Philippines - Small Coconut Farms Development Project

Docunent of The World Bank FOR OFFICIAL USE ONLY Report No. 8210-PH STAFF APPRAISAL REPORT PHILIPPINES SMALL COCONUT FARMS DEVELOPMENT PROJECT MAY 1, 1990 Agriculture Operations Division Country Department II Asia Regional Office This document has a restricted distribution and may be used by recipients only In the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (July 1, 1989) US$1 = Philippine Peso (P 22.00) P 1 = US$0.05 FISCAL YEAR January 1 - December 31 WEIGHT AND MEASURES 1 hectare (ha) = 2.47 acres 1 metric ton (ton) = 2,205 lbs ABBREVIATIONS AND ACRONYMS ARDB - Agricultural Researc.n Development r anch (PCA) CARP - Comprehensive Agrarian Reform Program CETC - Coconut Extension Training Center (PCA) CNO - Coconut Oil COCOFED - Coconut Producers' Federation CPOU - Central Project Operations Unit (PCA) DA - Department of Agriculture ERR - Economic Rate of Return FOB - Field Operations Branch (PCA) ICB - International Competitive Bidding IEC - International Economics Department (IBRD) LCB - Local Competitive Bidding MAWA - Hybrid PB121 - A cross between Malayan Dwarf and West African Tall Coconuts MCDO - Municipal Coconut Development Officer (PCA) NEDA - National Economic Development Authority ODA - Overseas Development Agency (United Kingdom) ODNRI - Overseas Development Research Institute PCA - Philippine Coconut Authority PCDO - Provincial Coconut Development Officer (PCA) PKO - Palm Kernel Oil RDB - Research and Development Branch (PCA) SCFO - Small Coconut Farmers' Organization SPD - Seed Production Department UCAP - United Coconut Association of the Philippines UCPB - United Coconut Planters Bank UNICOM - United Coconut Oil Mills Inc.  FOR OMCIAL USE ONLY PHILIPPINES SMALL COCONUT FARMS DEVELOPMENT PROJECT Loan and Project Summary Borrower: Republic of the Philippines Beneficiaries: Coconut smallholders and the Philippine Coconut Authority (PCA) Loan Amount: US$121.8 million. Terms: Repayable in 20 years, including five years of grace, at the Bank's standard variable interest rate. Proiect Obiectives: These would be to: (a) launch a long-term program of coconut replanting and productivity improvement, supported by the necessary infrastructure and strengthened technical and support services; (b) increase the incomes of coconut smallholders by improving coconut yields and copra quality; and *c) boost foreign exchange earnings by ensuring an increasing and reliable supply of higher quality copra for processing and export. The proposed project would constitute the first phase of the 20-year small coconut farms development program. Proiect Description: Over a five-year period the project woulds (a) establish seedgardens, nurseries and other infrastructure sufficient to sustain a long-term program of replanting of 50,000 ha of senile palms, p.a.; (b) replant 25,000 ha and support intercrop- ping during the first three years of replanting; (c) rehabilitate 348,000 ha of middle-aged palms and support the development of 50,000 ha of immature palms; (d) support a pilot copra quality improvement program; and (e) provide for the institutional strengthening of the Philippines Coconut Authority (PCA). This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - Project Benefits and Risks: The project would improve the productivity and incomes of the impoverished smallholder subsector, increase exports and re-establish confidence among end-users in the future supply of better quality coconut-ti'sed products from the Philippines. The main technical risks of the project concern possible poor site selection, typhoon damage and inadequate continued use of inputs by smallholders. Very conservative yield assumptions have therefore been adopted and strict criteria for recipient selection have been devised. The long-term coconut develop- ment program depends on the willingness of GOP eventually to restore self-financing arrangements. Project benefits should improve the climate for the necessary action, and GOP would be asked to prepare a long-term financing plan by the fourth year of the project and implement the plan before project completion. Finally, there is a possibility that peace and order conditions may inhibit project activities in certain locations, but as this is a national program, sufficient flexibility exists to avoid such areas. Estimated Costs Local Foreign Total --------USS milliop'------- Replanting 13.8 6.7 20.5 Rehabilitation 28.3 40.0 68.3 Nutrient Support 8.5 10.5 19.0 Copra Quality Improvement 5.7 1.7 7.4 Research 3.3 1.4 4.7 Extension & Training 4.0 1.3 5.3 Institutional Strengthening 2.3 5.8 8.1 Total Baseline Costs 65.9 67.4 133.3 Physical Contingencies 3.7 6.3 10.0 Price Contingencies 15.9 17.4 33.3 Total Proiect Costs /a 85.5 91.1 176.6 Financing Plan Farmers 21.9 - 21.9 PCA/GOP 31.6 - 31.6 ODA - 1.3 1.3 Bank 32.0 89.8 121.8 Total 85.5 91.1 17C.6 /a Including duties and taxes of US$12.5 million.  - iii - Estimated Disbursements lb Baik FY FY91 FY92 FY93 FY94 FY95 FY96 FY97 ____--_-_----------(USS million) -------------- Annual 9.8 14.3 17.4 23.1 29.5 22.2 5.5 Cumulative 9.8 24.1 41.5 64.6 94.1 116.3 121.8 Economic Rate of Return: 402 Mapt IBRD No. 21986R lb Project start-up is planned for September 1990, corresponding to the first quarter of FY91. The project would be complete on September 30, 1995, and the Loan would close on June 30, 1996, at the end of FY96, with final disbursements processed in early FY97.  - iv - PHILIPPINES SMALL COCONUT FARMS DEVELOPMENT PROJECT Table of Contents Page No. Loan and Project Summary . .............. . i I. AGRICULTURE IN THE PHILIPPINE ECONOMY ....................... 1 Sectoral Performance . ... . . .... .... 1 Policy Environment . .. ............... 2 Development Issues ....... ........ 2 Government Objectives and Strategy ............................ 3 Bank Sector Assistance Strategy ............................... 4 II. THE COCONUT SUBSECTOR ......................................... 5 Overview . ..................................................... 5 Agro-Technical Characteristics .. 5 Cropping Patterns and Tenurial Arrangements ................... 7 Coconut Products . ..... ............................ . 8 Processing .................................... .............. 8 M-arlceting ..................................................... *..... 9 Coconut Sector Institutions ................................... 10 Financing ...................................... 0.................... 12 Future Prospects ....... .................................. . 12 III. THE PROJECT. ... ....... . . . . . .. ..15 Project Origin and Preparation. 15 Project Objectives and Summary Description. 15 Detailed Features .. ....... . ...... . .17 Establishment of Seedgardens and Nurseries............ 17 Replanting . ........ . ...... 18 Intercropping.t. r ... ........... . ..... . 19 Rehabilitation of Low-Bearing and Immature Palms 19 Copra Quality Improvement ................ 21 Institutional Strengthening of P CA . .22 This report is based on the findings of an appraisal mission to the Philippines in June/July 1989, comprising Messrs. D. Meadows (Mission Leader, Senior Tree Crops Specialist), S. Husain (Senior Economist), A. Chupak (Senior Financial Analyst) and A. Juanengo (Consultant, Processing Specialist).  Page No. IV. PROJECT COSTS AND FINANCING ............. ............... . 24 Project Costs ......... .......................... . 24 Financing ....... ............................................. 25 Procurement . ..... . ...... . . .... ......... . 26 Disbursement ......... . ..... . . ... .............. . 27 Accounts, Auditing and Reporting ............................. . 28 V. ORGANIZATION AND MANAGEMENT .. . . ......... . 30 Philippine Coconut Authority (PCA) ............................ 30 Farmer Enrollment and Supervision ............ 34 Monitoring and Evaluation ....... ......... ....... . 34 VI. PROJECT JUSTIFICATION AND RISKS ..................... .......... 35 Production, Market Prospects and Prices ..................... ** 35 Project Benefits .......... ... .... 37 Financial Analysis ............................... ......... 37 Economic Anal7sis ............... ......................... 40 Environment Imv4act ............................................ 41 Tmpact on Women. . . ........ .................... 42 Risks .... ... .......... 42 VII, AGREEMENTS AND RECOMMENDATION ................ . 44 ANNEXES ANNEX l: Project Costs and Disbursements .................... 46 Table 1.1: Summary Accounts Costs Sunmmary .............. 46 Table 1.2a: Project Components by Year Including Contingencies ..................... 47 Table 1.2bs Project Components by Year .. 48 Table 1.3: Summary Accounts by Year, Including Contingencies ..................... 49 Table 1.4: Financing Plan .. ..... ....... . S 50 Table 1.5: Disbursement Schedule by Categories ........... 51 Table 1.6: Disbursement Schedule by FY/Quarters .......... 52 ANNEX 2: Project Yields and Production ....................... 53 Table 2.1: Copra Yield Profile . ........ 53 Table 2.2: Net Incremental Production .................... 54 ANNEX 3: Economic Analysis... ................. .... ..... ... S 55 Table 3.1: Computation of Economic Farugate Prices ....... 55 Table 3.2: Economic Costs and Benefits ... ......... 56  - vi - ANNEX 4s History of Coconut Legislation and Institutions.... 57 ANNEX 5: Auditing and Reporting Requirements ....... . 60 ANNEX 6: Project Implementation Schedule ............... ...... 62 ANNEX 7s Project Supervision Plan ............................ 63 ANNEX 8: Documents in the Project Plan ...................... 64 CHARTS CHART lt Philippine Coconut Authority ................. .. ... . 65 CHART 2: PCA Field Operations Branch .................... 66 MAP IBRD No. 21986R  PHILIPPINES SHALL COCONUT FARMS DEVELOPMENT PROJECT I. AGRICULTURE IN THE PHILIPPINE . XY Sectoral Performance 1.1 The agricultural sector (including livestock, fisheries and forestry) continues to play a key role in the Philippine economy, generating about 271 of GDP and 252 of exports in 1988, directly employing about 10.1 million Filipinos (482 of the total employed labor force), and providing many of the natural resources and much of the domestic demand on which the industrial and service sectors depend. Agriculture's share of GDP has remained essentially unchanged since 1970. The crops subsector accounted for 602 of the gross value added in agriculture in 1988, followed by livestock and poultry (21Z). fisheries (17Z), and forestry (21). Over 80Z of the country's cropped area of 12 million ha is occupied by rice, corn (3.5 m ha each) and coconuts (about 3.3 m ha). Coconut products constitute the principal agricultural export, followed by prawns, fish, forest products, banana, pineapple and sugar. 1.2 From 1970 to the beginning of the economic recession in 1982, the agricultural sector grew by over 42 p.a. in real terms (5Z p.a. if the declining forestry subsector is excluded), but thereafter the rate decelerated. Cood sectoral performance in the 1970s was facilitated by historically high international prices for agricultural commodities, which encouraged expansion of total area under cultivation and the use of modern technology, most notably in the staple food, rice, but also in other commodities such as bananas, pineapples, poultry and acquaculture products. A large irrigation investment program doubled the irrigated area. This, together with the adoption of high-yielding varieties and increased fertilizer application, boosted average paddy yields from 1.6 tons/ha in 1971/72 to 2.4 tonslha in 1982183. These positive factors outweighed the policy biases against agriculture in the 1970s, which included an overvalued exchange rate, export taxes, price controls, trading bans, monopolies in the coconut and sugar subsectors, and heavy protection for industrial goods. 1.3 Sectoral performance declined for several years after 1982, due to low international commodity prices, severe droughts in 1983 and 1987 (resulting in negative agricultural growth rates of 2Z and 12, respectively), contraction of credit to the sector, and a shortage of foreign exchange which adversely affected the import of agricultural inputs. Beginning in 1988, the sector has begun to show strong recovery, with a 3.42 growth in 1988 and about 4.3Z growth in the first half of 1989. This growth is accounted for mainly by the performance of "other crops' (e.g., banana, mango, pineapple, coffee, root-crops and vegetables), poultry and fisheries. Rapid growth of non- traditional crops has resulted in significant agricultural diversification: although occupying only about 141 of the cultivated land, they now account for about 45? of total gross value added in the crops subsector.  -2- Policy Environment 1.4 The removal of policy biases against agriculture (para. 1.2) started as a response to the economic crisis in 1982. Measures taken included the opening up of the import trade in animal feeds and wheat; the phasing out of price controls on rice, poultry, eggs and pork; deregulation of interest rates and gradual elimination of subsidies on agricultural credit. More significantly, the successive devaluations of the peso from 1982 onwards helped offset the decline in international market prices of export commodities. After assuming power in February 1986, the new Government further reduced distortions and institutional constraints unfavorable to agriculture, with the objective of increasing farm profitability. Important actions included lifting of the copra export ban; abolition of export taxes; dismantling of some of the monopolistic controls over the coconut and sugar subsectors; deregulation of the desiccated coconut and banana export industries; liberalization of urea and potash imports and distribution and reduced tariff protection for locally-produced fertilizers; and exemption of most agricultural inputs from taxes and customs duties. These measures, coupled with the earlier ones, and a gradually improving international market have created a more favorable environment for agricultural growth. Development Issues 1.5 Although the record of agricultural growth and diversification over the past two decades has been generally good (paras. 1.2-1.4), massive rural poverty and low productivity still pose major challenges for the future. Government estimates show that the incidence of poverty in the Philippines increased from 49t in 1971 to 58Z in 1985s urban poverty increased from 37? to 50?; rural poverty from 56? to 62Z.11 At present, although only 58? of the population is rural, about 67Z of all poor families are in rural areas, and rural incomes are only about 47? of average urban incomes. 1.6 Most poor farmers are involved in rice, corn or coconut production. The growing number of the poor and the persistence of income inequality is a result of three strulctural factors: unequal asset ownership (particularly land), a high population growth rate (2.41), and poor productivity growth. The situation has been aggravated by the increasing scarcity of land and the failure of the economy as a whole to provide sufficient employment opportunities outside of agriculture. Population pressure and limited arable land have led to a rapid growth in the numbers of the landless and increased migration to upland areas, where soil quality is poor and agricultural activities often produce severe environmental degradation. Rapid advances in technology have occurred in commodities developed by the large commercial sector, especially bananas, pineapples, poultry and aquaculture, and significant yield increases have been obtained in rice cultivation, although these are still low by Asian standards. However, the productivity levels of corn, coconuts and sugarcane continue to be disappointing, due mainly to shortages of advanced planting material, smallholders' lack of resources to buy improved planting material and fertilizers, tenurial problems and increasing cultivation on marginal lands. 1/ The Philippines: The Challenge of Poverty, The 'lorld Bank, Report No. 7144 -Ps, October 17, 1988.  -3- Government Obiectives and Strategy 1.7 The Government is seriously attempting to address the issues of low agricultural productivity and pervasive rural poverty. The basic aim of agricultural development, as defined in the Philippines Medium-Term Development Plan (1988-1992), is to lay the foundation for equitable, efficient and ecologically sustainable agricultural growth. The Government's role is seen primarily as one of creating a supportive policy and institutional framework and providing the necessary incentives and investments in such areas as infrastructure, research and technology, while encouraging the private sector to propel the economic recovery in the countryside. 1.8 The most well-publicized initiative of the present Government to reduce rural poverty and income inequality has been the Comprehensive Agrarian Reform Program (CARP), launched in 1987. The CARP covers all public and private agricultural lands regardless of tenurial arrangements and commodities produced and is, therefore, more far-reaching than the agrarian reform program of 1972, which extended only to rice and corn lands. CARP would cover about 10.3 million ha and benefit some 3.9 million farmers and farm workers, and is to be implemented in three ohases over a ten-year period. Some exemptions have been allowed (e.g. for seed production units) and a 10-year deferment is granted to private commercial farms devoted to livestock, poultry, swine raising, aquaculture, orchards, vegetables, cut flowers, cocoa, coffee and rubber. Through 1988, about 181,000 ha of rice and corn lands and about 22,000 ha of Government land previously leased to multinational corporations had been distributed. Although progress is being made, major issues related to institutional capabilities, land valuation, landowner opposition and agricultural support systems for beneficiaries will have to be overcome if CARP is to be effectively implemented as planned. 1.9 As noted earlier (para. 1.4), the main successes to date of the present Government have been in the area of policy reform, which has considerably improved conditions for agricultural growth, increased producer prices and reduced the costs of many inputs. Significant efforts have also been initiated to reform the rural financial system, including: (a) the elimination of various special (subsidized) official credit lines and the merger of others into an effective, well-administered rediscounting facility which has been successful in attracting more private cnmmercial credit to the agricultural sector; (b) partial rehabilitation of the rural banking system, which had nearly collapsed as a result of high arrearages on earlier Government-directed credit programs in the 1970s, compounded by the financial and economic crises of the mid-1980s; and (c) the expansion of credit guarantee facilities which are also aimed at attracting commercial credit to the agricultural sector. Marketing assistance to farmers is being provided through the new Livelihood Enhancement for Agricultural Development Program launched in May 1988, which relies on private initiative and resources, with the Department of Agriculture (DA) acting as a broker to facilitate farmers' access to financing, management expertise and markets. Finally, although still in the early stages, the Government is also devoting increasing attention to the issues of conservation of natural resour.es and improved environmental management, with particular attention to deforestation, destruction of coistal fisheries resources, and erosion and related problems in the uplands.  -4- Bank Sector Assistance Strategy 1.10 The Bank attaches high priority to agricultural development, as a means to support both economic growth and poverty alleviation in the Philippines. Since 1964, the Bank has approved 40 loans and credits (US$1.4 billion) for investments in agriculture and rural development. Approximately one-third of these projects were for irrigation development, and another one- third for rural credit. The remainder have been for area-based rural development projects, rural infrastructure, processing and storage, land settlement, extension and research, smallholder forestry, watershed management and erosionG control, and financing of agricultural inputs ur'er one policy- based loan. Implementation of completed and ongoing Bank-financed projects has generally been satisfactory, although some operations have experienced delays because of local funding constraints, overly optimistic targets, design changes after project start-up, peace and order problems, weak or poorly coordinated multiple implementing agencies and time-consuming procurement procedures. The proposed project would be the Bank's first direct lending for the treecrops subsector in the Philippines. Other future Bank operations over the next few years would continue to assist the irrigation subsector, environment and natural resource management, rural finance, and poverty alleviation through support for agrarian reform and improvement of key sectoral institutions.  II. THE COCONUT SUBSECTOR Overview 2.1 The coconut subsector accounts for over 252 of the cultivated area in the Philippines, and provides incomes for at least one-fourth of the rural families and a significant number of people engaged in coconut-based industries and trade in urban areas. Coconut-based products are the third largest contributor of foreign exchange, accounting for 101 of the total value of merchandise exports and about 401 of the value of agricultural exports of the Philippines in 1988. Developments within the coconut subsector, therefore, have important effects not only on the rural sector but also on the economy as a whole. 2.2 Low productivity and lack of any long-term replanting program are the principal issues facing the coconut industry in the Philippines today. With average yields of 700-800 kg/ha (copra equivalent), coconuts have accounted for only about 8-101 of gross value added in the crops subsector, although they occupy over one-fourth of the cultivated area. The main factors responsible for low productivity are the use of planting material of low genetic potential and the virtual absence of fertilizer use on nutritionally deficient coconut lands. A related problem has been the limnited progress to date with intercropping (which usually affects the palms beneficially), due to the prevailing tenurial arrangements on some coconut lands and the lack of markets for potential intercrops in many locations. Finally, improper harvesting, drying and storage practices are responsible for the poor quality of Philippine copra, which results in low oil extraction rates and higher refining costs. Horeover, Philippines copra meal, which is a livestock feed, is encountering increasingly stringent aflatoxin regulations in the EEC market. Agro-Technical Characteristics 2.3 Varieties. Coconut palms may be classified as talls, dwarfs or hybrids (usually crosses of dwarfs and talls). Prior to the introduction of hybrids in 1976, all Philippine plantings were talls. At present, more than 98X of the total coconut area is still planted to talls. Talls generally begin bearing about 7 years after planting, achieve full yield by year 12, and senility at about 60 years. Harvesting is done throughout the year, theoretically at intervals of about 45 days, but more commonly every 2 to 3 months. The average annual yield per tree is about 30 nuts, although under good management it can exceed 150 nuts. Typically, each nut yields about 200 g of copra. A few named tall varieties (Bay Bay, Laguna, Tagnanan, San Ramon, etc.) are recognized, but the vast majority of holdings were planted from unselected seeds, which is a major reason for the generally low yields. Poor management is an important contributing factor: only 1X of coconut parcels receive fertilizer regularly, although this can more than double copra yields (up to over 3 tons/ha from selected talls); planting density is often suboptimal; and stands of unproductive, diseased or senile palms are frequently not replanted. The problem of senility is particularly serious in the traditional coconut producing Southern Tagalog region (including Quezon, Laguna and Cavite provinces), where nearly half the palms were over 60 years old in 1979. Nationwide, about one-third of the palms are  now thought to be over 60 years old, implying that 875,000 ha are due for replanting. 2.4 The new hybrids introduced since 1976 begin bearing at four years, and reach full development by year 10. Their productive life span has not yet been definitely established, but it is expected to be similar to that of talls. Their yield potential is double that of talls, exceeding six tons/ha under good management. The most common hybrid (PB121), popularly known as the MAWA hybrid, is produced by crossing the Malayan Dwarf with the West African Tall. MAWA has been found suitable for planting in about 502 of the coconut areas of the Philippines, notably in Mindanao. Several other hybrids, mostly bred by the Philippine Coconut Authority's (PCA's) Breeding and Genetics Division, are under trial and some are better adapted than MAWA, particularly to the drier environments of the Philippines. In addition to better drought- tolerance, some hybrids such as PCA 15-1 produce larger nuts and have better tolerance to Phytophora disease; others appear be more resistant to typhoons. Hybrid breeding and development is a dynamic process, and suitable hybrids have now been identified for almost all agroclimatic conditions in the Philippines coconut areas. 2.5 Hybrid seed production is a skilled horticultural activity requiring careful management and close supervision. The seed is produced by artificially pollinating the palms selected as female parents (usually dwarfs), which are grown in isolated seedgardens. During the 1970s, a large seedgarden was created on the island of Bugsuk (South Palawan) with funds derived from a levy on copra sales (para. 2.23). This seed garden was awarded monopoly status and could potentially have supplied sufficient seed for 60,000 ha/per year. Consequently, only insignificant seed production facilities were developed elsewhere in the country. However, a planned hybrid replanting program in the early 1980s was never launched and, with the subsequent change of Government, Bugsuk was abandoned and hybrid seed production is currently very limited in the Philippines. Reactivation of the Bugsuk seed garden is impractical at this stage, because the assets are frozen pending resolution of, legal disputes with the former owner, and because the seed garden would now need almost complete rehabilitation, the cost of which would not be justified as the palms are too old for artificial pollination. 2.6 Pests and Diseases. Talls and hybrids alike suffer from a few pests, the most important being the rhinoceros beetle, rats and slug caterpillars. Rhinoceros beetle breeds in decaying coconut wood and is the major pest in all but two coconut regions. Biological controls are available, but the best defense is avoidance of breeding sites, which increases the importance of the commercial utilization of coconut wood. Slug caterpillars can likewise be managed biologically. Control of rats is a matter of better farm management. Cadang-cadang is the most serious disease, caused by a viroid which kills 300,000-500,000 palms per year in southeastern Luzon and parts of Samar, and for which there is as yet no cure. This disease normally attacks palms older than 25-30 years, so it may be a less serious problem for hybrids whose productive life starts only four years after planting. Phytophora diseases have become increasingly important, both infecting and spoiling nuts and killing palms (bud rot). It has become an international problem on which research resources are being concentrated.  2.7 Climate and Soils. Coconuts thrive in tropical monsoonal areas with no more than 4.5 dry, months per year. Rainfall in most of the coconut areas ranges from two to four meters annually, with the most even distribution occurring in the southern and eastern regions of the country. Prolonged droughts can seriously damage coconuts, particularly newly planted areas. Typhoons regularly damage coconut stands in the Bicol and Eastern Visayas regions, but in general, the benefit of the associated rainfall exceeds the losses suffered by sites hit by the centers of the storms. However, the most powerful typhoon in 40 years did severely damage coconuts over wide areas of Bicol and the Northeastern Visayas region in 1987, where recovery of production has been slow. 2.8 Coconuts perform best on well-drained soils of sandy or silty clay loam, of at least 10 cm depth and no more than 18Z slope. However, they can thrive in most soils, including sand, provided there is no stagnant waterlogging. Coconut yiel.ds often show good response to chlorine and nitrogen, and, less frequently to potassium and magnesium. Soil nutrient deficiencies have been mapped across the country, so that fertilizer requirements are broadly known. PCA has a foliar analysis laboratory and can routinely test plant samples for assessing nutrient deficiencies. Cropping Patterns and Tenurial Arrangements 2.9 In the Philippines, coconuts are the principal crop outside of the irrigated areas, where rice predominates, although most coconut farmers also grow other crops for subsistence and cash. The spacing and high leaf canopy of coconuts permit intercropping, which is practiced on about 402 of all coconut parcels. Subsistence intercrops are especially important during replanting. Annuals such as corn and peanuts and longer-term crops including cacao, coffee and banana are grown under the coconut palms. Nearly one-fifth of all coconut parcels have both annuals and perennials as intercrops, illustrating the opportunity afforded by coconuts for intensification of land use through "multistory' cropping. Intercropping coconuts increases coconut yields and can be very attractive where markets are assured. 2.10 According to the 1980 Agricultural Census, there were approximately 825,000 coconut farms occupying some 3.0 million ha: about 492 of these farms were smaller than 1 ha; 712 less than 2 ha; 912 less than 5 ha; and 98Z under 20 ha. Since the agrarian reform program (para. 1.8) provides for a retention limit of 5 ha for the landowner and 3 ha fir each qualified child, it would not affect over 902 of the farms, or about 752 of the coconut lands. The tenurial status of coconut farms is quite complex: some 712 of farms (covering about 602 of land) are reported to be owner-operated; 222 of farms (covering 252 of the area) are share-tenanted; and the other 72 of farms are partly owned, lease tenanted or otherwise managed. Sharing arrangements for the coconut crop vary widely from 50/50 to 90/10 in favor of the owners but annual intercrops belong to the tenants. In the case of owner-operated farms, caretakers are frequently hired, who live on the farms and receive a share of the harvest, which means that a typical farm may actually provide income for three families (owner, resident workers or caretakers, and laborers).  -8- Coconut Products 2.11 Based on traditional low-input practices, coconut farming has few backward linkages with input suppliers. As the raw material for a host of important processed products, however, coconuts have many important forward linkages in the economy. The major product is coconut oil (CNO), which is extracted from copra, the dried meat of the coconut. Oil may be refined and consumed directly as cooking oil or processed further to produce chemicals such as fatty acids, fatty alcohols, esters, glycerine, etc., which are the raw materials for soaps, detergents, lubricants, cosmetics and pharmaceuticals. The Philippines has some 88 oil mills and two coconut oil processing complexes. The latter process up to 95,000 tons of crude coconut oil annually into chewicals, mainly for export. The second major coconut product is desiccated coconut, which is the peeled white meat cut into small shreds and dried under rigid hygienic conditions. The Philippines is the world's largest producer of desiccated coconut, with 13 modern factories manufacturing mainly for the US market. Copra cakes and meal, derived from the residues cf oil extraction, are the third product. They are primarily exported as animal feed, but are encountering difficulties in some markets due to high aflatoxin levels. A fourth product with potential is coconut shell charcoal, used directly for fuel in smelting and as the raw material for the local activated carbon industry. Five companies in the Philippines currently produce activated carbon mainly for export to Japan. 2.12 Many other products have excellent but underexploited potential. These include: coconut wood (sold primarily for lumber and now being purchased at attractive prices by small-scale commercial saw millers in increasing quantities; abundantly available when senile coconut palms are felled for replanting); and coir fiber from coconut husk (which can be used for producing carpet underlays, mattress and bristle fiber, car seats, etc.). There is substantial scope for Government assistance in the technlcal and commercial development of these and other non-traditional products. Finally., there is an increasing international market for both fresh young coconuts for' drinking and ripe coconuts for eating. Processing 2.13 In order to retain a higher proportion of the value of coconut products within the Philippines, the Government encouraged a rapid but uncoordinated expansion of coconut processing plants during the 1970s. The crushing capacity of coconut oil mills rose from 1.2 million tons in 1970 to 3.4 million tons in 1982, while desiccated coconut capacity rose from 112,000 tons to 156,000 tons, and activated carbon manufacture was introduced, with capacity rising to 11,300 tons. In all three industries, overcapacity was created, mostly on the basis of directed credit. The disastrous financial consequences for oil mills, as well as the perceived need for greater bargaining strength in the world market, led to the creation of United Coconut Oil Mills, Inc. (UNICOM) in September 1979. UNICOM bought mills, mothballed unnecessary ones and soon controlled directly or indirectly at least 672 of the country's oil milling capacity and nearly all coconut oil exports. Nonetheless, by 1982 capacity utilization was still only about 53Z for coconut oil (despite a ban on copra export at the time), 872 for desiccated coconut,  -9- and about 8O for activated carbon. Much of the equipment of the mothballed mills was reportedly cannibalized for replacement of poorly-maintained equipment in operating mills, so the present extent of overcapacity is reduced, but not readily quantifiable. After the UNICOM monopoly was abolished by the present Government, some mothballed mills have been purchased and returned to service by private companies and a new private mill is under construction in General Santos City. Two coco-chemical plants now in operation fully meet local demand, and any further investment must be carefully justified on the basic of export requirements. 2.14 The most intractable problem of the oil milling industry has been poor copra quality. Copra bound for oil mills commonly has a moisture content of 10-202 (much above the optimum), is sometimes scorched, discolored, frequently rubbery, deteriorating from mold and insect attack and contaminated with dirt and gravel. The result is that Philippine coconut oil is of low quality and sells at a discount of about 2Z in the world market; further, the mills suffer from low oil extraction rates and high machinery operating and maintenance costs. The persistence of these problems stems from the lack of any price incentive to producers for supplying high-quality copra. A moisture-based price scale does exist but is largely misapplied and, in any case, does little more than compensate for loss of water weight during drying. No mill can offer a true quality premium unless it is assured of enough high quality copra to justify separate stock piling, milling and oil and meal storage. As not enough farmers in a single mill catchment area have the necessary drying facilities to produce the required quantity of high quality copra, the mills have no incentive to pay a premium for it. This vicious cycle costs the industry an estimated US$52 million gross annually, in terms of lower prices for oil, lower oil recovery, higher copra storage losses, and higher mill operating and maintenance costs. The problem of quality has recently come to a head with the introduction by the EEC of stricter limits on the level of aflatoxin contamination of copra meal imported as a livestock feed. Aflatoxin is produced by a fungus, Aspergilus flavus, which develops on moist copra and can be controlled only by rapid and adequate drying and good storage of copra. The importance of overcoming this problem rapidly has been recognized by PCA, as the closure of key international markets to Philippines coconut meal would severely reduce farm-gate copra prices. Marketing 2.15 World CNO prices, which are rapidly reflected at farmgate, fluctuate with the general movement of the prices of all vegetable oils and fats (see Chapter VI). However, as a specialized lauric oil with a firm but finite demand, CNO can command a substantial premium or suffer a modest discount in relation to other oils, depending on the supply position. Thus, wide price fluctuations occur, largely in response to the Philippine supply position, which from year to year is mostly controlled by the weather. Drought depresses production in the following year, while good rainfall, which is frequently associated with cyclonic disturbances, enhances the next year's production. The rare severe typhoon can cause sufficient damage to affect total output. Coconut production has shown a five-year cycle, with a two to three year peak followed by a trough of similar duration. Maximum production of 2.6-2.7 million tons was recorded in 1976-78 and 1986-87. Troughs are usually around 2 million tons with the lowest recently recorded output being  - 10 - 1.4 million tons in 1984. The wide price and volume fluctuations affect farm incomes and the demand for consumer goods in rural areas. 2.16 Between the coconut farmer and the oil miller or exporter, copra usually goes through three or more marketing intermediaries. Most coconut farmers maintain long-standing relationships with local merchants who act as primary copra buyers, but also provide informal credit and sell consumer goods to their copra suppliers. These are deep-rooted economic and social relationships, which have resisted attempts to supplant them by national or regional marketing agencies. Additional tiers of copra buyers exist at barangay, town and city levels. These buyers accumulate copra into larger lots for transport, warehousing, and eventual sale to the ultimate buyers of copra, which are large oil mills in exit ports, small domestic oil mills, and the port-level export warehouses. A network of copra and coconut oil brokers and agents operates throughout the industry, linking buyers and sellers locally and with foreign markets. Competition for copra is keen among both exporters and oil millers, and the world market for processed copra products is also very competitive. Since more specialized down-stream products have limited individual markets, Philippine exporters have not yet been very successful in penetrating them. Under the present Government, individual mills and independent traders have been freely exporting CNO and copra. In 1987 there were 15 exporters of copra and 28 exporters (mostly millers) of CNO. Invariably the millers also export most of their production of copra meal. The traditional multitiered structure of buyers and traders receives a substantial share of the average millgate price of copra. Export taxes and levies have been abolished and the only fee is P 30/ton for PCA documentation. Coconut Sector Institutions 2.17 Philippine Coconut Authority (PCA). Over the years, the Government has tried several approaches to fostering a strong and viable coconut industry. Since 1916, when a Coconut Products Board was created by Public Act 2598 to encourage the improvement of coconut products, numerous laws and regulations have been enacted (Annex 4), culminating in the creation of ttie Philippine Coconut Authority under Presidential Decree 232 in June 1973. PCA is an autonomous public corporation attached to the Department of Agriculture (DA). Its Board of Directors comprises seven members, including a Chairman, who are all appointees of the President. Day-to-day management of PCA is the responsibility of an Administrator, supported by five Deputy Administrators, each of whom oversees a branch or major office. PCA's programs are executed by eight Regional Offices, each under a Regional Administrator. Within the Regions, Provincial Coconut Development Officers (PCDO) are assigned to each of the 63 coconut growing provinces and manage the activities of the Municipal Coconut Development Officers (MCDO). 2.18 A Coconut Extension Training Center (CETC) in Davao provides residential and training accommodations for 125 students. PCA's Research and Development Branch (RDB) is responsible for developing the technology on which to base improvements in coconut production. RDB's activities are carried out by three PCA research centers in Davao (agronomy and crop protection) and Zamboanga (breeding and coconut wood utilization), both in Mindanao, and Albay (cadang-cadang disease and tissue culture) in Luzon. RDB is also responsible  - 11 - for the management of a leaf analysis laboratory located in Manila, which provides the recommendations for the type and quantity of fertilizers to be applied. Most industrial coconut research activities are undertaken by the Industrial Technology Development Institute, universities and the private sector, often under contracts with the Industrial Research and Market Development Branch (IRMDB), but RDB also executes some farm level processing research directly. IRDB performs principally regulatory functions, including the operation of a product standards laboratory for quality testing and inspection of products for export, and analyzes and prepares forecasts of domestic and international demand. 2.19 Although previously authorized to collect substantial levies on copra sales (para 2.23), PCA now collects only a statutory fee of P 30 per metric ton of copra, which provides the bulk of its annual income of around P 85 million. In addition, PCA has been spending the equivalent of about P 80 - 100 million annually, which it has been drawing from its diminishing reserves. PCA has adapted to this tight financial situation by cutting back its staff, particularly those assigned to Headquarters, from 1,530 to 900, ar.d by reducing other operating expenses. Direct contributions were received from the national budget for the first time in 1989, and this will continue in 1990. While current staff are generally well motivated and quite competent, significant increases in the number of field staff and a considerable investment in training, as well as some internal reorganization, would be necessary to enable the PCA to implement a major development program. 2.20 Coconut Farmers' Organizations. Most coconut farmers in the Philippines are members of either the Coconut Producers' Federation (COCOFED) or a Small Coconut Farmers' Organization (SCFO). COCOFED is the older of the two. Its membership peaked in the early 1980s at over 900,000 coconut farmers grouped in 992 municipal chapters which, in turn, elected the officers of provincial chapters and a 15-person national Board of Directors. COCOFED was financed largely from coconut levy funds, and supported chapter-level development programs, scholarships and life insurance schemes for coconut, producers' families. It also set up the Coconut Marketing Corporation, which' operated some 200 buying stations. The activities of COCOFED slowed down with the suspension of the coconut levy and both institutions further declined after their assets were sequestered by the Government in 1986. At that time, PCA adopted a policy to encourage a more participatory form of organization based at the barangay level. In contrast to COCOFED, the SCFOs, which now number some 896 in 63 coconut producing provinces, are reportedly less controlled by larger farmers and vested interest groups. PCA's extension service interfaces with small farmers mainly through the accredited SCFO's. SCFOs are also encouraged to undertake comunal livelihood and other income supplementing activities. 2.21 United Coconut Planters Bank (UCPB). UCPB was acquired in 1975 in the name of the coconut farmers out of the proceeds of the cocoxut levy funds, with the declared objective of setting up a credit institution which could meet coconut farmers' financing needs and also provide credit to the processing industry. UCPB's operations have grown rapidly and it is now classified as a universal bank, providing a wide range of banking services through some 63 branches, as well as through association with ten rural banks. UCPB's capital base has been increased and it has acquired a controlling share  - 12 - of stock in the Philippines' largest food and beverage industrial corporatton (San Miguel Corporat. on). Until recently, however, UCPB has provided very little production credit to small farmers. Resolution of the ownership of UCPB, and other levy-acquired assets, is now before the Supreme Court. 2.22 Others. While PCA is responsible for the implementation of the Government's coconut farms development program, the DA also provides some related support services, particularly for intercropping. Two research and development agencies also have close complementary linkages with PCA: the Philippine Council for Agriculture, Forestry, and Resources Research and Development, a government agency under the Department of Science and Technology; and the Philippine Coconut Research and Development Foundation, a private agency originally funded from the levy. Both fund some research activities on coconuts and other crops, professorial chairs and scholarships, and occasional in-house research. The United Coconut Association of the Philippines (UCAP) is a federation of the main coconut industry associations and entities, including PCA. UCAP maintains a small secretariat, a subject library and publishes comprehensive statistics, and is generally recognized as the authoritative representative of the industry as a whole. Financing 2.23 For most of the last two decades, much of the official support for the coconut industry has been self-financed by way of levies on the sale of copra. Starting with a trivial levy of P 5.5 per ton in 1971 -- to generate a Coconut Investment Fund (administered by COCOFED) -- collections were raised through the 1970s to fund coconut development (e.g., for price stabilization in the early 1970s; the acquisition of UCPB in 1975 (para. 2.21); the establishment of the Bugsuk hybrid seed garden, para. 2.5, etc.). Under the latest provisions, the levy was specifically intended to support coconut replanting. Farmers contributed an aggregate of about US$380 per ha (equivalent to about US$1,500 per average farm family, most of whom are among the poorest of the rural poor in the Philippines). PCA received some of the funds collected, and its share was sufficient to enable it to expand staff; construct a number of office and research buildings, and accumulate a reserve which permitted it to maintain operations on a reduced scale after the levy was terminated. However, the majority of the funds collected were largely misappropriated, and individual farmers have thus far received almost no return from their contributions. The political passions aroused by this scandal are still strong and, at least in the short-term, limit the Government's ability to fund the proposed small farmer coconut development program (paras. 2.2i 2.26, Chapter III) through new taxes or levies. Future Prospects 2.24 The Philippines now accounts for about 45Z of total world coconut production and 65-70Z of total world exports of CNO and copra. World imports of CNO are projected to increase at about 0.7S through the year 2000. Because of its technical properties, CNO presently sells at a premium of US$40-50/ton over palm kernel oil (PKO), its nearest substitute in the world market, and this premium is expected to continue in the foreseeable future. Domestic demand for coconut products in the Philippines is also projected to expand at about 2-3Z p.a. The projected world price for CNO for the year 2000 (in 1988  - 13 - constant terms) is US$516/ton, which is considerably above the estimated average cost of production of US$250-300/ton in the Philippines. Although the demand prospects are reasonably good (paras. 6.3-6.4), the supply side is at risk and Philippines' production will likely decrease in the 1990s and later if no Government intervention occurs, for several reasons. (a) A significant expansion of cultivated area is not feasible because of the increasing scarcity of land (para 1.6). (b) The proportion of senile coconut palms is becoming excessive: although the current age profile is not known with certainty, a 1979 survey showed that about 20Z of the coconut palms were senile (over 60 years old) and very little planting has taken place since then. Even if farmers replanted on their own, most of this would be done with the readily avaUlable low potential planting materials, which would contribute to decreasing yields. (c) Much of the coconut area close to major urban centers in Luzon has been replaced over the past decade with higher-value crops, and this trend is likely to continue where markets are good. (d) Because of lack of fertilizer use, nutritional deficiency on coconwut lands is becoming progressively worse, with consequent adverse effects on yields. A recently published Strategic Study of the Philippine Coconut Industry%, produced by eminent local consultants, under a Steering Committee comprising the Chairman of XICPB, the Secretary of Agriculture and the Chairman of PCA, estimates that production will decline by 22 p.a. over the next 20 years. This would result in the absence of an exportable surplus in the first decade of the next century -- a prospect which has begun seriously to worry end-users. The study's findings are at variance with earlier IEC projections based on internationally available statistics, which are derived from the extrapolation of old data and overstate spontaneous new planting since 1983. 2.25 Given the reasonably good forecasts of domestic and world demand for coconut products on the one hand, and the prospect of decreasing production on the other, the Government has adopted a strategy to revitalize the coconut subsector and prevent it from lapsing, unnecessarily, into sunset industry status. A long-term coconut productivity and copra quality improvement program would be initiated under the proposed project (see Chapter III). The- program would involve replanting of senile coconut palms with higher-quality planting materials, improving the nutritional status of lands under mature coconut through greater fertilizer use, encouraging intercropping on coconut lands, introducing improved drying techniques to improve copra quality and reduce aflatoxin levels, and strengthening coconut research and extension, and the overall institutional capacity of the PCA. 2.26 While the Government recognizes that farmers throughout the country will continue to grow coconuts for a long time to come, public resources for coconut productivity improvement would be increasingly  - 14 - concentrated in areas which are favorable for coconut growing and less prone to typhoon damage. This strategy would ensure productivity growth as well as a more stable production over the longer term. For the most typhoon-prone areas, the Government would encourage diversification away from coconuts into more viable enterprises. For these reasons, a replanting target of 50,000 ha per year has been set, which eventually implies an advanced industry of 2.5 million ha -- that is, about a 25Z reduction of the 3.3 million ha currently devoted to coconuts. Because of the need to develop seed production capacity and the necessary support staff and logistics, the annual replanting rate would be much lower in the initial years, not reaching the desired level until about 1997. This would be partially compensated by investments in rehabilitation and nutrient support to existing trees, which would enhance production and farm incomes until the full replanting program is in place. Table 2.1: LONG TERM COCONUT DEVELOPMENT PROGRAM, 1990-2009 a/ (ha) Annual Area Under Area Under Replanting Rehabilitation Nutrient Support 1990 5,000 20,000 50,000 1991 3,500 80,000 50,000 1992 3,500 168,000 50,000 1993 4,000 268,000 47,000 1994 9,000 328,000 27,900 1995 24,000 288,000 - 1996 44,000 200,000 1997 50,000 100,000 1998 50,000 80,000 1999 50,000 20,000 2000 - 2009 50,000 _ a/ The proposed project would support the first phase of the long-term program, during 1990 - 1994.  - 15 - III. THE PROJECT Proiect Origin and Preparation 3.1 The need for a long-term development program for the Philippines coconut sector has been recognized for many years. However, the predominantly impoverished smallholders who make up the backbone of the industry have been unable to invest in yield-improving measures on their own. The very few large-scale producers who have invested in new technologies now face being split up under the land reform program (para. 1.8) and their total area is, in any case, relatively insignificant. Consequently, the proportion of senile palms gradually increased and coconut production, once buoyed by extensive new plantings, is now declining to the detriment of both farmers' incomes and the country's balance of trade. A national coconut replanting program announced in the 1970s was never implemented (para. 2.23). With FAO/CP assistance, PCA then prepared a coconut development project which the Bank appraised in 1984, but the Government subsequently decided not to proceed with that operation, partly because of unwillingness to reconcile the accounts of the levy proceeds. In 1987, following the change of Government, contacts were renewed with the Bank concerning possible support for a long-term smallholder development program, and project preparation was initiated in 1988. The experience gained by PCA staff and much of the documentation from the 1984 exercise was utilized in preparing the proposed project. The Preparation Report for this project was compiled and edited by local consultants, PCA staff having produced the draft text and cata, and the National Economic Development Authority (NEDA) having assisted with the technical review and economic analysis. The project was appraised in June/July 1989, and loan negotiations took place in April 1990. Proiect Obiectives and Summary Description 3.2 The project would have the following objectives: (a) to launch a long-term program of coconut development and productivity improvement, supported by the necessary infrastructure and strengthened technical and support services; (b) to increase the incomes of small-scale coconut farmers by improving coconut yields and copra quality; and (c) to boost foreign exchange earnings by ensuring an increasing and reliable supply of higher quality copra for processing and the export market. 3.3 The project would constitute the first phase of a long-term small coconut farms development program which, over the next twenty years, would result in the replanting of some 743,000 ha of senile coconuts and the rehabilitation of about 418,000 ha of low-bearing palms (paras. 2.25-2.26). The project would develop and apply improved technologies, establish the operating procedures, and prepare the institutional and financial bases for such a program. The rationale for the project, and the Bank's involvement in  - 16 - it, is the urgent need to reverse the lapse into senility and declining productivity of the Philippines' coconut production base, which endangers the country's international competitiveness, undermines end-user confidence and ultimately threatens the Philippines' future share of tIe world market. The urgency stems from the immensity of the task, and the long lead-time needed to obtain a substantial impact. 3.4 The proposed project would take advantage of a combination of promising opportunities: (a) the Philippines already possesses excess capacity in oil-milling, refining and coconut desiccating (para. 2.13), which would allow considerable value to be added to incremental copra production at very little additional capital cost; (b) world market prospects for copra products are good (para. 2.24); (c) the technical basis for achieving much higher yields is well established; and (d) the existing organizational framework of PCA can easily be adapted to handle a large coconut development program, with some reorganization and institutional strengthening. From the standpoint of poverty alleviation, hybrid coconuts, particularly when associated with intercrops, offer one of the few widely replicable means of intensifying land use by smallholders. As indicated in para. 3.1, the Bank has been interested for some time in assisting a program aimed at benefitting small coconut farmers, who are among the poorest in the country. Although other Bank-financed projects in the Philippines have served the rural poor, the proposed operation would mark the beginning of a possible pipeline of operations to improve the living standards of many people who have, to date, remained by and large outside the scope of most official development assistance. 3.5 Over a five-year period, the proposed project would comprise: (a) Coconut farm development: Mi) establishment of seedgardens and nurseries to produce high- yielding hybrid coconut seedlings sufficient, when full production is achieved, to sustain a replanting program of about 50,000 halyear; (ii) replanting of overaged palms with high-yielding hybrid coconut seedlings on about 16,400 ha, and re:'anting of palms damaged by typhoons and other natural disasters with selected tall seedlings on abou.tt 8,600 ha; (iii) provision of inputs and technical assistance to support annual intercropping during the first three years of replanting; (iv) provision of inputs to rehabilitate middle-aged palms on 348,000 ha, and to support the development of young palms planted on about 50,000 ha under previous PCA development schemes; (b) Conra quality improvement: (i) equipping of an existing laboratory in Manila for aflatoxin assay, and establishment of a second regional copra quality control laboratory in Cebu;  - 17 - (ii) support for a pilot effort to introduce hot-air copra dryers to smallholders in 2-3 major mill catchment areas; and (iii) provision of technical assistance and training; (c) Institutional strengthening of PCA: (i) expansion of central, regional and provincial PCA office staff; replacement vehicles; office, communications and other minor equipment; construction and equipping of three regional offices and L'novation of three existing regional offices; support fo- incremental operating expenditures; and technical asi:3tance, training and research studies; (ii) completion of facilities for PCA's Coconut Extension Training Center; training of staff trainers and extension workers; and supporting materials for training and extension activities; and (iii) upgrading of PCA's coconut research program througa agronomic consultancy services, vehicles, equipment and materials for PCA's Research and Development Branch and three regional research centers, and support for contract research on coconut processing and end uses. Detailed Features 3.6 Estsblishment of Seedgardens and Nurseries (a) Seedgardens. PCA's strategy for the future of the coconut industry calls for a sustained arntual replanting rate of 50,000 ha per year, which should be attained as rapidly as possible. Other than in exceptional circumstances caused by typhoon damage, where lack of planting material may necessitate the use of local talls, replanting is economically justified only if hybrids of proven suitability for specific locations are used. Due to the lack of hybrid production facilities (para. 2.5), it would be necessary to establish about 1,000 ha net of hybrid seedgardens to meet the demand. Five seedgardens of approximately 250 ha each (216 ha net) would be established to produce sufficient hybrid seednuts to sustain the program. One of them would be established by PCA under the project and assurances were obtained during negotiations that PCA would formally obtain the use of a suitable site for not less than 20 years, no later than March 31, 1991 (para. 7.1(a)). The other four seedgardens (in Mindanao, the Visayas and Luzon) would be established and managed by private agricultural enterprises under contracts with PCA. These enterprises would benefit from "pioneer industry" status under the Bureau of Investments' incentives scheme and several enterprises have indicated strong interest. Assurances were obtained during negotiations that contracts for hybrid seed production would be entered into only with agricultural enterprises with adequate n financial, technical and managerial resources, as agreed with the Bank (para. 7.1(b)). It would be a condition of effectiveness that arrangements satisfactory to the Bank had been made for the establishment of at least  - 18 - one seedgarden. PCA would specify the type of hybrids to be produced, supply parental seed as required, and maintain technical supervision of these seedgarden operations. Financing for the establishment of the private seed gardens would be raised by the agricultural corporations, and is therefore not included in the project costs. In the case of PCA's own seedgarden, the project would finance site clearing, fencing and road construction, civil works, acquisition of planting material, equipment, supplies, vehicles, and incremental operating costs on a declining basis. The first hybrid seed would become available from 36 to 40 months after field planting of the female parents (pollen from external sources would be necessary for the first two years production). Thereafter seed production would increase rapidly, effectively reaching full production by the seventh year after planting. The first three seedgardens would be established in Year 1 and the remaining two in Year 2. On this basis they would provide sufficient seed in Year 4 to replant 2,045 ha, rising in Year 5 to 6,680 ha. (b) Nurseries. Initially seedlings for planting on the farm would be raised in temporary nurseries established by participating small coconut farmers' organizations (SCFOs), under the direction and control of PCA field staff, with the project providing fencing materials, tools and supplies. The two-stage nursery system would be followed with selected germinated seed being normally sown in polybags. As the replanting program grows in magnitude, PCA would establish its own nurseries with irrigation facilities, fences and essential civil works, as required in each province where replanting is to take place. In the case of talls, seed equivalent to 200X of the required number of seedlings would be set in to seed beds to iK'llow for 45Z cullings and 102 replacements. For hybrids, 240 seeds would be set for each ha to be replanted. Assurances were obtained during negotiations that PCA would present to the Bank annually, for approval, its nursery development plan for the following year, with specific reference to the need for any field nurseries and the circumstances justifying their use (para. 7.1(c)). 3.7 Replanting. Some replanting would be possible during the project period, since reasonable hybrid seed could be obtained from existing sources for about 6,600 ha of replanting and the new seedgardens would start to produce sufficient seed to supply 8,800 ha during the fourth and fifth years (para. 3.6(a)). It is also assumed that typhoon disaster- related replanting of about 9,600 ha of local talls would be necessary during the first three years (principally in Bicol (para 2.7)). Talls would be planted at 100 palms per ha (10 m squares) and the hybrids at 143/ha (9 m triangles). The phasing of coconut replanting activities under the project is shown in Table 3.1, and the sequence under the long-term coconut development program is shown in Table 2.1. 3.8. Existing palms would be felled and, wherever possible, the stems sold for lumber production. PCA would assist farmers to find buyers when necessary, and any residual stems would be burned or stacked and treated with green muscardine fungus (Metarhizium anisopliae) to prevent rhinoceros beetle infestation. PCA would supervise land preparation by the farmer. Intercropping with annuals would be encouraged for the first three years, after which a cover crop would be established (para. 3.9). Where  - 19 - intercropping is not feasible, cover crops would be sown immediately. Close supervision would be the responsibility of a PCA-managed task force during the planting year, supplemented by enhanced extension input in succeeding years. Fertilizer would be provided for the first seven years, as most of the soils under senile stands have very impoverished surface strata which cannot adequately sustain the rapid growth and early bearing of young hybrid palms. Table 3.1: PHASING OF COCONUT REPLANTING (ha) Replanting Project year with Hybrids with Talls Total 1 1,000 4,000 5,000 2 500 3,000 3,500 3 900 2,600 3,500 4 4,000 4,000 5 9,000 9,000 Total 15,400 9,600 25,000 3.9 Intercropping. Farmers in the replanting program would be encouraged to cultivate annual intercrops for the first three years of replanting, to supplement farm income during the immature period before the new coconut palms come into production. Cover crops would be sown together with the intercrops in the third year to avert the risk of the weed grass lalang (Imperata cylindrica). In many instances farmers would also be able to harvest cover crop seed for sale. PCA-managed field staff would advise the farmers on suitable crops. Farmers who are able to intercrop would receive seeds, fertilizers and other inputs to support the first crop, up to a value of P 2,000 each, and all farmers would receive cover crop seed at the appropriate time. 3.10 Rehabilitation of Low-Bearing and Immature Palms (a) Low-bearing Mature Palms. The current decline in coconut productivity over the past years is partly attributable to the increasing proportion of senile palms in the Philippines, but the poor nutrient status of the palms of bearing age is also a asjor factor, which is caused by increasing impoverishment of soil nutrients through continuous cropping and an almost total absence of fertilizer use. A nationwide PCA palm nutrition survey has identified the principal nutrient deficiencies in each area and appropriate fertilizer recommendations are available. Where these have been applied on a demonstration basis, yield increases on the order of 1252 have been achieved over four years of application. Under the proposed  - 20 - project, appropriate fertilizers would be provided for a period of four years to mature palms on a total of 348,000 ha, as shown in Table 3.2: Table 3.2: INITTL& APPLICATION OF FERTILIZER Project Year ha 1 20,000 2 60,000 3 88,000 4 100,000 5 80,000 Total 348,000 In most cases, the application would be 1.5 kg per palm per year of ammonium sulphate and 2 kg of potassium chloride. Common salt would be substituted for KCL in areas where potash is not deficient and where there would be no adverse effects on intercrops or on soils. Fertilizers would be applied only after qualified farmers had removed any shrubs from their plantation and ring-weeded the palms, and this would be carried out under the close supervision of the MCDO on a communal basis, with all recipient farmers in an SCFO assisting each other in turn. On average, there are about 30-35 nuts per tree, each nut yielding 0.2 kg of copra or 700 kg per ha (at 100 trees per ha). It is estimated that these yields would increase to about 1,470 kg/ha over four years, which would provide adequate funds and incentive for farmers to continue applying fertilizers and would boost coconut production by 267,000 tons by 1998. (b) Nutrient Support for Immature Palms. Approximately 50,000 ha, primarily hybrids, have been planted during the past 10 years under various small PCA sponsored schemes, most of which were short-lived as a result of financial constraints. The premature termination of these programs eliminated the planned support for the young palms and, having received little or no fertilizer after field planting, their growth and development have been very poor. In order to restoLe these palms to something close to their original potential, fertilizer would be provided under the proposed project on the same basis as for rehabilitation of low- bearing mature palms (para. 3.10(a)). It is intended that the applications should be for a maximum of four years, but would terminate for palms over 12 years old. It is estimated that yield increments would range, depending on age and planting material, from nearly 600 kg to over 2 tons of copra per ha (Annex 2, Table 2.1), implying an additional 63.000 tons per year by 1996. 3.11 Taken together, the two rehabilitation programs for low-bearing and immature palms would generate a fairly rapid increase of almost 330,000 tons p.a. of copra production from the 398,000 ha involved (Annex 2, Table 2.2). They would thus help to arrest the decline in total production during the initial years of the long-term program, as the rate of replanting builds to the desired level (paras. 2.25 - 2.26).  - 21 - 3.12 Copra Quality Improvement. The Philippines produces a very poor quality of copra which is frequently contaminated with aflatoxin, caused by the inadequate drying methods practiced by most smallholders (para. 2.14). This situation is estimated to cost the country about US$52 million per year in reduced export prices and physical losses. In the future, however, there is also a risk that the Philippines may lose access to its European markets for copra meal, as various countries are in the process of tightening standards concerning acceptable aflatoxin levels. This could deprive the economy of a further US$75 million p.a. However, in spite of the growing necessity to improve copra quality, the objective is not easily achieved. Any piece-meal approach based on improving quality on a limited number of holdings would not work, as the quantity of superior material would be *lost' among the mass of poor copra and would, therefore, have no additional trade value. Rather, this situation can be overcome only by changing drying practices in sufficiently large areas so that commercially valuable parcels of higher quality copra would result. This would involve concentrating resources in the catchments of individual oil mills or core areas, and negotiating appropriate arrangements with those mills for the payment of quality premia. 3.13 Under the project, PCA would follow a two-staged approach to raising copra quality. Initially, supported by co-financing from the United Kingdom, PCA would create the necessary laboratory facilities in Manila to analyze aflatoxin levels and, supported by a mycotoxicologist and an associate professional officer, would develop standard methodologies and sampling techniques. 'When these are fully developed, a second laboratory would be established in Cebu to service the Visayas and Mindanao Regions. An oilseed processing expert would assist PCA in conducting surveys of aflatoxin incidence and copra drying practices in several major mill catchments. The technical experts would be supported by short-term consultants and back-stopping by the Overseas Development Research Institute (ODNRI) in the U.K. Technical assistance totalling 96.5 staff months, together with analytical equipment and vehicles, would be covered through the grant cofinancing. 3.14 In a second stage, after the research work and surveys had been completed, the project would support the introduction of hot air copra dryers on a pilot basis in 2-3 mill catchments, based on a detailed plan prepared by PCA and the technical assistance specialists. The plan would specify current aflatoxin levels in each catchment. and the targets to be achieved. Selected catchments would be those in which a majority of SCFOs, representing at least 802 of the area supplying an individual mill, are willing to participate. In addition, the mills involved would have to be prepared to pay quality premia sufficient to enable participating SCFOs to recover the cost of the driers and to reward farmers for the additional inputs involved. Manufactured components of the driers would be provided on a reimbursable basis to the SCFOs, which would construct sheds, provide necessary local materials and assemble the driers under PCA supervision. Steering committees composed of representatives of PCA, the farmers, the oil mills and traders would be set up within each catchment to agree on proceedures, including quality price differentials, and small project managerial units would be established and equipped. Presentation of a  - 22 - suitable plan would be a condition of disbursement of loan funds for the copra quality improvement component of the project (para. 7.3). 3.15 Institutional Strengthening of PCA. The project would assist in strengthening PCA's capacity to undertake the proposed long-term coconut development program. Following suspension of the coconut levy (para. 2.23). over the last few years PCA's income has declined dramatically and it has had to reduce staff and operating expenses and curtail capital expenditures. Moreover, although PCA's organizational structure may have been adequate for the kinds and level of activities for which it has thus far been responsible, several changes in the distribution of functions and management relationships are needed as the agency poises to implement a much more comprehensive, long-term program. The project would therefore support: (a) a planned reorganization of PCA, with particular attention to coconut extension and research activities; (b) an increase in and upgrading of PCA staff, mainly at the provincial and municipal levels; (c) selective renovation/expansion of physical facilities; and (d) technical assistance and training. 3.16 Details concerning the reorganization of PCA and the staffing requirements of the project and the longer-term coconut development program are provided in Chapter V. With regard to physical facilities, three PCA regional office buildings would be constructed to replace unsuitable rented buildings and three existing offices would be renovated. New provincial offices to be constructed would be located on sites suitable for nurseries, which would be provided with fencing, irrigation and a storage building. The PCA seedgarden would also be established with roads, fencing and office, residential, laboratory and storage facilities, and would be fully equipped. Some investment in vehicles would be needed to restore mobility to PCA field staff and others for whom transport is essential, as many of PCA's existing vehicles are no longer serviceable. In total, 72 cars, 8 light trucks and about 1,700 motorcycles would be required. The latter would be mainly for extenslonists, who would purchase them through loans,, repayable over five years through salary deductions. The Coconut Extension' Training Center (CETC) would be renovated and equipped to allow for full- scale utilization in staff training. Communications equipment would be renewed as necessary at regional offices and research centers, and provided for the first time at provincial offices to allow direct linkage to the regional offices. Office equipment, including support for the new project management unit at PCA Headquarters and some computer facilities, would be provided and some of the scientific and farm equipment at the research centers would be replaced or rehabilitated, as most of it is now 10-14 years old. 3.17 In addition to the 96.5 months of ODA-cofinanced support for copra quality improvement (para. 3.13), provision would be made for 12 months p.a. of internationally recruited consultant services and studies. A comprehensive training program would be developed to upgrade the knowledge and performance of PCA staff. To allow for wastage and promotion, about 1,800 extensionists would be trained by the CETC, which would also monitor the performance of trainees and provide regular in-service follow-up training for them and other PCA staff. In addition, provision would be made for: (a) overseas training, in the form of study tours to ASEAN  - 23 - countries with effective replanting or quality control programs for a total of 50 staff and short-term training courses for a further five; and (b) 10 local MSc courses, five local Ph.D courses in Research Management, Soil Science, Entomology and Bio-Technology (2) and about 50 local short-term training courses.  - 24 - IV. PROJE-T COSTS AND FINANCING Proiect Costs 4.1 Total project costs over the five-year implementation period are estimated at US$176.6 million, including a foreign exchange component of US$91.1 million (522). The base costs were estimated using prices obtained during appraisal in July 1989 and adjusted to levels expected to prevail at the time of project start up in September 1990. Physical contingencies equivalent to 10Z were added to the base costs for civil works, farm inputs and operating costs; and equivalent to 7? for equipment, vehicles and spare parts. Price contingencies were calculated on base costs plus physical contingencies and compounded annually as follow: (a) for all local costs, 92 for 1989-91 and 82 for 1992-95;2/ (b) for all foreign costs 7.22 for 1989, and 4.4S for 1990-95. Total contingencies are equivalent to about 322 of base costs, or 252 of the total project cost in terms of US dollars. Project costs are summarized in Table 4.1 and Annex 1, and are further detailed in the Working Papers. They include only incremental investments and operating costs, above the present level of PCA expenditures. Table 4.1: PROJECT COST /a Local Foreign Total Local Foreign Total X ------(P million)------ ---- (US$ million)---- Replanting 303.6 147.4 451.0 13.8 6.7 20.5 15.4 Rehabilitation 622.6 880.0 1,502.6 28.3 40.0 68.3 51.2 Nutrient Support 187.0 231.0 418.0 8.5 10.5 19.0 14.3 Copra Improvement 125.4 37.4 162.8 5.7 1.7 7.4 5.5 Research 72.6 30.8 103.4 3.3 1.4 4.7 3.5 Extension & Training 88.0 28.6 116.6 4.0 1.3 5.3 4.0 Institutional Strengthening 50.6 127.6 178.2 2.3 5.8 8.1 6.1 Total Baseline Costs 1,449.2 1,483.4 2,932.6 65.9 67.4 133.3 100.0 Physical contingencies 81.2 140.0 222.2 3.7 6.3 10.0 7.5 Price contingencies 584.8 639.9 1,224.7 15.9 17.4 33.3 25.0 Total Project Costs 2,115.3 2,263.2 4,378.5 85.5 91.1 176.6 132.5 la Including duties and taxes of US$12.5 million. 2/ Price contingencies, initially calculated in local terms, have been converted to USS using exchange rates that correct the difference between the expected rate of domestic inflation and the expected trend 'ld~ '  - 25 - Financing 4.2 The proposed Bank loan of US$121.8 million represents 692 of total project costs (74Z of total project costs excluding duties and taxes), and would finance 99Z of the foreign exchange cost and 37Z of local costs. Bank financing of some local costs is justified by the relatively low income level of the Philippines and strong poverty focus of the project. The balance of US$54.8 million would be funded as follows: US$1.3 million by a grant from the U.K. ODA (1Z of total project cost); US$31.6 million by PCA and/or the Government (18Z of tntal project cost) and US$21.9 million by the project farmers in the form of hired labor and local materials (12.5Z). Assurances were obtained during negotiations that PCA and/or GOP would include in their annual recurrent and capital budgets adequate funds to finance project activities, including both incremental and non- incremental costs, and that such funds would be released for use in a timely manner (para. 7.1(d)). The proposed financing plan is outlined in Table 4.2. Table 4.2: PROJECT FINANCING Local Foreign Total Local Foreign Total Z -(---.P million) ------- -----(USS million)----- Farmers la 547.0 - 547.0 21.9 - 21.9 12.4 PCAIGOP 786.2 - 786.2 31.6 - 31.6 17.9 ODA - 30.7 30.7 - 1.3 1.3 0.7 Bank 782.1 2,232.5 3,014.6 32.0 89.8 121.8 69.0, Total 2,115.3 2,263.2 4,378.5 85.5 91.1 176.6 100.0 /a Farmers would also contribute incremental family labor valued at US$33.0 million equivalent.  - 26 - Procurement 4.3 Procurement arrangements are suimmarized in Table 4.3. Table 4.3: PROCUREMENT ARRANGEMENTS a/ (USS million) Procurement Method Total Project Element ICB LCB Other N.A. Cost Civil Works 2.7 0.8 0.7 - 4.2 (2.5) (0.7) (0.6) - (3.8) Equipment and 2.8 0.5 0.8 - 4.1 Spare Parts (2.6) (0.3) (0.6) - (3.5) Vehicles and 5.5 0.3 0.5 - 6.3 Spare Parts (4.7) (0.2) (0.2) - (5.1) Copra Improvement - - 5.5 - 5.5 - - (4.9) - (4.9) Research - - 0.3 - 0.3 - - (0.3) - (0.3) Extension and Training - - 5.5 - 5.5 - - (5.5) - (5.5) Technical Assistance - - 1.4 - 1.4 - - (0.4) - (0.4) Farm Inputs 96.8 - 3.1 - 99.9 (87.4) - (2.5) - (89.9) Farmers' Hired Labor - - 21.9 - 21.9 Incremental Operating - - 2.5 25.0 27.5 Costs - - (1.9) (6.5) (8.4) Total 107.8 1.6 42.2 25.0 176.6 (97.2) (1.2) (16.9) (6.5) (i21.1) a/ Figures in parenthesis represent share to be financed out of the proceeds of the Bank loan. 4.4 Whenever possible, items to be procured would be grouped into purchases of at least US$200,000 each, likely to result in about 33 contracts (10 contracts for vehicles, 10 for equipment and 13 for fertilizers). All  - 27 - such contracts exceeding US$200,000 for vehicles, equipment and farm input and US$1.0 million equivalent for civil works (two contracts) would be procured through International Competitive Bidding (ICB) in accordance with Bank procurement guidelines. In evaluating ICB tenders, a margin of 152 of the c.i.f. bid price or actual customs duties, whichever is less, would be allowed for preference for domestic manufacturers. 4.5 Contracts from US$50,000 to US$1.0 million for civil works and to US$200,000 equivalent for vehicles, equipment and farm input would be procured through Local Competitive Bidding (LCB) in accordance with procedures acceptable to the Bank, in an estimated aggregate amount of about US$1.3 millio'n, representing approximately 10 to 15 contracts. Procurement of technical assistance services amounting to US$1.4 million would be carried out in accordance with Bank guidelines for the selection and recruitment of consultants. About US$1.3 million of co-financed consultants, equipment and vehicles would be procured in accordance with ODA procurement procedures. Procurement of items valued at less than US$50,000 would be through prudent shopping, based on a comparison of at least three price quotations, and would not exceed: US$0.7 million for civil works; US$1.3 million for equipment, vehicles and spare parts; US$0.3 million for research and materials; US$5.5 million for extension and training; US$3.1 million for fertilizer and other farm inputs; and US$2.5 million for incremental operating services, including repair and maintenance of vehicles and equipment servicing the scattered PCA operating units. The remaining incremental operating expenses amounting to US$25.0 million are not applicable for procurement. Farmers' contributio i.s the form of hired labor, amounting to US$20.9 million, would be proL.r.ei through normal commercial practices. 4.6 All bidding packages above US$200,000 for vehicles, equipment and farm input and US$1.0 million equivalent for civil works would be subject to prior review by the Bank, representing 852 of Bank-financed items and including about two contracts for civil works and 33 contract packages for vehicles, equipment and fertilizers. Other Bank-financed contracts would be, subject to selective post award review. PCA would be encouraged to use the Bank's sample bid documents for procurement of goods, commodities and civil works. Disbursement 4.7 The proposed loan of US$121.8 million would be disbursed over seven years, during Bank FY91-97. The disbursement schedule provided in Annex 1, Table 1.6 is shorter than the historical disbursement profile of 10 years for Bank-financed agricultural projects in the Philippines. The proposed seven- year disbursement period appears realistic, however, since much of the expenditure involves bulk procurement of vehicles, equipment and fertilizers, which is unlikely to be seriously delayed. PCA, the institution responsible for implementing the project, is firmly in place and has acquired experience with many of the individual operations to be supported under the project. Disbursement for contracts with a value over US$200,000 equivalent would be fully documented. All other disbursements for eligible expenditures, including disbursements for incremental operating costs, would be made on the basis of Statements of Expenditures (SOEs).  - 28 - Table 4.4: SUMMARY DISBURSKMENT SCHEDULE Category Amount of the Loan Allocated I of (Expressed in Expenditures Dollar Equivalent) to be Financed (1) Works 3,400,000 9OZ (2) Vehicles and 4,600,000 100I of foreign expendi- spare parts tures, 100X of local expenditurr-s (ex-factory cost) and 802 of local expenditures for other items procured locally (3) Equipment and 3,200,000 1002 of foreign expendi- spare parts tures, 1002 of local expenditures (ex-factory cost) and 852 of local expenditures for other items procured locally (4) Consultants' services, 5,300,000 1002 training, studies and extension (5) Research 300,000 1002 (6) Copra driers 4,400,000 902 (7) Farm inputs 80,900,000 902 (8) Incremental operating costs (a) 2,000,000 602 (b) 2,100,000 452 (c) 1,700,000 302 (d) 1,800,000 252 (9) Unallocated 12,100,000 TOTAL 121,800,000  - 29 - 4.8 Special Account. Assurances were obtained at negotiations thats (a) GOP would establish a Special Account for the project into which the Bank would make an initial deposit of US$5.0 million, equivalent to 2-3 months' average withdrawal from the loan account, to be used to prefinance goods and services reimbursable under the loan; and (b) the Special Account would be operated under terms and conditions satisfactory to the Bank (para 7.1(e)). The Special Account would be managed by PCA and should any disbursement made from this account be found to be ineligible for financing under the project, GOP would deposit the corresponding amount into the Special Account prior to submissiou of any further replenishment application. Accounts, Auditing and Reporting 4.9 Assurances were obtained at negotiations that PCA would keep separate accounts of expenditure made under the project, irrespective of the sources of funds, and that all accounts related to the project would be audited annually by independent auditors acceptable to the Bank (para. 7.1(f)). The auditors' report and statements of accounts would be submitted to the Bank within nine months of the end of each PCA fiscal year. The audit report would include, inter alia, a separate opinion that funds disbursed against SOEs had been used for the purpose for which they were provided. Assurances were also obtained that PCA would submit regularly quarterly progress reports to the Bank, and would prepare a completion report on project implementation and achievements within six months of the final loan disbursement (para 7.1(g)). Details of auditing and reporting requirements are given in Annex 5.  - 30 - V. ORGANIZATION AND MANAGEMENT Philippine Coconut Authority (PCA) 5.1 Responsibility for project coordination and implementation would rest with PCA (paras. 2.17-2.19). While PCA's current structure is basically sound, some reorganization and rationalization of functions and authority would be necessary to enable the entity to carry out its responsibilities under the project. The main concerns relate to PCA's research and extension activities, and their linkage with field operations. In addition, owing to its tight financial position over the past few years (para. 2.23), PCA has reduced its staff in absolute terms and been unable to provide adequate training programs, and renovate and replace its physical facilities and equipment. The proposed project would therefore support various institutional strengthening activities, to prepare PCA not only to carry out the project itself but also to develop the necessary capability to implement the longer- term coconut development program. Specifically, the project would support: (a) a planned reorganization of PCA, with particular attention to coconut extension and research; (b) an increase in anid upgrading of PCA staff, mainly at the provincial and municipal levels; (c) selective renovationiexpansion of physical facilities; and (d) technical assistance and training. Items (c) and (d) have been discussed in paras. 3.16-3.17. With regard to PCA's reorganization and staffing (items (a) and (b)), the proposed changes have been thoroughly reviewed and agreed in principle during project preparation and appraisal. Assurances were obtained during negotiations that formal approval of PCA's reorganization would be a condition of loan effectiveness (para. 7.2 (ii)), and that the new organization structure would be implemented no later than September 30, 1990 (para. 7.1 (n)). The principles underlying the planned reorganization, reflected in Chart 1, and the staffing implications ure summarized below. 5.2 Extension. PCA's extension staff 0MCDOs) are insufficient in number for the needs of the project and would be augmented by DA field staff- Agricultural Production Technicians (ATP). ATPs would be assigned to the project under the terms of a Memorandum of Agreement between DA and PCA, dated March i3, 1990, and a Supplemental Agreement thereto dated April 4, 1990, which provide that ATPs selected for assignment would successfully complete training at CETC and would be under the operational control of PCA. The projects extension field staff (MCDOs and ATPs) and their PCA supervisors and managers would be the critical driving force of the projectlprogram, responsible for encouraging the formation of SCFOs and guiding their development; promoting the objectives of the coconut development program; identifying qualified participants; initiating requisitions for the necessary inputs; ensuring that farmers have undertaken the prescribed preparatory activities; supervising delivery of the planting materials and fertilizers and ensuring that they are properly planted or applied at the designated sites; monitoring production responses; and providing advice on all aspects of coconut cultivation, including processing. Presently, the PCA Deputy Administrator of the Agricultural Research and Development Branch (ARDB) is responsible for both agricultural development (extension) and research, but has no in-line subordinate units to supervise these two major activities, nor exercises formal control over the Regional Administrators who are responsible for executing field development programs in the eight regions and report directly to PCA's Chai . fu e, P 's Fi d (  - 31 - would take over the extension activities of the zurrent ARDB and would asstme direct control of the Regional Offices. It would also assume responsibility for the Coconut Extension Training Center (CETC), to ensure that field staff training is fully coordlinated with the needs of the program. 5.3 Project/program implementation would pose heavy management responsibilities on FOB; for this reason, the Deputy Administrator would be supported by a strengthened Operations Planning and Management Department (OPD), located at the Head Office. The manager of OPD would ensure that the field program is carried out according to approved plans; that appropriate technical standards are maintained; that the necessary logistical and human resources are available so that development targets can be met; and that adequate statistical data is recorded at each phase of field operations. OPD would have four Divisions to meet these requirements: Field Operations, Logistic Services, Operations and Statistics, and Seedgarden/Seed Contracts. Given the importance of OPD, assurances were obtained at negotiations that the position of Department Head would be filled at all times with an officer whose qualihications and experience are agreed with the Bank (para. 7.1 (h)). The Seed Supply Division (SSD) would be responsible for the establishment and management of the new PCA seed garden and for technical supervision of the four private seedgardens which would supply hybrid seed to PCA. For these purposes, PCA would require about 25 additional regular staff and 310 skilled and unskilled workers and security guards, thse latter to be provided by contract. In consultation with PCA's research staff, SSD would determine the necessary crossing programs at least 18 months in advance of need, so that the seedgardens could program their pollinations accordingly and ensure that an adequate amount of suitable seed is available for each region at the required time. 5.4 The Manager of the CETC would report to the Deputy Administrator of FOB. The rapid expansion of the extension force (prra. 5.6), as well as the requirements of in-service training and pre-promotion courses, would place a major burden on the CETC, whose staff would have to be increased by 12 persons. Three of these new staff would be specialists in development communications or agricultural journelism, to assist in strengthening the technology packaging functions of CETC. All catering for resident students would be contracted out. Pre-service courses for MCDOs would last 10 weeks and those for ATPs, six weeks. There would also be in-service training for current MCDOs, PCDOs and subject matter specialists. The training staff itself would be supported in the development of its skills through periods of field work with MCDOs, increased exposure to research center work, courses at local universities, and visits to foreign agricultural extension and coconut research agencies. Local universities and PCA's existing in-house expertise would be tapped as technical resources for the training program. An experienced training consultant would be retained for limited periods over the life of the project to monitor and evaluate the effectiveness of CETC's activities (para. 3.17). 5.5 PCA's eight Regional Offices, each under the direction of a Regional Administrator, are entirely responsible for all PCA activities at field level. By far their major function is the supervision of extension staff (PCDOs, ATPs and MCD0s) and their tasks at SCFO and farm level. Regulatory functions and  - 32 - copra improvement activities are generally minor components of their work programs. Nevertheless, as indicated in para. 5.2 above, reporting relationships hitherto bypassed the Deputy Administrator responsible for agricultural development and research, which sometimes resulted in the adoption of technically inappropriate or inadequate agriculturc'l practices at field level. Under the project, charges would be made to ensure that the Regional Administrators report to the Deputy Administrator FOB on all agricultural matters. 5.6 The success of the project would rest largely on the quality and motivation of the extension staff. The current staff of 595 MCDOs would need to be augmented over the five years of the project to about 1,950, as follows: Table 5.1: NET EXTENSION STAFF REQUIREEENTS BY PROJECT YEAR Project Year Existing Staff New Staff Total MCDOs 1 595 -- 595 2 595 148 743 3 743 479 1,222 4 1,222 443 1,665 5 1,665 285 1,953 To allow for turnover, about 1,800 extension personnel would be sought to meet the requirement for 1,355 incremental extension staff. As the Government is reluctant to increase the already large number of agricultural extensionists in the country, many of whom are perceived to be unde. -employed, the majority of new extension staff for the project would be made available to PCA by means of assignment of ATPs from the Department of Agriculture. During negotiations the Government furnished to the Ban2k a satisfactory plan for the assignment to PCA from DA of sufficient numbers of competent extensionists to enable PCA to carry out its obligations under the project (para. 5.2). During negotiations, assurances were obtained that: (a) the Government would take all necessary action throughout the life of the project to ensure the aforementioned assignment of extensionists to PCA; (b) new extension staff, from whatever source, would be selected on the basis of having successfully completed six weeks of field immersion experience and passing the pre-service training course at CETC; and Ic) in the event that insufficient numbers of suitable ATPs were assigned to PCA, the Government would make provision for the external recruitment of MCDOs (para. 7.1 (i)). Besides the aforementioned extension staff, posts for additional supervising CDOs would be required, some clerical staff would be assigned to the Provincial Offices to provide technical and clerical support, and some staff strengthening would be needed in the eight Regional Offices. These incremental staff would be contracted by PCA. 5.7 Agricultural Research. PCA's Research Management Department (RMD) would be responsible for both agricultural and farm level processing research. The Manager would ensure that all research is directed to solving pressing problems in the coconut subsector, that research quality standards are kept high, and that the research program receives the necessary financial, material  - 33 - and human resources in a timely manner. Most agricultural research is located in the three regional Research Centers, but a number of genetic and agronomic studies are located at other test sites. Project support for research would allow these efforts to be expanded and higher levels of technology to be employed. Staffing is not seen as a constraint, and therefore no major changes are envisaged in the organization or staffing of the three Research Centers. However, training opportunities provided under the project and the availability of technical assistance to address specific problems would serve to improve the selection of research projects and expedite the completion of research tasks. Processing research would concentrate on the improvement of copra quality and the better utilization of coconut by-products, particularly coconut wood and coconut shells. These tasks would entail the appointment of some additional technical staff to supervise research work subcontracted to universities and institutes on specific priority issues. 5.8 Copra Quality Improvement. The technical assistance team engaged in the analytic technique for aflatoxin determination (paras. 3.13-3.14) would work in the Quality Control laboratory of the Industrial Research and Market Development Branch. The field team surveying aflatoxin incidence and studying current copra making methods would work closely with the respective regional offices and the FOB staff. They would assist in the selection of the pilot areas for the introduction of hot-air dryers. Special arrangements would be made, involving collaboration between PCA, COCOFED, SCFOs, UCAP and the local oil millers, and an interagency management unit would be created in each pilot area. The technical assistance field team would advise the management units for the duration of their assignments. 5.9 Accounting and Procurement Staff. The volume of financial transactions handled by PCA would increase dramatically under the project, and the Financial Management and Services Department would therefore need five additional accounting staff at the Head Office and one extra bookkeeper in each regional office. 5.10 Central Project Operations Unit (CPOU). The Administrator of PCA would serve as Project Director. A Central Project Operations Unit would be established in the Office of the Administrator, with a staff of four. The Unit would have no direct implementation responsibility, which would reside in PCA's Branches and Regional Offices, but it would be responsible for project coordination and monitoring and would report to the Project Director on all aspects of project progress. The CPOU would also be responsible for project procurement and for keeping PCA's management and Board fully abreast of project progress and alerted to emerging problems. The head of the CPOU would be responsible for inspection of field operations, and would report to PCA's Administrator on any problems which might not be identified through the routine monitoring system (para. 5.13). Designation of the incumbent was made prior to negotiatiot,3. Assurances were obtained during negotiations that, no later than June 30 of each year, the CPOU would furnish to the Bank for comment the proposed annual project area coverage targets and related plans and budget for the succeeding year (para. 7.1 (1)). The CPOU would also send the Bank quarterly summaries of project performance, and prepare a Project Completion Report for submission to the Bank within six months of final loan disbursement (para. 7.1 (g)). Establishment of the Unit would be a condition of loan effectiveness (para 7.2 (iii)), and assurances were obtained during  - 34 - negotiations that the post of the head of CPOU would be filled at all times by an incumbent with training and experience agreed with the Bank (para. 7.1 (h). Farmer Enrollment and Supervision 5.11 At field level implementation would be in association with recognized farmers' organizations, whose smallholder members would be beneficiaries of the project, and with cooperating oil mills for the copra quality improvement component. PCA has established the following selection criteria for farmers to participate as beneficiaries under the project: farmers must be: (a) Filipino citizens; (b) members of a recognized farmers' organization; (c) owning or operating less than the maximum farm sizes permitted by CARP, and in the no case more than 10 ha; (d) past contributors or heirs of contributors to the coconut levies; (e) willing to contribute such inputs as labor, transport of seedlings and/or fertilizer; and (f) willing to undertake project related work on their farms. Assurances were obtained during negotiations that selection criteria would be agreeable to the Bank (para. 7.1 (i)). 5.12 In the interest of equity and of benefitting the maximum number of farmers, project-supported replanting would be limited to a maximum of 1 ha, rehabilitation to 3 ha and nutrient support to 4 ha per farmer. Assurances to this effect were obtained during negotiations (para. 7.1(k)). Extension staff would be provided with pro forma application documents which, when completed, would clearly identify those farmers who qualify for project assistance. They would ensure that in all cases the necessary preparatory work is undertaken by the farmers and that seedlings and fertilizers are put on the approved sites. To facilitate supervision by the extension staff, benefitting farmers would assist each other in these operations. This mutual cooperation conforms to Filipino tradition (Cbayanihan') and would further strengthen the spirit of the SCFOs. Monitoring and Evaluation 5.13 Ensuring effective monitoring and evaluation would be the responsibility of the Operations and Statistics Division of FOB, but monitoring functions would be a routine responsibility of each operational unit. Basic operational monitoring requirements are already being built into FOB's implementing guidelines for the various field activities. Managers and key staff would be trained and equipped to undertake effective monitoiing to ensure successful accomplishment of their units' tasks. Their aim would be to maintain an accurate picture of not only physical progress, but also of the quality of work and the determinants of success and failure, as inputs into the planning of successive stages of the coconut development program. On a regular basis, CPOU would aggregate this data to report to the Administrator, the Board and the Bank (para. 5.10).  - 35 - VI. PROJECT JUSTIFICATION AND RISKS Production, Market Prospects and Prices 6.1 Production. Full incremental production from coconut palms replanted or rehabilitated under the project would be at about 405,000 tons copra equivalent per year around year 2004 (Annex 2, Table 2.2!. Limited quantities of annual intercrops, such as corn and mung bean, would also be produced. Felled coconut palms on about 25,000 ha of replanted area would supply about 175 million board feet of sawn timber. The incremental project coconut production would be about 182 of the average production of 2.2 million tons copra equivalent in the last five years. If the current average production level were to continue in the future, the total production, including project increzrautal output, would be about 2.6 million tons copra equivalent by the year 2000. However, due to decreasing yields (para. 2.24), average production from the non-project areas is likely to decline by at least 300,000 tons copra equivalent by the year 2000. Therefore, despite contribution from the project, the total Philippine production in the year 2000 will be less than the 2.4 million tons copra equivalent assumed by the Bank's International Economics Department (IEC) for its current price projections. In the absence of the project initiated development program, CNO exports would decrease by 452 by the year 2,000. 6.2 International and Domestic Market Prospects. World demand for copra (oil equivalent) is projected by the IEC to increase at about 12 p.a. and world imports at 0.7Z p.a. through the year 2000. Domestic demand for coconut products in the Philippines is also projected to grow at 2-32 p.a. The combined international and domestic demand would justify at least a 252 increase by the year 2000 over the last five years' average production of 2.2 million tons. The project incremental production, which would be much lower than the additional demand, is expected to be easily absorbed by the market. 6.3 Exports, which account for over 802 of the total Philippine coconut output, go primarily to the United States (over 402) and the Netherlands (over 25Z). Coconut oil (CNO) is the principal export (about 800,000 tons worth US$410 million in 1988). Coconut oil demand in these importing countries is about evenly divided between edible and inedible uses, although demand for edible uses has grown relatively slowly because it is price-elastic and affected by the supply of several lower-priced substitutes, notably soybean oil and palm oil. Nonetheless, coconut oil is used in many products, including cooking oil, simulated dairy products (coffee whiteners, whipped toppings, filled and imitation milk, non-dairy ice cream, cream fillings), candies, margarine and shortenings, cocoa butter substitutes, and spray oils. These diversified uses promise reasonable growth prospects for edible coconut oil. Non-oil demand is also broad-based, with uses in laundry products, cosmetics, lubricants, pharmaceuticals and a myriad of industrial processes. For many of these uses, there are no good substitutes apart from PKO and petroleum-based products, and since CNO enjoys a premium over PRO, petroleum prices are projected to increase significant in the longer term, and there are growing environmental concerns over the use of petroleum-based products, market prospects for CNO for industrial uses are very good. 6.4 The principal by-product of coconut oil production is copra meal, which is mainly exported to Europe and used as a component of animal feeds. Over 902  - 36 - of copra meal produced in the Philippines is exported (530,000 tons worth US$63 million in 1988). This source of demand for copra is generally robust, but because meal is a lower value by-product of CNO production, it is not a very important factor in overall copra demand. Recently concerns have arisen over the levels of aflatoxin in animal feeds. Since December 1988, EEC is enforcing a maximum tolerated limit of 200 ppb and the Federal Republic of Germany, which is the major importer, intends to impose an even more stringent limit of 50 ppb with penalties between 30 and 50 ppb of 1/2 of price for each ppb. Analysis of samples shipped recently indicated that, while Philippines should be able to meet the 200 ppb requirement, nearly half of its exports would fail the 50 ppb test. The future prospects for copra meal exports will, therefore, depend heavily on: (i) whether restrictions below 200 ppb are actually introduced; and (ii) the ability of Philippine farmers, traders and exporters to improve practices so as to meet the new standards. While copra meal unsuitable for export to Europe might find altern-tive markets (either less discriminating buyers for livestock, or buyers intending to use it as an organic fertilizer), it would probably also command a much lower price. 6.5 Desiccated coconut, which is nearly all exported (88,000 tons worth US$78 million in 1988), is used entirely by the food industry in confectionaries, baking products, frozen foods, some canned foods and ready-to- cook mixes for home use. The United States accounts for about half of the Philippines' exports, and Western Europe for nearly a third. World demand is moderately price-elastic, but very small (under 150,000 tons) in comparison to CNO demand. It can, however, strongly influence local prices for coconuts, and thus copra production, in the catchment areas of the desiccating factories. 6.6 The price outlook for coconut wood has a significant influence on farmer decisions on replanting. Demand for wood is strong and increasing, though the market share of coconut wood is far below its potential. The techniques for handling and converting coconut wood are known, as is its potential usefulness, but this knowledge is not widely disseminated. Only since the start of the original planting/replanting program around 1980 has a major supply of coconut timber started to develop, although it has proved to be unsteady. The potential for its wider use stems from the depletion of natural forests and the aging of the coconut palms and attendant need to replant, which many savmillers are now beginning to recognize. The project would support initiatives in coconut wood processing, primarily to improve farmer incentives for replanting. This would be undertaken through continued applied research at Zamboanga, as well as by assisting farmers to fell palms in an orderly manner, while keeping saw mills informed of the location and scheduling of sources of supply. 6.7 Prices. Price projections for copra and coconut oil are notoriously unreliable because of unpredictable production variations in both copra and sources of substitute oils. Bank projections show a small decline in the coconut oil price in 1988 constant terms from US$565/ton (1988) to $554/ton (1995) and $516/ton (2000). For copra, the projected changes are from US$398/ton (1988) to US$396/ton (1995) and US$367/ton (2000). The project incremental production is not expected to exert any pressure on projected world prices since, even with project output, total Philippine production and exports of copra (oil equivalent) may barely equal the level projected by the IEC (para. 6.2). For economic analysis, IEC projected prices, converted to 198B constant  - 37 - terms on the basis of the MUV index, were used. A standard conversion factor of 0.90 was used to convert local costs into border prices. Because of this, economic farmgate prices for copra, which is an exportable, would be about 2? higher than financial farmgate prices. Project Benefits 6.8 The main project benefits would be: (a) improved productivity and farm incomes for small coconut farmers, tenants and resident workers, who are a major poverty group in the country; (b) increased foreign exchange earnings from coconut product exports; and (c) development of technical, financial and instititional bases for the long-term coconut replanting program. Some 275,000 coconut farms (about 30? of total coconut farms in the country) are expected to benefit from the project's replanting, rehabilitation and technical support activities and about 180,000 fa-ms from the drying component. The precise number of beneficiaries is difficult to estimate since benefits could be shared by owners, tenants and caretakers (para. 2.10). The project on-farm activities would generate about 12.3 million days of incremental work per year (equivalent to about 50,000 jobs) at full development. At peak incremental project production in the year 2006, net foreign exchange earnings from incremental exports of coconut products (using projected world market price of copra for the year 2000 in 1988 constant dollars) would be about US$97 million per year. The project would provide the technical basis for improving planting material, cultural techniques and pest/disease control in future phases of the long-term program. The establishment of about 1,000 ha of seedgardens would supply sufficient material by the year 1997 for replanting the national coconut stand at a rate of 50,000 ha per year, appropriate to the long run needs of the industry. Formulation of a financing plan for replanting and institutional strengthening of PCA is another aspect of project significance. 6.9 The project would produce several other benefits which have not been quantified. First, it would stimulate the use of fertilizer on coconuts by non- beneficiaries through its widespread demonstration effect, thereby increasing copra production beyond that made possible by project-supplied inputs. Second, the project would encourage the practice of intercropping, thereby increasing the intensity of land use. Third, a range of by-products would be made available, including coconut husks for coir and fuel, and shells for fuel and further processing into activated carbon. Fourth, if the copra quality improvement scheme proves successful, its replication throughout the country could substantially improve farmer incomes and prevent a potential loss of foreign exchange earnings wh.ch could result from more stringent regulations on aflatoxin contamination in Philippine copra products. Fifth, the project would provide the basis for the development of a competitive local hybrid seednut market, which may reduce costs of future phases of the program. Finally, the various research activities supported by the project are expected to identify better hybrid crosses, improved cultural methods, and optimal strategies for developing the coconut processing industry. Financial Analysis 6.10 Farm Incomes. The financial impact of the project on participating farm families was estimated using models of six typical kinds of participants (Table 6.1). The models analyze cash flows per ha for replanting with both  - 38 - talls and hybrids and rehabilitation. Farmers would provide for land clearing, removal of senile palms, planting, transportation of items other than fertilizer, tools and upkeep. Fertilizer, seedlings, and seeds for cover crops and intercrops are to be provided by the project in the development phase. At full development, however, project participant farmers would bear all costs of inputs. The incremental income per ha and re<urn per man-day in with and without project situation summarized in Table 6.1 below is based on the assumption that farmers would pay for inputs and hired labor. The without project scenario assumes 1002 family labor, while the with project situation assumes 402 hired labor, since the incremental labor requirements may not be fully met by family labor. Table 6.1: FARM INCOMES AND RETURN TO LABOR (in P) Without proloct With troect Is Incremental return p r day pr h p d r pr day per ha Fortilization/Nutrient SuDPort F-rtilizing mature local talls 280 4,870 284 6,8657 34 2,407 Fertilizing local talls, 1 yr old 208 3,956 265 7,e68 67 3,784 F-rtilizing hybrids, 3 yre old 134 2,146 309 12,044 176 9,898 Fertilizing hybrids, 6 yr. old l78 8,783 346 14,199 168 10,466 Replenting (with covercrope and ntercrops) With hybrids 16O 2,237 364 19,316 204 17,076 With local tells 216 4,820 262 10,469 46 6,149 /a At full developent: year 12 for replanting with talls, year 11 for roplanting with hybrids, yer 5 for fertilizing mature local talls, year 13 for fertilizing 1 year old tall., year 10 for fertilizing three yer old hybrids, and year 7 for fertilizing eight year old hybrids. Incremental incomes per hectare and per day of familv labor are quite high, in particular from replanting with hybrids. The returns per day of family labor compare very favorably with the average rural daily wage of P 35 for unskilled workers. These incomes would, therefore, provide sufficient incentive to small farmers to participate in the project. A family which is short of workers would have a strong incentive to hire labor rather than forego the benefits of rehabilitation or replanting. It should be noted that incomes from coconuts alone would not be sufficient to raise the farmers above the officially estimated rural poverty level of P 32,000 per family per year unless the farm size is above 2 ha. The analysis in Table 6.1 is based on the assumption that KCL would be used for fertilization/nutrient support. However, on about 20? of farms, NaCl, which is much cheaper than KC1, would be  - 39 - used and incomes of those farmers would be much higher than the figures in Table 6.1. 6.11 Cost Recovery. Except for some international and bilateral assistance for research, the Philippine coconut industry has largely self-financed its official support and regulatory services. Apart from some official counterpart funds, PCA collects a fee of P 30/ton on copra sales and has operated until 1989 without any contribution from the Treasury (para. 2.19). A replanting program launched in 1974 was to be financed by a levy of P 200 per ton of copra (or equivalent) impose. at point of first sale. The objective was to replant 50-60,000 ha per year, starting as soon as hytr!d seed became available (1979), and by now over half a million ha should have benefited. However, because of diversion of the accumulated funds to other purposes and the subsequent suspension of the levy, little was achieved (para. 2.23). This occurred in 1983 after funds, with a value of approximately US$l billion, had been collected from the farmers--representing about US$380 per ha or almost US$1,400 per average farm family. The proposed project would mainly benefit impoverished small farmers who coatributed to the levy. Project benefits are regarded as only partial returns for the contributions made and therefore do not present a cost recovery issue. The average inputs to be received by a typical project family would be about US$196 (including contingencies of US$47), or 15Z of the amount contributed by such families to the levy. Copra quality improvement was not foreseen as a benefit of the levy, and therefore a fee will be collected from those utilizing the driers. 6.12 It is expected that PCA's contribution to project costs (US$31.6 million) would be financed initially from the regular budget, however it may eventually be possible through recovery of levy funds previously contributed by the coconut farmers (paras. 2.23 and 6.11). In order to ensure the sustainability of the development program to be set in place by the proposed project, assurances were obtained at negotiations that GOP would submit to the Bank by June 30, 1993 a financing plan for the long-term coconut replanting program and the associated ac:ivities and staffing of PCA. The plan would be finalized within six months of having received the Bank's comments, and implementation would commence not later than January 1, 1995, (para. 7.1(m)). 6.13 Fiscal Impact. During the project period, PCA and/or GOP would need to contribute an average of about US$32.7 million (P 825.0 million) annually to cover PCA non-incremental and project incremental costs. The average annual incremental cost is estimated at US$6.5 million (P 162.2 million) which would be financed from partial recovery of the levy funds (paras. 6.11-6.12). As recovery of these funds may be time-consuming because it is dependent on judicial proceedings, disbursements under the project would be phased so as to postpone higher GOP/PCA contributions (58Z of the total) to project year 4 and 5: US$8.0 million (P 200.7 million) in 1993/94, and US$9.8 million (P 257.9 million) in 1994/95. After project completion, the annual capital expenditure necessary to maintain adequate services to the coconut subsector (primarily for replacement of vehicles and equipment), exclusive of price contingencies, would be about US$3.0 million (P 76.6 million). Also, GOP/PCA would have to make provision to finance the recurrent costs of PCA, particularly its research and extension services, at approximately US$6.0 million (P 153.2 million) p.a. Debt service on the loan for this project would be met by GOP; the resulting fiscal impact, and the fiscal deficit would peak at US$23 million in year 8, when repayment of the Bank loan would start.  - 40 - Economic Analysis 6.14 Economic Rate of Return (ERR). The ERR for the project is estimated at about 402 (Annex 3) on the basis of the following methodology: (a) all project incremental costs and benefits (except those for copra quality improvement, which is treated in the manner of applied research) were expressed in constant 1988 border prices. Economic farmgate prices of inputs and outputs were derived from the Bank's price projections of June 1989, adjusted to 1988 constant US dollars using the MUV index, and converted to local currency at the official exchange rate of P 22 = US$l. Local costs and locally valued benefits were converted to border prices by using the standard conversion factor of 0.9; (b) market wage rates, which are significantly below the official minimum wage, were used for the analysis but converted to border prices by the standard conversion factor of 0.90; 'c) for replanting, incor foregone and sale of a proportion of the coconut stems in the first year were tak3n into account; and (d) rates of return for individual components are based on on-farm costs and benefits while the ERR for the whole project includes all incremental overheads, civil works, vehicles and equipment. For rehabilitation/nutrient support, the on-farm cost is based on the use of KC1 fertilizers. The ERR for fertilization of mature local talls is 532; for fertilizing one year old talls 12Z; for fertilizing three year old hybrids 114Z; for fertilizing eight year old hybrids 93Z; for replanting with local talls (and cover crops) 14?; and replanting with hybrids (and cover crops) 26?. If the benefits of intercrops are included along with cover crops for replanting with local talls and hybrids, returns will be much higher; however, because of positive net benefits from the sale of logs and intercrops in the initial years, the ERR is not uniquely determined in these cases. The ERRs are relatively high for rehabilitation and fertilization components because there are no initial investments, and yields would rapidly respond to nutrient support. Since the major part of the project is rehabilitation/fertilization, the overall project ERR is also relatively high. 6.15 Sensitivity Analysis. The results of a sensitivity analysis show that the project remains viable across a raage of assumptions on costs and benefits. The switching value test shows that costs would have to increase by 46? or benefits decrease by 322 to lower the project's ERR from 401 to 12?, the estimated opportunity cost of capital in the Philippines. While the probability of such cost increases is very low, a decline in benefits, particularly if prices turn out to be lower than projected, could occur. However, a price level 32Z lower than projected, while possible in some years (given the high price volatility of vegetable oils), appears unlikely over the entire 20-year period of analysis. The project can also withstand a three-year delay in the benefit stream without the ERR going below 12?.  - 41 - Table 6.2: SWITCHING VALUES /a (Opportunity Cost of Capital 12Z) Component Base ERR Benefits Costs Rehabilitation of mature talls (KC1) 53 -38 62 Nutrient support (KCl) 1 year old talls 12 - - 3 year old hybrids 114 -65 188 8 year old hybrids 93 -64 181 Replanting (with cover crops and intercrops) With hybrids -/b -52/c lo8/c With local talls -/b -42/c 7l1c Total Proiect 40 -32 46 /a The opportunity cost of capital is assumed to be 122. ib Because of positive net benefits from sale of logs and intercrops in the initial years, the ERR is not uniquely determined in these cases. /c The switching values are for the net present value. Environmental Impact 6.16 Overall, the project would have a positive impact on the environment. Project activities are restricted to existing coconut areas and involve no expansion into new land; on the contrary it is hoped that enhanced farm incomes would help to reduce farmer incentives to exploit nearby forest lands. Similarly, project support for utilization of coconut wood should help to relieve pressure on rapidly depleting forest reserves. This would become a major benefit in later years as the replanting program expands. A potential environmental risk would be the localized large volumes of wood waste which could breed coconut pests if not properly disposed of. The project might also eventually lead to a slight reduction in the genetic variability of the coconut population. Both of these considerations are relatively minor, since the pests are biologically controllable and pose no known threat to anything other than palms, and PCA has a well established program for conserving coconut genetic material. 6.17 Neither insecticides nor herbicides are currently used in coconut husbandry by smallholders and their introduction is not anticipated, as techniques for biological control of the major pests have been developed. Fertilizers to be procured would be determined on the basis of actual deficiencies determined by leaf analysis. Ammonium sulphate, potassium chloride and common salts will be utilized as required. As the fertilizer is applied only around each palm, the quantity per hectare is small and application would be by forking into the soil, thus virtually eliminating any run-off. The  - 42 - introduction of cover crops under the project will assist in stabilizing the soils, improve the microclimate and provide a source of nitrogen. Impact on Women 6.18 A small proportion of coconut farms are owned and/or operated by women -- most frequently widows. Harves,ing, the main activity in coconut farming. involves climbing palms or using long bamboo poles with knives attached; it is both arduous and hazardous and is undertaken almost exclusively by men. On the other hand, women may manage the property, assist in copra making and frequently assist in the cultivation of intercrops, and women often participate in both DA and PCA extension groups and the SCFOs. With regard to PCA itself, many women are involved in the research activities of RDB, where they head four important and highly technical divisions. FOB alsc employs women as MCDOs and some PCDOs and from time to time women havq also headed the extension activities and CETC. No negative impact on women can be anticipated from project activities. Risks 6.19 The crucial conditions for project success are continLed input use after the grant period, the selection of agronomically suitable areas for the rehabilitation and hybrid replanting, adequate supply of hybrid planting materials through the development of private seed-gardens, and the maintenance of a stable source of local funding to allow activities (principally replanting) started under the project to be completed. On the issue of inputs, attainment of expected production benefits depends on farmers' continuing to use fertilizer over the full period of analysis, although fertilizer would be available through the project only during the first several years. Under normal conditions the demonstrated value of fertilizer should persuade most farmers tt continue using it. However, should increases in the fertilizer/copra price rat!. occur, or the supply of fertilizer be interrupted by exogenous factors, then fertilizer use would fall, and with it project benefits. By assuming average project yiel4s considerably below those obtained on well-run corporate coconut farms (1.5 tons/ha vs. 2.5 tons/ha for rehabilitation, 3.50 tons/ha vs. 4.0 tons/ha for hybrid replanting and 1.6 tons/ha vs. 2.8 tons/ha for tall replanting), the analysis has taken into account part of this risk. PCA can further reduce this risk by augmenting its extension efforts in the outer project years. Location of palms in agronomically suitable areas is essential to achieve estimated hybrid yields (and those of talls to be rehabilitated). Therefore, considerable care needs to be taken in selection of farms to receive seedlings or fertilizers. PCA would ensure that in allocating these inputs among the large number of potential beneficiaries, only productive efficiency criteria, based primarily on agronomic suitability, would be used. Concerning an adequate quantity of hybrid planting materials, private corporations have indicated a strong interest in establishing seedgardens, possibly due to the fact that they would obtain pioneer industry incentives. If private investment does not materialize, PCA would have to establish the seedgardens itself and arrange priv&te management contracts. Concerning long-term financing for the coconut subsector, there is a strong likelihood that once the proposed project gets underway and its benefits are evident, willingness of coconut farmers to accept a suitable financial arrangement (such as a new form of levy) will improve quickly. The assurance concerning preparation by GOP of a long-term financing  - 43 - plan by project year 4(para. 6.12) would help to ensure that official efforts are focussed on this issue well before this first phase project comes to a close. Finally, peace and order conditions and typhoons may inhibit project activities in certain locations, but *s this is a national program, sufficient flexibility exists to avoid such areas.  - 44 - VII. AGREEMENTS AND RECOMMENDATION 7.1 During negotiations, assurances were obtained on the following: (a) PCA would present to the Bank evidence that it had formally obtained the use of a suitable seedgarden site, for at least 20 years, by no later than March 31, 1991 (para. 3.6(a)); (b) PCA would enter into contracts for hybrid seed production only with agricultural enterprises with adequate financial, technical and managerial resources, as agreed with the Bank (para. 3.6(a)); (c) PCA would present to the Bank annually, for approval, its nursery development plan for the following year, with specific reference to the need for any field nurseries and the circumstances justifying their use (para 3.6(b)); (d) PCA and/or GOP would include in their annual capital budget adequate funds to finance project activities, including the non-incre'aental costs, and that such funds would be released for use in r. timely manner (para. 4.2); (e) GOP would establish and manage a special account to be operated under terms and conditions acceptable to the Bank (para. 4.8); (f) PCA would (i) maintain separate project accounts; and (ii) all accounts related to the project, including PCA's regular accounts, would be audited annually by independent auditors acceptable to the Bank and the audit reports and statements of accounts would be submitted to the Bank within nine months of the end of each financial year. The auditors' report would include a separate opinion that funds disbursed against SOEs had been used for the purpose for which they were provided (para. 4.9); (g) PCA would submit quarterly progress reports to the Bank and would contribute to a project completion report within six months of the final loan disbursement (paras. 4.9 and 5.10); (h) the posts of the Heads of PCA's CPOU and OPD would be filled at all times by incumbents with training and experience agreed with the Bank (para. 5.3 and 5.10); (i) (i) GOP would take all necessary action, throughout the life of the project, to ensure the assignment to PCA of sufficient numbers of competent extensionists to enable PCA to carry out its obligations under the project; (ii) new extension staff, from whatever source, would be selected on the basis of having successfully completed six weeks of field immersion experience and passing the pre-service training course at CETC; and (iii) GOP would make provision for the external recruitment of HCDOs in the event that insufficient numbers of suitable extension staff are available for assignment to PCA (para. 5.6); _ v~~~~~~~~~~  - 45 - (j) farmers participating in the project would be selected according to criteria agreeable to the Bank (para. 5.11); (k) for the duration of the project. replanting would be limited to 1 ha. rehabilitation to 3 ha and nutrient support to 4 ha per farmer (para. 5.12); (1) PCA would furnish to the Bank for comment the proposed annual project area coverage targets and related plans and budget for the succeeding year, no later than June 30 of each year (para. 5.10); (m) GOP would Ci) submit to the Bank for review by June 30, 1993 a financing plan for the long-term coconut replanting program and associated activities and staffing of PCA; and (ii) the plan would be finalized within six months of having received the Bank's comments and implementation would begin by January 1, 1995 (para. 6.12); and (n) PCA would begin to implement a new organizational structure agreed with the Bank, no later than September 30, 1990 (para. 5.1). 7.2 Conditions of loan effectiveness would be (i) that arrangements satisfactory to the Bank have been made to establish at least one seedgarden (para 3.6(a)); (ii) the formal approval of a new organizational structure for PCA (para. 5.1); and (iii) the establishment of the CPOU (para 5.10). 7.3 A condition of loan disbursement for the copra quality improvement component would be the presentation of a suitable plan for the implementation of a pilot scheme to introduce improved drying practices in 2-3 major oil mill catchments (para. 3.14). 7.4 With the above assurances and conditions, the proposed project would be suitable for a World Bank loan to the Philippines of US$121.8 million, repayable in 20 years, including five years of grace, at the standard variable interest rate.  PILIPPINES SMALL CDI'T FARM MflVE R ECT SLAR' Amon C2T WmA 'PeCo '0001 Ir c 2 Total * `:': S Froige Rate ' Fser. best Local Fordin TotUl Excha?ne Costs L:ca! F^*eigt. T; taI S;:ce;aa S3.,: *2um_v%2` __zz:- 17 .*77e##7t= B.-C=.' S=eS w=-OxIrazzl MCCO IC7C.:7:= mc.... =5aw. z- 1. DHJES11E CI'T A. CIVIL VWRKS 58944.9 14021.2 73,606.0 20 ?3 2676,6 66g.! 7.34!.' 2 B. VEIC1S 33,773,5 79,74.6 113s549.1 70 4 1 43.t ?,3#.61.? . 4 C. BUPNNt 17,629.5 3 SO993.4 7!.7?2.9 7 3 901.3 264C.9 3.412.2 7 . ,. RE