Philippines - Telecommunications Technical Assistance Project

Documfc of The World Bank FOR OFFICIAL USE ONLY Report N.e P-3891-PH REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AMD DEVELOPMENT TO THE EXECUTIV DIRECTORS ON A PROPOSED LOAhN IY AN AMOUNT EQUIVALENT TO US$4.0 MILLION TO THE REPUBLIC OF THE PHILIPPINES FOR A TELECOMMUNICATIONS TECHNICAL ASSISTANhCE PROJECT January 28, 1985 This document has a restricted distribution and may ;e used by recipients only in the performance of their official duties. Its oatents may not otherwise be disclosed without World Bank authoruiation.  CURRENCY EQUIVALENTS Currency Unit Peso (P) US$1.0 - P 20.00 P 1.0 = USSO.05 GOVERNMENT OF THE PHILIPPINES FISCAL YEAR January 1 - December 31 ACRONYMS BUTEL - Bureau of Telecommunications JICA - Japan International Cooperation Agency MOTC - Ministry of Transportation anxd Communications NTC - National Telecommunications Commission PLDT - Philippines Long =stance Telephone Company PPF - Project Preparation Facility  FOR OmCIAL USE ONLY PHILIPPINES TELECOMMUNICATIONS TECHNICAL ASSISTANCE aGi-CT Loan and Projrct Summary Borrower: Republic of the Philippines Beneficiary: National Telecommunications Commission (NTC) within the Ministry of Transportation and Communications (MOTC) Amount: US$4.0 million Terms: fayable over 20 years, including five years of grace, at the standard variable interest rate. Project Description: The Philippine Government has postponed the major elements of its telecommunications sector investment program until the macro-economic situation improves. However, iP order to maintain the momentum of the institutional and policy reforms for the sector initiated over the past few years, this technical assistance project would promote and support the sound regulatory, institutional and financial development of the telecommunications sector. The project thus provides consultancy services and equipment for: (a) strengthening NTC within the MOTC; (b) a tariff study; (c) radio frequency management; (d) network planning; and (e) reviewing training needs, plus fellowships. The project would provide MOTC/NTC with the means to adequately regulate existing sector operations, lay the groundwork for future major physical investments once the macro-economic situation improves, and ensure viable private sector operation, consistent with the public interest. There are no major risks to the project per se, but achievement of the potential long-run benefits of thTe project would be subject to boch political risks and the possibility of delay in the ecoaonxic recovery. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. [ts contents may not otherwise be disclosed without World Bank authorization.  - ii - Project Cost: Local Foreic Total Strengthening of NTC 90 432 522 rariff study 90 216 306 Radio frequency management: consultancy 130 576 706 equipment and services 208 700 908 Updating of network plan 60 72 132 Training 60 250 310 Subtotal 638 2,246 2,884 Physical contingencies - 225 225 Price contingencies 162 529 691 Refinancing of PPF - 1,000 1,000 Total project cost /a 800 4,000 4,800 Financing Plan: Local Foreign Tctal (USS '000) IBRD - 4,000 4,000 Government 800 - 800 Total 800 4,000 4,800 Estimated Disbursements: Bank FY 1985 1986 1987 1988 1989 1990 (US$ M) Annual 1.0 0.6 0.8 0.8 0.6 0.2 Cumulative 1.0 1.6 2.4 3.2 3.8 4.0 Rate of Return: N/A Staff Appraisal Report: There is no staff appraisal report. Map: IBRD Map Nb. 17234 /a Taxes and duties are insignificant.  REPORT AND RECOMM!ENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPKENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF THE PRILIPPINES FOR A TELECOMMUNICATIONS TECHNICAL ASSISTANCE PROJECT 1. I submit the following report and recommendation on a proposed loan to the Republic of the Philippines for the equivalent of $4.0 million, to help finance a technical assistance project for the telecommunications sector. The loan would be repaid over 20 years, including five years of grace, at the * standard variable interest rate. PART I - THE ECONOMY 2. An economic report entitled "The Philippines: An Agenda for Adjust- ment and Growth" (No. 5258-PH) was distribluted to the Executive Directors under Sec. M84-1038, dated December 14, 1984. A special report, "The Philip- pines: A Review of External Debt" (No. 4912-PH), was distributed to the Executive Directors on November 2, 1984. Country data are given in Annex 1. Performance in the 1970s 3. During the 1970s, the Philippines followed a much more dynamic, growth-oriented development strategy than in earlier decades. The growth rate of GDP rose from 5.1% in the 1960s to 6.2% in the 1970s, a rate well above that of lower middle-income oil importers (5.6%) but lower than that of com- parable Asian countries. During the 1970s, the agricultural sector grew at about 4.5% p.a. and manufacturing industry at 7.2%. ManuractarTng, however, did not play a leading role in the country's economic development. Although manufactured exports grew rapidly, the greater part of the sector remained oriented to the domestic market and was affected by severe inefficiencies. 4. Although economic performance was relatively good in the 1970s, structural weaknesses held it below its full poteitial. GDP growth was achieved at a high investment cost - the incremental capital/output ratio (ICOR) was about 35% higher thaa those of comparable Asian countries. Although inherently capital-intensive infrastructure investments explain part of the high ICOR, ineFf:ciency of industrial investment was the more important cause. Inappropriate trade, industrial, financial, and exchange rate policies designed to foster import substitution provided high protection for domestic manufacturers, and led to investments in which the Philippines did not have a 1/ This section is substantially the same as that contained in the President's Report for the Agriculture Sector/Inputs Project which was distributed to the Executive Directors on July 17, 1984.  -2- Llear comparative advantage. External borrowing and imports expanded rapidly while traditional exports and domestic resource mobilization lagged. This resulted in a chronic shortage of foreign exchange and increasing external debt. 5. Despite satisfactory aggregate growth during the 1970s, the inci- dence of poverty remained around 40%, income distribution continued to be skewed, and regional risparities remained pronounced. The incidence of poverty reached 60-7C7 in the least developed regions. Large numbers of people, especially in the rural areas, still suffer from malnutrition and lack safe water, basic education, and health facilities. An increasingly unfavorable man/land ratio, the resulting expansion of cultivation into marginal lands, limited employment opportunities in the industrial sector, and the sharp deterioration in the external terms of trade put downward pressure on real incomes. Although the Government instituted several programs to improve directly living conditions of the poor, most of these were implemented on any significant scale only during the last few years and are yet to have a marked impact on reducing poverty. 6. Population growth in the Philippines was reduced from 3% in the 1960s to 2.5% in the early 1980s; the labor force continues to grow at over 3% per year, reflecting the rapid population growth of past decades. Thus, rapid population and labor force growth continues to strain available land resources, aggravate the already serious unemployment and poverty problems, and burden the public budget with a high growth in demand for basic public services. The Philippines has a family planning program which expanded rapidly during the 1970s; however, participation in the program is still low by East Asian standards. 7. Growth of productive employment, particularly in the industrial sector, has lagged behind the rapid expansion of the labor force, and consid- erable underemployment exists. During the 1970s, the agriculture and service sectors had to absorb an excessively high proportion of new entrants to the labor force. Manufacturing employment stagnated in the first half of the decade, and picked up only slightly thereafter as labor-intensive export pro- duction grew. Overseas employment, especially in the Middle East, increased rapidly, providing a temporary income opportunity. Structural Problems and Adjustment 8. The structural weaknesses of the Philippine economy have become more apparent in recent years as unfavorable world economic conditions have exacerbated the balance of payments, debt, and resource mobilization prob- lems. In the late 1970s, the country's terms of trade deteriorated sharply due to oil price increases, accelerated international inflation, and depressed prices for major export commodities. The continued heavy reliance on export earnings from a few primary products (coconuts, sugar, copper, and timber) kept the Philippines extremely vulnerable to international commodity price fluctuations, while continued high dependence on imported oil further aggravated the balance of payments problem.  -3- 9. Excessive protection and an artificially low cost of capital led to low efficiency of investment and stagnant employment in industries producing for the domestic market. The industrial sector remained a net burden on the balance of payments; although manufactured exports grew rapidly, their net foreign exchange earnings were limited due to a high import content. Export promotion measures induced rapid growth in nontraditional manufactured exports, e.g., garments, electronics and handicrafts, from S50 million in 1970 to $2.4 billion in 1982. However, export expansion was concentrated on a few items, and backward linkages were limited by high cost and low quality of domestic inputs. As part of an adjustment program supported by SAL lending, the Governnent has initiated major policy reforms designed to move towards an industrial structure utilizing more effectively the country's comparative advantage with respect to labor cost and raw material availability and which is internationally competitive. The program includes major tariff reform, liberalization of import controls, realignment of industrial incentives and improved export incentives. The implementation of the program has been good, despite the international recession which has hampered the adjustment process in the manufacturing sector and slowed down the sector growth rate from around 4Z in 1980-81 to an estimated 1% in 1982-83. 10. Financial Sector. Although well developed, the Philippine financial sector has not performed adequately in raising private sector savings and pro- viding investment financing. 4mong the main reasons have been the level and structure of interest rates which were not geared to mobilize sufficient sav- ings and encourage longer maturities; their low level contributed to rela- tively inefficient and capital-intensive investment. Further, the Central Bank's rediscounting scheme frequently resulted in encouraging over-investment in some sectors while others were relatively neglected. In 1981, the Govern- ment introduced far-reaching financial policy changes. The banking system was given greater flexibility, interest rates were deregulated, and the Central Bank was given a stronger position in its role as "lender-of-last-resort,t all of which produced positive real interest rates (for the first time since 1978) and a significant increase in domestic savings. Government-owned lending institutions have made less progress; as a result of insufficient autonomy in the selection of their portfolios plus a depressed domestic economy, loan collection rates continue to be very low and substantial government budgetary support is required. Rehabilitation of several government-owned institutions is necessary to reduce strains on the budget and to continue important development banking operations. 11. Agriculture and Rural Development. While the performance of ''te agricultural sector was satisfactory during the 1970s, some policy problems still remain unresolved. Although the sector has made commendable progress in food production in the last ten years, it could have made a stronger contribu- tion to the balance of payments under a more favorable policy environment. Trade policies have discriminated against agriculture. Similarly, pricing and exchange rate policies have had a negative impact on agricultural incomes. The institutional framework for agricultural policy formulation and implemen- tation suffers from serious fragmentation. Overall, there is a need to deal directly with the problem of the rural poor, particularly farmers engaged in rainfed agriculture, coconut growers, municipal fishermen, and landless sugar workers. Increasingly, investment programs will have to be directed towards  - 4 - rainfed agriculture and include innovative appro_ches to reaching smallholder farmers. 12. Energy. Since the 1973-74 oil price increase, the Philippines has made a considerable effort to reduce its dependence on imported oil. Through a combination of pricing, taxation, and conservation measures, the Government exerted downward pressure on commercial energy consumption. Steps to increase and diversify domestic energy supply, i.e., the development of hydroelectric, geothermal, nuclear and coal based power sources, have contributed to reducing import dependence. Limited domestic petroleum production also began in 1979. However, due to the long gestation period of energy projects, domestic energy production still Lonstituted only 232 of total commercial energy supply in 1983. In response to the second oil crisis, the Government included in its adjustment program policy measures for the energy sector which aim at further reducing the country's dependence on oil imports through improving the efficiency of energy use and increasing the share of domestic sources to nearly 50% of commercial energy supply by 1987. Pricing policy will continue to support conservation and revenue objectives. 13. Public Sector Resource Management. The weak management of public sector resources has been a chronic problem in the Philippines, and has been further aggravated by the current recession. The fiscal stress generated by the growing imbalance between public investment and public sector resource mobilization has manifested itself in a number of ways. Government current expenditures (exclusive of interest payments) have been reduced to only 9% of GNP, as compared to an average of 14% of GNP in middle-income developing coun- tries. Implementation of projects has been stretched over longer periods than is economically efficient. The overall public sector deficit has become excessively high and has threatened the stability of the economy, particularly in 1981-1982. A rapidly rising level of public investment and an unsatisfac- tory financial performance of public corporations contributed towards increas- ing the fiscal deficit despite a reduction of recurrent expenditures. The public sector deficit, which traditionally had been relatively small, reached a peak of 5.8% of GNP in 1982. 14. As a short-term response, the Government is now implementing a fis- cal austerity program. To reduce the national budgetary deficit to manageable levels, the Government has enacted revenue measures and reduced its investment program and equity contributions to public corporations. However, to improve the medium-term outlook for public finances, structural problems of the system need to be addressed. The Current Economic Situation 15. The econom