Philippines - Second Irrigation Operations Support Project (IOSP II)

D_ocmt of The World Bank FOR OICEAL USE ONl AM/ S4 O 7-P+ N. rg P-6002-P NDORAU AD UCNEIDTIOl OP THE PRESILDEN OFF T INTESRNATIONL BANM FOR REMOMS1JCTIOR hEll DEVELOIPT ECUTIVE DIRECTORS ON A PROPOSED LOAN IN TEII AMOuNT BQuIVALENT TO US$51.3 MLLION TO THE R1LIC OF THE PHILIPPINES FOR A SECOND IRRATION OPEuTIONS SUPPORT PROJECT APRIL 28, 1993 ,', . L j 4 ,i- r ' ' I 8 - FThis domnt ha a resticted distributon and may be aset b,y ripient only in the pefoman of dir eoffaical duties. its contents may not otberwise be dilosed without World Bank authorization.  CIRRENCY EOUIVALENTS (as of December 1992) Currency Unit - Philippines Peso (P) P 1.00 - US$ 0.039 US$1.00 - P 25.5 WEIGHTS AND MEASURES 'jetric System ABBREVIATIONS AND ACRONYNS IA - Irrigators' Association ISF - Irrigation Service Fee 1OSP - Irrigation Operations Support Project NIA - National Irrigation Administration NIS - National Irrigation System GiN - Operation and Maintenance FISCAL ER January 1 - Decembsr 31  FOR OMCIAL USE ONLY PHILIPPIN SECOND IRRIGATION OPERATIONS SUPPORT PROJECT Loan and Project Summarv Borrower: Republic of the Philippines Amount: US$ 51.3 million equivalent Terms : Repayable in 20 years, including 5 years of grace, at the Bank's standard variable interest rate. Financing Plan: Local Forei Total IBRD 34.8 16.5 51.3 Government 4.8 - 4.8 NIA 13.5 - 13.5 Total 53.1 16.5 69.6 Economic Rate of Return: 17X Staff Appraisal Regort: Report No. 11603-PH Ka: IBRD No. 24576 This document has a restricted distribution and may be used by recipients only in the perfornance of their ofilcial duties. Its contents may not otherwise be disclosed without World Bank authorization.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF THE PHILIPPINES FOR A SECOND IRRIGATION OPERATIONS SUPPORT PROJECT 1. I submit for your approval the following memorandum and recommendation on a proposed loan to the Republic of the Philippines for the equivalent of US$51.3 million to help finance a Second Irrigation Operations Support Project. The loan would be at the Bank's standard variable interest rate, with a maturity of 20 years, including five years of grace. 2. Backgrou. Rice self-sufficiency has been the most important goal in the food security program of the Philippine Government. Irrigation development has been the main instrument to achieve this goal. Irrigation systems now serve about 1.5 million ha and produce 70 percent of all the rice in the Philippines. 3. The Philippines has three types of irrigation systems: 165 national systems built and operated by the National Irrigation Administration (NIA); 6,200 communal systems, owned and operated by farmer groups, and often built with financial and technical assistance from NIA; and several privately owned and operated pump systems. The national systems account for about 431 of the total irrigated area. NIA manages the facilities and charges farmers an irrigation service fee (ISF). The communal systems account for about 471 of the irrigated area. NIA helps organize and train irrigators' associations (IAs) to manage and operate the systems. The privately-owned pump systems account for about 101 of the irrigated area. 4. Though ETA is an autonomous corporate entity, it does not finance investment projects from its own resources or loans. All investment programs are financed by the Government. However, NIA is responsible for the operation and maintenance (06M) of national irrigation systems. The O&M is covered by NIA's ope'rating budget, which is financed principally from ISF collections, management fees charged to the Government for the design and construction supervision of irrigation projects, and rentals of construction equipment. Any change in ISF rates is approved by the Government, and management fees depend on the level of the investment program, which has declined in recent years due to the Government's financial constraints. 5. Because of inadequate maintenance resulting from a shortage of funds, irrigation infrastructure and the quality of irrigation services provided to farmers on the national systems has deteriorated. This, in turn, has adversely affected NIA's fee collection performance. To address this problem in a cost effective manner, NIA adopted the same beneficiary participation approach as on communal systems, that is, to develop the IAs and provide them with the training and incentives to assume an increased level of responsibility for system ON. 6. NIA formulated a nine-year Irrigation O&M Improvement Program in 1986. In mid-1988, the Bank helped finance the first phase of this program through the First Irrigation Operations Support Project (IOSP I, Loan 2948-PH) with a $45.0 million loan (this was later reduced to $23.5 million when concessional financing from USAID and OECF became available). The project has been completed and has yielded measurable benefits: (i) the average cropping intensity rose from 134X in 1987 to 1401 in 1991; and (ii) ISF collection improved from 481 of current  - 2 - billings in 1987 to 60X in 1991. The economic rate of return (ERR) of the project is re-estimated at completion at about 21 percent. 7. Lessons Learned and Incorporated. The project design incorporates the following important lessons learned from the IOSP I: (a) some lower-priority rehabilitation works could have been avoided if a strategy of cost-effective rehabilitation and greater participation of water users had been adopted; (b) increased ISF collection indicates that improved services induce water users to pay ISF dues more readily; (c) system components operated by the IAs appear to be generally in better shape than those operated by NIA without beneficiary participation; (d) training in water management should be continued; and (e) the system for monitoring improvements in water deliveries was deficient and needs close attention. 8. Rationale for Bank Involvement. The Bank has been actively involved in the development of irrigation in the Philippines to increase rice production and alleviate rural poverty. Support for a follow-up second phase to IOSP I is essential to consolidate the progress made so far and to ensure sustainability of the improved irrigation O&N services. Bank support would also be invaluable in sustaining NIA's pioneering approach to participatory irrigation development which has drawn considerable international attention. The project would greatly assist in implementing the Bank's country assistance strategy for the Philippines. 9. Country Assistance Strategy. The Bank's country assistance strategy for the Philippines revolves around five themes: (a) maintaining the stabilization program; (b) deepening the structural adjustment program; (c) deepening the sectoral reform programs; (d) alleviating poverty; and (e) obtaining greater effectiveness in utilizing existing aid commitments. The Bank's investment lending emphasizes infrastructure (including irrigation), poverty-alleviation and environmental protection and conservation projects. With regards to agriculture, the Bank's strategy focuses broadly on sustainable rural development, including improving support services, rural finance, irrigation operations, and natural resource management. Expansion of irrigated area coupled with rehabilitation and improvement of existing systems are considered keys to growth in crop production. The project supports this strategy. 10. Project Objectives. The project aims to achieve sustainable improvement in the operational efficiency of the national irrigation systems (NIS), thereby increasing agricultural production (mainly rice), expanding small farmer income and rural employment opportunities, and contributing to rural poverty alleviation. 11. Proiect Description. The project would finance, over five and a half years, the second phase of the program launched under IOSP I (para. 6) and benefit about 640,000 ha of NIS area through: (a) Systems Improvement and ReDair (501 of project costs): improvement of 18 NIS, urgent structural repairs in another 14 NIS, construction of three sediment exclusion and a few improved water control structures on a pilot basis, and erosion prevention measures in critical areas; (b) Imroved O&.M (36% of project costs): continued support of the improved system-level O&N services and of measures to ensure the sustainability of these services: (i) maintenance in 1992 real terms of the annual  - 3 - O&N expenditure of P 822/ha on NISs; (ii) increase in ISF collection from 60X of current billings at present to a target 70% by the end of the project; and (iii) generation of savings by NIA through increasing participation of the irrigators' associations (IAs) in system O&M; (c) Inatitutional DeveloRment (131 of project costs): (i) strengthening of existing IAs, establishment of new lAs, and enhanced financial and management training of the IAs to facilitate progressive turnover of system O61 to them; (ii) strengthening of NIA through improvements in the ISF collection process; (iii) staff training in O&, appropriate engineering design techniques, farmer training techniques, etc.; (iv) technical assistance for studies, IA development work and staff training; and (v) provision of high priority O&M equipment and materials; and (d) Strengthened 4fricultural SupDort Services (1X of project costs): research and extension, farmer training in integrated pest management, and promotion of IA-based seed production. 12. Prolect ImRlementation. NIA will be principally responsible for project implementation. Its Systems Management Department will handle project activities through a full-time project coordinator. The Department of Agriculture will be responsible for the agricultural support services component. The total project cost, including physical contingencies and expected price increases, is estimated at about US$ 69.6 million, with a foreign exchange component of US$ 16.5 million. The proposed Bank loan of US$ 51.3 million would finance about 75X of total cost excluding taxes, including 1001 of the foreign exchange requirement and about 661 of local costs. The remaining project cost of US$ 18.3 million would be funded by NIA (USS 13.5 million) and the Government (US$ 4.8 million). To ensure continuity of the improved O&, eligible incremental O&M expenditures of up to US$ 3.0 million, incurred after January 1, 1993, would be financed retroactively. A summary of project costs and the financing plan is given in Schedule A. Amounts and methods of procurement and the disbursement schedule are shown in Schedule B. A timetable of key project processing events and the status of Bank Group operations in the Philippines are given in Schedules C and D, respectively. A map is also attached. The Staff Appraisal Report, No. 11603-PH, dated April 22, 1993, is being distributed separately. 13. Project Sustainability. The improved irrigation services to be achieved under the project would be sustainable (entirely financed by NIA) if the ISF collection and beneficiary participation in O& increase as envisaged. In 1991, ISF collections financed about 671 of the total O&M expenses of NIS of P 471 million. In 1999, after the end of the project, ISF collections are expected to cover at least 951 of the projected OM expenses of P 795 million in current terms. Savings generated by NIA through increasing beneficiary participation in O&M and income from equipment rental would be sufficieu.t to cover the gap of 5X in financing of O&. An increase in ISF rates to cover the gap is not considered feasible at this stage since about 701 of farmers in irrigated areas are at or below the rural poverty threshold. The substantial scope for improvement in ISF collection efficiency should first be utilized, as is envisaged under the proJect. However, a review of and dialogue on ISF rates and efforts to reduce NIA overhead costs would be continued during the project period to further improve project sustainability. The long-term objective is to finance the improved O&M services entirely from ISF collections. Taking into  - 4 - account recent improvements in ISF collection performance and the current 60X collection level, an annual increase of about 1.5X during the next few years was judged to be realistic and achievable. Accordingly, the target ISP collection level, to be achieved under the project, has been set at 70X. NIA would, however, make every endeavor to achieve a co'lection level close to 752, which would provide full O&K financing by the year 1999. 14. Asreed Actions. Prior to loan negotiations NIA furnished to the Bank for review the Work Program for the first twelve months of the project, with detailed engineering, System Operation Plans in respect of systems to be improved during the first twelve months, cost estimates, sources of funds, draft bid documents for all equipment procurement, and draft terms of reference for all consultancies. These were found to be satisfactory. During negotiations, Government and NIA confirmed that: (a) NIA will apply agreed selection criteria and prepare improvement and operation plans for participating NIS, in consultation with beneficiaries, and will submit detailed annual work programs and operation plans for Bank review; (b) NIA will budget severance/retirement costs for workers affected by IA takeover of O&M responsibilities; (c) the Bank will review the proposed criteria for NLA's incentive scheme for its staff; (d) lIA will prepare a plan by end 1993 to improve ISF collection efficiencies; (e) NIA will submit a proposal by October 1993 to modify the Irrigation Xanagement Information System; (f) NIA will submit annual statements of actual and projected 0c&M cashflow; (g) GOP/NIA will maintain OM expenditure at agreed levels; (h) NIA will establish Quality Control Teams and follow up on proposed actions; (i) NIA will ensure that approved expenditures for systems improvement are not exceeded without prior approval; and (j) NIA will submit biannual progress reports. 15. Environmental Asoects. The project is not expected to have an adverse environmental impact. Since the project provides for improvement of existing irrigation systems, no major new earth movement, water regulation or storage, deforestation, or drainage will be involved. In project-related erosion-prone areas, the project will provide for erosion control and stabilization using vegetative erosion prevention measures, such as vetiver grass and leguminous shrubs. Specific environmental protection measures will be incorporated as needed in the design of individual system improvements. Fertilizer and herbicide application would be based on guidelines issued by the Philippine Fertilizer and Pesticide Authority, which are consistent with Bank guidelines. 16. Project Benefits. Project benefits include increased rice production and reduced imports of about 100,000 tons p.a. at full development in year 2000, with consequent foreign exchange savings of about US$30 million in current prices. It would alleviate rural poverty through increasing incomes and employment opportunities for about 460,000 low-income farm families. It would also benefit NIA through improving its institutional and financial capacity to deliver irrigation services; local communities through increasing their participation in O&M activities, thereby reducing their dependence on public funds and improving the quality and reliability of irrigation services; and the environment through the promotion of sustainable farming practices. The project would also encourage more active participation of women in the IAs and the project impact on women will be monitored carefully. 17. Lisks. The proposed project does not face any major risk as it involves improving existing irrigation systems and sustaining their maintenance, and incorporates lessons learned from the first phase project. The main  - 5 - potential risk would be the delays in 1'uplementation due to inadequate and delayed fund releases by the Government and inefficient procurement. To minimize these risks, agreements were reaahed at negotiations on funding, programs of work and procurement documents. 18. Roomendation. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve it. Lewis T. Preston President Attachments Washington, D.C. April 28, 1993  -6- jEcheduleA PHILIPINES SECOND IRRIGATION OPERATIONS SUPPORT PROJECT Esimaggd Cgsts and FiMncing Plan Estimated Colt: lgcal Egreigh $Tgal ---------- US$ Million- .- Systems Improvement and Repair (a) Systems Imp. 15.2 3.0 20.2 (b) Urgent Repairs 4.1 2.2 6.3 (c) Erosion Control Works 0.8 0.1 0.9 (d) Silt Excluders- and Improved Water Control Structures 1.1 0.6 1.7 Incremental O&M 20.0 2.2 22.2 Institutional Development (a) IA Development Program 1.5 0.1 1.6 (b) Technical Assistance 0.5 0.5 1.0 (c) Parcellary Mapping for ISF Collection 0.2 0.1 0.3 (d) NIA Staff Training 0.7 0.2 0.9 (e) Equipment and Materials 1.0 3.1 4.1 Agricultural Support Services 0.7 0.1 0.8 Total Base Cost 45.8 142...Q Physical Contingencies 2.4 1.0 3.4 Price Contingencies 4.9 1.3 6.2 Total Project Cost La 53.1 16.5 69. Financing Plan: IBRD Lk 34.8 16.5 51.3 NIA 13.5 - 13.5 Government 4.8 - 4.8 Total OA ta Including taxes and duties of about US$ 1.2 million. /b Including up to US$ 3.0 million of retroactive financing.  -7- Shgeduile Page 1 of 2 PHILIPPINES SECONp IRRIGATION OgERATIONS SUPPORT PROJECT Procurement Df tUS$ million) Expenditure Category ICB LCB Other Total Cost Improvement and repair works - 14.4 21.6kY 36.0 (13.4) (20.1) (33.5) Incremental O&M - 6.2 18.5W 24.7 (2.4) (7.0) (9.4) Equipment and Vehicles 3.6 1.0 - 4.6 (3.2) (0.9) (4.1) IA development, training, 4. 34V 4.3 mapping, and technical (4.3) (4.3) assistance Total 3.6 21.6 44.4 69.6 Z3.2) (1-67) (31.4) (51.3) IV Includes physical and price contingencies. Figures in parentheses are amounts to be financed by the Bank. Y Through force account. L/ US$12.3 million through force account, US$6.2 million through piece-work by farmer groups. sv IA development, training and mapping (US$3.2 million) will be accomplished by NIA and technical assistance (US$1.1 million) through consultant contracts.  8- Page 2 of 2 PSILIPPINES SECOND IRRIGATION OPERATIONS SUPPORT PROJECT Disbursems=t Category Amount X of Expenditures (US$ million) to be Financed (1) Improvement and repair works 33.5 93X (2) Equipment and vehicles 4.1 1001 of foreign expenditures, 1001 of local ex-factory cost and 80X of local expenditures for items procured locally. (3) Technical assistance, IA 4.3 1001 development, training, and mapping (4) Incremental operating and maintenance costs 9.4 80X - from January 1, 1993 501 - from January 1, 1995 201 - from January 1, 1996 Total 51.3 Estimated IBRD Disbursement Bank FY 1994 1995 1996 1997 1998 1999 ----US$ million----------------- Annual 6.0 9.0 11.0 12.0 9.0 4.3 Cummulative 6.0 15.0 26.0 38.0 47.0 51.3  9- Sgd2dul m PHILIPPINES SECOND IRRIGATION OPERATIONS SUPPORT PROJECT Timetable Qf Key Processing Events (a) Time taken to prepare : Two years (b) Prepared by : National Irrigation Administration (c) First IBRD mission : February 1991 (d) Appraisal mission departure December 1992 (e) Negotiations April 5 - 7, 1993 (f) Planned date of effectiveness September 1, 1993 (g) List of Relevant PPARs/PCRs: Loan/Credit No. Project PPAR/PCR Date Loan 637-PH Upper Pamganga River Irrigation Project June 1980 Loan 984-PH Aurora Penaranda Irrigation Project June 1983 Loan 1080-PH Tarlac Irrigation Systems Improvement Project December 1985 Loan 1367-PH Jalaur Irrigation Project December 1985 Loan 1554-PH Magat River Multipurpose Projects, Stage I I Loan 1567-PH Stage II ] June, 1989 Loan 1639-PH Stage III ] Loan 1639-PH/SAP n Stage III, Special Action 3 Program 3 Credit 790-PH Rural Infrastructure Project June, 1989 Loan 1227-PH Chico River Irrigation Project June 1989 Loan 1414-PH First National Irrigation Systems Improvement Project May 1992 Loan 1526-PH Second National Irrigation Systems Improvement Project May 1992 Loan 1809-PH Medium Scale Irrigation Project (PCR) December 1992 Loan 2173-PH First Communal Irrigation Development Project December 1992 (PCR) This report is based on the findings of a Bank appraisal mission to the Philippines in December 1992, comprising Messrs./Mmes. C. Gunasekara (Civil Engineer) and S. Husain (Economist), EhlAN, and I. Naor (Irrigation Engineer), R. Dy (Economist), E. Boerema (Agriculturist) and N. Raby (Sociologist), Consultants. Peer reviewers were Ms. L. Bennett (UID Specialist) and Messrs: J. Cunningham (Irrigation Engineer), and Y. Choi (Agriculturalist). Mr. C. Madavo (Director, EAl) and Ms. Pamela Cox (Chief, EAlAN) have also endorsed the project.  - 10 - d 0 THE STATUS OF BANK GROUP OPERATIONS IN THE PHILPPIMNES A. STAEMT OF LAN LOANS an IDA CREDm I/ (As of March 1, 1998) Loan or Amount (US$ a)IIIon) Credit Fi"sal (100 cancel latlon,0) Number Year Eorrower Pure Irni IDA eUndle6bured One hundred and two loans and seven credits fully disbursed 42906.90 171.18 Of whleh SECALS, SAL. and Program Loans 2297 1981 Rep. of the PhiIlppine Envtronment A Natural RUsource Mgt. O.00 1908 1081 Rep. of the Philippines iAL I 199.90 226 108m Rep. of the Philippine SAL II 802.2t 2469 l06 Rep. of the Phtlippneos Agriculture Sector In pts 160.00 2787 1997 Rep. of the Philippines Economic Recovery Program 800.00 2906 198 Rep. of the PhilIppines Program for Govt. Reform 200.00 Subtotal TT U a M.U 2392 1092 Rep. of the Philippine Second Vocational Training U .00 U8.64 2418 1084 ReP. of the PhiIlppines Highways V 102.00 81.00 2486 1904 Rep. of the Philippines Muntcipal Development 40.00 6.82 8876 199O Rep. of tho Philppines manila Water Oistribution 88.00 8.84 2716 1066 Rep. of the Philippine Rurnl Road. II 62.00 86.70 2628 1997 Rep. of th Philippine Provincitl Porte 82.00 6.06 2069 1998 Phi1. National Oil Co. Bacon-Manito Geothernal Poser 41.00 .24 2969-1 1909 Rep. of the Philippine Oacon-Manite Geothermal Powr 59.00 85.86 2974 1988 Rep. of the Philippine. Housing Sector 160.00 84.74 3049* 199 Rep. of the PhiIppi noe Financlal Sector 800.00 160.00 8084 1989 ev. Bank of the Phil. Meanla Powr Distribution 65.60 87.68 8099 1989 Rep. of the PhilIppines Health Oevelopmnt 40.10 44.90 8124 1990 Mebtro. Waterworks A Sew. Angat Water Supply 40.00 6.24 3146 1000 Rep. of the Philippine Municipal Development t 40.00 27.27 816 1090 Phtl. National Powr Corp. Energy Sector Loan 200.00 76.08 8164 1000 Phil. National Oil Co. Energy Sector Loan 150.00 101.64 8165 1900 Rep. of the PhilIppine Enorgy Sector Lon 40.00 19.76 8204 1990 Re. of the Philppines Coconut Form Development 121.60 10.04 8242 1000 Rep. of the Philippine S/Seer/Sanitation 85.00 71.87 8244 1001 Rep. of the Philippinem Second Elemntery Education 200.00 149.26 826 1991 Rep. of the Philippinee Cemunal Irrigation II 46.20 42.42 8268 1001 Rep. of the Phi IIpnee Earthquake Recontruction 126.00 61.86 27 11 Rep. of the PhiI ppine Indusetril Reetructurtag 175.00 4.64 8312 1991 Rop. of the PhilIppitne Cottage Entrprise 15.00 18.60 85 101 Rep. of the Philippine. Rural Finance 150.00 54.11 880. 11 Rep. of the Philippine Envitonmet A Natural RNe. Mgt. 158.00 55.70 480 1m Rep. of the PhiIlppine Highway Managment 150.00 150.00 845 12 Rep. of the Philippine. Engineering A Science Education 85.00 a." J439 l092 atonl Electelf. Adm. Rural Electelfieation 91.80 91.80 8466 1002 Rep. of th Philippine Mluntcipal DOvelopmnt III 68.00 66.00 852S 1008 DeW. Bank of the Phil. Telephone Systes Expansion 184.00 134.00 Sa8* 193 Rep. of the PhilIppine. Economic Integration 200.00 81.02 TOtal 7,660.80 207.18 1,86599 of which has ben repaid 2 0574 6.5 Total now held by Bonk and IDA l.4 Amunt old 81.85 of which repid 81.85 Total undisbured 1,8109.34 S.4 1,865.99 / The status of the project lsted In Part A is decribed In a eprate rort on all IBank/IDA-flaaned proJecte In execution, thich Is updated twice yearly and rculated to the Exeutiv bireotre on April 80 and October 81. * SAL, SECAL or Program Loan  - 11 - e. Statmee of tFC In U ts nt (As of March 81, 1933) Total held lmndisb.incld. Fiscal Type of Orilenl C