Philippines - Smallholder Tree Farming and Forestry Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 7585 PROJECT PERFORMANCE AUDIT REPORT PHILIPPINES SMALLHOLDER TREEFARMING AND FORESTRY PROJECT (LOAF 1506-PH) DECEMBER 30, 1988 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in 'he performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Name of Currency (Abbreviation) Peso (P) Appraisal year average (1977) US$1.00 - V 7.4 Intervening years average (1978-85) US$1.00 - V10.6 Completion year average (1986) US$1.00 - f20.0 GLOSSARY OF ABBREVIATIONS USED APPDP Abra Pine Plantation Development Project APPU Agricultural Project Preparation Unit BFD Bureau of Forest Development BPI Bureau of Plant Industry DBP Development Bank of the Philippines FAPMU Foreign-Assisted Project Management Unit FORI Forestry Research Institute GOP Government of the Philippines MAF Ministry of Agriculture and Food MNR Ministry of Natural Resources NGO Non-Governmental Organization PCARRD Philippine Council for Agriculture, Forestry and Natural Resources Research and Development PCR Project Completion Report PPAM Project Performance Audit Memorandum SAR Staff Appraisal Report WIDA Wood Industry Development Authority GOVERNMENT OF PHILIPPINES FISCAL YEAR January 1 - December 31 FOR OFFICIAL USE OWLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Ofir of Octor-Genral Operatmans Evaluatian December 30, 1988 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT* Project Performance Audit Report on Philippines Smallholder Treefarming and Forestry Project (Loan 1506-PH) Attached, for information, is a copy of a report entitled "Project Performance Audit Report on Philippines Smallholder Treefarming and Forestry Project (Loan 1506-PH)" prepared by the Operations Evaluation Department. Attachment This document has a restricted distribution and may be used by recipients only in the performance of their offi3al duties. Its contents may not otherwise be disclose6 without World Bank authorlastion. FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT PHILIPPINES SMALLHOLDER TREEFARMING AND FORESTRY PROJECT (LOAN 1506-PH) Table of Contents Page No. PREFACE ....... . . . ............. ..... I EASIC DATA SHEE ................................ 1i1 EVALUATION SUMMARY ............................................. vi PROJECT PERFORMANCE AUDIT MEMORANDUM I. Proiect Background ...... ....................... 1 Context.................. .......................... 1 Objectives......................................... 1 Design............................................ 1 Finance Plan...........................*000v*90900000 2 Pre-implementation Processing...................... 2 II. Proiect Implementation and Processina.............. 4 Management........................o................. 4 Start-up................... .. .... .............. 4 Sequence........................................... 4 Otcomes............................................ 5 Economic Performance.. ..... .*...................... 5 Sustainability..o.................. ...o............o 6 Environmental Effects..................0..0..... 6 III. Findings and Issues................................ 6 Overview....... ...... .... ..... . ...... ** ** 0........ 6 Issues Arising..................................... 6 A. Over-optimistic Appraisal Expectations... 6 B. Unrealistic Yield Assumptions............ 6 C. Plantation Site Selection.............. 9 D. Paper Industries Corporation of the Philippines Experience................... 10 OVERVIEW OF TE PROJECT COMPLETION REPORT....o................ 13 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. Table of Contents (Cont'd) Pase No. PROJECT COMPLETION REPORT I. Introduction................................... 35 II. Implementation.......................... .0000.... 44 III. Impact............................................. 57 IV. Rates of -etn................................... 62 V. Institutional Performance.,................... 64 VI. Special Issues .....*.*.......................... 65 VII. Changes in Repeater Project.................... *.... 69 VIII. Conclusions*.................................... 71 Ix. Recommendation*... ...... ...................... 73 Tables 1. Target and actual disbursements of funds for the Credit Component under the Treefarming II Credit Line (Loan No. 1506-PH), 1978 to 1985............................. 75 2. Treefarming II Target and actual commitment of Funds, 1978 to 1983.......0*........................ 76 3. Treefarming II Annual availment of funds, 1979 to 1985................................................ 77 4. Treefarming II: Annual availment of funds, by category, 1979 to 1985................................... 78 5. Treefarming IIs Appraisal and actual cost, by source of fund..................................... 79 6. Treefarming II: Summary of target and actual number and area financed, amount of sub-loans granted, by type of sub-project, 1978 to 1983 ......."........ ......... 80 6a. Treefarming IIs Target and actual number of farms financed, by type of sub-project and year.................. 81 6b. Treefarming II: Target and actual area financed by type of sub-project and year.......................... 83 6c. Treefarming IIt Amount of sub-loans granted, by type of sub-project and year... ................... .. ...... 85 7. Treefarming IIs Target and actual average size of farm financed, by sub-project type............................... 87 8. Treefarming Us Target and actual number and percentage distribution of farms financed, by region and sub-project type ................................. 87 Table of Contents (Cont'd) Page No. 9. Treefarming II Target and actual distribution of farm area financed, by region and sub-project type....... 88 10. Treefarminn II: Rates of return of sub-loans, by type of sub-project............................. ....... 89 11. Treefarming II: Net operating income per hectare, by type of sub-prject, 1978 and 1984...... ..... ..... 90 12. Treefarming II: Expenses per hectare, by type of labor and operation, 1984...... . ...... .................... 91 13. Treefarming IIs Employment generation per hectare, by type of laborloperation and sub-project.................. 92 14. Treefarming II: Results of operations per income statement, 1978 to 1984................... .............. 93 15. Treefarming IIs Results of operations after cost of funds, by average growth rate, 1978-1984............ 94 16. Treefarming II: Results of operations after cost of funds with percentage of average investment, 1978-1984.*.......................... 95 PCR Annexes A. Study Methodology B. Performance of Contractors/Supplier C. Farm Investments D. Agricultural Impact E. Supporting Services F. Farm Credit G. Arreages H. Institution Building COMMENTS FROM THE BORROWER Attachment I - Development Bank of the Philippines Attachment II - Pl .1ippine Council for Agriculture, Forestry ano Natural Resources Research and Development MAPS - IBRD Nos. 13076R 13077 - I- PROJECT PERFORMANCE AUDIT REPORT PHILIPPINES SMALLHOLDER TREEEARMING AND FOESTRY PROJECT (LOAN 1506-PH) PREFACE 1. This is a Project Performance Audit Report (PPAR) on the Small- holder Treefarming and Forestry Project, involving an IBRD loan in the amount of US$8.0 million to the Government of the Philippines with the twofold objectives of initiating industrial-scale reforestation with long fibre species, and demonstrating the lucrative possibilities of tree farm- ing to smallholders and subsistence farmers. The loan was approved on December 22, 1977, and became effective on May 11, 1978. US$3.8 million of the loan was cancelled. Initially it was reduced by US$2.35 million, when the balance outstanding of the credit component was cancelled on October 17, 1984. Subsequently, an undisbursed balance of US$1.45 million was cancelled after loan closure. The closing date of December 31, 1983 was extended to December 31, 1985. Final disbursement was made on June 30, 1986. 2. The PPAR consists of the Project Performance Au,it Memorandum (PPAM) prepared by the Operations Evaluation Department (OED), an Overview, prepared by the former East Asia and Pacific Regional Office, and the Project Completion Report (PCR) prepared by the Borrower. The PPM is based on the attached PCR and Overview, the Staff Appraisal Report No. 1696-PH dated November 4, 1977, the President's Report No. P-2179-PH dated December 6, 1977, the Loan Agreement dated January 23, 1978, the transcripts of the Executive Directors' meetings at which the project was considered, a study of project files, and on discussions with Bank staff. The Project Performance Audit Report (Report No. 5744), the SAR (Report No. 424a-PH), and the PCR of the Indastrial Investment and Smallholder Treefarming Project (Loan 998-PH), which included a US$2.0 million component for a pilot smallholder treefarming project, were also reviewed. The Overview and the PCR were submitted to OED on April 28, 1987. 3. An OED mission visited the Philippines in July 1988, and discussed the effectiveness of the Bank's assistance with officials in the ministries and other agencies associated with the project in Manila. Field visits were also undertaken to a representative selection of project sites for familiarization and to interview staff responsible for implementation and project beneficiaries. Their kind cooperation and valuable assistance to the mission is gratefully acknowledged. 4. The PCR was prepared by the Development Bank of the Philippines (DBP), the agency implementing the credit component, with assistance from - Ui - the Bureau of Forest Development (BFD! and the Philippines Council for Agriculture, Forestry and Natural Resources Research and Development (PCARRD). The PCR fairly records the progress, problems, failures and successes of the project, out overstates the economic benefits for the smallholder treefarming component. The Regional overview complements the PCR by addressing the problems arising in a more forthright manner and discussing the issues which arose in greater depth. 5. Following standard OED procedures, copies of the draft PPAR were sent to the Government. Comments received from DBP and PCARRD are reproduced as Attachments I and II. - iII - PROJECT PERFORMANCE AUDIT REPORT PHILIPPINES SMALIOLDER TREEFARMING AND FORESTRY PROJECT (LOAN 1566-PH) BASIC DATA SHEET KEY PROJECT DATA Appraisal Actual or Actual as of Item Expectation Current Estimate Appraisal Estimate Total Project Costs (USS million) 16.6 10.7 67 Loan Amount (USS million) 3.6 4.2 52 Date Physiel Components Coopleted&,_ 12/81/82 12/81/88 126Lc Proportion completed by that date (M) 8W 40 46 Economic Rate of Return () 27-167 1. 4-6 n/a rinancal Rate of Return () 25-165 14 4-6 n/sf Institutional Performance below appraisal expectatione Agronomic Performance below appraleal expectations f/ Number of direct beneficiaries 7,46 1,792 24 CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS FY78 FY79 FYW FY81 Y2 FY8 FY54 FY86 Appraisal Estimate (USS million) 0.67 0.92 2.28 4.37 6.72 8.66 6.66 8.6 8.66 Actual (USS million) 6.66 606 6.64 1.71 2.16 8.87 8.76 8.9 4.20 Actual as X of Appraisal () 6.60 0.00 24 41 82 42 - - Date of Final Disbursement June 80, 1986 PROJECT DATES Appfrle Actual Date of Board Approval n.s. 12/22/77 Date of Loan Signing n.e. 01/28/78 Date Effectivenees 01/81/78 65/11/70 Closing Date 12/81/88 12/81/86Lc - lv - STAFF INUT (Staff Weekø) FY78 FV74 FY75 FY78 FY77 FY78 FY79 YGG FYGI FYG2 FY83 FYG4 FYØS FY88 FWS TotalI Pr,approlool 8.8 6.4 19.8 21.6 52.8 - - - - - - - - - - 94.0 Apprasal - - - - 22.2 14.9 - - - -- - - - - 87.1 Negotation - - - - - 9.9 - - - - - - - - - 9.9 Supervision - - - - - 1.4 7.0 12.4 14.4 10.8 18.8 16.1 8.4 12.4 2.2 108.0 Other - - - 6.1 .8 0.8 - - - - 6.8 - - - - 1.5 TOTAL 6.8 6.4 19.8 21.7 74.6 27.0 7.8 12.4 14.4 16.8 18.6 16.1 8.4 12.4 2.2 245.6 MISSION DATA Speciøliza- Date No. of tlone Pørfor~ance Typs of Msseon (oo./yr.) Persona R*prsnted Ratin TC!nd Proble~s Le Lb i Li Identlfloation L 01/78 2 b,i Preparotion L 66/78 4 ,s,s,b n.e. n.*. 01/77 8 PrppraløgI 10/78 8 Approisel 04/77 8 o,b,c in n.*. n.*. Supervioon I 68/78 1 1 2 F,M Supervialon II 01/79 1 s 2 2 F,M,O Supervislon III 11/79 1 0 2 2 F,M Supervilon IV 05/80 2 *,f 2 2 F,T Supervielon V 02/81 2 6,g 2 2 F,T Supervlsion VI e8/sl 1 2 2 F,T Supervislen VII 08/82 8 ,ab 2 1 F,M,T Supervilon VIII 08/82 2 eb 2 2 M,T Superviolon IX 02/88 2 e 2 8 F,M,T Supervlslon X 11/88 1 1 2 2 F,M,T Supervlolon XI 61/84 2 c,0 n.a. n.a. n.*. Supervimlon XII 68/84 2 *,c 2 2 F,M,T Supervilon XIII Ø8/85 1 c q.e. n.&. n.a. Supervirilon XIV 11/86 2 e,g 4 2 F,T OTHER PROJECT DATA Borrower: Republic of the Philippines Executing Agencies Development Bank of the Philippines (DBP) Bureau of Forest Development (BPO) Philippines Council for Agriculture, Forestry and Natural Resources Research and Developent (PCARRD) Pertaining to roads and building construction under the pine plantation development component. Percentage in third column ts calculated from Board approval date. The Seal tholder Treeforming component was closed on December 81, 1988. A variety of subprojects. Pertaine to agronomic performance of both the tree farming credit component and the pine plantation development component. f US22.85 million was cancelled effective October 17, 1984 and the total loan amount reduced to USSS.65 million. Before the cancellation became effective, as of May 21, 1988, the Bank requested DBP not to make new subloan components. &a agriculturist; b = agricultural economist; c = financial analyst; d a agricultural credit specialist; * forester; f = loan officer; g a technical, silviculturist, entomologist; h = plantation specialist; I a economist. 1 a problem-free or minor problems; 2 = moderate problems; 8 a major problems. 1 a improving; 2 a stationaryl 8 a deteriorating. F = financial; M a managerial; P = political; T a technical; 0 a Other. Identifled fol!owing the USS2 million loan for the pilot smallholder tree farming project supported under Bank Loan 99-P, an Industrial Investment and Smallholder Tree Farming Project. Ll A joint FAO/CP Bank mission prepared the project. fg Preparation of the BFD pine plantation component identified during project preapproleal. Therefore, the preparation followed, rather than preceded preppraloal. - vi - PROJECT PERFORMANCE AUDIT REPORT PHILIPPINES SMALLHOLDER TREEFARMING AND FORESTRY PROJECT (LOAN 1506-PH) EVALUATION SUMMARY Introduction 1. This was the second forestry project financed by the Bank in the Philippines. It included two principal components, namely afforestation to be handled by the Bureau of Forest Development (BFD), and smallholder treefarming which was the responsibility of the Development Bank of the Philippines (DBP). Objectives 2. The project had two principal objectives. Firstly, to initiate an industrial scale pine reforestation program, and secondly to demonstrate the lucrative opportunities in treefarming to smallholders and subsistence farmers. Implementation Experience 3. Progress of both components was less than satisfactory from the start. The plantation component encountered serious peat infestation problems which led to a curtailment of the planting program and reformulation of the component towards trials and entomological research. 4. The smallholder treefarming component also fell short of its targets, and dissatisfaction on the part of the Bank with the financial and operational performance of DBP led to cancellation of the DBP credit component with only 47% of the subloans allocation disbursed. 5. After a two year extension of the plantation component the loan was closed with only 52Z of the agreed amount disbursed. Results 6. The plantation component failed in respect to its appraisal objective of initiating an industrial scale reforestation program. The smallholder treefarming component failed in its objective of demonstrating the lucrative opportunities in treefarming to smallholders, especially those who planted ipil-ipil (the local name for a fast growing leguminous tree), many of whom are, along with DBP, now having to bear a loss from their investment in tree farming. - vii - Sustainability 7. Both principal components are clearly unsustainable. Findinas and Lessons 8. The principal cause of failure in this project can be traced back to inadequacy in the preparation and appraisal process. Preparation should have been more rigorous; and appraisal should have been governed by more realistic, less optimistic assumptions. The Bank's internal project review system operated imperfectly in this instance (PPAM paras. 24-31). 9. Standard Bank practice was not observed in *-hat a preparation report was never finalized, and the appraisal mission was dispatched before project preparation was completed (PPAM paras. 9 and 30). 10. Despite the failure of the smallholder treefarming component, a private sector initiative, which was supported under a previous pilot project and is continuing, confirms that treefarming remains a viable investment proposition in the Philippines. The success of this private initiative is attributable to the fact that the company provides good quality planting material and a high level of extension advice in addition to an assured market at a fair price for quality produce (PPAM paras. 32-38). PROJECT PERFORMANCE AUDIT MEMORANDUM PHILIPPINES SMALLHOLDER TREEFARMING AND FORESTRY PROJECT (LOAN 1506-PH) I. 'PROJECT BACKGROUND Context 1. A rapid increase in forest exploitation caused by strong overseas demand for logs and other forest products, and by forest destruction resulting from the activities of shifting cultivators during the 1950s and 1960s gave rise to much concern for the future of the Philippines forest industry, and led to the formulation in the mid 1970s of a National Program for Forest Ecosystem Management. The program had as its basic objectives the reforestation and protection of the Philippines rapidly declining forest resources. The project was intended to support this program. Obiectives 2. The project had two principal objectives. Firstly to initiate an industrial scale reforestation program with long fiber (pine) species which was to pave the way for wide-scale industrial reforestation; and secondly to demonstrate the lucrative opportunities in treefarming to smallholders and subsistence farmers through provision of credit and other services for tree planting. Desism 3. Separate, independent components were drawn up for each of the above objectives. The Bureau of Forest Development (BFD), recently renamed the Forest Management Bureau, was made responsible for the 3,020 hectare (ha) pine reforestation component, using Pinus caribaea, an exotic fast growing tropical pine, which was to be established within a 33,000 ha reforestation site in Abra province in northwestern Luzon. The site was selected because of its proximity to a private pulpwood mill which was expected to provide a secure market for the wood produced. Because little was known about Pinus caribaea in the Philippines the planting program was planned to permit rapid testing of imported strains and development techniques for plantation development, on 400 ha of trial plantings in the first three years of the project, followed by 600 and 2,000 ha of plantation scale development in the fourth and fifth years respectively. 4. The smallholder treefarming component was made the responsibility of the Development Bank of the Philippines (DBP). DBP had previous experience in providing credit to smallholders for tree farming, and had -2- been assisted under an earlier Bank loanl/ through which 15,022 he of Albizzia falcataria (a locally popular leguminous pulpwood) was planted by 1,300 smallholders in the neighborhood of a privately owned paper mill in northeastern Mindanao which provided a guaranteed market for the smallholder's logs. The success of this project in its early years encouraged both Bank and GOP in the belief that DBP could expand on this initial effort, and a four year 28,600 ha planting target was accordingly set. The component as appraised was to include 22,200 ha of giant ipil ipil (Leucaena leucocephala, a fast growing leguminous tree species) to be used for tobacco curing, charcoal or leaf meal in addition to 6,400 ha of falcataria. Market security was to be provided through marketing agreements between the DBP assisted smallholder borrowers and five private companies, with operations in Luzon, the Visayas and Mindanao, which had agreed to participate by purchasing the tree products. The company which had pioneered the smallholder treefarming approach to pulpwood production, and had beei involved in the earlier project, declined to participate because of reservations regarding the outlook for pulp and paper products at the time of preparation and appraisal. 5. The project as appraised also included three small components, for establishing project preparation units withiA the Department of Agriculture and the Department of Natural Resources (DNR) and a wood industry development study. Finance Plan 6. The US$8.0 million Bank loan was inten4ed to finance 50% of the estimated US$16.0 million total project cost. In the event, the Bank disbursed only US$4.2 million, amounting to 45% of the actual US$9.3 million final cost. Cost underruns were a direct result of shortfalls in target attainment, especially with regard to the two principal components. Pre-implementation Processing 7. At the start of the identification stage in early 1976 the project was envisaged as a 24,000 ha extension of the earlier falcataria pulpwood treefarming project in northeastern Mindanao together with an additional 45,500 ha giant ipil-ipil component for producing charcoal, agricultural props, woodfuel and leaf meal in other parts of the country. The project, as envisaged at that time, was to be directed toward assisting shifting cultivators in establishing eight ha tree farm plots on debilitated grasslands in formerly forested areas. The project preparation was viewed as straightforward and implementation as relatively free of problems. 8. However, in May 1976 an FAO/CP-Bank review mission, which provided a more complete basis for identification, concluded that the original targets were too ambitious, and noted that DBP had reduced its proposal to a firm base of only 2,400 ha of falcataria and 1,000 ha of ipil-ipil. The 1/ Phlippines - Development Bank of the Philippines (Loans 998-PH and 1190-PH), PPAR No. 5744, June 28, 1985. - 3 - mission recognized that this new proposal would be too small in investment terms from the Bank's point of view, and proposed that preparation be undertaken of a project which might include 11,000 ha of quick growing pulpwood species, including falcataria and gmelina, and 5,100 ha of ipil- ipil, to which the Bank representative on the mission added a proposal for 5,000 ha of Pinus caribaea plantations in northeastern Mindanao, where the company which had pioneered the successful developments under the earlier project was expected to provide an assured market. 9. No further preparation mission for this component was undertaken by FAO/CP but later the same year, in October 1976 when it baecame increasingly evident that the private company involved in the earlier project was unlikely to participate in the new project, what was described as a pre-appraisal mission2/ was mounted by the Bank. This mission returned with a revised proposal for a 25,000 ha smallholder treefarming component and an 8-10,000 ha pine plantation component. An alternate site, at Abra in northwest Luzon, was identified for the latter component which the mission proposed should be managed by the BFD. 10. In January 1977 an FAOICP-Bank preparation mission visited the Philippines to commence preparation of the pine plantation proposal, which in its final form was reduced to 3,020 ha, to be progressively developed with 400 ha of species and cultural trials in the first three years followed by 610 and 2,010 ha of commercial planting in years four and five respectively. At this stage in preparation the project was expected to require a US$6.0 million Bank loan. 11. Correspondence in Bank files indicates that FAOCP had considerable reservations about the Bank's pine plantation propvsal, especially with regard to the Bank's assumptions regarding land availability, given that BFD had difficulty in securing even 400 ha for the plantations trial site during preparation. FAO/CP cautioned that, normally, several years of trials would be advisable before proceeding to large scale commercial planting when introducing an exotic species into a new area, and stated that the trial period had been reduced to three years in the preparation report in compliance with Bank desire for immediate involvement in commercial scale plantation operations. 12. Appraisal took place in March 1977. The issues paper noted that only minor issues arose during appraisal, and argued for proceeding with the project in spite of the small loan size on grounds of its innovative nature. It was recognized that the climate at Abra was not the best for Pinus caribaea, but the site was considered acceptable because land pressure was judged to be weak and "virtually free" of pasture permits and leases, so that BFD could be expected to allocate the necessary 3,020 ha and possibly expand to 10,000 ha at a later stage. 1/ An inappropriate title for the mission, considering that it was followed three months later by a preparation mission (para. 10). -4- 13. No substantial changes appear to have been made during the appraisal review stage, but one commentator observed that further provision was necessary to provide for settlement of disputes between farmers and commercial firms in the case of the marketing agreements to be used for the smallholder treefarming component. 14. Shortly before loan negotiations the loan size was raised to US$8.0 million. The increase was justified on resource transfer grounds. Negotiations and Board presentation were uneventful, and the project was declared effective in May 1978, two weeks later than specified in the loan agreement, caused by delay in obtaining a legal opinion. II. PROJECT IMPLEMENTATION AND OUTCOME Management 15. Lack of commitment by senior BFD officials (Overview, para. 27) appears to have seriously hindered the progress of the pine plantation component. The smallholder treefarming component was adversely affected by weak administration on the part of DBP which lacked the supervision capability to deal with the large number of small borrowers (Overview, para. 26 (b)). In a comment from the borrower, PCARRD points out that a worsening peace and order condition in some project areas also adversely ffected DBP's ability to manage (Attachment I). Start-up 16. Activities were initially very slow due to a low demand for credit from smallholders in the case of the treefarming component, and to insufficient local budgets and a shortage of seed in the case of the pine plantation component (Overview, para. 5). Sequence 17. In spite of a shortfall from the planting target in the first year, the 400 ha trial plantation target was attained by the end of year three. Thereafter attainment (1,278 ha) fell short of appraisal target (3,020 ha) following a recognition in 1980 of the seriousness of shoot-moth infestation, which severely retarded growth of the earlier pine plantings, and led to a reorientation in the scope and redesign of the project (Overview, para. 5). The priority shifted from plantation development to research with emphasis on entomology, and the species used in the later plantings included a local pine (Pinus kesiya) and several broadleafed species (Overview, para. 8). The loan closing date was extended (for the plantation component only) by two years, to the end of 1985, in order to give the redesigned project time to develop some momentum. 18. The treefarming component experienced an acceleration in subloan commitments in the third and fourth years but slowed in 1982 when DBP had - 5 - to substantially curtail its lending operations because of liquidity problems. Dissatisfaction on the part of the Bank at the unsatisfactory financial condition of DBP and uncertainty about a long awaited DBP reorganization led to the Bank requesting DBP to stop making new loan commitments under the project in May 1983. The treefarming component of the loan was closed on the scheduled date of December 31, 1983 (Overview, para. 5). Outcomes 19. The pine plantation component was a total failure in respect to its appraisal objective of initiating an industrial scale reforestation program with long. fiber species. The approximately 1,000 ha of pine planted is stunted and misshapen and in the absence of a local market for pulpwood, has no commercial value (Overview, para. 10). The revised, research oriented, component, introduced in 1982 when the failure of the original approach was first recognized, was also unsuccessful in that no commercially practical solution to the shootmoth problem has emerged (Overview, para. 18). However, knowledge gained under the project, especially with regards to shootmoths has assisted in modifying the implementation of another ongoing, bilaterally assisted, large-scale pine plantation development in another part of Luzon. 20. The smallholder treefarming component failed in that it only attained 80%, 24% and 65% of its subloan amount, number of farms and planted area appraisal targets respectively (Overview, para. 9). More significantly, because of marketing difficulties, it failed in its objective of demonstrating the lucrative opportunities in tree farming to smallholders especially those who planted ipil-ipil,I/ many of whom are, along with DBP, now having to bear a loss from their investment in tree farming (Overview, para. 16). Equally significantly, the project failed in its objective of reaching subsistence farmers, in that the average "smallholder" treefarm plot financed through DBP credit was 10 ha compared with the appraisal estimate of 4 ha (Overview, para. 17). Economic Performance 21. A reestimate of the firewood and charcoal investments made under the smallholder treefarming component in the closing stages of the project gave a 4-5% IRR and ERR (Overview, para. 15). The unsatisfactory financial returns from these investments is reflected in a DBP figure of 65% arrears 3/ The 16% of smallholders who planted falcataria fared much better because many of them are able to sell their wood to the private company which was the market guarantor in the first treefarming project, while the recent development of an export market for falcataria logs has come as welcome relief to others. -6- in the principal outstanding of accounts which had reached the repayment stage at the end of 1984 (Overview, para. 16). The seriousness of the situation was further underlined by the audit mission's finding during a July 1988 visit to the DBP Butuan branch office in northern Mindanao, where the entire portfolio of 270 subloans made for ipil-ipil under the project was classified as non-performing. Sustainability 22. Both principal components are clearly unsustainable. Any future project having the same, still relevant, objectives should be prepared much more rigorously and appraised with a greater degree of caution and realism for it to succeed. Environmental Effects 23. The planting of trees on steep grassland areas, such us occurred at the Abra pine plantation site, or in place of seconda.ry growth on smallholdings, as was the case in most treefarming plots, should be beneficial in terms of soil conservation.4/ III. FINDINGS AND ISSUES Overview 24. The very poor performance of this project invites questions as to the reason for its failure. While poor management on the part of BFD and DBP and the worsening political and economic circumstances which prevailed in the Philippines undoubtedly contributed to the failure, the audit concludes that inadequacies in the project preparation and appraisal process were chiefly responsible, as explained in the following paragraphs. Issues Arising A. Over-optimistic Appraisal Expectations 25. Preparation was a shared responsibility of FAO/CP and Bank, but Bank staff were solely responsible for appraisal. No specific preparation mission was undertaken for the smallholder treefarming component, apparently reflecting a Bank judgement, expressed early in the identification stage, that preparation would be straightforward. However, FAO/CP was less confident in this assertion, for their report on the joint 4/ PCARRD points out that use of a leguminous tree species like Albizia falcateria and leucaena improved the soil fertility due to nitrogen- fixation and organic matter build-up (Attachment I). - 7 - FAO/CP-Bank review mission of May 1976 itemized a number of important issues requiring attention during preparation. These included limited market prospects for falcataria pulpwood; inadequate technical information necessary to support large-scale ipil-ipil planting; and uncertainties in regard to the viability of treefarming outside the earlier project area in northeast Mindanao because of lack of experience on the part of possible private companies which would be expected to provide agronomic guidance to smallholders and to enter into marketing agreements. Similar reservations were expressed by a Bank forester from the Central Project Staff who joined the above FAOICP mission. Regrettably, little account appears to have been taken of these highly prophetic reservations during the subsequent preappraisal and appraisal process, as the failure of the component can now be seen to have been due to weaknesses in precisely those areas. 26. The October 1976 preappraisal mission suggested the inclusion of an 8,000 to 10,000 ha pine plantation component, to be implemented by the BFD. GOP responded very favorably to this suggestion and proposed the Abra area as a suitable site. Despite its marginal suitability, the mission accepted the GOP site proposal without seriously considering other, possibly more suitable areas, and a joint FAOICP-Bank preparation mission subsequently prepared the component in January 1977. The preparation report reduced the proposed plantation area to 3,000 ha, reflecting what the mission described as the lack of a suitable technical base and sufficient available land. FAO/CP, referring to the report in a letter to the Bank, commented that the mission "... still has considerable reservations on the Bank's aporoach and on the availability of the land", and added that "Normally the development of such a project would be preceded by several years of sample plot trials, but in the current situation this is not possible considering the Ban:s desire for immediate involvement of BFD..." The component as appraised remained the same in its essentials as described in the preparation report. The subsequent outbreak of shootmoth, detected in the second year after effectiveness and leading to the abandonment of the commercial objective of the component in the fourth year, once again serve to underline the insightfulness of the FAO/CP concerns and the rashness of the Bank in overriding these well founded concerns. 27. The apparent reluctance on the part of the appraisal mission to seriously take account of the reservations of FAOICP and Bank technical staff during the preparation period had unfortunate repercussions on the subsequent progress and final outcome of both major components. After careful review of the Bank files covering the period in question and exhaustive discussions with several Bank staff involved, the audit is led to conclude that over-anxiety on the part of the appraisal mission to process the project in a timely manner appears to have clouded the - 8 - judgement of the appraisal team, possibly as a result of actual or imagined lending pressure,5/ or because of excessive zeal and/or their perception of how the reward system operates within the Bank.6/ This resulted in the introduction of unduly optimistic expectations as to project possibilities in the appraisal report. B. Unrealistic Yield Assumptions at Appraisal 28. The appraisal --ssumed particularly high wood yields for ipil-ipil by participating smallholders, averaging 30 m31halyr over a four year rotation in the Ilocos area of Luzon and 43 m3/halyr in the Iligan area of Mindanao where growing conditions were judged to be more favorable. Actual yields reported in the PCR ranged from 14 m3/halyr to 24 m3/halyr (Overview, para. 20), which are approximately half the appraisal projections. Similarly, leaf yields of 10 tons dry matterlha/yr were predicted at appraisal, but actual yields were only 2 tons/ha/yr as reported in the PCR (Overview, para. 21), equivalent to 20% of the appraisal predictions. Such wide differences between predicted and actual yields, in the opinion of the audit, suggest unusually poor judgement on the part of the mission, given that yields at the levels of those assumed by the mission are only likely under the most suitable environmental 51 Members of the mission, each of whom were interviewed, disagree on the extent of this pressure. The mission leader felt that there was no undue pressure to lend while the other two staff members on the mission were emphatic that such pressure was strong* The fact that the appraisal mission was launched only 5 weeks after the pine plantation component preparation mission had completed its field work in the Philippines, and before the latter had produced a final preparation report, supports the argument that an undesirable degree of pressure existed, at least in terms of conforming to timetables. Furthermore, indirect evidence of lending pressure can be deduced from the fact that the Bank was giving special emphasis to forestry lending in the mid to late seventies, at which time the East Asia and Pacific Region was behind other regions in terms of forestry projects. Also significant is the fact that the Region was giving particular emphasis to boosting the Philippines lending program at that time, and the division responsible for forestry lending was judged to have been perforr:ing poorly in terms of numbers of lending operations presented to the Board in the immediately preceding fiscal years. 61 The mission leader and the forestry specialist on the missior were relatively inexperienced in terms of Bank operations. The mission leader was leading his first appraisal, while the forestry specialist, who had been assigned to the project from Central Projects Staff, was undergoing his first preparation and appraisal experience, commencing during his initial (probationary) year of Bank service. Pressures to conform by successfully delivering lending operations to the Board are particularly strong at these stages in Bank operational staff careers. conditions (fertile soils with neutral to alkaline pH) and with high management standards. Soils in the project areas are for the most part acid in reaction, and degraded due to past cultivation, while management standards of the smallholders involved could be described as only average at best. 29. Much lower yield estimates should therefore have been assumed. The fact that the project appraisal report survived the Bank's internal processing an.0 received the acceptance of the Board when it was based on such unrealistic yield assuuptions, and on other evidence of inadequacies in the preparation and appraisal process (paras. 25-27 and 30-31) raises serious questions as to the effectiveness of the Bank's review procedures as they operated in this instance.71/ C. Plantation Site Selection 30. An unfortunate aspect of this project was the selection of the Abra site for the BFD pine plantation. Originally proposed by GOP at the time of the October 1976 pre-appraisal, the selection was accepted by the Bank, apparently without consideration of other options or adequate concern for the full range of appropriate site selection criteria, including suitability in agronomic terms and availability in :espect to competing land occupancy claims. The principal rationale for choosing the Abra site, well appreciated by GOP but only indirectly referred to in the appraisal report (Annex 4, para. 45) was its proximity to a proposed pulp mill to be constructed by a private corporation. The presence of a mill would provide a secure market for the plantation wood products. Accordingly, the January 1977 FAO/CP-Bank preparation mission for the pine plantation component was specifically required to prepare a 10,000 ha industrial pine plantation component based on Pinus caribaea at the pre-selected site. Correspondence referring to the FAO/CP preparation work in Bank files are notable for the reservations expressed in their back-to-office report and in related correspondence from the agency, concerning the suitability of the site, both in regard to agronomic circumstances of land and climate, and to land availability arising from the fact that BFD was unable to allocate even 400 ha for the first three year trial plantings owing to competing legal or customary rights claims. Unfortunately, no further preparation was done on this component and no final preparation report was submitted to the Bank, apparently due to insuffic1ent time between the return of the FAO/CP mission to Rome in February and the departure of the Bank appraisal mission in March 1977. 31. The subsequent failure of the pine plantation component, due in the first instance to a site-specific technical factor in the form of shootmoth infestation, coupled with the closure of the private pulp mill in 7/ Other examples of overoptimistic yield forecasting include: Ivory Coast-Second Cocoa Project, PPAR No. 5190, June 29, 1984, PPAM pares. 30-32, and Indonesia-Seeds Project, PPAR NO. 2800, December 28, 1979, PPAM para. 5. -10- 1983 which effectively eliminated the only foreseeable market for the wood at maturity, underlines the perceptiveness of the FAO/CP preparation mission in arguing for a less ambitious, reqearch oriented approach, and the rashness of the Bank in proceeding with a project which progressed too rapidly into commercial scale planting. Site selection should have been given much more critical attention than was the case in this instance. D. Paper Industries Corporation of the Philippines (PICOP) Experience 32. The approach to treefarming in the smallholder treefarming and forestry project, whereby smallholders were encouraged to grow trees through provision of seedlings, extension services and market guarantees for their product, was in the first instance developed by PICOP, a private Philippines company which owns and operates a large pulp and paper plant at E1slig in northeast Mindanao. The plant depended for its raw material on the production from company managed plantations in several nearby forest concessions. 33. In 1967 PICOP management decided to encourage smallholder pulpwood production as a socially desirable initiative which would provide the company with a useful supplemental raw material source, and in 1968 commenced an agroforestry demonstration program by means of model tree farms strategically located in agricultural lands neighboring their plant and concession areas. The response from farmers was positive, but large scale adoption was constrained by lack of finance. In 1972, encouraged by the success of its initiative the company enlisted the support of DBP to provide the necessary financial assistance for extending the program to a larger number of farmers having secure title to their lands. Later, in 1974, the Bank provided additional financial support to DBP through a US$2.0 million loan component as part of a development credit project. 1,159 smallholders were able to plant 15,022 ha of falcataria pulpwood using credit provided under this project. 34. The audit report for this first Bank-assisted tree farming project8/ judged the project to be "fairly successful". PICOP was considered to have done a good job in providing a secure market and in supplying seedlings and extension services. DBP, however, was faulted for its poor management, lack of autonomy for making investment decisions regarding borrowers based on strictly financial and economic criteria, and inadequate staffing at branch office level which resulted in slow loan approval and processing. 35. By 1976 the performance of the first smallholder tree farming component, subsequently referred to as the Pilot Tree Farm Project, was sufficiently promising for DBP and the Bank to proceed with the identification of a second project, which was scheduled to overlap the implementation phase of the first. This later project, the loan for which became effective more than three and a half years before the loan for the first project was clced, included the smallholder tree farming component 8/ Development Bank of the Philippines Project (Tree Farming Sub-project), PPAR No. 5744, June 1985. - 11 - which is the subject of this audit. Contrary to Bank expectations PICOP did not assume any additional marketing commitments under this component as appraised, oecause of economic factors, and the company's judgement that the 16,000 ha of smallholder pulpwood targeted under the first project would be sufficient for its raw material needs. 36. In consequence, the component vent ahead without PICOP involvement. The lack of experience, apparent absence of commitment, and perticularly the inability of the companies which entered into marketing agreements to honor these agreements, proved to be among the principal causes of failure. Meanwhile, PICOP has continued to operate its extension service and honor its agreements under the earlier, pilot project, and, following a recent reassessment of the economic outlook, was at the time of audit (July 1988) prepared to encourage additional smallholders to develop tree farms, for which it has indicated a willingness to evter into new marketing arrangements provided a source of smallholder financing could be found. 37. The continuing success of PICOP in supporting smallholder tree farming over more than 20 years is in sharp contrast to the project experience, where other private companies, in part because of adverse economic conditions, failed to provide the secure market on which the incomes of smallholders, and the loan recovery plans of DBP, so heavily depended (Overview, para. 25). 38. Notwithstanding the failure of the project supported smallholder tree farming component, the PICOP-pioneered approach remains viable, and, in the opinion of the audit, is worthy of additional public sector support. However, as this project experience has shown, a much more rigorous approach should be introduced in evaluating the long-term viability, and the commitment, of private --ompanies which may be willing to provide markets for smallholder produce in future projects. - 13 - PHILIPPINES SMALLHOLDER TREEFARMING AND FORESTRY PROJECT (LOAN 1506-PH) PROJECT COMPLETION REPORT Overview Introduction 1. The Smallholder Treefarming and Forestry Project-Project Completion Report (PCR) was prepared by the Development Bank of the Philippines (DBP), the implementing agency for the Project's credit component. The Bureau of Forest Development (BFD) and the Philippines Council for Agriculture and Risources Research and )evelopment (PCARRD) prepared supplementary completion reports for the Abra Pine Plantation Development and the Research components. 2. This overview is based primarily on the PCR, which reviews the proj- ect's performance and impact, and Bank supervision reports on project imple- mentation. Except where indicated otherwise, this overview agrees with the PCR. The Region concurs with the findings and conclusions of the PCR except for the computation of subproject rates of return. The overview is divided into four sections: Section A provides basic information on the project; Section B summarizes the important aspects of project implementation; Section C discusses project impact and accomplishment of project objectives; and Section D elaborates on implementation issues and lessons learned. A. Basic Information 3. Project Objectives and Components. The project was a follow-up to the Smallholder Treefarming Pilot Project supported under Bank Loan 998-PH. Project objectives weret (a) to assist smallholders and subsistence farmers to develop treefarms on marginal agricultural lands to provide higher incomes and to help reduce forests destruction; and (b) to assist BFD in strengthening its capability to prepare an industrial long-fiber species reforestation pro- gram. Major project components weret (a) supervised credit and technical services for treefarm development for 7,400 smallholders on about 28,600 ha of marginal agricultural land; and (b) 3,000 ha of Pine Plantation Development in ASra. Other project components incluieds institutional support to DB?; increased nursery capacity at Bureau of Plant Industry (BPI), to produce Leucaena leucocephala (ipil-ipil) seedlings; a treefarming research program; support to Ministries of Natural Resources and Agticulture (MNR and MOA) to strengthen project planning, monitoring, and preparation; and consultancy services for a wood industry development study. 4. Project Cost and Financin. Total project cost was estimated at P 118.1 million (US$16.0 million) with a 22% foreign exchange component. IBRD was to contribute 50% of total project cost, the Government/DBP 46%, and sub- project beneficiaries 4%. The PCR did not recompute total project cost to reflect the reduced project scope. The Region's project cost computation is - 14 - based on data from the main and the supplemental PCRs (para. 1), and project expenditure based on Bank disbursements. The total project cost at completion was P 96.1 million (US$9.3 million), which was below the appraisal estimate due to the partial cancellation of the credit component and scaling dcn of the plantation development component. Corresponding funding was IBRD 45%, Government/DBP 50%, and subproject beneficiaries 5%. Actual project cost in local funds (P 96.1 million) is only 19% below the appraisal estimate. However, in dollar terms (US$9.3 million) the total project cost is 41% below the appraisal estimate, due to peso devaluations. B. Project Implementation 5. Project Implementation. The project was to be implemented over five years from January 1978 to December 1982. Except for the research component, which did not begin until 1980 due to a lack of 1978 and 1979 budget appropri- ations, implementation began promptly in 1978. However, this was initially very slow, due to: (a) a low demand for treefarming credit; (b) a budget allocation shortfall for noncredit components; and (c) an insufficient seed supply for the plantation development component. Consequently, there were no loan disbursements in the first two years. When implementation improved and disbursements began in 1980, other problems were encountered. The pine plan- tation was infested with shootmoths, which caused a slow down while the proj- ect scope and design were reassessed. Subloan commitments accelerated in 1980 and 1981, but slowed in 1982 when, due to liquidity problems, DBP substan- tially curtailed its lending operations. DBP's financial problem., and uncer- tainty about its reorganization, eventually led the Bank to request DBP Lo stop making new subloan commitments under the project as of May 21, 1983. 6. The loan closing date was extended by two years from December 31, 1983 to December 31, 1985, to enable completion of the noncredit components. The credit component was eventually canceled on October 17, 1984, after the Government and the Bank failed to agree a restructuring program for DBP. 7. Growth in treefarming subprojects was much below appraisal due to poor site quality (see further, paras. 15, 18 and 19), thus the rotation period was lengthened. This problem, compounded by the failure of the market- ing contracts (discussed further in para. 23) and the weak market for Leucaena, resulted in little credit demand from smaLtholders. 8. Changes in Project Scope and Design. Low demand for treefarming credit and the shootmoth problems, which resulted in extremely slow progress in the early years, necessitated changes in project scope and design. The major changes agreed in the credit component, were: (a) expansion of project area; (b) increase in subloan ceiling per hectare; (c) increase in maximum subloan size from 50 ha to 100 ha; (d) exten:4on of subloan repayment terms; (e) relaxing of collateral by waiving tne requirement of proof of ownership or legal possession of the land; (f) selected waiver of the marketing contract requirement. Although these changes improved project implementation, the credit component was reduced and part of the loan caAcelled (para. 4). The major changes in the pine plantation development component weret (a) shifting priority from planting to research on entomology and silviculture; (b) reduction of target plantation from 3,020 ha to 2,325 ha; and (c) change - 15 - in species from Pinus caribaea to local pine (Pinus kesiya) and broad-leaf species (Eucalyptus and Acacia). 9. Status of Project at Completion. For the credit component, DBP committed P 40.7 million to 1,789 accounts to finance 18,542 ha of treefarm development. Compared to the appraisal estimate, the accomplishment was 80%, 242, and 652, in subloan amount, number of farms, and area, respectively. After adjusting the appraisal targets to reflect the partial cancellation (para. 4), the corresponding accomplishment improves to 124%, 562, and 150% respectively. Compared to appraisal estimates, financing per hectare was lower (P 2,190/ha vs. P 2,662/ha), DBP's share of financing was higher (54% vs. 50%), and average size of farm financed was larger (10 ha vs. 4 ha) (see Attachment 5 for details). Subproject yields were about half of the appraisal estimates for wood and charcoal production, and about 20% for leaf production (paras. 18-19). 10. On the plantation, only 1,278 ha were developed, which is 42% of the appraisal estimate, or 55% of the revised estimate. Of the area developed, 976 ha are planted to pine, 60 to Eucalyptus, 5 to Acacia, and 237 to mixed pine and broad-leaf species. Because shootmoths caused high mortality of the pines, 450 ha originally planted to pines had to be replanted. (See Attach- ment 6 for detailed calculation.) The remaining pines most of which were stunted and mishaped by shootmoth attacks have no commercial value and serve only to reforest the denuded site. To date, the shootmoth problem has not been overcome. Research was conducted on chemical and biological controls, but large scale applications were found not practical. Further research on attractants (pheromone) had been recommended, but no budget was made available. C. Project Impact 11. Institutional Impact. The project was able to establish a project preparation and monitoring unit, Agricultural Project Preparation Unit (APPU), at the Ministry of Agriculture and Food (MAF), which has since been incorpo- rated in the Ministry planning unit. At the Ministry of Natural Resources (MNR), the Foreign-Assisted Project Management Unit (FAPMU) was formed, whose task is to monitor performance and progress of special projects at the MNR and related agencies. The project, however, did not succeed in improving BFD's capability to prepare an ineustrial reforestation program as the pilot planta- tion failed (see further para. 16). According to the PCR, DBP improved its capability to administer the treefarming project in the course of project implementation; but financially, DBP sustained losses from project implementa- tion as its lending rate at 5.72 margin over IBRD borrowing rate was insuffi- cient to cover overhead and operating expenses and the high cost of counter- part funds, not to mention the abnormally high default rate of the tree farming portfolio. 12. Financial and Economic Impact. The SAR used three models for tree- farming investment: firewood, charcoal, and leafmeal. The PCR, however, computes a rate of return for firewood only, as there werl,very few borrowers who harvested leafmeal or engaged in charcoal production The PCR computa- tion of firewood subprojects shows the IRR to be 7-15% and ERR to be 14-25%, which are far below 4ppraisal estimates of 25-105% IRR and 23-103% ERR. - 16 - 13. Appraisal estimates of IRR and ERR were exagerated consequence of a greatly overestimation of yields (see further para. 18-19) and an under- estimation of costs. Labor costs were, on the most part, excluded as it was assumed that up to 300 man-days/year would be contributed by family labor. Transport costs were excluded as it was assumed that the buyers would buy at farmgate. 14. The PCR-estimated IRR and ERR are also overstated. DBP conducted a sample survey and gathered revenue data from those who had harvested. Because the majority of leafmeal borrowers did not harvest due to high marketing costs and low selling prices, they were excluded from the sample. Had leaf-meal subprojects and other firewood been included, the IRR and ERR would be much reduced. 15. The IRR for 5-ha firewood and charcoal investments, initially esti- mated to be 26-28%, was recomputed in 1985 (see July 1985 supervision report). With the yield and harvesting cost halved, the harvesting time postponed 2y one year, and the cost of hired labor of up to 300 man-days/year included,_ the IRR and corresponding ERR would become 4-5%. 16. The low IRR has an adverse effect on DBP's Tree Farming II portfolio. As of end-1984, P 2.7 million, or 64% of the P 4.2 million principal outstanding under repayment stage was in arrears. This arrearage ratio is well above the average arrearages of DBP's agricultural loan port- folio. Thus, both the tree farming farmers and DBP shared the losses from the fai'Lure of the tree farming component. 17. Accomplishment of Project Objectives. Although the credit component exceeded the adjusted performance targets in terms of amount and area of sub- loan financed, project objectives were only partially achieved. Most of the subprojects were larger than envisaged, 10 ha on average, compared to the appraisal estimate of 4 ha. Consequently, most of the project beneficiaries are not smallholder or subsistence farmers. And although the project objec- tive of using marginal agricultural land for creefarming was accomplished, it was at the expense of reduced returns to farmers. Field observations, sub- stantiated by recent research findings, indicate that Leucaena leucocephala produces well only under certain soil and land conditions, which precludes financially profitable use of marginal agricultural land. 18. On the pine plantation, the project failed to initiate a large-scale industrial reforestation with long-fiber species. Although project implemen- tation was affected by the lack of counterpart funds, slow procurement, etc., the most significant factor affecting project implementation was the infesta- 1/ While leafmeal borrowers did not harvest due to high harvesting and marketing costs and insufficient expected revenues, charcoal borrowers harvested wood, not for conversion to charcoal, but for sales as firewood. 2/ Practically all tree farm operations hire labor. - 17 - tion of shootmoths which killed and stunted young pines. Consequently, it was not possible to embark on, or develop replicable techniques for, large-scale pine plantation development. In light of this, priority was shifted from plantation development to research to contain the shootmoths and identify alternative plantation species. The project conducted field trials of pine species specifically to test for resistance to shootmoths, which are wide- spread in the Philippines and throughout Southeast Asia. In the process, the Forestry Research Institute (FORI) was brought in to assist. Alternative broad-leaf species were planted, and their market potential identified. Know- ledge gained under the project, especially with regards to shootmoths has assisted BFD in modifying tJ implementation of another ongoing large-scale pine plantation development- in Luzon. D. Important Issues, Summary of Lessons Learned, and Government and Bank Performance 19. Institutional Issues. The project did not attempt a major reform of DBP.4/ However, project implementation had an adverse effect on DBP's financial condition as DBP incurred a negative spread on subproject lending (para. 11). In restrospect, the Bank should have required DBP to lend at subloan terms and conditions which would have enabled DBP at least to break even on its treefarming loans. 20. Agronomic Issues. The appraisal predicte4 yields of 120-170 m3/ha over a 4-year rota ion, or a growth rate of 30-43 m'/halyr (average incremen- tal yields of 37 m /halyr) for planting of Leucaena leucocephala for wood production. These yields are higher than the yields of the ten bist dendro- thermal plantations in the Philippines, whose yiel§9 were 19-46 m /ha/yr, or averge yields of 33 m3/ha/yr. According to NFTA,- wood yields above 30 m/halyr are considered very good, obtainable with good sites and manage- ment, both of which were lacking under the subprojects. In practice, actual 3/ The Bank has no further information on this project as it is a bilateral- aid (New Zealand-assisted) project. 4/ The Bank has known of DBP's precarious financial position and the poor quality of its loan portfolio since 1972, and has, on various occasions, assisted the Government in its effort to reform DBP. A number of Bank loans for on-lending by DBP included technical assistance and institu- tional strengthening components. Loan 998-PH, the predecessor of the project under review, and Loan 1190-PH had, as a primary objective, improvement of procedures, standards and financial position of DBP. But, according to the PPAR for these two projects, progress was very limited. 5/ Leucaena, Wood Production and Use, Nitrogen Fixing Tree Association (NFTA), Waimanalo, Hawaii, USA. - 18 - growth of Leucaena for wood prolyction ranged from 14 m3/ha/yr to 24 m3/halyr, or half the appraisal estimate.- 21. For leaf production, the appraisal predicted yields of 10 tons dry matter (DM)/ha/yr. These yields reflect the planting of Leucaena on good soil with abundance rainfall, good management practice and frequent harvests, conditions which do not exist in the subprojects.- The project promotes the use of marginal agricultural lanip which precludes the ideal condition for high yields. According to NFTA,- leaf yields in semiarid and highland tropics range from 1.5 tons to 10 tons DM/halyr. A figure at the low end of this range should have been used in the appraisal yields prediction. PCR estimate of actual leaf yields, 2 tons DM/ha/yr or 20% of appraisal estimate is indicative of poor-quality of the sites, which the project promoted for planting of Leucaena. Planting on marginal land has since proven to be finan- cially nonviable (para. 15). 22. During project preparation, the FAO-CP/Bank mission voiced concerns about the marketing arrangements and DBP's administration of the project, but not on the agronomic or technical data regarding Leucaena planting. Conse- quently, the risk of an overestimation of the yield was never considered. 23. Plantation Site Selection. In retrospect, the selection of Abra for pine plantation development was a mistake. Bank supervision reports and reports of entomologist consultants indicate that the project site at Abra had glaring evidences of shootmoths attack on natural pine. Although preparation and appraisal teams were appropriately staffed and included a forester, avail- ability of land was a primary concern which overrode site suitability. When the appraisal was launched, the exact plantation site had not been determined. From the project files, it appeared that the appraisal mission did not visit the site. Had the site been properly evaluated, either at appraisal or early or. during supervision, the shootmoth risk would have been detected. 24. Subproject Sites. As the project promoted use of marginal agricul- tural land for treefarming, a number of inaccessible subproject sites resulted in higher than expected operating expenses for DBP loan processing, verifica- tion, and supervision. The high transport cost of transferring wood from these sites to a major road or to the mill/factory was also a major factor. At many subprojects, expected sales revenues barely covered harvesting and transport costs. These expenses were not anticipated as it was expected that the buyers of the woods would buy at farmgate and undertake to fell the trees. 6/ The PCR states that actual wood production yield is 76% of appraisal estimate, which is incorrect. Yields were rgached over 5 to 6 years' rotation with average growth rate of 14-24 m /ha/yr, which is about half the appraisal expectation. 7/ Leucaena, Forage Production and Use, Nitrogen Fixing Tree Association (NFTA), Waimanalo, Hawaii, USA. 8/ Leucaena, "A versatile plant", Gerald Proverbs, Caribbean Agricultural Research and Development Institute (CARDI), Barbados. - 19 - 25. Marketing Contracts. During project preparation and appraisal, the Bank was concerned whether DBP would be able to secure marketing contracts with users of wood products for DBP-funded treefarmers following the model of the pilot project. Although most of these marketing contracts were obtained, many were dishonored, as number of firms either went out of business, or ran into financial difficulties. Some marketing contracts relied on planned expansion of the firms and on mills which were not built. As a result, these marketing contracts did not assist farmers in the sales of their product, nor did they assist DBP in its subloan collection, as expected. 26. Summary of Lessons Learned. The PCR recommends some considerations in designing of future projects, a number of which are discussed below. (a) Adequacy of technical and agronomic data (paras. 18-20). Knowledge on Leucaena growth in the Philippines was lacking and the project financed a six-year research program on planting techniques, pat- terns, volume, growth, etc. But subproject funding took place simultaneously, before the research findings were available. Large- scale investment should not have taken place before the species had been fully tested. Alternatively, yield estimates should have been m7re conservative. In restrospect, the project should have had a small Leucaena treefarming pilot component, and the main treefarming component should have focused on promoting A. Falcataria, the suc- cessful species financed under the previous treefarming pilot project, instead of the then promising, but little known Leucaena leucocephala. (b) Replicability of pilot projects (para. 24). Replication of pilot projects on a larger scale can create problems, particularly in marketing. The earlier pilot project owed its success largely co the assured market and technical assistance provided to farmers by PICOP, the end-user of the wood. This project attempt to do the same, but with the numerous end-users, problems arose. These prob- lems included insufficient analysis of the financial condition of firms involved in marketing contracts; reliance on the firms' expan- sion plan, which did not materialize; the large size of the project area, which was beyond the supervision capability of DBP branch staff; compounded by the lack of a fully developed market for Leucaena. Thus, pilot projects which performed well are not neces- sarily successful pilot projects particularly if they are not repli- cable on a larger scale. (c) Experience from implementation of previous related projects. Experience from implementation of the previous (pilot) project demonstrated that subloans should include a provision for harvest, hauling and transport expenses, which would have provided farmers with more flexibility in seeking alternative market outlets. The design of this project, however, did not include a provision for these expenses in the subloans. Nor was an amendment made to do so following such a recommendation of the pilot's PCR subsequently issued. The market for Leucaens products was not fully developed, and in some cases the lack of funding for harvesting and transport - 20 - prevented farmers from responding to temporary surges in demand. The design of follow-up projects should incorporate the implementa- tion experience of previous related projects. (d) Adequacy of extension services. The main reason for limited inter- est in crop regeneration is the lack of information and extension services. In the earlier pilot project PICOP provided extensive extension services to farmers. In this project, the failure of the marketing contracts aslo meant that no extension services were pro- vided. And as the market for Leucaena was weak, farmers had minimal incentives to protect tree regeneration. Alternative government extension services should have been arranged. 27. Government Performance. Insufficient budget allocation (para. 5), lack of commitment by senior BFD officials, management changes, and changes in procurement procedures imposed by MNR significantly delayed implementation of the Abra Pine Plantation component. In addition, the peace and order problem at the plantation site limited communication between project management and BFD and MNR in Manila. Primarily because of budgetary constraints, Government was unable to restructure DBP, which led to cancellation of the treefarming credit component. And although extension services linked to -arketing con- tracts did not materialize satisfactorily (para. 25), no attempt was made to use government forestry extension services to assist farmers. 28. Bank Performance. Project preparation was inadequate for the Abra Pine Plantation component (para. 22), and yields for the credit component were grossly overestimated (paras. 18-19). A covenant should have been negotiated requiring BFD to certify site suitability, and to provide an alternative site if the initial certification was faulty. Technical information regarding Leucaena growth in the Philippines was inadequate, and initially a smaller pilot project should have been implemented (para. 24 (a)). Pest and disease problems frequently associated with monoculture plantations were unanticipa- ted. Project supervision was adequate, and improved communication between project management and BFD and MNR. Supervision missions also helped to select and hire consultants who assisted with the program and research to contain shootmoths. The Bank was successful in assisting MAF and MNR to strengthen their project planning, preparation, and monitoring (para. 11). The main study financed under the project, the Wood Industry Development Study, became the basis for creation of the Wood Industry Development Author- ity (WIDA), comprising public- and private-sector representatives, to conserve primary forests and promote wood industry development. Attachment 1 - 21- PHILIPPINES SMALLHOLDER TREE FARMING (LOAN 1506-PH) PROJECT COMPLETION REPORT Actual Total Project Cost and Project Financing (million) Pesos US$ Remarks DBP 45.57 4.80 APPDP 32.37 2.91 For the DBP and the APPDR components, BPI 0.00 0.00 total project costs are calculated in PCARRD 2.20 0.20 Pesos. Conversion to US$ uses average MNR of the exchange rates during implemen- WIDS 7.51 0.68 tation of the respective components- FAPMU 1.97 0.18 1978-84 average for the DBP component, MAF and 1979-85 average for the APPDP Cons 2.51 0.23 component. APPU 3.94 0.36 For components other than DEP and Total Act 96.07 9.34 APPDP, actual Bank disbursements were used, and adjustments made to Total SAR 118.10 15.96 reflect IBRD/GOP cost sharing. Con- version to Pesos equivalent uses an Act/SAR 81.30 58.50 average of 1979-85 exchange rates. Actual Project Financing Beneficiaries DBP/Gov't IBRD Total DBP 4.56 24.60 16.41 45.57 APPDP 0.00 20.88 11.49 32.37 BPI 0.00 0.00 0.00 0.00 PCARRD 0.00 0.33 1.87 2.20 MNR WIDS 0.00 1.50 6.01 7.51 FAPMU 0.00 0.39 1.58 1.97 MAP Cons 0.00 0.00 2.51 2.51 APPU 0.00 0.79 3.16 3.94 Total Actual 4.56 48.50 43.02 96.07 % total 4.74 50.48 44.78 100.00 Attachment 2 - 22- PHILIPPINES SMALLHOLDER TREE FARMING (LOAN 1506-PH) PROJECT COMPLETION REPORT Allocation of Loan Proceeds - Actual vs Loan Agreement (US5 million) Actual Original Actual/ disburse- Subs L.A. ment L.A. L.A. (%) DBP Tubloans under A.1 (a) 1.774 3.775 3.775 47 Equipment and materials 0.015 0.025 0.025 61 for Part A.1 (b) BPI =Tquipment and materials 0.000 0.040 0 for Part A.2 PCARRD Equipment, material, salaries 0.168 0.300 56 and consultancies for Part A.3 BFD =ivil works, equipment, salaries, 1.046 1.760 59 consultancies and training for Part B.1 MNR =quipment, materials, salaries and 0.142 0.350 41 consultancies for Part B.2 (a) Consultancies 0.541 0.600 90 MAF Equipment, materials, salaries and 0.284 0.350 81 consultancies for Part B.3 Consultancies and studies for 0.226 0.000 project preparation UNALLOCATED 0.800 0.340 0 Total Disbursements 4.197 52 Undisbursed balance 1.451 Earlier cancellation 2.352 Original loan amount 8.000 8.000 4.140 SAR DBP Subsidiary Loan Analysis Actual L.A. estimate Credit components 1.774 3.175 4.115 43 Noncredit component 0.015 0.025 0.025 61 Unallocated 0.000 0.340 0.000 Total Subsidiary Loan 1.789 4.140 4.140 43 Attachment 3 - 23 - PHILIPPINES SMALLROLDER TREE FARMING (LOAN 1506-PH) PROJECT COMPLETION REPORT DBP Project Cost - Actual vs. SAR At Average 1978-84 exchange rate Benefi- DBP IBRD Total DBP IBRD Total ciaries - P million --- - US$ million -- Actual 4.56 24.60 16.41 45.57 2.59 1.73 4.80 % 10 54 36 100 SAR 4.44 34.78 31.08 70.30 4.70 4.20 8.90 % 6 50 44 100 Adj. SAR 1.92 15.03 13.43 30.39 2.03 1.82 3.85 Actual/SAR (%) 71 53 65 55 41 54 Actual/Adj SAR (%) 164 122 150 128 95 125 Attachment 4 - 24 - PHILIPPINES SMALLHOLDER TREE FARMING (LOAN 1506-PH) PROJECT COMPLETION REPORT APPDP Project Cost - Actual vs SAR At average 1979-85 exchange rate GOP LP Total GOP LP Total -- (P million) - -- (US$ million) -- APPDP Actual Project Cost Personal services 9.73 2.48 12.21 0.88 0.22 1.10 MOE 5.22 5.25 10.47 0.47 0.47 0.94 Equipment outlay 0.83 0.19 1.02 0.07 0.02 0.09 Capital outlay 5.10 3.57 8.67 0.46 0.32 0.78 Total 20.88 11.49 32.37 1.88 1.03 2.91 % total 64.5 35.5 100.00 APPDP SAR Project Cost Total 16.28 16.28 32.56 2.2 2.2 4.40 Z total 50.00 50.00 100.00 Actual/SAR estimate Total (%) 128.3 70.6 99.4 85.4 47.0 66.2 - 25 - Attachment 5 PHILIPPINES SMALLHOLDER TREE FARMING (LOAN 1506-PH) PROJECT COMPLETION REPORT DBP Credit Component - Key Indicators SAR projections Adjusted SAR projections No. of Area Amount /a No. or Area Amount /a farms (has) (P'OO0Y- farms (has) (P000J £1i-Ipil Trewood/charcoal 2,850 14,200 28,400 1,232 6,138 18,505 Leafmeal 3,900 8,000 14,400 1,686 3,458 9,383 Pup1wood 0 0 0 0 0 0 Subtotal 6,750 22,200 42,800 2,918 9,596 27,888 A. Falcataria Pulpwood 250 2,400 2,800 108 1,037 1,824 Particle board 400 4,000 4,900 173 1,729 3,193 Subtotal 650 6,402 7,700 281 2,766 5,017 Total 7,400 28,600 50,500 3.199 12,362 32,906 Actual Realization Actual/adjueted SAR (Z) No. of Area Amount No. or farms (has) (P'000) farms Area Amount /a Ipil-Ipil Trewood/charcoal 705 6,311 14,308 57 103 77 Leafmeal 148 1,594 3,499 9 46 37 Pulpwood 718 7,677 18,282 n.a. n.a. n.a. Subtotal 1,571 15,581 36,089 54 162 129 A. Falcataria Pulpwood 217 2,951 4,487 201 284 246 Particle board 0 0 0 0 0 0 Subtotal 217 2,951 4,487 77 107 89 Other 4 49 124 n.a. n.a. n.a. Total 1.792 18,582 40,700 56 150 124 Average Farm/Loan Size Adjusted SAR projections Actual No. of Area Amount /a No. of Area Amount farms (has) (P-000)- farms (has) (P'000) Total Averages 3.86 10,288 2,662 10.37 22,712 2,190 /a Subloan amount does not include contingencies. If contingencies were included, expected subloan commitment would be .... P 76.1275 million, which is derived from the total credit component including the unallocated amount converted at the then exchange rate of P 7.4 to US$1, and adjusted for IBRD financing of 40% of subloan. Adjusted SAR projections adjusts the origlial SAR estimates to reflect the cancellation. It also adjusts the amount of expected subloans to include contingencies provided. - 26 -Attachment 6 PHILIPPINES SMALLHOLDER TREE FARMING (LOAN 1506-PH) PROJECT COMPLETION REPORT APPDP Component - Key Indicators Actual/ Actual +/ SAR Revised Actual + revised revised estimate estimate Actual replant ---- (Z) -- Plantation (has) 1M 100 100 48.5 48.5 49 49 1979 100 100 130.0 168.3 130 168 1980 200 200 234.0 273.4 117 137 1981 610 410 282.2 332.2 69 81 1982 2,010 440 102.5 164.1 23 37 1983 0 440 143.0 202.9 33 46 1984 0 410 176.6 369.4 43 90 1985 0 225 161.3 170.8 72 76 Total 3,020 2,325 1,278.1 1,729.6 55 74 Actual/ SAR Revised revised estimate estimate Actual (%) Roads TM8 5 12 0.0 49 1979 5 43 5.9 130 1980 12 12 12.9 117 1981 31.5 12 5.2 69 1982 33 12 0.0 23 1983 0 25 11.5 33 1984 0 0 0.0 43 1985 0 0 0.0 72 Total 86.5 116 35.5 55 Actaal/ SAR Revised revised estimate estimate Actual (%) Buildinx 19/8 31 1 0 0 1979 5 5 14 14 1980 18 18 2 108 1981 5 1 0 43 1982 3 1 0 0 1983 0 0 1 46 1984 0 0 0 n.a. 1985 0 0 0 n.a. Total 62 26 17 31 Actual/ SAR Revised revised estimate estimate Actual (%) Vehicles 197 10 10 0 0 1979 1 1 0 280 1980 8 9 0 11 1981 0 7 0 1982 0 0 0 0 1983 0 0 0 n.a. 1984 0 0 0 n.a. 1985 0 0 1 n.a. Total 21 20 8 65 1즐··―-&！··’l·“…l&!‘·’…［‘·‘…！‘· …－-－■－－…－&－……－∼ ·―,,”·―숩－..&..．·― 31 T&BLE OF CMnMw SECTLON PAGE 1. MMO&RUM A. Background 35 B . Identification and Preparation 36 C. Appraisal, Negotiation and Approval 37 D. Project at Appraisal 37 E. Procurement 39 F. Implementing Agencies 39 G. Lending Term 2 H. Benefits, Justification and Risks 43 A. Start-up 44 B. Loan Availments 53 C. Supervision of Sub-project 54 D. Revisions 54 E. Implementing Schedule 55 F. Reporting 56 G. Procurement 56 h. costs 56 1. Farm Investments 56 III. rMoact* Institutionai 57 AgAcultural 59 W. 'Rates of Return 62 V. Institutional Performance 64 VIT. Special Issues 65 VIZ. Changes in 'OwFsMV*eA*fttt 69 VIII. Conclusions 71 IX. Recomqendation 73 - 32 - TABLE NO. PAGE 1. Target and actual disbursements of funds 'i tie for the credit compohent under the Treefarming 1I Credit Line (Zoan No. 150t,-R), 197% to 1985 75 2. Treeferming II: Target and actual eommitment of Funds, 1978 to 1983 76 3. Treefarming II: Annual availment of funds, 1979 to 1985 77 4. Treafarming II: Annual availment of funds, by category, 1979 to 1985 78 5. Treefarming II: Appraisal and actual cost, by source of fund 79 6. Treefarming II: Summary of target and actual mumber and area financed, amount of sub-loans granted, by type of sub- project, 1978 to 1983 80 6a. Treefarming II; Target and actual number of farms financed, by type of sub-project and year 81 6b. Treefarming It: Target and actual area financed by type of sub-project and year 83 6c. Treefarming II: Amount of sub-loans granted, by type of sub-pro ect and year 84 7. Treefarming II: Target and actual average size of farm financed, by sub-project type 87 3. Treefarming I: Target and actual number and percentage distribution of farms financed, by region and sub-project type 87 9. Treefarming II: Target and actual distri- butijn of farm area financed, by region and sub-project type 10. Treefarming II: Rates of return of sub- loans, by type of sub-project 89 -33 - PAGE 11. Treefarming II: Net operating income per hectare, by type of sub-project, 1978 and 1984 90 12. Treefarming 1: Expenses per hectare, by type of labor and operation, 1984 91 13. Treefarming II: Employment generbtion per hectare, by type of labor/operation and sub-project 92 14. Treefarming 11: Results of operations per income statement, 1978 to 1984 93 15. TTreefarming 11: Results of operations after cost of fund, by average growth rate, 1978-1984 94 16. Treefarming II: Results of operations after cst of funds with percentage of average investment, 1976-1984 95 ANXEES A. Study Methodology B. Performance mf Contrnctor/Supplier C. Farm Inv ments D. Agricultural Impact E. Supporting Services F. Farm Credit G. Arreatages R. Institution Building - 35 - PRGECT COMPLETION REPORT* PHILI?PINES SECOND SMALLROLDER TREEFARMING AND FORESTRY PROJECT (LOAW NO. 1506-VR) I. Introduction A. !fk&,ound 1.41 The second Smallholder Treefarming and Forestry Project (Loan No. 150C-PR) is a repeater of the pilot project implemented by the Development Banbk of the Philippines (DBP) inl974 to 1978. A sub-component of the Industrial Investment Credit Project (Loan No. 998-PH), the pilot project was*assisted by the World Bank (WB) with a US $ 2-million loan. 1.02 Implementation of the initial treefarming project under Loan No. 998-n- was confined within the Bislig Bay area in Southern Philippines and limited to the development of Moluccan sau (Albizzia falcataria) tree farms. It supported the expansion of the agro-forestry program of the Paper Industries Corporation of the Philippines (ICOP), which aimed to: a. Ensure availability of pulpwood supply for the Corporation's mill complex; b. Improve the socio-economic conditions of the small- holder tree farmers surrounding the Corporation's concession in Mindanao; and c. Increase-the amount of forest cover in the area. - 36 - 1.03 Early success ia the implementation of the pilot project led to the formulation of a more expanded Smallholder Treefarming and Forestry Project (Loan No. 1506-PH) or Treefarming II. Implemz!ated in 1978 to demonstrate that treefarming could be lucrative, the repeater pro- ject additionally provided for the nationwide develop- ment of Giant Ipil-ip4l and other face growing tree species. Target was the large number of snaltholders and subsistence farmers on marginal agricultural lands. Treefarming II T.rs developed in line with the Government of the Philippines (GOPs) national Program for Forest Ecosystem Management (PROFEM) to pave the way for wide- scale industrial reforestation. 1.04 This completion report evaluates the results of the implementation of the Project, highlighting the Small- holder Treefarrt-, Component. B. Identification and Pre;arztlon 1.05 In 1976 the Secord'?roject was identified jointly by the GO? and the World Bank while implementation of the Loan No. 9S8-.H wes Ctill in progress. 1.06 The 7roject was formulated by D3? and the then Departments of Agriculture (now Ministry of Agriculture and Food) and Natural Rescu-ces (now Ministry of Natural Resources). The nroject was envisioned as a means of channelling the upsurge of interest in tree planting along commercial lines. - 37 - 4 It was intended to stimulate awareness among smaltholders and private companies of the mutual benefits arising from treefarnming. It was envisaged to extend financial and technical assistance for the reforestation efforts of smallholders and government services in the PROFEM. 1.07 The proposal was reviewed by a FAO/CP mission which found it to be deficient in technical data and marketing experience for Giant Ipil- ipil, The missien also suggested to scale d'wn the proposed involve- ment of the participating private companies in smallholder plantings of Albizzia falcataria. 1.08 The report was revised and submitted to the World Bank in Oct. 1976. Cl Appraisal. Negotiation and Approval 1.09 The Project was appraised in March-April 1977 by an- IBRD mission composed of Mesers. D.A. Forno, J. Andrew and C. Keil. Their ap- praisal report was the basis for negotiations. The Loan Agreement beteen IBRD and GOP for a loan of US$8.0 million was signed on 23 January 1979, the effectivity date of the Project. D. Proiect at Appraisal 1.10 The loan granted by IBRD was intended for a smallholder treefarming component (Part A) and a plantation development component (Part B). . The provision for Pat A would support implementation of DBP's lending program; expansion of government nurseries; and conduct of research, the results of which would facilitate monitoring of tree farm development. - 38 - The allocation for ?art B would support GO?'s programs of upgrading reforestation implementation capacity, and project identification and preparation capability. 1.11 The total ?roject Cost was estimated at US $16.0 million, broken down as follows: ?art A. Smallholder Treefarming US $8.14M A.1 Farm Investments 7.70 A.2 BPI nurseries 0.10 A.3 ICARRD research 0.34 ?art B. Plantation Development 3.05 B.1 'lant6tion Development 2.90 Training and Technical Assistance 0.15 B.2 Forestry Preoject Development Unit 0.50 Wood Industries Studies 0.75 B.3 Agricultural 1-rojects 5reparacion Unit 0.50 Total 12.94 hysical Contingencies 0.30. Price Contingencies 2.70 Total US $15.94M or US $16.00M 1.12 Of the US $8.A loan from the World Bank, the equivalent of US $4.14M would be -*lent to the DB? under a Subsidiary Loan Agreement. Of this Subsidiary Loan, US $3.775 million would be on-lent to smallholder treefermers; US $0.025 would finance the cost of equipment and materials for the Smaltholder Treefarming Component; ane US$0.340 million would be unallocat2d. - 39 - The loan to the DBo would cover around 44.2% of the requirements for the supervised credit sub-component. Forty-nine and two-tenths per cent (49.2%) would be raised from the Government's counterpart funds; while 6.3% would constitute beneficiaries' equity. E. rRrocurement 1.13 The Loan Agreement stipulates that procurement of equipment and materials shall be carried out in accor- dance with the Borrower's (00?'a) procurement procedure satisfactory to the Bank. Where the amount involved exceeds the equivalent of $50,000, procurement and contracts for c-il works shall comply with competitive bidding procedures satiffMctory to the Bank. 1.14 All invitations to bid, proposed awards and fizal con- tracts involving an amount equivalent to $100,000 or more are subject to review by the Bank and must comply with certaft6ther*tequisites, e.g., submission of the text of the invitation to bid and a detaile report on the evaluation and comparison of*bida recoivdd. F. Implementint Agencies 1.15 The followine are the agencies that implemented the Iroject and their respective functions in Iroject implemented on: a. Smallholder Treefaraing Component (1) Development Bank of the 'bippines (DBP) (a) Arovision of credit and technical services for -ree form developcent; an -40- (b) *rovision of motorcycles, other vehicles, and office equipment to DB? Branches ser-c vicirg the Smallholder Treefarming Component. (2) Bureau of ?lant Industry (B31) ?rovisitre of facilities in the Ilocos Region to increase the capacity to facilitate production and distribution of giant Inil-ipil seedlings to beneficiaries. (3) 7hilipine Council for Acriculture and Resources Research and Development IPCARMD) .(a) Conduct of research on Albizia and Giant varieties of Letcaena in such fields as: (i) Biological, technological, and socio- economic aspects, to bridge gaps in state of knowledge; (ii) Cultivation of both tree species, parti- cilarly smallholder treefarming, to improve methods; and (iii) End-uses of the products of both spe- cies, to firm up utilization. (b) Conduct of verification studies on marketing and pre-sale practices of Ajbizzla and Leucaena end-products. (c) Site quality assessment for Albizsta and Luecaena. - 41 - b. Plantation Devdopment Compenent (1) Bureau of Forest Development (BFD) Establishment of the special Reforestation and ?ilot Industrial Tree plantation 'roject in Abra Province, as a bisisfor: (a) Developinz industrial scale plantation of long fibered species; (b) Establishing a fairly replicable techno- logy in the developmcnt of pine plantation for use throughout the country; (c) Conducting development research on the best techniques in establishing Thus caribaea ctc-ids; and (d) De-loping - workable resettlement and/or assWstance program for forest occupants for the su.*-ess of said forest development project and similar ones. (2) Department (now 11inistry) of Natural P.esources (MR) (a) Strengthening of the managemast%, operations and finances of the Department's Natural Resources PIrojects ?reparation Unit; and (b) Study of wood industries development. (3) Department of Agriculture (n-w Ministry of Agri- culture and Food or MAF) Strengthening of the mrnagement, operations and finances of the Departnent's Agricultural 'Projects 'reper-tion Unit. - 42 - 1.16 Five private companies had been initially identified by the DI? as prospective participants in the ?roject to: (a) Purchase all wood rad leafmeal production of bene- ficiaries at the prevailing competitive market price; (b) ?rovide tree seedlings at cost to beneficiaries, as required by them to carry out their Investment Project;and (c) Provide beneficiaries with adequate technical assistance. 1.17. The five participating private companies were the General Milling Corporation (04C) and the Mandave Industrial Man- facturing Corporation (MCC) for leafmeal produced in the Visayas, the Mabuhay Agro-forestry Corporation (MAFCO), for charcoal produced in Mindanao, the Davao Timber Cor- poration (DATICOR) for particle board and the Rustan Pulp and Paper Mills, Inc. (R1?M) for paper pulp produced in Mindanao. The number of participating private companies increased during implem!ntatLon (?ara. 2.11). G. Lendin Terms 1.18 The World Bank loan to GO?, as well as the subsidiary loan from G0? to DB2 would bear an interest rate of 7.9% per annum on outstanding amounts throughout a 20-year repayment period, including 5 years of grace. Commitment charges on the loan would be at 3/4 of 1% per annum on principal amounts not withdrawn within the projected 4-year investment period. - 43 - H. Benefits., Justification and Risks 1.19 In effect, the Apprvisel Report had justified World Bank assistance to the ?roject on the basis of the following anticipated benefits: a) Development of the forestry sector by stimulating interest of smallholders in treefarming and ulti- m.tely in the forest maintenance end reforestation efforts of the government; b) Savings froL. the importation of short and long-fiber pulp; c) Reduced crude oil/coal imports; d) Production of additional particle board, and poly- vinyl resins and relaeed chemicals; e) Export earnings from production of high protein leafmeal; f) Reduced underemployment level for the lower 40 of the low income group in the rural population; and g) Incremental income from idle and/cr marginal agri- cultural leads. 1.20 Only minimal risks had beenenvisaged for the supervised credit program, considering the guaranteed market agreements, the high financial rate of return, and the success of the 7ilot ?roject. i4oreover, it had been foreseen that the 12roject would be flexible enough to cope with the epected varying degrees of involvenent b- the participating private companies. 1.21 The main risks associated with the 1lantation Davelopment Component were: (a) graPing or burning out of trees; (b) resettlement of people living or gracing their cattle in the sub-project area; or, (c" unsuitability of ?inus cariba'G in the Abra area. Nevertheless, precautionary measures had been built into thi POroject eesli*-, the implementation of whi-h vould b rnr- ad dir-M- nsotiatton.. The safeguards included provision of wetcht-cra ant' fcac against risks from grazing/burntigont; cuapena'on of the issuance of pasture lesses/peritz in tlae Ab:a forestry region to offset resettlenent difficulties; a-d reallocation of funds for financing field trials vith other strains of ?ins. II. Implementation A. Start-up 2.01 The implementing agencies commenced Iroject Cerations as follows: Agency S=.b-Component Yer:: BFD .*1antation development 1978 MNR Strengtheniag of the Fatural .esources ?reparatiou Unit and comaduct of Wood Industry Dave- lopment Studies. 1978 - 45 - ASency Sub-Component YEAR MAE Strenthening of the Aericultural 7rojects Preparation Unit. 1978 BPI 7rovision of facilities in the 11ocos Region to increase the capacity to facilitate production and distriaution of Giant Ipil-ipil. Corresponding loan not availed of. 'CARRD Conduct of field researches 1980 DB? ?rovision of credit and provision of vehicles avd office equipment. 1978 2.02 The Plantation Development Component comprisee eight sub- components, o mely: a. Nursery operations; b. Plantation establishment; c4 ?lantation maintenance and protection; d, Building and housing construction; e. Road and trail construction; f. 2rocurement of equipment; g. Research; and h. Consultancy. -46 - Information provided by the Bureau of Forest Development showedthat implementation of th49 component was adversely affected by procedural restrictions, budgetary limitations, and economic.crisis. A major deterrent to the establishment of pine plantation was infestation of shoot moth. 2.03 As a result of the abeve-mentioned prcSlems, the following mid-course revisions were adopted for this Gomponent: a. Extension of cut-off date from 1982 to 1955; b. Reduction of target pine plantation area from 3,020 to 2,325 hectares; c. Shffting41 priority to research; d. Planting of long fl-ber non-pine tree species (Eucalyptus and Acacia); and a. 1lanting of local pine tree species (inus. kesia on higher elevations. 2.04 As of 30 September 1985 the following are the accom- plishments under the 7lantation Development Component: a. A total of 188.95 kile-rams of various seeds, mostly of the pine and Eucaliptus species, was procured/ collected locally and/or abroad; and 4,622,200 seedlings of pine and non-pine gree species were raised. - 47 - b. About 1,278.1 hectares or 55% of the revised terset plantation area was developed. Of the aggregate area, 976.5 hectares were for the pine tree species; 65 haS, non-pine; ane 236.6 ha; mixed stand. Of the total area planted to pine tree species around 161.3 he were Pinus kesiva. Atut 451.5 hectar s were replante' in areas with 20% or more mortality rate. c. A system of plantation maintenance and protection was established, consisting of regular weeding, fertilisinp, fire* ontrol, and joint pest/disease control with University of the Philippines at Los Bafsos (U?L), Forest Research Institute (FORI) and foreign experts. d. A total of 35.5 kilometers of roads was constructed, representing 45% of revised target. e. POrocurement of 8 equipment which is equivalent to 40% of the revised tar.et of 20 units. f. Under research, four major activities on the following fields had been started and were on-going in 1985- (1) Shoot moth infestation; (2) Provenshee trials of various tree species; (3) fficiency nursery and plantation techniques; and (4) Market prices of non-pine speties and production cost of mixed stand. - 48 - g. For the sub-compo-ent on consultancy, expatriate consultants from Silviconsult Ltd. were engaged for the ?lantation Development C.mponent. 2.05 The W>od Industries Development Stddies subcomponent was implemented by the Ministry of Natural Resources (MNR) to promote the enhancement of the country's fo- restry and wood processing sector. Th- studies comprised three stages, namely (a) conduct of five (5) base sur- veys; (b) formulation of broad development alternatives and strategies; and (c) undertaking of a series of con- ceptual and pre-feasibility studies. The Forestry Project Development Unit, established in the H undw the ?roject, was re-named Foreign Assisted Projects Management Office (PA?MD) on 25 January 1982 out of necessit,. By then, financial support to the natural resources sector of the country from foregn institutions/countries hae increased tremendously. The PAPNO -dditionally han?les foreign nssiitance to the sector where before, as the Forestry Project Devplopment Unit, it had been mostly involved in project preparation. 2.06 The Project provided for the establishment of the Agri- cultural Projects "?reparation Unit (A?PU) in the Depart- meat of Agriculture (now Ministry of Agriculture and Food or MAF). Since its implementation in 1978, the A??U has prepared five project proposals for the DA/MF four of which are financed by the World Bank and one by the USAID. - 49 - To-date, the A-11 is involved in the preparation of ten projects for possible fundi=g by variouc interna- tional, =lti-lateral, an! bilateral institutiorg with the assistance of consulants. Aside from project pre- paration, management staff services to MLF top Officials are also perfUrmed by the .?'?U. 2.07 The Bureau of "7nt Industry (B?I) ei! not utilize, the US$40,000 loan :>c,.teated to finance 40% of the procure- meat cost of equi- mtt and L%ater:als for the nurseries subcomponent because it vr.3 suppased to sell seedlings at cost to fermer-beneficiaries but some povermment agencies, e.g. 7hilippine Virginia Tobacco Administration and BFD, and private individuals distributed seedlings to certain farmers without cost. Nevertheless, the B'I was provided by 0O? with counterpart funds for the establishmont of 17 hectares of Giant 1pil- ipil nurseries in three (3) provinces in the Ilocos region. These nurseries cost P1.5 million to establish and main- tain with funds disbursed over a 5-year period, at O.3 million per annum starting in 11978. The raagement of the nurseries was assumed by the Minitry of Agrizulture (now Ministry oi Agriculture and Food) in 1980 cr a re- sit of a reorg!--A..ion in which the B7I ended up as the coordinating agen.i. ^ne ..-sery stopped operations in 1982 owing to lac,- of fun.*- while the other tuo have phased out the raising if Giant 7pil-ip. ?Ceeelirpa. - 50 - 2.03 The Philippine Ccircil foe Agriculture and Resonrces Research and Development's (ICAPRD) research program for the 7?roject was captioned "Establishment, U:iliza- tion and Economics of Leucaena and Albizzia Species for Small Tree Farm Holders". The program period was six years endin8 in 1984 but was extended to another year ending 31 December 1985. The resecrch program consisted of eight sub-components, namely: a. volumetric information; b. seed production; c. socio-economic info-nation; d. marketing, markets and prices; e. technical studies; f. social survey and economic analysis of Lnecena end products in the ?hilippines; p. pre-sale practices and marketing procedures of selected Leucaena and Albizzia end-products in the P'hilippines; and h. assessment of site quality for Leucaena %eucoceohale and Albizzia falcataria. A total of 24 studies comprised the research program, tventy one (21) of which hrve been completed. 2.09 The implementation of some of the research wub-components was delayed by protracted negotiations with cooperating agencies. Delays in some studies were also contributed by re-establishment of plantations destroyed by accidental - 51 - forest fires and/or Pvrm. The conduct of sore of the research studies was affected by critical peace and or- der conditions such that visits to study sites were restricted, study sites were practically abandoned, or research activities were cut short. The field surveys were constrained by lack of cooperation from respondents and other respondent-related hindrances. 2.10 The DBI immediately started on-lending to smallholders after the Subsideiry Loan Agreerent with the GO' was signed on 7 March 1978. Implementation was covered by an Expanded Smallholder Treefarming Financing Orogram approved by the DB7 Board of Governors on 8 March 1978. The credit component was implemented by the Agricultural Loans Department, 31 branches and three compact branches of the DBY. Thirteen (13) of these branches are in Luson; 10 in the Visayase; and eight in Mindanao. Management of the credit component was centralized in the defunct Agricultural Projects Department I (A?D I) from start+up in 1978 to August 1980. Thereafter, said function was absorbed by the Agricultural Supervision Department (ASD) . (Pars. 5.01) Accelerated implementation of the credit component in 1980 and 1981 or before the DB' suspended the acceptance of loan applications in 1982, was attributed by DB? Branch Managers to any or a combination of the following: a. Availability of marginal agricultural lands suitable to Giant Ipil-ipil treeftrminS; - 52 - b. Existence of wood processing/dendothermal plants; c. Demand for fLrewood and charcoal for industrial and household uQt; d. Need for refprustation of deruded marginal and logged-over arnau; a. Availability of labor end planting materials; and f. Unemployment/underem?lyment. A total of 1,792 sub-projects involving some 18,582 hectares was financed dnier the credit line (Tble 6). This represents 24% and 65% of appraisal target for number of sub-prnject beceficiaries and area, .respectively. This low attainment of goal, despite the initial accele- rated implementation, in 1980 and 1981 was due to unfor- seen financial constraints of the D37. 2.11 During implementation, the number of participating private companies increased to 14 from five during project pre- paration and app- disal. These companies/buyers with which sub-loan heneficinries entered into marketing agrnements, are: For leafmeal a. General Milling Corporation (GMC) b. Nandawe Industries M-nufacturing Corporation (MICO) c. Virone Milling Company d. Bagong Lipunan Sites and Services in Southern Samar (BLISS II) e. Yu Sin Lai Enterprises f. Renatu Tayag. Jr. - 53 - For Charcoal a. 73hilippine Smelters Corporation (SMELTERS) b. Mabuhay Agro-Forestry Corposation (MAFCO) c. Maria Cristina Chemical Industries, Inc. (MCI) For fimood a. Victories Milling Company (VMC) For Tulpwood a. Paper Industries Corporation of the "3hilippines ( ICO?) b. Manila 'aper Mills, Inc. (M1) c. Cellophil Resources Corporation (CRC) d. Davao Timber Corporation (DATICOR) Aside from these institutional buyers, the other group of users of Giant Ipil-ipil fuelvood included the tobacco industry, bakeries and small establishements. For prop- pings, the banana growers in Davao del Norte and the Coal Miners in Cebu "rovince were the end-users. 3. Loan Availments 2.12 Disbursements of funds from the World Bank was to start in the first quarter of 1978 and close in the 4th quarter of 1983. However, while initial availment was made in 1979, the credit component was not fully availed of but reduced to US$1,789,491.59. The target and actual disbursements of funds under this component are shown in Table 1. - 54 - C. Supervision of Sub-project 2.13 The supervision of sub-projects which is a standard practice of the MB?, is undertaken in two stages: a. Supervision during releasing Period of sub-loan. DB? technical staff, through regular project visits, see to it that releases on sub-loans are invested by the sub-borrowers in accordance with 'the approved purposes& During such visits, sub-project Implemen- tation being undertaken by the borrowers is assessed and only when the developments effected in the sub- projects are in order, or deviations from the ap- proved plan straightened out are further disbursements on sub-loans made. b. Supervision after full release of sub-loan. Should manpower availability not tA a problem, sub-projects are visited usually within 30 days from the final release of sub-loans to determine, among other thinRs, the completion or non-completion of sub-projects; success potential of the sub-projects in future operations; and other relevant data. In late 1982, the ASD, as part of its monitoring and evaluation function, conducted a rurvey of 3ub-loan beneficiaries under the program. D. Revisions 2.14 Reduction of World Bank loan from US$4.14 million to US$1.789 million upon cancellation of unavailed balance amounting to US$2.351 million on 17 October 1984; - 55 - 2.15 Increase of sub-loan ceilings, as follows: a. A. falcateria, from P1,200/ha to P1,700/ha b. Giant Ipil-ipil leafteal, from P1,800/ha to P2,500/ha c. Firewood/charcoal (including props/pulping materials), from P2,080/ha to P2,800/ha. 2.16 Extension of sub-loan repayment period for Giant Ipil-ipil leafmeal from two years (including one year grace) to three years, including one year grace; 2117 Liberalization of PBT? agricultural lending policies; 2.18 Starting in 1982 restriction of DB? agricultural lending only to projects which can be fully funded from specific sources, thereby vittually closing the credit window for treefarming and other projects; 2.19 Deviation of actual treefarming practices from treefarming concept of sustained yield management through retation; 2.20 Shifting from private companies to independent buyers as marketing outlets; and 2.21 Inclusion of other areas not originally covered by the project. E. Implementing Schedule 2.22 At the closing date of the credit component on 31 December 1983, only 80.69% of target investment of P50.5 million had been committed. The year before, an extension in the closing date was requested fromthe World Bank, as only 72.9% had been committed. The request was not favorably acted upon by the World Bank and eventaully the unavailed balance was cancelled. (Table 2) -56 - F. Reporting 2.23 DB? complied with the provision in the Loan Agreement to establish and maintain s1arate accounts and records for the 1roject in accordance with generally accepted and sound accounting procedures. G. ?rocurement 2.24 The procurement of motorbikes and jeeps was done in accordance with generally accepted normal procedures of the DBP, through commercial channels. H. Costs 2.25 The total cost of the credit portion of the Smallholder Treefarming Component was reduced from US$9.5 million to US$4.919 million as a result of the following developments: (Table 5) a. Slow loan commitment during the initial year; b. Suspension of DB? 1ending operations in August 1982 - or about one an, a hall years before closing date of the credit line on 31 December 1983; and c. Cancellation of the unavailed balance of the credit line. 1. Farm Investments 2.26 The smal1holder treefarmin credit program converted some 18,502 hectares of idle land into treefarms. Of the total 15,631 hectares or 84% have been developed into Giant Ipil- ipil tree farms; and 2,951 hectares or 16% into A. falcateria treefarms. The agregate area financed represents 65% of the target 28,600 hectares (Tables 6-9). - 57 - III. Impact Institutional 3.01 Bueeau of Forest Development (BFD) . The shift in priority to research from plantation development and infrastructure establishment due to procedural and budgetary constraintshas produced alternative results. Based on research findings on the control of pests and diseases obtained by FORI, BFD is adept- ing a large-scale spraying program for the plantation site and conducting spin-off research. Further, expectations are high that the results of the provenance trials, and the studies on nursery /plantation techniques, market prices of non-pine tree species, and production costs of mixed stand would pro- vide the new direction for plantation development. 3.02 Ministry of Natural Resources (MNR). Within the project period, the MNR has accomplished m-sch in the implementation of the Wood Industries Development Studies and the develop- ment of the FA?MD. These activities are attributable for the guidelines that were formulated for the operations of the Wood Industries Development Authority (WIDA). 3.03 Ministry of Agriculture and Food (MAFI. The A'?U has developed skills in project preparation through a rigid "on-the-job" staff training and non-degree type training programs. Such expertise is indicated by the ability of the APPU to prepare five (5) project proposals which are at -present the benefi- ciaries of foreign assistance. Moreover, the ATYU is assured of being absorbed into the planning system of the MAP. - 58 - 3.04 Bureau of Plat Industry (B?I). The Bureau kept its comitment in establishing and maintaining nurseries within the ?roject Amplementation*period. The three nurseries had produced about 500,000 seedlings with which 250 hectares of tree farms were planted, including non-project are:s. A B?I official claims that farmer response to the credit program in the Ilocos was not so encouraging as etpected. This is attributed to small holdings in the region, preference for conventional crops, indifference to credit traceable to its cdture .(Hyman)'and unavailability ofarea. 3.05 Philippine Council for AMriculture and-Resource a Ra=arob and DevelopmentPCARRD). The research program of PCARRD arrived at a conclusion that treefarming can become a more popular and successful venture in the ?hilippines. Technological gaps have been identified; and base tech- nologies, made available. Research results were presented . in a national seminar/workshop on treefarmin, held in October 1985. However, these findings have yet to be packaged into materials for dissemination that are readily understandable to laymer and small farmers. The facilities for seed renearch initially established under the Iroject have been expanded itto the National Forest Tree Seed Research Certification Office (VATSERCO). The Office now services research on se,ds of forest species. -59 - 3.06 Development Bank of the 'hilippines (DB'?). In terms of financial benefits, the IBRD loan pro- vided the DB? with a 5.7% margin. However, be- cause of fetbr- increase in expense and cost of dunds which were higher than the increase in ope- rating income, n-t losses have been incurred by the DB2 since 1978. Nevertheless, DB?'s capability to administer tree- farming projects built up during the implementation of the ?ilot Oroject was sustained in Treefarming II. Agriculturr' 3.07 The actual vclue of production for 1984 increased as a result ef a 238% increase over projected unit price. The increase in unit price, rather than in yield per hectare, accounted for the increaseln value of productior;. Actual yield per hectare did not reach expected levels, as realization rates ranged from 20% (leafmeal) to 76% (firewood). It is not to be discounted, however, that de shortfalls from appraisal estimates may be traced to misappli- cation of technical parameters. 3.08 A major deviation from intended end-use was the shifting of a number of original charcoal subprojects to firewood. This also holds true for some leafmeal '1 subprojects. Shiftings in farm production were due to prevailing low price of the oripinal farm output; high marketi,:-/transporting cost; and lack of better markets for t-e farm produce. - 60 - 3.09 A survey of 30 Managers of the inplement'r , DB? Branches shows varied perceptions on the effect of the smallholder treefarming compo- nent on the social and economic conditions of sub-borrowers. Forty-three per cent (43%) attributed visible improvements to treefarming; and 7%, partially. Thirty-three per cent (33%) did not perceive any upliftment in the farmers' quality of life as a result of the "roject. Seventeen per cent (17%) thought it was still premature to ascertain the impact of treefarming on the community. 3.10 In the areas where the effects of treefarming had been reportedly felt, imptct was attributed by the Managers to the following* a. The sub-projects provided employmeatfor the unemployed and underemployed. b. Wages paid for labor grnerated/ugmented the income of the underemployed and provided a regular source of income for the unemployed. rc. Idle lands were utilized for productive purposes. A. Interest in treefarming spread to farmers other than the participants in the credit pro"am. - 61 - 3.11 With the tendency of assisted tree farmers to shift to firevod production, it is likely that foreign ex- change conserved through import -substitution would exceed expectations from this sub-componentf On the other hadd, indications are the expected foreia exchange savings for pulpw'd would be realised through import restrictions rather than local vroduction. 3.12 As against expectations to reforest denuded public lands, titled lands were largely reached by the smallholder treefarming program. Indications are that the program had not reached the lover income group. 3113 Due to everages in projected costs and shortfalls in target yields, net operating incomes were lower than expected for Giant 1pil9tpil firewood and leafteal. On the other hand, the considerable increase in the price for fuelvood produced from original charcoal tree ftrms and fairly high yield for Alitzia pulpwood, caused not operating income to exceed appraisal estilmate. 3.14 The tree farm projects created employment in the locality but the projected levels for farm development, harvesting and marketing of farm produce were not realized. Contrary to appraisal projections, family labor was not employed in treefarming, except for supervision of the project. 3.15 A survey of participating private companies revealel that the treefarming program created the following secondary effects: a. Establishment of livelihood projects; -62- b Developmat of itaeatucte aslart,of colp*uy assiatance rprogtik atWd*l - c. Acquisition and utilization of privately-owned marginal lands for tteefatming purposes, 3.16 From the DB? Managers' observations, the following se- condary effects resulted from the program: a. TreefarminA encouraged cattle fattening, goat raising, and orchard culture. b, The program provided additional income in hauling and transporting businesses. IV. Rates of Return 4.01 It was estimated at appraisal that each of the sub-projects financed under the Second Smallholder Treefarming Credit Component would have an internal financial rate of re- turn (IR) of more than 20% and a projected eonomic rate of return (ERR) of 651, However, the resultant 1M and ERR, based on 1984 business activities of sample sub- projects,g very low anddLscouraging at less then 15% and 25% respectively. (Table 10) 4.02 Purbhermore, financial evatation conducted on tree- ferminw. projects, based on models preparedusing the 1984 price and cost indices, also disclosed a lower IRR and ERR compared at appraisal as shown in Table 10. 4.03 The low IER of the sub-projects is mainly attributed to higher investmrat costs brought about by increase in labor coats and price of inputs. Moreover, these increases are not directly proportional to increase in output prices. - 63 - 4.04 In estimating Er of sub-projects financed, the 'CR model consideree labor as semi-skilled and used 75% shadow wage rate (SW). Foreign exhhange components for fertilizers were assumed at 80% while plastic bags at 45%. The official exchange rate (CER) used is P16.82 : $1.0 (based on average OER from January to Decemher 1984) while the shadow exchanRe rate was as- sumed 20% above the official exchange rate. 4.05 A marked deviation from the appraisal model could not be prevented as a consequence of the low volume of production, and i'gh development and harvesting costs actually experienced by the assisted treefarms. Even assuming that the volume of productiun contemplated during appraisal was attained, and using current wage rates, output prices and costs, the realizable rates of return would itill fall short of the appraisal target. It should be pointed out that above findings may not be conclusive as onl- few sub-project oeneficiaries have started harvesting r-.nce most of the trees had not yet reached the harvesting age. Base data were pro- vided by only 1f out of a possible 95 respondents. Also, some beneficiaries had harvesting schedules protracted as a result of prevailing low prices of output coupled with high harvesting and transporting costs. In some cases, extended/delayed harvesting schedules were caused by shifting in end-uses to products for which better prices were being offered, e.g., charcoal to fuelwood. - 64 - V. Institutional *erformance An3 Development 5.01 The ,jezt Magmw.u fur the smitlholder treefarming credit program was constitutee from the Crops and Tree Farmin.q Group (CTFG) of the Agricultral Supervision De- partment (ASD) of the DB?. The ASD was created on 6 August 1980 as a result of the reorpanization of the Aericultural 7Projects Department I (A"D I) and the Agricultural Projects Department Ii (APD II) into the ASD and the Agriculture: Loans Department (ALIX). This major revamp arose from the need to accelerate the pace of the D3?'s assistance to the continuing thrust and the increasing impetus to food pro- duction and the advent of universal banking. Under this scheme the ASD was created to further strengthen the DB?'s supervision and technical assistance to the network of Branches througheut tho country. After its organization , ASD assisted in upgrd-in the quality of loan appraisal stan- dards and facilitated loan processing activities through its supervision missions to the branches. 5.02 The Branch network was likewise reorganised in 1980 to fur- ther strengthen countryside development. it was reinforced with 32 technical per3onnel from the reorgnnized Departments and gave rise to the creation of the fifth Regional Office. 5.03 An internal reorganization of the ASr wa3 implemented in May 1983 with the transfer of the functions of the disbanded Agricultural Planninr Unit (A'U) to the former. The intfig- - 65 - ration was necessary to further streamline the activities in the Read Office for more effective planning and imple- mentation of the DB"?'s lending program for the agricultural sector. Moreover, the DB?'s aSricultural lending activities were expanded to regular post-disbursement loan supervision, intensified loan collectLon and credit sourcing diversification. 5.04 In terms of functional organization, the present set-up has realigned the technical staff intv fields of special :ion. 1Ireviously, delineation was based on geographical areas. As a result of the internal reorganization in 1983 the per- sonnel requirement of the ASD increased by 35% from the initial complement in 1980. 5.05 Financial difficulties suffered by the DB? caused the sus- pension by the World Beak of the credit component of the ?roject in 1983. As of year-end 1985, 7'residential approval has been granted to a rehabilitation program for the DB? in which non-performing accounts (WA) will be transferred to another government institution; the operations of the new DB? will be scaled down; and the organizational frame- work of the DB7? will be restructured to fit its operations. The rehabilitation program b9stbeen designed to dovetail into the economic recovery program of the GO?. VI. Special Issues 6.01 Since the Implementation of Treefarming II in 1978, it has spawned similar projectesponsoredby either the public or private sector. Of the Government programs concerning tree- -66- farming# foremost nre the Kilusang Kabuhayan 'ara Sa Kaunlaran (KKK) or Livelihood Program, Kiluseng Sariling Sikep (KSS) and the Integrated Area Development ?rojects of the National Council for Integrated Area Development (NACIAD). The other government institutions implementing treefarming projects include the National Electrification Administration (NEA), Farm Systems Development Croratfor (FSDC), and Natural Resources Development Corporation (aDC). From the foregoing indications, a possible special issue is that of substitution of 7roject funds for other funds. That treefarming could have proceeded even without the Iroject is further substantiated by perceptions of two participating private firms that without expansion the operation of their rills can be sustained by their own plantations. 6.02 One of the possible pre-negotiation condition was the suitability of the soil to Giant Ipil-ipil. Findings of the interim monitorinft conducted by the ASD In 1982 indi- cate that some project sites have high levels of s6I acidity. Likewise, a significant research result recently made available by ?CARRD reveals that contrary to popular belief, Giang Ipil-pil cannot be grown anywhere throughout the country. It can grow only on certain pH.levels and percentage slopes. Likewise, further validation of tech- vical parameters should have been undertaken first before implementing the ?rdject. 6.03 Insufficient technical data and marketing experience with Giant Ipil-ipil was a major issue brought to light by the - 67 - PAO/C7 '*reparation Mission that reviewed the GOI's projeet proposal in May 1976. At the same time an adaptive research component was built in the Smallholder Treefarming Corponent to be undertaken by ?CARRD. The research undertaking spanned a 6-year period which surpassed the investment period of the credit program. The issue, therefore, is that the research Orogram could not have provided new technologies nor inputs for possible mid-course revision Ct the program. 6.04 Such loan covenants es counterpart funding, foreign exchange risk-bearing, and other requirements from the World Bank became major issues ct the height of the economic crisis in 1984. As a result of cutdown in government expenses, a number of government projects could not be continued, much less implemented. The cancellation of the undiabursed ba- lance of the credit component of the Project was an effect of financial constraints of DB? that led to certain policy changes. 6.05 The Smallholder Treeformins, Component had been designed such that its implementation would involve complementing activities of government institutions and private companies. This de- sign, however, would later give rise to the issue of integ- rated development duving program implementation. The private companies could not keep their commitment to assure markets for an, guarantee prices of the assisted tree farmers' produce because of financial difficulties brought about by the economic crisis. The B71, on the other hand, -68- established nurseries WithouL assistance from the Project believing that this would not be feasible due to the pro- liferation of agencies distributing seedlings at cost or freeof charge. As previously mentioned, the research sub*component could not provide data for mid-course revi- sion of the credit program. 6.06 The recent research finding that Giant Ipil-ipil grows well only under certain M. level and percentage slope precludes marginal agricultural lands as the primary tar- get of the Project. This implies that while the ?roject may have succeeded in converting idle marginal lands into productive lands and in reforesting deauded or logged over ares, it might not prove that Giant Ipil-ipil is a lucrative crop. 6.07 Another issue in retrospect is the inclusion of the Ilocos Provinces as Iroject areas. Research findings indicate that Ilocano culture is characterized by grugality and financial conservatism. (Hyman, 1981) Ilocanos shyaway from credit explaining the slow enrolment of subborrowers in the area. (Interim Monitoring Report, ASD, 1982) 6.08 Finally, in a World Bank supervision mission for Tree- farming II undertaken in November 1985, the incidence of ?eyllide Infestation was noted. This suggests that studiec on the control of pests aue diseases to supplement the prograss of the participatint private companies should have been emphasized in the research pro,-ram of ?CARRD. - 69 - VII. Changes in Repeater Projects 7.01 The emalholder treefarming program also adopted the salient features of the Pilot 7roject. However, it im- proved on the first project by upgrading loan ceilings and liberalizing lending policies. The institutional capability gained by DB? from Treefarming I in adminis- tering and managing a preject of this nature was further strengthened. 7.02 The Project Completion Report ('?CR) for the P?ilot Iroject (Loan 998-7H) had pr3posed the provision of loan funds for harvesting, hauline and transporting in the financing package for future treefarminr projects. The proposal was not, however, adopted in the second treefarming project because of the option of the participating private compa- nies to contract out harvesting if stumpage price is availed of by the tree farmers. At the same time the provision of loan for harvesting, hauling and skidding of logs is deemed inconsistent with the agricultural lending pro- cedures of the DB7. Since treefarming sub-projects are long-maturing, the releasing periad would be extended over four years for firewood and seven years for pulpwood. This implies administrative costs on the part of the DB?. Fe- vertheless, loans for harvesting, hauling and skidding can be saparately Srante, as part of the financing package to be released on or !-fore harvest time. This amendment could not be introduccel b)ecause the credit program wa sues pended When the financed tree farm began to mature. - 70 - 7.03 The rdOuction of interest rates has also been proposee by the participating pri-ate companies but the high cost of funds for DB? detracts from this proposal. Reduced interest rates on su-loans may be possible with the D37 servicing soft loans acquired by non-financial government institutions. However, the DBP experience is that at 2% sertice charge losses are incurred because its adminis- trative cost iQ higher than 2%. 7.04 Some participating private compaties feel strongly the need for the resumption of the financing program by DBI, However, there are indications that tree farmers' parti- cipation in a future project would be continpent on the solution of the sating marketing problems. Only the producers oE Giant Ipl-ipil firewood have shown interest in expanding their sub-proocots because of good prices. It is reported that the end-user for the output of this group of tree farmers in Ii1an is a cement factory. In addition, an effective and economical control measure to combat jumping lice pest (7syllids) has to be readily available to ensure sub-project viability. 7.05 For future expansion of the plantation establishment sub- component, BFD recommends that the strenith of the privcte sector as end-user be re-assessed. Moreover, physical targets shoulA be revised to lower or less optimistic levels than those of the ongoing program. BFD believes that had the plantation not been biologically disturbe., the phase out of Ci711ophil Resource Corporation (CRC) would have caused ' venture to fail just the same. - 71 - VIII. Conclusions 8.01 The formulation of the Smallholder Treefarming and Forestry !'roject in 197E was geared towards the national program for forest ecosystem management. The attainment of Project objectives, however, was impeded by external and inteunal financial crises that have been affecting the country since the early 1980's. Financial difficul:lesdflimited DB?'s lending operations as early as Aurust 1S82 an! caused the suspension of the smallh&lder treeforming program in Mny 1983 which cul- minated in the cancelletior of the uravaileA balance of the loan on 17 October 1984. The suspension of the prog- ram long before closing date aggravated the implementation lag that had set in before 1982. As a result, onl# 65% of target area and 24% of target clientele was attained. Financial distress also decelerated the buying activities of the participating private companies. Consequently, the increase in income of farmer-beneficiaries could not be realized. e.02 The shortfalls in tarvet area/clientele and in projected income increases me be attributed to the following, a. Because of the commercial orientatioriof the program,. performance was -reatly and adversely affecte by the financial crisis. b. There was inadequate promotion and coordination among interacting in-titutions/private firm. - 72 - c. The World Bank did not approve the GOD requests for increased level of subloan rc-ourse-entand extension n! the closing date of the credit sub-component. d. Certain changes in the DB? lending policies instituted to offset financial difficulties curtailed movement of the smallholder treefarming program. e. In a way the cultural characteristics of the target clientele, such as the Ilocanos in the North, hindered attainment of this toal. f. Issuance of land awards was delayed by bureaucratic red tape. 8.03 Barring the stid financial crisis, the expected outcome of the program would have been realized since the program was high on the priority list of the national development plan, .marginal land was available, and awrket/prices was suppo3ed to be assured/guaranteed by private firms. The implemen- tation capability of the executing agency had been built on experience gained from the ?ilot ?roject. Rowever, with the financial crisis, costs rose at infla- tionary rates while prices could not be raised because of financial difficulties of the participating private firms. On the other hand many tree farmers would not harvest be- cause of high wage rates and lack of capital. 8.04 Considering that the Abra pine plantation does not have a commercial outlet it assumes the status of a large-scale research/experimental station. Because of the considerable funding required its services should be diversified so it could be cost efficient. - 73 - 8.05 The FAWMO is recommending that it be form-illy recognized as an integral part of the MNR, an office with a legitmte status and a separate budget. Considering that the PAFMO provides the umbrella for the management of all foreign- assisted projects of the MNR, it should ..be given a per- manent tenure. 8.06 A more exanded evaluation of yield performances of the project aspect of t'-.o smallholder treefarming component should be undertaket as against the volumetric informawtion studies conducted by ThARD. IX. Recommendation 9.01 Notwithstanding the uncertainties ir the operating outcomes of the Smallholdar Treefarming Component, it is recommnded that a Repeater Project should be implemented. Its concept, however, should be adapted to the framework of the national recovery program. 9.02 In designing future projects, the following features should be taken into consideratic.L: a. Use of site index for projecting yields; b. Strengthening of marketing tie-ups between tree ftrmers and participating private companies; c. Provision in the loan package for harvesting, hauling and transporting; and contingencies for calamities; d. Requirement of pest-harvest care of subprojects; e. Size of project area and its suitability and accessibility; - 74 - f. ?ackaging of available technology for the tree species, including the effective and economical control of pests attacking Ipil-ipil plantations; g. Strengthening of coordination aspect-among implementing institutions; h. Provision of a component on pest and disease control assistance, such as those extended by the Federal Republic of Germany; and i. Adoption of research findings (Hymen, 1981) to con- sider regional cultural characteristics in project setting. 9.01 On the concept of plantation establishnent, the following are recommended by BFD: a. GOP should continue to extend financial support for the maintenance and protection of the plantation; b. Provision should be made for the conversion of the plantation into a pine research station; and c. There should be continuing inter-agency research for the development of replicable technology for pine plantation development. t:ble i - Tar8et ad actual disbursementa oi funda or the Credit Ccmponent under the Treefsr~rp. 11 Credit Line (Losn Io. 1506 !"l), 1978 to 1985 Periodic Disburcement (1BRD. 40%) . --... Cunnlative Di£bursemei_(WIM, 40%) 2 rin Target 0ua Oerao tf Terae(shotfll) Ral4_LtIon (US $ 000) (US$ 000 173 U* 191 - us$ 191 UO 191 - US$ 191 -. 1979 595 27 566 786 27 759 3.43 10 30 833 267 566 1,619 294 1,325 18.1( 19P1 13211 479 732 2,830 773 2,057 27.31 19c2 1,1,8 679 439 3,948 1,452 2,496 36.78 19L;3 1,921 182 10 4,140 1,634 2,506 39.47 19z4 - 153 (-153) 4,140 1,787 2,353 43.10 - 2 (-2 4,140 1,789 2,351 43.21 T,-til r3 $ jm.4m UO$3LM8 li.~ $ . is$ 4.14 us$ Ad789 u8s 2.351 3! Total reitnburt-ment from IORD - US $ 1.729 Nf Amount zequetd to be cancelled per Minister Viteta's letter dated 17 October 1984, Os amended USØ 2.351 ff Table 2 - Treeftrming II: Target and actual comitmen. of funde, 1978 to 19F3 Annual Cmulative year Prolected Actual Overage/ Projected Actual overavel Realization (Shortfall) (Shortfall) Rate (01,000) (P1,000) . Year I (1978) 5,000 483 4,517 5,000 483 4.517 9.66 Year II (1979) 10,800 1,560 9,240 15,800 2,04s 13,757 12.93 TearD M 1980) 16,900 13,510 3,390 32,700 15,553 17,147. 47.56 Year I (1981) 17,800 12,356 5,44* 50,500 27,909 22,591 .5.26 Year V (1982)y 8,908 (-8,908) 50,500 36,817 13,W#3 72.90 Year VI (1983) -3,883 (-3,883) s 40,7. 9,80 80.59 TOTAL .45 80.59 g/ Exceeding investment period. Table 3. • Treefarming II: Annual availment of funda, 1979 to 1985 (60%) (40%) CUtIJLATIVE DbP I b R D D B p I B R D (P0001 (P 000 $0( (P(P 000) <$000) 1979 9 302 P 201 * 27 P 302 9 201 $ 27 1980 3,023 .,015 267 3,325 2,216 294 1981 5,746 3,831 480 9,071 6,C47 774 1982 8,82C 5,887 679 17,891 11,934 1,453 1983 3,017 2,012 182 20,908 13,946 1.635 1984 3,650 2,433 153 24,558 16,379 1,788 1985 45 3C 2 24,603 16,409 1,791. Table 4. - Treefarming II: Annual evatiment of funds, by cateRory, 1979 to 1985 DB P (60 %) IBRD ( 40 % ) T 0 T A L(001) Sub- Equipment & Sub- Equipment & Sub- Equinment & YEAR. Loan Materials Loan Materials Loan Materials (P 00c) (P 00C) (P 000) 1979 P 302 P - P201 P - P 503 P - 1970 3,023 2,015 - 5,038 1981 5,671 75 3,781 50 9,452 125 1982 8,716 114 5,811 76 .14,527 190 1983 3,017 - 2,012 - 5,029 - 1984 3,650 2,433 - 6,083 - 19P5 45 * .30 - 75 - o TOTAL P 24,424 P 189 P 16,283 P 126 940.707 1 315 Table 5. - Treefarming II: Appraisal and actual priject cost, by source of fund Appraisal Actual Realization Amount Dercent Amount Percent Rate Sources of funda (1l$iL I (_ ( % ) (.3 ) Sub-Borrowers 0.60 6 0.447 a/ 9 74.5 D n ? 4.7CC 50 2.683 55 57.1 I B R D WC-10 44 1.79 36 42.6 TOTAL 9.500 100 4.919 100 51.8 / *er DB? Board Resolution No. 6C>78 subbotrowers were required to contribute at least 10% of the total Investment cost of the treefarming project to the Form of family labor. Table 6.- Treeferming II: Summary of target and actual Mumber and area financed, amount of aubloans granted, by type of subproject, 1978 to 1983 Numb6r at ates ea*ra faanAunQ4t 0t Sb*Loan UU) Ke-al- is I ie:Uh- mt0 W "al Subproject Type Actual P 'rojected 2/ nation Actual Projected sation Actual Projected satiou Rate (1) Rate (%) Rate(%) Gtat Inthiptl Firewood/harcoal 705 2,840 24.0 6,310.9 14,200 b/ 44.44 14,30f.0 -8,400 %.4 uarmeal 148 4,00OC0 3.7 1,593.7 8,000 / 19.9 3,499.0 14,400 24.3 Vulowood 718 0 - a/ 7,676.8 0 * 18,282.0 C - a/ Sub-Ttal 1.371 6,840 23 .0 15,581.4 22,2C 71.4 36,C89.0 42,800 84.3 ALbinas YAlcatara 9peaood 217 240 90.4 2,951.0 2,400 123.0 4,487 2,8C 16C.2 article board 400 0.0 0.0 0.0 0 4,9C 0.0 Sub-Total 217 640 33.6 21951.0 6,400 46.1 4,487 7,700 5e.3 Others 4 C. - 49.4 0 124 0 A Grand Total IA792 24.0 18&581.8 18600 . 40.700 505CC 806 11 This to lower than the nuaber of farms reported financed inl982 (Interim Report) because there were farms approved at the time which were not pushed through later. The same is also true for area financed reffected in succeeding parts of this report. / The 5,000 has. portion of target area under the .rogram not allocated to any specific subproject type was distributed per assumption during appraisal as follows: 5C for firewood/charcoal and 501 for leafmal makin (giant ipil-Ipil). This corresponds to 500 farms for firewood/charcost and 1,275 farms for leafaeal at an average of 5 has. and 2 has. per farm, respectively. a/ Po basis for computing realization rate as there was no appraisel target. il Includes 2500 has. of the S,U0 has. portion of target area not allocated to any specific subproject type. @1 Sems as Pootnote 1/ above. Table 6a. - Treefarming II: Target and actual number of farms financed, by type of subproject and year. 1978 1979 198C Number Reafti- Fumber Reali- : umber Reali- Subproject Type Actual Projected zation : Actual Projected zation : Actual Projected sation Rate(%) : Rate(5): Rate(5) Giant Ipil-ipil Firewood/charcoal 7 26C 2.7 45 58C. 7.8 158 1,0CC 15.8 Leefameal 5 350 1.4 8 9CO C.9 27 1,25C 2.2 Pulpwood - - - 6 - - 179 - - Sub-total 12 610 2.0 59 1,480 4.0 364 2,250 16.2 Albizia Palcataria Pulpwood 0 50 0.0 28 60 46.7 130 7X 185.7 'arti le board 7 41L 17.5 - 90 C.0 - 130 (.< Sub-total 7 90 7.8 28 150 18.7 130 200 65.C Others 2 - * - - - 2 - - Grand Total 21 700 M 87 IA630 5.3 496 45C 2(.2 Table 6a. Treeferming II: Target and actual mober of farms financed, by type of subproject, 1978 to 1983 - contimed 1981 1982 1983 Number Reali- : Number Reali- : Number Reali- Subproject Actual Projected ation : Actual Projected ration : Actual Projected cation Rate(%): Rate(%): Pate (%) Giant Ipil-Ipil Firewood/charcoal 141 1,000 14.1 189 - * 165 LeeEmeal 44 1,500 2.9 25 - - 39 Pulpwood 350 - - 183 - - * Sub-total 535 2 5C4 21.4 397 2(4 * Albizzia Falcateria Pulpwood 33 70 47.1 19 - * * * Particle board - 13C 0.0 - * * - * Sub-total 33 20C 16.5 19 - Others - - - Grand Total 568 2.700 21.0 416 to2 - Table 6b. - Treefarming II: Target and actual area financed, by type of subproject and year 1978 1979 : 198C Area (Ha.) Reali- : Aea (Ba.) Reali* Area (Ha.) Realt- Subproject Type :Actual Projected sation :Actual Projected sation :Actual Projected cation Rate(%) Rate(%) Rate (% ) Giant Ivil-pil Firewood/charcoal 99.3 1,30C 7.6 591.4 2,9CC 20.4 2,350.8 5,000 47.0 Leafmeal 94.0 7C0 13.4 113.2 1,800 6.3 372.3 2,500 14.9 Pul"wood -- 72.0 - - 1,693.9 - * Sub-total 193.3 29.7 7. 4,700 16.5 4,417.0 7.5CC 58.9 Albizzia Falcateria Pulpwood 48.5 400 12.1 244.5 600 4C..8 2,091.6 700 298. *article board C 50C (I - 90L (.0 - 1,3CC - Sub-total 48.5 9CU 5.4 244.5 1.5M0 16.3 2,091.6 2.0C 1C4.6 Others - - - - - 43.5 - Grand Total 29OC 8.5 4021j 642(C 1 .552.1 9AC 19.C Table 6b. * Treefarming II: TArget and actual area financed, by type of subproject - contiwnde 1981 U 1982 1983 Prea (He.) Reall- : Area (Ha.) Reali- : Area (aa.) Reall- Subproject Type :Actual Projected sation : Actual Projection sation :ActuaL vrojection cation Rate(%): Rate(%): Rate(%) Giant Ipil-1pil Firewood/charcoal 813.8 5,0CC 16.3 1,155.4 - - 1,300.2 - - Leafmeal 496.7 3,000 16.6 289.7 * - 227.8 - - Pulpwood 3,647.0 - 2,263.9 - - - - - Sub-total 4,957.5 8,000 62.C 3,709.0 - - 1,528.0 - Albizzia Falcataria Pulpwood 371.5 70C 53.1 194.9 - - - - - Darticle board - 1,30C - * * * * * s ub-total 371.15 2,000 18.6 194.9 others . - f Gra6d Total 5,329.C C.000 53.3 3,903.9 - * l528.0 - - table 6c - Treefarming 11: Amount of subloans granted, by type of subproject and year 1978 : 1979 : 1980 Amount (P000) Reali- : Amount (P000) Reali- : Ar-ort. PJ Realt- Subproject Type :Actual Projected sation : Actual Projected sation : Actual Projected sation Rate (%): Rate (): Rate Giant Ipil-Ipil Fiewood/charcoal 205 2,600 7.9 975 5,800 16.8 5,167 10,000 51.7 leafmeal 216 1,300 16.6 171 3,200 3.3 740 4,500 16.4 Pulpwood - 160 - - 4,319 - Sub-total 421 3.900 10.8 1.306 9.00 14.5 10,226 14,50U 70.5 Albissia Falcattria !Nlpw-rod 47 500 9.4 254 700 36.3 3,175 800 396.9 Parti-le board 0 600 0.0 - 1,100 0.0 - 1,600 sab-total 47 1.100 4.3 254 14.1 3.175 2.400 132.3 Others 15 - - - 109 - - Grand Total 483 5 9.7 1060 14.4 13L510 16.900 79.9 Table 6c. - Treefarming I: Amount of subloans granted, by type of subproject, 1978 to 1933- .continued 1931 1982 198A Subproject Amount (90O) Reati- : Amount (000) Realt- : A=unt (P000) Re a AculPe ce ai ______ Ia~o atn. Actual Projected ate %) Actual Projected ate .%): Actual Projected Rce(%) .Ciant Ipil-Ipil Firewood/charcoal 2,076 10,000 20.8 2,455 - * 3,430 - - Leafmeal 1,159 5,400 21.5 760 - * 453 - PulpWLod 8,522 - * 5,281 - - . Sub-total 11,757 15,400 76.3 8,496 - - 3,883 * - Albizzia Falcataria Fulpvood 599 600 74.9 412 - * *O Particle board - 1,600 - - - . . . Sub-total 599 2,400 25.0 412 - - - . . Others * - - - - . . . - Grand Total 12,356 17.800 69.4 8.908 "Mmm mmme - 87 - Table 7 TreeferMN I: Target and actual average size of farm financed, by subproiect type Average Size of Farms Financed (Has.) Subproject : Actual : Appraisal : Percent Realgation Giant tpil-ipil Firewood/charcoal 8.97 5.00 179 Leafmeal 10.77 2.00 539 Pulpwood 10.69 - * / All G. 1pil-ipil Subprojects 9.92 3.25 3.05 Albizzia falcataria Particle board - o * 10.00 - 0 - Pulpwood 13.60 10.00 136 All Albiszia faleatfria Sub-projects 13.60 10.00 136 Both tree spcies 1g37 g. 271 2t No basis for computing realization rate as ttere was no appraisal target. Table 8 Treefarming MI: Tarset and actual number and percentage distribution of faras financed, by rasion and subproiect type. Giant I Actual Appraisal : luzon :Visavas:Mindaneo:Total:Lson:Visavas:Mindanao:Total Giant Ipil-oil Firewood/charcoal 160 95 454 709 2100 - 740 2840 Leafmeal 2 144 2 148 - 4000 - 4000 Pulpwood I . . . . Sub-total 162 140 1173 1575 1.100 4000 740 6840 Albizzia falcataria Particle board - - - * 400 400 Ptipwood * * 217 717 - 240 240 Sub-total 217 217 '* - 640 41J T_o t a 1 162 240 1390 2 2100 4000 1380 7A.50 Giant in$l-igil As Percentaie of Total Firewood/charcoal 23 13 64 100 74 * 26 100 eafmeal 1 97 1 99 A/ - 100 - 100 Pulpwood - k 100 100 - - - Sub-total 10 5 75 T 31 58 11 100 Albizia falcataria Particle board - * -0- -0- - - 00 100 Pulpwood * * 100 100 *!* 7.00 10 Sub-total - * 100 100 - 100 103 Total 7T 18 8 3i 1 9 M D or naW up tos WDG7 dUe co roun&,-,3. Les than 1%. TABLE 9 - Treefarming II: Target and actual distribution of farm area financed, by region Page - 54 aud subproject type Subproject : Actual : Appraisal TYPE Luson ; Visayas : Mindanao : Total Luzon VisaXa. : Mindanao : Total . iLI-il Farm Area (Has) F'vood/Char. 1952.0 1315.6 3092.7 6360.3 10500.0 3700.0 14200.0 Leafmeal 85.0 1448.7 60.0 1593.7 - 8000.0 - 8000.0 Pulpwood - 5.5 7671.8 7 6 *6. - S-total 2037.0 2769.8 WIj ". 15630.8 10500.C 8000.0 3700.00 22200.0 1. falcataria P. board - - - 0 - -0-0 - - 4000.0 4000.0 Pulpwood - * 2951.0 2951.0 - * 2400.0 2400.0 S-total - - 2951.0 2951.0 - - 6400.0 6400.0 .o t a 1 2037.0 2769.8 13775.0 18581.0 10500.0 8000.0 10100.o 28600.0 (. Ipil-ipI1 As of Percentage of Total ]/ F.vood/Char. 31 21 49 101 74 - 26 100 Leafmeal 5 91 4 99 - 100 - 100 Pulpwood - 4a 100 100 - - -- S-total 15 69 100 47 36 17 100 A. Falcataria P. board - - *0- -0- - - 100 100 Pulpwood 100 100 - 100 100 S-total 100 * - 100 100 To t a 1 _T5 74 100 28 5 76T Some totals do not add up to 100% due to rounding. Less than 1%. - 89 - TABLE 10 - TREEFARMING II: Rates of Return of Subloans, by Type of Sub-project TREE FARM-MDDEL END-USE APPRISAL ESTIMATE ACTUAL (1984) (1984 costings) IRR ERR IRR ERR IRR ERR Giant Ipil-Ipil Firewood 29 35 0 0 7 23 Charcoal 25 34 15 25 17 29 Leafmeal 105 120 - - 40 48 Albiszia Falcataria .6/ Pulp 25 17 7 14 9 16 1/ Sample charcoal borrowers harvested and sold their tree-farm product as firewood to minimise expenses because of high marketing costs. However, model is based on charcoal production. / No actual data on harvesting inasmuch as majority of leafmeal borrowers did not harvest product due to high marketing cost and low price of leave. ] Computed over 20 years / Computed over 20 years of Computed over 10 years d/ Computed over 25 years Idm Table 11. Treefarming i: Net Operating Income Per Hectare, By Type of SubWroject, 1978 and 1984 Charcoal Firewood Shifted to Firevood Leaf Heal Pulp Projected Actual Projected Actual Proiected Actual Projected Actual Quantity/Ra. 120 45 170 129 10 2 240 180 Unit of Measure cU.M. cU.M. cu.m. cu.m. tons tons cu.m. CU.M. Price/Unit (Peso) P 3' P 120 P 26 P 189 P 300 P 500 P 40 P 120 Sales (Peso) P4,440 P5,400 P 4,420 P24,381 P3,000 P1,000 P9,600 P21,600 Expen*es (Peso) 1/ lj.70 P4,454 P 2010 P182000 P1.805 940 ad19 Pl6.l!1 Met Sperating Income (Peso) P2,670 P 9.6 P 6.381 &1619.5 P 4805 / aintefnce cost only. Table 12. - Treefarming 11: Expeness Per Rectare, By Typ. of Libor and Operation, 1984 (Peso) Firevood Charcoal to Firevood Leaf Heal Pulp (A. Falcataria) Typa of Operation Family Family Family Family .utired Labor Total uired Labor Total ,o red Labor Total ulred Lebor etal 1.0 PLMI1 Land clearin/preparation a) Plovin/harroing P 450 - P>450 P 450 - P 450 P 600 - P 600 P 600 - P 600 b) Planting 390 - 390 420 - 420 300 - 300 760 - 760. c) Fertilizig 84 - 84 100 - 100 75 - 75 . 250 - 250 d) eedinthinning 360 - 360 374 - 374 600 - 600 540 - 540 e) Cultivating 120 - 120 100 - 100 - - 250 - 250 1.1 SEEDLINGS/SEgDS 1,500 - 1,500 1,250 - 1,250 899 - 899 300 - 300 1.2 FERTILIZERS 232 - 232 210 - 210 116 - 116 206 - 206 *ub-total 231f.Lä 0.13 R,904 - 9 942590 , P2.906 .2,906 2,0 WAINTENANCE a) Fertilizag - - - - - - . b) Weeding 85 - 85 - - - 340 - 340 17 - 17 c) Over/undarbushing 5 _ _ ..-.. -. - -- 578 578 i 629 - _.62n, - - - ? 595 - p 595 2.1 FERTILIZER - - - - - -t629 - P 629 - - - - 9 340 595 - P595 3.0 HARVESTING a) Cutting/harveatnag P1,1258i 1,125 7,200d - 7,200 > - 6 300Y 6.300 b) Drying/debark logs • - - - - 600 600 l: . 1,800 c) KaM1lag 1,350 1,350 6,300W - 6,300 -8100. 8,100 d) Transporting 1,350-./ 1,350 4,500./ 4,500 - sub-total ,2 5 93.825ýPl "'P - ~18,000 9 600 P> 600p16,200 P16,200 Qaj0 •w.Ta P2.9 >75010.904. - 920,904 P3.530 - PP.30119.701 9>19.701 / cu.m. P1/cu.D. ?.05/kg. 930/cu.n. P45/cu.m. j/ Sharing basis 60:40 harvester:owner P30/cu.ta. 9.08/kg. v35/cu.e. P.07/kg. Table 13. - Treefarming i: Employment Generation Per Hectare, By Type of Labor/Operation and Subproject 1 Firewood Charcoal to Firewood Leaf Meal Pulp Hired Family Total Hired Family Total Hired Family Total Hired fatily Total 1. PLATING (Man-days) a) Land preparation/rlearing 30 - 30 30 - 30 40 - 40 30 - 30 b) Planting 30 - 30 35 - 3> 25 - 25 38 - 38 c) Fertilizing 7 - 7 10 - 10 5 - 5 10 - .10 d) Weeding/thinning 30 - 30 22 - 22 50 - 50 27 - 27 et Cultivating 10 - 10 10 - 10 - - - 10 - 10 Total 107 - 107 107 - 107 120 - 120 115 - .15 2. MAINTENANCE (Man-days) a) Fertilising - - - - - - - - - - - - b) Weeding 5 * 5 - * - 20 - 20 1 - 1 c) Over/underbushing 32 - 32 - - - - - 34 - 34 d) Cultivating ----- - - - . . - - Total *7- - 20 20 35 - 35 3. HARVESTING (Laborers) a) Cutting/harvesting 15 - 15 15 - 15 10 - 10 10 * 10 b) Drying/debarking - - - - 5 - 5 12 - 12 c) Hauling 13 - 13 13 - 13 10 - 10 1 - 1 d) Transporting 10 - 101 10 - - - . . Total - 38 38 - 38 25 - 25 23 - 23 GRAND 70TAL 182 - 182 145 - 145 165 - 165 173 - 173 Table 14. - Treefarming 11: Results of Operation Per Inomo Statement 1978 to 1984 (P000) 1978 1979 1980 1981 1982- 1983 198.-" Amount 7,._L Amount Amount A Amount _ _j_ Aeuut. --,Aount . Earnings: Interest Income 7.12 34 21.19 24 10.83 11 204.10 62 714.23 93 682.21 79 Misc. Bank Fees ----- - Service & Application Fees 2.72 100 13.60 66 56.33 63 60.38 60 82.04 25 .83 U.S. - - Commitment Fees - 17.88 2 - Total Misc. Bank Fees 2.72 t 13.60 66 56.35 63 60.38 60 82.04 25 1. 2 Other Income Additional Interest & Penalty Charges 19.30 3 166.59 20 miscellaneous .11.15 13 29.17 29 42.99 13 16.64 2 10.87 1 Total Other Income 329 4 1 35.94 5177.46 21 Total Earnings .72 jo 2 1 8 100 1 100 329.13 100 768.88 100 859.67 100 Expenses: Interest-Bills Payable-Domestic .- 5.88 5 42.58 24 315.95 51 592.60 55 .00.43 62.1.150.54 63 Salaries & Other Personnel ; Benefits 7.55 41 50.29 44 81.81 46 225.98 36 326.30 31 502.17 31 539.8C 2 Loan Processing .26 2 3.55 3 8.59 5 20.18 3 67.71 6 15.22 1 3.00 U.S. Travelling 9.3 54 44.02 39 18.97 11 32.87 5 31.37 3 31.34 2 49.48 3 Stationeries & Supplies .11 1 4.58 4 6.79 4 10.18 2 14.78 1 13.64 1 12.86 1 Postage, Telegraph & Telephone . - - - - 0 - - - - 5.91 U.S. Miscellaneous/Other Administra- tive Expenses .42 2 5.20 5 17.53 10 15.96 3 43.6 4 46.33 3 71.79 4 Litigation Expenses . - - - - - .02 U.8. Total Expenses 18,29 100 113.52 100 176.27 100 621.12 100 1,076.42 100 1,618.13 1N) 1833.48 100 NET LOSS 9 15.57 )9 (520.74 ) 747.29) ( 849.25 ) ( )73.81 Sof et os over Total ernin ( 5.72 4.48 3 198.75 2 (518.77 ) 227.05 ) ( 110.45 ) ( 13.2 7 NOTE: Financial Statement are prepared on a modified cash basis. 1.S. - 1ot sign.fic3nt Table 15. * Treefarming, i: Results of Operations After ODst of Fund By Average Growth Rate 1978 - 1984 (in Thousand Pesos ) Average Annual 1979 1980 1981 1982 1983 1984 Growth Rate Earnings 3 218 00= 69 6O % Increase 600% 324% 12% 229% 134% 118% 236% Expenses: Administrative (Net of Interest Bills Payable - Domestic) 18 108 134 305 484 609 1.292 % to Total Expenses 9% 28% 19% 17% 18% 33% 48% Cost of Funds 182 276 570 1,503 2,267 1,226 1,426 % to Total Expenses 91% 72% 81% 83% 82% 67 52% Total Expenses 200 384 704 IS808 2,751 1,835 2,718 % Increase/Decrease 92% 83% 1571 52% 33% 48% 78% (NET LOSS) (197) (363) (615) (1V708) (2,422) (1,066) (1,858) Table 16. - Treefarming I: Results of Operations After Cost of Funds With Percentage of Average Investment. 1978 - 1984 (In Thouspnd Pesos) Average Adminstrative Cost of Investent Income Expenses Funds (Met Loss) 1978 95 3 18 182 ( 197 ) As % of Ave. Investment 3% 19% 192% ( 207%) 1979 588 21 108 276 ( 363 ) As % of Ave. Investent 4% 18% 47% ( 62%) 1980 3,671 89 134 570 ( 615 ) As % of Ave. Investment 2% 4% 16% ( 17 ) 1981 10,796 100 305 11503 ( 1708 ) As 1 of Ave. Investment 1% 3% 14% ( 161) 1082 17,09 329 484 2S267 ( 2;422 ) As % of Ave. Investment 2% 3% 13% ( 14%) 1983 21,661 769 609 j226( 1.066 ) As % of Ave. Investment t. 3% 6% ( 51) us 1984 23,506 860 - 1,292 1,426 ( 1,958 ) As % of Ave. Investment 4% 5% 6% ( 8%) - 97 - Page 1 1. A MIjoe e e g data end C nain f~ im do wepmsua of the PC vas a stattattså urvey cmduted by the AUD ta lage Jene to early dugust 1985. Me atmvey covered tmo eveIs of 2espndents, namely, (e) farm., and (b) Institutional whIch Inaclded the anagare of the fwipementing mr ar~@see. techto~ens ta the *urvey era, and participting pIvAt op~a. 2. tGe ampl ~ farmers iubered 200, resting the erw« juie- dietos of the folloing DU? arm~zbest guevey Are Nn. f sap1 1. gen Jonc (Ocidental Mendoro) 17 2. arlec 18 3. Lboag 24 4. Baguto 11 3. Cebu 35 6. 1lotl1 6 7. sornpan 29 8. Tagbileram 7 9. 1pil 12 10. Iligan 41 Total Ihe distribution of safplea, by @ub-project typ .as s folles: Total -o. of u-__ tyM. of s-m6les Borur~ Siant 1pti-1p1 Leafnal 71 148 pireood 76 705 Chareoal35 Pulpuwod 12 7mi A. valcatarta (Pu1pvsod) 6 217 Total 200 IL.8 3. DeterTnatton of nample 61se wao based om available budget and manpoer, end allovable ti. vithiå whIch the survey ahould be completed. Ike total number of smcples reprenamtad 11% of the total number of aseslted famers under the credit comeponnt. Seleation of sample sub-projecta vas based on äranch portfolio, end-unm, @sn of aub-projeet, and ag* of standing tre. rop (year of approval). 4. The urvey tetr~en*ts vare designed by the Moettorteg and Program Svaluatton Valt (MPgU) of the 89, whieb vm orgamsaed a Ney 19133. Tbe implemetatton of the surveya and preparatlon of thn PM vere participated la by the ·techaeal staff of the operattng roups and the dcoumting and MeportIng Vtt of the AOD. -98 - ANNEX A Page 2 5. Tbe preparation of this MC, however, s constrained by dearth of historical records and limitations on the sample survey. A major constraint in the coverage of the sample survey is the critical peace and order situation in Mindano. because of this, sample tree farmers in the provinces of Agasen del Norte and del Sur could not be surveyed although these provinces account for 46.5% of the total number of treeforming projects financed. Moreover, -.he BP Branch in Agusen del Sur financed 80% of all Albtssia falcatarig tree farms assisted under the Project. As'a result, the nmber of samples for Albissia pulpwood is very minimal while the smple for Giant 1pil-ipil pulpwood did not include tree farmers in Agusan del Norte. Further, the majority of the pre-determined sampla subloans for leafseal and charcoal production 1are shifting to firewood production. Thea aituations have altered the sample structure and offset efforts to obtain nationwide representation of all project types. Likewise, since this PCR was prepared at a time when non-credit componants were still beiag Implemented, the report deals mostly on the credit component implemented by WB. 6. The detailed findings of the statistical surveys are presanted in annemes B to G. -99 - AmX _ Page 1 PERFORMANCE OF CONTRAC1RS/SUPPL!ERS 1. The commercial aspect of the smallholer treefanming component was provided by the participating private companies by way of guaranteed markets and minima or floor price. Technical assistance, provision of planting materials and loan collection were the additional respon- sibilities or obligations of the participating private companies. 2. Despite the provision in the marketing agreement between the tree farmers and the participating private companies requiring the former to sell their produce* to the latterb a tandency to "pole vault" is indicated. The initial practice of "pole vailting" evolved from the following situtations: (a) The participating private companies could Not increase miniman price because of financial difficulties, so tree farmers sold their produce to agents of the local market in w!.ich- priceswere higher. (b) It was easier for. the tree farmers to sell raw wood to market agts than to convert it into charcoal as required by the private participating companies. (c) Tree crops with inadequate maintenance at the early stage of growth which turned out to be below company standards of quality were sold In the market. 3. The Iminent danger posed by "pole vaulting" is the shortage of raw material supply for the programed expansion of some contracting companies or the initial operation of others. Moreover, since loan collection tie-up is provided for in the marketing agreement, the repayment performance of the beneficiaries is adversely affected. Two (2) concerned companies came up with preventive measures to minimize the practice of "pole vaulting" in which (a) farmers are made to understand the benefits --f - -- ' :tr project; (b) farmers' problem are monitored asd solutions are offered and (c) adjustments are made in the buying.price to peso deva- luation. 4. The participating private companies had given the tree farmers two pricing options at which the produce could be sold, namely, (a) stumpage price; or (b) millgate price. Considering the high cost of harvesting, debarkingthauling and transporting the advantages.of selling at stumpage price are as follows: (a) Harvesting and transporting problems are eliminated. (b) Labor requirements are minimal. (c) Log extraction activities are assumed by the company. However, indications ar tat the tree farmers prefer to sell at millgate price for the following reasons: (a) Millgate prices are higher; -100 - ANNEX B PaRe 2 (b) Tree farmers who are capable of harvesting their tree crops realise higher net profits; (a) Re*development of the area harvested can be facilitated; and (4) Destruction of the plantation as a result of the use of machinery/equipment can be minimized. S. The price difference between the two levels may be illustrated by the following random samples based on marketing agreements: (1) Based on current price at the time of purchase the MCCI pays a stumpage price of no less than 40/m3 of Giant Ipil-ipil wood if harvesting and hauling of trees to the plantaite are assumed-by the authorized agents/contractors of the company. fowever, the MCCI pays 945/m3 if trees are logged, cut to uniform bolts as per MCCI specifications, debarked and stocked by the farmer at roadside indicated by MCCI. Por delivered charcoal MCCI pays P300/m3 (2) Under similar conditions given gbove, MAF 's stumpage prices for wood are no less than 920/m and 925/m . The prevailing millgape price for charcoal in 1984 was P985/ton or about 9690/r'. (3) PICOP pays a stuipage prices for plwood at no less than P20/3 and P25/m and in 1984 paid a millgate price of P120/a . (4) M00 pays PO.25/k of Giant Ipil-ipil dried leaves delivered to the firm's plant. 4. Under the Mbmorandum of Agreement entered into between the DBP and the participating private compane the latter are committad to review annually the minimn price to ensure that the tree farmers obtain a reasonable return on their investment. Survey findings revealed that of six respondent companies only two complied with the requirement to update prices annually, if necessary. One company fixed annual price increase at 10% while the other gradually raised price every two years from 1974 to 1982; and every year in 1983 and 1984. Price increase of the latter company was from PSO per cubic meter to P120 per cubic meter. Another company's price fluctuated with the price/demand for leafmeal in the export market. A distressed company had not yet Increased its price while two others have still to set their prices because there are no suppliers yet. -101 - ANNEX B Page 3 2. Sea of the issues that affected the company's operations in relation to those pf other agencies were (a) interested/prospective tree farmers shied away from the project because of delaws in the approvial of lease permits; (b) farmers sold to outside buyers in violation of the contract agreement on marketing aspect; and (c) Cutting Permit being required by the Bureau of Forestry. 8. Other than the aforementioned issues,*the zompanies encountered problems with the DBP in regard to: (a) collection of payments for seedlings delivered to DP borrowers;(b) delays and verification of development performance preparatory to subsequent release of loan proceeds; and (c) suspension of the granting of loans to tree famers. 9. Likewise, the companies had to cope with borrowers regarding: (a) etersion of funds which should have been utilized in the development of the tree farm; and (b) non-compliance with marketing agreemencs, as the tree farmer beneficiaries never reported back nor delivered their produce to the company. 10. To strengthen the tie-up between the DBP and the Company, the followin- suggestions were given by Company officials for the PCR; 0. (a) Notify the Company concerned on changes in policies affecting DBP-assisted tree farmers by way of dialogues; (b) Educate borrowers prior to grant of loan to the extent of their performAng pilot operations; (c) Resume DBP financing to tree farming; (d) Revise the financing scheme to include expenses for harvesting operations; and (a) Reduce interest of subloans; and (f) Diversify loan package to include Giant Ipil-ipil for implemen- tation in the concessions of PICOP. The adoption of these ideas -is discussed in Section VII Changes in Repeater Projects. /dm -103 - ANNEX C PaRe 1 FARM wiw S mbir of fats - 1. The total number of farms financed by DBP under the credit program was 1,792 representi-ig aout 24% of what was contem- plated to be funded under the Credit Line during appraisal. Of this number, 1,575 were planted to Giant Ipil-ipil and 217 to Albtasis falcateria. The distribution of these farms to various sub-project types financed as compared to appraisal expectations is shown in Table 6. It must be noted that not all of the WP-financed farms planted to Giant Ipil-ipil were intended for the production of trees for firewood, charcoal and leafmeal making as thought of during appraisal. A substantial number of them was earmarked for the production of wood for pulping purposes as well. 2. On the other hand, all the DBP-financed farms planted to Albizzia falcataria were designed for the production of wood for pulping materials. /Not a single fAm financed for Albizzia falcataria intended for the production of trees for particle board making. The intended and-user, Davao Timber Corporation (DATICOR) ceased operation before the credit program became effective. DATICOR wes acquired by DBP, which extended industrial loan for the Corporation's pulp mill. 3. Of interest to note also was that although the Prog%ran includes financing of cash crops other than trees, not a single farm funded by DBP under the Credit Line availed itself of the assistance. Parm Area 4. In terms of farm area, DBP financed under the Program a total of about 18,582 hectares, approximately 65% of appraisal target. A breakdown of this area to various subproject types, together with the corresponding appraisal targets thereof is shown,in table 6. As will be noted, the area financed by DBP under each specific Giant lpil-ipil subproject type was way below appraisal goals. However, under Albizsia falcateria for pulpwood production wherein the area financed exceeded the target by about 23%. Compared with the Project's target realization rate in terms of number of farms financed (24%), the rate of accomplishment for area fanded (65%) is fairly much better. Such was the case because most'farms financed constituted bigger sizes. The average farm area financed under each subproject type far exceeded those contemplated during appraisal (Table 7). 5. Most borrowers under the Program preferred bigger sizes of farms for efficiency in management and utilization of family and hired labor. Financing of bigger-sized farms was also facilitated when DBP rel-..d its requirements on subproject size such that government lands with long term lease agreement were included for financial assistance under the Program. -104 - ANNEX C Page 2 Of the number of farms financed by DBP under the Program about 96% have an area falling within the range of 25 hectares and below; and 4% within the range of over 25 to 50 hectares. As required in the Program, farms exceeding an area of 50 hectares were not financed by DBP. Financing of farms with an area of over 25 to 50 has. was allowed under the Credit Line so long as not more than US $1.00 Million of the IBRD Loan is allocated for it. The number of such farms (67) involved only a loan of P6,522,168.00 which is equivalent to US $869,622.00 at an exchange rate of P7.50 per US 4 prevailing in 1982 and prior years when bulk of the loan was granted/released to sub-borrowers. of this amount only 92,608,867 (US $347,849.00)or about 407. was reimbursed by the World Bank. The total farm area of 18,581.8 has. financed by BP under the Program represented about 0.14% of the country's alienable and disposable area of about 13,269,340 hectares; Regional distribution of farms financed 6. A comparison of appraisal with the actual distribution oa farms financed by DBP under the Program to the Luzon, Visayas and Mindanao regions according to subproject type is shown in Table 8. As will be seen the actual distribution of DBP-financed Giant Ipil-ipil subprojects intended for firewood/ charcoal production in the three regions is generally not consistent with appraisal estimates. However, the actual dispersal of those earmarked for leafmeal production is fairly in accord with projections during the planning stage of the Project. Furthermore, under the Gianc Ipil-ipil subprojects group, a substantial number (718) was funded by DBP in Mindanao primarily to produce wood for pulping mate. 1als. Such group of sub-projects was-not contouplated among the farms to be funded by DBP in said region during appraisal. 7. As regards the Albizzia falcataria subprojects group for generation of pulpwood, the distribution of farms financed by DSBP In the Program is completely consistent with what was thought of during appraisal. All of them (217) are located in Mindanao. 8. Regarding farm area, the distribution pattern of subprojects financed by DBP under the Program to the three regions - (Table 9) is almost similar with that of the number of farms funded by said institution as discussed above. 9. Of DBP's overall realization rates for both number and area of farms, that of Mindanao is the best. For example , as regards number of farms, DBP has financed only about 8% of target in Luzon and 6% in Visayas; but 101% on Mindanao. In terms of farm area, DBP has financed only about 19% of target in Luzon and 35% in Visayas; but 136% in Mindanao. -105- ANNEX C ..z Page3 10. Several factors for DBP's ability to finance a greater number anc! big-Wer arca of farmn !n Mininnn than in the other two regions may be enumerated, thus: a) The stimulation of Mindanao farmers' interest in tree farming by the Paper Industries Corporation of the Philippines (PICOP). b) The successful campaign launched by the Manila Paper Mills (MPM) for the Program in the region in order to be assured of the supply of raw maeerials for its proposed paper mill plant in Butuan City which, however, was not pushed through by the company; c) The availability of vast area of land suitable to tree farming in Mindanao region; and d) The apparently higher credit consciousness of farmers in Mindanao thah that of their countetparts in the other regions particularly from the Ilocos area in Luson where the Project was initially launched. 11sm -107 - ANNEX D Page 1 AGRICULTURAL IMPACT (1) Incremental Output l. Data and information for this Annex v refer to the per hectare basis derived through a sample survey of 188 treefarmiug sub- projects. However, not all of the samples could provide bhe data requirements of the survey. Only 9% out of a possible 51% respondents provided data and information related to production and income, as 42% had not actually harvested and marketed at the time of the survey. The protracted harvesting schedule of this 42% arose from shiftings in end-use-, i.e. from leafmeal to firewood. In some cases, the harvesting period was extended in speoilation for higher priees. Twenty-six per cent (26%) provided data and* information on plan- tation maintenance costs; and 23%, on costs of land preparation and plant' ;. The foregoing pAttern of sample distribution was the outcome of stratification bnsed on the development year of the treeferming sub-projects. Efforts were exerted by the ASD in enlisting the assistance of the Bureau of Forest Development (BFD) in the estimation of aggregate production over time. However, due to inadequate budget for this purpose, the activity was not carried out. (i) Aggregate Increases 12. A significant increase in value of production is to be expected with the adjustment in unit price by as much as 238% (using 1978 as base Iear and CPI 337.7%.as of 31 December 1984). Between actual and adjusted values of production per hectare of firewood, inurease was 72.8%. A shift in end-use from charcoal to fire- wood increased value of production by 114.8%. However, for leaf- meal, actual value of production per hectare declined by 50.6 from the adjusted appraisal target. For Albizzis pulpwood, value of production per hectare had a shortfall of 11.1% from the adjus- ted appraisal estimate. (ii) Nature of output 3. Major deviations from intended end-uses to firewood production were indicated. Shiftings in farm production were due to the prevailing low price for the oriLinal farm output, high marketing/ transporting cost and lack of better markets for the farm produce. - 108 - ANNEX D Page 2 -4. Based on the survey, 94% or 34 of 3'6 borrower for charcoal pro- duction shifted to firewood production. The prohibitive coat of charcoal making makea operation unprofitable. ;5. Likewise, some leafmeal producers stopped harvesting Ipil-pil leaves because of high cost of labor in marketing. Moreover, it is reported by some treo farmers that hervestirg is so labor- intensive that the family cannot cope with requirements for a given time limit. Harvesting involves hired labor which is cost- ly. This situation prompted 17% of the 45 samples to shift to to firewood production. Except for five (5) leafmeal sub-borrowers who were able to pay thetr accounts from other sources of income, all sample leafmeal accounts have matured. .6* Only two out of 91 sample sub-borrowers for firewood shifted in end-use. The change was to pole production, merely because prop. were needed for their coal mines. 7* Another sub-project for the production of proppings was financed by the DBP Dz.vao Branch. The tree farm covered an area of SC hectares and intended to supply the banana industry with Giant Ipil-ipil poles. The tree farmer could not be included in the survey due to the critisal peace and order conditions in the Davao provinces. ( ) Sources: Prices and Volumes *,. 8. The increase in value of farm production was primarily brought about by the increase in price rather than increase in volume. The volume of production was lesser than targetted output levels for all treefarmS Larveyed. Except for that of leafmeal, the observed increase in the price of farm output more than compensated for the decrease in the volume of production in terms of sales revenues. .1. 9. The actual selling prices for Giant Ipil-ipil firevood and Albizia pulpwood increased to as -mch as the adjusted prices. Both pmducts were sold at P120/cu.m. in 1984 as against the respective adjusted prices of P125/cu.m. and P135/cu.m. The appraisal projections were P7/cum. for firewood P40/cu.m. for pulpwood. On the other hand, the adjusted selling price for Giant Ipil-ipil charcoal was P88/cu.m. from.the projected P26/cu.m. Sold as firewood, actual price was P189/cu.m. or ?101 more than the ad- justed price for charcoal. However, the actual selling price for Giant Ipil-ipil leafneal was PO.51/k short of the adiated price of P1.01/k. The appraisal price estimate for leafmeal was PC.30/k. -109 - ANNEX D Page 3 10. Apparently, the yielIs per hectare in all types of treefarming sub-projects did notreach the expected levels. The realization rate ranged from 20% (leatmeal) to 76% (charcoal). The non-attainment of production goals maybe attributed to sub- borrowers' lack of technical skills on treefarming operations, unfavorable price of proCuce, high labor cost of harvesting and marketing of outputs, and inadequate technical assistance from marketing companies and government agencies concerned. (iv) Sources: Productivities 11. This section considered the possibility that the shortfall in appraisal estimate may be due to misapplication of technical parameters. In a paper presented at a symposium 1/ by Uriarte, et. al, variations in vo me yield per hectare of Giant Ipil-ipil and Albizzia facataria were attributed to age, site and specir4g. The Giant Ipil-ipil plantations studked were located in ateas with Site Indices 10, 12, 14, 16 and 18 and were from two to six years in age. Specings were lm x lm, lm x 2m, 2m x 2m, and 3m x 3m. The yield estimation for pulptimber from Albizzia falcataria trees planted 3m x 3m (Project design) was based on 15 Site Indices. Starting with Site Index 14, the series ended with Site Index 42, at two-point intervals; age ranged from year 2 to 26. ' 12. The Giant Ipil-ipil firet:ood tree farms which had been harvested at the time of the survey were fix-e years old,. Trees were spaced at Im x 2m; yield areraged 45 cu.m./ha. Withtbese parameters, volume yield should range from 62.61 cu.m./ha at Site Index 10 to 158.C8 cu.m./ha at Site Index 18. Appraisal estimate for volume yield was 12G cu.m./ha, which is closest to Site Index 16, at 133.12 cu.m./ha. j/ Torres - Uriarte, Monina G., Agustin A. Piftol and Bayani E. de Castro Volume, Growth, Yield and Economic Rotation of Albizzia falcataria and Leucaena Leucocephala"(paper presented at aSymposinWorkshop on Smallholder Treefarming held on 2-5 October 1985 at CSSAC, Pili, Camarines Sur). -110- ANNEX D Page 4 13. The sample Giant Ipil-pil charcoal tree farms were spaced lm a 1.Sideviating from appraisal planting distance of 2m a 2m. Shifting in end-use, fuelvood was harvested in year 5 at an average volume yield of 129 cu.m./ha as against an appraisal target of 17G cu.m./ha of charcoal. Based on the Uriarte study the expected yield approximated that of Site Index 16 (169.44 cu.a./ha) if trees are planted la x lm apart and four years old at harvest. Assuming that appraisal target had been met the actual yield of 129 cu.m./ha, however, is attainable at year 5 under Site Index 18. Distance of planting may very from 2m x 2m (127.80 cu. m./ha) to 3m x 3m (129.27 cu.m./ha), ..14* The sample Albizzia falcataria pulpwood tree farms were 7 years old and yielded an avergeeharvest of 180 cu.m,/ha, This level is closer to Site Index 36 (177.84 cu.m./ha) than to Site Index 38 (188.25 cu.m./ha). The projected yield was 240 cu.m./ha, which is close to Site Iedex 42 (222.99 cu.m./ha) for year 9. 15. From the foregoing analysis, indications are that the setting of appraisal targets for yield had been generalized and, moreover, estimates are liberal. On the other hand, the actual date for yield have their own limitations, as site index had not been a basis for the selection of samples. The initial findings that target yield had not been attain6d (Pares. -.^,8 and 3.10) should not be taken as conclusive. In this connectiong a mows expanded evaluation of this aspect of the smallholder treeferming compo- nent should be further undertaken. (v) Attribution 16. A survey of 30 Managers of the implementing DBP Branches shows varied perceptions regarding the effect of the smallholder tree- farming component ont the social and economic conditions of the sub-borrowers. Forty-three percent (43%) attributed visible improvements to treefarming; and 7%, partially. Thirty-three per cent (33%) did not perceive any upliftment in the farmers' quality of life as a result of the Project. Seventeen per cent (17%) thought it was still premature to ascertain the Impact of treeferming in the coamunity. -.17. In the areas where the effects of treeferming had been reportedly felt, impact was attributed by the Managers to the following: (a) The sub-projects provided employment for the unemployed and the underemployed. (b) Wages paid for labor generated/augmented the income of the underemployed and provided a regular source of income for the unemployed. -111- ANNEX D Page 5 (c) Idle lands were utilized for productive purposes. (d) Interest in treefarming spread to farmers other than the participants in the credit program. S.18 *On the other hand, failure of the program to make an Impact was ascribed to the follo-ing: (a) Righ cost of bired labor needed to supplement family labor. (b) Tree farms were abandoned due to deteriorated peace and order conditions in some areas. (c) Financial difficulties due to the drought in 1982-83 hindered the participation of aher farmers in the program. (d) Marketing problems arose as a result of slowdown in the operations of paper mills or shutdown of some wood processing plants. 19. To supolemmt the Managers' perceptions on program impact, a survey of six participating nrivate companies was lilewise con- ducted For one company, the assisted tree farms were a cheap source of raw materials while for another the farms were able to deflect an impending shortage of raw imaterials. For two other companies. dependence on the treetirming progrem was minimal because they had their own concessions of native Ipil- ipil Still, for another compey the impact of the treefarming orogram eld not be felt because of financial and operational constraints. Moreover, the comiany did not have control over tree farmers' preference for the local market as an outlet because of higher prices. The other company could not give a definite * assessment because its raw material requirement was errativ, de-- pending on the demand for leafmeal of the foreign market (vi) _ForeieExchange 1.20. In another paper presented at the symgosium/workshoo on small- holder treefarming the author 2/ attributed to the program eventual reduction in oil imports. It was noted that the oroject supports the govenment energy program, particularly the estab- lishment of dendrothermal plants utilizing Ipil-ipil wood for fuel. With the tendency of assisted tree farmers to shift to firewood nroduction it is likely that foreign exchange conserved through import substitution would exceed expectations from this sub-component. 7T Dias, Celso.' Socio-Economic Impact of Smallholder Tree Farming Program."(Paper presented during the Symoosium/Workshoo on Smallholder Tree Farming held at CSSAC, Camarines Sur, on 2-5 nctober 1985). -112 - ANNEX D Page 6 21. On the other hand, indications are that the expected foreign exchange savings for pulpwood would be realised through import restrictions rather than local production. As previously re- ported, the participating end-user companies for Giant Ipil- ipil pulpwood stopped operations, that for Albizzia pulpwood could not expand operations due to finantial difficulties. (2) Technoloical Change (1 Eumber and selection farmers 22. Against expectations to reforest denuded public lands, the Smallholder Treefarming Component largely reached landowners. Of the sample tree farme% only about 20% was leased from the government. .23. About 87% of the sample financed sub-projects was located within the 50-km radius of the infented markets. Moreover, 84% of the tree farms was less than 3 km away from accessible roads. ..24. Around 55% of the sample tree farmers used to grow food crops before engaging in treefaruing. Indications are that also a large number had been government employees at the time of sub- loan application/approval and were retirees at the time of the survey. The presence of former government employees among the beneficiaries probably explains the high perventage of samples who had attained college education and graduate studies (38%). It is aotable that only 3% of the samples did not have any educational attainment. Around 49% of the samples was of retirement age (61 to ever 71 years). 25. The following factors were the bases for the selection of tree farmer participants in the credit program: (a) Availability of land suitable for treefarming; (b) Willingness to participate and interest in treefarming; (c) Feasibility of sub-project; and (d) Reedy market for the produce. (ii) Farm Income ..26. Using an escalation factor for labor wage index with 1978 as base year, operating expenses increasetO by 220% in 1984. Due to overages in projected costs and shortfalls in target yields, net operating incomes were lower than expected for Giant Ipil-ipil f6rewood and leafmeal. The considerable increase in the price of fuelwood pro- duced from original charcoal tree farms and fairly high yield for Albizsia pulpwood, however, caused net onerating income to exceed appraisal estimate. -113- ANNEX D Page 7 .27. The adjusted net operating incomes from firewood and leatmeal were lower than the projected at appraisal by 128.8% and 262.70% respectively. For fuelvood tree farms that shifted from chare coal production, net operating income was higher than projected by 187.55% and for pulpwood, 178.78%. .*.28. Firewood tree farm operations realized a net operating income of 9946.00 per hectare, leafmeal only P606 and pulpwood, P4,805. One factor that contributed to the low operat+ng income wai the use of hired labor, especially in harvesting, instead of family labor as envisioned in the appraisal forecast. The survey indicated that the tree farming sub-projects did not have a marked impact on the income of the farmers/sub-borrowers. This may be atttbuted to the fact that majority, or about 57% of sample projects, were not yet productive/harvesting or if already productive, there was no luceative market for the farm- produce. Only 18% of the respondents reported that their income increased as a result of die Project while a greater number, or about 25%, said their income was not affected or.was negatively affected by the program. The rest could not determine the effect of treeterming on their incomes. 29. The survey showed that the sample tree farmers were predominantly (42%) earming more than P10,000 per year. only 22% earned less than P3,500 per year; 9% from P3,500 to P5,999 per year; and 18% from P6,000 to 910,000. Nine per cent (9%) could not determine their incomes or the survey respondents were farm ma- nagers, caretakers or relativis who did not have access to such information. In the Dia study, the poverty,line has been established at the income level of P3,617 per annum, Even assuming that - (i) 90% of those within the income range of P3,500 to 95,999 were earning P3,617 per annum (ii) all of those who could not estimate their incomes were earning P3,617 per annu the percentage of samples within the poverty line would be 39%. With the larger number of samples (61%) falling uneer the income range of P6,000 to over P10,0CC per ann, indications are that the sallholder treefarming program had rft reached the lower income group. fi1l) Employmust '.30* The tree farm projects created employment in thelocality but, the projected levels for farm development and harvesting/marketing of farm produce were not realized. -114- ANNEX D Page 8 The survey indicated that the development of a hectare of tree farm utilized coly approximately 107-120 mandays of hired labor as against the projected average of 122 mandays. The shortfall maybe attributed to the reluctance of the farmers to follow/ implement prescribed post-planting activities such as weedingg thinning and cultivating. The muaer of mandays of labor generated in marketing, on 1he other hand, could not be established, as farm produce was gene- rally sold on contractual basis. However, 23 to 38 laborers per hectare were hired during harvest tis. .31. Contrary to appraisal projections-, family labor was not employed in treefarming by the respondents, except for supervision of the project. (iv) Secondary goals and unexpected effects ..32. A survey of participating private companies revealed that the treefarming program creaded the following secondary effects: (a) Establishment of livelihood projects' (b) Development of infrastructure as part of comphny assistance program; and (c) Acquisition and utilization of privately-owned mar- ginal lands for treeterming purposes. 33. From DBP Managers' observations, the following secondary effects resulted from the program: (a) Treefaring encouraged cattle fattening, goat raising and orchard culture. (b) The program provided additional income in hauling and transporting businesses. /cp -115- ANNEX E Page 1 SUPPORTING SERVICES 1. * The key government Institutions that provided supporting services to the DBP in the tIplementation of the smallholder treeftrming credit program were the BFD, PCARRD and the BPI. The Ministry of a Agrarian Reform (MAR) in Tarlac Province and the BLISS I In Southern Samar Province assisted the DBP Branches in Implemen- ting the program Barangay officials In some areas were Involved in the promotion of the program. In the private sector, the participating companies and individuals extended supporting services as part of the marketing package for the tree farmers. Tree farmers' associations organised in some areaA looked after the collective Interests of their members. (1) Technical assistance 2. 1 Technical assistance was extended by foresters of the participating private companies and extension men of some district BFDa together with Branch technicians in the following topics/fields: (a) Planting techniques; (bY Proper handling of seedlings during growing stage; (c) Control of peeps and diseases; (d) Proper handling of products; (e) Farm planning; and () Crop diversification. The foregoing were Imparted to the tree farmers during pre-loan orientation meetings and regular project supervision. 3. A total of 33 foresters was fielded by the different participating private companies, with PICOP contributing 22; CRC, four; MCCI, three; NAFO, two; and SMBETERS, two. Reports from the other perticipating private companies are not available. 4. Except for MAFCO, the participating private companies that reported to have fielded foresters accounted for 306 tree farmers extended technical supervision. Sixty-three per cent (63%1 was assisted by the PICOP foresters; 33% by the MCCI foreters; 2% by the 099 foresters; and 2% by the SMELTERS foresters. Indications are the NCCI fieldmen have the heaviest load with a ratio of one forester to 33 tree farmers. Among the five companies, the frequency of farm visits made by their fieldmen ranged from once a week to once a month during the development stage of the tree crop. Only PICOP foresters made farm visits during the post-development stage of the tree crop. -116 - ANNEX E Page 2 (2) huppi' of planting materials 5. Provision of seedlings at cost to the program beneficiaries was the responsibility of the participating private companies. However, when supply was inedequate, the companies reportedly assisted their respective contractors in the procurement of plant!ng materials from the BPI, BFD or private nurseries. (3) Soil Analysis 6. Of the six participating private companies that responded to the surveyt only PICOP and SMELTE$S provided services and facilities for soil analysis to theircohtituent tree farmers. (4) Nursery establishment/operation 7.. PICOP encouraged the establishment of nurseries outside its concessions and assisted in the operation of such nurseries. (5) Chainsaw assistance program .- Due to exhorbitant prices of chainsaws, which were not provided for in the subloan, PICOP made these tools available for custom service to facilitate harvesting. (6) Hauling and loading subsidies 9. PICOP subsidized the hauling and loading costs of its contractors. This kind of incentive to tree farmers was not reported by the other respondent participrting private companies. (7) Issuance of certifications/permits 10, Inasmuch as the implementing Branches lacked professional foresters in their staff, the services of the BFD were sought during sub- project appraisal. The assistance of the BFD included certificatioc. to the suitability of project sites to Giant Ipil-ipil treefarming and eligibility of land as alienable and disposable. BFD cipertise on field conditions was also availed of; and the Bureau's assurance of adequate supply of seedlings obtained. At harvest the BFD issued permits to cut trees and to transport logs. -117- ANNEX E Page 3 (8) Trainings I1. In one district, the Bureau of Forest Development conducted a series of seminars for prospective borrowers on the importance of the program. Technical specialists of the BLISS (in con- junction with the technicians of the Southern Samar Agricul- tural College) held seminare for a Branch and future program participants& The Manila Paper Mills, Inc. and the DBP Butuan Branch initiated several meetings/seminars on a weekly basis. Three Branch borrowers underwent a three-day seminar at the University of Life at PaSig, Metro Manila and re-echoed the lessons learned to the other interested parties and recipients of the Piroject. Assessment of Support Services 12* An assessment of the level of support and commitment given by the different actors was drawn from the sample tree farmers and 19 technicians. Indications are as follows: (a) Tree farmers' association. About 737. of the samples did not belong to tree farmer's associations and said no support was given to them by the association. On the other extreme end, 67. rated the support given by tree farmers' associa- tions as Very fjgh. Vbre than 71% of the respondent technicians rated the tree farmers' associations from Low to None in support and commitment given to the program. (b) Barangay officials. For 83% of the tree farmer respondents, village officials did not support, or extended a very low level of support to tree farmers. The technicians' ratings confirmed the tree farmers' perceptions. It is reported that the town leaders simply relied on the government agencies concerned end the participating private companies to deal directly with the program beneficiaries. (c) BFD. Only around 337. of the 79 respondent tree farmere who had dealings with BFD rated the Bureau' s support igjh to Very High. The reported cause of tree farmers' dissatis- faction with BFD'S services was the protracted processing of leases and permits. This difficulty was experienced by loan applicants before the transfer of such function from the Office of the Minister for Natural. Resources to the BFD and decentralized to the district offices. (d) BPI. Apparently only 55 sample tree farmers were recipients of support from the BPI and 73% rated the Bureau's assistance as Very Low. It is reported that the BPI could not sufficiently supply the tree farmers with seedlings. However, of the 12 technicians who rated the BPI, six rated the Bureau's assistance Very High; and one, Hig.. -118 - ANNEX E Page 4 (e) Paricipating private companies. About 59% of the respon- dent tree farmers rated the participating private companies' support from Loi to Very Lo4. Similarly, the majority of the technicians assessed the assistance of the companies at the same levels. This may be attributed to the closure of some companies and the distressed conditions of the others. The issues raised against a few private firms were as follows: .(i) Inadequate supply of planting materials; (ii) Delayed delivery of planting materials, thereby entailing additional expenses for re-clearing; (iii) Underaged seedlings, thereby causing high mortality; and (iv) Inadequate soil acidity determination. (f) DBP. The sampie tree farmers evaluated the DBP's support services as follows: Very High - 24.5%; Rgh - 43.5%, Low - 26%; Vey Low - 4% and None - 2%. Further evalua- tion of DBP s lending policies by the sample tree farmers is presented in the 'Annex P - Farm Credit. UI. Indications are that the participating private companies and the other support institutions have not made their impact on the tree farmers. As regards the other government agencies, It has been noted by some Branch Managers that interest in the program was keen only at start-up. Apparently, coordination among the DBP, other government institutions and the private firms could stand further improvements -119 - ANNEX F Page 1 FARM CREDIT 1. For the implementation of the credit component of the Project, the DBP fr*tmuated a Treefarming Financing Program, with the followinq features: Qualified Borrovers: Individual, registered partnership, cooperative and/or association of small-holders intending to grow Albizuia falcataria for pulpwood and particle board production, or Giant Ipil-ipil for either firewood, p'olpwood or leafmeal production on a maximum area of 50 fi*.per borrower who would enter into a marketing agreement with an accredited marketing company. Amount of Loan: Base! on actual project needs but not to exceed maximum ceiling per hectare equivalent to 90% of total investment cost of project, Wit 10% as borrower's equity contribution. Loan ceilings of P1,700/ha. for Albizzia falcataria, P2,500/ha for Giant PpAi-ipil leafmeal, and P,800/ha for Giant Ipil=ipil 191T6WAd/charcoal. Additional P500/ha geMMOObenion cropping to borrower. qualified for such operations was also provided. Collateral: First and/or second mortgage (with prior written aeent from first mortgagee) on privately owned titled/ untitled land; free patent/homestead rights over alienable and disposable public lands; leasehold rights over land covered hy long-term leases; permits granted to shifting cultivators; rights and interests on properties granted to small farmer under Presidential Proclamation, including Memorandum of Agreements with BFD; marketing agreement with the marketing firm- or chattel mortgage on crop. Elinible Purposes: Related to establishment and maintenance )f tree farme and companion agricultural projects, i.e., land clearing and preparation, purchase/application of production on inputs, weeding, tools and equipment. Release of Loan Funds: In accordance with the schedule on the development plan prepared by DBP representative. Interest Rate: For loans secured by land, 12%; for loans granted against assignment of rights on project site and other chattels, 14%. Highest interest rate charged was 15% pursuant to DBP Board Resolution No. 3234-81 increasing basic interest rate on loans of P170,000 and below with maturities of -ver 365 days. -120 - ANNEX F Page 2 Terms of Repayment: For Albizzia falcatnria loans, 14 years including a grace period of 7 year,; for Giant Ipil-ipil leafmeal, 3 years including a grace period of 1 year; for Giant Ipil-ipil charcoal, 8 yeats including a grace period of 4 years; and for companion crops, variable depending on kind of project and in accordance with DBP Board Resolution No. 116-74. 2. From loan accounts of the 188 samples involved in the survey, it is indicated that a total of P4,244,451 was granted to the sub-loan beneficiaries to finance the development of 1,477.99 hectares. Based on these data the average cost per hectare follows: 1)) 91 firewood accounts entailed a cash outlay of P1,808,654 to develop 539.85 hectares or an average cost of P3,350/ hectare. 2) 46 leafmeal sub-projecs needed P979,696 to develop 395.99 hectares or an average cost of P2,474/hectare. 3) 35 charcoal tree farms required P1,267,632 to develop 456.5 hectares or an average cost of P2,777/hectare. 4) Six pulpwood accounts for A.falcataria required P82,881 to develop 50 hectares or an average cost of P1,657/ hectares. 5) Ten pulpwood'sub-projects of Giant Ipil-ipil needed 105,588 to develop 35.65 hectares or an average cost of P2,962/heetare. 3. Of 188 respondents, 103 or 55% felt that the amount of. loan was "just right"; '8 or 26%, "somewhat small"; and 22 or 12; "much too small". Two or 1% said that the amount was "a little too b g"; and 12 -)r 6% could not tell whether or not the amount of loan was adequate for the development of their tree farms. 4. Although an equity contribution of 10% was required of all types of sub-borrower, this level was actually exceeded in pulpwood sub-l0ans. For Giant Ipil-ipil pulpwood equity contribution averaged 12.56% while for Albizzia pulpwood counterpart averaged 27.5a%. Indications are that for the latter, the 25% equity contribution of the Pilot Project had been maintained. Of 138 respondents, 123 or 65% felt that their equity contri- bution was "just enough.", and not so to 45 or 24%; 11 or 6% could not assess the situation while nine or 5% did not give any comment. -121 - ANNEX F Page 3 5. Of the total project cost, P0.5 million was the sub-borrowers equity, and around P3.7 million was loan from the DBP, Of the latter amount, 40% or P1.48 million was for reimbursement from IBRD; and 60% or P2.22 million was to be financed from DBP funds. 6. Of the total commitment amounting to P3,730,383, availment attained a 92.27% realization rate involving an amount of P3,442,068 actually released. In some branches, fund releases were withheld from borrowers who failed to comply with certain Bank requirements. In some instances, borrowers simply were no longer interested in availing themselves of the balance of the loan. The amount of loan released to firewood producers amounted to j9.6% of the loan funds; to the leafteal producers, 90.1%; to the charcoal ptoducers, 97.0%;to producers of pulpwood derived from A. falcataria, 98.5%; and from Giant Ipil-ipil, 95.4%. 7. Sixty-two per cent (62%) of the Program beneficiaries reported that the loan funds were given on time; and 10% were given ahead of the scheduled release. Twenty-six per cent (26%) suffered late loan releases while 2% could not recall whether loan releases were timely or late. .. A review of the DBP's policy on the acceptable collateral(s) under the program revealed that the guidelines were too stringent for the prospective borrowers to cope with. In line with the DBP's commitment to countryside development, with emphasis on the upliftment of the marginal farmers, several * policies on collateral requirements were amended thrice to enable small landholders to avail themselves of a less stringent financing program. Survey data indicate that 87% of the farmer beneficiaries found the guidelines on the liberalized collateral requirement to be "just right" but 6% opined that these were "too liberal". Despite the revisions, 7% thought the collateral requirements were still "too stringent". 9. One hundred twenty one (64%) of 188 respondents considered the interest rate "just right", fifty eight (31%) gauged it as "high", while nine (5%) were not fully aware of the interest rate imposed on their loan. 10. Eight-one per cent (137) of the beneficiaries regarded the repayment period "just right",; 10%, rather "short"; 4%, "too long", and 5% did not bother to comment or were not aware of the manner of repayment. 11. Compared to those of other agricultural lending institutions, the MBP policies were deemed 'more liberal" by 89 borrowers (47.3%) but "less liberal" by nine borrowers (4.8%). Eighteen borrowers (9.6%) regarded DBP policies to be "the same" as those of other agricultural lending banks. Seventy-two borrowers (3.3%) did not have any exact idea because it was only with the DBP that they first experienced borrowing as far as agri- cultural project is concerned. -123- ANNEX G Page 1 ARREARGES 1. Based on the areing of Tree Farming II accounts, about 12% is still under releasing stape while about 75% is still under grace period as of December 31, 1984, broken down, as follows: (In Thousand Pesos) Under Releasina Under Grace Period No. of Outstandint No. of Outstanding Accts. Balance Acets. Balance A. Falcataria 19 P 353.21 195 P 4,111.41 G. Ipil-lpil/leafmeal - - 37 972.81 G. Ipil-ipil/char. 90 1,893.90 511 9,928.42 G. Ipil-ipil/pulp 110 3 568.30 594 14,210 97 Total 219 P29,2231 2. As of the same date, total outstanding balance of Tree Farming II loans amount to P39.26 million. Total arrearages amount to P4.75 million consisting of principal past due (P2 72 million), interest past due (P0.89 million) and penalty e9A other charges (P1.14 million5. Sixty-nine per cent (69%) or 03d$ Uilton of arrearages is accounted for by Giant Ipil-ipil leafeal projects while 23% or P1.07 million, Giant Ipil-ipil charcoal projects. 3. About 47% of total arrearages of 94.75 million had been in arrears for 13-24 months; 36% for over I years; 14% for 7-12 months; 2% for not more than 3 months; and only 1% for 4-6 months. 4. Over-all arrears ratio for the smallholder treefarming sub-loans is computed at 8.99%. Arrears ratios for Giant Ipil-ipil leaf- etal and charcoal projects are placed at 67.45% and 6.454%, respectively. For Albizzia falcataria and Giant Ipil-ipil charcoal projects, arrears ratio is very minial. 5. The possible causes of the high arrears incidence for Giant Ipil-ipil leafteal accounts are as follows: (1) Inability of the tree farmers to pay back loan due to reduced sales revenues as a result of low prices; (2) Limited quantities of leaf bought by participating private companies due to reduced operations; (3) Restrained implementation of the collectton tie-up between the DBP and the participating private companies as tree farmers sell to independent buyers; and (4) Refusal of tree farmers to harvest leaf due to low prices. -124- ANNEX G Page 2 In some program areas,repayment problems have been attributed to crop damage due to typhoon, floods and other calamities; and to abandonment of tree farm due to critical peace and order conditions. 6. From the participating private companies' viewpoint, the follow- ing are the PICOP's feedback: (1) Low volume availability of tree farms being harvested; (2) Complaints/requests of farmers to defer deduction or collection for emergency reasons; and (3) Attachment of deliveries with those of other farmers to avoid deduction of payments from sales proceeds. On the other hand, the MAFCO's loan collection problem is that no one sells to the company. 7. Of the 188 sample respondents, 59 (31%) experienced a lot of difficulty in paying back the loan; 12 or (67.) felt some dif- ficulty; six (3%), not much difficulty, and nine (5%), no difficulty. Ninetyfive (51%) borrowers stated that it was too soon to tell because their amortisation payments are not yet due. -125- ANNEX H Page 1 INSTITUTION BUILDING On the nationwide scale, new domestic policy measures and structural changes in the economic and financial framework of the country have been implemented since 1981. These changes have been infused into the economy to enable the country to cope with adverse domestic developments, at the same time adjusting to adverse external developments. On the domesti front, unfavorable weather prevailed; un- settling events and crisis of confidence shook the financial system; tight liquidity situation arose In late 1983; and non-economic factors developed. The high interest rates that accompanied inflation in the external scene increased the cost of servicing foreign borrowings. Moreover, the country did not have sufficient foreign exchange to service maturing obligations so the country drew heavily on international reserves. The low level of reserves and delay in debt-repayment made new foreign borrowings even more difficult. 2 . The program that was launched to stabilise Philippine economy was formulated within the context of the Updated Development Plan for 1984 to 1987. Its objectives are to reduce inflation; stabilize balance of payments position; and restore growth at a substantial pace. In support of this stabilization program, the government has arranged a financing package consisting of the following: 1) An 1T,-month standby arrangement with International Monetorary Fund (IMF) 2) Fresh inflows of official development assistance loans from bilateral and multilateral sources, as well as re- scheduling of direct and -earanteed obligations with foreign governments and appropriate agencies; and 3) An arrangement with foreign banks and other financial institutions consisting of new money, the re-scheduling of existing debts maturing in the near future, and committed trade facilities. 3. To supplement assistance provided bytthis financing package, the following stabilization measures have been adopted: 1) Successive adjustments in exchange rates; 2) Decontrol of administered prices; 3) Substantial cuts in public investment expenditures; 4) New revenue policies; 5) Import restraint; and 6) Tight control of monetary expansion -126- ANNEX H Page 2 4. The f)regoing economic recovery program has been integrated into the bkoader framework and longer-term objectives of the Updated Development Plan for 19t4 to 1987. The scope of the Updated Development Plan for 1984 to 19b7 is outlined by the President, as follows: 1) Adoption of a disciplined financial and budgetary program that will stabilize the nation's bblance of payments position, exercise greater control on public spending, and channel resources to activities that will result in productivity and growth. 2) Restructuring of the nation's external debt to relieve the pressure of maturing foreign obligations and to encourage new foreign investments in the economy. 3) Refocusing of economic priorities to emphasize balanced agro-industrial (BAID) and agrarian reform side by side with industry. 4) Acceleration of the structural adjustment program for the economy to strengthen export production, energy self- reliance, industry dispersal, and tourism development. 5) Implementation of a nationwide productivity effort.designed to mobilize the people for productivity and self-reliant objectives. 6) Promotion of social equity in the national recovery effort so that individual welfare is fully protected and social services continue to expand and Improve. 7) Development of closer and stronger.partnership between the governeent and the private sector in the Implementation of the recovery program. 0) Action to enhance the performance, productivity and accounts. bility of all levels of government in development administra- tion. 9) Action to ensure the peace and security of the nation in the face of insurgency efforts to derail the recovery programs and to sow social unrest and political instability. 10) Continued strengthening of the nation's political systems and institutions. - 127 - ATTACHMENT I BORROWER'S CommENTs Page 1 of 2 DEVELOPMENT BANK OF THE PHILIPPINES VICE CHAIRMA14 12 December 1988 Mr. Graham Donaldson Chief, Agriculture. Infrastructure and Human Resources Division Operations Evaluation Department International Bank for Reconstruction and Development 1818 H Street, N.W. Washington. D.C. 20433 U.S.A. Dear Mr. Donaldson: Subject: Philippine Second Smallholder Treefarming and Forestry Project (Loan 1506 - PH) This refers to your letter dated 27 October 1988 requesting our comments on the draft of your Pro.ect Performance Audit Report (PPAR). I went through your draft with a great deal of interest and rioted that it confirms the findings reflected in the Project Completion Report (PCR) prepared by DBP staff formerly with the Agricultural Supervision Department. Upon your request., hereunder are our comments on the PPAR which you may use to finalize your Report; 1. Admittedly, DBP's project supervision was inadequate. I gathered this was attributed to the lack of manpower of the department sinQe income generated from this facility did not .iustify additional hiring of personnel t.ot undertake adequate supervision of a big number of small tree farmers. The PPAR confirms DBP's assessment indicated in its PCR as regards the World Bank's (WB) haste in the preparation and its appraisal process. WB's preparation should have been more rigorous while appraisal of the project should have been more realistic with less optimistic assumptions. BANGKO SA PADPAPAUNLAD NO PILIPINAS It I I A .X. i, A n"r, PH HEAD OFFIC.E MAKATI. METR(3 MANILA.Ptillt111 [[it t. i MAI KAY 4!,IPR 'IiPHiI PM P 0. BOX 800. MAKATI COMMt RCIAL * ENI F W f A II tM 6J.''I IlP PN I.ABL E 114is PEIANK MANil A I P t PI4.INf ti o I1 t ro0 " 2 11"A *til TO ei) -128 - .•8-ATTACHMENT I Page 2 of 2 Page 2 3. We however differ with PPAR's cmpwtation of project returns. We surnise that the cmputation indicated therein was ba3ed on the ricome producing sub--projects already existing without provision for DBP's financed sub-pro;iects yet in the initial stage of implementation. It seems there is much to be learitect frm the inadequacies of prorject prepzrati n ga apirrs-is process evident in the Prngram. 1 is ur rn future World Bank Programz will iav-. .zo-- mi..:1 .tL r chance of success if there, is [t-tad c fr.m al1 concerned. ROB3ER<TO F.i E OfAME - 129 - ATTACHMENT II Page 1 of 2 COMMENTS FROM THE BORROWER & OFFICE OF THE EXECUTIVE DIRECTOR 08 December 1988 Dr. Graham Donaldson Division Chief Agriculture, Infrastructure & Human Resources Division Operation Evaluation Division The World Bank 1818 H. Street, N.W Washington, D.C. 20433 USA Dear Dr. Donaldson: Re: Smallholder Treefarming & Forestry Project (Loan 1506-PH) Project Performance Audit Report Please find enclosed our comments on the Project Performance Audit Report on "Smallholder Treefarming and Forestry Project for your consideration/appropriate action. Thank you. Very truly yours, moV. YOR Exe tive Director Encl. a/s. PHILIPPIN COUNCIL FOR AGRICULTURE, FORESTRY AND NATURAL Rl5oURCus RESEARCH AND DEVELOPMENT LOS BAAOS, LAGUNA, PHILIPPINES TEL NO. 50014-50020 & 50024 MANILA OFFICE: 8323773 * 8323733 Cable Address: AGRESPHIL Manila TELEX NO. 40860 PARRS PM - 130 - ATTACHMENT II Page-2 of 2 COMMENTS ON PROJECT PERFORMANCE AUDIT REPORT Comments: 1. In the Preface and Evaluation Summary: "Philippine Council for Agriculture Resources Research and Development" should be "Philippine Council for Agriculture, Forestry and Natural Resources Research and Development". 2. Project Performance Audit Memorandum Item 6 - Project Background We fully agree with the statement. We could add, though, that the species planted was an introduced one, and a monoculture plantation was developed. Based on existing situations that time, the Bank should have taken more pre- cautions because PICOP has already encountered stemborer and pink disease infestation in their Eucalyptus. In Benguet, our own native Pinus kesiya was already attacked by Ips beetle. Item 15 It may also be worth mentioning that one reason for DBP's "weak administration" is actually caused by the worsening peace and order condition in some areas like Marawi and Iligan. Item 1T After the initial attacks of shoot moth, the succeeding mission should have stopped further pursuit of the appraisal target. Item 22 The second statement should be given more emphasis. Item 23 The following may be added, "Furthermore, use a leguminous tree species like Albizia falcataria and leucaena improved the soil fertility due to Nitrogen-fixation and organic matter build-up. Item 38 The PICOP-pioneered approach is really viable but should be adopted in areas where there is assured market. IBRD 13076R li6 CJ,A FICATIO0+ OF PROVINCES 120* 24' BY GEOGRAPHICAL REGION8 PHILIPPINES I ILOCOS V1 WESTERN VISAYAS IIlas Noin AklaR Able Cap- ocoSFORESTRY PROJECT 20 20' uo'"n'" 09 Occdenlal Le Un,06 Negas del Note VII CENTRAL VISAYAS Panganan cu Plantatio Development Proect Area II CAGAYAN VALLEY Neg9o Oe Batan** 9.ohol Cagayn Ongoing Pilot ree Frm Proect Kahlngs-Anyto VIII EASTERN VISAYAS t Airport Isabol Northern Sar, 1ugao. Sama Apar Roads Nuevo V.cays Eastern Samr, oL*ye LLoeg Lao Railroads I11CENTRAL LUZON Sotlern Lsyls Nevo Ecila IXB WESTERN MINDANAO Province Uounlarles Tolac Zmiboalgs as Noo Zambalas Zamboanga del S., Region Boundaries Papenge IXA WESTERN MINDANAO Slacan B , international oundares Satn sol1 l.ogan IVANATIONAL CAPITAL Tawitai Son o REGION Fernando IV SOUTHERN TAGALOG X NORTHERN MINDANAO Be 1 0 Auaa KILONITINS CACv.GUI mitse Cal.Aquwa del Nolte 0 so 100 6SO 30 Ma-aouque euklonne Ca Mndolo Oriental Agu"n del Sul Angelol M.woo Occidental X EASTERN MINANAO Ronblon Sul-94 del Sul Palawan Da Criental Caarines Norte Daa dl S Camar.nee S: XII CENTRAL MINDANAO Catanduanes Lp AbayLana d None Cagine* del SoN' lorogon Nolth Cotsbhto colopon Mbate moqa,ndanao Suslan ldorat useme OrietasSon =seose 30 ocrotaiala aanta 122* Surga del Sur11 1?1 o Purtou 3:Pr.nceo ,7c Dava0Buguart LaCaayo deeS SS. i *-*-* Ratod CHiNA 1Boaoox Zonoog D nentoa odroe o so 10 502025 0 ViKL NAO Basio PHILIPPINES VIWAS a" 1All Gen a8to as VII PAdAAINa -. A11HOAAM0O %AAYI I. Motors and 4 vncow" wo i itenal use oi T1he wow Salm 1010 nol Ilntrnah" Frir0000,11Nbon The dentann8ort;W acd y ie ~yAC1q on0c 08 "11It 60 11 vokt' onl Wo1 ow of rhe Ktrll Balnk an8, th nimnal Fnance1001 Canloafth.. Vill A1nrt i 00N IAon ow1 WWga florwb of ^0 WhAon,of ally endirow or ootlonce of turn bv.$ 120NV IA4. s28 NOVEMBER 19 88 〕一常