Philippines - Shipping Project

Document of The World Bank FOR OFFICIAL USE ONLY FILE COPY Report No. 4910 PROJECT PERFORMANCE AUDIT REPORT PHILIPPINES FIRST SHIPPING PROJECT (LOAN 1048-PH) January 31, 1984 Operations Evaluation Department 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.  FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT PHILIPPINES FIRST SHIPPING PROJECT (LOAN 1048-PH) TABLE OF CONTENTS Page No. Preface ...............******.**............ Basic Data Sheet ...................................................ii Highlights ..................................... iii PROJECT PERFORMANCE AUDIT MEMORANDUM I. INTRODUCTION ...................... .. ........ 1 II. PROJECT IMPLEMENTATION AND RESULTS ....... ............. 2 III. POINTS OF PARTICULAR INTEREST ..................... 8 IV. CONCLUSIONS .............................................. 10 Attachment - Borrower Comments....................... 13 PROJECT COMPLETION REPORT I. Introduction *............................. 37 II. Project Preparation and Appraisal ............. 37 III. Project Cost and Implementation ***.............. 39 IV. Financial Evaluation ........................... 48 V. Economic Evaluation ........... ................ 50 VI. Institutional Development ........................... 52 VII. The Role of the Bank ..................................... 54 VIII. Conclusions ............................................ 55 Annexes 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.  PROJECT PERFORMANCE AUDIT REPORT PHILIPPINES FIRST SHIPPING PROJECT (LOAN 1048-PH) PREFACE This report presents a performance audit of the First Shipping Pro- ject in the Philippines for which Loan 1048-PH for US$20.0 million equivalent was made in October 1974. Final disbursements were made in October 1981. The report consists of a Project Performance Audit Memorandum prepared by the Operations Evaluation Department (OED) and a Project Completion Report (PCR) prepared by the East Asia and Pacific Regional Office. The memorandum is based on the PCR, a completion report prepared by the executing agency, discussions by OED staff during an audit mission in January 1983, with government officials and representatives of shipping com- panies in the Philippines, and interviews with Bank staff. The transcript of the Executive Directors' meeting of October 15, 1974, which considered the project, has been read and project files and documents have been reviewed. The audit memorandum generally agrees with the PCR, but raises a few aspects which were not dealt with by the PCR. These include the sugges- tion that a different approach to the financing of ships could have made the project as appraised more attractive to shipowners; the desirability to undertake a thorough review before the objectives of a project are effectively changed; and the need to achieve continuity in technical assistance efforts. The report has been sent to the different agencies in the Philippines which were involved in the project. Comments were received from the Minister of Transport and Communication, MARINA, the National Economic Development Authority and the Development Bank of the Philippines. Most comments supported the conclusion of the audit memorandum.  - ii - PROJECT PERFORMANCE AUDIT BASIC DATA SHEET PHILIPPINES FIRST SHIPPING PROJECT (LOAN 1048-PH) KEY PROJECT DATA Appraisal Actual or Item Estimate Reestimated Total Project Costs (US$ million) 34.1 24.8 Underrun (%) - 27 Loan Amount (US$ million) 20.0 20.0 Disbursed 20.0 19.4 Cancelled - 0.6 Repaid as of 10/31/83 5.3 Borrower's Obligation) - 12.3 /a Date Physical Components Completed 06/30/79 07/31/81 Proportion Completed by Original Completion Date (%) 100 90 Proportion of Time Overrun (%)- 45 Economic Rate of Return 20-30 n.a /b No disbursement estimates were made at the time of appraisal OTHER PROJECT DATA Original Item Plan Actual First Mention in Files - 02/16/72 Negotiations - 06/74 Board Approval Date - 10/15/74 Loan Agreement Date - 10/29/74 Effectiveness Date - 01/15/75 Closing Date 06/30/79 06/30/81/c Borrower Republic of the Philippines Executing Agency Development Bank of the Philippines and Maritime Industry Autnority Fiscal Year of Borrower July 1 - June 30 Follow on Project None /a Includes exchange adjustment. /b The PCR has reestimated the rate of return for individual Ships to range between 8-46%, but the audit questions the methodology used (para. 18). /c Date of final disbursement October 14, 1981.  - iii - MISSION DATA Month/ No. of No. of Staff/ Date of Item Year Weeks Persons Weeks /a Report Preappraisal 12/04-20/72 2.0 3 6.0 01/18/73 Preappraisal -- 0.4 1 0.4 Not available Preappraisal 04/05-18/73 1.8 1 1.8 05/18/73 Identification 07/16-27/73 1.7 1 1.7 09/17/73 Appraisal 01/21-02/06/74 2.4 3 7.2 09/26/74 Supervision 06/01-06/75 0.7 1 0.7 06/20/75 Supervision 04/26-05/05/76 1.4 3 4.2 05/24/76 Supervision 04/24-05/03/76 1.4 3 4.2 06/03/76 Supervision 01/08-19/77 1.6 1 1.6 Undated Supervision 02/12-03/03/77 2.7 1 2.7 03/10/77 Supervision 03/31-04/02/77 0.4 1 0.4 04/14/77 Supervision 07/03-06/78 0.6 3 1.8 07/12/78 Supervision 09/23-10/06/78 1.7 1 1.7 10/20/78 Supervision 01/15-18/79) Supervision 01/25-26/79) Supervision) Supervision) 07/14-27/79 0.4 3 1.2 09/12/79 Supervision) Project Completion Report 12/02/82 COUNTRY EXCHANGE RATES Name of Currency (Abbreviation) Peso (P) Appraisal Year Average (1974) US$1 = P 7.3 Intervening Years' Average (1975-1981) US$1 = P 7.4 Completion Year Average (1982) US$1 = P 7.9 /a The mission may have been for the particular project alone or for other purposes as well. Time estimates do not attempt allocating between various tasks nor do they include estimates of travel time or of time spent on supervision in non-mission status.  - iv - PROJECT PERFORMANCE AUDIT REPORT PHILIPPINES FIRST SHIPPING PROJECT (LOAN 1048-PH) HIGHLIGHTS The purpose of the Shipping Project was to improve safety standards and increase efficiency of the interisland shipping fleet. The project was also to assist in strengthening institutions which deal with the shipping sector. The major part of the loan was intended to be onlent to shipowners for procurement of used ships abroad, while the project also covered acquisition of some new ships abroad as well as in the Philippines. About 10% of the project aimed at conversion and major repairs of interisland ships. The objectives of the project were only partially achieved. Very little of the financing was used for importing ships to upgrade the fleet of existing shipping companies in the interisland liner service as was originally intended. Instead, ships were built locally for newly established companies which operate unscheduled services (paras. 11-12). The change was caused by a lack of interest by the intended beneficiaries (established shipping companies) for funds from the Bank loan. Progress was made in strengthening the planning and coordination of the sector but efforts to systematically improve safety largely failed (paras. 19-23). The project took 45% longer to implement. Insufficient information is available to reestimate the economic return (paras. 16-18). Points of Particular Interest - Contrary to the loan agreement the Development Bank of the Philippines (DBP) decided to pass the currency of disbursement risk on to its borrowers which made subloans unacceptable to most of the intended clients (para. 8). - DBP's administrative rules as well as reluctance on the part of some borrowers to disclose information to a Government institution also reduced interest in the project (para. 9). - Changing the target group of borrowers from established shipping companies to new entrants in the interisland shipping field substantially increased the financial risks to DBP (paras. 11, 15). - A more thorough review, at the time of appraisal, of the alternative financial intermediaries and of different methods of financing could have kept project implementation closer to the original targets (paras. 24-26, 33). v Lessons to be Learned - When it becomes clear that a project is diverging substantially from the original plans, a review should be carried out to determine the justification of the changes and the effect on economic justification and financial risks (para. 27-29, 34). - When a follow-on project is not financed because further investment is considered unjustified, ways should be found to still finance technical assistance when there is a clear need (paras. 30-31, 35). - 1 - PROJECT PERFORMANCE AUDIT MEMORANDUM PHILIPPINES FIRST SHIPPING PROJECT (LOAN 1048-PH) I. INTRODUCTION 1. The Philippines consists of some 7,000 islands; maritime transport is, therefore, a vital means of internal communication. Modernization of the roads system is decreasing the importance of coastal shipping between ports on the same island and is leading to concentration of cargo on a smaller number of ports. However, the extent to which road transport can be a sub- stitute for maritime transport is limited and maritime transport will con- tinue to be essential. 2. Interisland shipping services are provided by private companies. At the time of project appraisal it was estimated that some two thirds of the fleet was more than 20 years old with the larger operators having the newer ships and the small owner operators generally the oldest ones. Many of the ships were cargo cum passenger vessels. A large part of the interisland fleet was imported secondhand from Japan. At the time of project appraisal there was relatively little official planning or regulation of interisland shipping. However, regulation that did exist was fragmented between numerous Government bodies. Freight rates were set by the government and the Philippine Coast Guard (PCG) was charged with safety inspection. In order to provide more consistent control over shipping and to achieve adequate planning for the subsector, the Maritime Industrial Authority (MARINA) was created in 1974. It was given jurisdiction over the development of shipping, shipbuilding and repair, stevedoring and freight forwarding, and coordination of marine training. The Board of MARINA was to provide policy guidance for the maritime industry. 3. Realizing the importance of interisland shipping, the Government of the Philippines and the Bank decided that modernization and increased effi- ciency for both the ports and the fleet as well as strengthening of planning and organization for the maritime sector were essential. As a result the Second Ports and the First Shipping Projects were financed in 1973 and 1974, respectively (the first ports project was financed in 1961). This report covers the performance under the shipping project, while the audit report on the Second Ports Project is under preparation. 4. The purpose of the Shipping Project was to improve safety standards and increase efficiency of the interisland shipping fleet; it was also to help the Government improve coordination and supervision of the shipping subsector. These aims were to be achieved by providing financing for the acquisition, conversion and major repair of vessels of the interisland fleet with emphasis on replacement of ships over 20 years of age and the major repair of ships up to 16 years of age. The project was also to assist in strengthening institutions serving the shipping subsector. The project covered the following items: -2- Project Cost Bank Loan -------US$ million------- Acquisition of new and used interisland ships 30.0 17.3 (of which for ships built in the Philippines) (n.a.) ( 1.8) Conversion and major repairs of interisland ships 3.0 1.8 Technical Assistance not otherwise financed from other sources outside the Philippines 0.8 0.7 Training 0.3 0.2 Total 34.1 20.0 5. The loan was made to the Government of the Philippines and funds for acquisition and conversion of ships were to be onlent to the Development Bank of the Philippines (DBP) which was to administer the subloans to ship- ping companies. The loan included normal conditions for Bank loans; it also stipulated how DBP was to handle procurement. The loan agreement further stated that services of experts were to be engaged to assist DBP and MARINA and required the latter organization to prepare a 10 year program for development of the maritime industry in the Philippines. The loan agreement did not stipulate what type of ships should be bought nor did it state a max- imum age for used ships. II. PROJECT IMPLEMENTATION AND RESULTS Investment in ships 6. From the appraisal report and other documents it is evident that the project funds were intended for assistance to existing shipping companies to purchase newer, more efficient ships from abroad, which were to be used in the interisland liner service. The prospective borrowers were already well established in the shipping field, operating small to medium size fleets, some being the mainstay of the interisland shipping service. In the event, however, virtually none of the loan funds were borrowed by these companies and most funds were used to construct new ships in the Philippines for newly established shipping companies. 7. Before the project was financed Bank missions held discussions with the major shipowners and DBP, which was already involved in lending for ships. Apparently, however, this led to an overoptimistic assessment of the demand for financing. After reviewing the project with Philippine authorities and a number of shipowners the audit concluded that, at least seen in retrospect, advantages for the subloans for the established shipping companies were often only marginal, while disadvantages as seen by the shipping companies were numerous. - 3 - 8. The loan agreement between the Bank and the Government of the Philippines stipulated that subloans by DBP to shipowners were to be made in the currency of procurement. DBP was to absorb any difference between the currency of procurement and the currency in which the Bank disbursed and had to be repaid. However, DBP decided to pass the currency of disbursement risk on to the shipowners. As an example of what transpired, one shipping company which had bought a Japanese ship found itself with a debt in Swiss francs at the then prevailing DBP interest rate of 14%. The shipping company con- sidered the interest rate too high and the risk of the Swiss franc appreciat- ing unacceptable. It, therefore, obtained other financing and prepaid the DBP loan. The currency problem has apparently played an important role in reducing the interest of shipping companies in utilizing the funds under the Bank loan. DBP in their comments explain why the currency risk was passed on and express disagreement with the suggestion that this played an important role in reducing the interest in the loan (Attachment Part D). 9. Other factors, however, have also played a role and may have been equally important. MARINA and NEDA in their comments concur with this view, while NEDA adds that a review of DBP's loan conditions should be done (see Attachment Parts B and C). Representatives from the shipping industry expressed unhappiness about several of DBP's loan conditions and had reserva- tions over the use of DBP as the intermediary institution. Shipowners objected to such conditions as assigning 67% of the companies' voting rights to DBP, and having representatives of DBP on their Board. They also found the very high collateral requirement of DBP unacceptable and suggested that it exceeded the equity required by commercial banks.1/ Furthermore, sub- stantial reluctance to use the loan funds was induced by the fact that DBP is a Government agency, and shipowners did not like to provide details on their companies to a Government body. The funds which were earmarked for conver- sion and major repairs of interisland ships remained virtually unused, mostly because the repayment period of 5 years was considered unacceptably short and also due to the fact that rehabilitation had to be done to international classification standards which shipowers considered too costly for older ships. 10. The PCR suggests that loan applications were delayed by the Govern- ment's discussions with Norway (which are detailed in DBP's comments, Attach- ment Part D) and the Federal Republic of Germany on possible loans for ships. This financing was expected to be on more generous terms than the Bank loan. However, the possibility of these loans came up only well after the start of the Bank project and could not have affected the project during the first 1 - 2 years. In the end the bilateral financing did not become available. 11. When it became evident that the established shipping companies were showing little interest in the Bank loan, the emphasis of the project changed. With the Bank's agreement DBP switched to financing ships for small 1/ DBP amplifies on the various modifications made in these requirements during the project (Attachment Part D). and very often newly established shipping companies.2/ But even with this change, interest by reasonably qualified borrowers continued to be weak and part of the loan funds remained unused, while subloan approvals were spread over a period of almost five years as against about two years anticipated at appraisal. In the end, US$2.9 million was used for port studies and other studies in the transport sector (PCR, Annex 3.2) and US$0.6 million was cancelled. 12. The new shipping companies were interested in borrowing from DBP because most of the constraints discussed earlier (paras. 8-9) did not apply to them. They needed loans for smaller vessels which could be built in the Philippines. The loans, therefore, were in pesos and the shipowner did not have to accept any currency risks. Other conditions imposed by DBP such as voting rights to be assigned and high collateral were more acceptable in the case of a company owning one or two vessels. Most importantly, however, these small companies normally had no access to loans from commercial banks and if they did it was at a very high cost. 13. The change in borrowers described in the previous paragraph has resulted in a significant change in the objectives of the project. Rather than aiming at modernization of the liner fleet through the purchase of serviceable secondhand vessels, new ships were now being added to the interisland tramping fleet, which were generally used for transport of cargo in the more remote parts of the country. The impact of the project on the maritime sector was also markedly different. Instead of contributing to the consolidation and strengthening of existing companies it led to the proliferation of small companies, making it more difficult to promote efficiency and safety in the sector. Officials in MARINA are rather dissatisfied with this development but apparently were not in a position to influence it. MARINA notes that the Bank opted for realignment of the objectives of the loan to suit the pattern of loan availments rather than a more thorough review of the mechanics of loan implementation and maintenance of the original loan objectives (Attachment Part B). DPB, on the other hand, suggests that the subloans made were in line with the country's maritime policies. DPB believes that fleet replacement and modernization were accomplished through the introduction of containerization (a proposition with which the audit does not agree) and that the use of the loan for smaller companies helped to develop secondary and tertiary routes and the growth of the local shipbuilding industry (Attachment Part D). 14. The project had envisaged only a minor role for the local ship- building and repair industry (about 20% of project funds). Local shipbuild- ing, however, became a main element but, as the PCR points out, this was not without problems. Delays in completing ships have been considerable because of the limited experience and often weak organization of the local shipyards 2/ NEDA comments that since the loan had to be disbursed DBP had to change the emphasis of the project. It also suggests that the experience points at the need for adequate project preparation (Attachment Part C). - 5 - (PCR, para. 3.15). Little information is available to the audit on the quality of the ships built in local yards. A very positive aspect has been the fact that ships were to be built in accordance with international classification standards. Undoubtedly in the process the local shipyards have acquired useful experience, but this experience would have been more valuable if adequate technical assistance had been available. The audit is of the view that even for the amount of work to be done by local shipyards under the project as originally envisaged, some technical assistance for the industry would have been useful. Furthermore, it is not clear why such assistance was not added during project implementation when it became evident that many ships were to be built locally and ample loan funds were available for such assistance. In their comments NEDA expresses disappoinement that the project did not provide technical assistance for the local shipbuilding industry (see comments in Attachment Part C). 15. The change in emphasis under the project also had, as might be expected, an impact on the financial risk taken by DBP. Loans to the larger shipping companies would have involved a very limited risk and lendi to the medium and smaller companies would not have involved unusual risks. / Most of those companies have adequate resources to carry extra debt without defaulting on payments, even during the current recession. By contrast, the small companies which have now been financed have neither the assurance of regular cargo which the liner services have, albeit somewhat reduced at present, nor the financial reserves to cope with the current recession. This has contributed to the fact that virtually all subloans under the project are now in arrears. Information provided to the audit mission indicates that total arrears by subborrowers under the loan equal some 30% of the original principal of all subloans. At the time of the visit by the audit mission only a few cases had been identified by DBP as being on the verge of foreclo- sure, but at least two loans have already been restructured because of the companies' financial problems. The above arrears, combined with serious pro- blems with loans to other sectors of the economy, have caused DBP substantial losses since 1980. A major reorganization of DBP is now under considera- tion. The forthcoming PCR on two Industrial Development Loans (Loans 998 and 1190-PH) will deal with DBP's financial problems and their causes in greater detail. Economic Evaluation 16. Estimates of the economic justification for investments in ships such as those financed under the project are subject to greater uncertainty than for other investments. The regular liner flow of interisland cargo and passenger traffic in the Philippines is subject to some economic fluctuations and is at present rather depressed. However, the charter market in which the ships concerned are operating is more volatile, with the result that during a 3/ OPS considers that the riskiness of the loans does not depend on the size of the firms and that there is no clear evidence to conclude that the original target group would have fared better than loan recipients. - 6 - recession tramp ships are often idle. The occurrence of this phenomenon has contributed to the international practice of often using somewhat older ships in this end of the freight service. However, the project financed new ships to operate in the tramper market. Furthermore, these ships were owned by new companies which would generally be expected to be less efficient than an experienced company and would often lack the established business contracts. 17. For the country as a whole the economic benefits of investments in ships consist of the extra freight which can be carried by the new vessels or, if older vessels were scrapped, the cost difference between providing services with old versus new vessels plus benefits from the added reliability of the new vessels. This type of calculation is difficult to make because data available for interisland traffic in the Philippines are limited. The PCR, therefore, looked at the individual ships and the economic justification was calculated as a variant of the financial results. 18. The audit questions whether recalculating the economic return for the project would be meaningful.4/ DBP, at the request of the Bank, has prepared calculations for eleven vessels financed under the project and found economic returns ranging from 8 - 46% (PCR, Annex 5, Table 9). The calculations include shadow prices for a number of cost items. The audit is of the view that because of the nature of the project the data in the PCR are not representative of the economic return on the project. Other than some uncertainties regarding the calculations themselves, the main reasons for the reservations are that the results represent only eleven ships out of the 37 self-propelled ships and 25 barges financed and that the freight market has deteriorated resulting in sharply reduced benefits for at least a number of the vessels. Even though complete information for 1982 was not yet available at the time of the audit mission, the fact that virtually all borrowers were in arrears on their payments to DBP is indicative of a drop in revenues. The final justification of the project will depend much on how soon demand for shipping services will strengthen and whether the improvement will be sustained. Institutional Development 19. The impact of the project on strengthening institutions which deal with the maritime sector has been mixed. MARINA has become a valuable focal point for the development of the sector. It has completed and subsequently updated a 10 year Merchant Marine Development Plan. It also organized the training of ship surveyors. Furthermore, MARINA had studies done on operating costs of ships; the financial ability of the shipping industry to absorb further investments; tariff and freight revenues; and maritime training needs. 4/ NEDA suggests that recalculation of the economic return, if feasible, would be useful (Attachment Part C). DBP comments on agreements reached with the Bank's Operational Staff on the methodology to be followed (Attachment Part D). -7- 20. Part of MARINA's task is to evaluate and approve vessels which will be procured or constructed. In this manner it exerts control over quality, age, size, etc. MARINA's policy is to refuse permission for procurement of ships which are older than 12 years and it is intended to reduce this to a maximum age of 10 years by 1985. Exceptions are made for high techno- logy vessels (e.g., LPG carriers). In MARINA's judgement there is at present an overcapacity for interisland shipping and it insists that when a shipowner wants to replace an old ship, the latter is to be scrapped or sold abroad.5/ MARINA is also working on the introduction of a new tariff structure which, when introduced, is expected to improve the financial viability of interisland shipping services. The Minister of Transport (Attachment Part A) suggests that availability of ship financing should be important for the realization of MARINA's major development programs. 21. MARINA received technical assistance under the project but officials were rather critical about the quality of the experts. They also felt that the Bank had not provided an adequate list from which the experts were to be selected. MARINA staff considered that the training component had been successful. 22. The task of actual ship inspection and enforcement of safety regulations did not transfer to MARINA as was originally planned, but remained under the Philippine Coast Guard (PCG) in spite of the Bank's efforts. Commitments made by the Government in this respect have been rather misleading (PCR, para. 3.17). The PCG is operated by the Philippine navy which did not want to relinquish this task. Under these circumstances training programs are handicapped because the navy staff are assigned for only a few years to duty with the PCG while it is generally difficult to use funds from development assistance programs to train military personnel. As a result, the project has not made any impact on maritime safety standards and accidents continued to be rather frequent. The age of the ships can play a role in these accidents but factors such as standards of maintenance, defective safety equipment, improper loading, and errors made by inadequately trained crew play an important role. 23. The project relied heavily on DBP which was to appraise the sub- projects. To strengthen DBP's capability in this field, two advisors, financed from bilateral sources, assisted DBP's shipping section. Further- more, some staff of the organization received several months training abroad in technical matters and ship financing procedures. Apparently DBP's compe- tence in those two fields improved considerably, but the audit mission found that DBP had insufficient skilled staff available to assess the freight market conditions and general business aspects as they related to the ship- ping companies which were to be financed. DBP in their comments amplifies on this aspect (Attachment Part D). 5/ Indonesian companies apparently bought several of the old ships. - 8 - III. POINTS OF PARTICULAR INTEREST A more thorough review of possible financial intermediaries and methods of financing would have benefitted the project b/ 24. The audit does not have statistics available which provide a com- parison between the ages of vessels in the regular liner fleet at the time of appraisal and at present. However, even though virtually no financing was used from international organizations or bilateral aid loans, the established shipping companies have acquired secondhand vessels as additions or replace- ments to their fleets. The larger companies suggested that they had little or no difficulty in obtaining loans from commercial banks which were some- times slightly more expensive than the DBP loans but provided a higher per- centage financing and avoided onerous conditions imposed by DBP. For smaller companies, even though they may have been in business for some time, commer- cial financing was often more difficult to obtain and could be costly. More detailed enquiries than could be made within the scope of this audit would be needed to determine the role which could be played by international lending to the established shipping companies in order to achieve a more modern and efficient fleet. 25. Assuming that there was a need for such financing when the loan, which is the subject of this report, was made in 1974, the question arises as to which alternative forms were available to pass the funds on to the shipping companies. Unfortunately this is an aspect which apparently did not receive much attention during appraisal. Bank staff seemed to consider DBP, which is Government owned, the most obvious intermediary. However, the arrangement with DBP did not appeal to the shipping companies (paras. 8-9). Several shipowners suggested to the audit mission that they would have preferred to deal with the Private Development Corporation of the Philippines (PDCP) which was created with World Bank support in 1962. The reasons behind this preference were that this private institution is considered to use a more business like approach7/ than DBP and there was less risk that con- fidential information would fall into the wrong hands. Because several companies already had experience in dealing with PDCP it appears that such an approach could have been more suitable. The Government could still have assumed the currency of disbursement risk as was intended under the project. 6/ NEDA comments that experience under the project shows the need to reassess the financing schemes (Attachment Part C). 7/ DBP expands on this characterization to suggest that PDCP as a private institution had the flexibility to tailor its terms to the specific situation of the borrower, an approach which DBP as a government-owned bank and conducting its operations according to uniform procedures could not adopt (Attachment Part D). - 9 - 26. A further alternative for financing could have been to use the loan funds for rediscounting shipping loans made by commercial banks. Under this system shipping companies would have borrowed from their own banks and part of these loans would have been rediscounted by the institution designed as the executing agency for the Bank loan. The latter could have been PDCP, DBP or another organization in the Philippines which operates in this field. The rediscounting system would have eliminated many obstacles which the ship- owners have now objected to. DBP has rediscounted loans in other sectors and the system is being used successfully in various countries. This method of financing would have been of particular importance in assisting smaller established companies whose access to commercial loans was only marginal, while in the process it could have served the desired sectoral aims. Project objectives should be clearly identified and reviewed when circumstances change 27. The project objectives were identified only in a broader sense; the target group to be financed in the shipping sector was agreed on but not spe- cifically mentioned in the official documents (para 6). The appraisal report includes a two year investment program of the major interisland shipping companies, covering 41 used and 4 new ships at a total estimated cost of US$46.8 million. It was the apparent intention to finance a substantial number of these ships under the project. In the event, the established shipping companies which were to be the beneficiaries of the loan were not interested and loan funds were mostly used to finance ships for new companies which had little or no shipping experience. As a result the project changed substantially from the one presented to the Board. The descriptions in the loan agreement were sufficiently general that the change could be accom- modated without separate Board approval, but there was a major reallocation of funds between loan categories (PCR, para. 3.04). 28. These changes have led to some less desirable developments. Rather than achieving a consolidation of companies operating in interisland shipping it has encouraged the creation of new companies. The additional capacity for transporting goods to and from the outer islands will ultimately result in some benefits, but available information is not clear about the needs and achievements in this part of the subsector. Most importantly, however, the changes in the project have greatly increased the financial risks of DBP. 29. The audit believes that the appraisal and loan documents should have been more precise about the target group in the shipping subsector at which the loan was directed. Furthermore, when it became clear that the target group which had been agreed on, even without stipulating this in the documents, was not interested in borrowing, a critical review of the project and the effect of the changes should have been done, looking specifically at such matters as whether the purpose of the project would still be served, the financial risks would still be acceptable and there would be a need for more or a different kind of technical assistance. - 10 - Technical assistance efforts should have continued even without further lending for shipping 30. The project under review aimed at making the shipping subsector more efficient through the financing of investment as well as strengthening various institutions. These efforts were to be continued under a follow-on project. However, the lack of demand for subloans led the Bank to conclude that there was no need for further financing for ships. Unfortunately, this also ended the plans for continued and expanded technical assistance to the sector. 31. The original plans included assistance for ship design services; rehabilitation of the training school for deck and engine room officers; shipyard training; shipping management courses; and legal advice on maritime matters. In 1976, this program was estimated to cost about US$4.5 million. Officials in MARINA were of the view that much of the technical assistance is still required. They were particularly worried that trained staff were leav- ing MARINA for jobs with local shipyards. Even though their skills are thus still benefitting the country, it means that inadequately trained replace- ment staff in MARINA will be regulating the activities of more skilled staff in the private sector. In September 1979, a Bank supervision mission recom- mended that a next shipping project be postponed indefinitely, mostly because of weak demand for investment funds under the first project. However, this did not detract from the needs for technical assistance. The audit, therefore, is of the view that much of the proposed technical assistance should have been considered for inclusion under the Philippines Third Ports Project (Loan 1855-PH) which was approved by the Board on May 27, 1980.8/ The need for continuation of technical assistance is confirmed by the Minister of Transport's comments and by the comments of MARINA (Attachment Parts A and B). IV. CONCLUSIONS 32. The original objectives of the project were achieved only part- ially.9/ The project changed from financing mostly secondhand ships for established companies to construction of new ships for recently created com- panies. This was counter to MARINA's intentions to encourage companies 8/ OPS considers that since the Philippines authorities did not request technical assistance at the relevant time it would not be reasonable to expect the Bank to have financed further technical assistance in other projects. 9/ The Minister of Transport in his comments agrees that project objectives were achieved only partially; however, he believes that further shipping loans are necessary to support the development of the maritime industry (Attachment Part A). -11 - already operating in maritime shipping and thus upgrade service, efficiency and safety. The change also exposed DBP to much greater risks because the new shipping companies generally had little or no experience in shipping and were operating in tramping which is the part of the market most seriously exposed to economic fluctuations. In view of the above changes it is diffi- cult to judge to what extent the project's investments have contributed to greater efficiency and improved safety of interisland shipping. On the institutional side, the project did contribute to the strengthening of plan- ning and coordination of the sector through MARINA. However, the very important element of introducing increased safety failed through a lack of interest on the side of the Coast Guard. 33. The project experience suggests that the original assessment by the Bank and the Borrower of the demand for ship financing was incomplete. The audit found that a more thorough review, at the time of appraisal, of the alternative financial intermediaries (such as DBP versus PDCP) and of the methods of financing would have been desirable. The latter should have included the possibility of having a financial intermediary such as DBP or PDCP rediscount loans made by commercial banks instead of the direct financ- ing by DBP. 34. Experience under the project indicates that when there is evidence that a project cannot be implemented as originally defined, a thorough review should be carried out before modifications are introduced. Such a review would have pointed at the increased risks to DBP as a result of the changes in the project and could also have indicated the immediate needs for techni- cal assistance to the shipyards. In the event, too much emphasis was placed on speeding up loan commitments. 35. The audit also concludes that continuity of the institution strengthening efforts for the maritime sector would have been desirable. The Bank's practice to discontinue technical assistance efforts when the invest- ment element of a follow-on project is not to be financed, seems open to question. Often continued technical assistance is essential to protect development which took place under a first project, as was the case in the Philippines. In this case, the technical assistance funds could have been part of a ports project.  - 13 - ATTACHMENT Republic of the Philippines Part A MINISTRY OF TRANSPORTATION AND COMMUNICATIONS PHILCOMCEN Building, Ortigas Ave.,Pasig, Metro Manila OFFICE of the MINISTER 83L-MIN-1275 03 October 1983 Mr. Shiv S. Kapur Director Operations Evaluation Department The World Bank 1818 H Street, N.W. Washington, D.C. 20483 U.S.A. Subject: FIRST SHIPPING LOAN PROJECT (LOAN WO. 1084-PH) Dear Mr. Kapur, This is with reference to the draft performance audit report on the above subject project, as prepared by your department. In connection therewith, please be advised that this Ministry finds the draft report satisfactory and concurs, in general, with the findings and conclusions of the report. In particular, the project objectives have not been fully realized, considering that the financing (or relending) terms and conditions of the Development Bank of the Philippines (DBP) have been found disadvantageous by the potential shipping companies who hoped to avail of the shipping loan-at that time. Hence, the project did not contribute, by and large, to the fleet inprovement and modernization, as originally envisioned. This notwithstanding, it is believed that further shipping loans are necessary to support the development of the Philippine OED Comment: maritime transportation industry. More recently, the Chamber of Footnote added Maritime Industries of the Philippines (CMtP), in a dialogue to para. 32 of with the Maritime Industry Authority (*NRINA) has expressed PPAM to note concern over the availability of financing sources, for ship this point. improvement and modernization. The Chamber has requested for a study that will determine the OE Comment: sources, as well as the most advantageous arrangement, method The need for and terms of financing. Availability of ship financing may improved ship contribute largely to the realization of the MRINA major financing has development programs; namely: the rationalization of the finn in interisland shipping routes, the rationalization of the maritime been noted in transpo ation institutional linkages and economic regulations para. 20 of PPAM. - 14 - under the maritime codification project, the ship standard design project, the shipbreaking industry, the grant of additional incentives for overseas shipping, the gradually increasing domestic and foreign sea-borne cargo, among others. Within this context, continuity of World Bank technical OED Comment: assistance in the Philippine shipping transportation sector can This has been not be overemphasized. Prospective sources may be the proposed added to Fifth Highway Loan Project or the future Fourth Ports Project. para. 31 of the PPAM. It is hoped that the foregoing matter receives your preferential attention. Very truly yours, V . 04N JR Minister cc: Mr. Kevin C. Rodley Chief, Transportation Division Projects Department East Asia & Pacific Region World Bank Mr. Antonio M. Locsin NEDA Deputy Director-General Capt. Victorino A. Basco MRINA Administrator :1dg 83L-MIN-1275 - 15 - ATTACHMENT Part B 16 September 1983 MEHORANDUM FOR s Minister Juoe P. Dana, Jr. SUBJECT: Comments on the tiorld Bank PerformACe Audit Reort Fe th PhiliPPiM First 9hLRR1ina Loan Project This has reference to the Project Performance Audit Report on the Philippines First Shippin Loan Project (Loan 1048-Mi) prepared by the Operations Evaluatien Department of the World Bank, the ttrat draft of which was referred to the Hinistry for comment and a copy of which was furnished this Authority likewise for comtan. It is informed that this Athority, after a thorough review of the said report and a recap of its experiences with the project, finds the present draft satisfactory particularly with respect to the following potas 1. Factors influencing te Lackloss of interest in loan availments a) The DBP relandin rate was quite close to the preV4ating comarcial rutes and its decision to pass on the cuftencY OED Comment: disbursement risk, contrary to the loan agreement, made Lhe This point has loan unattractive to borroers. been noted in a footnote to b) Certain loan couditiors imposed by the DBP, which were not para. 9 of the required by oLar financial institutions, were considered PPAM. Ly borrowers as unacceptable, viz: i) assigneut of 671 of voting ri6hts; ii) representatioi Gf Tm- uu th- Lorrower's Board; and iiiilaib collatWrArequiraw".t c) The borrovrs wero reluctaut to provide details on their comany with !UE, it bein a -overnment a6ency. 2. World Bank Activities a) The appraisals uadertaken by the Bank during the project's - 16 - implementation revealed already a substantial divergenes OED Comment: from the original objectives of the project. The Bank, This point has however, opted for a reali,nient of objectives to suit the been added to pattern of loan availments, which ultimately led to fleet para. 13 of PPAM. expansion rather than fleet improvement/modernization. It is believed that a more thorough review of the mechanics of implementation in terms of the financial inttrmadiary and methods of financing would have benefited the project. b) The Bank, in its decision to suspend further shipping loans as a result of the experiences in the first shipping loan, OED Comment: -inadvertently discontinued further technical assistance in This point has terms of strenthening of institution in the sector. It is been added to believed that this should have been continued if the Bank para. 31 of PPAM. intends to sustain its development efforts in the sector. This could have been included in other maritime-related Bank leans, like for instance, in the port projects. c) The Bank's efforts to transfer ship inspection and enforce- ment of safety regulations from the PCG to MARIN& were not successful. it is the opinion that Government failed to recognize the importance and urgency of this plan in the liaht of institutional and manpower constraints at the PCG and the conditions of the operating fleet. Inspite of the apparent failure of the project to attain its objectives, this Authority is of the opinion that further sipping loans are necessary to support its development plans for the maritime industry. In the recently concluded HARINA*CHIP Dialogue on the Maritime Industry Development Program, the industry was particularly concerned with financing in terms of, sources and the methods and terms of financing. It was agreed at that meeting that a joint government-private sector study on the suject shall beudertaken. The results of this study can form the basis for the negotiation with financing sources like the World Bank for the granting of shipping loans to the industry. On the interim, it is suggested that government pursue its request for theincluaton of technical assistance by the Bank to the sector in its other maritime-related project loans. For consideration, VICTORINO A. BAhCO Administrator 17 -ATTACHMENT REPUBLIC OF THE PHILIPPINES Part C NATIONAL ECONOMIC AND DEVELOPMENT AUTHORITY NEDA sa Pasig, Amber Avenue Pasig, Metro Manila Cable Address: NEDAPHIL P.O. Box 419, Greenhills Tels. 673-50-31 to 50 2 November 1983 Mr. Shiv S. Kapur Director, Operations Evaluation Department International Bank for Reconstruction and Development 1818 H Street, N.W. Washington, D.C. 20433 U. S. A. Dear Mr. Kapur: Re: PROJECT PERFORMANCE AUDIT REPORT ON THE PHILIPPINE FIRST SHIPPING PROJECT (LOAN NO. 1048-PH) We thank you for sending us a copy of the draft Project Performance Audit Report on the aforementioned project for our review and comment. We have reviewed the document and noted with great interest the report's substantial findings with which we concur in general. We only have a few comments on the report with reference to the following paragraphs. On DBP's Loan Conditions (Para. 9) We concur with the report's finding that one of the reasons OED Comment: for low availment of project funds was DBP's conditions for the loan This point has which eventually resulted in the change of project beneficiaries. been noted at Considering DBP's terms, i.e., assignment of 67% of voting rights to the head of DBP and DBP representation in the Board, other (private) sources seemed para. 24 of preferable to the intended clientele. In this light, a review of DBP's the PPAM. loan conditions should be done to assess their practicability as well as their acceptability to prospective borrowers and also their com- parability with loan conditions of other financial institutions. On the Alternative Methods of Financing (Paras. 24-26) Relatedly, the experience under the project shows the need to reassess the financing scheme adopted in the project for the shipping sector and to determine the suitable and most advantageous arrangement under the circumstances. - 18 - On the Change in Project Scope (Paras. 11-13; 27-29) The change in project scope and objectives might have been deemed OED Comment: necessary at that time because of the low demand from the targeted .This point borrowers who objected to DBP's loan conditions. Since the loan had to is noted be disbursed, DBP had to change the emphasis of the project from large in the foot- to small and newly-established shipping companies, and from importation note to of second-hand vessels to acquisition of locally-constructed ships and para. 11 of barges. The new and small companies were willing to accept DBP's loan 'the PPAM. conditions as they normally had no access to high-interest loans from commercial banks. This experience in the project's implementation also points to the need for proper project preparation, specially in the projection/estimation of demand for project funds. On the Development of the Local Shipbuilding Industry (Paras. 14; 30-31) Despite the deviation from appraisal scope and objectives, the project could have indirectly contributed to the development of the local ship- building industry. The construction in the Philippines of 57 of the 60 vessels financed under the project in accordance with international class- ification standards became an unintended benefit. While there were delays in the completion of the locally constructed vessels, they could be,attributed mainly to changes in vessel design and late delivery of spare parts from abroad, reasons which were beyond the control of the local shipbuilders. We note with disappointment, however, that even when it became OED Comment: apparent that majority of the vessels that were to be financed under the This point project were to be built in the Philippines, no technical assistance was has been provided the local shipbuilding industry. It would appear from this project noted in experience that necessary technical assistance be provided the local ship- para. 13 of building industry considering the greater role it is undertaking with respect the PPAM. to the shipping industry. On the Recalculation of Economic Returns (Para. 18) OED Comment: The report questions whether recalculation of the economic return for This point the project would be meaningful (para. 18),. On the contrary, recalculation has been of the economic return for the project, if possible, would serve to determine noted in a whether and to what extent the investment yielded favorable returns, not- footnote to withstanding deviation from objectives. para. 18 of the PPAM. 19 - We appreciate the opportunity to comment on the PPAR and we hope that our comments will be helpful in its finalization. We would also welcome opportunities for us to assist you in your post-evaluation acti- vities in the Philippines as part of our continuing liaison with your office. Best regards. Very truly yours, ----ANTONIO M. LOCSIN Deputy Director-General - 20 - ATTACHMENT Part D BANOKO SA PAOPAPAUNLAD NO PILIPINAS Novenber 2, 1983 Mr. Shiv S. Kapur Director OWaticns Evaluatin Department The World Bank 1818 H. Street, N.W. Washington D.C. 20433 U.S.A. Dear Mr. Repur: Re: Project Performance Audit Repaort on Philippines First Project (loan 1048 -PH I am pleased to enclose our caments on the first draft of the Project Performance Audit Report on Philippines First Shipping Project (Loan 1048-PH), as requested in vc" letter of Auut 12. 1983. It is hoped that the caments v1d be taken into osidera- tion in fornulating your final conclusions. mearmbile, we look forward to receiving the final copy of the report as soon as it is available. With kid regsrds. Very truly yours, RIANDO M. ZOSA - Governrr Attachent DEVELOPMENT BANK OF THE PHILIPPINES TELEX: RCA 22197 DBP PH HEAD OFFICE: MAKATI, METRO MANILA, PHILIPPINES GLOBE-MACKAY 45128 DBPHIL PM P. 0. BOX 800, MAKATI COMMERCIAL CENTER 3117 EASTERN 63771 DSP PN CABLE: PHILDEBANK MANILA TELEPHONE: 818-:st: TO 9520 818 8611 TO 9820 - 21 - OUR COMMENTS ON CERTAIN ASPECTS OF THE WORLD BANK AUDIT REPORT a. Per IBRD Report (par. 8) The loan agreement between the Bank and the Government OED Comment: of the Philippines stipulated that sub-loans by DBP to This point shipowners were to be made in the currency of procure- has been ment. DBP was to absorb any difference between the added to currency of procurement and the currency in which the para. 8 of Bank disbursed and had to be repaid. However, DBP the PPAM. decided to pass the currency of disbursement risk on to the shipowners which made sub-loans unacceptable to most of the intended clients. Our Comments Schedule 5 item 1(a) of the Loan Agreement states the following: "1. Subsidiary Loan (a) Exchange risk. The proceeds of the Loan allocated to finance Parts A, B and D of the Project shall be on-lent by the borrower to DBP in the currency or currencies in which withdrawals from the Loan Account shall be made in accordance with Section 4.01 of the General Conditions; i.e., the respective currencies in which the expenditures to be financed out of the proceeds of the Loan have been paid or are payable. DBP shall repay the principal so on-lent to it in the same currency or currencies in which such withdrawals were made, and the amount repayable in each currency shall be the amount withdrawn in that currency." - 22 - As interpreted, the above condition implies that the currencies of withdrawals or the currencies of obligation are to match the currencies of procurement. However, since IBRD's disbursements on the loans were not nrede in the currencies in which the obligations financed had been paid or are payable and since the Philippine Govern- ment has also declined to shoulder the foreign exchange risk in the currency of obligation, DBP had no choice but to pass on the burden to the sub-borrowers in turn. We do not also agree to the statement in the OED Comment: audit report that this practice by DBP has This point has apparently played an important role in reducing been added to the interest of shipping companies in utilizing para. 8 of the the loan since foreign exchange risk on loans PM was also being passed on to borrowers by other institutions lending to the shipping sector, according to a DBP study in 1977. These are the PDCP, State Investment House, National Investment and Development Corporation and commercial banks such as First National City Bank, Far East Bank & Trust Co., Solid Bank, Rizal Commercial Banking Corporation, Manila Banking Corporation, Philippine Veterans Bank and Commercial Bank & Trust Co. b. Per IBRD Report (par. 9) Representatives from the shipping industry expressed unhappiness cibout several of DBP's loan conditions and had reservations over the use of DBP as the intermediary institution. Shipowners objected to such conditions as assigning of 67% of the companies' voting rights to DBP, and having representatives of DBP on their Board. They also found the very high collateral requirement of DBP unacceptable and suggested that it exceeded the equity required by - 23 - commercial banks. Furthermore, substantial reluctance to use the loan funds was induced by the fact that DBP is a Government agency and shipowners did not like to provide details on their companies to a. Government body. Our Comments It is true that some borrowers expressed unhappiness over some of DBP's loan conditions like the assign- OED Comment: ment of 67% voting shares and high collateral require- This point ment. These were however later liberalized by DBP has been through a waiver of the assignment of voting shares noted in a in the case of certain large, established companies footnote to and the increase in loan values assigned to vessels para. 9 of the to be mortgaged to DBP. Real estate collateral PPAM. requirement was also waived. As originally adopted in 1974, the following loan values were given for vessels offered as collaterals: Age of Vessel Loan Value Brand-new and up to 2 years old 80% of appraised value Used not more than 12 years old 60% of appraised value Used not more than 16 years old 40% of appraised value As revised, the above was amended in 1977 as follows: Age of Vessel Loan Value Brand-new and up to 4 years old 80% of appraised value Over 4 years old up to 10 years old 70% of appraised value Over 10 years old up to 16 years old 60% of appraised value It is our opinion, however, that theavailability of alternative sources of financing at somewhat similar rates or even better terms with shorter processing times, was a key factor in the slow utilization of the line and the non-availment thereof by the bigger - 24 - more established firms. The more aggressive approach employed by PDCP as discussed in letter (f) and the private sector, also contributed to the slow utilization of the Line. A comparative survey on existing interisland ship financing facilities conducted by IPD III staff in 1977 showed the following results: Commercial DBP NDC FNCB PDCP NIDC Banks Interest Rates Secured by real estate 12% 8% 11-3/4% 12% 12% 12% Secured by ship/chattel 14% 8% 11-3/4% 12% 14% 14% Service Charge 2% None None 2% 1.5% 2% Maturity 5-16 15-20 5-7 8-15 3-10 1 year years years years years years Extent of Financing 80% 80% 80% 100% 100% 100% NDC grants purely peso loans hence no foreign exchange risk is borne by the borrowers. The rest of above institutions offer both peso and foreign currency loans. For the latter type of loans, foreign exchange risk is passed on to the borrowers. Another study conducted in 1978 shoWed that DBP's financial charges were more or less aligned with those of the private sector except that our penalty rate of 36% compounded monthly was by far the highest compared to the prevailing rate of 2% to 15% p.a. then. It may be recalled that this stiff penalty rate was imposed upon the recommendation of IBRD in 1976 when effective money market earning rates went as high as 27% p.a. - 25 - It was only in 1979 when the DBP considered reducing the penalty rate to 8% and 16% depending on loan amount. In the study of 1977, with the exception of NDC which was lending at much lower interest rates, DBP had the longest processing time of about 8 1/2 to 10 1/2 months mainly due to the requirement that subloans be sent to Washington D.C. for approval; and to conduct international competitive bidding for the procurement of new ships. PDCP which also uses IBRD funds, was not required to follow the time- consuming international competitive bidding (ICB) procedure for ship procurement. The ICB procedure was later eliminated and processing time was trimmed down by IPD III to seventy-five (75) calendar days. c. Per IBRD Report (par. 10) The PCR suggests that loan applications were delayed by the Government's discussions with Norway and the Federal Republic of Germany for possible loans for ships. This financing was expected to be on more generous terms than the Bank loan. However, the possibility of these loans came up only well after the start of the Bank project and could not have affected the project during the first 1-2 years. Our Comments The Norwegian loan referred to was a credit agreement negotiated with Norway by Philippine National Lines of which about $28 Million was allocated for interisland shipping. The Norwegian loan was to have been payable over 15 years with 3 years grace period at 6% interest per annum. The IBRD loan carried an interest rate of 8% to be repayable in 16 years with 4 years grace period. - 26 - NDC had also negotiated for a foreign credit of $80 Million from Kloeckner INA of West Germany maturing in eight (8) years without grace period and bearing an effective interest rate of 9.5% p.a. which NDC originally proposed to relend at 8% p.a. payable over 15-20 years. However, this relending proposal was questioned by the National Economic Development Authority (NEDA) which charged that this could bring about huge losses to the government. The first two years of the project, between November 1974 (signing of the sub-loan agreement) and November 1976, were IPD III's initial experience in this type of lending and preparations for the actual take-off of the project were made during this period. Two (2) consultants from Britain, Mr. John Craig, a financial adviser, and Mr. Keith Stevenson, a naval architect/ technical adviser, were sent to assist DBP in the initial stages of the project. Prequalification of local and foreign shipbuilders were made at this time, legal documents and shipbuilding contracts were prepared and referred to IBRD and other certain small details had to be ironed out. Although the first sub-loan was approved in May 1975, it was only in August 1976 when the first loan release was made. The negotiations for the Norwegian and Kloeckner loans came at the time when DBP had yet to streamline its processing time and lending operations. Prospective clients had therefore felt it worth while to await the anticipated credit with definitely better terms than DBP's. The Norwegian loan was never finalized while the Kloeckner deal was finally dropped in 1979. d. Per IBRD Report (par. 11, 13) When it became evident that the established shipping companies were showing little interest in the Bank loan, the emphasis of the project changed. With the Bank's agreement, DBP switched to financing ships for small and very often newly established shipping companies . . . - 27 - The change in borrowers has resulted in a significant change in the objectives of the project. Rather than aiming at modernization of the liner fleet through the purchase of serviceable secondhand vessels, new ships were now being added to the interisland fleet Instead of contributing to the consolidation and strengthening of existing companies, it led to the proliferation of small companies, making it more difficult to promote efficiency and safety in the sector. Our Comments The Credit program was developed on the basis of OED Comment: IBRD's findings that 65% of the Philippine interisland this page and fleet were 20 or more years old, poorly maintained, following ones built to obsolete standards and ill-suited to modern have been cargo handling methods aside from the poor record added to of safety. The Government, through the Maritime para. 13 of Industry Authority, was to cause replacement of these the PPAM. old and obsolete vessels. As envisioned, the funds were to be used to buy a vessel after scrapping another vessel. This was not however followed at the time of implementation. MARINA's program instead consisted of fleet replacement, fleet expansion and the rationalization of interisland shipping such as the regulation of routes and schedules to balance the allocations of shipping services throughout the country and the restructuring of the rates to ensure the responsiveness of the rate structure to changes in trade. Fleet replacement and modernization were accomplished through the introduction of containerization which is considered the most modern cargo handling system introduced in the country's domestic trade. - 28 - It was started in 1976 by Aboitiz Shipping Corporation with the operation of M/V P. Aboitiz along the Manila- Cebu link with a capacity of 120 TEU. The succeeding years witnessed the significant increase of container operation in the country as more shipping companies joined the containerization business. At present, the country's domestic container fleet consists of 47 vessels with a total capacity of 4,183 TEU owned by nine (9) shipping companies, as follows: Name of No.of Capacity Shipping Companies Vessels (TEU) Aboitiz Shipping 6 825 William Lines 13 739 Sulpicio Lines 6 590 Sea Transport 1 146 Lorenzo Shipping 8 637 Solid Shipping 3 405 Negros Navigation 2 280 Compania Maritime 2 226 Sweet Lines 6 265 47 4_.8_3 Twenty-seven (27) ports are already being serviced by container vessels on liner service. The six (6) leading major link interchanges are: 1. Manila - Cebu - Manila 2. Manila - Davao - Manila 3. Manila - Dadiangas - Manila 4. Manila - Cagayan - Manila 5. Manila - Iligan - Manila 6. Manila - Iloilo - Manila Existing container vessels were funded mostly by PDCP. Some were acquired through lease/purchase arrangements, again, from the private sector. - 29 - Fleet expansion or addition was made in the country's secondary and tertiary routes through a redeployment of the vessels of the large shipping firms replaced by the new ones and by the entrance of new shipping ventures which were, to a large extent, financed by DBP. Most of the funds -wr6relent to new small shipping companies which at the time DBP found deserving of such loans. As stated in the IBRD report, the IBRD agreed to the switch in target and not one of the loans approved by DBP was denied financing by IBRD. As mentioned earlier, the larger shipping companies which had a monopoly over the primary routes preferred to borrow from private sources and were reluctant to ply the developmental routes where demand is not completely established. In keeping with DBP's developmental role, DBP had supported MARINA's thrust to develop the country's secondary and tertiary routes. We therefore find the statement in the IBRD report, i.e., officials in MARINA were rather dissatisfied with the proliferation of small shipping companies but were not in a position to influence it, disconcerting. As stated in paragraph 20 of the IBRD audit memorandum, part of MARINA's task is to evaluate and approve vessels which will be procured or constructed. This is the very reason why it has been DBP's policy that no loan application for ship acquisition is accepted without a clearance from MARINA. In addition, we wish to emphasize that MARINA in separate guidelines, under its memorandum Circular Nos. 10 and 16, had stressed priority to be given to vessels to be used to ply a developmental route. In fact, among the incentives cited by MARINA for - 30 - vessel acquisition in a developmental route is "preferential treatment in government ship financing program through granting of priority in allocation of loan funds, premium rates for government lending and guarantee operations." DBP-financed vessels play a vital role in the improve- ment of shipping services along the secondary and tertiary routes. Some even pioneered in developmental routes which the MARINA advocated. Moreover, they have significant impact on the develop- ment of the country's shipbuilding industry as most of these vessels were locally built. e. Per IBRD Report (par. 23) The project relied heavily on DBP which was to appraise the sub-projects . To. strengthen DBP' s capability in this field, two advisers, financed from bilateral sources, assisted DBP's shipping sector. Furthermore, some staff of the organization received several months training abroad in technical matters and ship financing procedures . Apparently, DBP's competence in these two fields improved considerably,. but the audit mission found that DBP had insufficient skilled staff available to assess the freight market conditions and general business aspects as they related to the shipping companies which were to be financed. Our Comments In the process of loan evaluation, an important aspect of consideration. is the market study for the project which include an assessment of freight market conditions and general business aspects for each project under consideration. The market becomes the basis of tech- nical assumptions prepared to support financial projections to find the viability of a particular project. The market reports were originally being prepared by our Business - 31 - Research Department. However, to minimize processing time and centralize control in the Industrial Projects Department III (IPD III), the IPD III created its own Research Group headed by a technical man who underwent 3 months training abroad in ship financing techniques. DEP has competent staff to handle the appraisal of a project except that in the assessment of freight market conditions and general business aspects, DBP relied to a great extent on MARINA's statistics and data. f. Per IBRD Report (par. 25) Several shipowners suggested to the audit mission that they would have preferred to deal with PDCP. The reasons behind this preference were that this private institution is considered to use a more businesslike approach than DBP and there was less risk that confidential information would fall into the wrong hands. Our Comments The report should define what it means by "more OED Comment: businesslike" as this tend to be damaging to DBP's DBP's amplifi- image. What could probably be accepted as PDCP's cation has been advantage is its flexibility in tailoring its terms noted in a ftnote to a to the specific situation of the borrower. DBP, para. 25 of being a government-owned bank has had more the PPAM. difficulties in adopting this approach as it would be subject to criticism. DBP has tended to apply its conditions with few exceptions. - 32 - Below is a listing of some conditions/requirements of DBP normally objected to by shipping loan applicants as compared to PDCP's requirements: Condition/ Requirement DBP PDCP 1. Assignment of This may be waived This may also be 67% voting provided that the waived depending on shares following circumstan- whether or not an ces are present: applicant is considered a prime borrower. a. The account is consis- tent and up-to-date; b. The firm is a going- concern and operational results are satisfactory. c. The loan is fully secured. 2. Assignment of This is a must for all Imposed depending on future earnings accounts. who the borrower is. 3. Designation of This is a standard This may be waived. directors in the condition. firm 4. Joint and several This is a standard This may be waived. signature of prin- condition. cipal stockholders and officers for the loan 5. Payment of This is a requirement No filing fee is charged. filing fees to loan acceptance. Amount is staggered. For loans of PlM - P5 M, fee is P5,000. For loan above P5M, fee is P1,000 for every million applied for. - 33 - 6. Submission of This is a require- This may be individual income ment for credit waived. tax returns for the checking. past 3 years of principal officers and stockholders 7. Vessel construc- The contract award is The borrower is tion in a DBP made after a canvass allowed to choose prequalified by DBP of the offers his own shipyard. shipyard for made by local pre- local vessels qualified shipyards. 8. Designation of This is a standard This is not a controller in DBP condition. imposed. the firm if and when. necessary. 9. Equity DBP requires a PDCP may grant requirement minimum equity up to 100% participation of financing. equivalent to at least 25%-30% of total project cost or 20% of vessel acquisition cost, whichever is higher. Considering the above, we believe that most borrowers, expecially the prime ones, have found DBP requirements and conditions more onerous. g. On IBRD's Economic Evaluation (par. 16-18) We agree to the audit's view that the charter/transport market in which the vessels financed under the shipping project are operating, is more volatile than the regular - 34 - liner traffic. Liner services, however, along the major/primary routes or even secondary routes are controlled by big and established shipping companies which displayed little or no interest at all in getting a loan from the Bank. Furthermore, the Maritime Industry Authority which approves the acquisition of secondhand vessel/s and/or construction of new vessel/s of shipping operators have declared these major/primary routes as closed or saturated which means that no other shipping company or vessel will be authorized to ply these routes. Only developmental or tertiary routes remained open to new entrants in the shipping industry. These new entrants, instead of concentrating in these developmental routes on a regular liner basis, preferred to have their vessels on a non- scheduled tramping basis for more flexibility. On the audit's view that the calculated economic return of eleven (11) vessels out of the thirty-seven (37) self-propelled ships and twenty-five (25) barges is not representative of the economic return on the interisland shipping project, we have the following comments: In the discussion of the staff the World Bank regarding the preparation of the Project Completion Report, it was mentioned that difficulties in getting data for the ERR calculations existed. Some companies have not yet established voyage accounting for each of their vessels, others have just barely started commercial operations due to delays in construction. It was there- fore agreed then that ERR calculations could be made on a sample of each type of vessel financed under the project which was done in the Project Completion Report. - 35 - As it is intended, the performance audit report is in essence self-critical in that it points out areas and circumstances where the IBRD could have done better. Certain aspects, however, dealt with in the preceding paragraphs should be clarified to erase any misrepre- sentation on DBP's roles and actions.  - 37 - PHILIPPINES: SHIPPING PROJECT (LOAN 1048-PH) PROJECT COMPLETION REPORT I. INTRODUCTION 1.01 The Philippines is an island nation with a total land area of 300,000 sq km (about the size of Italy) scattered among some 7,000 islands. While much economic activity is concentrated in Manila, the main entrepot for trade, a substantial and growing economic area is located in the central islands of Negros and Cebu, as well as in the far south and west of Mindanao. Shipping is therefore of great importance in distributing imports, collecting exports, and facilitating internal trade and the movement of passengers. 1.02 In early 1972 the Bank was asked to help finance the replacement and repair of vessels in the inter-island fleet as part of the Government's plan for the integrated development of the maritime industry and for the economical and efficient movement of passengers and goods. It was proposed that funds for improvement be channelled through the state-owned Development Bank of the Philippines (DBP). In order to focus attention on the marine transportation sector and its problems it was decided to provide a separate supervision system and to organize a Maritime Unit within DBP. 1.03 At the time of the appraisal, in September 1974, the Bank Group had made 26 loans and three credits to the Philippines totalling US$572.0 mil- lion, net of cancellations. About half of this amount was for agricultural and industrial projects and the balance for infrastructure projects, including US$90.6 million for roads and ports. 1.04 This report is based on discussions with the Philippine staff involved, on Bank staff supervision reports and on material prepared by DBP and MARINA. II. PROJECT PREPARATION AND APPRAISAL 2.01 In early 1974 the Government set up MARINA as a semi-autonomous body to coordinate the maritime sector and prepare and periodically revise a development program for shipping, shipbuilding and repair, stevedoring, freight forwarding and marine training. MARINA is also responsible for the effective supervision and the regulation of management and ownership of marine enterprises, control over the import of vessels and their registry, - 38 - issuing registration certificates for Philippine vessels; and assistance to the Coast Guard (a branch of the Navy) in the classification and inspection of vessels. 2.02 The project consisted of: (a) the acquisition, conversion and repair of vessels of the inter- island fleet, with emphasis on replacement of ships of over 20 years of age and the major repair of ships of up to 16 years of age; (b) the provision of technical assistance to DBP and MARINA: and (c) the formulation of a maritime industry development plan. The project was appraised in January 1974 and a loan of US$20.0 million was approved by the Board of Executive Directors on October 15, 1974. The loan became effective on January 15, 1975, and the closing date was originally set at June 30, 1979 and subsequently extended to July 31, 1981. An amount of US$644,798.65 was ultimately cancelled /l with a final disbursement being made on November 12, 1981. 2.03 Four main issues were identified during project preparation and addressed during appraisal. They were: (a) the manner in which the foreign exchange risk would be passed on from the Government to the shipowners; (b) the interaction of ship imports, the customs tariff on the import of shipbuilding materials, and the local shipyards; (c) the way ship safety inspection would be carried out; and (d) the manner and speed of introducing a new cost-based rate structure so as to enable the shipping industry to finance its required improvements. 2.04 Foreign Exchange Risk. DBP had experienced heavy financial losses on its earlier shipping loans as a result of exchange rate changes and insisted that it would not bear any part of such risks in shipping loans in the future. Consequently, in the case of ships procured overseas, it was agreed that the exchange risk on the currency of procurement would be passed on to the domestic shipowner. The exchange risk on the currency of obliga- tion to the World Bank would be borne by the Government. For domestic ship /1 As of July 3, 1981 DBP loan commitments under the program were US$20,178,557 but disbursements were only US$15,896,251 so that DBP was required to finance US$4,282,306 from its own regular funds. - 39 - procurement the loan would be made in pesos. These understandings were embodied in the loan documents (Schedule 5 para. 1A and 2D and para. 4.01 of the General Conditions). 2.05 Ship imports, customs tariffs, etc. The basic strategy adopted by the Government was to discourage imports of ships by maintaining a customs duty on them and to exempt from customs duties all parts and equipment needed to build ships. The duty on imported ships was, however, maintained at only 10% and this was not high enough to substantially discourage imports. The Bank's industrial loans and other foreign loans supplied DBP with the resources from which to extend shipyard improvement credit to ship builders who had orders. The placing of orders which would result from the project was expected to induce improvements in the shipyards financed through DBP (see para. 3.16). 2.06 Ship Safety Inspection was identified in a UNDP-financed study as being poorly carried out by the Philippine Coast Guard. The study also proposed revised Merchant Marine Rules and Regulations. Appraisal mission findings confirmed the poor quality of enforcement of safety regulations. Arrangements were made for training of ship safety inspectors so that a start would be made on the professionalization of safety inspectors under the general supervision of MARINA (paras. 3.17-3.19). 2.07 Tariffs, Rates and Shipping Improvements. Until recently the Philippine shipping industry operated under an outmoded tariff and rate schedule first developed in pre-World War II years and subsequently adjusted by across-the-board percentage increases. New types of goods were forced into old classifications and distortion of costs, resulting from inflation and rapid fuel price increases, made it difficult for most companies to generate the cash flow needed for proper operations. Maintenance and repairs were delayed, cash was short for replacement, and an arbitrary and uncertain system of tariff adjustments prevented proper planning in the face of rising costs. After interviews with 15 of the 18 members of the Conference of Interisland Shipowners and Operators, the appraisal mission found that the industry supported the idea of vesting rate making powers in MARINA. A 10-Year Shipping Development Plan was to be prepared by MARINA and a special tariff study undertaken (para. 6.04) with technical assistance under the project. III. PROJECT COST AND IMPLEMENTATION (A) General 3.01 The basic objective of the project was the replacement and repair of vessels in the interisland fleet, in accordance with the Philippine Goverment's plan for the integrated development of the maritime industry, to - 40 - to provide for the economical and efficient transport of goods and passengers. Financing was to be provided by DBP for interisland ship acquisition and repairs, and technical assistance by the Maritime Industry Authority in the development of shipbuilding plans and programs, thereby creating an improved environment for shipping. It was expected that the large inter-island shipping companies would be the first to improve their fleets and scrap old, uneconomic ships. 3.02 A specific goal was the upgrading of the expertise of local ship- yards through the requirement that any new vessels constructed in the Philippines with project finance be classed in accordance with standards of internationally accredited classification societies and by requiring ship- owners to go through proper bidding procedures in order to secure financing under the program. 3.03 In implementing the goals, the stiff financial terms of DBP, par- ticularly those related to foreign exchange risks, and the availability of credit on less onerous terms from other sources (e.g., commercial banks) led to the project focussing on newer, smaller shipping companies whose project proposals responded to the need to develop and service secondary and ter- tiary routes which the traditional operators were reluctant to service; and whose small ships could be built in the Philippines and financed through peso loans. The outcome was that the project assisted new, small shipping companies with no possible source of financial assistance except a govern- ment development bank like DBP, while commercial banks were better able to respond to the needs of larger companies. 3.04 Problems arose on how foreign exchange risks would be assumed by various Government organizations and on the roles of MARINA and the Coast Guard in vessel safety inspection. The first problem caused delays and distortion of loan operations and disbursements. While the second remains unresolved. Other delays in disbursement were also caused by (i) the fuel price increases in 1979 which, in the face of delays in tariff increases, discouraged applicants, (ii) slow construction and late delivery of ships, and (iii) a proliferation of low cost financing offers from other official financing institutions, often without final approval of the Government. The long delays in construction (see Annex 3.1) and the distortion of the appraisal expectations for the project illustrated in the table below, was, however, not entirely deleterious to the project. While fewer second hand ships than had been expected at appraisal were imported with loan funds, a much larger number of small ships were.financed with loan funds and built in the Philippines than had been considered possible at appraisal. The number of ships and tonnage financed was larger than had been anticipated and many small shipping companies participated in the loan rather than a few large ones. - 41 - Appraisal Actual estimate results Disbursement by category ---- (US$ million) ----- New and used ship acquisition from abroad 15.5 1.4 New ship acquisition in Philippines 1.8 14.5 Major repair and conversion 1.8 - Technical assistance 0.9 3.5 Cancelled - 0.6 Loan amount 20.0/a 20.0 Closing date 6/79 7/81 Tonnage (excludes tugboats) 35,500 46,675 /a Of this amount US$19.1 million was relent to DBP under a Subsidiary Loan Agreement dated November 13, 1975, with the balance allocated to MARINA. 3.05 The increased financing of locally built ships helped the local shipbuilding industry, and shipbuilders were encouraged to improve their facilities, employ more workers, and gain experience in shipbuilding and contracting. During appraisal only one or two domestic shipyards were expected to bid for ship construction and none of these had built ships in the recent past. At the closing of the loan, 15 local shipyards had been prequalified by DBP and ships were constructed under the project in 12 of them. In addition numerous other shipyards, including one financed by IFC, had been expanded or constructed and were in operation. (B) Project Cost 3.06 The appraisal estimated that total project cost, including ship- owners' equity would amount to US$34.1 million of which US$31.9 million would be foreign currency. The Bank loan was expected to provide US$20.0 million (62.7% of foreign exchange and 58.7% of project cost) whereas the final cost of ships delivered under the project amounted to only US$24.8 million, of which the Bank provided US$15.9 million or 64.1% and DBP and the shipowners the balance. Loans were made to 24 enterprises and involved 37 selfpropelled vessels and 25 barges including 2 chemical products barges, altogether totalling 46,675 deadweight tons. Only 3 second-hand vessels were imported at a total cost of about US$2.2 million of which the Bank loan accounted for US$1.4 million or 64%. Details of the subloans made are included in Annex 3.1. - 42 - 3.07 The net result of these operations, shown in the table below, was that financing of ships in the project decreased by 27% compared to appraisal estimates (from US$34.1 million to US$24.8 million) while the Bank's disbursement on vessels declined by about 17% (from US$19.1 million to US$15.9 million). Substantial changes also took place in the technical assistance component, which increased from an appraisal estimate of US$1.1 million to actual disbursements of US$3.5 million, much of the increase (US$1.9 million) being due to the inclusion of detailed engineering for a port project. Loan disbursement on the entire project, as shown in the following table, represented about 70.6% of the foreign exchange cost of the completed project rather than the 62.7% anticipated at appraisal. Because of the shift to locally built ships, loan disbursement on ships represented 64.6% of the cost rather than the average 60% anticipated at appraisal. Appraisal estimate Completion result Foreign Foreign exchange Local Total exchange Local Total --------------------(US$ million)------------------- Imported Ships New 6.0 - 6.0 - - - Used 21.4 - 21.4 2.2 - 2.2 Domestic Ships New 1.8 0.8 2.6 19.2 3.4 22.6/a Repairs 1.8 1.2 3.0 Technical Assistance 0.7 0.1 0.8 } } 3.5 3.5/b Training 0.2 0.1 0.3 } Total Project 31.9 2.2 34.1 21.4 6.9 28.3 Loan finance 20.0 - - 20.0 - 20.0 % Loan finance of total 62.7 - 58.6 93.0/c - 70.6 /a Taken at 85% foreign exchange, 15% shipyard value added. 7b See Annex 3.2 for detail. 7- Total of shipping projects is US$24.8 million of which the loan accounted for US$15.9 million or 64.1%. - 43 - (C) Implementation-Shipping Subloans (i) Foreign Exchange Risks and Other Financial Aspects 3.08 Of the problems which affected the project, the most serious was disagreement among Philippine Government institutions (the Central Bank and the Ministry of Finance and DBP) on how to pass on the foreign exchange risk to shipping companies. 3.09 It had been agreed during negotiations that the Government would bear the foreign exchange risk on the currencies of obligation while the risk on the currency of procurement would be passed on to the shipping companies. This undertaking was embodied in the Loan Agreement, Schedule 5, items 1(a) and 2(d), amplified by Section 4.05 of the General Conditions. However, the agreement was not acted upon by the monetary authorities. Other Bank loans were also involved in this matter. Both of the Bank's industrial loans (Loans 998-PH - First Industrial Investment Credit, US$50 million, and Loan 1190-PH - Second Industrial Investment Credit, US$75 million) were affected; these loans were also channelled through DBP. 3.10 The Government did not abide by the undertakings in the Loan Agreement. This was not known to the Bank/1 or the shipping industry for some time and DBP, assuming that the matter would be resolved, proceeded to accept applications and undertake appraisals for shipping subloans and sent them to the Bank for approval. The first subloan was approved by DBP on May 7, 1975. By August 31, 1975, some 10 months after the Bank's loan had been approved, DBP reported that it had a pipeline of 138 applications for ship loans, and had received applications involving 10,375 GRT representing pro- jects having a value of US$12.0 million. But by December 1975 only US$7.4 million of shipping projects had been approved by DBP. This level of DBP subloan approval did not change over the next five months. As a result of difficulties related both to DBP requirements concerning security for subloans (e.g., assignment of 67% of voting shares to DBP) and to the uncertainty of foreign exchange obligations, a number of applications accep- ted by DBP and some loans approved by DBP but not finally agreed to by shipping companies, were cancelled. As a result, by September 1976, almost a year and a half after the first subloan had been approved by DBP, the Bank had received subloan appraisal reports involving only US$3.5 million of loan funds. It was clear that DBP would not be able to commit the loan by the date set in the Loan Agreement for such action (September 30, 1976). Successive extensions of the commitment date were granted and the loan closing date was extended, ultimately by a total of two years. /1 This major problem was not identified until a March 1977 supervision mission which reported in April 1977. -44 - 3.11 Behind all this were a number of problems. After DBP had received Bank approval for withdrawal on account of a subloan application, negotia- tions were opened with the shipping company on the terms of the DBP sub- loan/i and on the ship building or ship procurement contract. DBP was unsuccessful in obtaining application of the foreign exchange risk provi- sions as specified in the Loan Agreement to shipping companies seeking to import ships as the Government declined to bear the foreign exchange risk on the currencies of obligation. Two loans which were made for import of second-hand ships were accepted by the borrower in the expectation that the foreign exchange risk would apply only on the currency of procurement. When one shipping company discovered that the risk would be on the currencies of obligation, it repaid the loan immediately rather than accept the risk. Several loan applications were withdrawn for this reason. 3.12 In June 1977 the Bank wrote a formal letter to the Minister of Finance and the Governor of the Central Bank requesting compliance with the terms of the loan agreement. The Bank followed up its concern over the question of foreign exchange risk but without response except that in June 1978 DBP wrote to the Bank to ask its assistance in getting the Central Bank to assume the foreign exchange risks as set out in the Loan Agreement. This matter of which organization should bear the foreign exchange risk was never formally resolved, but the Bank offered to amend the Loan Agreement to allow DBP to pass on the foreign exchange risk in the currency of obligation instead of in the currency of procurement to shipping companies importing ships, but no action on this offer was taken. 3.13 Other complications arose to delay the project. Early in 1977. the Government had initialled a memorandum of understandine with the Government of Norway for low-cost bilateral assistance of US$150 million for shipping and shipyards, including USS30 million for inter-island shipping. Later in the same year. the Government. through the National Development Corporation (NDC). had conditionally accented an offer by the Federal Renublic of Germany of bilateral assistance of US$80 million equivalent to assist shipping. NDC had, it-was reported. subsequently issued letters of intent to lend funds for the ourchase of shins at interpnt rAts AR low AR 8% (far below the then enrrent DBP rate of about 15%) and the shipping companies believed that low-cost Norwegian funds would become available. News of this effectively dried-up loan application to DBP and delayed action by shipping companies on contracts for ships to be financed by loans already approved by DBP. Although the German loan proposal was finally withdrawn in /1 Initially these included the standard DBP rule that a new borrower had to assign 67% of the company's voting shares to DBP. After discussions with DBP this rule was revised so that shipping companies had easier access to credit and DBP began to receive an assignment of freight revenues. - 45 - October 1978 and the Norwegian proposal was never finalized, the uncertainty created substantially delayed the Bank project. A Presidential Letter of Instruction in September 1978 nominating yet another agency, the Philippine National Line (PNL), as the implementing agency for ship finance with DBP acting as credit evaluator caused further delays. However, this Instruction did not become effective. In the face of this unsettled situation, the Bank abandoned plans for a Second Shipping Project. 3.14 Finally, traditional shipping operators preferred to borrow from private commercial banks where their long-established relationships permitted them to obtain dollar-linked peso-denominated loans to procure second-hand ships from abroad, with the loan amount adjusted yearly. This was not considered to be risky by the shipping companies. (ii) Effect on Shipbuilding and on Small Shipping Companies 3.15 In contrast to the difficulties surrounding loans for ship impor- tation, DBP found little difficulty in making loans for ships to be built locally. Although some initial delay in operations was experienced because of the requirement that all new ships had to be subjected to international competitive bidding /1 (it had not been expected that local ship building could develop rapidly for the sizes of ships anticipated to be required) the entire shipping lending of DBP became focussed on locally built ships. As experience showed that foreign shipyards did not bid on small ships construction, the Bank agreed that local competitive bidding could be used. As the sizes of ships required by the major shipping companies (from about 1,000 to 3,000 tons capacity) could not then be built locally and because the larger shipping companies could obtain loans denominated in pesos from commercial banks for imported ships the only source of subloans was found by DBP to be for loans to small and, in many cases, new shipping companies for small ships which could be locally built. Construction times were initially substantial as shipyards had to learn their craft. Improvement was seen with time but delays in delivery (see Annex 3.1) continued because of changes in plans, delay in import of materials and equipment, and difficul- ties in shipyards securing working capital funds. DBP reacted by tightening its bidding procedures, including added penalties for late delivery, and increasing the frequency of its supervision. 3.16 There is no doubt that this change in emphasis created opportu- nities for many shipping entrepreneurs. Those with sound contractual relationships with freight suppliers did well, but some, more dependent on the general growth of trade, were affected adversely. Such companies, the /1 The initial six-month period for processing of subloan applications by DBP (including ICB) was eventually reduced to 75 days and is currently 55 days within DBP's regular ship lending program. - 46 - Bank warned DBP on the occasion of the fuel price increase, were likely to have severe problems of repayment. DBP and the Bank eventually approved US$14.5 million of subloans, mainly to small shipping companies, by the extended closing date in mid-1981. (iii) Safety in Shipping 3.17 An issue which caused concern and somewhat altered the impact of the project was the inability of the Government to cause the Philippines Coast Guard to utilize the project to improve safety at sea. As noted earlier, the appraisal had counted on MARINA trained ship safety surveyors gradually to assist in the duties of safety inspection then undertaken by the Coast Guard. A satisfactory decree was agreed prior to negotiations. By the time of its promulgation directly prior to negotiations, the text had been altered. This led to the Bank to state at negotiations that, until the respective roles of MARINA and the Coast Guard were arranged so that the project could be used gradually to increase the professionalism of the ship survey operation, the loan proposal would not be presented to the Board of Executive Directors. This led to issuance of a Presidential Letter of Instruction (No. 208) calling for MARINA to augment the cost of Coast Guard civilian employee salaries, training, and other relevant expenditure not adequately provided for by the Coast Guard. The Coast Guard and MARINA were instructed to coordinate their activities in ship registration and in maritime training. The revised Merchant Marine Regulations, the Letter of Instruction stated, were to become effective January 15, 1975 but they were not promulgated until 1981. These steps were also embodied in an agreement between MARINA and the Coast Guard. 3.18 This agreement did not work because of resistance by the Navy. While the Coast Guard was a part of the Navy, it was also an assignment of about two years for career officers who did not have a career interest in ship safety and who were not ready to surrender the power given to them by the laws requiring ship surveys for seaworthiness and safety surveys for ships leaving ports. MARINA, however, embarked upon a training program which envisaged up to 20 trainees eventually to be used for ship safety and construction surveys. This training program was reduced when the difficulty of implementing the agreement with the Coast Guard became apparent. The net result was that only five surveyors were trained by consultants (UK) in Japan in a 19-week course, starting in August 1975 and three were trained by consultants (US) at a 15-week course on surveying and diesel engine operations. 3.19 The practical result of the inability of the Bank to persuade the Government to settle the jurisdictional question of ship safety inspection is seen in the fact that few ships in the Philippines today are properly surveyed for safety, few are scrapped because of safety requirements, and there are many marine casualties leading to heavy loss of life. After the Bank had decided that further pressure on the question of improving safety - 47 - at sea would not yield results, a Bank-financed consultant prepared a report on maritime safety in the Philippines. A copy of this was given to the Coast Guard and another was sent to the National Economic and Development Authority. This report's conclusion was, inter alia: "Serious efforts should be made to make the Philippine Coast Guard a separate entity from the Navy." The tragedy in the bureaucratic impasse described above is that, in 1975 and 1976 alone, 23 and 59 ships in respectively were lost due to capsizing, fire, and other causes of sinking and 9 and 20 ships respectively ran aground and required substantial repair. No record of the loss of life in such accidents is available, nor is a record of the cost of repair. (D) Implementation - Technical Assistance (i) Original Technical Assistance Plan 3.20 As noted earlier, MARINA moved quickly to organize training of ship safety surveyors. At MARINA's request, the Bank financed consultant assistance in preparing and carrying out a maritime development plan. This plan, completed in April 1977, is being revised by MARINA on an annual basis. 3.21 When the original two-year contracts for advisers to DBP (a technical and a financial adviser), which had been financed under the Colombo Plan, expired, they were not renewed and DBP itself carried on the technical and financial appraisal work satisfactorily. (ii) Amended Technical Assistance Program 3.22 When it became apparent that disbursements on shipping projects would lag behind the levels forecast at appraisal, MARINA and the Bank agreed to an expanded program of technical assistance and training. Studies were undertaken of the costs of operation of various ships, the financial ability of the shipping industry to absorb a further program of investment, of the tariff and freight revenues required to support such investment, and of maritime training needs. These studies were carried out by four Philippine consulting firms. In addition, various individuals received short training courses in a variety of fields (53 man-months). Finally, agreement was reached between the Government and the Bank that project preparation activities, including detailed engineering for the Third Port Project would be financed from the loan proceeds. A list of technical assistance funded under the loan is given in Annex 3.2. - 48 - IV. FINANCIAL EVALUATION 4.01 As stated earlier the scope of the project shifted during implementation, so that: (i) most of the proceeds of the loan were used to finance the buildine of new and relatively small ships in Philippine shipyards; and (ii) shipping companies participating in the loan were mostly small and new and mainly with no other possible source of financing than the DBP. Because the participating shipping companies and the shipbuilders were small and sometimes new and the economic climate worsened during the project period, both the shipping companies and the DBP experienced finncial problems outlined in the next few paragraphs. (A) Shipping Companies 4.02 New entrants in the shipping business usually encounter difficul- ties in their initial years of operations. These were, however, exacerbated through delays in the construction of vessels (about 2/3 of the newly built ships were delayed at least half a year, some much longer)./1 Circumstances that had appeared favorable at the time of the subloan appraisal had fre- quently changed by the time the vessels were ready for operation. Companies that did not have long term contracts with shippers, but which relied more on the general growth of trade, found themselves with excess capacity and low load factors. These operating problems were compounded further through the steep rise in fuel costs during 1979 and 1980 and the fact that shipping tariffs were not raised quickly to compensate for increased costs. 4.03 These factors contributed to operating performances that were generally worse than originally projected at time of appraisal. However, most of the earlier projects, for which ships had been delivered before /1 Principal reasons for the delays were: (a) Modification of original plans; (b) Delays in importation of engines and other materials: (c) Delays in approval of vessel classification; (d) Others such as failures of borrowers to make equity payments on time and shutdowns of shipyards. The DBP has taken steps to lessen these delays, but improvement has been slow. . - 49 - 1980, now show at least a positive Net Operating Income (Gross Profit from Operations less Administrative Expenses) with a generally improving trend. Several of them even show outstanding performance exceeding the initial expectations. Although no data are available at present, it can be anticipated that the more recent sub-projects will follow the same pattern, i.e. gradual improvement after the start-up problems have been overcome. 4.04 The subloans carried interest rates from 12-14% for the early loans to 21% for the most recent ones, plus a service charge of 2%, and a grace period of two years./1 Because of the high interest charges even most of the earlier project companies that had shown a positive Net Operating Income for several years showed a positive Net Income (after interest) only in recent years while some still show losses, albeit of decreasing magni- tude. As a result of these accumulated losses, two companies already show negative equity (paid-in-capital and retained earnings), while a few more are very close to it./2 Furthermore, the short grace period of two years, coupled with the delay in commencement of operations, posed a heavy strain on the cash flow of the companies, especially the new ones. As a conse- quence, all but two had arrears of varying magnitude, ranging in a few cases up to 100% of principal. Loans to two of them were restructured. 4.05 Annex 4.1 gives a brief summary of the performance of the shipping companies participating in the -project. (B) The Development Bank of the Philippines 4.06 As will be explained later in detail (6.01 to 6.02), the manage- ment of the loan by the DBP did contribute to the strengthening of its operations in the transportation lending field. However, from a purely financial point of view, the result was less than satisfactory: For the first few years interest collected on the subloans was sufficient to cover DBP's interest payments on the loan and processing costs. This was to be expected, considering that the Bank's funds had an interest rate of 8%, while the subloans were made at 12 or more percent. However by 1980 inter- est collections on the subloans had deteriorated substantially, so that /1 These interest rates were the ones currently in use for domestic loans. As the exchange risk factor (paras. 3.08-3.14) caused applications for foreign ship procurement to dry-up, domestic procurement could be undertaken only as domestic interest rates. /2 In one case the situation appears beyond repair, as even operating losses are increasing from year to year, in the other cases operating losses appear to have bottomed out, or the company may already show an operating profit. Although all need recapitalization, only one had an infusion of equity capital recently. - 50 - interest payable on the loan far exceeded DBP's collections on the subloans, leading to heavy losses attributable to the project in 1980 and 1981. Annex 4.2 shows the situation in detail. 4.07 DBP shows only two sub-borrowers having no arrears in their pay- ments to DBP. On the other hand, despite the difficult starting periods, most of the sub-borrrowers have positive operating income and some have become profitable. DBP should therefore be able to improve collection performance. This, together with closer supervision of sub-loans, should enable DBP to reduce accumulated arrears so as to contain or reduce their financial losses attributable to the project. V. ECONOMIC EVALUATION A. Introduction 5.01 The appraisal pointed out several specific features of the project which have implications for the economic evaluation and which make an interisland shipping project different from most public transport projects. Such a project: (i) does not represent a single, lumpy investment in creation or improvement of a single facility, but is composed of a number of subprojects which have similar general characteristics, although different in special features; (ii) does not represent assets which, once created, are fixed in place like infrastructure investments; ships can be sold on the market and can be put into alternative use; (iii) is not tied to specific infrastructure facilities except at terminal points; so there is complete freedom of route selection; and (iv) does not have alternative modes to fulfill interisland transport demand except for some high unit and time-value transport where air transport facilities would be preferred. At the macro-economic level, the appraisal concluded that interisland shipping is essential to the continued overall economic development of the Philippines. Not improving the interisland shipping would result not only in lost value added from inability to transport considerable volumes of domestic production but also in stagnation of the national economy. 5.02 In the assessment of the internal economics of interisland shipping, the appraisal presented only indicative estimates based on ship - 51 - acquisition programs submitted by shipowners and their actual cost and operational data. Two typical cases were evaluated. One is the introduc- tion of a 5,000 GRT, modern, secondhand roll on/roll off (ro-ro) type of vessel involving an initial investment of P 30 million (US$4.5 million) on the main interisland shipping route, Manila-Cebu, replacing a number of conventional passenger/cargo vessels which, in turn, will replace, through scrapping, a number of 30-year-old "FS-type" vessels on some of the second- ary (feeder) routes. The economic rate of return was about 30% over an assumed project life of 25 years based on double the port times of European operations. The computed rate of return was sensitive to the estimated port times of the ro-ro vessel which require fast turnaround times. With a further doubling of the port times, the economic rate of return dropped to about 20%. 5.03 The other case was the scrapping and replacement of a number of FS-type vessels with newer conventional type pasenger/cargo vessels involv- ing an initial investment of P 20 million (US$3 million) on secondary routes only, while the operations on the main route, Manila-Cebu, remain essentially unchanged. The economic rate of return was estimated at about 27%. A reduction in the operating efficiency of 20% (about a 35-40% increase in port times of the passenger/cargo vessels replacing the FS-type vessels) resulted in an economic rate of return of about 21%. B. Economic Re-evaluation 5.04 The project was not carried out as visualized at appraisal. The emphasis was placed on the fleet buildup program rather than on replacement. Most of the recipients of the project sub-loans were new entrants to the shipping industry. In the appraisal, most of the vessel acquisitions were assumed to be secondhand which resulted in high economic returns. Second- hand acquisitions had been considered economically and technically sound because of the high cost of new ships and the availability on the market of a substantial number of secondhand ships less than 12 years old which are reliable in operation but no longer financially viable in their present area of operation because of technical obsolescence. If new ships were used, the appraisal felt that there would not be any further substantial additional improvement in operational efficiency over the use of second-hand ships under Philipine conditions. However, actual vessel acquisitions financed under project sub-loans were mostly brand new except for one cargo vessel and two tankers. 5.05 In the economic re-evaluation, the economic return was calculated for two different types of general cargo vessels and certain specialized vessels, e.g. log carrier and oil tanker. Revenues generated in 1981 were treated as the benefits and the capital and operating costs, excluding taxes, - 52 - fees, interest and depreciation, with adjustment for wages /1 to reflect the economic costs of labor, were treated as the economic costs. The results of these calculations are summarized below: (i) New 1,000 DWT cargo vessel procured for an established company (Annex 5, Table 1) 20% (ii) New 1,000 DWT cargo vessel procured for a new entrant (Annex 5, Table 2) 10% (iii) Log carrier (Annex 5, Table 3) 14% (iv) Cargo vessel (Annex 5, Table 4) 15% (v) LCT (Annex 5, Table 5) 29% (vi) Oil tanker (Annex 5, Table 6) 46% (vii) Specialized tanker (Annex 5, Table 7) 24% (viii) Tugboat and barges (Annex 5, Table 8) 23% 5.06 The project financed vessel of an established shipping company yielded a lower economic rate of return than its 5-year-old vessel. This may be attributed to the low investment cost of the latter vesel. In situations (i) and (ii), vessels operated by an established shipping company (whether old or brand new) yielded higher economic rates of return over a vessel operated by a new entrant in the shipping industry. The former's operating efficiency may be considered the critical factor in the big difference in the results. As to type of vessels, oil tankers yielded the highest economic rate of return, followed by landing craft type vessels (LCTs). 5.07 The assessment of the overall economic return on the project investment cannot be established yet since some of the subprojects are still in the construction stage while some have just barely started commercial operations. However, results of the economic benefit calculations under- taken on a representative number of subprojects financed under the project give indications of a satisfactory economic return on the whole interisland shipping project. The economic rates of return range from 8% to 46% as shown in Annex 5, Table 10. VI. INSTITUTIONAL DEVELOPMENT (A) Development Bank of the Philippines (DBP) 6.01 DBP is a major financial institution so that the loan under review, being only a small part of its operations, is only one of many Al 100% of actual wages for skilled labor, 75% for semi-skilled labor and 50% for unskilled labor. - 53 - sources of finance utilized. However, in the field of shipping lending the project did have a positive impact on DBP in its transportation lending field. In anticipation of the loan, DBP sent three of its staff to foreign shipbuilding companies and banks for several months to become acquainted with shipping loan procedures and appraisals. This training aided the formation of the Maritime Credit Unit which, assisted by two advisors financed under the Columbo Plan, reviewed loan applications, prepared analyses for DBP's Board of Directors, and administered the loan through supervision. At the end of the period of the advisors' contracts, DBP staff took over the entire responsibility for the loan. 6.02 DBP and its staff amended a basic shipbuilding contract, adapted it to Philippine conditions, and used it successfully in international competitive-bidding. The use of this contract gave DBP and the shipyards familiarity with international ship classification society requirements and generally accepted procurement procedures, and introduced new production concepts to the shipbuilders which had to meet class standards. DBP also focussed more of its concern about security on cash flow and the value of the ship mortgage than in the past. The Bank offered DBP the opportunity for its legal department to obtain Admiralty law consultants to effect changes in the mortgage laws govering inter-island shipping but this offer was overtaken by events when the Philippine ship mortgage law was altered to bring it into line with international practice. After this it became feasible for overseas financial agencies to lend for construction of ships to be registered under the Philippine flag. (B) The Philippine Coast Guard 6.03 The project was unable to focus the Government's attention on the poor quality of ship safety. Efforts to assist the Coast Guard to improve its ship safety inspection capability proved fruitless. (C) MARINA 6.04 The new organization was effective in the fields of sector econ- omic analysis. It successfully completed, and several times revised, a 10-year Merchant Marine Development Plan which was adopted by the Govern- ment. The organization's activities were well received by the shipping industry, which was assured that its views were being properly represented at the councils of Government. A start was made on developing shipping cost data and, through route analysis, proposals for a cost based tariff and rate structure. MARINA personnel were helpful and competent in their review of shipbuilding plans and of ship imports made through finance from commercial banks. 6.05 However, had the difficulties in cooperation with the Coast Guard in the field of safety been overcome, MARINA could have further stimulated domestic shipbuilding through proper enforcement of regulations. This would - 54 - have resulted in scrapping of more overage ships and their replacement through import of ships or by locally constructed new ships; in this process it would have succeeded in reducing loss of lives and property in maritime accidents. 6.06 Today, MARINA is an accepted and, in the fields it now operates in, an effective organization. In great part this results from the ability of the staff, their dedication to the institution, and the results of the training programs undertaken. VII. THE ROLE OF THE BANK 7.01 While the Bank contributed significantly to the preparation of the project through its contacts with private shipping companies, it lacked decisiveness in dealing with the major issue related to the way in which foreign exchange risks were to be passed on to shipping companies. It could be argued that the Loan Agreement should have provided for a different sharing of the burden of foreign exchange risks - and in that case the project would have been a different one with a different purpose. What in fact happened was a de facto alteration of the project through disregard of the Loan Agreement. Had the issue of passing on the foreign exchange risk on the currencies of obligation to shipping companies procuring ships overseas been raised during negotiations, the Bank might have anticipated that few foreign built ships would be procured and so could have provided for a large technical assistance component for improvements in ship repair yards, for funds for shipyard improvement, and for smaller purchases of second hand ships from overseas. 7.02 The Bank was unable to persuade the Government to improve the way in which maritime safety inspection was carried out, and was unable to convince the Government to introduce new and better safety regulations prepared by a consultant financed under UNDP. This lack of improvement meant that few ships were scrapped and few upgraded to meet reasonable safety standards. As the safety improvement of the fleet of inter-island ships was delayed, the training programs for safety inspectors was reduced and became less relevant. The initial difficulty surrounding cooperation between the Coast Guard and MARINA in safety matters (para. 3.17) was not resolved during negotiations by the agreements reached between them. As the parties to the agreement did not carry it out, the Bank hired its own consultant to prepare a report and recommendations to the Government about safety. This report was presented to the Government and the Coast Guard, marking the end of its efforts to persuade the Government to improve ship safety. 7.03 The Bank's working relationship with DBP and MARINA was positive and suggestions by the staff working on the project enabled both DBP and - 55 - MARINA to make a quick start on the project. Although not recorded as formal supervision missions, many brief visits were made to DBP and MARINA by staff who were on their way to missions in other countries and/or who were involved in other projects in the Philippines. These informal and frequent visits served to buildup a close relationship and understanding of problems faced during the course of the project. 7.04 Substantial work on the preparation of a second project was terminated when it became clear that alternative sources of finance for inter-island shipping would be available and that the important maritime safety issue could not be resolved. VIII. CONCLUSIONS 8.01 Because of delays in construction, some of the ships financed under the project had not been delivered when this report was written; others had only recently started operations. Thus it is not possible to give a final opinion on the overall success of the project except to say that, while financial and economic results are mixed, there appears to be a trend to improvement. 8.02 The project sub-loans stimulated construction of small ships in the Philippines. This had not been expected. The sudden demand for shipbuilding of small ships in the Philippines, occasioned by the manner in which the Government decided to pass on the foreign exchange risk had the ships been built overseas, led to long delays in construction and financial problems for many of the shipping companies from which they are slowly recovering. The reluctance of the Government to permit higher freight tariffs in the face of the costs increases of fuel also caused difficulties. Finally, the project was plagued by the lack of implementation of the safety and ship inspection provisions of the loan. Proper enforcement would have led to scrapping and a stronger demand for ship replacement. Although the Bank had achieved a good working relationship at all levels of the Philippines Government and with DBP and MARINA, it was unable to achieve resolution of the two important questions - foreign exchange risk and ship safety inspection. A speedier resolution of these matters should have been achieved. 8.03 The project had., however, a beneficial impact on the institutions created to undertake it - the Maritime Credit Unit of DBP and MARINA. These organizations are wholly capable of continuing their shipping activities without further Bank support. PHILIPPINES FIRST SHIPPING PROJECT (LAm 1048-PH) PROJECT CDlPLETIOI REPORT Subloan Record Sub- Appli- Mount approved Appraisal Expected Actual No. of days Delivered loan cetion DBP (Pesos except cost Ship- Costruc- delivery comple- delivery cost no. Borrower-fire date approval where noted) Vessel type (Pesos) builder tion date date tion date delayed (Pesos) Reiarks I Phil. lausa 03/03/75 05/07/75 7.500,000 (1) 3150 DWT log 9,870.000 Sandoval 10/05/76 11/04/76 06/22/77 230 10,155,700 Delay in delivery mas aily due to Shipping Corp. carrier Shipyard delay in shipment of veseal parts from foreign supplier which were shipped to another port. 3 Link Shipping 02/10/75 06/11/75 5.742,000 (3) 650 tT cargo 2,380,000 PloW 01/27/77 07/07/77 09/26/77 61 2.750,000 Delivery delay due to certain modifi- Co. , Inc. vessels 2,380.000 01/27/77 08/26/77 01/09/78 136 2,750.000 cations made during construction, 2.380,000 01/27/77 09/25/77 06/23/78 271 2,750,000 particularly increase in capacity from 500 to 650 Wff each, added qear- ters, hatch raising. 4 Itrthern Mian- 07/03/75 3,731,200 (2) 650 T cargo 2,120.000 PIONI 10/08/76 04/06/77 12/13/77 251 2,450,000 Increase in capacity from 550 to 610 denso Trans- vessel@ DWT each at the time of constructien port Co., Inc. 2,120.000 10/08/76 04/06/77 12/13/77 251 2.450.000 caused delay in delivery. 5 Southwest 07/13/75 6,084,000 (2) 1000 T cargo 5,348,000 Progr 07/23/76 01/22/77 03/17/77 39 5,798,113 Delay ws caused by converting the Cargo sad vessels vessel@ from general cargo to log Shipping carriers. Co., Inc. SA 07/26/78 06/16/78 2,700.000 5.348,000 07/23/76 03/10/77 06/08/77 75 5.798.113 7 Abottis 06/18/76 07/14/76 SUF 1,060.466.13 Secondhand 1873.93 6,228,300 Importa- 5.293.500 Shipping Corp. IMr cargo vessel tion 8 Cagayan 03/16/76 09/29/76 4.160,000 (1) 1400 MT cargo 5,611.122 Sandoval 06/17/77 10/05/77 12/19/77 45 5,200,000 Shipping Corp. vessel Shipyard 9 Mayflower 01/03/76 09/29/76 4,870,600 (1) 1200 W LCT 5,534.700 RIC 07/25/77 03/05/78 09/29/79 544 6.100.000 Delay as caused by: (a) various 0 Shipping Corp. changes made against original plane, 0 (b) delay in approval of plans by ABS, and (c) delay to delivery of . materials. L. 0 11 tavotas Indus- 07/01/76 12/29/76 IN 1.494,549.01 Secondhand 2500 WY 9,471.840 Imports- 05/18/77 6,848,865 trial Corp. SlF 94,481.43 tanker tion Sub- Appli- Mount approved Appraisal Expected Actual No. of days Delivered lose cation OBP (Pesos except cost Ship- Construc- delivery comple- delivery cost no. Dorrover-flrm date approval where noted) Vessel type (Pesos) builder tion date date tion date delayed (Pesos) Memarks 12 Tbtal anlk 01/07/76 02/16/77 2,648,800 (1) 550 Wr No1e- 3,010.797 Cebu 10/03/77 04/31/78 05/15/78 89 3,117.603 Slight delay cause by swo modifie. Corp. hauler Shipyard tions made for alcohol handliog. is Marcelino K. 05/27/77 10/05/77 2,582,400 (1) 450 Wr LCT 3,000,000 Ceob (Sales contract) 3.228.000 Castro Shipyard 16A Pasacao Trans- 07/14/76 10/19/77 $ 293,190 Secondhand tanker 4,150,000 Imports- 4.017,346 port Services, tion Inc. 165 Pasacao Trans- 03/13/78 05/24/78 4,500,000 (1) Tugboat 2,900.000 BASECO 08/03/78 03/12/79 10/15/79 187 2,353.000 Delay in the delivery of the tughot port Services. 11/01/78 10/21/78 900,000 was due to delay in the delivery of Inc. (4) 750 WT barges 3.600,000 08/03/78 12/02/78 11/23/78 900.000 the engine. 01/02/79 01/80/79 900,000 02/02/79 03/08/79 900,000 19 Candano Ship- 08/1/79 7,360,000 (3) 1000 WT cargo 7,820,000 Mayon 02/28/79 07/16/79 04/02/81 227 7,820.000 Delay was caused by modification Ln ping Unes, vessels each Docks, 10/14/79 (change of engines) made which called '- Inc. 01/16/78 03/15/78 10,800.000 Inc. 01/12/80 for an additional loan. Two vessels are still under construction. 20 Rico Shipping. 12/01/76 03/15/78 3,520,000 (1) Tugboat 2,185,000 BASECO 10/04/78 02/19/79 11/03/79 274 2,300.000 Delay in delivery was caused by modi- Inc. (1) 1000 WT barge 1,244,000 12/10/78 04/20/79 138 1,200.000 fications and delay in delivery et (1) 750 Wy barge 940,000 12/02/78 12/14/78 9 900.000 the engines for the tugboat. 21 Trans-Asla 10/17/77 08/02/78 3,178,000 (1) 450 Wy LCT 3,800,000 Sandoval 12/29/78 04/26/79 03/05/80 283 4,085,845 Delay mas caused by frequent plan Shipping Corp. bulk carrier Shipyard brounout and delay in engine deltv- ery. 22 Pacific Deep 05/12/77 08/30/78 1.248.390 (2) 750 W barges 793.000 RIC 05/10/79 09/07/79 06/14/80 247 825,000 Delay due to (1) delivery of wrong Sea Fishing 793,000 10/07/79 07/16/80 249 825,000 class of materials and (2) brownesta. 23 Interisland 01/17/78 08/02/78 1,167,300 (1) 300 WT cargo 1.375,000 Filipino 11/23/78 03/23/79 01/07/80 260 1.500,000 Delay caused by: (1) noncompliamee Ferry Service vessel Shipyard with classification, and (2) delay I machineries. 25 Palacto Ship- 07/20/78 12/20/78 3.440,000 (1) 500 My ILCT 4,118,000 NSSC 06/08/79 12/05/79 05/12/80 127 6.108.000 Several modifications (change of 1 ping, Inc. gears and winches) made caused the delay. (An additional loan of D P 110.000 under the DBP regular lad * Ing program mas granted to fi nce part of the increase in cost of wee- O * Sel.) MF - 26 Paul N. 12/12/77 12/20/78 2.015,986 (1) 350 WY cargo 2,481,000 MSSC 04/27/79 10/04/79 05/13/80 189 3.589.088 Some modification (change of gears) Coroaines vessel caused the delay in delivery. Am additional loan of F 456,395 mas granted to finance the changes. Seb- Applt- mount approved Appraisal ftpected Actual on. of days Delivered lose cation DP (Peso except cost Ship- Cbastruc- delivery comple- delivery cost no. lorromar-fir date approval dhere noted) Vessel type (Pesos) builder tion date date tion date delayed (Peace) anorkm 27 Total falk 05/08/78 12/27/78 3,215,880 (1) 550 WT alco- 3,388,000 Sandoval 06/07/79 12/04/79 02/26/81 2S4 4,575.000 The delay we des to the accidestal Corp. hauler Shipyard launching of. the vessel, extesding the time of delivery. 28 Berda Shipping 01/26/78 01/24/79 3,637,500 (1) Catamaran-type 3,709,000 PIOWf 08/08/79 02/04/80 09/09/80 185 4,860,000 The delay as due to the design fail- Lines cargo vessel ure to attain the required buoyancy during the first launching, so cor- rective masures have to be made. 29 luvimin Oebu 05/22/79 2,583,686 (1) Tugboat 1,939,000 Sandoval 12/18/79 03/28/80 Vessel still under construction. Mining Corp. Shipyard Delay is due to delayed order of asi eanglss. (2) 600 DVr barges 1,006,000 POC 12/18/79 03/08/80 06/12/80 64 805,000 1.006.000 03/08/80 06/12/80 64 805,000 31 Pedrito R. 11/07/78 06/13/79 1,884,800 (1) 350 3WT cargo 2,984,000 MSSC 09/10/79 01718/80 The vessel, already long overdue for Bastida vessel delivery, is still under construc- tion. (Omflict between borrower and shipbuilder.) 32 Seaborne Cor- 12/03/79 04/02/80 19,052,200 (2) 1200 WUT barges 3,508.000 OMC 09/01/80 01/06/81 01/29/81 3,400,000 Tugboats and chemical barges under riere Corp. 01/06/81 01/29/81 construction by E81. (2) 1200 DUT barges 3,508.000 Eppel 10/12/80 01/26/81 12/18/80 3560,000 01/26/81 01/14/81 (2) 1200 WT barges 3,508,000 EZI 10/09/80 01/06/81 01/17/81 3,564.000 01/06/81 02/17/81 (2) Tughboate 5.800,000 EE1 10/09/80 04/06/81 5,800,000 04/06/81 (2) 750 DWT chemi- 7,980,430 HI1 10/09/80 04/06/81 7,980,430 O cal barges 04/06/81 34 Martina Sea 11/20/79 05/14/80 4,404,000 (1) Tugboat 2,570,000 PIO1e 11/21/80 04/05/81 Delay Is due to weather disturbance Transport. Inc. and delay in transshipment of mater- lts. (1) 1100 OWT LCT- 2.960,000 PDC 12/08/80 03/10/81 Delay is due to modifications. type barge 35 brthern Mi- 01/09/80 08/13/80 12.305,000 (2) 1000 WT cargo 15,526,000 For implementation. danso Trans- vessels port Co., Inc. 09/09/80 04/01/81 2,109,000 36 Waterfront 08/25/80 12/17/80 4,803,300 (1) Tugboat 2.179,000 i1 05/30/81 10/30/61 Under construction. Stevedoring & (4) 500 Wrr barges 4.280.000 REI 05/30/81 07/16/81 Arrastre Ser- vices, Inc. 37 Islands Inte- 01/16/80 01/08/81 4,000,000 (2) 750 WT barges 2,840.000 tnder constructie. grated Offshore (1) Tugboat 2,842,000 Services, Inc. - 59 - ANNEX 3.2 PHILIPPINES SHIPPING PROJECT (LOAN 1048-PH) PROJECT COMPLETION REPORT Technical Assistance US$ A. Studies Maritime Training Institute: location, need, curriculum 162,300 Feasibility Study of Training Facilities 10,100 Financial Studies of Industry 15,000 Ten-Year Maritime Development Plan 30,000 B. Training Marine and Safety Surveyors 264,100 National Computer Center 14,950 Individual Training - Master Degree in Transportation (40 M/M) 34,700 - Master Degree in Marine Engineering (16 M/M) 20,780 - Other (maritime training, administration, law, etc.) 20,850 C. Engineering Related Related to preparation of ports loan 1,904,867 Related to National Transportation 1,022,353 Sector Study Total disbursed by Bank $3,500,000 - 60 - ANNEX 4.1 PHILIPPINES FIRST SHIPPING PROJECr (LOAN 1048-PH) PROJECT COMPLETION REPORT Subloans - Sumary of Financial Data Appli- Average T p sitive Subloan cation Ship(s) delay O ing Ne Debt/ no. date completed (months) income income Trend equity Notes 1 03/73 06/77 7 77 79 Improv- 66/34 Operating expenses underprojected ing 3 02/75 02/78 9 - D/b <0 Extremely poor situation. Operating income was positive 1978-79 and has been negative ever since. 4 ??/75 12/77 8 78 79 Imprv. 72/28 5 ??/75 03/77 1 80 - Imprv. 96/04 Losses decreasing 7 06/76 Importation 77 80 Xaprv. 66/34 Only bigger shipping line participating, vessel net income positive, company net income negative. 8 03/76 12/77 1 78 - Imprv. 99/01 Losses decreasing, net Income almost break even in 1981. 9 01/76 09/79 18 80 - ?/a 87/13 11 07/76 05/77 - - D/b <0 Operating income a positive in 1978, negative ever since. 12 01/76 05/78 0 79 79 Imprv. 73/27 Results better than projected. 27 05/78 02/81 8 81 81 ?/a Results better than projected. 15 05/77 ?/a - 16A 07/76 Importation - 78 79 Japrv. 53/47 Tanker much better than expected. 16B 03/78 78,79 0-7 79 80 S/b Barges break about even,but below projections. 19 08/79 04/81 7 81 - /a 77/23 One ship delivered, doing wall, two more still under construction. 20 12/76 04/79 0-9 - - D/b 96/04 Very high operating expenses, had equity infusion recently. 21 10/77 03/80 9 80 - ?j 87/13 22 05/77 07/80 8 80 - S/b 81/19 23 01/78 01/80 9 80 - ?/a 76/24 25 07/76 05/80 4 80 80 Imprv. 62/38 Doing very wall. 26 12/77 05/80. 6 80 - 8Lb 70/30 28 01/78 09/80 6 - - ?/ 85/15 Poor, technical defects of vessel. 29 05/79 06/80 2 - - D/b 69/31 One tugboat still under construction. Red positive Income for half year of 1980. 31 11/78 TL - ?/& I/& ?/a ?/a Vessel was due January 1980. 32 12/79 01/81 0 7/a 7/a 1/a ?/a Six barges completed on or before time. ? meas no information. D means detriorating, 8 means Stagnant. Note: There are a few more recent subloans, but no financial information is available at this time. Source: DBP - 61 - ANNEX 4.2 PHILIPPINES FIRST SHIPPING PROJECT (LOAN 1048-PH) PROJECT COMPLETION REPORT DBP - Profit/Loss Related to Loan Administration 1976 1977 1978 1979 1980 1981 Subloans: Interest collected 33 2,283 4,223 4,317 5,172 3,923 Fees (application, commitment, 70 103 327 514 705 338 service) Subtotal 103 2,386 4,550 4,831 5,877 4,261 Other Income 0 0 1,134 0 0 5 Total Income 103 2,386 5,684 4,831 5,877 4,266 Interest Paid 0 1,862 3,610 2,625 7,600 7,101 Financial Charges 0 128 226 229 543 592 Administrative Expenses, Misc. 13 266 351 528 557 575 Total Expenses 13 2,256 4,187 3,372 8,700 8,268 Profit/Loss Attributable to project 90 130 1,497 1 ,459 -2,823 -4,002 Source: DBP - 62 - ANNEX 5 Table 1 PHILIPPINES FIRST SHIPPING PROJECT (LOAN 1048-PH) PROJECT COMPLETION REPORT Costs and Benefits Candano Shipping Lines, Inc., MV Romeo, 1,000 DWT, 1980 (-P) Year Total benefits Total costs Net benefits/costs 0 (7,820,000) (7,820,000) 1 4,181,484 2,415,304 1,766,180 2 4,181,484 2,415,304 1,766,180 3 4,181,484 2,415,304 1,766,180 4 4,181 484 2,415,304 1,766,180 5 4,181,484 2,415,304 1,766,180 6 4,181,484 2,415,304 1,766,180 7 4,181,484 2,415,304 1,766,180 8 4,181,484 2,415,304 1,766,180 9 4,181,484 2,415,304 1,766,180 10 6,668,154 2,415,304 4,252,850 ERR = 19.73%. - 63 - ANNEX 5 Table 2 PHILIPPINES FIRST SHIPPING PROJECT (LOAN 1048-PH) PROJECT COMPLETION REPORT Costs and Benefits Southwest Cargo & Shipping Co., Inc., General Cargo/Log Carrier, MV Athena J, 1,000 DWT, Brand New (p) Year Total benefits Total costs Net benefits/costs 0 - 6,754,585 (6,754,585) 1 1,049,276 982,771 66,505 2 1,518,309 1,336,971 181,338 3 2,303,178 1,249,881 1,053,297 4 2,418,337 1,249,881 1,168,456 5 2,539,254 1,249,881 1,289,373 6 2,666,216 1,249,881 1,416,335 7 2,799,527 1,249,881 1,549,646 8 2,939,504 1,249,881 1,689,623 9 3,086,479 1,249,881 1,836,598 10 6,299,640 1,249,881 5,049,759 ERR = 9.57%. - 64 - ANNEX 5 Table 3 PHILIPPINES FIRST SHIPPING PROJECT (LOAN 1048-PH) PROJECT COMPLETION REPORT Costs and Benefits Philippine Lauan Shipping Corp., Log Carrier, MV Emprise I, 3,150 DWT, Brand New Year Total benefits Total costs Net benefits/costs 0 - 9,822,743 (9,822,743) 1 954,966 654,822 300,144 2 3,324,661 2,055,957 1,268,704 3 4,077,494 2,620,607 1,456,887 4 5,043,874 3,422,870 1,621,004 5 5,425,429 3,956,577 1,468,852 6 5,696,700 3,956,577 1,740,123 7 5,981,535 3,956,577 2,024,958 8 6,280,612 3,956,577 2,324,035 9 6,594,643 3,956,577 2,638,066 10 12,941,747 3,956,577 8,985,170 ERR = 13.6%. - 65 - ANNEX 5 Table 4 PHILIPPINES FIRST SHIPPING PROJECT (LOAN 1048-PH) PROJECT COMPLETION REPORT Costs and Benefits Interisland Ferry Service, Steel Cargo Vessel (Cargoes-Silica Sand Cement) MV Marielle, 300 DWT, Brand New (.P) Year Total benefits Total costs Net benefits/costs 0 - 1,592,854 (1,592,854) 1 617,482 510,739 106,743 2 691,340 503,061 188,279 3 725,907 503,061 222,846 4 762,202 503,061 259,141 5 800,312 503,061 297,251 6 840,328 503,061 337,267 7 882,344 503,061 379,283 8 926,462 503,061 423,401 9 972,785 503,061 469,724 10 1,773,424 503,061 1,270,363 ERR = 14.525%. - 66 - ANNEX 5 Table 5 PHILIPPINES FIRST SHIPPING PROJECT (LOAN 1048-PH) PROJECT COMPLETION REPORT Costs and Benefits Palacio Shipping, Inc., LCT, LCT J-J, 500 DWT - Brand New Year Total benefits Total costs Net benefits/costs 0 - 6,108,000 (6,108,000) 1 1,421,596 539,784 881,812 2 2,790,937 757,077 2,033,860 3 2,790,937 757,077 2,033,860 4 2,790,937 757,077 2,033,860 5 2,790,937 757,077 2,033,860 6 2,790,937 757,077 2,033,860 7 2,790,937 757,077 2,033,860 .8 2,790,937 757,077 2,033,860 9 2,790,937 757,077 2,033,860 10 6,471,160 757,077 5,714,083 ERR = 29.20%. - 67 - ANNEX 5 Table 6 PHILIPPINES FIRST SHIPPING PROJECT (LOAN 1048-PH) PROJECT COMPLETION REPORT Costs and Benefits Pasacao Transport Services, Inc., Oil Tanker, MT Caranan, 1,650 DWT, Secondhand Year. Total benefits Total costs Net benefits/costs 0 - (4,184,718) (4,184,718) 1 2,711,836 1,292,040 1,419,797 2 4,939,991 3,423,213 1,516,778 3 5,663,866 3,124,297 2,539,570 4 5,663,866 3,124,297 2,539,570 5 5,663,866 3,124,297 2,539,570 6 5,663,866 3,124,297 2,539,570 7 5,663,866 3,124,297 2,539,570 8 5,663,866 3,124,297 2,539,570 9 5,663,866 3,124,297 2,539,570 10 7,672,539 3,124,297 4,548,242 ERR = 46.15%. - 68 - ANNEX 5 Table 7 PHILIPPINES FIRST SHIPPING PROJECT (LOAN 1048-PH) PROJECT COMPLETION REPORT Costs and Benefits Total Bulk Corp., Specialized Tanker, MT Molahauler, 550 DWT, Brand New (.F) Year Total benefits Total costs Net benefits/costs 0 - (5,340,938) (5,340,938) 1 2,791,573 1,710,392 1,081,181 2 3,690,614 2,581,735 1,108,879 3 3,636,476 1,986,795 1,649,681 4 3,636,476 1,986,795 1,649,681 5 3,636,476 1,986,795 1,649,681 6 3,636,476 1,986,795 1,649,681 7 3,636,476 1,986,795 1,649,681 8 3,636,476 1,986,795 1,649,681 9 3,636,476 1,986,795 1,649,681 10 4,324,506 1,986,795 2,337,711 ERR - 24.3%. - 69 - ANNEX 5 Table 8 PHILIPPINES FIRST SHIPPING PROJECT (LOAN 1048-PH) PROJECT COMPLETION REPORT Costs and Benefits Pasacao Transport Services, Inc.; Vessels - MT Daroanak, 730 HP; Barges - Balogo I, 750 DWT, Balogo II, 750 DWT, Balogo III, 750 DWT, Balogo IV, 750 DWT; 1978 Year Total benefits Total costs Net benefits/costs 0 - (5,953,000) (5,953,000) 1 1,366,872 586,482 780,390 2 2,443,685 1,096,346 1,347,339 3 2,980,553 1,304,620 1,675,933 4 2,980,553 1,304,620 1,675,933 5 2,980,553 1,304,620 1,675,933 6 2,980,553 1,304,620 1,675,933 7 2,980,553 1,304,620 1,675,933 8 2,980,553 1,304,620 1,675,933 9. 2,980,553 1,304,620 1,675,933 10 5,944,545 1,304,620 4,639,925 ERR 22.51%. - 70 - ANNEX 5 Table-9 PHILIPPINES FIRST SHIPPING PROJECT (LOAN 1048-PH) PROJECT COMPLETION REPORT Economic Rates of Return for Ships Financed under the Project Average load Avg. factor no. of Cost of per trips Name of company/ Type of Capacity vessel trip made ERR subloan no. Name of vessel vessel (DWT) (0) (M) p.a. (Z) Northern Mindanao MV Alexandra Cargo 650 2,710,268 - - 13.47 Transport Co., Inc. vessel (Subloan No. 4, MV Leticia Cargo 660 2,710,268 - - 7.71 Subloan No. 35) vessel Philippine Lauan MV Bnprise I Log carrier 3,150 9,766,694 65.0 26 13.60 Shipping Corp. (Subloan No. 1) Total Bulk Corp. MT Molahauler Specialized 550 4,466,500 98.3 74 24.30 (Subloan No. 12) tanker Palacio Shipping, LCT-JJ LCT 500 6,108,000 Time char- 42 29.20 Inc. tered by (Subloan No. 25) SMC Paul M. Corominas MV Alfonso Cargo 350 3,630,088 - - 21.89 (Subloan No. 26) vessel Pasacao Transport MT Caranan Oil tanker 1,650 4,017,346 99.8 42 46.15 Services, Inc. MT Daroanak, Tugboat, (730 HP 5,953,000 - 22.51 (Subloan No. 16A, Balogo I-IV Barges 750 @) Subloan No. 16B) Candano Shipping MV Romeo Cargo 1,000 7,820,000 - - 19.73 Lines, Inc. vessel (Subloan No. 19) Interisland Ferry MV Marielle Cargo 300 1,500,000 50.0 50 14.53 Service Corp. vessel Southwest Cargo & MV Athena Cargo 1,000 5,798,113 64.2 60 9.57 Shipping Co., Inc. vessel (Subloan No. 5, Subloan No. 5A)