Philippines - Central Visayas Regional Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 4504-PH STAFF APPRAISAL REPORT PHILIPPINES CENTRAL VISAYAS REGIONAL PROJECT October 26, 1983 Projects Department, Agriculture II East Asia and Pacific Regional Office 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 EQUIVALENCY US$1.00 Pesos (P) 14.00 P1.00 = US$ 0.07 REPUBLIC OF THE PHILIPPINES FISCAL YEAR January 1 - December 31 ABBREVIATIONS AIP - Annual Investment Program BFAR - Bureau of Fisheries and Aquatic Resources BFD - Bureau of Forest Development CDW - Community Development 'Worker CVRPO - Central Visayas Regional Project Office FAO - Food and Agricultural Organization (of the UN) FNP - Food and Nutrition Plan FSI - Forest Stand Improvement GDP - Gross Domestic Product GRP - Gross Regional Product GSRC - Government Survey and Reorganization Commiss ion IAD - Integrated Area Development IBRD - International Bank for Reconstruction and Development (World Bank) ICB - International Competit:ive Bidding IRP - Integrated Reorganization Plan LCB - Local Competitive BiddiLng MA - Ministry of Agriculture MB - Ministry cf Budget MCO - Municipal Coordinating Officer MDO - Municipal Development Officer MNR - Ministry of Natural Resources MPWH - Ministry cf Public Works and Highways NACIAD - National Council on Integrated Area Development NEDA - National Economic and Development Authority NFA - National Food Authority NFAC - National Food and Agricultural Council  FOR OFFICIAL USE ONLY - ii - NIA - National Irrigation Administration NPV - Net Present Value NRO - NEDA Regional Office PCA - Philippine Coconut Authority PCO - Provincial Coordinating Officer PCR - Philippine Commission for Reorganization PDC - Provincial Development Council PDO - Provincial Development Officer PEO - Provincial Engineer's Office PPF - Project Preparation Facility RBFAR - Regional Office of the Bureau of Fisheries and Aquatic Resources RBFD - Regional Office of the Bureau of Forest Development RDC - Regional Development Council RDIP - Regional Development Investment Program RFORI - Regional Office of the Forestry Research Institute RMA - Regional Office of the Ministry of Agriculture RPO - Regional Projects Office SCF - Standard Conversion Factor SMU - Site Management Unit SOE - Statement of Expenditure T&V - Training and Visit UNDP - United Nations Development Program 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.   PHILIPPINES: CENTRAL VISAYAS REGIONAL PROJECT STAFF APPRAISAL REPORT Table of Contents Page No. I. BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . 1 Introduction .... . . . . . . . . . . . . . . . . . . . 1 Rural Sector. . . . . . . . . . . . . . . . . . . . . . . . 1 Support Services and Institutions . . . . . . . . . . . . . 2 Government Objectives and Strategy . . . . . . . . . . . . 4 Experience with Past Lending . . . . . . . . . . . . . . . 4 II. REGIONALIZATION . . . . . . . . . . . . . . . . . . . . . . . 5 Historical Background .... . . . . . . . . . . . . . . . 5 Present Situation .... . . . . . . . . . . . . . . . . . 7 Planning and Development. . . . . . . . . . . . . . . . . . 7 Central Visayas (Region VII) . . . . . . . . . . . . . . . 9 III. THE PROJECT . . . . . . . . . . . . . . . . . . . . . . . . 10 A. Preparation . . . . . . . . . . . . . . . . . . . . . . . 10 B. Objectives . . . . . . . . . . . . . . . . . . . . . . . 12 C. Detailed Features .12 Watershed Management. . . . . . . . . . . . . . . . . . 13 Upland Agriculture. . . . . . . . . . . . . . . . . . 13 Social Forestry .13 Nearshore Fisheries .15 Infrastructure. . . . . . . . . . . . . . . . . . . . 16 Support Services .18 Institution Strengthening . . . . . . . . . . . . . . 18 Regional Office of the Ministry of Agriculture . . 18 Regional Office of the Bureau of Forest Development . . . . . . . . . . . . . . . . . . . 18 Regional Office of the Bureau of Fisheries and Aquatic Resources . . . . . . . . . . . . . . Regional Projects Office . . . . . . . . . . . . . 19 Training and Technical Assistance . . . . . . . . . . 19 Research. . . . . . . . . . . . . . . . . . . . . . . 19 Project Preparation . . . . . . . . . . . . . . . . . . 20 This report is based on the findings of an appraisal mission in November 1982, consisting of David Parbery, Wayne Ringlien, Robert Hindle, Abate Menkir, Takeichi Ishikawa, and Robert Hecht (Bank); Bill Bilbo and Philip Pryke (consultants).  Page No. IV. PROJECT COST AND FINANCING .. . ..... ...... . ..20 Cost Estimates . . . . .. . . . . . . . . . . . . . . . . 20 Financing . . . . . . . . . . . . . . . . . . . . . . . 20 Procurement . . . . . . . ..22 Disbursement. . . . . . . . . . . . . . . . . . . . . . . 24 Accounts and Audit . . ,, ... . . . . . ....... . 25 V. ORGANIZATION AND MANAGEMENT ... . . . . . . . . . . . . . 25 Regional Development Council . . . . . . . . . . . . . . 26 Regional Project Office . .. .26 Site Management Units. .. . . .27 Client Associations . . .. . . . . . . . . . . . . . . . . 28 Regional Office of BFD . . . . ..29 Regional Office of MA .. . . . . . . . . . . . . . . . . 30 Regional Office of BFAR . .30 Provincial Engineers' Offices . . . . . . . . . . . . . . 30 VI. PRODUCTION, MARKETING AND PRICES . . . . . . . . . . . . . . 31 Production . . . . . . . .31 Marketing . . . . . . .37 Prices . . . . . . . . .40 VII. BENEFITS, JUSTIFICATION AND RISKS . . . . . . . . . . . . . 41 Benefits . . . . . . . . .41 Environmental Impact . . . . . . . . . . . . . . . . . . 44 Justification . . . . . . ...44 Risks ... .. 46 Cost Recovery .. . . . 47 VIII. AGREEMENTS TO BE REACHED ANI) RECOMMENDAT:[ON . . . . . . . . 47 TABLES IN THE TEXT 4.1: Project Cost Summary . . . .. . ........ . . . . . . . 21 4.2: Project Financing by Activity . . . . . . . . . . . . . . . . 23 6.1: Project Stewardship Contracts by Site and Year . . . . . . . 32 6.2: Project Participant Families by Site . . . . . . . . . . . . 34 6.3: Incremental Production from Upland Agricu:Lture at Full Development . . . . . . . . . . . . . . . . . . . . . . . 35 7.1: Family Income by Production Model . . . . . . . . . . . . . . 42 7.2: Summary of Rate of Return Analysis . . . . . . . . . . . . . 44 Annex 2, Table 1: Land Classification and Popu:Lation, Project Sites . . . . . . . . . . . . I . . . . . . . . . . . . . . . . 55  - iii - ATTACHMENT 1. Procurement Arrangements ANNEXES 1. Regional Development Investment Program 2. Regional and Project Setting 3. Training and Technical Assistance 4. Estimated IBRD Disbursements 5. Project Implementation Schedule 6. Input and Output Prices 7. Economic Analysis 8. Related Working Papers in the Project File MAPS IBRD #17219 IBRD #17031 IBRD #17032 IBRD #17033   I. BACKGROUND Introduction 1.01 The Government of the Philippines has requested the Bank's assis- tance to finance a project which forms the first part of a regional devel- opment investment program in Central Visayas. The project is designed to raise rural incomes in four poor watersheds in this relatively backward region through the establishment of systems of resource management. These would include rehabilitation and conservation, to arrest degradation of the farming, forest and fishery resources in upland and nearshore habitats. It would also support institutional changes to help implement Government's policy of decentralization of responsibility for programs of economic development. Rural Sector 1.02 Agriculture is the predominant sector in the Philippine economy, accounting for about 30% of gross domestic product (GDP), 60% of foreign exchange earnings and over half the total employment. Although agricul- ture's share of GDP is falling, food production rose during the 1970s at an average of 7% p.a. This was achieved by the introduction of high yielding crop varieties and technical packages coupled with improved extension and farm credit and, to a lesser extent, irrigation. Most of these initiatives were directed at rice and corn production, which together account for about one third of the value of agricultural production, two thirds of rural employment, and over half of the cropped area. 1.03 Rice is the primary staple of over 80% of the population, and accounts for about 30% of the cropped area. The Masagana 99 program, which was launched in the early 1970s, played a significant role in helping the country achieve rice self-sufficiency in 1977. Since then, the Philippines has exported small quantities of rice each year except in 1981, when adverse weather and lower prices limited production to about the level of consumption. 1.04 Corn is the primary staple of a sixth of the population and the main feed component for the livestock industry. A recent breakthrough in developing varieties resistant to downy mildew offers the prospect that corn yields, now among the lowest in Asia at under one ton per ha, might rise enough to eliminate the growing need for corn imports, and eventually provide some exports. 1.05 Coconut and sugarcane are the third and fourth most important crops, both major foreign exchange earners whose profitability and production depend on world prices which fluctuate widely and are currently depressed.  - 2 - 1.06 About 70% of the country's population lives in rural areas, where nearly two thirds of the households depend on small farms for most of their income. About 85% of the 2.35 million farms in the Philippines are smaller than 5 ha. The average farm size is estimated to be 2.7 ha. About 58% of farmers own their land, 30% are share tenants, and the remaining 12%, excluding squatters, have a variety of tenancy arrangements including lease- holding. About 40% of all rural households subsist below the absolute poverty income level of US$204 per capita (in 1983 prices). 1.07 Population pressure has r esulted in marginal lands being brought under cultivation, and most future increases in production must come from higher yields on existing crop land. At present, high prices inhibit the use of yield-enhancing fertilizers and crop protection chemicals; supporting services of research, extension, marketing and training are often inade- quate; formal credit is limited and informal credit expensive; and insecure land tenure limits many farmers' willingness or ability to adopt innovations in production. Higher cropping intensities are also constrained by existing low yielding crop varieties and inadequacy of water from rainfall or irrigation. A large part of the agricultural area consists of sloping land of marginal quality which, together with the current exploitive land use practices, is reducing productivitvy even further. Support Services and Institutions 1.08 Both the private and public sectors are actively involved in serving the farming sector through the provision of inputs and services. The private sector imports, produces, and distributes fertilizers, pesti- cides, feedstuffs and veterinary supplies, which are distributed by more than 2,000 licensed dealers through retail outlets in every municipality of the country. Some dealers advance credit for farm inputs and others provide technical advice, including farm trial plots. The private sector also plays the major role in purchasing, processing, and diistributing marketed farm produce. Even when government commodity agencies exist, such as the Philippine Coconut Authority, private traders often act as intermediaries between farmers and the agencies. Private rural banks, often owned by local residents, provide about 12% of farm production credit. 1.09 The public sector is actively involvecl in policy planning and implementation, research and training, and agricultural extension. Within the Government, responsibility for the agricultural sector is divided among several ministries and other agenci-es not under the direct control of the principal sector ministries. There is an urgent: need to rationalize the multiple ministries, agencies and committees involved in the sector and delineate responsibilities, roles and tasks in order to avoid duplication of services.  - 3 - 1.10 The Ministry of Agriculture (MA) is primarily responsible for crops, soils, livestock, applied research and extension services; production of improved seed, plant material and animal breeds; plant and animal disease control; and farmer cooperatives. In accordance with the policy of decen- tralizing government services, 12 regional offices of MA were created in 1980 to improve services to the regions./I The Ministry has five related agencies /2 under administrative supervision, and another 12 attached agencies /3 whose role is to promote crop production or control aspects of agricultural development. The Minister chairs a coordinating body, the National Food and Agricultural Council (NFAC) which, since its inception in 1969, has been the implementor of food self-sufficiency programs such as Masagana 99 (rice) and Maisan 77, 99 and 22 (corn), Gulayan sa Kalusugan (vegetables), Bakahyong Barangay (Carabeef), Gatasang Barangay (dairy), and Biyayang Dagat (blue revolution). Late in 1981, it was mandated to execute a new national rice and corn production program (Maisagana). 1.11 The Ministry of Natural Resources (MNR) is responsible for forestry, fisheries, lands and mining. Responsibility for the control of forest resources, reforestation and forest management rests with the Bureau of Forest Development (BFD). Responsibility for fisheries is vested in the Bureau of Fisheries and Aquatic Resources (BFAR) for regulation, research, extension and statistics. Land surveying and classification are the responsibilities of the Bureau of Lands. Unlike MA, the Ministry has not been reorganized regionally. However, its Bureaus all have regional offices. Besides its Bureaus, MNR also has six agricultural agencies /4 attached for policy and program coordination. /1 Authorized by Presidential Decree No. 1579, June 1978. Responsibilities are set out in MA Administrative Order No. 2, Series of 1981. /2 Green Revolution Expanded Program Action Committee, Livestock Development Council, National Artificial Rain Stimulation Committee, National Food and Agricultural Council, and National Meat Inspection Commission. /3 Abaca Industry Development Authority, Coconut Investment Company, Fertilizer arid Pesticide Authority, Pagkian ng bayan National Advisory Council (Food for the Needy), Philippine Agricultural Training Council, Philippine Cotton Corporation, Philippine Dairy Corporation, Philippine Tobacco Administration, Philippine Training Center for Rural Develop- ment, Philippine Virginia Tobacco Administration, Philippine Virginia Tobacco Board, and Presidential Committee on Agricultural Credit. /4 Commission on the Settlement of Land Problems, Fishery Industry Development Council, Forest Research Institute, Natural Resources Development and Management Council, Philippine Fisheries Development Authority, and Presidential Committee on Wood Industries Development.  - 4 - 1.12 The Ministry of Agrarian Reform carries; out the country-s rural reform program applicable to rice and corn land. The development, operation and maintenance of all national irrigation systems in the Philippines is the responsibility of the National Irrigation Administration (NIA), a government corporation organized under the Ministry of Public Works and Highways (MPWH). The organization of communal irrigation schemes is the joint responsibility of the Farm Systems Development Corporation, which answers to the Ministry of Human Settlements, and NIA. The National Food Authority (NFA) acts as a residual buyer of grains, and through Food Terminal Inc., its wholly owned subsidiary, also handles other food commodities such as vegetables, poultry, eggs, fish, oil, sugar and milk. It has a mandate to stabilize food prices, maintain food reserves and control grain imports and exports. NFA is under the Office of the President and the administrator has ministerial rank. Other important bodies under the President's Office are the Philippine Coconut Authority (PCA) and the Philippine Sugar Commission. Formerly, each of these organizations received funds from industry levies which enabled them to operate independently of the ministries although, recently, depressed copra prices have changed the status of PCA. Government Objectives and Strategy 1.13 The Government-s latest (1983-87) five-year development: plan sets general objectives of high growth, greater resource mobilization, reduced income disparities and improved environmental quality. All of these apply to rural development, but specific goals most relevant to the agricultural sector are poverty reduction, continued rice self-sufficiency and more diversified agricultural production. These goals are closely interlinked, since policies aimed at achieving one goal inevitably affect the others. Recognizing this, the Government has placed most of its agricultural sector investments in infrastructure-building to support the broadest range of economic activities, while launching specific programs to address particular problems. The specific programs include land tenure reform, crop research, and a wide range of crop production programs combining credit, input supply and/or technical support. The infrastructure investments emphasize rural electrification, irrigation and roads. Experience with Past Lending 1.14 A total of 38 loans and credits have been granted to the Philippines for investments in agriculture, fisheries and rural development. Of these loans, 12 were for irrigation development or rehabilitation and another 12 were for agricultural credit. The current rural portfolio will comprise, by the end of 1983, 20 projects including seven for area development, five for irrigation, three for support services, two for agricultural credit, and three others for watershed management, fisheries and treecrops.  1.15 The experience with lending for agriculture has been mixed. The lending portfolio has reflected well the major objectives and priorities of national development plans./l Developments in irrigation have been posi- tive, including the establishment of a strong institution (NIA) and an expansion of irrigated crop lands. In credit, operations have been largely successful in providing funds for onfarm investment, but serious institu- tional and loan recovery problems remain. Ongoing area development projects such as Mindoro Rural Development (Loan 1102-PlH), Land Settlement I (Loan 1421-PH), Samar Island Rural Development (Loan 1772-PH), and Rainfed Agricultural Development (Loan 1815-Pll) have encountered implementation delays due to problems of interagency coordination and lack of authority at the local level but, nevertheless, appear likely to attain their objectives. II. REGIONALIZATION Historical Background 2.01 Regionalization in the Philippines dates back to 1954 when the Government Survey and Reorganization Commission (GSRC) was established. One of its plans, adopted in 1956 but never fully implemented, divided the country into eight administrative regions to promote decentralization of government functions. During the 1960s, several development authorities were created to implement regional and subregional projects, but control of their operations remained largely centralized in Manila. 2.02 In 1968, a major reorganization of Government resulted in replace- ment of the GSRC by the Philippine Commission on Reorganization (PCR) which produced the Integrated Reorganization Plan (IRP) enacted into law in September 1972 under Presidential Decree No. 1, the first decree to be signed by the President after the imposition of martial law earlier in the month. The plan provided for the creation of a National Economic and Development Authority (NEDA) to be responsible for national economic planning and for implementing the regionalization program set down in the IRP. The NEDA took over the functions of the National Economic Council, the Presidential Economic Staff, and various ad hoc entities and councils involved in economic planning, all of which were abolished. 2.03 Many factors were considered in defining the regions and selecting regional centers including geographic, economic, ethnic, demographic and /1 Sector Operations Review: Agricultural and Rural Development Program in the Philippines. Operations Evaluation Department Report No. 3796. February 10, 1982.  - 6 - political characteristics. In 1970, PCR recommended ten regions. However, the number was increased to 11 when the draft IRP was presented to Congress and PD No. 1 described 11 regions. The number increased to 12 in 1975 with the creation of Southern Mindanao (Region XII). In 1976, the regions were increased to 13 with the division of Region IV into Metro Manila (Region IV) and Southern Tagalog (Region IV-A). Subsequently, in 1978 Region IV became the National Capital Region, and Region IV-A became Region IV. The 12 regions, excluding the National Capital Region, comprise 73 provinces and 56 cities. 2.04 The NEDA was regionalized as soon as it was formed and its Regional Development Staff set up Regional Development Councils (RDCs) during the period 1973-75. The functions and membership of the RDCs were described in Letter of Instruction (LOI) No. 22./1 They were established to facilitate regional planning and representation in lawmaking bodies,/2 and to coordinate all planning and programming activities of local and national bodies at the regional level. 2.05 Regionalization required Ministries to establish regional offices with adequate powers to act over a wide range of administrative matters designed to improve public services. Regionalization was also designed to make the regions focal points for planning and development and to encourage identification of projects at the local level for incorporation into national programs. In 1976, a system of regional budgeting was instituted to provide a link with regional planning. It provided that regional offices develop their budgets to conform with RDC priorities, and that the Ministry of the Budget (MB) advise the RDC of budgetary releases to regional offices. The RDCs were strengthened in 1977 and 1978 when additional budgetary and administrative powers were transferred to them. 2.06 A major political innovation in 1978 was the adoption of regional representation in the national lawmaking body, the Batasang Pambansa. /1 Current RDC membership comprises provincial governors; chartered city mayors; assemblymen; regional directors of the Ministries of Agrarian Reform, Agriculture, Education, Health, Human Settlements, Labor, Local Government, Public Works and Highways, and Social Services; President of the Barangay Captains- Association; Commander of the Philippine Constabulary; General Managers of regionally located development authorities; and a NEDA representative. A smaller Executive Committee deals with operational aspects of regional planning and budgeting. RDC membership reflects the Board composition of NEDA Central. /2 Subsequently, in 1981, the judiciary was reorganized into 13 regional courts under the Judiciary Reorganization Act of 1980.  - 7 - Representatives sit on the RDCs as invited members. Subsequently, the Sangguniang Pampook or Regional Assembly, and the Lupong Tagapagpaganap ng Pook or Regional Executive Council, were created in the newly declared "autonomous" Regions IX and XII in deference to their special ethnic and religious characteristics. The Assemblies are designed to exercise legis- lative power and the Executive Councils act as the executive arm of regional Government. The two Councils were merged in 1982. The administrative structure in the two "autonomous" regions, and the emergence of the National Capital Region, based on the older Metropolitan Manila Commission, indicated by their respective statutes some characteristics of local governments including the power to tax. Present Situation 2.07 At present, there are 15 ministries /1 with ministry-wide regional offices. An additional four ministries /2 havTebureau-wide regional offices. Two others /3 have partial regional representation. Surveys in 1975, 1977, 1978, and 1981, administered by PCR, have indicated that "regionalization" is interpreted differently in the various ministries and that stipulated administrative powers have not been fully delegated in most cases. The Government is urging that the designated powers be fully delegated, and that additional administrative powers for the regional directors be implemented during 1983, including more direct budgeting, contracting, accounting, and staff control. 2.08 The Ministry of Budget (MB) has been requiring ministries to identify their programs on a regional basis. In 1977, MB initiated regional budget hearings wherein regional offices of national government agencies presented their proposals together with RDC comments. Currently, about 30 percent of the national budget is designated for regionally formulated expenditure. Planning and Development 2.09 With assistance from a Bank-executed UNDP-financed technical assistance project,/4 the NEDA produced in 1977 the first national and /1 Agrarian Reform; Agriculture; Budget and Management; Education, Culture and Sports; Health; Human Settlements; Labor; Local Government; Media Affairs; National Defense; NEDA; National Science-and Technology Authority; Public Works and Highways; Social Services and Development; and Trade and Industry. /2 Finance, Justice, Natural Resources, Transportation and Communications. /3 Tourism and Muslim Affairs. /4 NEDA-UNDP/IBRD Technical Assistance Project on Regional Planning and Development, 1975-present.  regional five-year, 10-year and year 2000 development plans. The Government and the Bank agreed in 1977, to formulate a regional development program for the Central Visayas (Region VII). As a result, Region VII became a pioneer area for regional development. In line with methodology stipulated in the five-year plan, an area development strategy was adopted to formulate a Regional Development Investment Program (RDIP) (Annex 1) which could be replicated in other regions. The in-country work was supported by a Bank mission in 1978 which set guidelinies for the first Bank-supported regional project in the Philippines./l 2.10 As a result of the successful experimental preparation of a RDIP in Region VII, which became the basis for the Central Visayas regional project, the President instructed the other regions to prepare similar programs./2 NEDA, in collaborationl with the RDCs, began preparation of the other RD1Ps during the latter half of 1978 as a means of translating the five-year regional development plans into projects. Draft RDIPs were completed for all 12 regions by thes end of 1980. They are to serve as the basis for public sector resource a:Llocations to the regions, and all development activities of the national government, semi-government bodies, and local governments are to be made consistent with them. 2.11 The regional five-year pLans were revised in 1982 for the second five-year period (1983-87). The RDIPs are currently being updated and will become the basis of future regionaL projects as well as the basis for regional budgeting which is being introduced by MB. In 1981, under a joint NEDA/MB instruction, Annual Investment Programs (AIPs) were defined for each region. After RDC approval, the A[Ps were submitted to NEDA central for consolidation, and to MB for integration into the national budget. RDIP projects can be submitted for external funding by the Development Budget Coordinating Committee of MB, as is the case for Central Visayas. 2.12 Despite the progress noted above, the RDCs remain limited in their influence over regional development as they have no supervisory authority over the regional offices of line agencies, local governments or statutory bodies operating in the regions, such as the National Council on Integrated Area Development (NACIAD), nor do they have substantial budget resources of their own to fund projects. They do, however, receive small allocations from the Regional Development Fund - a line item in the national budget which so far has not received significant funding. At the present time, the Government is considering a linkage between the RDCs and NEDA with the Prime /1 The Philippines: A development strategy and investment priorities for the Central Visayas (Region VII). Two volumes. World Bank Report No. 2264-PH. January 4, 1979. /2 Adopting the Regional Development Investment Program as the implementing framework of the Five-Year Regional Development Plan. Presidential Executive Order No. 589. April 19, 1980.  - 9 - Minister's Office, created after the 1978 national election, through a Council of RDC Chairmen. They would be redesignated as Regional Commissioners or Administrators with enhanced powers, to be jointly respon- sible for overall coordination of regional planning and development. The alliance would also incorporate NACIAD which transferred to the Prime Minister's Office during 1982. Central Visayas (Region VII) 2.13 The Central Visayas Region comprises the island provinces of Cebu, Bohol, Siquijor, Negros Oriental (eastern Negros) and a number of smaller, minor islands (Map #17219). The Region has a limited agricultural potential due mainly to its rugged and inaccessible topography, but possesses exten- sive mineral reserves (Annex 2): 27% of the nation's copper, substantial deposits of limestone and clay suitable for cement, and coal. The Region accounts for only 6% of the total national gross value added in agriculture (including fisheries and forestry), but 26% of the gross value added in mining and quarrying. Agriculture's share of gross regional product (GRP) has dropped from 25% in 1978 to 20% in 1980, while the industrial sector's share has increased from 30% of GRP in 1978 to 34% in 1980. The share of GRP contributed by services has remained static at around 45%. 2.14 Over the years, the pattern of land use in the Central Visayas has been characterized by insecurity of tenure which leads to short-term, low-cost production strategies, and inequities due to conflicting policies of government agencies regarding land allocations for fish ponds, grazing and logging. In turn, this has led to deterioration of the natural resource base and perpetuated poverty for thousands of settlers on forest land, uplands, and nearshore areas - constituting 46% of the Region's area. 2.15 The Region has pioneered a land stewardship program under which leases are granted to present land occupants. Stewardship contracts provide settlers with security of tenure, for 25 years extendable to 50, on condi- tion of compliance with a resource management plan, which would be evaluated periodically. To support the stewardship policy, larger scale concessions on public lands within the Region for fish ponding, timber cutting and grazing have become more difficult to obtain. 2.16 The concept of land stewardship for the occupants of public lands was developed during the preparation of the proposed project. It builds on the existing forest occupancy management program, and received so much favorable attention at the national level that the President ordered a national stewardship program. The regional office of the Bureau of Forest Development (RBFD) has drafted an administrative order for issuing stewardship contracts, as part of the Region's innovative "Integrated Social Forestry Program."  - 10 - 2.17 The Bank's review of poverty in the Philippines /1 identified the Region as the second poorest (after Region X - Northern Mindanao) having an average poverty incidence /2 of almost 60% in 1975, with urban poverty at 52.5% and rural at 62.6%, compared with 45%, 40% and 47.5%, respectively, for the country as a whole. The Region ranks among the poorest in the Philippines in terms of per capita distribution of arable land and agricul- tural productivity. For these reasons the Region was chosen in 1977 by the national Government for implementation of the nation's first regional project. Northern Mindanao has been nominated as the second. III. THE PROJECT A. Preparation 3.01 The Central Visayas Regional Project (CVRP) was conceived origi- nally as a single, multi-sectoral investment program in support of the RDIP. In early 1981, it was agreed that the project should be processed as two separate, but related, rural and urban projects. Technical preparation of the rural project began in 1981 following the creation of the Central Visayas Urban and Rural Project Office,/3 the first region-based project preparation unit to be established in the Philippines. 3.02 The preparation of the rural project continued from mid-1981 through 1982, when a report /4 was presented to the Bank. Preparation was financed in part by a US$500,000 Project Preparation Facility (PPF) advance (PO36-PH) from the Bank. A work plan for pre-implementation, between appraisal and loan effectiveness, is being financed in part from a second PPF advance (P055-PH) of US$500,000. Preparation of the urban project is being funded in part from a US$8 million Engineering Loan (Ln 2067-PH) and appraisal is scheduled later in 1983. /1 Aspects of poverty in the Philippines: A Review and Assessment. World Bank Report No. 2984-PH. December 1, 1980. /2 Poverty incidence was measured against poverty lines based on the 1975 family income and expenditure survey: rural poverty line at e 827 per capita, and urban poverty line at P 1,103 per capita. /3 Presidential Executive Order No. 694 creating the Central Visayas Urban and Rural Projects Office and providing funds thereon, May 21, 1981. /4 Philippines: Central Visayas Resource Management Project. Project Preparation Report. Four Volumes. CVRPO. September 9, 1982 (Project Working Paper No. 10).  - 11 - 3.03 Preparation of the rural project was assisted by three FAO/IBRD Cooperative Program missions which visited the Region in January/February and June/July, 1981 and May/June, 1982. The project's lengthy preparation period can be attributed to the innovative nature of the work, the lack of project preparation capability in the Region which had to be developed from scratch, and the slow resolution of disagreements among regional and national entities as to what should constitute the "regional project." 3.04 Initially, the rural project was to be region-wide, benefiting each municipality (Annex 1). However, it became apparent that resources which could realistically be mobilized were not sufficient to support a region-wide program. Regional needs were scrutinized and a modified and curtailed area approach was adopted focused on the watershed, i.e. on small farmers, particularly forest and upland occupants, and nearshore fishermen in distinct units. 3.05 The original project proposal covered 12 watershed sites in the four provinces of Cebu, Negros Oriental, Bohol and Siquijor. The sites had a total area of 265,000 ha and a population of 400,000 with implementation scheduled over six years. Owing to budgetary constraints and the realization that the proposed new procedures for regional development need testing, the Government reduced the initial project to five sites. However, the Government has requested that the remaining seven sites be considered in a subsequent project after the first has been evaluated. 3.06 The revised project is based on the following principles: (a) a burgeoning population's demand for food and raw materials has outpaced the ability of the soil, forest and marine habitats to regenerate their productive capacities; the system needs to be changed from exploitive to self-regenerative and the project's production models have been developed accordingly; (b) the maintenance of sustained yields over time requires that producers have secure tenure over their production units. The project's concepts of 50-year stewardship contracts and smallholder forest operations are designed to meet this requirement; and (c) resource management practices and their delivery must be respon- sive to the socioeconomic needs of project participants and appropriate to the biophysical conditions of the sites. To achieve integration at the farm level, and because the Region has a limited agricultural resource base, but a substantial forestry and fisheries potential, the watershed was chosen as the planning unit rather than the municipality. The project is to be managed by units located on the sites, easily accessible to participants, and responsive to local needs and priorities.  - 12 - B. Objectives 3.07 The project, on a pilot scale, addresses the two most important rural problems in the Region: declining productivity in upland and near- shore areas due to continuing environmental degradation, and the associated poverty of the rural population. It is intended to demonstrate "replica- bility" for adoption elsewhere in Region VII, and in other Regions. Strengthening the resource management capabilities of both Government and small farmers and fishermen would be part of the first phase of a long-term regional development program which aims to develop institutional capability for project development and management. 3.08 Specifically, over a five-year invastment period beginning in FY84, the project would: (a) raise the incomes and living standards of poor, small-scale producers in project areas, particularly upland farmers and artisanal fishermen; (b) improve the management of the forest, upland, and nearshore habitats in these areas, both by arresting the rapid degradation of the environment and augmienting the resource base; and (c) reinforce the Government's regionalization program, set out in the IRP (para. 2.02), to ensure greater administrative and budgetary autonomy for the Region, direct and timely flow of development funds, maximum financial accountability by project managers and staff, and maximum participation by local officials and beneficiaries. 3.09 The project would improve the tenure status of upland occupants, facilitate construction of upland conservation works and upgrade agrofores- try, agricultural, livestock and fisheries production systems. Access roads and trails would be constructed or upgraded. Support institutions would be strengthened and the project would fund specialized training, technical assistance and research in support of the production activities, and prepar- ation activities for future projects. C. Detailed Features 3.10 The project would be implemented in five sites (Map #17031), consisting of watershed managment programs in each of four provinces and a social forestry site in Negros Oriental Province. The sites involve a total land area of 140,000 ha, a coastline of 200 km and a population of about 200,000 (Annex 2). Project sites were selected according to provincial development priorities, relative poverty of inhabitants, degree of ecologi- cal degradation, development opportunities including public land availabil- ity, and attitudes of the people toward development.  - 13 - Watershed Management (US$20.4 million) Upland Agriculture 3.11 The component is designed to develop and manage four watersheds/i and create within the Region the institutional capability to plan and develop others. A major goal is to assist upland farmers in a transforma- tion from shifting cultivation of annual crops which causes serious soil erosion to stable systems utilizing perennials, livestock and reduced annual cropping by offering them security of tenure over their land. 3.12 Farm systems would be introduced to control soil erosion, increase soil water retention, boost soil fertility, intensify land use, increase perennial and annual crop production, and increase livestock production. Planting materials and livestock would be the main investment items but hand tools and small quantities of agricultural chemicals would be included (Annex 8 - Working Paper No. 8, Table 1, and Working Paper No. 1). 3.13 Nurseries established under the project would supply planting material for appropriate and profitable crops which fit the overall water- shed management approach. Perennial tree crops such as ipil-ipil, mango, jackfruit, cashewnut, and avocado would be promoted. Planting material would be provided as payment in-kind for soil conservation and replanting work according to farm development plans conceived with, and supervised by, project technical staff. Farmers would also be paid in-kind by the provi- sion of young cattle and goats once adequate shelter and fodder reserves have been established. About 11,600 cattle and goats would be distributed under the project. As the value of the in-kind payments is equivalent to the economic value of the work undertaken, there is no implied subsidy to farmers. 3.14 Management units would be established at each site including buildings, equipment, vehicles, staff, travel, materials, maintenance, consultancies and contracts (Annex 8 - Working Paper No. 8, Table 2). Each unit would include 4 to 5 ha for buildings, a plant nursery and stock holding facilities. Social Forestry 3.15 The social forestry site is under government control and had a stable population of approximately 450 occupant families before the timber license agreement was cancelled in 1979, when approximately 750 slash-and- burn farmers (kaingin) entered the forest and claimed land. Further incursions have occurred subsequently. The influx has resulted in the denudation of forests areas and reforestation blocks. Illegal forest occupants are destroying logged-over areas which are drier and burn readily. /1 Watershed is defined as the river system, from its land source to its sea outlet.  - 14 - 3.16 A timber evaluation study of the site showed that about 750 ha of virgin forest and 8,000 ha of logged-over area remain and need to be main- tained, although an additional 7,153 ha have already been converted to open cogon grassland. The soils are relatively shallow, derived from volcanic and sedimentary rocks. Occupants farm small plots, and gather secondary products from the remaining forest. They are poor and social unr est has been a growing problem since the late 1970s. 3.17 The main constraint to forest recovery in the open land is the intentional or careless burning of young trees by forest occupants to open up land to meet their subsistence needs. In the past, RBFD has used guards to dislodge the slash-and-burn intruders from logged-over areas thus reducing fire destruction of reforested areas but this practice incurred the wrath of displaced settlers and is no longer being practiced actively. 3.18 The objective of the social forestry component is to improve liv- ing conditions for poor families occupying government timber land by creat- ing employment and increasing incomes, and to conserve forests by reducing destruction of logged-over forests and implementing reforestation to prevent erosion under land stewardship agreements with Government which offer the settlers security of tenure over their land. The forestry component has two main activities: forest stand improvement and reforestation. The first would be implemented on the logged-over forest ar-ea of about 8,000 ha which is beginning to regenerate. The reforestation program would be executed on about 8,000 ha of grass, brush and cultivated area: about 5,000 ha for reforestation and the balance for subsistence cropping. 3.19 Forest Stand Improvement (FSI). The cutting of virgin forest has resulted in the rapid growth of weeds, vines and other minor vegetation which hamper the growth and development of seedlings and young trees. FSI involves the thinning of crowded young trees and the cutting of defective or deformed trees; the cut wood is used for firewood, lumber and posts. Under the project, forest stewardship groups, comprised of reforestation partici- pants, would guard against intrusion into the logged-over areas. The groups would be allocated an area for FSI operations as follows: 8 ha per family to be worked in stages (1.6 ha annually over five years). Cut wood would be processed into firewood, lumber and posts by hand tools and sold, providing an additional incentive for settlers to join the program. In addition to providing income to project participants, thinning would encourage healthy wood growth. 3.20 Reforestation. Each farmer would be allocated 5 ha of open cogon grassland and participants would be organized into forest stewardship groups; each participant would be granted a stewardship contract over his land. A total area of 5,000 ha of open cogon land would be developed. Con- tract planting using individual family labor, and community tree farming using communal labor, would be utilized. The project would support invest- ments in seedlings, fertilizer, herbicides, tools and fire prevention equipment (Annex 8 - Working Paper No. 8, Table 3, and Working Paper No. 2).  - 15 - 3.21 A management unit would be established in the social forestry site including investments in buildings, vehicles, equipment (including that for fire prevention) and materials. Provision would be made for staff salaries and allowances, and maintenance. A tree nursery would also be established to service the project (Annex 8 - Working Paper No. 8, Tables 4 and 5). The unit would provide seedlings and materials. Under community tree farming, the trees planted would belong to the farmers and maintenance would be their responsibility. Under the reforestation scheme, intercropping of annuals would be encouraged. The income from planted trees and intercropping would be an incentive to the occupants to prevent fire. 3.22 Under family contract planting, trees would belong to the Govern- ment and the management unit would pay wages to the occupants based on the number of seedlings which survive. Responsibility for fire prevention would rest with participating farmers, i.e., if young trees were burned, the SMU would recover their cost, so participants would have an incentive to main- tain planted seedlings. Planting payment would be made as follows: 70% of the labor cost in each year would be paid at planting and 30% would be paid approximately nine months after planting. Both payments would be based on the number of trees surviving. Nearshore Fisheries 3.23 The nearshore fisheries component comprises: (a) establishment, and allocation of user rights to cooperating families, of a system of artificial reefs, the technology for which has already been tested in the Region, in the waters adjacent to three upland agriculture sites in Cebu, Siquijor and Bohol Provinces and the forestry site in Negros Oriental; (b) replanting of mangroves, in areas where they have been cleared, and allocating use rights to the replanted areas, at the four sites; and (c) establishment of coral reef sanctuaries in the four sites. 3.24 The four sites have an aggregate coastline of about 200 km with 150 km of fringing reefs, 10,000 ha of mangrove and about 8,000 fishing households. Some 7,000 bancas (fishing boats), of which 1,570 (22%) are motorized, operate in the project areas. 3.25 Artificial Reefs. The project would establish artificial reefs over 114 km in the four sites. Use rights would be conferred on full-time municipal fishermen, preferably the poorer ones, those without motorized bancas. Families would be assisted in the siting and construction of reef production units so that four families would benefit from each km of artificial reef. The project would provide reef construction materials, a  - 16 - nonmotorized barge suitable for transporting artificial reef modules from the beach assembly point to placement locations, a motorized banca with fuel for towing the barge, construction tools and staff to assist with construc- tion (Annex 8 - Working Paper No. 8, Table 6, and Working Paper No. 3). Each participating family would provide additional labor for establishment and carry a share of the expense of reef replacement which could begin in the fifth year after placement. Each site and beneficiary would be registered with the local municipality under a renewable permit system similar to that used for stationary fish cages. Permit renewal would depend on the participant restoring his part of the reef. 3.26 Mangrove Replanting. About 650 ha in the four sites would be divided into 2 ha blocks and leased by the Regional Office of the Bureau of Forest Development (RBFD) under stewardship contract to families responsible for mangrove replanting. They would 'be paid for their labor and be granted user rights as incentives to join the program. Again, preference would be given to full-time fishermen without motorized bancas. Mangrove replanting by families would be supervised by the community development workers according to block plans worked out with each family. The project would include seed collection from existing mangrove areas to provide seedlings for replanting. 3.27 Reef Sanctuaries. In conjunction with artificial reef development and mangrove replanting, the coastal population would be educated on the importance of healthy reefs and mangrove stands in restoring and maintaining fish production. After the above programs had been established, probably by the fourth year of the project, local people would be assisted to identify and establish sanctuary areas in cooperation with municipal authorities. The project would provide reef marker buoys, anchor wraps and anchors and assist in their placement (Annex 8 - lWorking Paper No. 8, Table 6). 3.28 Subsite management units would be established at the four coastal sites, including investments in buildings, equipment, vehicles, staff, supplies and maintenance (Annex 8 - Working Paper No. 8, Table 7). Infrastructure 3.29 In order to provide adequate access to the project sites and to service the upland agriculture, forestry, and nearshore areas scheduled for development, the project would support investments in rural roads and trails (Annex 8 - Working Paper No. 8, Table 8, and Working Paper No. 4). The rural roads component (Maps #17032 and #17033) of the project includes: (a) construction of about 97 km of new barangay (village) roads and the improvement of about 125 km of existing roads under local contracts; grading of about 475 km of trails under piecework contract in the five project sites including the nearshore locations; and maintenance of all project roads, including spot improvement, under force account or contract depending on local conditions;  - 1 7 - (b) the procurement of equipment, vehicles, materials, and supplies for the improvement and maintenance of barangay roads; and (c) appointment of consultants to assist with route survey, the preparation of detailed design, and road construction supervision. 3.30 Barangay Roads. The project roads would have gravel surfaced pavement for the operation of medium-sized trucks and light utility vehi- cles. The geometric design standards would be similar to those prescribed for the Rural Roads Improvement Project (Loan 1860-PH). For the improve- ment of existing roads, the subgrade would be reformed to the original level and adequately compacted prior to the placement of the gravel surface. Embankment materials for new roads and sections of roads to be improved would be obtained from adjacent cuts or from suitable borrow pits. Minor drainage structures would consist of single or multiple reinforced concrete pipe culverts. Crossings over major rivers and streams would be on 4 m wide reinforced concrete deck girder bridges of standard spans. The major drainage structures and bridges would have a free-board of 1 m above the estimated maximum flood water level (within the last 10 years), and would be designed and built to comply with MPWH specifications. 3.31 Graded Trails. The project trails would facilitate access from remote farms and agroforestry areas to roadsides and market centers. They would be used by animal drawn carts and sleds for hauling agricultural produce and for moving timber to sawmills. The trails would have a minimum width of 1.50 m with widened sections of 3.00 m at about 50 m intervals to allow for passing. Density would be about 1.5 to 2.0 km per 100 ha of agroforestry area. 3.32 Status of Engineering. Road planning, preliminary design studies and cost estimates were prepared by CVRPO, the Provincial Engineers' Offices and Provincial Development Staff assisted by the FAO/World Bank Cooperative Program. The project roads were identified and checked in the field in consultation with prospective users and were classified into three groups based on terrain conditions: flat, rolling and mountainous. The following criteria were used for road evaluation and selection: (a) project roads would provide access to roads of equal or better standard and would not be less than 2 km in length; (b) proposed roads would conform with the provincial road development program and their service area would not overlap with those of existing or other planned roads; and (c) project roads would serve a minimum of two barangays and a total population of 100 or more per km.  - 18 - Support Services (US$7.1 million) Institution Strengthening 3.33 As part of the support services component of the project, three existing regional offices of two Ministries would be strengthened and one new regional project management office would be established. The Regional Office of the Ministry of Agriculture (RMA) would provide soil and livestock services; the Ministry of Natural Resources' (MNR) Regional Office of the Bureau of Forest Development (RBFD) would contribute off-farm reforestation and general regulatory services; and MNR's Regional Office of the Bureau of Fisheries and Aquatic R7esources (RBFAR) would stregthen its regulatory services to control illegal fishing. A new Regional Projects Office (RPO) would be established to manage the project overall. 3.34 The Regional Office of the Ministry of Agriculture (RMA). Both off-farm and on-farm soil conservation works, designed to stabilize erosion-prone areas of the watershed,, would include gully check dams made of stones and earth, and banks planted to permanent vegetative cover. Their construction would be the responsibility of the management units with technical assistance from RMA. 3.35 On-farm works would consist of contouring, including ditches and bunds, the planting of erosion control vegetation and construction of small check dams to reduce water flow according to farm development plans prepared in collaboration with the farmers and the management units. RMA would be provided funds for buildings and civil works, vehicles, equipment, staff, travel and soil survey materials and operations to strengthen the service (Annex 8 - Working Paper No. 8, Table 9). 3.36 In order to provide livestock, cattle and goats, required under the project, the Ministry's Ubay sto,ck farm on Bohol Island and the goat breeding station at Siaton, Negros Oriental Province would be upgraded by the provision of buildings, utilities, equipment, vehicles, pasture, fencing, yards, supplies and stock (Annex 8 - Working Paper No. 8, Table 10). 3.37 The Regional Office of the Bureau of Forest Development (RBFD) - particularly its planning, regulatory and reforestation services - would be strengthened to participate in the social forestry component of the project and to develop additional social forestry programs in the Region. It would be provided funds to reforest land in the watersheds not required fcr forestry or agricultural production. Additional staff, specialized buildings, equipment, vehicles, and related expenditures would be provided under the project (Annex 8 - Working Paper No. 8, Table 11). RBFD would also be provided with five forest guards and motorized bancas to patrol the 5,000 ha of mangrove wilderness and forest swamp preserve in northern Bohol. Part of the above reforestation fund would be utilized for tree planting within the mangrove preserves.  - 19 - 3.38 The Regional Office of the Bureau of Fisheries and Aquatic Resources (RBFAR) - particularly its regulatory services - would be strengthened to control illegal fishing in the region. The office would be provided equip- ment, staff, fuel oil and travel funds under the project to upgrade the service (Annex 8 - Working Paper No. 8, Table 12). 3.39 A Regional Projects Office (RPO) has been established within the Region, under the Prime Minister, to coordinate implementation of the project. It is a new office and would be provided with staff, office equipment and vehicles (Annex 8 - Working Paper No. 8, Table 12). No permanent building is envisaged at the outset and office space would be rented. Training and Technical Assistance 3.40 The training and technical assistance component would address two related needs within the Region. First, there is a shortage of skilled personnel qualified to implement watershed management activities; land occupants also lack the knowledge and skills needed to adopt and practice the innovative technology proposed. Second, facilities for training are inadequate to accommodate project requirements. 3.41 The objectives of the training and technical assistance component are to: improve the skills of project staff, farmers and fishermen, and related line agency personnel; strengthen regional training facilities; provide technical assistance and training from outside the Region as needed, and generate additional data from special studies as required to enhance project performance. 3.42 Training would cover 22 courses dealing with all aspects of the project, since it is a major new undertaking, including 9 for project staff and participants, and 13 for related line agency personnel. Study tours and fellowships would be provided to complement project-funded training. A total of 12 local study tours tours and 32 fellowships would be offered in 11 subjects (Annex 3, Table 1). Consultancies would be provided to assist project and line agency staff implement the project. The project would fund about 27 staff-years of consultant time covering all aspects of the work since it is the country's first regional project, about one third of which would come from overseas (Annex 3, Table 2), comprising studies on management, agriculture including credit, forestry, fisheries, communal irrigation, socioeconomics, and training materials development (Annex 8 - Working Paper No. 8, Tables 13, 14 and 15). Research 3.43 The project would support applied research aimed at improving low-input farming systems for the slopes and uplands of the Region. Funds would be provided to RMA to conduct on-farm trials in the project sites. The Ministry's research focus would be on upland farm systems, including  - 20 - annual and perennial crops and livest:ock, and the program would be integrated with research by the Farm Systems and Soil Research Institute of the University of the Philippines at Los Banos which is active in the Region. Funds would also be providedl RMA to establish an upland research station and to complement the Ministry's lowland research facilities on Bohol Island which are being upgraded under another Bank-supported project (Ln. 2040-PH: Agricultural Support Services). Forestry research would be strengthened by funding an expanded program by the Regional Office of the Forest Research Institute (RFORI) (Annex 8 - Working Paper No. 8, Tables 16 and 17). Project Preparation (US$6.7 million) 3.44 The proposed loan would include repayment of two advances from the Bank's Project Preparation Facility (PPF), which partly funded the prepara- tion and preimplementation of the project. Additional funds would be pro- vided to assist preparation of other regional projects including a possible second phase of the proposed project,, and for preimplementation of the second Central Visayas Regional Project (Urban) due for appraisal in FY84 (Annex 8 - Working Paper No. 8, Table 18). IV. PROJECT COST AND FINANCING Cost Estimates 4.01 Total project cost is estirmated at US$44.4 million, of which US$21.0 million would be in foreign exchange (Table 4.1), and including taxes and duties representing about US$1.8 million equivalent (Annex 5, Table 1). Expected price increases over the project period amount to about 25% of total base costs plus physica:lL contingencies; project costs reflect price estimates at the date of loan negotiations (third quarter 1983). Inflation of local costs was estimated at 12.0% for 1984, 8.0% for 1985, and 7% through 1990; inflation of foreign exchange costs was estimated at 7.5% for 1984, 7% for 1985 and 6% thereafter. Physical contingencies, at 5% of base cost for buildings and 10% for equipment and civil works, have been applied but not for on-farm development costs as these are based on actual farming costs. Consultancies (US$1.4 million excluding contingencies), including about 8 staff-years of overseas and 19 istaff-years of local consultancies, are required to implemaent the project and are estimated to cost on average about US$10,000 (including international travel and subsistence) and US$1,700 per month, respectively. Detailed project costs are provided in Project Working Paper No. 8 (Annex 8). Financing 4.02 The proposed Bank loan of US$25.6 million, including the capita- lized front-end fee of US$0.1 million would contribute 60% of total project  - 21 - Table 4.1: PROJECT COST SUMMARY % of Local Foreign Total Local Foreign Total foreign --- (P million) --- -- (US$ million) -- exchange Water shed Management Upland agriculture 63.9 11.9 75.8 4.6 0.8 5.4 15.7 Social forestry 37.3 8.5 45.8 2.7 0.6 3.3 18.6 Nearshore fisheries 11.3 4.8 16.1 0.8 0.3 1.1 29.9 Infrastructure 50.7 97.7 148.4 3.6 7.0 10.6 65.8 Subtotal Watershed Management 163.2 122.9 286.1 11.7 8.7 20.4 42.6 Support Services Institution strengthening Ministry of Agriculture Soil services 6.0 2.5 8.5 0.4 0.2 0.6 29.9 Livestock dispersal 11.5 7.3 18.8 0.8 0.5 1.3 38.7 Ministry of Natural Resources 12.5 2.1 14.6 0.9 0.1 1.0 14.3 RBFD 0.3 0.1 0.4 0.1 0.1 0.2 19.3 RBFAR 7.4 2.9 10.3 0.5 0.2 0.7 28.4 Regional Projects Office Training 4.1 2.4 6.5 0.3 0.2 0.5 37.1 Technical assistance 8.6 11.7 20.3 0.6 0.8 1.4 57.6 Research 13.7 5.5 19.2 1.0 0.4 1.4 28.5 Subtotal Support Services 64.1 34.5 98.6 4.6 2.5 7.1 35.0 Project preparation 14.9 78.3 93.2 1.1 5.6 6.7 84.0 Total Baseline 242.2 235.7 477.9 17.3 16.8 34.1 49.3 Physical contingencies 6.4 12.6 19.0 0.5 0.9 1.4 66.7 Price contingencies 78.8 44.6 123.4 5.6 3.2 8.8 36.2 Total Project 327.4 292.9 620.3 23.4 20.9 44.3 47.2 Front-end Fee on Bank loan /a - 0.9 0.9 - 0.1 0.1 100.0 Total Financing Required /b 327.4 293.8 621.2 23.4 21.0 44.4 47.3 /a Bank loan of US$25.6 million. /b Figures rounded to nearest US$100,000.  - 22 - cost, excluding taxes, and cover the total foreign exchange cost of US$21.0 million plus local costs equivalent to US$4.6 million (Table 4.2). The remaining US$18.8 million would be provided by Government. The partial coverage of local costs by Bank lending is designed to assist the Government at a time of overall budgetary stringency. 4.03 Because of Government's current budgetary constraints, an assurance was obtained at negotiations that the Government (MB) has sufficient funds to begin implementation of the project in 1984. Annual recurrent costs, subsequent to the project and for which the Government would be entirely responsible after the fifth year, approximate US$3.3 million, inclusive of contingencies. Procurement 4.04 Attachment 1 gives an overview of procurement arrangements for the various project inputs. Construction equipment for the PEOs to be utilized for road improvement and maintenance (US$0.9 million) and vehicles (US$0.6 million) would be bulked where suitable and purchased through international competitive bidding (ICB) in accordance with Bank guidelines. Eligible domestic manufacturers would receive a preference of 15% of the c.i.f. price of the imported goods, or the import duty, whichever is lower. The Provincial Engineers' Offices (PEOs) would prepare the appropriate specifications and bidding documents for the construction equipment, and the RPO would prepare documents for the vehicles. 4.05 Equipment (mostly hand tools) for on-site development of farming, forestry and nearshore fisheries (US$1.4 million) as well as planting materials, fertilizers, chemicals, and other materials (US$4.4 million) would be purchased through local competitive bidding (1CB) in accordance with procedures satisfactory to the Bank; foreign suppliers are well represented in the country and would be eligible to participate. Other equipment costing less than US$10,000 per lot but not more than US$150,000 in total would be purchased by prudent shopping based on three price quotations. 4.06 Contracts for construction of new secondary roads, trails and stock farm works (US$8.2 million) and civil works contracts for the construction of buildings (US$1.4 million) would be awarded under LCB, because the small size and dispersed location of the works would render them unsuiltable for ICB; however, foreign contractors would not be precluded from bidding. 4.07 The improvement and maintenance of roads and watershed rehabili- tation works would be carried out by, force account because of the remote terrain, and consequently the problem of attracting contractors to the upland sites. The construction of artificial reefs and nearshore works would also be carried out by force account to ensure proper implementation of the relatively new technologies. Work carried out under force account would be limited to an aggregate amc,unt of US$500,000. Construction materials and supplies would be procured through normal commercial channels.  - 23 - Table 4.2: PROJECT FINANCING BY ACTIVITY /a (US$ million) Government IBRD Total Activity Amount x Amount % amount Civil works and buildings 2.3 20 8.8 80 11.1 Equipment and vehicles 0.4 10 2.8 90 3.2 Production inputs, livestock and materials 0.7 10 6.0 90 6.7 Salaries and allowances 8.3 100 - - 8.3 Travel, maintenance and office supplies 4.3 100 - - 4.3 Training and technical assistance 1.2 40 1.9 bO 3.1 Project preparation /b 1.6 20 6.0 80 7.6 Front-end fee - - 0.1 100 0.1 Total 18.8 42 25.6 58 44.4 /a Inclusive of price and physical contingencies. /b Including repayment of two advances from the Project Preparation Facility totaling US$1.1 million with interest.  - 24 4.08 Livestock purchases (US$1.7 million) wou:Ld be procured by direct purchase from local ranchers at prices agreed on by a review committee comprising a representative from project management, RMA and the farmers. 4.09 Overseas consultants for technical assistance would be contracted according to Bank guidelines. 4.10 Contract Review. All bidding packages for goods and civil works over US$100,000 would be subject to prior review by the Bank (Attachment 1). This would result in coverage of about 68% of amount of goods, and 75% of civil works procurement. The balance of contracts would be subject to random post reviews by Bank staff after contract award. Disbursement 4.11 Disbursements from the loan would cover: (a) 80% of civil works expenditures (US$8.8 million); (b) 100% of foreign expenditures for vehicles, construction equip- ment, production inputs and materials; 100% of local expenditures when locally manufactured (ex-factory); and 70% of other local expenditures (US$8.8 million); (c) 100% of foreign or 80% of local expenditures for consultants, technical assistance, and overseas training (US$1.9 million); (d) 100% of foreign or 80% of local expenditures for CVRP II (Urban) and other regional project preparation activities (US$4.9 million); (e) refinancing of CVRP Project Preparation Facility advances (US$1.1 million); and (f) the front-end fee (US$0.1 million). 4.12 Disbursements for civil works carried out by force account and for locally purchased items costing less than US$10,000 under (b) above would be made against statements of expenditure. Disbursernents for other expendi- tures would be made against full documentation. All statements of expendi- ture would be certified by the Project Manager and Financial Controller. Supporting documents would be retaine!d in the RPO and made available for review by Bank supervision missions. 4.13 A schedule of estimated disbursements is presented in Annex 4. This is based on a six year disbursement period. Area development projects have been slower to disburse (9 years) but the project has been reduced in scope to pilot scale covering only five watersheds (para. 3.05); it is anticipated that the other seven watersheds will constitute a second phase. Further, the design of the proposed project departs significantly from earlier models to speed implementation. For example, the project has been  - 25 - given a strong preimplementation phase utilizing the PPF; it is nonintegrated in that no component is dependent on any other; it has been provided with direct funding and simplified management; and the technologies are known in the Region. The investment schedule is presented in Annex 5. Accounts and Audit 4.14 Consolidated project accounts would be maintained by the Financial Controller in the RPO and be audited annually in line with established practice for all Bank-assisted projects in the Philippines. The Controller would also supervise accountants at each site unit and help train local personnel in project procedures. Accounting experience at the regional and provincial level is not extensive although both provincial and regional offices have budget, accounting and audit staff. Nevertheless, the scale of the proposed project is sufficiently large, and the accounting requirements for statements of expenditure (SOE) are sufficiently rigorous, to require accounting training. Therefore, the terms of reference for the Financial Controller at the RPO would include establishment of an SOE accounting system, acceptable to the Bank, immediately following his appointment. 4.15 The Financial Controller would submit through the Project Manager certified copies of the audited accounts and auditors' reports to the Bank no later than six months after the end of the Philippine fiscal year. The audit report should certify that funds disbursed against SOE had been used for the purpose for which they were provided. Assurances were obtained at negotia- tions that RPO would appoint a Project Financial Controller by May 31, 1984 who would follow the above accounting and auditing procedures and who would forward to the Bank by June 30 each year, beginning in 1985, the project accounts and auditors' reports for the Philippine fiscal year. 4.16 A revolving fund of up to $2.0 million would be established within the Central Bank to expedite disbursements and help overcome current budgetary constraints. The fund would cover all categories of expenditures to be financed under the loan. It is a condition of loan effectiveness that the revolving fund be established as a Special Account within the Central Bank under the name of the Central Visayas Regional Project. V. ORGANIZATION AND MANAGEMENT 5.01 CVRP is the first major foreign-funded project in the Philippines supporting regionalization. The project is innovative in nature as it pro- poses fiscal and administrative reforms to strengthen decentralization, and new institutions and procedures to bring it about. A new Regional Projects Office (RPO) has been created in the region, responsible to the Prime Minister, to implement regional projects in cooperation with the regional offices of line ministries and the offices of local (provincial and municipal) government.  - 26 - 5.02 The project is designed as a pilot scheme, to implement part of the Central Visayas (Region VII) RDIP, and its scope is consistent with the current budgetary situation and with the objective of allowing new regional administrative procedures to be tested. The RPO would establish site manage- ment units in five watersheds to implement the first phase of the project including programs in upland agriculture at four sites, social forestry at one, and nearshore development at four subsites. Road and trail construction within the sites would be the responsibility of the Region's four Provincial Engineers' Offices. Support services would be provided by the Regional Offices of MA (para. 1.10), BFD and BFAR (para. 1.11). Project preparation funds are being applied in part to the proposed project and in part to other regions where formulation of regiona:L projects has begun. 5.03 Project implementation is based on three main objectives: first, that project participants be made responsible for their own development; second, that involved government agencies be made accountable to project clients and their local political rep.resentatives; and third, that funds be passed directly from the Ministry of Budget (MB) to the regional body to decentralize implementation authority and minimize wastage. It is also recognized that regionalization is a long-term process which is evolving steadily as the Government decentralizes its services. 5.04 The Regional Development Council (RDC) has primary responsibility for regional planning, programming and budgeting. Projects to be implemented by the RPO must be approved by the RDC, as part of the RDIP, to ensure order and consistency in regional integrated development. Executive Order (EO) No. 907 has amended earlier legislation and created the RPO as an implementing agency which has taken over from the CVRPO which was responsible for pre- implementation of the project under previous arrangements. 5.05 A Central Visayas Regional Projects Board has been designated by the Prime Minister to establish and direct the RPO. The chairman of RDC serves as chairman. Board membership comprises four local government officials who are either Governors or City Mayors in the Region, and two Regional Directors, probably BFD and the Ministry of Local Government (MLG). The Regional Directors of MA and MPWH serve as ex-officio members of the Board. In addition, the NEDA Regional Director, the RPO Executive Director, and the Regional Director of the Ministry of Human Settlements (MHS) attend meetings and participate in deliberations but do not have voting rights. 5.06 The RPO would be funded directly by MB, according to RDC-approved annual schedules of expenditures (paira. 3.38). The RPO is empowered to recruit staff, and to contract work with Government and private agencies, the substance of which is being formulated during preimplementation. The office would be under the day-to-day supervision of an overall project manager, preferably drawn from the Region, who would be technically and managerially proficient to supervise the project. The Executive Director for the RPO has been nominated and would hold overall responsibi:Lity for all investments in Region VII and for this project. The Executive D)irector has been involved in the planning of this project since its inception. Formal appointment of the nominated Executive Director and conlfirmation of the designated Board members are expected shortly.  - 27 - 5.07 Specifically, the RPO would prepare staff terms of reference, negotiate and supervise contracts, coordinate and implement training, admin- ister project funds, and design, establish and operate a project monitoring and evaluation system covering all components. The RPO would also review the SMU annual development plans and work programs, prepare budgets for the RDC and allot funds as directed by the RDC. 5.08 Effective project monitoring is considered central to implementation of the regional development project, while evaluation is essential to aid the preparation of subsequent phases of this project, and other regional projects. Design of the project monitoring and evaluation system is being incorporated into the management structure of both the RPO and the site units. Technical assistance is being provided under the PPF, and by the Bank, to formulate a suitable system during 1983 and to establish it in the RPO immediately following loan effectiveness. 5.09 The RPO would be responsible for part of the project preparation funds provided under the project (para. 3.43), including a possible second phase of this project. Funds have been utilized by the former Central Visayas Regional Project Office (CVRPO) in preparing the project and taking it through preimplementation under two advances (a total of US$1.1 million) from the Bank's Project Preparation Facility (PPF). Another part of the allocation would support preimplementation of the second regional project (urban). A further part would be administered by NEDA Central to support the preparation of other regional projects already identified. 5.10 Site Management Units (SMUs), under the RPO, would be responsible for implementing agricultural programs (paras. 3.11 through 3.14) in four watershed sites: Badian-Alegria, Cebu Province; Bayawan River, Negros Oriental Province; Ipil River, Bohol Province; and Siquijor Island, Siquijor Province, and the social forestry program (paras. 3.15 through 3.22) in the Ayungon- Bindoy site, Negros Oriental Province. An Action Program has been agreed with the Government to ensure the establishment and staffing of site manage- ment units for the various project components (Section 3.06 and Schedule 5 of the draft Loan Agreement). Most of the arrangements for implementing the Program are in place. The immediate implementation of the Action Program would ensure that project activities would commence on schedule. The SMUs would work directly with project participants training them in recommended technologies and instructing them in self-management. The units would also be responsible for designing and implementing public works and reforestation to protect the watersheds from further degradation. The social forestry unit would be assisted by RBFD of MNR because regional authorities do not yet have authority to license and control timber cutting and extraction, or to grant leases on timberlands. 5.11 Specifically, the SMU staff would constitute the field staff of the RPO and would prepare overall site development plans and annual work programs, negotiate services, promote client associations, and monitor the physical and financial progress of the project (Annex 8 - Project Working Papers Nos. 1 and 2). Each SMU would be headed by a manager and employ about 30 support staff. It would be located on about 5 ha of land in a central position in the water- shed. The land would be utilized for office, housing, nursery and livestock  - /_b I facilities. Dormitory accommodation and training facilities, with electric and water utilities, would also be provided. Assurances were obtained from Government at negotiations that the RPO would acquire land, selected during 1983; establish five SMUs to implement the upland agriculture and social forestry programs of the project; and appoint five SMU managers by June 30, 1984. 5.12 The social forestry SMU would operate like the SMUs at the four upland agriculture sites. However, to ensure tenure over the site, an assurance was obtained at negotiations that RPO would request that BFD Central Office reserve the Ayungon-Bindoy site for the social forestry program by June 30, 1984. 5.13 The social forestry SMU would be responsible for issuing stewardship contracts on forest land to settlers selected from the itinerant occupants, according to established criteria, a feature of the social forestry component of the project. The substance of the contracts has already been drafted, as the program began in the Region. The SMU would arrange surveys, prepare documentation, issue contracts, enforce stewardship conditions and collect fees. In addition to stewardship contracts, the unit would encourage settlers to form self-help associations, formulate farm plans in collaboration with the settlers and supervise their execution, and undertake off-farm reforestation to stabilize the subproject area. 5.14 Sub-SMUs would be responsible for managing the nearshore fisheries programs (paras. 3.23 through 3.28). Each subunit would be managed by a deputy site manager who would, with extension specialists, formulate and supervise work programs for the community development workers (CDWs) and artificial reef crews. He would also be responsible for liaising with municipal officials to gain their support, and in formulating appropriate ordinances and permits required under the project. 5.15 The subunits would be located on the coast, about midway along the section of coast to be covered by the project but EIs near as possible to the main watershed management units to which they would be subordinate. Each subunit would have from two to four artificial reef siting and construction crews equipped with motorized bancas, nonmotorized barges and appropriate construction tools (Annex 8 - Project Working Paper No. 3). An assurance was obtained from Government at negotiations that the RPO would establish four sub-SMUs to implement the nearshore fisheries program of the project, and appoint four deputy SMU managers by June 30, 1984. 5.16 Although membership in an association would not be mandatory for participation in the project, the fornation of client associations would be encouraged by the SMUs since successful implementation of the project depends on the combined actions of thousands cof smallholders in the Region's forests, uplands and nearshore areas. The annual development plans and work programs would be approved by the associations, in consultation with the SMU managers, before being submitted to regional authorities for finalization (Annex 8 - Project Working Paper No. 6).  - 29 - 5.17 To achieve the above aims, project staff at the SMUs would need to provide effective extension, promote producer associations, and train parti- cipants. Extension would be provided by a corps of CDWs including about 55 in the uplands, 20 in the nearshore areas and 6 in the social forestry site assisted by specialist staff from the Ministries of Agriculture and Natural Resources. In the upland agriculture and forestry sites, extension would employ the Training and Visit (T&V) system currently being implemented in the Philippines under the National Extension Project (Loan 1626-PH). The ratio of farmers to CDWs would be 100:1 in the early years and 500:1 at full implementation. 5.18 In the nearshore areas, as the technology is newer and innovative, the ratio of fishermen to CDWs would be 40:1 for mangrove and artificial reef stewards. The improved fisheries development program to be designed under the project would also utilize the T&V extension system. 5.19 Many Philippine community associations in the past have foundered because of "over-bureaucratization," particularly in the formative stages, and because members were inadequately trained to discharge their duties. The project would attempt to improve on earlier associations by: (a) forming flexible groups of producers performing similar functions, such as soil conservation works, in the early stages of the project. Only in later years would more complex tasks be attempted, such as input purchasing, produce marketing and credit provision; (b) specialized training of selected barangay leaders: two in each project village or about 272 during the life of the project, half of which would be women since they are equally responsible with the men for many production tasks; and (c) specialized training of all 1,200 project participants in forest stand improvement, an innovative feature of the social forestry component. 5.20 The agricultural development program would be linked to the research component through the upland research fund which provides for trials on farm fields, and by having farm systems research staff train CDWs and extension personnel. The program would be monitored by project management so that improvements would be made during implementation. 5.21 The Regional Office of the Ministry of Agriculture (RMA) would be responsible for providing soil and livestock services under the project (paras. 3.34 through 3.36). In addition, RMA would be responsible for estab- lishing an upland research station (para. 3.42), administering an upland research fund, and providing packages of technology (techno-packs) to farmers (Annex 8 - Project Working Paper No. 1). RMA would also be responsible for  - 30 - the agricultural part of the training and technical assistance components (paras. 3.39 through 3.41) of the project (Annex 8 Project Working Paper No. 5). All RMA support activities would be done under memoranda of agreement with RPO, and an assurance was obtained from Government at negotiations that the RPO would designate RMA to provide support services under the project as set out in Project Working Papers No. 1 and No. 5 (Annex 8), under memoranda of agreement with RPO, and appoint officers-in-charge of the services by June 30, 1984. 5.22 The relevant sections of the Regional Office of the Bureau of Forest Development (RBFD) would assist the SMU as required in forest evaluation and law enforcement, watershed management, and reforestation. The assistance would be defined in memoranda of agreement between RBFD and the RPO, and the relevant sections of RBFD which would also be responsible for off-farm reforestation at all sites under the project (para. 3.37). In addition, RBFD would be responsible, through the Regional Office of the Forest Research Institute (RFORI), for forestry research activities under the project (para. 3.42). Details of both activities are set out in Project Working Paper No. 2 (Annex 8). RBFD would also implement the forestry part of the training and technical assistance components (paras. 3.39 through 3.41) of the project as set out in Project Working Paper No. 5 (Annex 8). 5.23 All RBFD support activities would be done under memoranda of agreement with RPO, and an assurance was obtained from Government at nego- tiations that the RPO would designate RBFD to provide support services under the project, as set out in Project Working Papers No. 2 and No. 5 (Annex 8), under memoranda ot agreement with RPFO, and appoint officers-in-charge of the services by June 30, 1984. 5.24 The Regional Office of the Bureau of Fisheries and Aquatic Resources (RBFAR) of MNR would be responsible for providing fishing regulatory services (para. 3.38) under the project and implementing the fisheries part of the training and technical assistance components (paras. 3.39 through 3.41) of the project (Annex 8 - Project Working Papers No. 3 and No. 5). An assurance was obtained from Government at negotiations, that the RPO would designate RBFAR to provide support services under the project under memoranda of agreement with RPO, and appoint officers-in-charge of the services by June 30, 1984. 5.25 The four Provincial Engineers' Offices (PEOs) of Cebu, Negros Oriental, Bohol and Siquijor Provinces would imp:Lement the infrastructure component (paras. 3.29 through 3.32,1 of the project under memoranda of agree- ment with the RPO (Annex 8 - Project Working Paper No. 4). Construction of 97 km of new, and improvement of 125 km of existing roads in the five sites would be undertaken by the PEOs in consultation with the SMUs which would establish priorities and allocate funds. A rural road conStruction section would be established within each PEO, and wotLld be responsible for implementing the programs with assistance from qualif-ied local consultants. The PEO planning  - 31 - division would prepare terms of reference, appoint consultants acceptable to the Bank, and administer the contracts. An assurance was obtained from Government at negotiations that the RPO designate the four PEOs (Cebu, Negros Oriental, Bohol and Siquijor Provinces) to implement and maintain the infra- structure program of the project, under memoranda of agreement with RPO, to establish rural road construction sections within the PEOs, and to appoint officers-in-charge of the programs by June 30, 1984. The detailed engineering designs for about 15% of the project roads were completed during 1983 and the first year's program should be ready for bidding in early 1984. Maintenance would be carried out by the rural road units within the PEOs, in collaboration with the respective Barangay captains and the Ministry of Local Government, using vehicles and equipment procured under the project. Trails would be constructed under piece-rate contracts between the PEOs, representing the SMUs, and farmer groups who would be responsible for trail maintenance on completion. VI. PRODUCTION, MARKETING AND PRICES Production 6.01 Socio-economic surveys conducted during 1981 in seven watersheds in the Region, as part of project preparation, show that project benefici- aries are generally poor and work small parcels of land with declining productivity. They have medium-to-large families and live on their land in simple bamboo and wooden houses with few amenities. They are poorly educated, practice subsistence agriculture and are generally suspicious of all outsiders, particularly government officials. Average farm size varies from 0.4 ha in Siquijor to 2.2 ha in the Bayawan River Watershed, Negros Oriental Province. 6.02 Land is farmed by household members in simple, family groups; husband, wife and unmarried children. Many household heads possess tax declaration papers which they believe legitimize their land occupancy. However, a general sense of tenure insecurity prevails since the Government does not recognize the declarations as substitutes for titles. 6.03 The granting of stewardships over the land is designed to elimin- ate tenure insecurity. It is estimated that 5,800 stewardship contracts would be awarded during the five-year project implementation period (Table 6.1). The contracts would include about 4,500 for upland farmers on mixed agroforestry sites at three watersheds: Badian-Alegria, Bayawan and Ipil Rivers; 325 for municipal fishermen managing mangroves at four sites: Badian-Alegria, Ayungon, Siquijor and Ipil River; and 1,000 for forest occupants at the Ayungon social forestry site. The contract projections assume that all participants, except those on Siquijor Island where all land is alienable and disposable (A and D),/1 occupy public land where steward- ship would be applicable (Annex 8 - Project Working Paper No. 7). /1 A and D lands are non-forested and available for titling and private  - 32 - 6.04 Farm labor is provided by the conjugal family members and can be supplemented by help from kinsmen, neighbors and friends, especially through labor exchange groups known in the Region as "alayon." Labor may also be hired, but wage workers contribute only a small fraction of the work done on upland farms. Hired workers receive a low wage, P 6-10 daily, or instead are remunerated in-kind particularly at harvest. Table 6.1: PROJECT STEWARDSHIP CONTRACTS BY SITE AND YEAR Number of contracts Site PY 1 PY 2 PY 3 PY 4 PY 5 Total Upland Agriculture Badian-Alegria 0 160 400 560 540 1,660 Bayawan River 0 140 320 440 423 1,323 Ipil River 0 160 360 500 470 1,490 Subtotal 0 460 1,080 1,500 1,433 4,473 Social Forestry Ayungon 200 500 300 - - 1,0 Nearshore Fisheries Ipil River 10 27 28 27 28 120 Siquijor 0 5 8 8 15 Badian-Alegria 5 17 18 11 18 /5 Ayungon 5 2/ 28 2/ 28 115 Subtotal 20 76 79 76 74 325 Total 220 736 1;359 1,776 1,707 5,798 6.05 The project's payments-in-kind (with livestock and inputs) for soil conservation and reforestation works should overcome producer reluc- tance to participate in the project. In forestry areas, the project would promote forest stand improvement, labor intensive logging, reforestation, and forest protection. In upland agriculture, the project would promote the construction of contour terraces andl ditches, and introduce improved mixed farming systems utilizing livestock with annual and perennial crops. In nearshore areas, the project would establish arti'ficial reefs, replant mangrove areas, and improve the management of coral reefs through the designation of sanctuaries.  - 33 - 6.06 The technologies being introduced under the project are simple, inexpensive and do not depart radically from current practices. In fact, examples of all the advocated technologies can be found within the Region. The project aims to promote the wider adoption of the best of these, as described in the Project Working Papers, and to measure their impact over time so that further refinements can be made. 6.07 Upland Agriculture. In Cebu Province, despite growing population pressure in the upland areas, the total cultivated area is not increasing. However, the upland farms have reached their limit of productivity and yields are dropping as soil is lost through continued erosion caused by annual food cropping. Therefore, soil stabilization measures, such as terracing and the planting of fodder grasses with legume and fruit trees, have been incorporated in the project. Ruminant livestock, given as pay- ment-in-kind for soil conservation work and reforestation, would be raised on pasture and crop residues from the farm, and on grass from nearby verges. Composting and fertilizers would be utilized to enhance soil fertility so the area cropped for food could be reduced as yields increase allowing soil stabilizing enterprises to be introduced and expanded. A farm model incor- porating these measures has been developed for a typical upland farm, 0.75 ha with mixed cropping and livestock, on 35% slope (Annex 8 - Project Working Paper No. 1, Table 71). 6.08 Population pressure in the Negros Oriental and Bohol sites is less intense than in the Cebu and Siquijor sites. Average farm size is larger, soil fertility is higher, and in Negros Oriental, there is more shifting cultivation. In Bohol, there has been less immigration and local agricul- ture is stable, based on non-irrigated rice production. Farmers are aware of the limits of these systems and are better prepared for change than farmers in the more isolated locations on Cebu Island. Two hectare farm models, on 25% slope, are presented for the Bohol and Negros Oriental sites. Both incorporate soil stabilization measures and show a reduction in the cultivated area for subsistence food crops as yields increase in favor of increased livestock and perennial fruit tree production (Annex 8 - Project Working Paper No. 1, Tables 78 and 89). 6.09 Population pressure is higher on Siquijor Island and farm size is smaller than for the other provinces. A 0.6 ha mixed farm model, on 20% slope, is presented incorporating soil stabilization measures, livestock production and a shift from food crop cultivation as yields increase, to perennial tree crop production, including fruit (Annex 8 - Project Working Paper No.1, Table 92). 6.10 In the Cebu, Negros Oriental and Bohol sites, where the farmers are operating forest land, stewardship contracts would be awarded to consolidate the holdings and provide incentives for farmers to rehabilitate their farms. This would not be the case in Siquijor Island, where the land is all A and D and farmers already have an incentive to improve their  - 34 - incomes as they have titles to the land. Farmers in the first three sites would be able to invest in agro-forestry on unutilized land for additional income. A representative one-hectare model of an agro-forestry enterprise with livestock, on 30% slope, is presented for general application (Annex 8 - Project Working Paper No. 1, Table 100). 6.11 In the upland agriculture program, 20,250 households are located on the 110,200 ha of the four project sites. About 5,700 families would participate directly in the project (Table 6.2). These farmers would introduce improved cropping and agro-forestry praLctices on about 6,000 ha. Table 6.2: PROJECT PARTICIPANT FAMILIES BY SITE Upland Social Nearshore Site agriculture forestry fisheries Badian-Alegria 1,660 - 1,398 Bayawan River 1,323 - - Ipil River 1,490 - 2,206 Siquijor 1,225 - 3,127 Ayungon-Bindoy - 1,200 974 Total 5 698 1 o00 7,705 6.12 Production increases from the upland agriculture program would be substantial (Table 6.3). At full production, project participants would generate incremental annual crop production of about 9,000 m tons. Incremental production from perennial crops, inc:Luding firewood, and also from livestock would also be significant (Annex 8 - Project Working Paper No. 1, Table 102).  - 35 - Table 6.3: INCREMENTAL PRODUCTION FROM UPLAND AGRICULTURE AT FULL DEVELOPMENT Quantity Commodity (m tons) Annuals Grains Rice 1,140 Corn 2,900 Tubers Cassava 1,380 Sweet potato 1,460 Legumes Peanuts 1,130 Mungbean 950 Subtotal 8,960 Perennials Trees (fruit) Mango 19,080 Bananas 6,000 Jackfruit 3,800 Avocados 2,500 Cashew 1,670 Trees (wood) Firewood 13,410 cu m Livestock Cattle 1,030 (liveweight) Goats 260 (liveweight) 6.13 Social Forestry. It is envisaged that each family in the social forestry program would be settled on a 7 ha lot, 5 ha of which would be used for reforestation and two for subsistance food production. During the establishment period, farmers would receive compensation for their labor, related to farm wages in the site, and be given planting materials until the fifth year when they would begin to derive an income from harvesting wood against which an annual stumpage fee would be charged. From the sixth year, the investment cost would be financed under a second phase of the project, or by Government. Each family would also be expected to pay a service charge equivalent to 5% of production value for marketing assistance. The impact of the project on farmer income is demonstrated by two farm models, one for reforestation and one for forest stand improvement (Annex 8 - Project Working Paper No. 2, Tables 4 through 9).  - 36 - 6.14 In the case of reforestation, investments in seedlings, fertilizer, baskets, firebreaks, seed and herbicide are made during the first four years as the trees are established. Maintenance costs peak by the thirteenth year and fluctuate at lower levels thereafter. The farm family is dependent on in-kind payments from the SMU until the sixth year when the first cuts are made. In the case of forest stand improvement, costs of selective thinning peak in the fourth year and fluctuate at lower levels thereafter. 6.15 About 1,200 families would participate in the social f'orestry program (Table 6.2). Production from forest stand improvement is expected to be 15,000 cu m of logs and 232,000 poles during the first five years of the project. Production from reforestation would be 423,000 m tons of firewood, 1,330,000 cu m of sawn logls, 4,512,000 pieces of rattan, and 300,000 posts during the life of the project from the 1,200 families participating directly in the project. 6.16 Nearshore Fisheries. Estimates of fis'h production from coral reef areas have traditionally been in the range of 4--6 m tons per sq km yearly for tropical waters like those in the Philippines. More recent records, from the Philippines and Western Sarimoa, show yields of 12-20 m tons per sq km yearly for areas with a high percentage of living coral cover and low fishing pressure. Since neither of these latter conditions are common in the Philippines, especially in the Central Visayas with its relatively high population density, current harvests from natural coral reef within the project area are assumed to average 4 m tons per sq km yearly, but are falling at a rate of 100 kg per year due to contamination and destruction of the reef, and overfishing. 6.17 Based on results from a nearby, existing coral reef sanctuary, in which the reef fish harvest doubled over a five-vear period after 17% of the reef was declared a sanctuary and closed to fishing, it is assumed that if 20% of a reef is protected, the catch in the remaining 80% will double, from 3.2 to 6.4 m tons per sq km yearly in five years. Under the project, it is proposed to establish 36 sq km of reef sanctuary which would, at full production, produce an incremental catch of 115 D1 tons per year (Annex 8 - Project Working Paper No. 3, Attachment 3, Tables 22 and 23). 6.18 Harvest from each kilometer of artificial reef is expected to reach 2 m tons per linear km yearly, at full development. Research indicates higher yields should be attainable, but because of the paucity of data on artificial reef production in the Region, a conservative estimate has been used. At full development, the project's 114 linear km of artificial reef would yield 227 m tons of fish per year (Annex 8 - Project Working Paper No. 3, Attachment 3, T'ables 15, 16 and 17). 6.19 An average hectare of mangrove is expected to yield 12.5 cu m per ha yearly of firewood, at full development, or 8,125 cu m from 650 ha  - 37 - proposed for replanting under the project. Direct harvest of fish products per ha at full development would reach 100 kg finfish, 25 kg shrimp, 15 kg crabmeat, 200 kg molluscs and 40 kg sea cucumber. In addition, an indirect harvest of up to 400 kg of finfish and 75 kg of shrimp is expected from mangrove-dependent species which mature and are harvested elsewhere (Annex 8 - Project Working Paper No. 3, Attachment 3, Tables 18, 19 and 20). 6.20 There are an estimated 7,705 families in the four nearshore fish- eries areas, over 4,000 of whom depend on fishing as their sole or major source of income (Table 6.2). Improving the productive base of the near- shore resource by establishing artificial reefs, protecting the natural coral reefs, replanting mangroves and better managing existing mangroves would benefit all those who are fully or partly dependent on the nearshore resource for income or food. Direct benefits, at full development, are estimated to be 8,125 cu m of fuelwood, 400 m tons of finfish and 180 m tons of other sea products. 6.21 For artificial reefs and new mangrove plantings, use rights would be allocated through a permit system - stewardship contracts for mangrove replanting and municipal permits for artificial reefs. On the basis of four families per linear kilometer of artificial reef, 440 families would benefit directly from the project. An additional 325 families would be awarded stewardship contracts over the 650 ha of mangrove area proposed for replanting. 6.22 Yield increases and positive farm cash flows would result almost from the first year of the project, from improved annual cropping and from payment-in-kind by the Government for beneficial works. The financial rewards to producers are substantial and immediate. Financial analytical data are presented in Project Working Paper No. 9 (Annex 8). Marketing 6.23 There is a well established and reasonably efficient private sector marketing network to handle production inputs and project output in the watershed areas of the project, and marketing margins for both inputs and output are commensurate with costs and risks involved. Where marketing infrastructure is deficient, traders often link provision of credit and supplies to purchases of farm output. Often, strong business bonds are based on principles of allegiance and reciprocity between farmers and marketing agents. The improved road and trail access provided by the project would help reduce transport costs and improve marketing services in the project areas, particularly after the pilot phase is completed. 6.24 Grains. Rice is a well established crop in the project areas, particularly in the inner valleys and lowlands. Most of the paddy is sold by farmers to traders and millers who are tied into the crop because of either advanced financing or traditional bonds. A significant amount of  - 38 - project output is consumed on the farm or traded for other foods from neighbors. Finally, about 2% to 4% of the rice would be sold directly to NFA buying stations. Rice for home consumption is usually custom milled in relatively small, locally operated mills. 6.25 The Visayans' staple food is white corn, the production of which is 2.5 times that of rice in the Region. Most of the corn, which is produced on small-sized farms, is consumed by the farm family or traded for other foods. Surplus white corn is sold to local buyers to mill into grits. Cebu is a national marketing center for corn and virtually all the major feed mills with headquarters in Manila have branches in Cebu. 6.26 Tubers. Central Visayas is a net food importer of all project commodities except tubers. The best fresh tuber market prospect is for sweet potato while the best processed tuber market prospect is for cassava which is chipped, diced and powdered for animal feed usually as a substitute for corn. In Bohol Island, the Philippine Starch Industrial Corporation has begun operations on 4,500 ha, with plans to increXase to 18,000 ha, to convert cassava chips into starch, of which aboul: 70% is expected to be exported; by-products of glucose and powdered waste would be sold in the domestic market. However, project participants would largely consume their tuber output on the farm. 6.27 Legumes. The international price of peanuts is about half the domestic price which indicates high costs of production as well as strong consumer demand. There are six peanut processors in Cebu producing mainly salted nuts, but also other products; incorporating nuts such as dessert nougat and candies. Mungbean is the legume stap:Le in the Visayas and maintains a steady market. 6.28 Tree Crops. The most important fruit grown in the project area is mango. The fruit is sold at local markets either directly by the farmer or by traders; farm owners often sell the crop on the tree and the purchaser harvests the fruit. About 50% of mango production is dehydrated as about 17 small firms are active in mango drying in the Region. Some of the high quality packs of slices are sold abroad to Hong Kong, Singapore and Taiwan. One of the main problems facing the industry, thes lack of raw material in the off-season, is gradually being overcome, in part, by chemically induced flowering to spread the fruiting season. 6.29 Bananas are grown on most farms. Trade is usually restricted to fresh bananas due to lack of markets, and susceptibility of the fruit to bruising. However, three firms are currently processing the "cardaba" variety into chips for export with considerable success. Banana puree is also being processed and sold as infant food and as a tomato substitute in catsup. 6.30 The bulk of jackfruit production is consumed as a fresh vegetable or as fresh fruit, but the demand for jackfruit preserves is increasing for  - 39 - ice cream flavoring and desserts. Farmers sell jackfruit in small quantities either to truckers at the farmgate or take their fruit, usually by bus, to the local market for direct sale. 6.31 A small quantity of avocados are produced in the Region. They are mainly consumed on-farm as fresh fruit because of their susceptibility to bruising during transport over rough roads. About 20% of production enters the commercial trade like other fruits. Recently, Carnation Milk Corporation of Manila has begun to extract oil from avocados and has strengthened the market for this fruit. 6.32 Cashewnuts, for which there are good prospects both on the local and international markets, are at present produced largely in Luzon and Palawan. However, growing conditions for cashewnuts are favorable in the project areas. 6.33 Livestock. Cattle and goats would be given to project farmers as payment for soil conservation works carried out on their farms. There are active livestock markets throughout the Central Visayas which not only supply Cebu City, but also Manila with better quality red meat. Farmers or traders usually walk the livestock to auction centers where they are sold and trucked or shipped to urban centers. 6.34 Timber. Sawlog production has been virtually prohibited in the Region since 1979. Under the project, in the Ayungon-Bindoy watershed, small farmers would undertake reforestation and labor-intensive logging utilizing fast growing species. Trees would be cut by hand and the logs hauled to roadsides by carabao, then trucked to the Ayungon wharf where they would be loaded onto barges for shipment to Cebu City. The most popular species, Albizzia falcataria, is a desirable wood for furniture. 6.35 A major objective of Government is to substitute fuelwood for oil where technically and economically feasible. The giant ipil-ipil species is playing a key role in this program. In addition to its use as fuelwood, the tree leaves are dried and ground as a substitute for alfalfa in animal feeds. Domestic feedmills are buying the leaf material and two firms in the Region are exporting the product regularly to Japan. 6.36 The market for firewood is substantial and is growing rapidly. Because of its high thermal rating, mangrove wood commands a premium price in the market, particularly from bakeries. The demand is likely to increase rapidly as the dendrothermal power plants in Cebu and Negros Occidental come on stream. 6.37 Fisheries. At the municipal level, fish marketing is usually handled by a female member of the household. Part of the catch is retained for home consumption, part is bartered for other produce, and the remainder sold, usually in the local market through brokers, who sometimes provide  - 40 - informal credit. During peak seasons, the catch is sold at sea to commercial boats for shipment to ma-jor urban markets. RBFAR statistics indicate that regional fish production declined 23% from 74,800 m tons in 1976 to 57,800 m tons in 1980. Estimates of regional demand by 1981 are 161,300 m tons which indicate that the Region as a whole is in deficit mainly due to strong demand from the Cebu City metropolitan complex. 6.38 The increased production of fish and f-ish products resulting from the project is expected to be absorbed entirely by the existing -market. Incremental production is expected to grow gradually and, given the increasing demand and current shortages of fish in the Region, is not expected to lead to oversupply. Most of the fish would be sold in local markets with the remainder transhipped to urban centers outside the Region. Prices 6.39 With the project, the use of inputs would rise significantly by comparison with the small amounts applied at present. The initial seeds and planting materials would be supplied by commercial firms which do a lot of their own applied research and seed multiplication covering a variety of crops. The government research stations would take the lead in supplying cattle, goats and appropriate pasture species for the maintenance of animals. Summaries of financial and economic pr:tces for project inputs and outputs are provided in Annex 6, Tables 1 and 2. Price derivations for key commodities are included in Project Working Paper No. 9 (Annex 8). 6.40 Fertilizer supplies and prices are controlled by Government through a complicated system of import licenses, import duties, subsidies and price ceilings. Private firms uLndertake the management of fertilizer stocks and distribution to farmers along normal commercial channels. Agricultural chemicals and veterinary medicines are available in the project area through several private firms. The marketing system for those inputs is less well developed in the uplands and would be improved by the upgrading of rural roads and construction of trails which would encourage local merchants to extend their operations. VII. BENEFITS, JUSTIFICATION AND RISKS Benefits 7.01 The main focus of the pro,ject and its primary economic benefit would be the increased incomes of some 14,600 poor families in five water- sheds of Central Visayas, with indirect benefits for many others, through incremental production of agriculture, forestry and nearshore fisheries. At present, the incomes of these families are declining due to severe soil erosion and fishery habitat degradat-ion. The project is designed to promote cultural practices which would reverse the trend and improve productivity of  - 41 - the watersheds. The project would also create more effective regional and local institutions for implementation of rural development activities in Central Visayas and test the concept for broader application regionwide, and ultimately for other regions in the country as well. 7.02 Direct project benefits are derived from the production models related to prospective project participants in upland agriculture, forestry and nearshore fisheries. The incremental per capita incomes derived directly from project investments range from P 230 to P 4,300 which are modest compared with average incomes around the country. For example, the national average per capita rural income demarcating the absolute poverty line is estimated to be about P 2,000 (in 1983 prices), and per capita incomes resulting from project activities fluctuate around this level although they would be significantly higher than at present. Per capita incomes without the project could be expected to decline further in most cases (Table 7.1). 7.03 In addition to income derived from project activities, agricultural participants would also engage in off-farm seasonal work and the forestry participants would engage in supplementary subsistence agriculture. Never- theless, project participants are among the absolute poor and while their economic position would improve under the project, they would still be relatively poor because of limited resources and the pressure of population which forces these families onto small plots and reduced fishing areas. 7.04 Only part of the benefits from rehabilitating upland farming systems would go to participating farmers as increased income from increased agricul- tural and wood production. Benefits to other producers would include increased nearshore fish production due to reduced reef siltation, reduced flooding and damage to downstream farms and roads, reduced soil runoff leading to increased moisture supply for crop production, increased employment as upland production increases, and reduced urban migration. 7.05 The labor requirement to implement the upland agriculture component of the project, including agro-forestry, would be substantial. It is esti- mated that almost two million man-days would be required to implement and maintain the new farm systems until they reach full development. Although most of the labor would be provided by members of 5,700 participant families, some would be contributed by other workers seeking employment within the four watershed sites.  42 - Table 7.1: FAMILY INCOME BY PRODUCTION MODEL (Expressed in pesos at 1983 prices) __ Future/a Incremental /b With Per Pres- proj- Without capita Farm model ent ect project Family /c Upland Agriculture Ipil River - 2 ha farm with 25% slope 2,780 L7,650 2,380 15,270 2,545 Bayawan - 2 ha farm with 25% slope 2,655 17,440 2,145 15,295 2,550 Badian-Alegria - 0.75 ha farm with 35% slope 2,050 11,285 1,680 9,605 1,600 Siquijor - 0.6 ha farm with 20% slope 1,695 7,680 1,460 6,220 1,035 General - 1 ha agroforestry farm with 30% slope - 20,515 - 20,515 3,420 Social Forestry /d 5 ha reforestation plot /e - 24,825 - 24,825 4,305 8 ha forest stand improvement plot ,'f - 2,610 - 2,610 435 1 ha off-farm reforestation plot /g - 1,365 - 1,365 230 Nearshore Fisheries 1 km of artificial reef /h 25,310 43,660 25,310 4,588 765 2 ha mangrove plantation 7i - 8,964 - 8,964 1,494 1 km of fish sanctuary /j 41,575 67,425 31,980 3,544 590 /a At full development. /b Compares future "with" and future "without." /c Assumes 6 members per family. /d The forestry model assumes that w:Lthout project there would be no activity in the project area. /e Would comprise an agroforestry farm unit. /f Supplemental income to project beneficiaries sesttled in the project area through labor-intensive harvesting techniques. /g Cutting and replanting of buri, bamboo and rattan. /h Four families would be responsible for the maintenance of the artificial reefs and would have exclusive rights to fish those waters. /i Replanting and harvesting of a 2 ha unit would be carried out by one fisheries family. /j Fish would be harvested from a 5 km area adjacent to the 1 km sanctuary; about 10 families would fish these waters.  - 43 - 7.06 Indirect benefits from the nearshore fisheries component would be significant. If, as trials indicate, each hectare of mangrove contributes about 400 kg of finfish and 75 kg of shrimp to the nearshore fishing area, the planting of 650 ha new mangrove would contribute 260 m tons yearly of fish and 16 m tons yearly of shrimp in indirect harvest. The proper manage- ment and enrichment of the 5,000 ha of preserve and wilderness would also have a significant impact on fish and sea-life production in the nearshore areas, although it is unquantifiable since the quality of existing mangroves is not known. The planting of mangroves in shoreline areas would reduce beach erosion which is serious in many places throughout the Region. A direct benefit would be the consequent reduction in road maintenance costs along these shorelines. The persistent educational effort proposed under the nearshore component, with support from RBFAR's law enforcement officials, should lead to a reduction of destructive and illegal fishing methods in project areas. 7.07 The regional line agencies, RBFAR and RBFD, would be strengthened under the project through improved resource management by field staff and improved fishpond extension through better mangrove management. Also, to the extent that survey and research contracts are awarded to them, the two private universities in the Region with marine research programs would enhance their contribution to the fishing industry. 7.08 Long-term employment generation in fisheries is not a primary objective of the nearshore component of the project as the municipal fishery is overcrowded already. However, the studies (para. 3.41) proposed to inventory nearshore habitats and to survey the prospects for seaweed culture could lead to alternative employment opportunities. 7.09 The major economic benefits from the social forestry component of the project would be incremental production and income from timber and rattan. Also, there would be foreign exchange savings resulting from a partial substitution of firewood for imported bunker oil in sugar milling. Employment benefits would accrue to the 1,200 participant families and the multiplier effect of increased incomes would have a positive effect on communities adjacent to the social forestry site. The project would help to stabilize the Cebu-based rattan furniture industry as inadequate and unreli- able supply of poles is a primary constraint to increased production. Timber supplies would also be improved as lumber consumption within the Region is estimated at 38 million bd ft yearly which requires 178,000 cu m of logs all of which come from outside the Region. 7.10 As for upland agriculture, significant indirect benefits would also be derived from the social forestry component: reduced soil erosion, reduced water runoff (less flooding), reduction in reef siltation, and increased tree production due to reforestation and stabilization of the watershed.  - 44 - Environmental Impact 7.11 The project is designed to have a beneficial environmental impact ranging from stabilization and rehabilitation of t:he upland forestry and agricultural areas, which are badly eroded, to reductions in siltation and damage to the nearshore mangrove and reef areas leading to increased pro- ductivity from all parts of the watershed. Possible adverse effects result- ing from the use of agricultural chem:icals would be minimized through the use of composting and the introduction of farm systems that reduce rainfall runoff so that residues from the small amounts of chemicals applied would not be carried downstream. Justification 7.12 The net present value (NPV) of the productive components of the project, with benefits and costs discounted at the opportunity cost of capital of 10%, is US$26.7 million (Table 7.2). Of this total, about IJS$15.7 million is contributed by the upland agricultural component and US$9.0 million originates in the social forestry component while US$2.0 million by nearshore fisheries. About 30% of project costs generate benefits regionwide, or in other regions of the country and have been excluded from the NPV and ERR calculations. Table 7.2: SUMMARY OF RATE OF RETtRT ANALYSIS Economic Component Net present rate of Switching values/b value Cc 10% /a return Benefits Costs (US$ million) (%)