Philippines - Agricultural Sector - Inputs Project

Docum t of The World Bank POR OFFICIAL USE ONLY Report No. 10314 PROJECT PERFORMANCE AUDIT REPORT PIJILIPPINES AGRICULTURAL SECTOR/INPUTS PROJECT (LOAN 2469-PH) FEBRUARY 10, 1992 MICROFICHE COPY Report No. 10314-PH Type: (PPR) JONES, WIL/ X31732 / T9057/ OEDD1 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Name of Currency Peso (p) Appraisal Year Average (1984) US$1.00 - p 16.70 Intervening Year Average (1985) US$1.00 - p 18.61 Completion Year Average (1986) US$1.00 - p 20.00 ABBREVIATIONS AAA Agenda for Action in Agriculture ADB - Asian Development Bank ASTAG - Asia Technical Agricultural Division CCC - US Commodity Credit Corporation DA - Department of Agriculture PPA - Fertilizer & Pesticide Authority CDP - Gross Domestic Product IBRD = International Bank for Reconstruction and Development ICB - International Competitive Bidding IDA International Development Association IMF - International Monetary Fund RASUTRA - National Sugar Trading Corporation NEDA - National Economic Development Authority NFA National Food Authority NIA - National Irrigation Administration OED Operations Evaluation Department OPS - Operations Policy Statement PCA - Philippine Coconut Authority PHILSUCOM - Philippine Sugar Commission PHILSUMA - Philippine Sugar Marketing Corporation PCARD = Philippine Council for Agricultural, Forestry & Natural Research & Development PCR Project Completion Report PPAR - Project Performance Audit Report SDR Special Drawing Rights SECAL = Sector Adjustment Loan TBAC Technical Board for Agricultural Credit UNICOM * United Coconut Oil Mills USAID - United States Agency for International Development GOVERNMENT OF THE PHILIPPINES FISCAL YEAR January 1 - December 31 Sw .w ANK FOR OFFICIAL USE ONLY THE WO0LD BANK Washington. D.C 20433 U.S A. - Office of Dtecto-Ce~&rat Opertom tveiatIn February 10. 1992 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Performance Audit Report - Philippines Agricultural Sector/Inputs Project (Loan 2469-PH) Attached, for your information, is a copy of a report entitled "Project Performance Audit Report on Philippines - Agricultural Sector/Inputs Project (Loan 2469-PH)", prepared by the Operations Evaluation Department. Attachment This document has a restricted distribution and may be used by recipients only in the performawe of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. FOR OFFICIAL USE ONLY PRO_JECT PERFORMANCE AUDIT REPORT PMILIPPINES AGRICULTURAL SECTOR/INPUTS PROJECT (LOAN 2469-PH) TABLE OF CONTENTS Pate No. Preface . . . . . . ... . . . . . . . . . . . . . .i Basic Data Sheet . . . . . . .. ......... iii Evaluation Summary . . . . . . . . . . . . . . . . . v I. Background . . . . . . . . . . . . . . . . . . I II. Project Design . . . . . .*. . . . . . . . . 2 III. Implementation . . . . . . . . . . . . . . . . 7 IV. Impact . . . . . . . . . . . . . . . . . . . . 12 V. Iseues and Findings . . . . . . . . . . . . ..* 17 Attachment 1 - Comments from Fertilizer and . . 23 Pesticide Authority Attachment 2 - Comments from National Food . . 25 Authority Attachment 3 - A Differing Assessment from . . 29 a World Bank Staff Member MAP: IBRD 22431 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. PROJECT PERFORMNCE AUDIT REPORT PHILIPPINES AGRICULTURAL SECTOR/INPUTS PROJECT (LN. 2469-PH) PREFACE 1. This is the Project Performance Audit Report (PPAR) on the Agricultural Sector/Inputs Project. The project was financed by Loan 2469-PH for US$150 million, approved 4 September 1984 and signed 26 September 1984. The original Closing Date, 31 December 1985, was extended to 31 December 1986 to permit f 11 disbursement of the loan. The final disbursement was made on 11 February 1987. 2. The PPAR is based on the Project Completion Report prepared by the Asia Regional Office, on the President's Report and the legal documents, on the transcripts of the Executive Directors' meeting at which the project was considered, on study of project files, and on discussions with Bank staff. 3. An OED mission visited the Philippines in June 1991. The mission discussed the effectiveness of the project with Philippine Government officials from National Economic Development Authority, Department of Agriculture, Department of Finance, Fertilizer & Pesticide Authority, National Food Authority, Philippine Council for Agricultural, Forestry & Natural Resources Research & Development, as well as private citizens and representatives of international organizations. 4. The PCR provides an accurate and extremely perceptive account of project experience, including performance of the Bank and of the Borrower, including executing agencies and other participants in the project. The PPAR reviews the PCR's assessment of the project's short-run economic benefits in the light of the Borrower's macro-economic situation at the time, and of its long-run economic benefits in the light of the Borrower's subsequent agricultural policy. Regarding short-run benefits, the PPAR supports the PCR's finding that continued availability of imported agricultural inputs during the 198415 agricultural season, at a time of financial crisis, thanks to the loan, permitted the agriculture to maintain its growth. Regarding long-run benefits, the PPAR supports the PCR's finding that limiting disbursements to a "positive list," which slowed disbursemerts and caused a major time over-run, was positive; the stretching out of disbursements promoted reform dialogue. The project probably did affect the course of agricultural policy reform. 5. Following standard OED procedures, copies of the draft PPAR were sent to the Borrower and its executing agencies for comments. Comments from the Fertilizer and Pesticide Authority and the National Food Authority are Attachments I and 2. Appropriate changes have been made in the text. Attachment 3 reproduces major excerpts from comments by the Bank's former Resident Representative who attributes more of the recent agricultural policy change in the Philippines to this project than do the PCR and the PPAR. - iii - PHILIPPINES ARICULTURAL SECTOR/INPUTS PROJECT (LOAN 2489.PM BASIC DATA SHEET As of 12/31(8S Original Disbursee Canoel led Repaid Outstanding Loan 246-P" yg3.M U850..- - USSISO M Or!lnal Dates Actual Dates Initiating Project Brief ** 01/19/84 Letter of Oeeope"s Policy -- 06/4/84 Negotialton* 05124-31/0 Board Approval 0. 09/04/84 Loan Agreement -- 09/26/84 Effectiveness 12/26/84 10/22/84 Loan Closing 12/31/88 12/31/88 FT;-1 Oiabursement 09/30/86 02/11/87 CUMULATIVE LOAN DISSURSEMENT (USS M) FY95 FY88 FY87 () Plannc 188.0 150.0 - (i) Actual 35.5 89.0 .50.3 (iii) (ii) as X of (1) 26.1 59.3 100.0 MISSION DATA No. of No. of Staff Date of Month/Yer weeks ast"ons Le- report Preparation 11/10-29/83 3 2 6 01/19/84 Appraisal 02/8-03/02/84 Variable 7 17.5 07/17/84 Supervision 1 10/28-11/25/84 1 1 1 12/12/84 Supervision II 04/19-05/08/86 1 3 a 07/17/85 Supervision III 11/24-12/14/85 Variable 2 4 01/02/86 A Supervision IV 01/18-80/88 1 2 2 02/12/86 Supervision V 08/30-07119/86 3 1 3 08/01/86 ompletion 12/0-16/88 1.5 1 1.5 12/30/88 TIME RECORDED (STAFPWEEKS) FY84 FY86 FY6 FY87 FY88 FY89 LENP 24.3 LENA 39.7 LENN 4.2 1.0 SPW 21.7 22.8 6.3 PCR 0.2 4.3 FOLLOW-ON AORICULTURE SECTOR ADJUSTMENT OPERATIONS (None) L Supplemented by follow-up letter of June 80, 1984. Ag Mid-term Review -v - PROJECT PERFORMACR AUDIT REPORT PHILIPPINES AGRICULTURAL SECTOR/INPUTS PROJECT (LOAN 2469-PH) AVALUATION SUNNARY INTRODUCTION a. insulate the agricultural sector 1. From before the Agricultural from the effects of the Sector/Inputs Project began to be external-payments crisis; and discussed in October 1983 until after it was approved in September 1984, the b. promote an agricultural public- Philippine economy was in serious policy reform agenda based on crisis, particularly as regards liberalization, reduction in external payments. This external conflict of interest in the payments crisis had serious quasi-autonomous agencies, and consequences for the agricultural centralization & rationalization sector due to its dependence on of public intervention in imports of fertilizer, pesticides, the sector. animal-feed components, et al. 4. As designed, the project 2. Philippine public intervention addressed both of these objectives. in agriculture was highly fragmented. Firstly, its US$150 million of This made central planning difficult financing was strictly limited to to impossible. Moreover, those in imports of specified agricultural charge of the quasi-independent inputs. It was expected that all of agencies that covered most public this would be used during calendar intervention in the sector were often year 1985. Secondly, its conditions regulating themselves, which sometimes supported those facets of the did not provide an incentive to serve Borrower's broad Agwnda for Action in the broad national interest. Agriculture (MA) which were of greatest interest to the Bank and OBJECTIVES which were deemed achievable. There were specific measures of price 3. The Agricultural Sector/Inputs liberalization, domestic and foreign Project, the Bank's first and, to trade liberalization, and promises to date, only agricultural sector reform or to study reform of public- adjustment loan in the Philippines, sector agricultural institutiovs. A arose in response to the pair of key part of the latter were six problems just mentioned. It was studies of key sub-sectors (and the perceived, both in the Bank and by largely-autonomous public agencies reformers in the Philippines, as an concerned with them): coconuts (PCA); opportunity to: sugar (Philaucom); food & feed marketing (A); fertilizer & - vi - poeticides (FPA); irrigation (RIA); and documentation requirements were and agricultural credit (TBAC). substantially relaxed, the rest of the loan disbursed in late 1986 and early 5. During project design and 1987. Almost all of the small amount processing, Bank staff consulted with allocated to technical assistance was Asian Development Bank, which was used for agricultural inputs. preparing a similar loan, and kept informed about progress on an IMF 8. The mid-term review was Standby agreement then under conducted in November/December 1985, discursion and on US Government plans one year later then projected, and the to finance Philippine agricultural conditions of Tranche 11 release were inputs. met before the change of government of February 1986. Tranche L1 was IMPLEMENTATION EXPERIENCE released shortly thereafter in March. 6. The US$130 million ADB loan was 9. With very few exceptions, the approved early in 1984 in advance of covenanted conditions were met. Agricultural Sector/Inputs and of the Moreover, progress was made on IMF Standby. It disbursed very virtually all goals in the Agenda for quickly, mainly to finance imported Action in Agriculture. The six fertilizers and pesticides for the studies were carried out virtually 1984 main season. Contracts for 86% without using IBRD finance for of the loan amount had been approved technical assistance, two of them with by the time Agricultural Sector/Inputs ADB financing and two by the agencies was being negotiated in May. The IBRD being studied. loan, in turn, was declared effective in October 1984, two months before the RESULTS IMF Standby was concluded and in time to finance fertilizers and pesticides 10. Since the Borrower did not set for the 1984/5 season. About US$30 up a system for monitoring project million was used for this purpose. impact as agreed in the legal documents, we have no quantitative 7. As 1985 advanced and the idea of the results. With that effects of IM approval were felt, caveat, the overall assessment is that disbursements on Agricultural the project has been satisfactory Sector/Inputs virtually came to a because of the results listed below. halt. Foreign exchange availability was no longer a problem for 11. Careful review of the situation agricultural-input importers. in 1984 and iarly 1985 strongly Fertilizer demand was off in the suggests that it was the ADS loan and recession. With the fertilizer trade the first one-fifth of the IBRD loan liberalized, the project's centralized that permitted Philippine farmers to ICB procurement was less appropriate. have fertilizer and pesticides in the For animal feed, meant to be the 1984 and 1984/5 seasons. This and biggest item financed under the loan, effects of project-promoted reforms better financing terms were available contributed to the agricultural from the US Commodity Credit sector's good performance while the Corporation (CCC). Cancellation was Philippine economy as a whole was considered but rejected at the shrinking. In 1984-69 agricultural Borrower's request. After procurement - vil - value added increased 10% whtle GDP as Borrower seems to have taken seriously a whole decreased 9Z. the major effort that would have been required to do so. 12. What about reforms? As usual, attribution of the ref orms that 16. The project disbursed against a occurred to the project is debatable. positive list. This assured that it The specific price and trade was not simply balance-of-payments liberalization reforms that were su#port and contributed to its required by project legal covenants, positive impact on production in the whethe-& they were attributable to the 1984/5 season during the severe project or not, actually occurred. external-payments crisis. They were useful but hardly major. The scope and impact of institutional 17. It is probable that policy reforms that occurred during the reform directly stening from the project and which were clearly project have been pretty modest, but attributable to it were at best major reforms are unlikely to be limited. However, the six studies achieved through a single adjustment helped to maintain the reform dialogue operation. within the Philippines and between the Borrower and foreign financiers. 18. The disbursement lag was These were associated with some fortuitous. It stimulated the reform significant reforms. The two most dialogue. important reforms usually claimed for the project -- liberalization of the 19. Concertation among foreign fertilizer and the wheat trade -- were financiers: IBRD, ADB, the IMF, and part of the broader AAA but not the US CCC which was financing feed specifically the object of project imports, was partial. There is more covenants. evidence of their working together during project preparation than during SUSTAINABILITY the disbursement period, except for joint review of studies of joint 13. The production gains that interest. While the institutions occurred because fertilizer and substantially agreed on the policy pesticides were available in the front, their individual disbursement 1984/5 season were a one-time agendas sometimes led them to behave occurrence. They were no less real independently. There was no cross- for that. effectiveness. It is not clear whether this is good or bad. 14. Nost of the reforms called for by project covenants look like being 20. Privatization of agricultural sustained. The exception is the trade led to some unexpected results. reduction in the poultry import tariff Fertilizer trade privatization was an from 50% to 40% which was reversed in unmitigated success. Privatization of April 1988. wheat and flour trade however initially resulted in the transfer of FINDINGS AND LESSONS the economic rents from the former public-sector monopsonist (NFA) to a 15. It is unfortunate that the small group of private traders and Borrower did not monitor the project's millers. Eventually, however, their impact, but neither the Bank nor the high profits atracted new entrants - viii - and bread prices fell. Liberalization 22. Almost no project funds were of the internal rice trade was spent for tacbnical assistance. The supposed to be accompanied by NFA studies which these funds were meant buffer-stock operations to stabilize to finance were carried out by the prices. This has not worked. By Borrower with its own or with ADB geography and becauss entry is funds, in some cases by the agency difficult, rice millers frequently whose reform was being studied. enjoy local monopeonies, but public Nevertheless, the result seems to have intervention to establish more been satisfactory. competitive markets is difficult. 21. Project success in strengthening centralized agricultural policy-makfIog has been modest. It is not clear whether whis is good or bad. PROJECT PERFORMANCE AUDI REPORT PHILIPPINES AGRICULTURAL SECORINPUTS PROJECT (LN. 2469-PH) 1. BACKGROUND 1.1 When the AgriculturAl Sector/Inpute Project was first mentioned in files in October 1983, the Philippine economy was in deep trouble. World prices for its principal exports -- coconut oil, sugar and copper -- were at historic lows. In an effort to sustain growth, Government had borrowed extensively. With the mid-1982 Mexican default, private banks became chary about developing countries in general and refused new credits to the Philippines. They withdrew US$700 million virtually overnight. No support came from the USA, with which the Philippines still maintained and maintains close ties. The Central Bank was forced into extremely short-term financing before suspending payments on principal in October 1983. 1.2 This crisis had serious fnplications for the agricultural sector because of its dependence on imports of fertilizers, pesticides, soya cake and other animal-feed components, resin for sacking, spare parts, .... It was natural, then, that the initial idea was for a quick-disbursing project, to address balance-of-payments problems, that a- ld finance agricultural imports. .That is exactly what files indicate from the very beginning. They also report that there was "wide agreement on policy shifts" that had been discussed earlier. 1.3 A word of background is in order about the Philippine tradition of public intervention in agriculture. Over the years, often in response to specific problems, specialized agencies and commissions were set up, to the point where the Department of Agriculture (DA) is humorously called the Department of Gardening. Indeed, in 1983, DA had little to say about the two big export crops, about agricultural inputs, about grain and feed marketing, about irrigation, about agricultural research. These matters were handled by specialized agencies 1 some of which were largely or completely ladependent of DA and attached to the Presidency or to other departments. 1.4 This state of affairs had two important consequences. Firstly, public intervention in agriculture was somewhat disjointed and far down the spectrum from centralized planning. Since it is now commonly accepted that government intervention in agriculture in low-income countries generally discriminates against agriculture and creates distortions inimical to Philippine Sugar Commission (Philsucom) & Philippine Coconut Authority (PCA) for the export crops, National Food Authority (NFA) for grain trade and other, Fertilizer & Pesticids Authority (FPA) and Philippine Phosphate Fertilizer Corporation (Philphos) of inpute, Philippine Council for Agricultural, Forestry & Natural Resources Research & Development (PCARD) for research. -2 agr4oultural growth, perhaps Philippine farmers are blessed by the often undobrdinated character of Government interventions. For instance, despite Government attempts to regulate consumer and farm rice prices and foreign rice trade over many years and regimes, the Bank's Irrigated Agriculture Sector Review recently pointed out, 2 in fact, over many yeare, Philippine farm-gate paddy prices have stayed reasonably close to vorld-market equivalents, despite occasional wild swings. The point is that the autonomous agencies accentuated the disbursed tendancies of a country already highly decentralized by reason of its geography. 1.5 Secondly, the existence of multiple, quasi-independent agencies with the power to regulate things -- especially trade -- has created many opportunities for rent-seeking, and, in some cases perhaps, for rent-finding. The power of major processors and producers in Philsucom and PCA, and the interest of grain millers and traders in trying to influence NFA are only the most obvious examples. 3 II. PROJECT DESIGN 2.1 From the beginning, Bank staff envisioned a project with two "components" supporting three objectives. 2.2 Financinit agricultural inputs. Firstly, to further the objective "to help maintain ... agricultural production by ensuring adequate supply of inputs" (Project Brief, Para. 19. 19 January 1984), the production comonent would finance US$149 million of imported agricultural inputs, estimated to be 35% of one year's demand. Feedgrains were expected to account for 34%, fertilizer for 30%, replacement machinery & spares for 13%, pesticides for 102, veterinary products for 92, and pig & poultry breeding stock for 32. Fuel was excluded. 2.3 This component was close to its final form by the January 1984 Project Brief. At that time, Asian Development Bank (ADB) was, as an IBRD memo put it, "groping with the design" ' of its future Agricultural Inputs Project. Probably because of uncertainty over ADB's role, IBRD's Project Brief does not mention ADB or the possibility of its financing part of the other 652 of agricultural inputs, nor does it mention other likely sources of finance which ultimately materialized, e.g. the US Commodity Credit Corporation (CCC). In the 2 "Intal and Power ... conclude that between 1967-86 'there is no evidence of a persistent or strong bias in rice pricing policy in favor of either producers or consumers'. Domestic prices have been more stable than world prices .. achieving a major policy objective. Modest protection during the deficit years has persisted since 1986. ...but ... in early 1991 domestic prices were broadly equivalent at import equivalent levels." Volume I, Para. 3.12 3 NFA points out in its comments (see Attachment 1) that, whatever has been said about rent-seeking opportunities, no evidence of corruption has been presented. See BTO Report of 16 January 1984, Para. 4. -3- followina months, however, IBRD-ADB correspondence was intense, over procurement rules for fertilizer and over conditions to reform NFA. Did IBRD wish to consider that the two efforts were "cofinancing or similar," ADS asked in March 1984. Parallel cofinancing, IBRD answered, meaning the "contribution of each lendinj institution will be specified in the financing plans of the documents." 2.4 The production component changed somewhat as what other financiers would finance became clearer, with IBRD generally playing the role it is supposed to play, that of financier of last resort. The April 1984 Decision Memo tells us who is expected to finance the US$309 million of the $458 one-year agricultural input program (not including fuel) not being financed by IBRD. ADB was to finance $130 million (of which $100 million for fertilizer); the CCC was to finance $79 million (of which $73 million for soybean cake), leaving, after IBRD financing, $100 million to be covered from other sources, presumably then still unidentified. Since ADB was covering so much fertilizer, IBRD fertilizer financing was reduced to $30 million (20%). Pig and poultry breeding stock was eliminated from the IBRD list. Soybean cake for animal feed was increased $20 million to $70 million or 47% of the loan. 2.5 The increased salience of soybeans attracted the attention of IBRD's Operational Policy Staff (OPS, now Sector Policy & Research), which strenuously argued that "financing consumption was not an appropriate use of scarce World Bank resources," 6 especially so in the case of grain for which alternative sources of finance were available and which the Bank anyhow had a policy of not financing, established during the Sahelian drought. The attack also questioned the welfare implications of shielding the poultry and pork industry, whose products were consumed disproportionately by the better off, from the consequences of structural adjustment. After two weeks, IBRD decided, at the highest level, that alternative financing was not available and that financing recurrent items was an acceptable use of IBRD resources in the instance because soy cake was an input, not a consumption good, and furthermore, that what mattered was economic efficiency, not who the ultimate consumer was. 2.6 Before the IBRD loan was negotiated, ADB finalized its loan and began disbursing. On 23 May 1984, for the benefit of negotiations then going on in Washington, ADB reported that 26,500 T of fertilizer financed under its loan had already landed and that a total of 182,500 T were expected to be by the end of May. The value of fertilizer, pesticide and resins contracts already approved and/or awarded under the US$130 million ADB loan was $111.6 million as of that date. ' By the time the negotiations were "substantially completed" on 31 May, the IBRD production component had been changed a bit, increasing fertilizer by S Sonmez-to-Krakovski of 19 March 1984. 6 Internal memo of 18 April 1984, Para. 2. ' ADB's loan was to cover inputs for the 1984 monsoon season since the IBRD loan would not be approved in time. The IBRD loan was to cover the 1984/5 "winter" season. - 4 - US$10 million, reducing soy cake by a like amount, and by allowing financing of animal-feed-protein sources other than soya. 2.7 On 10 May, between Yellow Cover Review and negotiations, IBRD received a telex from the head of FPA that was a harbinger of things to come for the "production component." "Believe business sector will find difficulty making drawdowne In the first tranche July to November PD <sic> scheduled due to simultaneous implementation of ADB loan and tight monetary situation," it says, adding that drawdowne may have to be stretched out. A marginal notation says, "I don't understand this fully, and I don't like what I do understand. Pl. discuss ASAP." The original estimate of US$458 million for a year's agricultural, non-fuel imports was, nevertheless, in project design. 2.8 Reforming policies and institutions. The second, policy and institutional reform component, had the twin objectives to: a) "lay the foundation for future increases in agricultural production and productivity by introducing policies, or requiring studies leading to policy reforms, which would improve efficiency, restore incentives and mobilize financial resources for sectoral development," and b) "improve the institutional framework for the formulation and implementation of agricultural policies and programs." * What substance did Agricultural Sector/Inputs Project give to these lofty objectives? 2.9 IBRD's January 1984 Project Brief gives IBRD's agenda for reform. It was a broad one. Its specificity is indicative of a detailed knowledge of the Philippine agriculture sector and its institutions by IBRD staff, and of a lot of prior reflection on reform priorities. Most of the wish list either involved derebulation/privatization to remove distortions, or measures to strengthen the Department of Agriculture so that it could plan better. Files reveal IBRD's strategy of seeking "upfront" conditionality and pursuing what could not be agreed upon beforehand through studies. This strategy was shared with the Borrower. 2.10 From January through Appraisal in March and on to negotiations in May, the Project Brief wish list was whittled down, while proposing to keep the discussion going on contentious issues through studies. At one point, negotiations nearly broke down over liberalizing foreigan and internal fertilizer trade. The PCR aptly describes these "compromises," reasoning that "this ... was apparently as much as the Bank could achieve at the time, given the strong opposition from the vested interests." 2.11 The most contentious issue was IBRD's expectations about change in NFA, particularly its ambitions for getting NFA out of the grain trade. An IBRD telex of 21 March 1984, appraisal time, to the Prime Minister's office reports that "NFA favors little or no change from the present situation. While the Bank is prepared to accept that present circumstances preclude drastic and wholesale changes, we urge that some changes be introduced before Board presentation in June." IBRD's strategy was to attack NFA's wheat import monopoly, the principal Project Brief, Para. 19. Notably Paras. 24 & 36. source of its income which it used to finance its other operations. '0 The telex goes on to outline IBRD's negotiating position: if NFA won't give up its wheat monopoly, then there would have to be guidelines for rice exports, liberalization of animal-feed imports, and decontrol of pork and poultry prices. Lender and Borrower were moving toward the final package with IBRD accepting that certain of its cherished reforms could not be obtained right away and moving them to conditions of second tranche release or to subjects to be studied. Nevertheless, NFA reform was central to IBRD's thinking. On 26 March, IBRD reiterated to the Borrower that NFA reforms were "among the most important elements in its overall package." Elements might have to be transferred to studies, but the studies would have to be completed by October 1984 so that the haggle could resume when release of the second tranche would be discussed. 2.12 Other major IBRD reform ambitions involved weakening the monopoly positions of Philsucom and PCA, and of ancillary organizations that monopolized or nearly monopolized coconut and sugar exports. n It was no surprise to anyone that reformers in IBRD and in the Philippine Government were up against very powerful interests here with a huge stake in the status quo. Evidence from project files and from interviews shows that it took orders from the President to get the sugar and coconut groups just to agree to be studied. Evidently the Borrower Government perceived that IBRD would just not proceed without some show of reform in the sugar and coconut sub-sectors. The study-ees fought hard to control the terms of reference and the execution of the studies. IBRD staff anticipated this; a 7 May 1984 file memo describes the agreement between the Operations' division and OPS that the suger and coconut studies would be "clearly independent" with internationally recrui.id consultants. The legal outcome of this tension is interesting. The President's Report contains detailed terms of reference for the studies, how "the consultant" will carry them out, the number and qualifications of the people in the consultants' teams, and when various reports would be made; the Loan Agreement engages the Borrower to "employ consultants whose qualifications, experience and terms and conditions of employment shall be satisfactory to the Bank" and according to the August 1981 Guidelines, 12 and provides US$ 300,000 in a separate disbursement category to pay them (Schedule I). However, these consultants were to be used "to the extent '0 While NFA's principal activities were in grain trade, it was a complex organization involved in a great many activities ranging from operating "fair price" food shops and food stores to promotion of Philippine culture and cuisine abroad. u UNICOM (United Coconut Oil Mills), a private organization, had a de facto monopoly of coconut oil exports. Copra exports were banned. NASUTRA (National Sugar Trading Corporation), later replaced with PHILSUMA (Philippine Sugar Marketing Corporation) was sole buyer of sugar and sole exporter. 12 Article III, Section 3.02. The section states "In order to assist the Borrower in carrying out the project" without reference to the 6 studies which are nowhere mentioned in the Loan Agreement, which has no schedule describing the project for legal purposes. - 6 - agreed upon between the Bank and the Borrower," 1 and the Agreed Minutes of Negotiations state: "The Bank representatives noted that Section 3.02 of the draft Loan Agreement did not oblige the Government to hire consultants to conduct the studies provided for under the project. This clause only refers to the procedures used to hire consultants." 14 2.13 During IBRD's review process, the fact that policy conditionalities had been compromised attracted some notice. Reflecting that worry (which turned out not to be an idle one judging by the preceding paragraph) a staff member wrote on 4 May, at Yellow Cover Review time, that IBRD was committing itself to an action program based on the results of studies without knowing what they would bet "We should be on our guard for studies which inspite <sic> of our best efforts fail to provide sensible conclusions." 2.14 The staff member also notes another design problem. Sector adjustment loans are supposed to be based on a Borrower Letter of Development Policy, embodying the Borrower's adjustment plan which IBRD is supporting. From this Letter of Development Policy, the parties then select a "core program," which is embodied in legal covenants attached to the loan. In the Philippine instance, what was to be the Letter of Development Policy was not some document ghost-written by the Bank but a real Borrower plan, then in draft, called Agenda for Action in Agriculture (AAA). "... for reasons I fully understand," continues the memo, "an attempt has been made to pretend that the conditions attached to the project all arise from AAA and that we endorse what is in that document. Clearly, this is not so." The Audit wishes to emphasize that what was going on here was not the charade that often passes for policy dialogue in SECALs but a real policy dialogue. The draft AAA represented the Borrower's point of view and the evolving list of conditions represented IBRD's. The 4 May memo warns about "very vague" language in the conditions: "satisfactory progress," "has commenced," "has adopted," "has turned over," .... OPS staff wrote, "...the specific approaches to liberalization outlined ... are ... not clear or <are> unworkable" 13 and that "... the specific approaches to liberalization were not clear...." .6 What OPS staff is really complaining about here is that Operational staff was discussing real reform with its Borrower counterparts. A key insider in this process on the Borrower's side has assured the Audit that the prospect of the loan softened those elements in Government resistant to change. Covenants were sometimes vague because they were not about reforms the Borrower had made already anyway or was intending to make with or without the loan but about aspects of Philippine agricultural organization where there was serious resistance to change. They were about real reform. 2.15 Perhaps it is a bit surprising that the "softness" of the reform package did not attract more attention in the Bank's review process. That it 13 Loc. cit. 14 Minutes of Negotiations, Para. 5. " Staff memo of 9 April 1984. 16 Staff memo of 20 April 1984. -7- didn't Is probably explained by the sense of urgency stemming a) from the depth of the economic crisis, especially of its foreign payments aspects, and b) from Agricultural Sector/Inputs' getting caught up in the greater policy maelstrom of the February 1983 Special Action Plan, of parallelism with the IMF standby then being negotiated, ' and with ADB's Agricultural Inputs Loan and US credit sales and other policy initiatives. Staff delayed Board presentation from FY 1984 to FY 1985 in order not to go ahead before the IHF standby had been agreed, but the urgency of the situation, and the fact that ADB and CCC were going ahead independently and that Agricultural Sector/Inputs was part of a whole with them caused IBRD staff to push ahead in each crunch. After all, except for its policy conditionalities, Agricultural Sector/Inputs' purpose was to finance imported agricultural recurrent items. As such, it was, as it had been from the beginning, a response to the financial crisis' impact on the agricultural sector. III. IMPLEMENTATION 3.1 After Board consideration and approval on 4 September 1984, at which concerns were expressed about the sufficiency of sectoral conditionality and about the wisdom of going ahead before the IMF stabilization program was in place, there was a flurry of procurement activity. Procurement proceedings were already well advanced and were urgent, in view of the need to have farm inputs in place for the October/November planting season. The loan was quickly signed and declared effective, two months before the projected date. The casual and uncynical observer might have inferred from Bank discussions and documents that agricultural trade was to be rapidly deregulated and privatized. Bank News Release No. 85/6 on 6 September 1984 said, "Import and export trade in rice and animal feeds will be opened to the private sector and appropriate measures will be taken to help private firms enter the trade." But the status quo did not change so quickly. On 6 September, NFA telexed the Bank, "As before soybean meal will be procured by NFA." In fact, the loan's insistence on ICB for animal feed and fertilizer meant that some Government agency had to play a centralizing role which, given the shortage of foreign exchange, inevitably became an allocating and licensing role. 's 3.2 Studies. Some of the 6 studies were well under way before the loan was signed. Two days after signing, Government brought the Bank up to date. The two most controversial studies -- of sugar and coconuts -- were being carried out 17 The IMF Standby for SDR 615 million was finally approved in December 1984, three months after IBRD approval of Agricultural Sector/Inputs. ' The news release says NFA would come under the direction of the just- renamed Department of Agriculture (It's present name; then it was Ministry of Agriculture & Food, previously Ministry of Agriculture). That was the original plan. However, following the Prime Minister's letter of 5 July, NFA's policy functions were transferred to DA but its marketing functions were not. This was presented as "a more drastic organizational change" and accepted as such by the Bank. - 8 - by study groups based in NEDA. Completed drafts would be ready in two weeks. As discussed over the preceding month and a half, foreign consultants would be hired for two weeks each to review the drafts. The fertilizer and UFA studies were to be financed by an ADB grant. The Japanese and American consultants, respectively, that would conduct them had already been selected. The credit and irrigation studies were going to be done in-house by TBAC and NIA. TBAC had assembled its team. A partial draft was expected by and November. NIA's study team was being organized. Since "satisfactory progress" on the 6 studies was a 2nd tranche release condition, and since it was hoped to use the 2nd tranche in December, the spirited pace of the studies is understandable. 3.3 In view of the Bank concern during project processing that Philsucom and PCA in particular would try to control the studies of themselves, one might have expected the Bank to have been concerned when four of the six studies were being done by the Borrower with minimal use of the provision for financing foreign consultants and two of the studies were actually being done by the agencies to be reformed. ' Project files show no such concern. In fact, Bank staff was pleased with the way NEDA carried out the sugar and coconut studies and considered several of the Philippine-executed studies better than the foreign- executed ones. In the event, the studies were not finalized as soon as anticipated at loan signing, but their execution did not hold up 2nd tranche release, which was much delayed for other reasons. The delay permitted discussion of study drafts, and of re-drafts, which were tremendously important to the cause of reform. As the PCR so eloquently says in discussing the impact of the six studies, "...the delay in loan disbursements was fortuitous in that it provided ample time for the Bank to pursue the recommendations of the studies." 20 3.4 Disbursement laLsg. The loan took 27 months to disburse, not 9 as planned. This need not have been and perhaps was not a big surprise. In April 1984, early in project processing, Bank staff pointed out, "relatively modest errors in the forecast could cause serious disbursement problems or unwarranted imports." 21 In the instance, major errors caused both. While the Audit does not regard this lag as tragic (see Impact below), it is important to understand what happened and why. 3.5 By the end of 1984, less than three months after loan effectiveness, US$25.2 million had been disbursed from the $150 million loan, all of it for fertilizer and pesticides. By 25 July 1985, two months before the originally projected date for final disbursements, US$ 30.1 million had been disbursed, $25.9 million for fertilizers, $4.1 million for pesticides, and $90,000 for consultants. The disbursement rate had slowed from $33 million/quarter in the last 70 days of 1984 to $2 million/quarter in the first half of 1985. By letter of 2 August, the Prime Minister, asking for an extension of loan closing, " See Para. 2.12 above. As per the understanding of the legal agreements in the Minutes of Negotiations, the Borrower was completely within his rights. "0 PCR, Para. 34. 21 Staff memo of 18 April 1984. - 9 - suggested that the balance all be used for fertilizer, and that purchases of local fertilizer and of raw materials for fertilizer be made eligible for financing. 22 3.6 The initial flush of disbursements was for fertilizer and pesticides for the 1984/5 "winter" season, those for the 1984 regular monsoon season having been financed by the ADB loan when IBRD loan approval lagged. But the economic crunch was hitting demand for fertilizer. Even at the time of Board presentation in October 1984, demand for phosphate in the sugar sector had fallen 50. Simultaneously, reforms broke the traditional five-firm oligopsony and allowed more businessmen to import fertilizer, always through FPA to be sure. 2 Many did. By the end of 1984, there was a large fertilizer stock accumulation and fertilizer sellers were losing money. The owners of Planters, the largest factor in the fertilizer trade, managed to turn their fertilizer-sales operation into a foundation, which was purchased by the farmer-buyers who paid a few Pesos more per bag for ownership rights in this loss-making operation. 24 3.7 The premise behind Agricultural Sector/Inputs had been that farmers would not get their inputs without the loan for two reasons: because foreign exchange would be severely scarce and because what little there was would not be used for agricultural input imports. The ADB loan and the Bank loan had solved the problem for 1984 and 1984/5 for fertilizer and pesticides; CCC financing relieved the constraint for animal feed. However, in the first half of 1985, the premise of severe foreign-exchange scarcity disappeared. After conclusion of the IMF agreement in December 1984, the Peso was floated and the economy continued to contract. Under these conditions and at these prices for foreign exchange, a Purchasing local fertilizer was and continued to be dogged by a conflict-of-interest problem. Philphos had started production of phosphatic fertilizers on Leyte with raw material from Nauru. It was expected to supply the Philippine phosphate market, and more. But the head of Philphos was also the head of FPA, which was responsible for all fertilizer procurement under the loan. IBRD insisted that the same individual not hold both jobs. The individual offered his resignation from Philphos, but it was rejected. (FPA points out (Attachment 1) that the conflict of interest was resolved in 1986.) Bank studies also showed that Philphoe's costs of production were about double the international price of its products and so was reluctant to get involved financing an inefficient industry. Moreover, as one staff member pointed out (memo of 22 July 1985), "it gets us even further into BOP support and away from development finance." 23 Fertilizer trade had not been comp)letely liberalized. In replying to the PM's request, the Bank asked when Government would implement the Presidential Order of 17 April 1985 on free implementation and distribution of fertilizer by all interested parties, and when restrictions on entry of new firms into the fertilizer trade would be abolished. (telex of 19 August 1985) The cartel had been broadened, not abolished. F FPA further explains this transaction in Attachment 1. - 10 - there was no shortage of it. " As the Prime Minister said in the letter cited above, I... at the time the loan was negotiated, it was thought that foreign exchange would be very scarce and should be reserved for priority imports. The actual situation now is that we have substantial unutilized foreign credit and need to promote domestic production." 3.8 The substantial unutilized foreign credits from other sources are the main rsson why nothing had been disbursed for what was to have been the largest item to be financed under the loan -- animal feed, meaning soy bean cake. Notably, credite from CCC were available to NEA and the terms were better than those under the IBRD loan. The PCR attributes the lag in disbursements to delays in signing a subsidiary loan agreement with NEA," which was expected to do most of the procurement under the loan. True enough, but the reason NFA did not care to sign the subsidiary loan agreement was that there were alternative sources of funds, and that their terms were better than those on IBRD funds. 3.9 Disbursements continued to move slowly in the second half of 1985, manifestly for the same reasons mentioned in Paras. 3.6-8. As of 21 January 1986, drawdowne had moved from 20% of the loan to 311 -- from $30.1 million to $45.9 million. The rate, at $8 million/quarter, though faster than the first half of 1985, still implied stretching out Agricultural Sector/Inputs over more than three more years to mid-1989. And, of the $45.9 million disbursed up to then, 99.71 was for fertilizer and pesticides and had been procured through FPAs none was feed, breeding stock, veterinary supplies or agricultural machinery, the categories to be procured through NFA. If fertilizer and pesticide contracts already awarded but not drawn down are included, these items had reached 94% of their allocated amount. The Bank's mid-term review mission noted in its 29 January 1986 aide-memoire the irony that, despite the policy emphasis on privatization, "To date, no disbursement applications have been submitted to the Bank on account of eligible items imported by the private sector." 3.10 Not surprisingly, thoughts continued to turn to how to speed disbursements, or of cancellation." The Borrower was reluctant to cancel and renewed the request that the agreement might be amended to permit use of all remaining funds for fertilizer procurement in 1986 and to permit finance of domestically procured fertilizer. The Bank was concerned that such modifications would commit Bank funds to procurement from a local firm which Bank studies had found to be inefficient and, furthermore, that liberalization of fertilizer trade 2 Foreign exchange was available to importers. That did not mean, however, that the financial crisis was over for the economy. That went on until late 1986. In the mean time, the moratorium on external debt payments continued. The withdrawal of even one foreign financier would have removed the apparent calm in foreign exchange markets. 26 That agreement was finally signed on 10 April 1985, but slow disbursements for feedgrains and other earmarked inputs meant to be the province of NEA did not, thereupon, accelerate. 2 Staff memo of 14 January 1986. - 11 - had been very limited indeed. The head of PPA was also the head of Philphos. The Bank responded to the Borrower's request that it would agree provided that FPA and Philphoe became completely separate; at the same time, the Bank asked when the Borrower intended to implement the Presidential order of 17 April 1985 on free importation and distribution of fertilizer by all interested parties and when restrictions on entry of new firms into the fertilizer trade would be abolished. In short, while there was pressure to accelerate disbursements, the Bank used the occasion to promote liberalizing policy initiatives that were embodied in the loan's reform program (and which were part of the agenda for Philippine reformers as well) but which were languishing. The discussion continued until the coup of February 1986. 3.11 When the change of governments occurred, Agricultural Sector/Inputs was getting close to the end of Tranche I, not in disbursements to be sure, but in contract awards. Had the Borrower made "adequate" or "satisfactory progress" in opening up foreign trade in feed to private entities; phasing out poultry, egg & pork price controls; broadening representation on the PCA and Philsucom boards; in preparing the 6 studies; in rationalizing the agricultural public investment plan and budget; and in reducing poultry import tariffs? In March 1986, the Bank judged that it had got about as much mileage out of Agricultural Sector/Inputs on these reform points as it would and released Tranche II. The Bank was impressed, as the PCR described it in referring to the implementation period as a whole, by "the new Government's commitment to a more market-oriented agricultural sector." (PCR, Para. 45) 3.12 Disbursements did not automatically pick up after the coup. There was a certain amount of confusion as new people took over and reforms were promulgated. The main disbursement-restraining factor, though, was still that the conditions for which the loan was designed no longer applied, as they had not since early 1985. Disbursements in the first half of 1986 only accelerated to $10 million/quarter. It was only when the Bank relaxed its procurement rules to permit reimbursement against almost any non-petroleum agricultural imports that disbursements picked up to $19 million in the third quarter and $53 million in the last 4.5 months. ICB thresholds were raised; procurement by standard commercial practices, negotiation with suppliers and on the basis of three quotations were allowed much more liberally; documentation requirements were simplified. As a result, at the end of the day, 31% of the loan went for ICh procurement. This is much lower than the 73% projected at appraisal, but very high compared to the usual experience in Bank/IDA policy-based loans.2 In the end, almost none of the loan funds were used for technical assistance. 3.13 ADB and other parallelism. Prior to the implementation period, there was manifestly close and frequent collaboration between the IBRD and ADB, also with the IMF and most probably with the US Government. The interactions are recorded in various project briefs, issues papers and the like, and there was 28 See OED Rerort #8341, A Review of Procurement in Policy-based Lending, January 1990, which demonstrated that, despite high projections for ICB in the appraisal reports and Board documents of policy-based loans, there is almost none. - 12 - probably a great deal more interaction that did not get recorded in IBRD correspondence files because it took place face-to-face in Manila. 3.14 During implementation, there is little file evidence of concertation on Agricultural Sector/Inpute with ADB and none on concertation with the IMF or USAID. What there Is refers to the two (of 6) studies being financed by ADB. This paucity of file evidence may be misleading. Perhaps there was a lot of consultation but it has not been recorded in files. Still, the absence of more of a paper trail is surprising because of the obvious importance of financier concertation. Firstly, whether formal or not, IBRD, ADB, and the US Government were obviously cofinancing imported agricultural inputs. As we have seen (Parsa. 3.6 & 3.8 above), what each did strongly affected the others' loans. Secondly, the sectoral reform objectives of the three were not identical, but they were strongly convergent. And they were related to IM macro-economic objectives. Quite a lot of concertation on the progress of reform, on tactics in a rapidly- evolving situation, and on what to do next would have been natural. IV. IMPACT 4.1 The Audit endorses the PCR account of project impact (Paras. 19-43). The following comments are a gloss of that account. 4.2 "At appraisal, the project was expected to generate both short-term production benefits, and medium- and longer-term benefits based on policy reforms and improved planning and institutional arrangements. None of these was quantified...." (PCR, Para. 19) 4.3 From financing aaricultural iniputs. Did keeping agricultural input imports flowing during the economic crisis produce agricultural growth? Apparently so. In 1984, 1985 and 1986 respectively, GDP fell by 6%, then by 4.31, then increased by 1.5Z; agricultural GDP increased by 2.3%, by 3.3% and by 3.7%. After the thre.. -ars, the economy had shrunk by 91 while its agricultural part had grown by 101 6espite the deep crisis in the sugar sector as a result of dismal (for producers) world prices. Keeping imported inputs flowing to the agricultural sector is not the only cause of this remarkable performance, but it is certainly an important one. As the PCR says, "It is likely that the inputs financed by the Bank and other official donors helped to achieve this performance, although it is extremely difficult to demonstrate this in quantitative terms." (PCR, Para. 20) 4.4 Such claims often turn out to be rather weak. After all, foreign exchange is fungible. Official financiers may be made to feel good because they finance fertilizer and pesticide imports, permitting the foreign exchange that would have been used to finance fertilizer and pesticides to be used to import champagne or for capital flight. In this case, the Audit is convinced, from conversations with key players in the financial crisis, that the financing crisis for imported agricultural inputs in 1984 and early 1985 was real -- in short, that without ADB and IBRD financing, fertilizer and pesticides for the 1984 and 1984/5 crops really would not have been imported and really would not have been - 13 - available to farmers, so that use of these inpute and consequently production would have declined drastically in the absence of the loans. The same is probably true with respect to CCC financing of animal food imports. 4.5 But, a look at disbursement patterns and the implementation dialogue shows that the financial co. straint on importing agricultural inputs was gone by early 1985. By the end of 1984, there was a more-than-ample fertilizer stockpile (thanks to ADB and IBRD financing to be sure). Thereafter, with the IMF package in place, finance for importing agricultural inputs was no longer a problem. As the Implementation section above shows, the problem was then to get the Borrower to use the loan funds available. 4.6 Therefore, the Audit adds to the PCR account as follows: the Philippines was able to maintain its agricultural growth during its external payments crisis in part because it was able to maintain imports of fertilizers and pesticides for the mid-1984 crop season thanks to $117 million of the ADB loan and for the 1984/5 crop season thanks to about $30 million of the IBRD Agricultural 6ector/Inputs loan. Thereafter, alternative sources of financing were available and it is unreasonable to assume that the other $120 million of Agricultural Sector/Inputs financing made any significant difference in consumption of agricultural inputs. The utility of the loan as a "production component" !-curred exclusively or almost exclusively in the first three or four months of the 26 months and 10 days between Effectiveness and Closing. The first $30 million of the loan were useful in boosting production by removing an input importing bottleneck; the last $120 million were not. This may seem like damning by faint praise, but Agricultural Sector/Input's impact on the 1984/5 crop season was significant. It is doubtful that similar claims can be made for other Bank/IDA agricultural SECALs.9 4.7 From policy and institutional reform. The PCR catalogues changes in the agricultural sector during the project-implementation period that are relevant to specific project conditionalities, of which there were 18, and/or to the 25 points in the Agricultural Action Program.30 All but a few conditions were met. This includes not only the five conditione of Board presentation (mostly adopting programs and proposals and initiating studies), but also the six conditions of Tranche II release (Para. 3.11), which were Tranche II conditions 2 See OED Reports #s 7868, 8797/8862 & 8806, dated June 1989, June 1990 and June 1990, audits of agricultural SECALs in Morocco, Kenya and Uruguay (Ln. 2590, Cr. 1717 & Ln. 2468 respectively). The Kenya audit argues, however, that Credit-induced policy dialogue caused the country to import more fertilizer. The other exception is Sudan - Agricultural Rehabilitation II (Cr. 1389), audited by ODED Report # 7342 of June 30, 1988. Cr. 1389, which was essentially devoid of policy conditions, financed Sudan's imports of cotton pesticides for one year, something the country, which was in dire financial straits at the time, might not hvve done otherwise. The following year, still in financial difficulties, Sudan turned to a bilateral aid agency which financed all cotton pesticide imports. 3o For summary, see Annex I and Annex II. For detail, see Paras. 29-43. - 14 - precisely because they were not easy for the Borrower to accept. There are two problems knowing what to make of this catalogue and the PCR recognizes both. 4.8 Firstly, did they stem from the project? At some points, the PCR seems to be attributing success to the February 1986 change of Government, for which the project can hardly claim responsibility: "A significant part of the credit for this success was due to the new Government ... which was more committed than its predecessor to liberalization of the economy." (Evaluation Summary, p. v) Yet, as the PCR admits (Para. 23), even Tranche II release conditions had been met by the previous Government before its fall. It is the Audit's impression that the forces favoring reform were running into heavy opposition from forces with an interest in the status quo under the pre-February 1986 Government, and, therefore, that the policy dialogue conducted in conjunction with the loan was real and probably helped push through the reforms. 4.9 Secondly, did the catalogued changes matter? Or, as the PCR puts it, "whether the policy and institutional reform package was substantive enough in the light of the project's long-term objectives." (Para. 44) 4.10 The PCR concludes, "While the project impact is considered to be positive, it is difficult to argue that it was major." (Para. 26) The Bank was supposed to have some way of measuring impact because the Borrower was supposed to set up a system for tracking the impact of the reform package, which was to be used to produce four evaluations: one at completion, one six months later, one twelve months later, and one two years later. NEDA was meant to do the job. It didn't. This is one of the unfulfilled covenants. NEDA argues the large-scale change of personnel following February 1986 as an extenuating circumstance. In any case, we are all left with no quantitative guide for assessing the impact of the reform. 4.11 Again, it is hard to disagree with the PCR. The specific reforms covered by loan covenants are modest enough in macro-sectoral terms. For instance, much was made of reducing poultry import tariffs. Adopting a program of phased reduction in them was a condition of Board presentation. Adequate progress in reducing them was a condition of Tranche II release. These conditions were met. In November 1985, poultry import tariffs were reduced from 50% to 402. Then, in April 1988, they were raised again to 50%. At least the Borrower waited two years after tranche release before rescinding the policy reform. So it turned out that, while some Borrower interests favored freer Sn Not all Borrowers have waited so long. The principal condition of Ln. 2675, an agricultural SEAL to Argentina, was that the Borrower switch its tax on the agricultural sector from export duties (retentiones), which discourage exports, to a tax on the potential value of land (FLT), to encourage efficient use of land. Export taxes were reduced, but FLT was never approved. IBRD released Tranche II anyhow on 22 June 1988. In August 1988, the Borrower adopted multiple exchange rates which had the same effect in discriminating against agricultural exports as earlier tariffs had. In May 1989, when multiple exchange rates were replaced with a single one, agricultural export tariffs were raised to levels above those that preceded the loan. See Proiect Completion Report. Arxentina. Agricultural Sector Loan (Loan 2675-AR), 22 August 1991. - 15 - imports of poultry, othere did not, and the latter prevailed. Reform, on this particular loan condition, barely got off the ground. And it certainly proved not to be sustainable. The deeper question, however, is how important are freer poultry trade, and freedom for poultry prices to find their own level, for Philippine agricultural development? The Audit can see the virtue for consumers of cheap chicken and eggs and the Audit can imagine that foreign competition might make the Philippine poultry industry be more efficient, and that a more efficient Philippine poultry industry might defeat foreign competition; and the Audit can see that a healthy local poultry industry would elicit more production of yellow maize for feed, a product the country now imports at the margin but in which it might be able to beat the foreign competition with proper promotional policies. Given all of that, the Audit still agrees with the PCR that is it difficult to argue that this reform that was made in a minimal way and then rescinded would have been major, 4.12 What was major was project reform objectives in privatizing the food and feed grain trade. These had major macro-economic implications. The first two points on the AAA reform agenda were: a) commitment to open foreign trade to the private sector "in a reasonable period of time;" and an undertaking to stabilize rice prices through buffer stocks and not through mandatory price ceilings. A Board condition was "appropriate measures" by NFA to privatize foreign grain trade; imports were to be directly private or private through pools coordinated by NFA. A Tranche II release condition was "adequate progress" by NFA in privatizing foreign feed trade. As the PCR records, NFA prepared the required guideline before Board presentation and opened foreign feed trade to the private sector well before Tranche II release, except for maize export, which was opened 1 September 1988. So, with the delay noted, the Borrower fulfilled its covenanted obligations. Nevertheless, the impact has been minimal. The PCR concludes (Para. 45) that privatization of grain trade has been "only partial" and that liberalization for rice and maize "has not yet been significant." Why? 4.13 Soybean meal trade really has been deregulated, but NFA still regulates other feed ingredients (e.g. fish meal). Theoretically, foreign trade in maize is open to the private sector. Before exports can take place however, NFA has to guide the private sector by certifying that an exportable surplus exists, to license the would-be exporter, and to grant a permit for every export transaction after examination of the contract. For imports, during implementation, the Bank fought hard to persuade the Borrower to reduce the tariffs and taxes private importers pay to the level that NFA pays. This has been of no significance for maize however because only NFA has been allowed to import maize. as So, despite the commitments, the appropriate measures and the adequate progress, the Borrower has found ways to restrict private involvement in foreign grain trade where it wanted to do so. 4.14 NFA's reduced role in internal grain trade is another matter and one not emphasized by the PCR. Rice retail price ceilings were removed in October 1985 by the pre-coup Government. NFA's palay procurement role is reduced. NFA still announces its palay procurement price, which is meant to stabilize that 32 NFA reports (Attachment 2, Para. 3) that foreign maize trade has been opened to the private sector in fact and not just in theory. - 16 - market, and sells milled rice, which is meant to stabilize the consumer end. But stabilization by buffer stock is manifestly not working. That is because NFA lacks the finances to maintain a place in the market 3 and because the unit coats of its operations are much higher than those of private traders and millers (often on% and the same). The Audit also received unsubstantiated reports of collusion between local NFA representatives and local trader/millers. The geographical position of these private millers often results in a local monopeony, which does not serve the interests of palay producers, and which is reinforced if rumors of collusion are correct. 4.15 In the PCR'a view (Para. 28), the most important long-term contributions or the project emerged from the six studies. Two of the Philippines' most distorted sub-sectors in which vested interests are most deeply entrenched are sugar and coconut. While the Bank would have liked more reform in these two sub-sectors, a pair of studies was the best compromise it could get. They furthered the reform discussions which the Bank and the Iff thereafter pursued with some success, which included liberalization of coconut oil and copra exports, of internal and export sugar marketing, end of sugar price determination.'" The reforms of EA discussed above (Paras. 4.12-14) stem from the NFA study as well as from the relevant covenants. The fertilizer study helped foster apparent reform before the February 1986 coup and real reform thereafter. Originally five firms were allowed to produce, import and sell fertilizer. Other companies ostensibly got the right to compete by order of August 1984, but EPA still determined import quantities and handled tenders on behalf of private importers. Only in May 1986 did FPA give up control of procurement and prices. By 1987, there were 24 active fertilizer importers; importers' margins and the difference between world prices and what Philippine farmers pay for fertilizer have declined greatly; fertilizer consumption has increased greatly. In none of these cases is it reasonable to argue that the studies alone caused the reform. This is also the case for other studies and the re-alignment of agricultural lending rates to Central Bank rates and in reforms of NIA. Reforms came about thanks to reformers and reform-minded interest groups in the Philippines, with some support from IBRD, ADB, IN, the US Government in the form of loans and grants, including support from the Agricultural Sector/Inputs' studies. 3 NEA comments on the difficulties of its position (Attachment 2, Para. 4). Also see Para. 5.16 below. 3 NFA is critical of the Audit for giving substance to these allegations by repeating them. See Attachment 2, Para. 1, which also refers to Para. 5.16 below. 3S The last of these is apparent only. Sugar imports are banned. The Sugar Regulatory Administration still sets marketing quotas allocating production for the domestic market, for the US quota, the world market and reserves. These regulatory powers keep domestic sugar prices at about double world market levels and thus protect the industry. However, given the volatile and quirky nature of the small world sugar market, would the Philippines be well advised to expose its sugar industry to it fully? Evidently, Bank staff are not sure (PCR, Para. 27) and neither is this Audit. - 17 - V. ISSUES AND FINDINGS 5.1 From the foregoing discussion, eight issues stand out. 5.2 I. Monitorability. As noted above (Para. 4.10), the Borrower was supposed to monitor the impact of the loan but did not do so. NEDA's explanation that doing so was made difficult by the large turn-over of personnel at the time of the February 1986 change of governments is weak. In any case, the Audit (and the Borrower) are left at the end of the day guessing what the impact of the loan really was. That is unfortunate. 5.3 But it is not surprising. What is more surprising is that anyone would have expected that a covenant would have induced the Borrower to undertake the vast and sophisticated effort that would have been required to monitor the project's impact. Perhaps no one did. The Audit just wishes to point out that great effort is required to model the agricultural economy (and the whole economy) well enough to be able to detect the impact of, for instance, a 20Z reduction in import duties on poultry. 5.4 Most agricultural SECALs generate no such monitoring effort. Therefore, although we are left with an idea of what happened (the before-after difference), we certainly do not know the impact of specific interventions which (presumably) would not have occurred without the project (the with-without difference). The Philippines was far from being able to model the situation. Host countries that try fail to produce models that are credible and sensitive enough. One exception is Morocco, and there the effort extended over many years and involved considerable technical expertise, both national and foreign.36 There is no evidence, in the case of Philippine Agricultural SectorlInputes, that anybody, either on the Borrower's side or on the Bank's, seriously considered the effort it would have taken to monitor the project's impact, or how to get that effort undertaken, over what time period, by whom, and at whose expense. As a result, the judgements by the PCR and the Audit that the project was successful are perforce subjective. 5.5 II. Recurrent-expenditure financing. Agricultural Sector/Inputs was based on a "positive list;" as noted in Para. 2.2, it really did finance agricultural inputs and not just any import. The PCR seems critical of this arrangement, noting that a "negative list" would have facilitated disbursements (PCR, Para. 46). 5.6 For the Audit, the positive list was a good thing -- one reason that the loan was useful for agricultural development. As argued above (Paras. 4.3- 6), the Audit is convinced that the first 1/5th of this loan had a major effect in keeping fertilizer and pesticides flowing to the Philippine agricultural sector in the 1984/5 season and helping prevent a major contraction like the one that hit the rest of the economy. 5.7 The Audit feels that the Bank's internal debate on the propriety of financing recurrent expenditures, reported in Para. 2.5, missed the point. After U See OED Report # 7868 of June 1989, the audit report on Morocco - Agricultural Sector Adjustment Loan (#2590). - 18 - much agonizing, the Bank decided that it was all right to finance soy cake imports because they are an input for animal feed and not consumed immediately. Nothing in the Bank's Articles of Agreement excludes financing recurrent items. However, the Bank certainly has a tradition of favoring capital over recurrent expenditures, but the financing in question here was permitted in 1984 because it was "incremental" and has been permitted since 1985 by the relaxed rules for sector adjustment operations." But all of the above is just so much casuistry. Whether a given item is capital or recurrent is merely an accounting distinction. The point ought to be that, without Bank (and ADB, and CCC) financing, Philippine agriculture would have suffered a major blow. If the Audit's judgement is correct, most of the ADB loan and the first $30 million of the Bank loan clearly had a major production impact on the 1984 and 1984/5 seasons. Thereafter, they did not. Since resources are fungible, the last $120 million of Agricultural Sector/Inputs financing was just like a general purpose loan in foreign exchange (except for the policy conditions). 5.8 III. Policy conditionalities. Whether these were "sufficient" or not was queried at Board presentation (see Para. 3. 1). The PCR asks whether they were "substantive enough" fPara. 4.9 above; Para. 44 in PCR), concluding guardedly that the impact was "positive" but probably not "major" (Para. 4.10 above; PCR Para 26). 5.9 Without any quantitative indicators, we are in the realm of speculation. There have been manifold policy changes, mostly for the better, but what would have happened in the absence of the loan, or of the change in Government? As argued above (Paras. 4.11-15), the Audit agrees with the PCR that Agricultural Sector/Inputs, especially the studies associated with it, contributed to Philippine agricultural reform. This contribution was not as great as one might have expected from reading internal Bank documents during the project-processing period. The "wide agreement on policy shifts" (Para. 1.2) was between Bank staff and reformers in the Philippines, but it did not include those with major interest in the status quo. But the Audit thinks that the contribution was as great as one could expect to buy with a US$150 million loan, in short, that the sector dialogue was intelligently conducted and that the sectoral changes being sought were not foregone conclusions being wheeled out to make the project look good but really open policy questions. The Audit can do no better than to echo the PCR: "The lesson is that a major institutional impact " The circumstances in which the Bank chooses to finance recurrent expenditures are set out in Operational Manual Statement #1.21 which, when the project was being processed in 1984, would probably have justified the financing in this case. The expenditures had to be "incremental," that is "over and above the recurrent expenditures which the agency would have to meet even without the project." (Para. 4) As long as there really was an external-payments crisis and project-financed imports were additional to what the country would have imported in the absence of Bank financing (not additional to what it imported the year before), then the soya cake, fertilizer, pesticides, etc. were incremental. Therefore, the financing is justified because of the emergency situation in which a crucial agency needs exceptional assistance to surmount an economic or financial crisis. (Para. 16c) With the revision of January 1985, after the decision was taken, all this became academic; such financing is explicitly permitted for sector adjustment operations (Paras. 17 & 27). - 19 - is unlikely to be achieved through a single adjustment operation." (PCR, Evaluation Summary, p. 5) 5.10 IV. The disbursement lax occurred because the conditions of foreign- payments stringency that inspired the loan disappeared with the INf standby agreement of December 1984 (Para. 3.7). That agreement, plus the subsequent availability of financing for agricultural input imports on more attractive terms from other sources (Para. 3.8), meant that Bank financing was no longer really needed. The Bank, wisely in the Audit's opinion, considered cancellation; the Borrower had reasons for wanting to keep the loan open. 5.11 The PCR's statement that "the delay in loan disbursements was fortuitous" (see Para. 3.3 above; PCR Para. 34) deserves some prominence. Even though the Borrower didn't really need Bank money to import agricultural inputs after early 1985, and even though the Bank was quite anxious to accelerate disbursements, the sector reform dialogue was faithfully pursued during the disbursement lag. Without the disbursement lag, it would be harder to make the case that this loan had any impact on sector reform. 5.12 V. Concertation among financiers. The discussion of project design and implementation above makes the importance of interactions between major foreign financiers quite obvious. The "wide agreement on <daasred> policy shifts" clearly included the Bank, the Asian Development Bank, the IM, and USAID. There is no evidence of working at cross purposes. When implementation begins, however, it becomes apparent that each of the organizations, despite the shared vision of Philippine agricultural policy reform, has its own agenda in, for instance, disbursements. In 1984, despite Philippine farmers' critical need for fertilizer and pesticides, the Bank, ADB and the IMF attempted to maintain parallelism. IBRD and ADB were reluctant to go ahead until the IMF standby was sealed. IBRD stretched out its project processing. After consultation with the others, ADB went ahead with its loan first, financing fertilizer and pesticide needs for the mid-1984 season (Para. 2.6). Then IBRD went ahead and financed the same for the smaller 1984/5 season in advance of the IMF standby (Para. 2.15). While American CCC financing for soybean imports was not available when Agricultural Sector/Inputs was being processed (Para. 2.5), it was available during implementation and, the terms being better for the Philippines than IBRD terms, it did displace IBRD financing (Para. 3.8). There did continue to be concertation during implementation on studies that were of joint interest to ADB, IBRD and US AID. There may have been other concertation but there is no evidence of it in files (Para. 3.14). 5.13 Would more explicit cofinancing, cross-effectiveness for instance, have helped? And if so, would it have been possible? The joint "leverage" of the foreign financiers would, no doubt, have been even greater. The Audit can't say whether greater would have been better or whether there was a realistic possibility of closer collaboration. If the ADB had not gone ahead, approving its loan, and financing fertilizer and pesticides for the main 1984 season, farmers and the agricultural sector would have suffered. Would the enhanced policy-reform clout of the foreign financiers have been worth it? Would the Philippines have been better off? Interesting though it would be to have an - 20 - answer, the Audit feels that the evidence is insufficient and that it has to duck. 5.14 VI. Privatizing rents? Many commentators in the Philippines and in the Bank take their greatest pride from successes in project-promoted liberalizations of the grain trade, especially that of wheat and flour (PCR Evaluation Summary, p. v). Fertilizer trade liberalization was an undoubted success; Philippine farmers pay lower prices much closer to international prices than they used to. But what about wheat and, for that matter, rice? 5.15 Under the old regime, NFA was monopoly wheat importer and used its profit, in part, to subsidize ric:e prices at the consumption end and, in principle anyhow, palay prices at the production end. Government approved opening up wheat imports to the private sector in April 1985, but the price of wheat did not begin to fall in real terms until 1988. The trading and milling firms with which NFA formerly dealt simply kept the oligopsony profits that formerly accrued to NFA and that formerly had been used (in part anyhow) for public purposes. As time went on, however, the high oligopsony profits attracted attention and new entrants, which led to competition, which lowered prices and profits. It all happened just the way it is supposed to happen in the text books, except that the benefits were delayed by from two to six years.3 5.16 For palay and rice, foreign trade has not yet been liberalized but internal trade has. As envisaged in the pre-February 1986 Government's AAA, NFA has reduced its role. NFA seeks to influence prices by announcing floor/ceiling prices and intervening in the market to try to bring the market up/down to these levels. All agree that this stabilization system isn't working. NFA has insufficient finances for the task. It cannot maintain a credible buffer stock. That would be enough to assure that the new system not work. In addition, however, there is evidence that NFA's market operations are overmanned and inefficient, and there are rumors of collusion between local NFA representatives and millers to influence local palay markets in favor of the millers. so As Philippines - Irrigated Agriculture Sector Review summarizes: "... the wheat industry was among the first to be liberalized. The initial impact of liberalization was disappointing, even adverse since NFA's import monopoly gave way to a cartel formed by the existing millers.... Though imports were technically free, the cartel was unwilling to buy from third parties and had little reason to compete among its constituent members. By cooperating on purchasing and hedging decisions they were able to earn monopoly profits. As a result, imports increased only modestly in 1986-87 and domestic wholesale prices rose in real terms then though they were falling on world markets.... Initially, therefore, little appeared to change. As esrly as 1986, however, ... other investors were attracted by the cartel's high profits and plans were finalized to more than double milling capacity. Even in advance of these new mills, the market had become more competitive.... Despite higher import prices, the current wholesale price has remained steady since 1987 (in real terms it declined dramatically).... by February 1991 excess profits had been substantially reduced...." (Volume I, Paras. 3.6-7) - 21 - 5.17 Is the above a cause for worry? Buffer stock stabilization funds rarely work in the world outside the textbook. A number of the AuditIa interlocutors representing the Borrower and the Bank argued that the NFA system that preceded the present stabilization fund hardly helped palay farmers anyhow. * If so, isn't it just as well to just let the free market replace it? 5.18 Maybe so, or then maybe not. By reason of geography, transport costs, and location of rice mills, the Philippine palay market is highly fragmented. The free market that many a palay farmer faces is a single, nearby miller who has an effective monopsony, given the cost of getting the palay milled somewhere else. It would be unreasonable not to expect millers in such positions to take advantage of them. Capital and other costs of entry into the milling business suggest that new entrants will not quickly appear to break these small monopeonies, as they did in the wheat milling case. That is exactly why Philippine public authorities have traditionally tried to intervene in these markets. About all the Audit can conclude is that there is a valid case for intervention to create more competitive markets under these circumstances. However, how to intervene effectively and efficiently is a matter of debate because experience shows few examples of successful intervention in such 40 circumstances. 5.19 VII. The project consciously promoted cantralized agricultural- policy making. A number of covenants had that specific intent. It was one of the purposes for which financing for technical assistance was provided. 5.20 The results have been modest. The one facet of the AAA that is reported in the PCR as not implemented (Annex 2) is "initiate a long-term institution-building program to make the new structure <of public agricultural institutious> fully operational." Department of Agriculture is now represented on the boards of various agricultural parastatals, e.g. the Sugar Regulatory Administration and PCA. Government intervention in the sector, however, is still quite fragmented. There is still little evidence of effective planning. 41 People still joke about the Department of Gardening. Someone reading the project documentation might conclude that this state of affairs is unfortunate. The Audit does not. The Audit feels that we cannot tell whether more centralized planning would be beneficial for the agricultural sector or not. 5.21 VIII. Technical assistance. Last and perhaps least, the Audit notes that almost none of the loan funds earmarked for technical assistance were spent. (Para. 3.12) These were meant to permit the Borrower to recruit consultants 3 NFA does not agree and argues that farmers support its position. See Attachment 2, Para. 5. 4o NEA agrees (Attachment 2, Para. 6), noting, however, that it, unlike the Audit must quickly come up with a workable alternative. 1 NFA disagrees, arguing that there is already too much centralized planning which, inter alia, impedes NFA from responding quickly. See Attachment 2, Para. 7. - 22 - internationally as might be needed to carry out the six studies as well as to rationalize and consolidate the agricultural public investment plan and the consolidated budget for that plan. As we have seen (Paras. 3.2-3), the Borrower carried out the studies either with its own resources or with funds from the ADB grant, which was available before the Bank loan became effective. The covenant on agricultural public investment was technically complied with, but never amounted to much, something the Audit refuses to get too worried about (Para. 5.20 above). While the carrying out of the studies by the Borrower and by institutions that might not have been totally independent of the institutions being studied was a cause for concern ex ante, in the event, this does not seem to have caused a problem. The studies, done essentially without Bank-financed technical assistance, seem to have been quite satisfactory for highlighting major issues and for promoting reform. Therefore, the failure of the Borrower to use the loan funds set aside for technical assistance was not a problem. AtWWW* * ** ***t** ** *t * - 23 - COMMENTS FROM THE BORROWER ATTACHMENT 1 REPUBLIC OF THE PHILIPPINES DEPARTMENT OF AGRICULTURE . FERTILIZER AND PESTICIDE AITHORilY 6TH FLOOR, RANA SULAYMAN SUILDING BENAVIDEZ ST., MAKATI, METRO MANILA December 10, 1991 T 0 MR. GRAMM DOALDSON Division Chief, Agriculture Human Dev't. Division, GED FAX # (202)477--6391 FR 0 M i HR. LUIS T. VILLA-REAL, JR. Executive Director III Fertilizer and Pesticide Authority FAX # 8181363 Fi E t PPAR-I1RD LAN 0 2469 The following are our comments on.the subject report; 1 Paragraph 3.5, footnote #21 - The conflict-of-interest problem ties already been resolved since 1986. 2) Paragraph 3.6 - The additional payment being referred to is tho P10/bag, called the "capital recovery component (CRC)", which waa added to all fertilizer sales in order to rehabilitate Planters Products Inc. (PPI). This was part of the commitment of the Marcos government under a Letter of Undertaking to PPI creditore. The CRC has already been abolished. 3) Paragraph 3.10 - The statement which reads "The head of NFA was also the head of PhilPhos" should read as follows The head of FPA . . . PhilPhos. 4) Paragraph 4.6 - The disbursement from the ADB loan amounted to US* 117.3 Million. Please communicate with us if you have further requirements. ,JR. Executive Director III cco Mr. Thomas Allen Resident Representative World Bank, Manila TELS.: 09-50.01 TO 03 P. O. BOX 1049 TELEX NO. 23170 FPA PH - - ATTACHME4T 2 COMMENTS FROM NATIONAL FOOD AUTHORITY -PageTof 3- December 11, 1991 MR. GRAHAM DONALDSON Division Chief Agriculture and Human Development Division Operations Evaluation Department- World Bank Dear Mr. Donaldson, Re: NFA Comments on the Draft Project Performance Audit Report (Loan 24&9-PH) As you requested we are sending you our observations and comments (attached) on the above-mentioned report. We hope the final report will take such comments into account. Sincerely, JOrM. AT Ad inistrator-NFA ATTAChMENT 2 -26- Page 2 of 3 NFA COMMENTS ONIHE DRAFT PROJECT PERFORMANCE AUDIT REPORT (PPAR) PREPARED BY THE WORLD BANK'S OPERATION EVALUATION DEPARTMENT (WB-DED) ON THE AGRICULTUR'. SECTOR/INPUT PROJECT (LOAN 2469-PH) 1. The statement in paragraph 1.5 of the main report states: " . the existence of multiple, quasi- independent agencies with power to regulate things - especially trade - has created many opportunities for rent-seeking, and in some cases for rent-finding. The power of . . . and the interest of millers and grains traders in corrupting HFA are only the most obvious examples." This is completely unsubstantiated by any factual presentation in paragraphs 1.1, 1.2 and 1.3 as well as paragraph 1.4 to which the above quotation is being related to. The above-quoted statement, which is reiterated in paragraph 4.14, referring to the matter as "reported collusion", and in paragraph 5.16, referring to the same as "rumors of collusion," is highly unbecoming of an institution such as the WB. It is regrettable that a rumor has indeed become a basis for a conclusion. Unfortunate still is WB-OED's willful use of the "rumors" to spice-up its report. Certainly, the World Bank itself will be, at the very least, bothered if a rumor is spread around that the International Competitive Bidding, (ICS) is just a show and that in reality favored consultants/suppliers get the juicier contracts. 2. On page 1 of the report, paragraph 3.10, there is a need to revise the fourth sentence, to read: " the heao of FPA was of 41 also. . . " instead of "the head of NFA was also . . . because the NFA head at that time was never connected with Philphos. 3. On page 26, paragraph 4.13 it is stated that "theoretically, foreign trade in rice and maize is open to the private sector." This statement is inaccurate since foreign trade for rice was never opened to the private sector either in theory on in actual practice. Moreover, foreign trade for maize was actually opened to the private sector, not just theoretically. 4. On page 27, paragraph 4.14 is a statement that reads "Private procurement of palay is now common." This statement implies that private procurement of palay was not common, previously. This is erroneous since the private sector has traditionally absorbed about 90% of all palay - 27 - ATTACHMENT 2 Page 3 of 3 output since rice trading began in the Philippines. Appropriate corrections must be effected here as well as with the second statement in paragraph 5.16. Also in this same paragraph (4.14) where it says that stabilization by buffer stock is manifestly not working because of lack of funds, it should be noted that the fund constraint was a deliberate effort and a direct response to the pressure to eliminate government in the rice trade. This is clearly a case which can be likened to a doctor blaming the patient for his deteriorating health when in fact such deterioration is caused by the doctor's withholding or decreasing the dosage of medicine for the patient. 5. On page 36 paragraph 5.17 a statement reads, thus: "the NFA system that preceded it hardly helped palay farmers anyhow." Comment: If that was the -case, how come the farmers themselves are demanding the continued existence of NFA and the continuance of its price support program? 6. The NFA wholeheartedly agrees with the statement- in paragraph 5.18. However, it should be noted that while some individuals have the luxury of time to debate as to which form of intervention is most effective and efficient, NFA will have to face reality and quickly come-up with a workable alternative. 7. On paragraph 5.20, it states that "there is little evidence of centralized planning 'and that' people still joke about the Ministry of Gardening." Comments: as far as NFA is concerned this is not true. In fact everything suggest that there is too much centralized planning. NFA*s policies, programs and activities, undergo very thorough scrutiny by the Department of Agriculture - from the smallest unit (Planning Office) to the highest level of management (DA MANCOM - Management Committee). Added to this is the fact that the head of NFA Council is the Secretary of the Department of Agriculture. This over centralization has in fact negatively affected NFA's quickness in responding to certain situations. A good example is the debate as to whether there is a need to import or not. Since the DA is directly in charge of production, its endorsement of a recommendation to import is virtually an official certification of a shortage or in other words, an admission of a production failure. And so by the time a decision is finally made, the situation may have already changed. - END - - 29 - ATTACHMIENT Page 1 of 3 A DIFFERING ASSESSMENT FROM A WORLD NK STAFF MEMER The main objective of the program of policy and institutional reforms supported under the loan was to remove distortions that dampen investment incentives, as clearly outlined in the Agenda for Growth. At the time when the loan was considered, Government controls on input and output prices, as well as, on the cost of money were pervasive. We estimate that government controls affected about 602 of the gross value added in agriculture--excluding forestry and fisheries (in particular rice roughly 23.52, corn 8.8%, coconuts 5.22, sugar 2.72, livestock 9.12, and poultry 12.3% of value added in the sector in the first half of the 1980's). Controls also distorted input prices, in particular those of fertilizers and of animal feeds. Agricultural credit programs were highly subsidized and the scarce resources were being allocated to programs that had a high political payoff to those in power. At the time, price controls and an institutional framework designed to control the distribution of key commodities through monopolistic arrangements dampened investment incentives in agriculture and helped transfer resources from the farming community to those who controlled the key corporations (e.g., the NFA, NASUTRA, UNICOM, FPA, etc.). The system was designed to extract rents from farmers and the public sector for the benefit of a privileged few officials. Against this background the reform strategy was evident: (i) remove price controls and trade restrictions, in particular quantitative controls; (ii) dismantle the monopolies; and (iii) drastically reduce the flow of financial resources to programs that contributed to distort the market mechanism. In this regard, the critical questions are: (1) whether the operation effectively addressed these problems; and (2) what were the results? A careful inventory of the program of action shows that the project addressed the main distortions in the input and output market for agricultural goods. The PPAR examined some of the policy changes but understated their impact in some instances by omission and unfortunately in others by commission. For example, in the case of rice, the PPAR quotes the irrigation study to support the view that the policy changes did not affect prices. The hypothesis being that domestic rice prices have been roughly in line with world market prices, although statistically true, the conclusion is analytically incorrect. The reference in the irrigation study is to a price trend spanning over two decades, the 1967-86 period (Mr. Intal's study). Statistically, the prices will be roughly in line over this long perion because the biases in the 1972-83 period are offset by opposite changes in the remainder of the period. However, we all know that it does not take long for a bias in the pricing policy to inflict major damage on producers or consumers. When the bias is against the producers, the effects can be financially devastating to the rural economy, as it was the case in the Philippines at the time the loan was considered. In fact, on closer examination, the data referred to, reveals that the project had a major impact on rice price policy. Whereas in the period immediately preceding the project, domestic prices were significantly below world market prices. In subsequent period&, domestic prices rose slightly above world market prices, as should be the case for an - 30 - ATTACHMENT 3 Page 2 of 3 importing country. This was not by accident. It was a deliberate policy change sought in the program of reform. By negating this important change and by arguing that the buffer price system instituted by the NFA (a secondary objective) was not effective, the PPAR underestimates the significance of the change. During appraisal, the mission sought to convince the government that a market intervention through a buffer stock operation would be more effective and economically sounder than price controls. Buffer stock operations are market based and as a result rice prices are now basically determined by market forces rather than by decrees. The PPAR as well as the PCR does not give enough credit to the project for the changes in the policies affecting the market mechanism for fertilizer. Before the project was approved by the Board, domestic prices of fertilizer were anywhere from 44% to 110% above the import price. Nobody can deny, however, that as a result of the negotiations between the Government and the Bank, a levy on fertilizer sales was removed and the import and distribution oligopoly dismantled. Once again, the main objective was to remove distortions which in this case made a vital agricultural input more expensive than it would be under a less restricted market. Fertilizer prices are now determined in a more competitive environment without the burden of a levy, mandated prices, and/or quantitative controls on imports. An inefficient domestic fertilizer industry has been restructured to the benefit of farmers. In the case of agricultural credit subsidies, the PPAR also does not give enough credit to the project for a fundamental policy change achieved under this operation. As a result of the program of reform, the Central Bank agreed to set it rediscounting rate for agriculture at about the same level as other lines. Prior to the project, the Government channeled through the Central Bank huge levels of resources to the sector at highly subsidized rates, and as should be expected at dismally low recovery rates. The change laid the foundation for a subsequent elimination of all subsidized credit schemes in the sector. This policy change was particularly significant from a fiscal and monetary point of view. A major leak of resources was plugged. The PPAR discussion of the policy changes in the poultry and pork subsector focuses mainly on the changes in the tariff level. Again, this is misleading and unfair. The analysis focuses on the secondary rather than the primary objectives. The main focus of the project was on the removal of price controls on poultry and pork prices and in the removal of quantitative controls on imports. As a result of the project, the price controls and quantitative import restrictions were lifted. Although we also sought to reduce the tariff, this was initially set at a high level. It was certainly a change in the right direction. In any case, under the trade liberalization program of the government, a tariff of 50% was automatically set for items being liberalized. From the policy perspective, both of the changes achieved were sound. On the institutional side the benefits are also grossly understated. While it is true that the changes have not had the desired effect yet, it is also true - 33 - ATTACHMENT 3 Page 3 of 3 that the institutional changes agreed under the project facilitated the dismantling of the infamous coconut and sugar monopolies and the streamlining of the wasteful NFA (Government subsidies to the NFA had reached a level of over $700 million per year in early 1980s). The IMF helped the Bank achieve these changes not by accident but by design. WE should not forget that a Bank Staff member, fully familiar with the project, was assigned to the IMF missions that negotiated the changes with the Government. Moreover from today's perspective, the institutional changes achieved seem to be working to improve the over all effectiveness of the public apparatus in the agricultural sector. Decision making is less dispersed than it was before as the Department of Agriculture is now present and in some cases leading the decentralized institutions. Also the decentralized sector does not constitute anymore a major financial burden to the national government. The changes have been important from the fiscal perspective and they have helped restore macroeconomic balances. The situation is evolving. It is not yet ideal but progress has been made. In conclusion, I think the PPAR should set the record straight. The impact of the project was much larger than acknowledged either in the PPAR or the PCR for that matter. As noted above the impact of the project has been understated by omission (by not focussing the analysis on the policy changes sought and attained) and by denial (by stretching the fungibility argument and by focussing on the secondary objectives). I must stress, however, that it is not critical to give the credit to the Bank for what has been accomplished. The credit should go to the Filipinos. The truth of the matter is that effective policy and institutional reform can only be accomplished if a committed group of reformers can success Ally challenge the vested interests of the establishment, irrespective of how well articulated the conditions are described in a loan agreement. This, the Filipino reformers with whom the Bank worked accomplished with distinction, not only during the last couple of years of the Marcos administration but also during the first couple of years of the Aquino administration. These people deserve our recognition and praise. As for the Bank, we should only recognize its catalytic role, in particular its timely intervention to foster policy change--nothing more, nothing less. This probably should be its main role in the process of structural reform anyway. IBRD 22431 1- 1lin- CLASSIFICATION OF PROVINCES BY GEOGRAPHICAL REGIONS I ILOCOS Vi WESTERN VISAY PHILIPPIN ES 2t 1 ilics Norte 38 Aklan 20 2 ltocos Sur 39 Capil 3 taUn'On 40 Antque BATANES 4 Panigasinan 41 ali10 COROILIERA ADMINISTRATIVE 42 NegOs Occidental REGION (CAR) 43 Guimaras P s ~ Vil CENTRAL VISAYAS <IProvince Capitats 6 Kalinga-Apayac 44 Cebu 7 Mountaln Provinc 45 Negros Oriental National Capital 8 ifugaO 46 Bohol 9 sngue47 SIQUI1Or Province Boundarles CAGAYANVALLEY Vill EASTERNVISAYAS 10 Baa 48 Northem Samar 6 Region Boundarles i1 Cagayan 49 Wester samar 0 1 12 Isabela 50 Euar R T sara n 13 NuevaVcya Tauk \ International Boundarles 14 qulrno 52 southern tøyte Ill CENTRAL LIZON 53 Biliran2 15 Nueva Ecija IX WESTERN MINDANAO 7 n 1 16 Tarlac 54 Zamboanga del Norte 0 e2 17 Zambalar ss Zamboanga del Su a FOr LOMMts 0 100 200 00 18 Pampanga 36 1asil1n 1 a b 19 Batan 57 Sulu 13 14 20 Bula~a 58 TawitawI 15 NATIONAL CAPITAl. X NORTHERN MINDANAO REGION MNCR) 59 Surlgwo del Nørte0 4 11V SOUTHERN TAGALtoG 60 igui 1 21 21 Aurora 61 Agusan del Nort1 50 16 raZlac 22 Quezn 62 Mbslma Oriental U Z 0 23 Rie 63 Msams OccIdental 17 e 24 Cavite 64 Bukdnn 0 t 25 Laguna 65 Agusan del Sur 26 Batangas XI SOUTHERN MINDANAO 2 a 27 Marinduque 66 Surigao del Sur 0 cru 28 Mfndoro Oriental 67 aava* Oriental 29 Mmador Occidental 68 Davao del Nørte 26 232 0t 30 Rombion 69 Damrn del Sur aCATANDUANES 31 Palawan 70 South Cotabato in V SICOL XI CENTRALMINDANAO 32 Camarlnes Norte 71 ~anae del Norte 33 cantarines Sur 72 Lanae del Sur5 34 Cantanduanes 73 North Cotabao 3s Albay 74 Mv 29 36 Soogon 75 Sultan Kudarat MINDQR 37 mashateA AD Ri 12 40 1 39 SOULTH CY///NA r1 VI 4 41 SFA PAN Y PALAA v l S A y2 44 puerto Princea 4E S -31 4 Aa n or 60 0 andas 0 X B aW/1c l b a n g6 7 3 46 N 7 -Nr NN PH#UNEP-I99S