effort is necessary if the country is to continue to make reasonable progress towards its development objectives. An increase in the efficiency of investment, reduced dependence on imported oil, and improved performance of the manufacturing sector will be critical to the success of the adjustment process and the development effort. Economic Performance in the 1970s 5. More Dynamic Role of the Public Sector. The public sector had historically played a relatively passive role in the development of the Philippine economy and had claimed a much smaller share of national resources than in many other developing countries. In the late 1960s, general govern- ment expenditures 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. 6. The public sector assumed a much more important and dynamic role in the 1970s. Both the overall level of expenditures and the shares going to economic services and public investment were raised dramatically. By the end of the decade, government expenditures reached an estimated 16% of GNP, and public investment equaled about 5.5% of GNP. This expansion brought about badly needed improvements in basic infrastructure, particularly in transpor- tation, power, and irrigation, as well as the development of more effective programs in the fields of urban and rural development, health and family planning. 7. At present, the size of the public investment program is appro- priate. Its composition is, with a few exceptions, broadly consistent with the country s development priorities. However, as resource constraints are likely to be tight during the next decade, further strengthening of investment programming and budgeting procedures will be needed to concentrate resources on the highest priority projects.  - 3 - 8. The rapid expansion of public expenditure has been made possible by a program of systematic tax reform to raise the needed revenues equitably and efficiently. The dependence on cyclically volatile taxes on international trade has been reduced, and the proportion of revenue coming from domestic taxes has been increased. The domestic sales tax has been restructured to improve its progressiveness. Numerous increases have also been made in excise taxes, both to raise revenues and increase the progressivity of the indirect tax system. Overall, the tax ratio was raised by more than two percentage points during the 1970s. Although revenue performance was thus quite buoyant, this buoyancy resulted from a series of annual packages of new tax measures and vigorous efforts to improve taxpayer compliance and collection performance. The elasticity of the revenue system to GNP growth is still below unity. Consequently, continuation of a strong revenue effort, both by the Government and government corporations, will be necessary to allow for further expansion in infrastructure and social services. Further tax reforms are needed to raise the tax system's elasticity, to improve its equity by increasing the proportion of revenue coming from direct taxes, and to reduce distortions in economic incentives. 9. Population. The Philippine family planning program now registers approximately 650,000 /1 new acceptors per year. The estimated proportion of married women of reproductive age practicing family planning increased from 15% in 1973 to 27% in 1978. However, the number of new acceptors has reached a plateau as the program faces the increasingly difficult problem of reaching rural areas. 10. In part because of the more active family planning efforts during the 1970s, the population growth rate fell from 3.0% in the intercensal period 1960-70 to 2.8% in the intercensal period 1970-75. It is currently estimated at about 2.4% per annum./l Nevertheless, rapid population growth is still straining available land resources, aggravating already serious employment and poverty problems, and burdening the public budget with a high growth rate of demand for basic services. Further reduction of the population growth rate is therefore vital for the country's future economic development. 11. Agriculture and Rural Development. Although there has been con- siderable variation in performance among subsectors, the trend growth rate of the agricultural sector as a whole was about 5% during the 1970s, which by international standards is quite high. Increased support for agricultural production has been provided through improved price policy and credit, exten- sion, and irrigation programs. Expanded rural development programs such as water supply, electrification and health have also been initiated. With the spread of irrigation and high-yield varieties, rice production from irrigated areas has expanded strongly. The Philippines, once a chronic importer of rice, actually exported about 1% of rice production in /1 These figures differ from those shown in Annex I as they are based on more recent data.  - 4 - the last two crop years. With the completion of the large irrigation projects now under construction, continued rice self-sufficiency appears assured for the 1980s. An agrarian reform was instituted in 1972 to transfer holdings of rice and corn land in excess of seven hectares to tenant farmers and to replace sharecropping with leaseholding on remaining tenanted holdings. Production of nontraditional export crops such as bananas and coffee has also expanded rapidly. 12. On the other hand, the development of rainfed agriculture, which is necessary for raising the incomes of the rural poor in nonirrigable areas, has lagged behind. Population pressure on the arable land is steadily increasing, and soil erosion is a serious problem in hilly areas that have been logged over or settled. Locally adapted technologies for improving yields of rainfed grains, particularly corn, are still under development. Productivity in the coconut sector is relatively low because of a large number of overaged trees, although a replanting program is scheduled to start in the early 1980s when a sufficient number of high-yielding variety seedlings will become available. Solutions of the interrelated problems of low incomes and soil erosion in the settled hilly areas will require development of new tree cropping and mixed farming technologies, resolution of difficult land tenure questions, and substantial upgrading of the administrative capabilities of the agencies concerned. Although progress in rainfed agriculture is likely to be slow because of the difficult technical and institutional issues that need to be solved, it is essential if the benefits of development are not to bypass a significant percentage of the population. 13. Industry and Energy. Two of the economy's critical structural weaknesses are in industry and energy. Despite some improvements in industrial and trade policies in the early 1970s, the rate and pattern of industrial growth has remained unsatisfactory and continues to be a major cause of the Philippines- economic problems. The structural weaknesses of the industrial sector and the steps taken by the Government to correct the situation are discussed in Part III of this Report. 14. At the start of the 1970s the Philippine economy was almost completely dependent on imported oil for energy. Since 1974, considerable effort has been made to reduce dependence upon imported oil through both energy conservation and the development of alternative domestic energy resources. Increases in world oil prices have been fully passed on to consumers, and gasoline taxes and electricity tariffs have been raised to restrain demand. Consequently, the growth rate of energy consumption has been held two percentage points below that of GDP. Measures to diversify energy supply have included the development of hydroelectric, geothermal, coal, and nuclear energy. More importantly, limited domestic petroleum production was started in 1979. However, due to the long gestation period of energy projects, total domestic energy production still constituted only 15% of total commercial energy consumption at the end of the decade. An energy sector mission visited the Philippines in June 1980 and its draft report is to be discussed with the Government in May of this year.  15. Savings and Financial Sector Development. Both public and private savings performance improved considerably during the last decade. Gross domestic savings expanded from 20% of GNP in the early 1970s to the present level of 24% of GNP, financing about 80% of total investment, with the balance coming from foreign sources (investments and borrowings). The Philippine financial system is relatively well-developed and in recent years has become increasingly sophisticated. However, some important issues concerning the mobilization and allocation of financial resources are being or are expected to be tackled in the 1980s. These issues and policy measures adopted by the Government are discussed in Part III of this report. 16. Balance of Payments. The "second oil crisis" has had a major impact on the balance of payments. The increase in oil prices since 1978 has added about $1.4 billion (3.5% of 1980 GNP) to the import bill for an approximately constant volume of oil imports. The current account deficit widened from $1.0 billion annually during the period 1976 to 1978 (4-5% of GNP) to $1.6 billion (5.4% of GNP) in 1979, and an estimated $2.2 billion (6.1% of GNP) in 1980. The debt service ratio, however, actually fell from about 19% in 1978 to 17% in 1979 and 1980. This resulted from two circum- stances. First, during the favorable borrowing conditions prevailing in 1978 and the first half of 1979, the Government was able to refinance or restructure about $2.1 billion of the $5.5 billion external debt outstanding at end-1977. Second, receipts from exports of goods and services have recently been growing rapidly, from $4.7 billion in 1978 to $6.2 billion in 1979 and an estimated $8.0 billion in 1980. This has arisen from the strong performance of nontraditional manufactured exports, the recovery of prices for export commodities, such as sugar and copper, and the growth of earnings from services such as tourism and overseas employment. Development Strategy and Key Issues for the 1980s 17. The Philippines development strategy was set out in a Five-Year Development Plan for the period 1978-82. The Plan's major objectives are (a) to accelerate the rate of growth of GNP first to 7% and then to 8%; (b) to generate sufficient productive employment opportunities for the rapidly growing labor force; (c) to provide for the basic needs of the population; and (d) to reduce social, regional, and economic disparities. The Plan's agricultural strategy emphasizes food production, agricultural diversifica- tion, and stronger linkages between agriculture and industry. Its indus- trial strategy calls for further processing of domestic raw materials, accelerated employment generation by small- and medium-scale industries, and selected large-scale projects. The projected current account deficit is to be restrained to manageable levels by, inter alia, aggressive export expansion and domestic energy development. The Plan also includes social development targets in education, housing, health, and family planning. 18. The Plan's objectives and strategy are still broadly appropriate, and its quantitative targets were reasonable given the assumptions about the external environment prevailing at the time of its drafting. However, in  - 6 - light of adverse external developments, the growth targets subsequently have had to be revised downwards to about 6% p.a., and adjustment policies need to be strengthened. Furthermore, as stated earlier, the Philippine economy still suffers from a number of fundamental long-standing development problems which need to be addressed during the 1980s. Efforts to improve economic performance will need to concentrate upon employment creation, poverty alleviation, the efficiency and labor intensity of investment and structural adjustment in the balance of payments. 19. Employment Creation. The economy has not generated sufficient productive employment opportunities for the labor force, which is growing at 4% per year. Due to the slow expansion of industrial employment, an exces- sively high proportion (85%) of additional labor has been absorbed by the agriculture and service sectors. This has resulted in a low or even declining value-added per worker in some areas and subsectors and has held down the overall growth of labor income since manufacturing employment is, on aver- age, much more productive than that in other sectors. With the exhaustion of most new land resources suitable for cultivation and the exploitation of the most irrigable areas, the agriculture sector will be able to absorb only about 40%, or 250,000, of the 600,000 annual entrants to the labor force in the 1980s. Manufacturing will have to provide employment for at least 150,000 of the other 350,000 new workers, a sharp contrast to the annual average of only 40,000 jobs created in the manufacturing sector during the 1970s. 20. Poverty Alleviation. For historical reasons, income distribution in the Philippines is highly skewed, and there is a small elite which is conspicuously wealthy. The incidence of poverty has declined in recent decades but is still about 40% and malnutrition is relatively widespread. Regional disparities are also pronounced, with the incidence of poverty reaching 60-70% in the least developed regions. During the last two decades, population pressure has led to an increasingly unfavorable man/land ratio and an expansion of cultivation into marginal lands with lower productivity. It has also increased landlessness and accelerated migration into urban areas. Both of these factors, in combination with the limited productive employment opportunities in the modern sector, have put downward pressure on urban and rural real incomes. Real wages fell at the start of the decade as part of an adjustment necessary to restore external balance and have remained comparatively low since then because of the deterioration in the external terms of trade and inadequate employment creation. Hence, despite relatively high overall economic growth of 6% per annum, no signi- ficant reduction was achieved in the incidence of poverty during the 1970s. The key elements in an attack on the country's poverty problem will be a rapid expansion of manufacturing employment, development of rainfed agriculture, more balanced regional development, continued improvement in basic public services, and a further reduction in the population growth rate.  21. Efficiency and Labor Intensity of Investment. Private and public investment have risen sharply during the last decade, and both are now at levels appropriate for a country with the Philippines per capita income and resource endowment. The expansion in the economy s real output has, how- ever, been low relative to the high level of fixed capital formation in the 1970s. The Philippines has an incremental capital/output ratio about 35% higher than neighboring Asian countries that have roughly comparable pat- terns of investment. In addition, as noted earlier, the rate of nonagricul- tural job creation has been inadequate, indicating that, overall, investment has not been labor-intensive enough. 22. Consumption needs to grow moderately rapidly if the poverty prob- lem is to be addressed and continuation of the prolonged containment of real wages is not to generate unbearable social stress. Hence, the scope for generating additional domestic savings by constraining consumption growth is limited. Since reliance on foreign savings needs to be reduced, it is not realistic to aim at further substantial increases in the investment rate. Consequently, it will be the efficiency and the labor intensity of investment that will be the critical determinants of the growth in output and employment. A primary cause of low investment efficiency and low labor intensity has been the distortive effects of past trade, industrial, and financial policies on the allocation and use of capital by domestic market- oriented manufacturing and service industries. Furthermore, as the public investment program rises during the next decade to levels at which resource constraints become increasingly important, greater attention will have to be devoted to questions of the efficiency of infrastructure investment. 23. Adjustments in the Balance of Payments. The current account deficit is expected to remain at about 6% of GNP in 1981. Assuming the Government continues to implement effective adjustment policies (see Part III), it would decline to about 5% of GNP in 1983 and less than 4% of GNP by 1985. The external capital requirements for 1981 are estimated at about $2.5 billion and are expected to rise to about $4.0 billion by 1984. In 1980, the Philippines received ODA commitments of $1.1 billion. The recent Consultative Group Meeting, held in Paris in January of this year, agreed that it would be reasonable for the Philippines to seek official aid of about $1.2 billion during 1981. It is expected that official sources would provide about 40% of the Philippines gross external capital requirements annually during the 1980s. If the Philippines can sustain the strong export performance of the recent past, the debt service burden should remain manageable despite the heavy commercial borrowing requirements of the years ahead; the debt service ratio is expected to remain in the range of 18%-20% to 1985.  - 8 - PART II - WORLD BANK OPERATIONS 24. To date, the Philippines has received 74 Bank loans (of which two were on Third Window terms) amounting to $2,665.7 million and six IDA credits amounting to $122.2 million. IFC investments totalled $103.6 million. The share of the Bank Group in total debt disbursed and outstanding is currently about 15% and its share in total debt service is about 7%. These ratios are expected to be about 13% and 9%, respectively, by 1985. Annex II contains a summary of IDA credits, Bank loans and IFC investments as of February 28, 1981, as well as notes on the execution of ongoing projects. 25. The Bank Group has financed projects in virtually all sectors of the economy with particular emphasis on agriculture and basic infrastruc- ture, which have each accounted for about one third of total Bank Group lending. In agriculture, emphasis has been given to expanding the irriga- tion system to increase food production and to credit programs to support foodgrain production and processing, livestock, fisheries and tree farm- ing production. Support has also been provided for integrated rural devel- opment projects in low income areas. The Bank Group has also provided large amounts of assistance in developing power and transportation to provide the basis for future growth of the productive sectors and development outside Metro Manila. 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 initially concen- trated on strengthening the capacity of public and private development finance institutions with increasing attention given to meeting the needs of small and medium industries. More recently, greater emphasis has been placed on policy reforms through structural adjustment lending (see paras. 33-36). 26. Execution of Bank-financed projects has improved markedly in the 1970s compared with the experience of the late 1960s, when shortages of peso counterpart funds and weak administration caused serious problems. While ongoing projects are being implemented reasonably well, adminstrative problems resulting from the acceleration of inflation and the need to maintain tight control on expenditures have caused some delays in project implementation, and disbursements have been slower than anticipated. A Project Implementation Review was held in May 1980, and steps are being taken to correct the procedural problems. 27. As noted in Part I of this report, the Government's Five-Year Development Plan (1978-82) 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. A recent revision to the Plan recognizes the need for undertaking structural adjustments as well as  - 9 - continuing prudent demand management, with a revised trade regime to strengthen the manufacturing sector, and an accelerated energy diversi- fication program. The Bank's future lending program has been designed to assist the Government in achieving the objectives of the Plan. 28. Agricultural and rural development will account for the largest part of future lending with continued emphasis on food production and programs to increase the productivity and incomes of small farmers. We will also continue to support projects for education, population and health, and slum upgrading and low-cost sites and services, particularly in areas outside Metro Manila. Substantial assistance will be given to industry with considerable attention given to policy reforms through ongoing and planned structural adjustment lending, through the proposed loan, and through subsector loans aimed at rationalizing and restructuring specific sub- sectors. Emphasis will also be placed on expanding the development of labor-intensive, small and medium industries outside the Metropolitan Manila area. Major assistance efforts are planned over the next several years to support the Government's efforts to develop domestic energy resources, and to strengthen the institutions responsible for developing and managing energy supplies. 29. This is the fourth loan to the Philippines to be presented to the Executive Directors this fiscal year. Loans for agricultural support services, the elementary education subsector, and national fisheries development have been appraised and are scheduled for presentation to the Executive Directors during the next few months. PART III - THE INDUSTRIAL SECTOR /1 AND INDUSTRIAL FINANCE The Industrial Sector 30. Despite some improvements in industrial and trade policies in the early 1970s, the rate and pattern of industrial growth has remained unsatis- factory and continues to be a major cause of the Philippines' economic prob- lems. Rather than being a dynamic leading sector, manufacturing grew rela- tively slowly during the last decade at 6.5% p.a., about the same rate as total GDP. The majority of industries are highly protected and produce only for the domestic market. Since the early 1950s, manufacturing employ- ment has grown slowly, instead of providing job opportunities for an increas- ing share of the labor force, and has remained constant at about 10-12% of total employment. Efficiency of investment is also low, and manufacturing industry is heavily concentrated in the Metro Manila area. 31. Historically, the industrial sector has been a large net burden on the balance of payments, relying heavily on imported equipment and /1 The industrial sector is normally defined to include mining and quarry- ing, construction, public utilities and manufacturing. The last of these is the focus of this chapter.  - 10 - intermediate goods but exporting very little. Successful steps were taken during the early 1970s to promote such nontraditional manufactured exports as garments, electronics, footwear and handicrafts. Nontraditional manufactured exports increased rapidly during the decade and currently account for nearly a third of the country's total merchandise exports. As a result, the rate of employment creation recently appears to have improved somewhat. However, the export expansion has been concentrated on a few items, and backward linkages with the rest of the economy have been limited. Consequently, the nontraditional manufacturing export sector is an outward-looking enclave in an otherwise heavily protected economy. 32. Improvement in the performance of the industrial sector is crucial to the attainment of the Philippines' development objectives. Manufacturing is the key to accelerating income, employment, and export growth. It is also important for restraining growth in imports of capital and intermediate goods and for using capital and foreign exchange resources efficiently, and for the Government's regional development objectives. Improved efficiency of resource use in the industrial sector and maintenance of the rapid growth in nontraditional exports will be critical to the success of the adjustment effort to meet the economic challenge of the 1980s. 33. The Industrial Development Program. Since the late 1960s, there has been growing awareness in the Philippines of the need to modify the import-substitution bias in industrial and trade policies of the previous decades. In the late 1970s, the Government commissioned a number of studies relating to industrial policy, the results of which indicated that: (a) the chief causes of poor industrial performance were the highly protective trade regime and the capital-intensive bias of investment promotion policies; and (b) several industries needed restructuring. The Government's concern about the performance of the industrial sector led to the subsequent undertaking of a Bank industrial sector mission in early 1979, followed by a joint IMF-Bank financial sector mission, to look at interrelated questions of banking system reforms and industrial finance. The reports of these two missions confirmed the findings of the Government's own studies and helped in the formulation of strategies for industrial and financial sector development. 34. The Government recently outlined its industrialization strategy and policy reform program in a Statement of Industrial Policy for the 1980s which provided the basis for the Bank's recently approved Structural Adjust- ment Loan (Loan No. 1903-PH). The policy reform program includes staged reforms over a five-year period designed to correct the import-substitution and capital-intensive biases of existing industrial and trade policies, and covers five major areas: (a) export incentives and promotion measures; (b) tariff reform and trade liberalization; (c) investment incentives; (d) industrial restructuring; and (e) major industrial projects. 35. Since 1979 the Government has adopted a number of measures to strengthen the export regime. These have included stronger fiscal incen- tives for export industries, simplified import/export procedures, easier access to bonded manufacturing warehouses, and financial assistance through  - 11 - the modification of the Central Bank's rediscount facility for exports and by empowering the Philippine Export and Foreign Loan Guarantee Corporation to guarantee loans to the export sector. The Government also streamlined and strengthened the institutional setup to support and promote exports. To this end, the Government reorganized the Ministry of Trade, supported the establishment of export trading companies and broadened the charter of the Export Processing Zone Authority to enable it to plan, develop and manage 12 new industrial estates. 36. The objectives of tariff reforms are to lower the overall level of protection in the economy and even out the spread in tariff rates within and between industry sectors. The movement towards greater uniformity in effective protection rates will reduce allocative distortions and provide a more rational incentive for genuinely justified import-substitution. The reduction in the higher rates of protection afforded to some industries should lead to increases in competitiveness and efficiency and help strengthen the linkages between home and export industries. Reforms in investment incentive policies would include removing the capital bias of fiscal incentives, improving the allocative system, adopting appropriate policies towards regional dispersion of industry and streamlining administrative procedures for granting of incentives. Subsectoral restructuring programs would specify the direction of a subsector's future development, government policies and the role of the private sector, and the instruments to help existing industries improve efficiency and otherwise increase their competitiveness. The Government also plans to establish a number of economically and financially viable industrial complexes which would contribute to technological deepening and import-substitution in the production of intermediate goods. Substantial work has been done in the areas of investment incentives, industrial restructuring and major industrial projects; however, any major advance in these areas will take a number of years to achieve and the progress made will form the basis of future discussions between the Government and the Bank. The Financial Sector 37. The financial sector in the Philippines is relatively well developed, and, in many respects, has served the country well. The 1973/74 energy crisis and the resulting prolonged deterioration in the terms of trade were weathered without disturbance to the monetary system. As a result of a series of reforms adopted in the 1970s, significant improvements were made in financial policy to increase the efficiency of financial markets in intermediating between savers and investors. The banking system was strengthened by increases in capitalization; a sophisticated money market was developed and a basis was laid for linkages with the international banking system; there were substantial improvements in the management and operating standards of institutions; interest rates were realigned 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; and special credit programs were introduced to  - 12 - expand lending to the credit-short agricultural sector and rural areas and to serve the needs of medium- and small-scale industries. 38. The rapid evolution of the financial system in the 1970s resulted in greater responsiveness of the system to mobilization of savings in finan- cial form. Total gross assets of the financial sector grew by 11% p.a. (in real terms) between 1974 and 1979, while real GNP grew at 7%. The range of financial assets increased and there was a clear response on the part of the savers to keep a larger proportion of their savings in financial form. 39. Gross domestic savings are relatively high in the Philippines and are presently about 24% of GNP. The Government is aiming at increasing this rate to 27% over the 1980s to maintain the level of investment while simultaneously reducing the current account deficit and the country's reliance on foreign savings. While all sectors are expected to increase their rate of savings, the household sector share is expected to rise from 9% of GNP in 1978 to over 11% in the 1980s. This will imply the necessity for a marked increase in the savings effort in a sector which is already financing the greater part of the country's investment requirements. An increasing proportion of such savings would need to be made available and intermediated on a longer-term basis. Long-term peso funds have been particularly scarce in the past and, as the country continues to industrialize, the needs of the economy for such longer-term finance will increase. 40. As the economy has grown in size and complexity, the Government has become increasingly aware of the need to further reform the financial system, which has grown in a rather ad hoc fashion, to enable it to respond better to present and future needs. The tendency towards specialization in response to specifically identified needs led to the separation of regular banking activities - the normal task of commercial banks - from investment banking activities - notably merchandizing, distribution and underwriting of security issues - and caused considerable fragmentation among institutions. It reduced competition by segmenting markets and reducing responsiveness of the system to changing needs and demands. It also did little to lengthen maturities and promote longer-term lending and borrowing. 41. At the same time the incentive system has not been geared to mobi- lize sufficient savings, encourage longer maturities and allocate resources where they were most needed. Nominal interest rates have been regulated and during periods of relatively high inflation, as in 1979 and 1980, real rates have been essentially negative. Low interest rates have been one of the factors contributing to relatively inefficient and capital-intensive investment. Lack of flexibility in nominal interest rates has also inhibited monetary and balance of payments management. Moreover, the absence of effective differentials between short- and long-term lending rates inhibited banks from investment in longer-term obligations. The problems in the interest rate structure were aggravated by the Central Bank-s complex and numerous rediscounting policies. This has frequently resulted in encouraging over-investment in some areas while other sectors of the economy, such as small manufacturing enterprises and housing, were  - 13 - relatively neglected in the allocation of investment funds. Also, the absence of "lender-of-last-resort" discounting facilities has accentuated the liquidity preference of banking institutions, and compelled them to match the maturities of their assets and liabilities. 42. Institutions in the Financial System. The financial system com- prises the banking sector, consisting of commercial banks, thrift banks, rural banks, and specialized Government-owned banks, and the nonbanking sector, comprised of investment houses and finance companies. Commercial banks, both foreign and domestic, are at the center of the financial system, commanding over half of the total resources. Thrift banks, with 4% of total resources, include savings and loan associations, mortgage banks and private development banks - the latter being small institutions located outside Metro-Manila and lending for small- and medium-scale enterprises. Rural banks, which exceeded 1,000 in 1980, are unitary banks that are located over a wide geographical area and lend mainly for agriculture. They account, however, for only 2% of the resources of the financial system. The major specialized Government financial institution is the Development Bank of the Philippines (DBP) which accounts for over 11% of the assets of the financial system (see paras. 53 and 67). As a result of the statutory separation of commercial and investment banking under the reforms of 1972, investment houses were established to provide facilities for equity financing and underwriting of corporate securities. The total resources of investment houses at the end of 1979 accounted for only 3% of the resources of the financial system. Two of the investment houses - the Private Development Corporation of the Philippines (PDCP) and the Philippine Investments Systems Organization (PISO) - have been recipients of Bank assistance in the past (paras. 53 and 66). Finance companies, accounting for about 5% of the financial system's assets, extend credit to enterprises and directly to consumers; their main activity is centered around consumer finance. Finally, there are the social security institutions consisting of private insurance companies, the Government Services Insurance System and the Social Security System. The combined assets of these comprise about 16% of the total assets of the financial system. 43. The Financial Markets. The capital market in the Philippines has not been a significant source of medium- and long-term finance. At present there are only 196 equity issues listed on the stock exchange (0.5% of all corporations registered with the Securities and Exchange Commission). For the development of an effective capital market, a well-articulated regulatory framework and an incentive-oriented tax regime are needed. In contrast with the marginal role of the long-term capital market, the short-term money market has played an important role in the Philippines. In the early 1970s, the money market grew very rapidly and its volume of business escalated at an annual rate of 50% during 1974-75; deposit substitutes increased to the equivalent of about 80% of the total savings and time deposits with commercial banks. This spectacular growth was made possible by an absence of control over money market interest rates and consequently the effective rate on deposit substitutes rose to over 30% p.a., in comparison with the time-deposit rates of 8% to 11%. In 1976, however, the Government imposed  - 14 - a 35% transaction tax on money market transactions and imposed an interest rate ceiling of 16% on deposit substitutes. These measures have resulted in a much slower growth rate (5%) of the money market since 1976. 44. The Financial Sector Reforms of 1980-81. In the late 1970s, the Government became increasingly concerned about the future direction of the financial system and in 1979 commissioned a joint IMF/World Bank study on the financial sector in the Philippines (para. 33). The study indicated that a major problem besetting the financial system was that specialization of functions of financial institutions had led to excessive fragmentation and inefficiency (para. 40) and recommended that statutory separation of commercial banking from investment banking should be relaxed. This would enable the commercial banks (currently holding more than 50% of the financial system's resources) to provide medium- and long-term credit and to participate in the underwriting and financing of equity. The study also recommended changes in interest rates and in monetary and fiscal policies to sharpen the responsiveness of financial institutions to the needs for long-term finance. In line with the study's recommendations, the Government introduced a comprehensive set of banking and financial reforms. 45. While these reforms did not abolish specialization, they broadened the scope of operations of each category of institutions. As a first step, the Monetary Board (the regulatory body of the Central Bank) was authorized to designate certain institutions (to be called "expanded banks") to parti- cipate in the underwriting and financing of equity in addition to making medium- and long-term loans. Expanded banks, combining the investment and commercial banking functions, are designated on the basis of criteria, among which an important one is the net worth of the institution. To begin with, the net worth qualification limit has been set at P 500 million which is rather high, reflecting the Government's cautious approach to "universal banking". However, in its Statement of Policy (Annex IV) on the future evo- lution of the financial sector (para. 52), the Government declared its inten- tion to make expanded banks more broad-based by encouraging institutional mergers and consolidation and, if necessary,would lower the net worth quali- fication limit. This would encourage competition and facilitate accessibil- ity of equity and term finance to smaller enterprises. However, the defini- tive action will only be taken after the Government has had sufficient opportunity to monitor and evaluate the performance of licensed expanded banks. 46. Reflecting the same objective of permitting the financial institu- tions to perform wider functions, thrift banks (para. 42) have been granted full domestic banking authority, including the opening of checking accounts, but excluding foreign banking operations. Rural banks (para. 42) may establish branches and perform most domestic banking functions, except the establishment of domestic letters of credit. The investment houses can now undertake trust and foreign exchange operations and their ability to expand operations has been enhanced by allowing them access to Central Bank dis- counting facilities. These additional powers will diversify the functions of existing financial institutions to bring about healthy competition between the different classes of financial institutions and help in their wider regional dispersal.  - 15 - 47. To facilitate term lending, the Central Bank has also revised a number of monetary policies. In order to provide liquidity to the banking system in times of cash stringency and to encourage them to undertake term transformation for long-term lending, the Central Bank has established a largely automatic "lender-of-last-resort" facility. The expanded banks and commercial banks were provided further encouragement to make long-term loans by: (a) making, for the first time, long-term bills eligible for Central Bank discounting; (b) giving discretionary powers to the Monetary Board to reduce, in appropriate cases, the risk assets to net worth ratio from 10% to 6%; and (c) abolishing the previous statutory limit which permitted a maximum of 20% of deposit resources of commercial banks to be used for term financing - the Monetary Board has been given discretionary powers to prescribe ceilings for term lending in accordance with the needs of the economy. Finally, to encourage longer-term deposits, reserve requirements have been fixed at a nominal rate of 5% for all deposits with original maturities exceeding 730 days; this change will be effective from January 1, 1982. 48. The third element in the reforms package is fiscal incentives. The most significant incentive involves a reduction of gross receipts tax on interest income on loans of longer maturity. Other incentives exempt expanded banks from tax on dividends earned by them on their equity invest- ments, and on capital gains arising from mergers and consolidation. 49. Until 1976, interest rates that could be charged by the banking system were restricted to a maximum nominal rate of 12% p.a. for loans secured by real estate mortgage and 14% p.a. for unsecured loans; also, there was no distinction made between short-term and long-term lending rates. Between January 1976 and March 1981, the Central Bank made substantial changes in the interest rate structure, as summarized below: (a) a distinction is now made between long-term and short-term interest rates and financial institutions are permitted to charge up to 21% p.a. on loans of two years' maturity or more and 16% to 18% on loans of shorter maturity. However, effective July 1, 1981, the interest rate ceiling for loans of two years' maturity or more will be abolished; (b) the interest rate ceiling on deposits of 730 days' maturity or more has been abolished. In June 1980 a multiplicity of rates was replaced by a 14% maximum for all deposits of less than 730 days- maturity. However, effective July 1, 1981, interest rate ceilings for all types of deposits will be lifted, except demand deposits which, as is normal, will continue to bear no interest; and (c) in August 1980, the Government gave financial institutions the option to charge variable interest rates without any ceiling for loans having a maturity of four years or more. From July 1, 1981 all loans with maturities of two years or more may carry variable interest rates. This feature will encourage term transformation as  - 16 - periodic adjustments in the interest rate will protect "spreads" on term lending in situations where subsequent changes in deposit rates increase the cost of funds. 50. While only short-term lending rates (para. 49(a)) continue to be regulated, they have been brought more closely in line with market condi- tions. The Government has also affirmed its adherence to positive interest rates as an instrument of policy and believes that the deregulation and flexibility already introduced and in the process of introduction will give interest rates greater market orientation. It nonetheless feels that com- plete deregulation of short-term lending rates may be detrimental to the interests of the small businesses, newcomers to industry and regional indus- tries. Also, because of the oligopolistic character of the Philippines' banking system, this would lead to undue concentration of economic powers by diversion of funds to the large-scale sector. Given the projected inflation rates of 14% in 1981, 10% in 1982 and 8% in 1983-86, the present short-term lending rates are expected to be significantly positive. While the Govern- ment will seek to maintain positive real lending rates and will periodically review the interest rate structure, it believes that the basis for such review should be the long-term underlying trends; frequent changes based on short-term variations in inflation rates could be destabilizing. In addi- tion, it is necessary that lending rates of Government financial institu- tions, particularly DBP, should not be subsidized and should reflect market rates. This will be consistent with the Government's current interest rate policy and with the objective of developing a competitive long-term lending market involving public and private financial institutions. The Govern- ment's recently issued Statement of Policy (Annex IV) spells out the agree- ments reached with the Government concerning periodic interest rate review, the Government financial institutions' lending rates and the establishment of suitable criteria and an appropriate mechanism for conducting the interest rate reviews on a regular basis. 51. Future Evolution. The financial sector reforms of 1980-81 are an important step in the continuing process of industrial and financial sector evolution. The broadening of financial and functional bases of financial institutions, the steps taken towards a more flexible and market-oriented interest rate policy, and the adoption of monetary and rediscount policies conducive to long-term lending, are important milestones. These measures should assist in mobilizing and channeling resources to meet the financial needs of industrial development and in enhancing the efficiency of investment. 52. In recognition of the continuing need to define future directions, the Government's Statement of Policy sets out its future aims and objectives in the continuing effort to strengthen the financial sector. Besides ensur- ing that changes required to keep the financial sector responsive to the varied needs of a growing economy would be made, it is the Government's intention to take adequate measures to provide for the credit needs of all sectors. Particular attention will be paid to the financing of exports, the small-scale enterprise and housing sectors for which institutional struc- tures are under consideration, and to the strengthening and broadening of  - 17 - existing institutional arrangements. Agricultural credit is still narrow in its scope and inefficient in its dispensation; changes in its structure and a rationalized institutional system, through which the credit could smoothly and efficiently flow, will be addressed. As for the capital market (para. 43), the Government intends to strengthen and streamline the market's network institutions and regulatorv authorities in order to Dlav an active role in supporting the financial system. Finally, the government financial institu- tions will be given greater autonomy in the selection of their portfolio and efforts will be made to make them less dependent on budgetary funds and more market-oriented in their operations. The Bank's Role and Future Industrial Lending Strategy 53. The Bank's lending to the sector (channeled through The Develop- ment Bank of the Philippines (DBP), Private Development Corporation of the Philippines (PDCP), Philippine Investments Systems Organization (PISO) and the Industrial Guarantee and Loan Fund (IGLF)) has amounted to nine loans totalling $398 million, including $110 million allocated specifically for small- and medium-scale industry (SMI) financing. 54. In 1978, the Bank reviewed its operational program in the industrial sector in the Philippines and reached the conclusion that while the Bank's past lending to individual development finance companies (DFCs) had largely achieved its institution-building objectives, industrial and financial sector policy improvements should be the major objectives of future Bank lending./l The findings and recommendations of the Industrial Sector Study (para. 33) provided the basis for major changes in industrial and trade policies suppor- ted by the first Structural Adjustment Loan (Loan No. 1903-PH). In addition, the Financial Sector Report (para. 44) recommended fundamental changes in the financial system which were adopted by the Government in 1980 and 1981, and constitute a satisfactory basis for the proposed loan. 55. The Bank's future lending program would assist Philippine industrial development through: (a) a series of structural adjustment loans associated, inter alia with industrial policy reforms in such areas as tariffs, export promotion measures and investment incentives; (b) industrial finance projects to support complementary financial policy and institutional reforms; (c) individual subsector loans that would assist in the restructuring of major industries including support initially for textiles and, possibly, the mechanical engineering subsectors; and (d) broadened institutional support for employment-creating activities, including particular attention to SMI. 56. The proposed loan is the first for a series of industrial finance projects described in para. 55(b) above. Instead of lending directly to the development finance companies, the Bank's future lending for industrial financing would be channeled through a specially created Apex Development /1 The only Project Performance Audit Report for Bank lending within the sector (No. Sec-M77-360 of April 29, 1977) was on PDCP.  - 18 - Finance Unit (ADFU) in the Central Bank. As financial institutions in the Philippines are relatively well-developed, the proposed approach has been designed to enable the Bank to work more intensively with the Government on broader sectoral policies. Moreover, by developing the capabilities of ADFU as a source of term credit for development projects, and by generally dele- gating its institution-building role to ADFU, the Bank would be able to assist a larger number of institutions. This is consistent with the thrust of the recent financial sector reforms which encourage long-term lending by a greater variety of institutions, particularly the commercial banks. Finally, the proposed approach allows for the gradual delegation of loan adminstration responsibilities to the Central Bank and provides for the strengthening of local capability to carry out these functions. PART IV - THE PROJECT 57. The project was prepared by the Central Bank of the Philippines with the assistance of the Bank. The loan was appraised in August/September 1980 and negotiations were held in Washington, D.C., in March 1981. The Philippine negotiating team was led by the Honorable Cesar E.A. Virata, Minister of Finance. A Staff Appraisal Report (No. 3331-PH), dated April 7, 1981, is being distributed to the Executive Directors separately. Supplemen- tary project data are provided in Annex III. Project Description 58. The proposed project reflects the Bank's new approach to industrial lending in the Philippines. Instead of lending separately to individual DFCs, as in the past, the Bank would use a two-tier approach. The Central Bank would be the borrower and would relend the proceeds of the proposed loan to accredited participating financial institutions (PFIs). In addition to the DFCs, which have been recipients of Bank financing in the past, other financial institutions, including commercial banks, with an existing or prospective capability for long-term lending, would be eligible for accreditation. The Central Bank would be responsible for identifying new PFIs and for evaluating and monitoring the performance of all PFIs. 59. The project funds would be used for financing economically viable investments which would be generally labor-intensive, export-oriented and efficient in terms of resource utilization. The project is intended to finance mainly medium- and large-scale enterprises with assets ranging from P 15.0 to P 50.0 million ($2.0-6.7 million); smaller enterprises are being assisted under separate Bank projects. About 170 projects are expected to receive assistance under the project for their establishment, expansion or rationalization. To ensure a reasonably wide distribution of project funds, there would be a ceiling of $6.0 million on the amount of an individual subloan (Section 2.02(c) (iv) of the draft Loan Agreement). The Central Bank would monitor closely the operations of PFIs to determine whether the project funds are being used to finance projects that are  - 19 - consistent with the Government's industrial policy of encouraging industries which have an inherent economic comparative advantage and need minimum protection in the home market or can compete effectively in the export market. Based on the understanding reached with the Central Bank, subprojects with an economic rate of return of less than 12% would normally not qualify for financing under this project. A provision to this effect would be included in the Subsidiary Loan Agreements (para. 74) between the Central Bank and accredited PFIs. Institutional Arrangements for the Project 60. In consultation with the Bank, the Central Bank has created a sep- arate unit, the Apex Development Finance Unit (ADFU), with specific respon- sibility for administering the project. The primary objective of this unit is to channel funds for industrial enterprises through suitable financial institutions capable of undertaking efficient intermediation of medium- and long-term funds. Detailed operating policy guidelines for ADFU have been set by the Monetary Board of the Philippines. These guidelines define ADFU's functions, accreditation criteria for PFIs, eligibility criteria for projects using ADFU financing, ADFU's policy on procurements, and the nature of ADFU's relationship with PFIs and with other departments of the Central Bank. The guidelines adopted by the Monetary Board for ADFU are satisfactory and in line with the project's objectives. 61. The Central Bank has taken steps to ensure strong management and proper staffing for ADFU. Under the overall guidance of the Governor of the Central Bank, ADFU's management would rest with a Chief Executive Officer (CEO), assisted by a deputy with the rank of director to handle the day-to-day operations of the unit. An experienced professional from the private sector has been appointed as ADFU's CEO and the Central Bank is in the process of recruiting a suitable candidate for the position of Deputy CEO. Considering that ADFU is the first organization of its kind in the Philippines and the Central Bank is still not fully conversant with development banking opera- tions, the Central Bank has appointed a senior adviser who will assist ADFU in policy formulation as well as in day-to-day operational matters. The services of the adviser are being financed for two years by a UNDP project, with the Bank acting as Executing Agency. 62. Including the CEO, a total of 10 professionals out of 20 established positions have so far been appointed to the ADFU; four of these were recruited from the private sector. Additional staff (including some economists) of suitable caliber, will, however, be needed to cope with ADFU's future workload as it expands. The Central Bank recognizes the need to develop ADFU's staff skills as well as those of accredited and potential PFIs through training programs, both on-the-job and formal. For this purpose UNDP financing, totalling $150,000, is available. The Central Bank's plans for recruitment of additional staff and organization of training programs will be reviewed in the context of the UNDP Project (para. 61) and completion of recruitment, including the Deputy CEO, and finalization of the training program are expected by September 30, 1981.  - 20 - The Accreditation System 63. The accreditation process involves a comprehensive evaluation of an applicant institution by ADFU, with a view to assessing its suitability to act as an efficient intermediary for industrial financing. The basic criteria for this evaluation are set out in ADFULs operating policy guidelines (para. 60). They are: (a) sound financial position and performance and a satisfactory portfolio; (b) appropriate operating policies and procedures, and a develop- ment-oriented strategy for future operations; and (c) an organization, manage- ment and staff with the requisite expertise to undertake term lending opera- tions. Final accreditation of a PFI, based on ADFU recommendations, rests with the Monetary Board. 64. While both privately- and government-owned financial institutions meeting the accreditation criteria are eligible to become PFIs, private sector institutions would be accorded priority in line with the Government's policy of promoting term financing by the commercial banks and other private financial institutions. Government-owned PFIs are required to be commercially oriented in their selection of subprojects. In exceptional cases, where financing was done at Government behest, the Government, rather than the institutions, would assume any financial loss that may arise. They would also be required to lend on terms (and, in particular, at interest rates) comparable to those applied by private sector financial institutions to avoid subsidy and to promote the development of the long-term lending market by private institutions (para. 50). The Bank would review ADFU-s evaluation reports on PFIs, and the related draft Subsidiary Loan Agreements; final accreditation would be subject to Bank concurrence (Section 1.02(b) of the draft Loan Agreement). 65. As an initial step in the accreditation, ADFU has carried out an evaluation of three major term lending institutions, viz., DBP, PDCP and PISO, to which the Bank has previously provided loans. In addition to these three, ADFU has identified eight commercial banks and four investment houses as potential PFIs. ADFU will evaluate these institutions, but, considering its limited initial capacity and staff and financial resources, it envisages accrediting only two or three initially. However, after ADFU has established a satisfactory working relationship with the accredited PFIs and as its operational capacity and financial resources increase, additional institutions will be considered for accreditation. The Participating Financial Institutions (PFIs) 66. The three institutions evaluated by ADFU (para. 65), and recomr mended by it for accreditation, have benefitted considerably from the Bank's institution-building assistance. ADFU's evaluation showed the two privately-owned institutions, PDCP and PISO, to be generally in compliance with the accreditation criteria (para. 63). ADFU has, however, identified certain areas in need of improvement; an increase in paid-in capital, a strengthening of supervision aspects and an improvement in geographical  - 21 - distribution of lending. These issues are within the capabilities of PDCP and PISO to resolve. Resolution on these institutional issues between ADFU and the PFIs would be a precondition for their accreditation and any agreements reached would be included in the Subsidiary Loan Agreements (para. 74). 67. DBP, a government-owned development bank, is by far the country's largest supplier of long-term credit. Since 1972, when the Bank first appraised it, DBP has made significant progress in improving its policies, organization, staffing, operating procedures and finances. These improvements enabled DBP to significantly expand its operations from P 50 million ($6.7 million) a year in 1971 to about P 2 billion ($267 million) annually since 1975. Notwithstanding these improvements, DBP continues to face a number of organizational, operational and financial problems, to which there are two main contributing factors. Firstly, because of its large magnitude, DBP-s portfolio remains highly susceptible to cyclical fluctuations in the economy, particularly because the industrial sector has yet to overcome its structural weaknesses. Secondly, as the financing arm of the Government, DBP has been called upon to make loans/investments at the behest of the Government which have sometimes not proved to be commercially viable, but were deemed important by the Government on socio-economic grounds. Under the latest Bank loan to DBP, the Government agreed to take steps to: (a) protect DBP against potential losses arising from Government behest loans, and (b) help DBP sell its large investments in three specific companies. The Government has taken some action to fulfill these commitments but some additional steps need to be taken. 68. In order to be accredited with ADFU, DBP would be required to agree to an "Action Program" which would spell out the steps to be taken in addressing its remaining institutional and financial problems; some elements of the Action Program would be implemented before actual accreditation. These efforts will include, inter alia: (a) a review, to be conducted by independent consultants, of DBPs portfolio of large and problem projects to determine the quality of the portfolio and to take appropriate remedial measures based on the findings of the review; (b) adoption of more intensive measures to improve DBP's loan collection performance; (c) further review and upward adjustments in DBP-s peso lending rates taking into account DBP-s marginal borrowing cost, overhead expenses and the need to make DBP-s lending terms consistent with the Government's current interest rate policy; (d) adoption of appropriate policies on refinancing assistance given to DBP's clients; and (e) reorganization of its Industrial Projects Department to improve the department's operational efficiency, particularly in respect of project supervision. Satisfactory resolution of DBP-s operational and financial problems would require the active support of the Government, including satisfactory resolution of the issues relating to government behest loans and investments. The longer-term objective of DBP would be to reduce its reliance on government budgetary support. A comprehensive Action Program has been formulated and agreed with the Government. DBP-s continued access to ADFU funds would be subject to satisfactory implementation of the Action  - 22 - Program. These conditions will form part of the Subsidiary Loan Agreement (para. 74) between the Central Bank and DBP. Relationship Between ADFU and PFIs 69. In line with the basic objectives of the project, the Bank would delegate to ADFU substantial institution-building responsibilities relating to PFIs. In addition to evaluating the suitability of PFIs for accreditation, ADFU would monitor their post-accreditation performance to ensure compliance with the accreditation criteria, the soundness of their portfolio and their adherence to the agreed lending criteria. ADFU, through its monitoring of PFIs, would also ensure that the supervision of subprojects is being effectively carried out by PFIs. However, until such time as ADFUTs staff has acquired the necessary expertise and capacity, the Bank would closely monitor ADFU's supervision of the PFIs and, if necessary, Bank staff would participate with ADFU in its field work relating to the supervision of PFIs. The Bank would continue to pay particular attention to the supervision of DBP in view of the magnitude and complexity of the problems that DBP is facing (para. 67). Finally, the Bank may undertake direct supervision of PFIs in the event it considered ADFU's supervision performance unsatisfactory or in the event such supervision was considered helpful in improving the institutional capacity of a particular PFI. Provision for such supervision would be made in each Subsidiary Loan Agreement (para. 74). 70. ADFU would set a "free limit" for each PFI in consultation with the Bank. Subloans above a PFI's free limit would require a detailed review prior to approval by ADFU; those below this limit would be reviewed by ADFU only with regard to their prima facie eligibility and would only require ADFU's authorization. In addition to this first-tier free limit, there would be a second-tier free limit of $4.0 million above which subloans would be submitted by ADFU to the Bank for review and approval. This free limit would give ADFU adequate authority in committing the proceeds of the Bank loan, and at the same time leave a reasonable number of subprojects (about 15% by number and 30% by amount) requiring the Bank's prior approval. However, before ADFU's free limit arrangements became effective, the Bank would scrutinize a reasonable number of subproject reviews done by ADFU to satisfy itself that ADFU had developed acceptable subproject review standards (Section 2.02(b) of the draft Loan Agreement). Procurement and Disbursements 71. ADFU would assist PFIs in formulating and implementing appropriate procurement policies to ensure that financed goods, works and services are reasonably priced. As with other DFC loans, PFIs would require their borrow- ers to canvass and submit competitive quotations from at least three sources for procurement of major equipment/plant. ADFU would encourage PFIs to apply international competitive bidding (ICB) wherever warranted by the size and nature of the purchase. ADFU's operating policy guidelines (para. 60) spell out its policy on procurement, and an understanding on detailed operating guidelines on procurement to be followed by the accredited PFIs was reached at negotiations.  - 23 - 72. The proceeds of the proposed loan would be disbursed against: (a) the foreign exchange cost of imported goods and services; (b) 70% of total expenditures on imported goods procured locally; (c) 50% of local expenditures on locally manufactured goods; and (d) 45% of civil works costs. These percentages represent the estimated foreign exchange cost of project-related expenditures under (b) to (d). ADFU would require PFIs to adopt procedures that would ensure that disbursements are made for their intended purposes and in accordance with the terms of the supply contracts. Withdrawal applications from the PFIs would be reviewed by ADFU prior to their submission to the Bank. Disbursements would be made against normal documentation except for local expenditures of less than $10,000 equivalent each; documentation for such expenditures would be retained by ADFU for the Bank's post-disbursements review missions. The annual audit of project accounts would include a separate opinion covering disbursements made from the loan account on the basis of statements of expenditure (Section 4.01(c)(ii) of the draft Loan Agreement). Resource Requirements and Financing Arrangements 73. Based on the estimated resource requirements of the three PFIs (DBP, PDP, and PISo) evaluated by ADFU, and the two or three additional PFIs that would be accredited during the project implementation period, the total foreign exchange resource requirement of ADFU to cover the subloan commitments of PFIs in the two-year period from mid-1981 to mid-1983 is estimated at $250 million. The proposed Bank loan would provide $150 million and the remaining $100 million would be secured, not later than July 31, 1981, by the Central Bank from borrowings on the international financial market (Section 4.04 (a) of the draft Loan Agreement). Out of its total resources, ADFU has proposed allocations of $60 million for DBP, $50 million for PDCP and $40 million for PISO; the balance of $100 million would be reserved for new PFIs. The proportion of Bank funds and commercial funds allocated by ADFU would, at least in the initial stages of the project, be identical for all PFIs; the allocations to PFIs would be subject to periodic review and possible reallocations amongst PFIs based on their requirements and performance. Main Features of the Proposed Loan 74. The proposed loan would be made to the Central Bank of the Philippines with the guarantee of the Republic of the Philippines. The proceeds of the loan (and funds raised from the international financial market) would be re-lent by the Central Bank (ADFU) to individual PFIs under Subsidiary Loan Agreements satisfactory to the Bank (Section 3.02 of the draft Loan Agreement). The Central Bank would repay the loan over 20 years, including a five-year grace period. These repayment terms are justified on the grounds that: (a) the Philippines, of which the Central Bank is an agent, stands in need of substantial borrowings on country terms; and (b) it would facilitate co-financing arrangements for the project as the longer grace period under the Bank loan would make it easier for ADFU to blend Bank funds with commercial funds which ordinarily are of a shorter maturity (about 8 years) and have a limited grace period. In order to assist the Central Bank  - 24 - in raising the required commercial funds, the draft Loan Agreement includes a standard cross default provision (Section 5.01(c)), which could be applied if the commercial lenders insisted on having an agreement with the Bank, i.e., formal co-financing, and the Government and the Central Bank agree. The Central Bank may also request a reduction in the Bank loan's early maturities to accommodate the potentially high repayment installments under commercial borrowings. The amortization schedule between the Central Bank and individual PFIs would reflect approximately the aggregate of the amortization schedules between the PFIs and their borrowers, which are expected to range from 6 to 12 years. 75. The proceeds of the proposed Bank loan would be on-lent by ADFU to PFIs at an interest rate at least equal to the interest rate for the Bank loan, plus a service fee of not less than 3/4 of 1% p.a. to cover its overhead expenses. The PFIs would relend the Bank funds to their clients with a maximum spread of 4.5%, the same margin as that presently accruing to PDCP and PISO on existing Bank loans. An attractive margin is necessary to encourage PFIs, particularly the commercial banks, to actively engage in term lending. Based on the Bank-s present lending rate of 9.6% p.a., and the Central Bank-s minimum service fee of 3/4 of 1% p.a., the cost to the final subborrowers would be close to 15%, which is in line with the current market rate for such funds. The Central Bank would charge PFIs a commitment charge of not less than 3/4 of 1% p.a. on the undisbursed portion of PFI loans; the PFIs would pass on the commitment charge to their clients. ADFU would review the lending rates of PFIs every six months and, when necessary, would revise its own on-lending rate on uncommitted funds to bring PFI lending rates in closer alignment with the market conditions (para. A4 of Schedule 2 of the draft Loan Agreement); the maximum margin allowed to PFIs would, however, remain unchanged. The foreign exchange risk on both the Bank funds and commercial funds would be borne by the subborrowers. Funds borrowed by the Central Bank from the international market are expected to carry floating interest rates and would be on-lent to PFIs at the floating rate cost to the Central Bank plus a standard service fee (at present 1/8 of 1% p.a.), which the Central Bank charges on all funds it acquires from the international financial market. The PFIs would relend these funds at a floating rate, with a maximum margin of 4.5% (the same as the margin on Bank funds) on their cost. Benefits and Risks 76. The proposed loan would support the reform measures recently adopted and would assist the Government in future reforms as may be necessary in the financial sector. In 1980-81, the Government made basic structural changes in the Philippine financial system (Part III). The impact of these changes on the performance of the financial and industrial sectors would be closely monitored during supervision of the loan and the Bank would continue to work closely with the Government and the Central Bank on future changes in the financial system. The project would also strengthen the institutional capacity of a wider number of financial institutions to provide development-oriented term lending.  - 25 - 77. For implementation of its development programs, particularly the structural transformation of industry, the Philippines will continue to rely substantially on a large inflow of external resources. The proposed loan and the commercial funds (para. 73) would help in this process by a net transfer of resources amounting to $250 million. The loan would only be used for economically viable industrial projects and the lending criteria encourage the financing of subprojects that are generally labor-intensive, export- oriented and efficient in terms of resource utilization. The application of the industrial and financial sector reforms would facilitate pursuit of these subproject objectives. Since individual projects to be financed under the loan are not yet identified, an ex ante quantification of their economic impact is not possible. However, under the Bank-s past DFC financing, the average ex ante financial rate of return was 28% and the economic rate of return was 33%. 78. The institutional arrangements for the project confer a key role on the Central Bank, which would not merely administer the loan but would also have the main responsibility for guiding and supervising the PFIs, and through them would influence the quality and enhance the economic impact of term financing in the country. The loan involves substantial delegation of responsibility by the Bank to the Central Bank (ADFU) in relation to PFIs. The capacity of ADFU to carry out its intended functions, and to evolve into a strong development-oriented apex institution, would be critical to the success of the project and the possibility of ADFU's failure to develop reasonable standards constitutes the principal risk. However, in view of the Government's and the Central Bank's strong commitment to ensure the success of the industrial and financial sector reforms, the steps being taken to recruit and train ADFU staff and the safeguards built into the loan, including the provision of technical assistance that would assist ADFU in functioning effectively and the substantial involvement of the Bank staff in the initial stages of the project, it would appear that the prospects for successful project implementation are good. PART V - LEGAL INSTRUMENTS AND AUTHORITY 79. The draft Loan Agreement between the Bank and the Central Bank of the Philippines, the Guarantee 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 distributed to the Executive Directors separately. Special conditions of the project are listed in Section III of Annex III. 80. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank.  - 26 - PART VI - RECOMMENDATION 81. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President by Moeen A. Qureshi Attachments Washington, D.C. April 13, 1981  27- ANNEX I Page 1 of 5 pages TABLE 3A PHILIPPINES - SOCIAL INDICATORS DATA SHEET PHILIPPINES REFERENCE GROUPS (WEIGHTED AVEAGES LAND AREA (THOUSAND SQ. KEM.) M DST RECENT ESTIMATE)- TOTAL 300.0 AGRICULTURAL 90. 7 MOST RECENT MIDDLE INCOME MIDDLE INCOME 1960 /b 1970 lb ESTIMATE /b ASIA & PACIFIC LATIN AMERICA 6 CARIBBEAN GNP PER CAPITA (PS$) 150.0 240.0 500.0 1114.7 1562.9 ENERGY CONSUMPTION PER CAPITA (KILOGRAMS OF COAL EQUIVALENT) 147.0 301.0 339.0 842.4 1055.9 POPULATION AND VITAL STATISTICS POPULATION. MID-YEAR (MILLIONS) 27.4 36.9 45.6 URBAN POPULATION (PERCENT OF TOTAL) 30. 3 32.9 35.4 39. 1 63.4 POPULATION PROJECTIONS POPULATION IN YEAR 2000 (MILLIONS) 75.0 STATIONARY POPULATION (MILLIONS) 126.0 YEAR STATIONARY POPULATION IS REACHED 2075 POPULATION DENSITY PER SQ. EM. 91.0 123.0 152.0 376.1 28.1 PER SQ. KM. AGRICULTURAL LAND 360.0 472. 0 503.0 2350.4 81.7 POPULATION AGE STRUCTURE (PERCENT) 0-14 YRS. 44.7 45.5 44.8 40.4 41.4 15-64 YRS. 52.3 53.6 52.1 56.2 54.7 65 YRS. AND ABOVE 3.0 2.9 3.1 3.4 3.9 POPULATION GRUSTH RATE (PERCENT) TOTAL 2. 7 3.0 2.7 2.4 2. 7 URBAN 3.9 3. 9 3.7 4.1 4. 1 CRUDE BIRTH RATE (PER THOUSAND) 45.0 44.0 35.0 28.7 34.8 CRUDE DEATH RATE (PER THOUSAND) 15.0 11.0 9.0 7.9 8.9 GR1SS REPRODUCTION RATE 3. 5/c 3. 3 2.4 1.9 2. 5 FAMILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) .. 191.7 509.0 USERS (PERCENT OF MARRIED WOMEN) .. 2. 0 22.0 39.0 FOOD AND NUTRITION INDEX OF FOOD PRODUCTION PER CAPITA (1969-71-100) 102.0 ICI.0 114.0 116.9 106.9 PER CAPITA SUPPLY OF CALORIES (PERCENT OF REQUIREMENTS) 88.0 92.0 97.0 108.9 107.4 PROTEINS (GRAMS PER DAY) 45.0 50.0 53.0 60.3 65.6 OF WHICH ANIMAL AND PULSE 17.0 20.0 21.0 18.8 33.7 CHILD (AGES 1-4) MORTALITY RATE 16.0 10.0 7.0 5.3 8.4 HEALIH LIFE EXPECTANCY AT BIRTH (YEARS) 51.0 57.0 60.0 63.0 63.1 INFANT 1IORTALITY RATE (PER THIUSAND) 98. 0 80.0 74.0 52.8 66.5 ACCESS T0 SAFE WATER (PERCENT OF PODULATION ) IOTAL .. .. 39.0 42.4 65.9 URRAN .. .. 51.0 62.1 80.4 RURAL .. .. 33.0 29.7 44.0 ACCESS TO EXCRETA DISPOSAL (PERCENT OF POPULATION) IOTAL .. .. 56.0 52.8 62.3 IRBAN .. .. 76.0 71.1 79.4 RURAL .. .. 44.0 42.4 29.6 POPULATION PER PHYSICIAN .. .. 2758.0 4120. 1 1849.2 POPULATION PER NIJRSING PERSON .. 3840.0 3058.0 2213.6 1227.5 POPULATION PER HOSPITAL BED TOTAL 1206.0 850.0 639.0 619.4 480.3 URBAN .. .. RURAL .. .. ADMSISSIONS PER HOSPITAL BED .. .. .. 28.8 HOUSING AVERAGE SIZE OF HOUSEHOLD TOTAL 5.8 5.9 URBAN .. 6.2 RURAL .. 5.8 AVERAGE NLMBER OF PERSONS PER ROOC TOTAL .. 2.3 URBAN .. 2.1 CURAL .. 2.4 ACCESS TO ELECTRICITY (PERCENT OF DWJELLINGS) TOTAL 16.5 22.9/d 31. 0 UREAN .. 62.8/d RURAL .. 5. 8T 10. 0  ANNEX I - 28 - Page 2 of 5 pages TABLE 3A PHILIPPINES - SOCIAL INDICATORS DATA SHEET PHILIPPINES REFERENCE GROUPS (WEIGHTED AVE .A0ES - MDST RECENT ESTIMATE)- MOST RECENT MIDDLE INCOttE MIDDLE INCOME 1960 /b 1970 /b ESTIMATE /b ASIA & PACIFIC LATIN AMERICA & CARIBBEAN EDUCATION ADJUSTED ENROLLMENT RATIOS PRIMARY: TOTAL 95.0 114.0 105.0 98.6 99.7 HALE 98.0 115.0 103.0 99.2 101.0 FEMALE 93.0 113.0 108.0 97. 7 99.4 SECONDARY: TOTAL 26.0 50.0 56.0 55.5 34.4 MALE 28.0 59.0 65.0 60. 7 33.5 FEMALE 25.0 42.0 47.0 49.9 34.7 VOCATIONAL ENROL. (2 OF SECONDARY) 15.0 6.0 .. 13.7 38.2 PUPIL-TEACHER RATIO PRIMARY 36.0 29.0 29.0 34.6 30.5 SECONDARY 27.0 33.0 31.0 28.5 14.5 ADULT LITERACY RATE (PERCENT) 71.9 82.6 87.0 85.8 76.3 CONSUMPTION PASSENGER CARS PER THOUSAND POPULATION 3. 0 8.0 8.9 9.0 43.0 RADIO RECEIVERS PER THOUSAND POPULATION 22.0 46.0 41.0 118.9 245.3 TV RECEIVERS PER THOUSAND POPULATION 1.4 11.0 17.0 39.4 84.2 NEWSPAPER ("DAILY GENERAL INTEREST") CIRCULATION PER THOUSAND POPULATION 17.0 14.0 18.0 .. 63.3 CINEHA ANNUAL ATTENDANCE PER CAPITA 0.6 .. 7.6 4.9 LABOR FORCE TOTAL LABOR FORCE (THOUSANDS) 10893.2 i3478.1 16310.9 FEMALE (PERCENT) 34.4 33.1 32.0 36.8 22.2 AGRICULTURE (PERCENT) 61.0 53.0 48.0 51.9 37.1 INDUSTRY (PERCENT) 15.2 15.8 16.0 21.9 23.5 PARTICIPATION RATE (PERCENT) TOTAL 39.8 36.6 35.3 39.1 31.5 14ALE 52. 1 48.6 47.1 48.5 48.9 FEMALE 27.4 24.4 23.3 29.6 14.0 ECONOMIC DEPENDENCY RATIO 1.2 1.3 1.2 1. 1 1.4 INCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY HIGHEST 5 PERCENT OF HOUSEHOLDS 28.8 HIGHEST 20 PERCENT OF HOUSEHOLDS 56.2 53. 9 53.3 LOWEST 20 PERCENT OF HOUSEHOLDS 4.2 3.7 5.5 LOWEST 40 PERCENT OF HOUSEHOLDS 11.9 11.9 14.7 POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. 250.0 . RURAL .. .. 190.0 192.1 190.8 ESTIMATED RELATIVE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. 132.0 .. 474.0 RLRAL .. .. 87.0 182.5 332.5 ESTIMATED POPULATION BELOW ABSOLUTE POVERTY INCOME LEVEL (PERCENT) URBAN .. .. 39. 0 RURAL .. .. 44.0 33.2 . Not available Not applicable. NOTES /a The group averages for each indicator are population-weighted arithmetic means. Coverage of countries among the indicators depends on availability of data and is not uniform. /b Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969 and 1971; and for Most Recent Estimate, between 1974 and 1978. /c 1950-55; /d 1967, household. Most recent estimate of CNP per capita is for 1979, all other data are as of April, 1980. October, 19R0  ANNEX I -29-Page 3of 5pages DEFINITIONS_OF SOCIAl INDI_CATORS Notes: Although the data are drov frol sure generaflly judged the eas nthoitoti-e And rl1iable, it should also be noted that they y not he inte- aniotuJllycopaeahle hecenee nf the tack of sanderdited deiaitioee and concpts ueed hy differentI.. cutries in collecting the dets Th data are,noe thsle...e,. ceef tin decrlihe orer of agnitods, indicane tranda, ned oh.laraeiee cetan in differences.. toat..I coo erie... The reersn gops orel C te an conrygou 'f, the subject I..nt. en, d (2) n coutry group otto -ueh'tihigh. or oerge toroo thu the coun.try geou.p of the subje countr (net fo fCptalOuple IEfpotters" group.cheFs 'M4iddle lo-o North AMecca nod diddle East" iclh.een hecaue of stronger socc-ol ncalaffnites) 1I the re,fhsoncotgrop data the noeregs sre PoPuletion eeithted aitbattic ooau for each tadictor- and hose ..Iy ohen t dats end is not .eif.r-. caution ous he roeroisdl In ea n rgao nieo oaohr Theso sh.nragneer onl.usfu In h.oparIg iltysvau of one indita',toestette acg th oo_r edrfeec grops. LAND AREA (thousand sq .mCrlanionpe PhysIoie-looindionded by ti-e of practicin phy- Totai - Totalur ... are coprisin land areed inland ors.icasquaife ffine a dion1 school et onite ityIlve.1 Alefc-ltuen1 - ettoats of ogri.tcnua nos _ oned temporarily or peomnently Populasc ose f4-si PIe---e-- Pouindiride hynsr of.peacn iia Foetaton oe osntelNed- tta,:uban,tad eus - IPoetuttion (toisi. GNP PER CAPITA (UiS) - lNP Per cepito Fatae a ueu mre rie,cl athon an oursi)divided hythe ir eprive obe, of hospital beds onee hy snecnoric nto asArd e..Als(17-9 at): 1960, availablein public nod private genera an petiatind hospital -anes 97li end 1979 dae aIiaimreee opet e eelstst emsei tPe ENUGY CONSUWTION PER CAPITA - AnI..1 If gyl hy an let-onephysician. nE-bIf.s-un prretdin Peintipully cotodia1 ENROT CNSOOPTIN PP CPIT - Ance cuenationof oenrcilecegy coatnee ar ino tulodd. Royal hospitals, h-ere, include halth and adinal and tigeite, penroisn, natura oat ed hydo-,.. nclira andgethsmai siec- peaero rrannly staffed by aPhysician (bhu hy . eedtre Iseet teiciny) in kilogrs If coa oqui-aent Per co.pita; lb, 1970, and 1918 neo iof.ec)atho e nptetacidte e rvd dets. ~~~~~~~~~~ifeltedfrange of aedical facititien. Foroaitia ipae ra bnspi- te.7i tontde WiN principal ge-e.1 and epeotnOisd hanptal.1 sad cara PoFtUlATIOf A00 VITAL STATISTICS hepteeloa or cornI hoepitais and -edi-It end e iycnes Tot.l Fopaletio.. Mid-Tear Ismiltions) - he of July 1; 1960, 1970, and 1978 Admissions per Ocecpitadl Ned - Tonl unnh, of adnisions to or discharge data, F. roe huptale dtridd ho the ocsber of beds. IranFrob tc (rr -1)o ocl - hatic of -bhan to ert1 populaniot; dilffe..nt defuidtnne of urban arasay ffc cprbiliny of date eotaiet asng ....stylee; l96b, 1970, and 1979 date. A-"eas tiee of Hcceehold (p-rece h per ..cehold) - tta.1 ucbn, And s- PPorulaioc Eroysotiou A household ..otniene of a stoop oleoins cshrliohn quarte.f Fopuafio in ear0000- Corec p00' eton rojeticr at hend 00900 sod heiroai ossa. Ahoaderfr lbce.say cd-yocthe9icludd i trnipoultin yg end or and ih oilty ad friiyrts t hehuec. o ttsia upee leve, ad femle lnf e epertacY IthuilioinA nt 77.5 years The p,ta- bdosilt ..ego,1'Ib': ..p..oly...lnnodoo-nnaetnrctiond1 andh frtirfly trends .. ..Ifth. fAr pPjACinn .r..ento titn, thac,t aol -t- -Ii. cue-oelutre t lou. Itationor' popintint-Sonata io...ey PoPnlati-o there Is Ino grooh niece f Ib .d d.l.. fpl -y the bieth rats in eq.ul to rho danthe-te, oIl alc the aE. anutn... t in- EDUCATION ant O constant. Thi in achieve IIIy after fertility rate decine to Adlusted fErc1lman Ratio rf mo.s replaces itel efn-ty. The -tet... ty .poplation siceasorlsn f.1agsa h ymr ee o eooue freef -etteue on She hbsu of: th roend chacacterietics of the poultion primary school-age popilafttu t; nraly icue oudes 1g.d A-l inthe yea 207, anthe rate ofdecineo fetilisy tecuelee-..c. but adjusted foe differeer l0he f r1-oarod-ceton foe ano dccl cotisonrboi-er-s nd.etioIn ..r..11at any eaceed101 percent lace sttionar,.y roruplaticn is reached - The year ohen etatimney pjpclution aic sca pup.il.sshl'ohbo heofca colae P sian. ha bean teethd. lodr col-tota,slan femle - Ceputed s aoIs seodar Pee se. Sm. - Mid-yanr populetine Persur kilot-r (101 heonarse) Iof providesgcrl.oainl rneoe riigtspcit tfoe pun Poe so. S.seclu laid - Coaputed .s bhro for sgrtcultue1 1med ....loded. .17.l I..;-..p.d . f -l1Y PoenI.ieni ARe Snt-otnee (ncEor.t) - Childrec (0-10 year), ocehieg-ago (Ii Ii-icuethto, i- detIf c othe.ry peg... ohih poat i ndtepse-. 64 years), nod recited (6 years andcs)a peretae of 0d-year popo- dontlyora departeectatof secondar ttIttinn. lac; 9,17. nod 1976 dIota rural-teache ai -1 p .r.anseod or oa fdee crlld i Frenlarin croothnato (rEreuSt) tta - Annual nrtih -o-e of toa i- pimary an eodr eredvddhynneno er ni h lattoco for 1950- 60, 1960-70,and 170-7 0acrrcn78 f oa an oultonce 11 year and ovr p npu fettot 190, 1970, ad707 dnaAd.IoTO Crue oat Rts or thosn..Id) - An-on loath pert.P nh h,csaud Io ni-yerdaege aefe ycusdoclaln..rnenrcr omee nu .poylatiot; 1960, 1970, sod 1979 data, teesMP seto estore0tpros .uldsebiro ere o leonae Orcuctnh t- Aoeoag oumberof dangh.e.u. .osat sill bear in sitin_rorolina her noma repodnotice porlod if she eaperienc PI.e"a ..t ag-Pec ifite Radio Receioern (per 1houead yoplatlir -All typas of rciosfor redo tilityeae;emil oeyudaena soIng ia 1961,'1970, and 1577 heoudoat ogoelpbi e ho.ead of population; -aclds uni- Fatly PloI-I-., cnre Al ncoa Ivhih...acde~ - Annual nanhor o acceptor...nuccior innuocireedi esh..r i-g--tiuoIfrsine of bith-cntr dente under ...epi..a of nationl fanily planing FPorem .se ineffert ; t or recent yearsill fdlPancia-Ieo(ecn o nredot,-Pecnaeo ora couttyir abolished' licocing o Ie f shill-bearingag (1)-dO yeea ho -u hit-crtirl deolces to TV tciers (ret thousa nd rprulartIc - Icrcvr ft broadcast to all an tril men to ano ORe occr genera public pee thon...nd populatino; ecrIldso TVices1 .e.i.e FOOD MD NUTRITION ~~~~~~~~~~~~it .. rutrien and it years ohen refisi..o.. o- f TV on e.ta to enffect. croductior o nil fool crsandittee. roduction n dule neod and fend and licanioc devoted yriaueily no recoodiep, genee eo, I is considered in Io calender y-n bania. Cu-dciti-e rove prer goods (eng. auarn oh daily' if cru.ppeareatleastIfou tierssek inatead of ougur) ohich s:te dtblean.dcoontonoItoi.nrr (e.g. coffee end CIte AnulAtenc erCct ela-endo i obeo trereeclded. ggcgae podctin o ech unrryisbasd n rlts e.Id during ch. year, ir-ludine adaiaf_ to drv-i inoa anini .. verage producer price cni'ghtte; 1961-hi,1970,an I070 lana. sri nbl ui pe gy. AIalll upilerople oetir -- pe dorrioc . toot lena local labor 2out rhonesds) - -cooirall a-is- esos including sopurt, and change i atock Ot spiia oldeaisal teed, _sd, anl fope o colydhtsroiehneie,soec,ec annsec si.ut.d hoAPu h..nd In physiologial1 nadl fur.- cm l at- 1079 dato. cit ned hecl,h -orshd-ert -vtrcer- l eooern1 body catbta sn Fnol (ecet Fenal labor corteg yarerag o trtnlI lahefrce. an r i Irhto f cpulation, and o11nlen 10 perenI fe seeat.Ircltr cece)-Labofrc Ineoi, fornry Icnl9 n househod level; 1901-05, 1971, ncd 1977 dota. Oeiga acrne ftt lhrfre 1960, 1970 nod 1979dae Far cant oupl of coei gon d ly dyorieconor of pee -nt Iedo-tr -re -ee) - Lnhue fcrcetr llf,rtceuru,mroatr Ot nplyoffulpe ay rteupy f od o eind enbcn e- ad electriciy na o u n err et oa labor freon; lOt, quiron-to fo I --corir otahlitched hy UtSD pec..ide foe olenue 1(0al iWOdta.--.dg .p- " If f1 alonnu of hi &man of .tota Proteic Pee day and 20 gElna of noimal nod Paiorto at er f) - tfl enl. nod fsl Participatton o pulan prcelo, f ohlch Igeeiodhrana cctn. h..ncn.- n ....yrrecr.- -p'-d a ton 1hcl, nod fenac lehot fotooga ode ar Plonrchrths ofo ra of ictap:ypced and FAO irna of. pThcire If rtni, eul nod Seanle popolarloro el uonOeeOtO Inml ori sno o..cug. fur th... ,poyedb A l h hr 1160, 1970. crd 1975 dItc These.. LO ynriiptf oa reflecting World tool Su"-y; 1961-65, 1970 nod 19177 data. ilp% ,A -..I rived f-o noninad polec ic gree pardy;1616,1 970 d cc 07 aa. tocno Isycdpc ratio R.Ptio of popu1.into -dc- it nod 65 td ocer Child (cuesi-_L-Al tiutiniy_Rtot _roe th-u..ld - nanuci dourhe pee th,oead ie to the ttrc1 labro Purro age group i-A yner. cc tilidre In thin noe orop; for anid-olnpie coun- tries da_ dleiced frog life tehlne; 1960. 1970 nod 1977 dni.fnuen a.croo 1EAI Peottae f Prita- brnt.. (bur in caoh .ld kbed) - Re-iced byrlh-he lif iretary t iet fnua) Aregeoceerofyean f ifereniing 9 ocon ,tihest 20 yerrert, p--ee 20 perror, nod po.ree. I4 percent Lic; hutch 1060,- if..ltnod- 1070Iifdeco,. of houseolda lat MortalIty Rts ettho....od) A-Ihna deorf of if attn under orefre PlOVETY TARGET GROUPS of aoe pe ihocaod lco irtho. E.tienied hbaclote Povety Iccno Le.l(i e MS pita) - uchn nd coe - naerst)n ch-c Iron p-uet-rl Icreho-, apoinge, erd oaif iay icll) c fstt,ed RIncioc f'nvety boone leve (000I ce capltal - orbon enditl- P.rre.rgeg of theIr, -penp.ctr ,popotiuna. IouIanb reaapolir unrltv pon to ioce lvelI: r-ho ciaaooproita do rut boon to epod a diuproporlori.te part of the lay in ferohieg the n ua _ P- Prre- of1 p oAtior1 (ucha lnod eseolloore"bluepr. rural, -and ruroflpople (-toIf rbpan,nodirual) neved byanceet diepol n. IIrstne of thei repcrc ycp1olsiEo... tarer lie- foo..o.ic c ol .. . iota Dlirs p...I any.irolode the c1l'etict and diapo.. net, h opai~th-onenest c-oic Anal ysi nod P-rJetioes Dpleprt-e pit prosend slila inoefatefc  - 30 - ANNEX I Page 4 of 5 PHILIPPINES - ECONOMIC INDICATORS Amount (million US$ at Annual growth rates (%) current prices) Actual Projected Indicator 1979 1976 1977 1978 1979 1980/a 1981 1982 1983 1984 1985 1990 NATIONAL ACCOUNTS Gross do4mstti pro4uct 28,854 7.1 6.2 5.9 5.9 4.7 5.8 6.3 6.3 6.3 7.1 8.3 A5r$cultur. 6,991 8.6 5.0 4.8 5.3 4.3 5.2 5.2 5.0 5.0 5.0 5.0 In4ustry 10,174 10.0 7.7 6.4 6.7 5.8 6.5 7.2 7.5 7.5 8.5 10.0 Services 11,689 3.7 5.7 6.3 5.5 5.0 5.6 6.2 6.0 6.0 7.0 8.5 Consumption 21,860 4.3 5.2 4.6 4.8 4.2 5.4 5.2 4.9 5.1 5.8 7.0 Gross investment 8,576 8.0 0.7 13.3 7.4 4.8 6.3 6.3 6.3 6.3 7.1 8.3 Exports of GNFS /b 5,528 19.9 17.6 1.6 7.4 11.3 10.2 10.7 11.2 10.6 10.8 10.5 Imports of GNFS 7,110 1.3 5.3 13.2 10.3 5.2 6.6 6.7 6.5 6.6 6.8 7.2 Gross national savings 6,665 -2.0 11.3 8.3 7.7 3.1 - - - - - - PRICES GDP deflator (1972 - 100) 183.6 198.8 210.6 250.8 296.9 - - - - - - Exchange rate (US$1 -) 7.45 7.41 7.38 7.39 7.52 - - - - - - Export price index (1978 - 100) 92.6 95.8 100.0 124.6 140.3 149.9 160.0 170.5 183.3 195.7 258.7 Import price index (1978 - 100) 91.6 94.2 100.0 117.4 142.2 157.0 170.8 185.2 197.1 210.6 289.3 Terms of trade index (1978 - 100) 101.1 101.7 100.0 106.1 98.7 95.5 93.7 92.6 93.0 92..9 89.4 Share of GDP at market prices (%) Average annual increase (Z) (at current prices) /c (at constant prices) 1960 1970 1975 1980 1985 1990 1960-70 1970-75 1975-80 1980-85 1985-90 Gross domestic product 100.0 100.0 100.0 100.0 100.0 100.0 5.1 6.1 5.9 6.3 7.6 Agriculture 28.1 27.8 29.0 26.8 25.0 22.0 4.3 4.3 4.8 5.0 5.0 Industry 25.8 29.6 33.5 35.5 37.7 40.6 6.0 8.6 7.6 7.5 9.1 Services 46.1 42.6 37.5 37.7 37.3 37.4 5.2 5.4 5.7 6.1 7.7 Consumption 85.3 79.2 75.8 74.5 72.4 68.7 4.8 5.5 5.2 5.2 6.5 Gross investment 16.3 21.5 31.0 30.1 29.2 30.5 8.2 11.5 6.5 6.8 7.6 Exports of GNFS 10.8 19.4 18.5 19.4 24.7 27.5 5.8 3.2 10.0 10.7 10.0 Imports of GNFS 10.6 19.7 25.3 24.0 26.2 25.4 6.8 6.8 8.0 6.6 6.9 Gross national savings 16.2 20.5 25.3 23.1 25.4 29.2 7.4 9.7 - - - As X of GDP 1960 1970 1975 1980 Labor Force in 1978 Millions (%) PUBLIC FINANCE Agriculture 7.4 44.4 Current revenues 9.8 9.5 13.9 12.8 Industry 2.7 16.2 Current expenditures 9.6 10.9 12.3 9.6 Services 5.6 33.0 Current surplus 0.2 -1.4 1.6 4.1 Unemployed 1.1 6.4 Capital expenditure 2.3 1.9 3.2 3.2 Foreign financing - 0.1 0.3 1.5 Total Labor Force 16.8 100.0 1960-70 1970-75 1975-80 1980-85 1985-90 OTHER INDICATORS Annual GNP growth rate (X) 5.1 5.6 5.9 6.3 7.7 Annual GNP per capita growth rate (X) 2.0 2.7 3.2 3.6 5.1 Annual energy consumption growth rate (X) 7.4 6.2 4.2 4.7 4.6 ICOR 4.5 4.7 4.6 4.5 4.1 Marginal savings rate 0.285 0.330 0.26 0.32 0.35 Import elasticity 1.33 1.12 1.20 1.05 0.90 /a Preliminary estimate. 7i Historical figures are official estimates based on 1972 weights. In relation to the composition of Philippine exports in the late 1970s these estimates give undue weight to stable or declining exports of raw commodities such as copra, sugar, and logs, and insufficient weight to rapidly growing exports such as nontraditional manufactures and coconut oil. Bank staff estimates of export volume based on 1978 weights are shown on Attachment 3b. /c Projected years of constant prices. East Asia & Pacific Regional Office February 1981  - 31 - ANNEX I Page 5 of 5 pages BALANCE OF PAYMENTS AND EXTERNAL ASSISTANCE (US$ million) Actual Eat. Projected 1976 1977 1978 1979 1980 1981 1982 1985 Summary of Balance of Payments Exports of goods and services 3,387 4,161 4,838 6,177 8,040 9,450 11,100 18,200 Of which: exports of goods 2,574 3,151 3,425 4,601 5,940 7,480 8,500 14,300 Imports of goods and services 4,763 5,248 6,323 8,108 10,620 12,540 14,450 21,700 Of which: imports of goods 3,633 3,915 4,732 6,142 7,870 9,360 10,800 16,200 Transfers (net) 269 260 313 355 410 450 500 800 Current Account Balance -1,107 -827 -1,172 -1,576 2,170 -2,640 -2,850 -2,700 Direct investment (net) 144 216 171 99 110 200 250 200 MLT loans (net) 1,040 662 891 1,091 1,050 1,700 2,200 2,600 Official-source loans (net) 282 332 333 449 560 800 1,000 950 Private-source loans (net) 758 330 501 642 490 900 1,200 1,650 Other capital (net) Ia -238 113 56 -193 530 370 200 300 Overall Balance lb -161 164 -54 -579 -480 -370 -200 400 International reserves (end-year) /c 1,640 1,525 1,883 2,424 3,160 3,000 3,000 3,200 Grants and Loan Commitments Official grants 0.0 0.0 0.0 0.0 Total public loans 1,577.4 1,392.0 2,417.0 2,105.2 IBRD 226.0 317.5 533.0 210.5 IDA 0.0 0.0 28.0 62.0 Other multilateral 64.2 226.6 189.2 286.6 Governments 391.6 182.3 370.4 223.6 Suppliers 52.0 194.2 76.7 52.3 Financial institutions 476.4 341.7 1,000.5 1,224.4 Bonds 367.2 129.7 219.2 45.8 Other MLT loans 603.6 115.0 914.0 278.8 Memorandum Items Grant element of commitments 8.8 14.7 16.8 16.5 Average interest (%) 8.3 7.9 7.4 7.7 Average maturity (years) 13.1 15.3 15.9 15.9 Medium 6 Long-Term Debt Total debt outstanding (disbursed only, end of period) 4,383.0 5,554.0 6,839.0 7,920.0 Including undisbursed 6,817.0 8,155.0 10,856.0 12,225.3 Public debt service -239.2 -441.9 -468.1 ??652.5 of which: interest -97.9 -215.2 -167.1 -300.0 Other MLT debt service -283.5 -320.1 -441.9 -375.5 Total debt service -522.7 -762.0 -910.0 -1,082.0 Debt Burden Debt service ratio 15.4 18.3 18.8 17.4 Debt service ratio /d 19.4 22.1 21.2 18.2 Debt service/GDP 2.9 3.8 3.9 3.6 Public debt service/governxeot revenue 9.9 12.0 20.1 18.3 Outstanding December 31, 1979 Terms Amount Percent External Debt (US$ aln) Interest on total DOD/total DOD 4.1 6.4 4.0 6.1 Total debt service/total DOD 10.5 15.8 13.3 13.0 (Disbursed only) IBRD 731 14.1 Dependency Rsatis Bank Group /e 763 14.8 Other oultilateral 397 7.7 Gross disbursenents/iaports (GNFS) 37.9 28.7 34.3 30.7 Governments 1,094 21.2 Net transfer/imports (GNFS) 29.6 20.8 16.0 16.7 Suppliers 250 4.8 Net transfer/gross disbursements 78.0 73.0 59.0 52.8 Pinancial institutions 1,879 36.4 Bonds 783 15.1 Exposure Total public MLT debt 5,167 100.0 Other MLT debt 2,753 53.3 IBRD disb./gross total disb. 5.5 7.4 8.3 10.4 Total MLT debt 7,920 153.3 Bank Group disb./gross total disb./e 6.2 7.5 8.3 10.4 IBRD DOD/total DOD 7.2 7.3 8.0 9.9 (Including undisbursed) Bank Group DOD/total DOD /e 7.8 7.8 8.4 10.3 Public MLT debt 8,971.4 173.6 IBRD debt service/total debt service 6.6 5.6 6.9 7.3 Total MLT debt 12,225.3 237.0 Bank Group debt serv./total debt. serv 6.7 5.6 7.0 7.4 /a Short-tern capital, monetization of gold, allocation of SDRs, and errors and omissions. 7T Equals change in net international reserves. 7c Gross reserves of the Central Bank ("International reserves", IFS). 7d Includes net direct investment income. 7e Excludes IFC. East Asia and Pacific Region February 1981  - 32 - ANNEX II Page 1 of 17 pages THE STATUS OF BANK GROUP OPERATIONS IN THE PHILIPPINES A. STATEMENT OF BANK LOANS AND IDA CREDITS As of February 28, 1981 Loan or Credit Amount (less cancellations) Number FY Borrower Purpose Bank IDA Undisbursed Twenty-two Loans and three credits fully disbursed 401.9 32.2 720-PH 1971 Rep. of the Philip. Rice Processing & Storage 14.3 0.3 984-PH 1974 Aurora-Penaranda Irrigation 9.5 1.0 998-PH 1974 DBP I 50.0 3.3 1034-PH 1974 National Power Corp. Power 61.0 2.3 1035-PH 1974 Rep. of the Philip. Population 25.0 9.1 1048-PH 1974 Shipping 20.0 4.6 1052-Pli 1974 Philip. National Bank PDCP IV 30.0 1.3 1080-PH 1975 Rep. of the Philip. Tarlac Irrigation 17.0 4.9 1102-PHl 1975 Rural Development 25.0 8.2 1154-PH 1976 Magat Irrigation 42.0 14.2 1190-PH 1976 DBP II 75.0 4.7 1224-T-PH 1976 Education III 25.0 5.7 1225-PH 1976 Livestock II 20.5 1.3 1227-PH 1976 Chico Irrigation 50.0 32.3 1272-T-PH 1976 Manila Urban 10.0 5.4 1282-PH 1976 Manila Urban 22.0 11.8 1269-PH 1976 Second Grain Processing 11.5 8.5 1353-Pli 1977 Third Highways 95.0 63.6 1367-PH 1977 Jalaur Irrigation 15.0 7.7 1374-PH 1977 Fourth Education 25.0 10.4 1399-PH 1977 Central Bank of the Fourth Rural Credit Philippines 36.5 17.6 1414-PH 1977 Rep. of the Philip. Nat. Irrig. Syst. Improvmt. 50.0 34.8 1415-PH 1977 Provincial Cities Water Sup. 23.0 15.5 1421-PH 1977 Rural Dev. Land Stlmt. II 15.0 10.9 1460-PH 1977 National Power Corp. Seventh Power 58.0 40.2 1506-PH 1978 Rep. of the Philip. Smallholder Tree Farming 8.0 6.8 1514-PU 1978 Philip. National Bank PDCP V 30.0 11.4 1526-PH 1978 Rep. of the Philip. Nat. Irrig. Syst. Improvmt. II 65.0 50.1 790-PH 1978 Rural Infrastructure 28.0 25.6 S.8-PH 1978 Education 2.0 1.4 1547-PH 1978 Nat. Electrif. Admin. Rural Electrification 60.0 15.1 1555-PH 1978 Philip. National Bank PISO 15.0 2.9 1567-PH 1978 Rep. of the Philip. Magat II 150.0 67.9 1572-PH 1978 Indtustrial Investment III 80.0 37.5 1615-PH 1978 Manila Water Supply II 88.0 84.4 1626-PH 1979 National Extension 35.0 34.5 1639-PH 1979 Magat River Multipurpose 21.0 18.3 1646-PH 1979 Small Farmer Dev. (Land Bank) 16.5 11.8 1647-PH 1979 Second Urban Development 32.0 27.3 1661-PH 1979 Highways IV 102.0 98.8 1710-PHl 1979 Water Supply II 16.0 16.0 920-PH 1979 Water Supply II 22.0 21.2 1727-PH 1979 Small & Medium Industry IT 25.0 13.4 923-PH 1979 Population II 40.0 39.9 1772-Pli 1980 Samar Island Rural Devel. 27.0 26.8 1786-PH 1980 Fisheries Trng. (Educ. VI) 38.0 37.8 1809-PH 1980 Medium-Scale Irrigation 71.0 70.9 1814-PH 1980 Manila Sewerage & Sanitation 63.0 62.5 1815-PH 1980 Rainfed Agric. Dev. (Iloilo) 12.0 11.9 1821-PH 1980 Third Urban 72.0 70.9 1855-PH 1980 Third Ports 67.0 67.0 1860-PH 1980 Rural Roads Improvement 62.0 60.8 1890-PH 1980 Watershed Management 38.0 37.9 1894-PH 1980 Third Livestock & Fisheries 45.0 44.6 1903-PH 1981 Structural Adjustaent 200.0 157.7/a Total 2,665.7 122.2 1,552.7 of which has been repaid (Bank and third parties) 191.4 Total now outstanding 2,474.3 122.2 Amount sold 24.3 of which has been repaid (third parties) 17.1 7.2 - Total now held by Bank and IDA (prior to exchange rate adjustments) 2,467.1 122.2 Total undisbursed 1,466.0 86.7 1,552.7 /a Payment of $41.3 million made in March 1981.  - 33 - ANNEX II Page 2 of 17 pages B. STATEMENT OF IFC INVESTMENTS As of February 28, 1981 Fiscal Amounts ($ million) Year Company Loan Equity Total 1963 & 1973 Private Development Corporation of the 15.0 4.4 19.4 Philippines 1967 Manila Electric Company 8.0 - 8.0 1967 Meralco Securities Corporation - 4.0 4.0 1970 Philippine Long Distance Telephone 4.5 - 4.5 Company 1970 & 1972 Mariwasa Manufacturing, Inc. 0.8 0.4 1.2 1970 Paper Industries Corporation of the - 2.2 2.2 Philippines 1971 & 1977 Philippine Petroleum Corporation 6.2 2.1 8.3 1972 Marinduque Mining and Industrial 15.0 - 15.0 Corporation 1973 Victorias Chemical Corporation 1.9 0.3 2.2 1974 Filipinas Synthetic Fiber Corporation 1.5 - 1.5 1974/1979 Maria Christina Chemical Industries, Inc. 1.5 0.7 2.2 1974 Republic Flour Mills Corporation 1.2 - 1.2 1975 Philippine Polyamide Industrial 7.0 - 7.0 Corporation 1976/1980 Philagro Edible Oils, Inc. 2.6 0.2 2.8 1977 Acoje Mining Company, Inc. 2.3 1.2 3.5 1977 Sarmiento Industries, Inc. 3.5 - 3.5 1978 Cebu Shipyard and Engineering Works, Inc. 2.1 - 2.1 1979 General Milling Corporation 4.0 1.1 5.1 1980 PISO Leasing Corporation 5.0 0.1 5.1 1980 Ventures in Industry and Business - 0.3 0.3 Enterprises, Inc. 1980 Consolidated Industrial Gases, Inc. 4.5 - 4.5 Total gross commitments 86.6 17.0 103.6 Less sold, acquired by others, 47.5 12.7 60.2 repaid or cancelled Total commitments now held by IFC 39.1 4.3 43.4 Total Undisbursed 5.0 - 5.0  - 34 - ANNEX II Page 3 of 17 C. PROJECTS IN EXECUTION /_ Agricultural Sector Credit No. 472 Aurora-Penaranda Irrigation; $9.5 Million Credit and Loan No. 984 $9.5 Million Loan of May 14, 1974; Date of Effectiveness: August 22, 1974; Closing Date: December 31, 1981 Overall progress of the project is satisfactory. Work on the dams and transbasin diversion channels was completed in 1975, about one year ahead of schedule. There were initial delays in the award of contracts for the service area improvement works, and further delays were caused by strong typhoons in 1978 and 1980 which damaged some of the project area. Completion is now planned for 1981 - a three-year delay in the original schedule. Due to increased costs, a reduced cropping intensity and delays in construction, the internal rate of return is expected to be close to 12% compared with the appraisal estimate of 17%. Loan No. 1080 Tarlac Irrigation; $17.0 Million Loan of January 27, 1975; Date of Effectiveness: April 30, 1975; Closing Date: June 30, 1982 The project is now about 75% complete. Full completion is expected by June 1982, a two-year delay in the original schedule, caused mainly by managerial problems and late preparation of the designs for the drainage works. The closing date has, therefore, been extended by two years to June 30, 1982. The area developed is likely to be some 20% less than originally planned mainly because of flooding from the Chico, Camiling and Agno rivers. Costs are higher, partly due to the delays referred to above, and the economic rate of return is now likely to be close to 10% compared with an appraisal estimate of 15%. Loan No. 1102 Rural Development; $25.0 Million Loan of April 16, 1975; Date of Effectiveness: July 28, 1975; Closing Date: June 30, 1981 Overall implementation is about 75% complete. The road subproject has been delayed by about two years because most of the construction contracts had to be rebid following the failure of the ongoing contracts. Contracts for the construction of the irrigation works are also behind schedule, but most of these should be successfully completed without rebidding. Recent efforts by the project management office to improve contract performance /1 These notes are designed to inform the Executive Directors regarding the progress of projects in execution, and in particular to report any problems which are being encountered, and the action being taken to remedy them. They should be read in this sense, and with the understanding that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution.  - 35 - ANNEX II Page 4 of 17 have been successful, and force account works are proceeding well. General shortages of fuel and construction material have now been overcome. Disbursements have improved significantly recently and completion is expected in mid-1982, about two years behind schedule. Loan No. 1154 Magat Multipurpose Project; $42.0 Mlillion Loan of August 7, 1975; Date of Effectiveness: Novemuber 4, 1975; Closing Date: June 30, 1982 Civil works by local contract and force acount for rehabilitation and new construction of canals, drains and access roads are progressing well, and the project is about 81% complete. All contracts have now been awarded but some of the work has been postponed until the end of the rainy season. The water management training is continuing satisfactorily. Problems experienced due to budgetary constraints in 1980 are expected to be lessened in 1981 as NIA taps other local financial resources. Due to earlier delays in contract award, budgetary constraints and typhoon damage in 1980, project completion is expected to be delayed by about two years over the original schedule. Loan No. 1225 Second Livestock; $20.5 Million Loan of April 8, 1976; Date of Effectiveness: September 13, 1976; Closing Date: June 30, 1982 The loan is expected to be fully disbursed by June 1981, one year before the closing date (June 30, 1982) as a result of significant subloan demand in piggery and poultry subsectors. Further support to livestock development in the Philippines is being provided under the ongoing Third Livestock and Fisheries Credit Project (Loan 1894). Loan No. 1227 Chico River Irrigation Project; $50.0 Million Loan of April 8, 1976; Date of Effectiveness: July 19, 1976; Closing Date: June 30, 1981 Although the project was due for completion by June 1980, it is now only about 40% complete. Work started slowly due to late procurement of equipment for force account work. Further delays have been caused by changes in design resulting in rebidding the three major contracts for the diversion dam, the main canal and the river siphon; severe and repeated typhoon damage; problems of right-of-way aquisition and the recent suspension of work on the diversion dam because of security problems. The project is not now expected to be completed before June 1984, a four-year delay over the appraisal estimate. Loan No. 1269 Second Grain Processing Project; $11.5 Million Loan of July 2, 1976; Date of Effectiveness: October 4, 1976; Closing Date: June 30, 1981 Due to delays in implementation of the first phase project (Loan 720-PTI) and to the general availability of funds to millers from  - 36 - ANNEX II Page 5 of 17 alternative sources, disbursements had been progressing slowly. Recently, however, due to DBP-s promotional efforts, the subloan demand from millers has been increasing. In addition, DBP is considering financing the grain warehouse construction program of the National Food Authority under this project. In view of these developments, the project funds are expected to be fully committed by the end of CY1981 and the loan disbursed by June 1983, two years behind schedule. The Borrower has now requested an extension of the loan's closing date to June 1983. The ongoing Grains Losses Study is expected to be completed by the end of 1981. Loan No. 1367 Jalaur Irrigation Project; $15.0 Million Loan of February 14, 1977; Date of Effectiveness: May 12, 1977; Closing Date: December 31, 1982 Overall progress of the project is about 40% compared with appraisal estimates of 55%. Force account work is proceeding satisfactorily. Some of the 24 civil works contracts failed, due to unsatisfactory procurement procedures, but the Government has now taken action to improve the situation. Progress has recently improved, and a timely completion is still expected. Loan No. 1399 Fourth Rural Credit Project; $36.5 Million Loan of April 11, 1977; Date of Effectiveness: June 2, 1977; Closing Date: December 31, 1982 Commitments and disbursements continue to be roughly one-half of appraisal estimates. The Central Bank has reassessed the project and as a result new categories of lending (for medium-size trucks, tree crops and working capital), and a new set of financial intermediaries (private development banks) have been included in the project. More recently the Central Bank has reduced the relative advantages of rural banks in short-term lending vis-a-vis medium- and long-term lending provided under the project, and has introduced a capital build-up program and conversion scheme to lower the high levels of arrears of participating rural banks. Although these initiatives should accelerate implementation, the completion date has been postponed by two years. Loan No. 1414 National Irrigation Systems Improvement Project; $50 Million Loan of May 13, 1977; Date of Effectiveness: August 9, 1977; Closing Date: December 31, 1982 Progress in project implementation has been slow, initially because of staffing and design problems, and more recently because of delays in the review of design and contractual arrangements for the Abulog diversion dam. Shortages of fuel and construction materials, which have been a major cause of delay, have now been overcome. The project is now expected to be completed in 1983, two years later than originally estimated. Implementation has improved during the 1980 construction season, and further improvements are expected in 1981, mainly because of better planning and organization, less complicated contract procedures, and completion of designs. Final project costs and benefits are expected to be in line with original estimates.  - 37 - ANNEX II Page 6 of 17 Loan No. 1421 Second Rural Development (Land Settlement) Project; $15.0 Million Loan of June 10, 1977; Date of Effectiveness: October 27, 1977; Closing Date: December 31, 1982 Satisfactory progress is being maintained. The Government has simplified and accelerated procedures for issue of land allocation certi- ficates and titles to project area settlers, improving their eligibility for term credit. Substantial progress has been made in construction of roads, bridges and related infrastructure. Initial irrigation works, water supply systems and health stations have been installed. Adaptive research trials have been completed and pilot extension programs for appropriate agricultural packages are now under way. Feasibility studies for development of other settlements are well advanced, but formulation of a long-term land use policy framework is lagging. Previous bottlenecks in the flow of funds and loan disbursements have eased since 1980. Implementation plans for 1981/82, currently being reviewed, show project costs and overall targets in line with original estimates. Loan No. 1506 Smallholder Tree Farming and Forestry Project; $8.0 Million Loan of January 23, 1978; Date of Effectiveness: May 11, 1978; Closing Date: December 31, 1983 Treefarmer enrollment in the DBP treefarming component, which has been slow in the past, has improved markedly following DBP's liberalization of application procedures and collateral requirements. However, so far fewer smallholders and more umedium-size land-owners are participating than expected at appraisal. The other components, all of which involve government agencies, now have budget appropriations commensurate with project requirements, although delays in fund releases still occur. The forest research component is progressing well and the wood industries feasibility study is approaching completion. Vehicles and equipment for BFD-s Abra plantation component have still not been acquired due to overly cumber- some local procurement procedures. Moreover, the young planted pines have been infested by a shoot borer insect, which will require immediate control measures. The pace of implementation of this component will, therefore, have to be reduced and its completion date extended by at least one year. Loan No. 1526 Second National Irrigation Systems Improvement Project: $65 tlillion Loan of March 15, 1978; Date of Effectiveness: June 20, 1978; Closing Date: December 31, 1984 Topographic surveys, project planning and design have been completed for most of the systems, and construction is fully under way. No major contracts have been awarded and those originally scheduled for 1980 were delayed because of financial constraints and difficulties in completing designs on schedule. To help with this problem, NIA has agreed to retain local consultants to assist in design preparation of drainage works and thus avoid delays in subsequent contract works. Overall progress is satisfactory and the project is expected to be completed as scheduled.  - 38 - ANNEX II Page 7 of 17 Credit No. 790 Rural Infrastructure; $28 Million Credit of April 21, 1978; Date of Effectiveness: July 21, 1978; Closing Date: December 31, 1983 Construction work on communal irrigation systems, village water supply, health stations and ports is proceeding well. As of December 31, 1980, construction of about 34 km of roads had been completed, 300 km of roads (about one-third of the program) were under contract or shortly to be awarded, and 90% of the design work on the remaining roads had been completed. While construction of the irrigation component is behind schedule, overall progress of the project is satisfactory. About 300 rural water supply units are completed and 48 barangay health stations have been built and commissioned. The overall progress on the port component is estimated at about 50%. The project is expected to be completed on schedule. Loan No. 1567-PH The Magat River Multipurpose Project - Stage II; $150 Million Loan of May 23, 1978; Date of Effectiveness; August 24, 1978; Closing Date: December 31, 1983 Progress is good. The first stage of river diversion was successfully completed in May 1980. Excavation work is substantially completed and concrete works, which had lagged because of difficulties with the batching plant, have been brought on schedule. Work on construction of new villages to accommodate families displaced by the reservoir is proceed- ing very well. Raising of the main dam closure section to a level of 158 m by May 1, 1981 to allow diversion through the main spillway will be the next critical phase. Loan No. 1626-PH National Extension Project; $32.0 Million Loan of December 21, 1978; Date of Effectiveness: March 26, 1979; Closing Date: June 30, 1983 The Ministry of Agriculture, through its Bureau of Agricultural Extension, aims to introduce the training and visit (T and V) system to the national extension service over a four year period. A Project Management Committee has been created under the Deputy Minister's Chairmanship, and appropriate subcommittees and operational units established. Regional reorganization was effected on March 24, 1980 with the appointment of 12 Regional Directors and 24 Assistant Directors, followed by 75 Provincial Executive Officers on March 28. The 1979 incremental staff appointments have been made and recruitment of the 1980 contingent is proceeding. A contract has been let for the construction of 167 extension centers. The first year-s motorcycle allotment has been purchased and distributed under the special vehicle loan fund. Procurement of the other vehicles, for the first and second year, together with equipment, is proceeding. Training was interrupted temporarily during reorganization, but is continuing in cooperation with the USAID/KSU program on Agricultural Production and Marketing. The first consultancy, on extension workers compensation and duties, and a second, on monitoring and evaluation procedures for extension  - 39 - ANNEX II Page 8 of 17 workers and services, have been let. Pilot areas for introducing the T and V system of extension have been established in all 12 regions of the country. The first four have been evaluated and a report issued. Benchmarker agro-economic surveys, on which the selection of the pilot areas was based, have been completed in the 12 regions. Loan No. 1639-PH Magat River Multipurpose Project; Stage II Irrigation; $21.0 Million Loan of January 26, 1979; Date of Effectiveness: April 25, 1979; Closing Date: December 31, 1983 Implementation started early in 1980 and progress is satisfactory. All major contracts have already been awarded and some are ahead of schedule. All construction equipment has been procured and delivered to site. Completion is expected by mid-1983 as scheduled at appraisal. The only problem to be foreseen is an overall financial constraint which is being carefully considered by the Government. Loan No. 1646-PH Small Farmer Development Project through the Land Bank of the Philippines; $16.5 Million Loan of January 26, 1979; Date of Effectiveness: April 25, 1979; Closing Date: June 30, 1983 Cumulative loan disbursements of $4.2 million up to December 1980 were lower than the appraisal estimate of $5 million because the subloan demand from small farmers and rural entrepreneurs for farm mechanization and backyard livestock investments have been generally weak owing to recent increases in fuel and feed costs. Further, loan withdrawals against completed infrastructure works ($3.5 million) have been held up by certain budgetary regulations. However, the Budget Ministry has recently settled this matter and disbursements should be made in the near future. The Land Bank has initiated measures to strengthen its field level organization and streamline its lending terms, which are expected to step up subloan disbursements to small farmers. Loan No. 1772-PH Samar Island Rural Development Project; $27.0 million Loan of February 1, 1980; Date of Effectiveness: May 21, 1980; Closing Date: June 30, 1985 Procurement of services, materials and equipment for the project is now under way, and the first phase of the Catubig valley studies has been completed. Loan No. 1809-PH Medium-Scale Irrigation; V71.0 million Loan of March 28, 1980. Date of Effectiveness: June 25, 1980; Closing Date: December 31, 1986 The loan became effective in June 1980 and project consultants started work in August 1980. Procurement of project equipment is under way. Design and preparation of contract documents for civil works are proceeding on schedule and construction should start as planned.  - 40 - ANNEX II Page 9 of 17 Loan No. 1815-PH Rainfed Agriculture (Iloilo); $12.0 million Loan of March 28, 1980; Date of Effectiveness: June 25, 1980; Closing Date: June 30, 1986 Project implementation is proceeding slowly due mainly to a lack of adequate budgeted funds. In addition, several rural banks in the project area are unable to provide production credit to farmers due to high arrearages under past loans. Following recent supervision, measures are now being initiated to induct other banks, such as the Land Bank and the Philippine National Bank, as well as to strengthen further the extension machinery. Loan No. 1890-PH Watershed Management and Erosion Control Project; $38.0 Million Loan of August 4, 1980; Date of Effectiveness: October 30, 1980, Closing Date: December 31, 1986 A good start has been made on implementation of the main components of the project. Jurisdictional difficulties between the implementing agency and the Bureau of Forest Development have been sorted out and a Memorandum of Understanding signed. The National Irrigation Administration is making vigorous efforts to protect the project as much as possible from the current shortage of local funds. Loan No. 1894 Third Livestock and Fisheries Credit Project; $45.0 Million Loan of August 4, 1980; Date of Effectiveness: November 5, 1980; Closing Date: June 30, 1984 A good start has been made in project implementation. During the first four months, up to December 1980, DBP-s subloan disbursements exceeded the appraisal estimnate. These disbursements were mainly for livestock and inland fisheries subsectors; the loan demand for marine fisheries is, however, weak. Under the noncredit component, the Borrower s Bureau of Animal Industry and Fisheries Industry Development Council are preparing proposals for research and other support prograims. DBP's studies on development of a new management information system and staff training programs are in progress. A plan for monitoring and evaluation of future agricultural credit projects is also being developed by DBP. Transportation Sector Loan NIo. 1048 Inter-Island Shipping; $20 Million Loan of October 29, 1974; Date of Effectiveness: January 15, 1975; Closing Date: June 30, 1981 The Closing Date was extended to June 30, 1981 to allow for the completion of training programs and for ship construction guarantee payments. About 70% of the loan has been disbursed. Loan applications covering the balance of uncommitted funds are tnder consideration by DBP.  - 41 - ANNEX II Page 10 of 17 Loan No. 1353 Third Highway Project; $95.0 Million Loan of January 12, 1977; Date of Effectiveness: March 30, 1977; Closing Date: June 30, 1981 Overall, the project is about 53% completed and two and half years behind schedule because of slow procurement, poor performance of many contractors, and inadequate planning for the use of local funds. The operations of the Ministry of Public Highways (MPH) have improved but require further efforts, specifically in road maintenance. In road construction and improvement, works on 11 national and 5 minor road contracts are progressing satisfactorily; however, poorly performing contractors continue to cause problems on three national and two minor road contracts. MPH has now undertaken the action necessary to forfeit and retender those five contracts, and contract award is scheduled by mid-1981. The road maintenance and restoration programs have been reviewed and are now making some progress. Of the 28 workshop contracts, 11 are now under construction, 13 are up for rebid and 4 have been renegotiated. There is a significant cost overrun on the workshop contract, caused by changes in the design and price escalation. Procurement of road maintenance equipment, tools and other machinery has been completed. Consultants for supervision of construction of roads and workshops are in place and the road and ferry feasibility studies have been completed. The technical assistance advisors to MPH completed their assignment in November 1970 and training advisors to MPH completed their work in March 1980. Overall, the project completion is likely to be delayed until mid-1983, and it will be necessary to extend the present closing date for two and a half years. Loan No. 1661 Fourth Highway Project; $100 Million Loan of March 9, 1979 ; Date of Effectiveness: June 15, 1979; Closing Date: December 31, 1983 After an initial delay of several months the implementation of this project has proceeded slowly, mainly because of time-consuming prequalifica- tion procedures for contractors and slow selection of consultants for technical assistance. The overall delay now amounts to at least a year, and the progress in implementing the project continues to be slow. Although MPHI has done a considerable amount of preparatory work and international competitive bidding is now under way, no construction or improvement works have yet started. A consulting firm for the design and construction supervision of workshops has started the design work. Land acquisition for road construction and workslhops is under way and preparatory work has begun for the continuation of the road maintenance and road restoration programs begun under the Third Hlighway Project (Loan 1353-PB). Prequalification for equipment suppliers has begun, but bids will be invited only after completion of workshop construction. Loan No. 1855 Third Ports Project; $67 Million Loan of June 13, 1980; Proposed Date of Effectiveness: September 11, 1980; Closing Date: June 30, 1984 Detailed engineering and preparation of tender documents are now complete, and bidding for the four main port contracts is scheduled to take  - 42 - ANNEX II Page 11 of 17 place by mid-1981. Other preconstruction activities are under way and are scheduled to be completed before the main contractors begin work. Consultants have been selected to provide technical assistance for construction super- vision, and contract negotiations are under way. Loan No. 1860 Rural Roads Improvement Project; $62 Million Loan of June 13, 1980; Proposed Date of Effectiveness: September 11, 1980; Closing Date: December 31, 1984 Initial progress in preparing the 1981 rural roads program has been slow due mainly to a delay in providing technical assistance services to the implementing agency. Due to delays in preparing and reviewing detailed engineering for rural roads, no construction contracts will start in the 1981 dry season, putting the project about nine months behind schedule. Consulting services are generally on schedule with the exception of the technical assistance. The Government is aware of the importance of this item and is taking steps to remedy the problem. Education Sector Loan No. 1224T Third Education Project; $25 Million Loan of April 8, 1976; Date of Effectiveness: July 29, 1976; Closing Date: June 30, 1981 The central part of the project, which is the development of primary and secondary textbooks and teachers' manuals in five subject areas, has made continuous progress since the inception of the project. Eighteen million books have been produced and distributed. The project should meet its goal of producing and distributing to schools 75 titles amounting to 30 million copies, as well as training about 250,000 teachers, by the middle of 1981. Civil works are about 28 months behind schedule. Project costs are close to appraisal estimates and disbursements are about 80% of appraisal estimates. Loan No. 1374 Fourth Education Project; $25.0 Million Loan of March 25, 1977; Date of Effectiveness: June 9, 1977; Closing Date: December 31, 1981 Implementation of the project is now some 18 months behind schedule. Rapid price escalation and high credit costs in the 1978-80 period resulted in a slow-down in building activity, the rescinding of an important contract and renegotiation of others, thus delaying implementation of the project's other physical components and dependent educational objectives. The situation is being recuperated and in the process EDPITAF has devolved implementation responsibilities to recipient institutions An extension of the closing date is to be sought once a revised financial plan has been elaborated with the Finance and Budget Ministries. Overall project utilization of Technical Assistance Specialists is only 20%, while over 80% of Fellowship time has been committed. Enrolments are about on target and other educational developments at UPLB and VISCA are proceeding satisfactorily. There is some tendency to proliferate fields of specialized study and the National Governing Board of  - 43 - ANNEX II Page 12 of 17 the PTC-RD system has not functioned as planned in reviewing important changes in policies and programs. Loan No. S-8-PH Educational Radio Technical Assistance: $2 Million Loan of April 21, 1978; Date of Effectiveness: August 22, 1978; Closing Date: December 31, 1981 The project is being implemented by an Educational Communications Office (ECO), established for this purpose within EDPITAF. ECO is functioning smoothly and is successfully preparing and distributing radio programs and printed materials for the two major project subcomponents - Radio Assisted Teaching in Elementary Schools (RATES), and Continuing Education for Teachers (CET). These programs have been implemented efficiently. The report on the project summative evaluation which has been completed by the University of the Philippines- Institute of Mass Communication, contains informative data on the use of radio for the improvement of education. The Educational Communications Office is now formulating follow-up plans incorporating this data into the forthcoming Elementary Education project. A separate evaluation of the Communication Technology for Rural Education will be completed towards the end of 1981. Loan No. 1786-PH Fisheries Training Project; $38.0 Million Loan of February 1, 1980; Date of Effectiveness: May 19, 1980; Closing Date: June 30, 1985 Although the loan became effective in May 1980, funds were released by the Government only in November, which resulted in some implementation delays. Physical implementation, however, is on schedule. Contract awards for the first 13 packages were expected in the first quarter of 1981. By December 1980, site acquisition was practically completed and equipment lists were nearing completion. The first of five planned RIFT/RCFT staff training workshops was conducted in November 1980. EDPITAF-s devolution of major responsibility and funds for implementation to recipient institutions is a major policy change which will require, among other things, the introduction of complex accounting practices. The proposed UPVCF Fellowship program is not consistent with project objectives and will require rigorous review by UPV, EDPITAF and the Bank. Urban Sector Loan No. 1272T Manila Urban Development Project; $10.0 Million and Loan No. 1282 $22.0 Million Loans of June 9, 1976; Date of Effectiveness: December 9, 1976; Closing Date: September 30, 1981 Overall construction on the Tondo project is about 65% complete. In spite of implementation delays in two key components - construction of major roads and the sewer outfall - overall management of the project has improved: key staff vacancies in the Tondo office have been filled, and NHA-s General Manager is increasingly devoting his personal supervision to the project. All but two infrastructure contracts have been awarded and are currently in various stages of mobilization. The Dagat-Dagatan component is 98% complete, and about 1,317 of the 1,501 completed units have been occupied. The shortfall of 499 units will be constructed under the Second Urban Project. The progress of the first package of the road component has been held up due to price adjustment problems in the contract, and  - 44 - ANNEX II Page 13 of 17 implementation of the sewer outfall component has been delayed due to design modifications. However, the contractor has now been selected, and implementation of this component is now expected to proceed smoothly. Loan 1415-PH Provincial Cities Water Supply Project; $23 Million Loan of May 13, 1977; Date of Effectiveness: September 9, 1977; Closing Date: March 31, 1982. Major contracts have been awarded. Work has started in four of the six project cities, and contractors are mobilizing in the remaining two. The construction cost is expected to be close to appraisal estimates and project completion is expected to be on target. Loan 1615-PH Second Manila Water Supply Project; $88 Million Loan of July 26, 1978; Date of Effectiveness: December 21, 1978; Closing Date: December 31, 1983. Delays in ADB-financed components of the project (source and treatment works) have resulted in similar delays in IBRD-financed parts of the project (distribution system). Nevertheless, according to rescheduling prepared by consultants, it is expected that the original target of completing the project by June 1983 will be met. Water rates were increased by 25 centavos in Mlay 1980 and a 10% water rate surcharge was implemented at the end of 1980. Loan No. 1647-PH Second Urban Development Project; $32.0 Million Loan of January 26, 1979; Date of Effectiveness: April 26, 1979; Closing Date: June 30, 1984 Since the loan became effective in April 1979, implementation has been in progress on earthworks, sewerage and drainage contracts in Dagat- Dagatan and on the SIR program in the regional cities. An action program to remedy the drainage problem of the Dagat-Dagatan area and to provide adequate fill materials has been initiated through IIPW and contracts for major earthworks and infrastructure are now being let. This should considerably accelerate disbursements on the Dagat-Dagatan component. Overall loan disbursement improved during FY80. Due to fill deficiency problems at the Dagat-Dagatan site and general price escalations, the total project costs have increased to approximately $95 million, reflecting a 38% increase over the appraisal estimate. It is likely that thie overall project will be completed on schedule by the end of 1983. Credit 920-PH Second Provincial Cities Water Supply Project; $22 Million Loan 1710-PH Credit and $16 Million Loan of June 27, 1979; Date of Effectiveness: November 30, 1979; Closing Date: December 31, 1985. The 50 Water Districts required under the project have been formed. Work on the feasibility studies for the project cities is in progress and some reports have been completed. Work has started on the development of a financial planning and control system. Consultants have started the preparation of a comaprehensive management assistance and training proposal.  - 45 - ANNEX IT Page 14 of 17 Loan 1814-PH Manila Sewerage and Sanitation Project: $63.0 million Loan of March 28, 1980; Date of Effectiveness: September 10, 1980; Closing Date: December 31, 1984. This loan was declared effective on September 10, 1980 and is proceeding on schedule. Loan 1821-PB Third Urban Development Project; $72 Million Loan of June 2, 1980; Date of Effectiveness: September 25, 1980; Closing Date: December 31, 1984. With satisfactory organizational and staffing arrangements now established, physical implementation of this project is generally on schedule in spite of procedural delays in budgetary releases. Second phase programs in community upgrading, serviced sites, basic municipal infrastructure and employment promotion are already being identified for inclusion. Power Sector Loan No. 1034 Sixth Power; $61.0 Million Loan of July 31, 1974: Date of Effectiveness: November 15, 1974; Closing Date: June 30, 1981 The generating plant was commissioned in April 1977, and the transmission facilities are now expected to be completed by mid-1981, more than three years behind schedule. The revised cost of the project is estimated at $124.2 million, an increase of about 35% over the original estimate ($92 million). The closing date of the loan has been postponed from December 31, 1978 to June 30, 1981 to allow additional time for completion of the transmission systems and payment of the retention money. Loan No. 1460 Seventh Power Project; $58.0 Million Loan of August 9, 1977; Date of Effectiveness: January 6, 1978; Closing Date: June 30, 1982 Project implementation is behind schedule, and is expected to be completed one year later than estimated. The foreign exchange component is now estimated at $57.1 million (including additional works) compared with the original estimate of $58.0 million; surplus funds will be used to expand substations to increase the reliability of the system. Due to delays in procurement and because of additional works authorized by the Bank, the closing date of the loan will need to be extended to mid-1983. NlPC has still been unable to meet the 8% rate of return target provided in the Loan Agreement and the Government has yet to provide specific assurances that appropriate action will be taken to remedy this. This problem is being followed up by the Bank.  - 46 - ANNEX II Page 15 of 17 Loan No. 1547 Rural Electrification; $60.0 Million Loan of May 10, 1978; Date of Effectiveness: August 17, 1978; Closing Date: December 31, 1981 After earlier improvements in implementation, the project is now behind schedule. About 300,000 house connections were made in 1980, compared with NEA's target of 487,000. NEA's financial performance in 1979 was good, but adjustments to the audited accounts for 1978 resulted in a net loss of P10.3 million ($1.4 million). The Bank has now made a number of recommenda- tions to improve the audit reports prepared by the Commission on Audit. NEA is making efforts to monitor the financial performance of the cooperatives and for the first time has published the financial results of the cooperatives as a supplement to its 1979 report. Industrial Sector Loan No. 998 Industrial Investment and Smallholder Tree-Farming; $50.0 Million Loan of June 12, 1974; Date of Effectiveness: September 9, 1974; Closing Date: December 31, 1981 The industrial portion of the Loan ($48 million) has been almost fully drawn down by DBP to finance medium and relatively large industrial projects. DBP is using the balance ($2 million) to finance about 1,300 smallholders in a pilot tree-farming project in Mindanao; this part of the loan is also substantially disbursed. Loan No. 1052 Private Development Corporation of the Philippines; $30 Million Loan of November 12, 1974; Date of Effectiveness: February 7, 1975; Closing Date: June 30, 1981 After some slowdown in commitments and disbursements experienced in 1976 and 1977 the loan has now been fully committed. Overall progress is satisfactory. Loan No. 1190 Industrial Investment; $75.0 Million Loan of January 28, 1976; Date of Effectiveness: April 6, 1976; Closing Date: September 30, 1981 Commitments of funds, which were initially much slower than expected due to a slowdown of investment in the industrial sector as a whole, improved in 1978 and 1979. The loan has since been fully committed by DBP for subprojects. Disbursements are now proceeding satisfactorily. Loan No. 1514 Private Development Corporation of the Philippines (PDCP); $30 Million Loan of February 9, 1978; Date of Effectiveness: June 23, 1978; Closing Date: September 30, 1982 As of January 31, 1981 commitments under the loan amounted to $25.6 million. The project progress is satisfactory.  - 47 - ANNEX II Page 16 of 17 Loan No. 1555 Philippines Investments Systems Organization (PISO); $15 Million Loan of May 8, 1978; Date of Effectiveness May 12, 1978; Closing Date: December 31, 1982 The loan is now fully committed and disbursements are proceeding at a satisfactory rate. Loan No. 1572 Third Industrial Investment Credit Project through the Development Bank of the Philippines: $80 Million Loan of June 6, 1978; Date of Effectiveness: September 15, 1978; Closing Date: June 30, 1982 DBP's SMI program is operating satisfactorily and the loan allocation for this component has been fully committed. However, cancellation/withdrawal of some subloans earlier committed under the loan has left an uncommitted balance of $6.5 million under the loan allocation ($50 million) for medium/large industry financing. The overall progress of loan commitment and disbursement is satisfactory. Loan No. 1727 Second Small and Medium Industries Development Project; $25 Million Loan of June 27, 1979; Date of Effectiveness: November 9, 1979; Closing Date: June 30, 1983 After the introduction of policy changes in IGLF in late 1979, IGLF's loan commitment rate has accelerated. As a result, disbursements under the IGLF component ($24.5 million) amounted to $10.4 million as of January 31, 1981 and are expected to be completed before the loan closing date. The reorganization within the Ministry of Industry has considerably slowed down disbursements under the MASICAP component ($500,000). Overall progress of the project is satisfactory. Structural Adjustment Lending Loan No. 1903 Structural Adjustment Loan; $200.0 million Loan of September 25, 1980; Date of Effectiveness. November 14, 1980; Closing Date: June 30, 1985 Considerable progress has been made in implementing the Government's industrial development program in support of which the loan was made. The first stage of the Government's five year program of tariff reform and trade liberalization became effective on January 1, 1981; studies are under way to review and improve the Government's industrial incentives and promotion system; and subsector development programs are under preparation to assist domestic industries to adjust to the tariff reform and trade liberalization measures. About $84 million of the first tranche of $100 million had been drawn down by April 1, 1981 and the Government had entered into commitments to utilize nearly half of the $5 million technical assistance component to help formulate and implement various industrial policy measures. The availability  - 48 - ANNEX II Page 17 of 17 of the second tranche of $95 million has been temporarily delayed to allow the Government additional time to finalize and adopt the final phase of the tariff reform and trade liberalization program. Population Sector Loan No. 1035 Population; $25.0 Million Loan of July 31, 1974; Date of Effectiveness: November 13, 1974; Closing Date: June 30, 1981 As of November 1980, 198 of the 219 training centers and rural health units and about 93% of all construction work had been completed. Procurement of furniture and vehicles has been completed, with some items of equipment still remaining. Problems associated with the phasing out of the old Project Management Staff with the resultant loss of continuity and coordination, and with continuing delays in budget release and austerity measures have severely restricted project activities, and the closing date of June 30, 1981 will not be met. Before agreeing to an extension to the closing date, the Bank is requiring, among other conditions, that the required budget funds be released to the Ministry of Health and that a suitably qualified person be hired as a consultant to coordinate project activities. If these conditions are met, it is expected that the project will close by December 1982, three years behind schedule. Credit No. 923 Second Population Project; $40.0 Million Credit of June 27, 1979; Date of Effectiveness: October 15, 1979; Closing Date: June 30, 1985 All sites for POPCOM