Philippines: Appraisal of - Fourth Rural Credit Project

Report No. 1415-PH

Philippines: Appraisal of PFourth Rural Credit Project

March 7, 1977

Rural Credit and Agro-Business DivisionEast Asia and Pacific Regional Office

FOR OFFICIAL USE ONLY

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Document of the World Bank

This document has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may nototherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

US$1.00 = Pesos (P) 7.5P 1.00 = US$0.1333

WEIGHTS AND MEASURES - METRIC SYSTEM

1 hectare (ha) 2.47 acres1 kilometer (km) = 0.62 miles1 kilogram (kg) = 2.2 pounds1 cavan (paddy) = 50 kg [a1 cavan (corn) = 57 kg1 picul (sugar) = 63.5 kg

ABBREVIATIONS

ACA - Agricultural Credit AdministrationAMDA - Agricultural Machinery Dealers AssociationAMTESP - Agricultural Machinery Testing, Evaluation and

Standardization ProjectCB - Central Bank of the PhilippinesDBP - Development Bank of the PhilippinesDRBSLA - Department of Rural Banks and Savings and Loan

Associations, CBIGLF - Industrial Guarantee and Loan FundIRRI - International Rice Research InstituteLBP - Land Bank of the PhilippinesMAU - Management Advisory UnitNFAC - National Food and Agriculture CouncilNIA - National Irrigation AdministrationPCAC - Presidential Committee on Agricultural CreditPNB - Philippine National BankSSLA - Stock Savings and Loan AssociationsTBAC - Technical Board on Agricultural CreditTSEU - Technical Support and Evaluation UnitUPLB - University of the Philippines, Los Banos

FISCAL YEAR

Government: January 1 to December 31CB: January 1 to December 31Rural Banks: January 1 to December 31SSLAs: January 1 to December 31

/a The former weight of 44 kg for cavan is sometimesstill used in the Philippines.

FOR OFFICIAL USE ONLY

PHILIPPINES

FOURTH RURAL CREDIT PROJECT

TABLE OF CONTENTS

Page No.

SUMMARY AND CONCLUSIONS ............................. i- iv

I. INTRODUCTION ........................................ 1

II. BACKGROUND .......................................... 1

General ......................... 1Economy ................................... . 2Agricultural Sector ..... .............. 2Agricultural Credit ............................ 3

III. RURAL BANKING INSTITUTIONS .......................... 6Rural Banks .................................... 6Stock Savings and Loan Associations .... ........ 8

IV. REVIEW OF PREVIOUS RURAL CREDIT PROJECTS ........... . 9Performance Under First, Second andThird Rural Credit Projects .................. 9

Issues Arising From Previous Projects ........ .. 11

V. THE PROJECT ....... .............. .................... 14Detailed Features ............... ............... 14Cost Estimates ......................... 19Financing .................... .................. 20Procurement ................... ................. 21Disbursement ........................... 22

VI. ORGANIZATION AND MANAGEMENT ......................... 22Department of Rural Banks and Savings andLoan Associations ............................ 22

Lending Policies, Terms and Criteria .... ....... 25Organization of Agricultural MachineryTesting, Evaluation and StandardizationProject ...................................... 27

Project Monitoring ............................. 27

VII. MARKETS AND PRICES .................................. 28Markets ........................................ 28Prices .... 28

VIII. BENEFITS AND JUSTIFICATION .......................... 29

IX. RECOMMENDATIONS ..................................... 31

This document has a restricted distribution and may be used by recipients only in the performance |of their official duties. Its conterts may not otherwise be disclosed without World Bank authorization.

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ANNEXES

1. Small-Scale Agriculture in the Philippines2. Cottage and Agro-Industries in the Philippines

3. Agricultural Credit4. Summary of Previous Rural Credit Projects5. Central Bank of the Philippines6. Rural Banks7. Stock Savings and Loan Associations8. Farm Mechanization and Transport9. Cottage and Agro-Industries10. Fisheries Development11. Livestock Development12. Monitoring and Evaluation13 Project Cost Estimate

14. Estimated Quarterly Schedule of Disbursements15. Phasing of the Lending Program16. Summary of Financial Rates of Return

17. Economic Evaluation

PHILIPPINES

APPRAISAL OF THE


SUMMARY AND CONCLUSIONS

i. The Government of the Philippines has requested a Bank loan toassist in the financing of the medium- and long-term credit program admin-istered by the Central Bank of the Philippines (CB). This would be thefourth loan since 1965 in support of this program, in which funds are on-lentthrough qualified rural banks and stock savings and loans associations (SSLAsito farmers, fishermen, and rural entrepreneurs. On the basis of the findingspresented in this report, a loan of US$36.5 million is recommended.

ii. Seventy percent of the Philippine population of 42.5 million livesin rural areas. Agriculture accounts for 50% of total employment, 70% ofcommodity export earnings, and 35% of GNP. Remarkable growth was achievedin agricultural production in the 1960's (7.7% per year between 1965 and1970), primarily as a result of improved technology and the increased useof cash inputs in rice production. After a period of adverse weather con-ditions in the early 1970's, production has again recovered. However, ade-quate supplies of production and term credit are essential to the continuedgrowth of production and the Government has undertaken a number of specialfinancing programs to augment private sector resources used in agriculturaldevelopment. The Rural Credit Projects supported by the Bank have been themajor component of Government assistance in term credit. Government goalsfor the agriculture sector are self-sufficiency in food grain production,expansion of agricultural exports, implementation of the Agrarian ReformProgram, improvement of income distribution and nutritional level, and con-servation of natural resources. Cottage and agro-industries in rural areasare viewed as a means of diversifying the rural economy and creating pro-ductive employment.

iii. Under the previous Rural Credit Projects, the first of which wasundertaken in 1965, a total of 10,860 sub-loans were made for farm mechani-zation, processing and storage, transportation, minor irrigation, fisheries,livestock and cottage and agro-industries. Bank loans totalling US$40 mil-lion accounted for approximately 50% of total sub-project costs. Approxi-mately 83% of total costs were for farm mechanization sub-projects, althoughthis share was reduced to 72% under the most recent project. The RuralCredit Prcjects have been instrumental in mobilizing domestic funds formedium- and long-term investments in agriculture and related industries.They have contributed to rural productivity and incomes and have generated

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substantial employment opportunities. However, arising from experience underprevious projects, the proposed project would include specific measures toaffect the following: the channeling of a larger share of project proceedsto smaller farmers and entrepreneurs; a reduction in the share of projectproceeds used for large-scale mechanization; improvements in the procurementpractices and guidelines governing farm machinery financing; greater attentionto the inter-relationship of the project with other rural credit programs; andimprovements in repayment performance among sub-borrowers.

iv. The proposed project would provide medium- and long-term credit(US$89.9 million) through qualified rural banks and stock savings and loanassociations to about 16,000 farmers, fishermen, and rural entreprenuers forinvestment in: farm mechanization (US$55.3 million); light transporation(US$1.5 million); cottage and agro-industries (US$7.0 million), coastal andinland fisheries (US$17.6 million) and small-scale livestock development(US$8.5 million). In addition, funds would be included for: a study toassess the impact of farm mechanization in the Philippines; an AgriculturalMachinery Testing, Evaluation and Standardization Project; training of creditpersonnel; and service vehicles for CB field personnel engaged in the project.

v. Total project costs are estimated to be P 684.4 million (US$91.3million). Foreign exchange costs would be US$29.4 million (32%). The pro-posed Bank loan of US$36.5 million, which would be for a period of 15 yearsincluding a 4-1/2 year grace period, would finance 40% of project costs. CBand the Government would provide 40%, rural banks and SSLAs 10% and sub-borrowers 10%. Terms and conditions for the release of project funds wouldbe set out in the Rules and Regulations governing the project, which wouldbe subject to Bank approval.

vi. As in the Third Project, machinery and equipment, including trucks,irrigation pumps, engines and equipment for fishing boats, and machinery andequipment for cottage and agro-industries would be purchased locally by sub-borrowers under initial supervision of the on-lending institution. Suffi-cient private contractors are available for construction of boats, buildingsand other civil works. The size of individual contracts would be too smallfor international competitive bidding and bulking of contracts would notbe practicable because of their wide dispersal both in location and time.All sub-project contracts would be made through ordinary commercial channels.The purchse of service vehicles by CB would be through local competitivebidding in accordance with procedures acceptable to the Bank. The procurementof four-wheel tractors and imported power tillers would continue to be subjectto ceiling price guidelines although these guidelines would be modified toreduce retail prices from present levels.

vii. Disbursement of loan proceeds to CB would be as follows:

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(i) 45% of the sub-loans disbursed by rural banks andSSLAs, against certified statement of expenditure;

(ii) 40% of the costs of instruction, materials and rentalof facilities for training and the preparation of acredit handbook, against certified statement ofexpenditure;

(iii) 100% of the c.i.f., ex-factory cost of vehicles, or40% off-the-shelf, against invoice;

(iv) 40% of the cost of the farm mechanization study,against certified statement of expenditure; and

(v) 66% of the cost of civil works and equipment contractsfor the Agriculture Machinery Testing, Evaluation andStandardization Project, against invoice, to be passedon to the Department of Agriculture.

viii. The Director of CB's Department of Rural Banks and Savings andLoan Associations (DRBSLA) would assume overall responsibility for imple-mentation of all aspects of the project except the Agricultural MachineryTesting, Evaluation and Standardization Project, for which funds would bechanneled through the Department of Agriculture to the University of thePhilippines at Los Banos. CB Agricultural Credit Supervisors or members ofCB Loan Teams would assist rural banks and SSLAs to prepare sub-projects.Loan Teams would evaluate sub-projects and, if approved, would recommend toDRBSLA the transfer of Special Time Deposits to an account of the on-lendinginstitution. Disbursement against sub-borrower contracts would be made bythe on-lending institution, direct to suppliers where possible. During theproject period, a gradual transfer of lending authority to qualified on-lend-ing institutions is envisaged, with technical assistance and post-approvalreview by Loan Teams. Monitoring, reporting and technical support would beprovided by the Technical Support and Evaluation Unit of DRBSLA. In addi-tion, a Management Advisory Unit would be established in the Departmentconsisting of a small number of experienced senior officers who would provideassistance to rural banks on managerial problems outside the regular super-vision and regulatory structure.

ix. Project funds for sub-loans would be channeled through rural banks(90%) and stock savings and loan associations (10%). The system of ruralbanks, consisting of 786 individual banks, is the largest network of bank-ing facilities in rural areas. Two hundred and forty five of these banksparticipated in the Third Project. DRBSLA provides rural banks with train-ing, technical assistance, and credit facilities, and supervises all aspectsof their operations. Loans by rural banks, of which 90% go to agriculture,increased over 200% between 1972 and 1975, to P 2,324 million (US$310 million),primarily as a result of Government supported food production credit programssuch as Masagana 99. This rapid expansion has been accompanied by a deteriora-tion in collections; arrears were 21.4% of outstanding portfolio on December 31,1975 compared to 16.7% a year earlier. Measures presently being taken to

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improve this situation, and implications for the proposed project are dis-cussed in this report. There are 44 SSLAs in the Philippines, of which 13participated in the Third Project. About 31% of total lending in 1975 ofP 77 million (US$10 million) went to agriculture, an increase of 13% fromthe previous year. Collection performance is satisfactory. SSLAs are alsoregulated by DRBSLA and receive the same training and technical assistanceservices as rural banks. They do not, however, participate in special financ-ing programs other than the Rural Credit Projects.

x. At full development, the project is expected to result in incre-mental production of agricultural commodities, small implements, handicraftsand rural services with a total annual value of P 379.4 million (US$50.6 mil-lion). It is expected to create 10,280 man years of employment per year, themajority of which would be unskilled. Fifty seven percent of all sub-projectsother than four-wheel tractors, amounting to US$11 million of loan proceedswould accrue to smaller farmers and entrepreneurs who would derive an averagenet income from sub-projects of P 5,445 per year. Custom hire services wouldalso be used primarily by smaller farmers who occupy the majority of cultivatedlands and do not generally own tractors or tillers. The project would have anet foreign exchange contribution of US$9.2 million per year primarily throughimport substitution. Financial rates of return for sub-projects and an overalleconomic rate of return have been determined and are satisfactory.

xi. The proposed project is recommended for a loan of US$36.5 millionwith a 15 year maturity, including a grace period of 4-1/2 years.

PHILIPPINES


I. INTRODUCTION

1.01 The Government of the Philippines has requested a Bank loan toassist in the financing of the medium- and long-term rural credit programadministered by the Central Bank of the Philippines (CB). This would be thefourth loan in support of this program, previous loans having been made in 1965(432-PH, US$5.0 million), 1969 (607-PH, US$12.5 million), and 1974 (1010-PH,US$22.5 million). The third loan was fully committed in December 1975 and isexpected to be fully disbursed by the end of March 1977, 8 months before theClosing Date. The proposed loan would be the eighteenth Bank loan in supportof agricultural and rural development in the Philippines.

1.02 As under the Third Rural Credit Project, the project would providefunds to CB which would on-lend, through qualified rural banks and stocksavings and loan associations, to farmers, fishermen and rural entrepreneurs.However, the project would place less emphasis on farm mechanization andtransportation than did previous projects and focus to a greater extent onthe development of fisheries, livestock, and cottage and agro-industries. TheGovernment has decided to place greater emphasis on the financing of smallerfarmers and a quota would be established for lending to this target group.Additional funds would be provided for training of credit staff both of CBand onlending institutions, and for other project support investments.

1.03 This report is based on a project proposal submitted in March 1976by CB and on the findings of an appraisal mission composed of Messrs.Y. Nakahara, J. Brown, D. Steel, D. Forno (Bank), H. Lapp, R. Jessup andH. Deomampo (Consultants) which visited the Philippines in May-June 1976. 1/

II. BACKGROUND

General

2.01 The Republic of the Philippines, with an area of about 30 millionha, consists of more than 7,000 islands scattered along the archipelago

1/ The mission also examined issues relating to the agricultural creditsector, small-scale agriculture, and credit aspects of the AgrarianReform Program.

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which extends over 1,600 km north and south. It is divided into threemain parts: Luzon in the north, the Visayas and Mindanao in the south.The population is estimated to be some 42.5 million, growing at 2.8%per annum (at the end of 1975), of which about 70% lives in rural areas.Luzon has the largest population (53%), with about 5 million concentratedin the Greater Manila area alone, the balance being evenly distributedbetween the Visayas (25%) and Mindanao (22%).

2.02 The climate is tropical and characterized by high temperature,humidity and rainfall. Mean temperatures range from 21 C in January to190C in May. Rainfall shows a wider range, from 1,000 mm in southwestMindanao to 5,500 mm in the highlands of Luzon. Most areas lave one majorrainy season but the rainfall pattern varies widely across the country.Climatically, the Philippines has high potential for agricultural production.

Economy

2.03 Real gross national product has been growing at 6 percent annuallyin recent years, and in 1976 reached a level of $390 per capita at currentprices and exchange rates. Major assets of the Philippines for economicdevelopment include relatively abundant mineral (with the exception of pet-roleum) and water resources, a climate favorable to large-scale agriculturalproduction, a high level of general education, and a vigorous entrepreneurialclass. Significant liabilities include a high population density in rela-tion to arable land and a high rate of population growth. Poverty and un-equal distribution of income are longstanding problems and a significantcurrent problem is the large current account deficit of about $1 billion in1976, brought about by a deterioration in the external terms of trade since1974. The Government is attacking these problems through increased effortsin rural development, family planning and labor-intensive export-orientednontraditional industries, In 1976, nontraditional exports increased by about50%. The Bank, in its Basic Economic Report, and the Government regard GNPgrowth of 7 percent a year as a feasible objective, and that the externalaccounts situation is and will remain manageable provided that external debtcontinues to be managed carefully and that nontraditional exports continueto grow at a fairly rapid pace.

Agricultural Sector

2.04 Agriculture is the most important sector in terms of employmentand export earnings. It accounts for about 50% of total employment and70% of commodity export earnings, consisting mainly of coconut and sugar-cane products. Agriculture also contributes 35% of GNP consisting of foodcrops (12%), export crops (9%), livestock (6%), fisheries (4%) and others(4%).

2.05 Agricultural output was accelerated during the late 1960's duelargely to increased rice production, a result of introducing a new tech-nological package of irrigation, high yielding varieties, fertilizersand other farm inputs. The annual growth over 1965-70 was 7.7%. From 1971to 1973 crops were seriously affected by adverse weather conditions and cropdiseases but production has since recovered.

2.06 More than half of the total land area of 30 million ha is forest-land and about one-third is cultivated including plantations. An additional2.5 million of fairly level or slightly sloping land is classified as avail-able for cultivation, of which 1.0 million ha is cogun grassland, difficultand expensive to reclaim. With the rate of land expansion for farm landslowing down in recent years, it has been clear that most of the increasedproduction and farm incomes must come from higher yields, intensificationof land use and cultivation of higher value crops.

2.07 The Government goals for the agricultural sector are self-sufficiency in food grain production, expansion of agricultural exports,implementation of the Agrarian Reform Program, improvement of income dis-tribution and nutritional level, and conservation of natural resources.

Agricultural Credit

2.08 Agricultural credit available from both Government and non-Government institutions probably accounts for about one-third of all agri-cultural credit, the remainder being provided by traditional non-institu-tional sources. In nominal terms, institutional credit for agriculture hasincreased continuously. In real terms, it grew rapidly during the first halfof the 1960's, decelerated during the second half and actually started todecline in the early 1970's. With the introduction of supervised food pro-duction programs, real growth has once again been substantial since 1973(Annex 3, Tables 1 and 2). One limitation on the flow of credit to agricul-ture is the inadequate coverage of institutions serving rural areas; anotheris collateral requirements which preclude access to credit by a large numberof small farmers. In efforts to overcome these problems, the Government ispromoting the expansion of the rural banking system and has introduced specialcredit programs such as Masagana 99 to provide production credit to smallfarmers without collateral. The Rural Credit Projects and other Bank-supportedprojects have provided additional investment credit to rural areas.

2.09 Government Institutions. About 20% of the institutional creditto agriculture is provided by the public sector principally through thePhilippines National Bank (PNB), and, to a much lesser degree, the Agricul-tural Credit Administration (ACA). 1/ In addition, the Land Bank of thePhilippines (LBP) has been revitalized and is expected to play an essentialrole in financing land transfer under the Agrarian Reform Program and provid-ing credit, mainly to agrarian reform beneficiaries.

2.10 PNB is the largest bank with about 170 branches and 120 mobileoffices. Its total assets increased from P 6.2 billion in 1973 to P 15 bil-lion (US$2 billion) in 1975. Traditionally, its agricultural lending has beento commercial farms and plantations primarily for seasonal credit for pro-duction inputs, marketing and processing. Now it also finances half of theshort-term credit for food grain production under Masagana 99 and Masaganang

1/ The CB support of agricultural credit is in the form of rediscountingfacilities and Special Time Deposits for other public and privateinstitutions.

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Maisan. As a result, about 30% of its total lending is for agriculture. DBPprovides medium- and long-term credit for a wide range of enterprises in theagricultural sector. In 1975, 23% of its loan approvals, reaching P 2.4billion (US$330 million), was to agriculture. Since 1972, the DevelopmentBank of the Philippines (DBP) has been the credit channel for seven IBRDagricultural projects. 1/ ACA finances production and marketing cooperativesand small farmers but, owing to lack of funds and poor loan recovery, itslending has decreased and its future role is under review.

2.11 Private Institutions. Commercial banks are the most importantprivate institutions providing some 55% of all institutional agriculturalcredit, although this amounts to less than 10% of their portfolios. CB nowrequires that a minimum of 25% of all commercial bank lending go to agri-culture. Instead of making direct loans, many banks purchase CB Certificatesof Indebtedness, the proceeds of which are used by CB to refinance agriculturalloans provided by other credit institutions. About 30 commercial banks servethe agricultural sector directly, mostly in the form of short-term credit formarketing and trade financing in copra and sugarcane.

2.12 The next important private institutions are rural banks (786 inJune 1976) with total assets of some US$470 million. They provide about20% of all institutional agricultural credit, mainly under the Masagana 99and Masaganang Maisan, and are also gradually increasing their term lendingprimarily under the Rural Credit Projects supported by the Bank. Althoughmuch smaller in scale, there are savings and loan associations and privatedevelopment banks which lend about a third of their funds to agriculture.

2.13 Cooperatives have begun to assume an important role in theflow of credit to small farmers, particularly agrarian reform beneficiaries.Membership in a Samahang Nayon (pre-cooperative at the village level) is a pre-requisite of credit for agrarian reform beneficiaries, and is encouraged forall small borrowers. Samahang Nayons in turn become shareholders in market-ing, processing and service cooperatives usually established at the pro-vincial level. Samahang Nayons may acquire up to 40% equity in rural banksand one bank has now been established in Nueva Ecija under full cooperativeownership. Government training courses for members and management aremandatory prerequisites for any financial undertakings by Samahang Nayons.At the end of March 1976, about 17,000 Samahang Nayon had been organizedand 90 cooperatives organized at higher levels. At that time, total sav-ings of Samahang Nayons amounted to P 29 million. It is too early, however,to predict the success of this program but it is evident that assistancein financial management and control will be essential to members' confidencein the success of cooperatives.

1/ Rice Processing and Storage Project, Loan 720-PH, US$14.3 millionFirst Fisheries Project, Loan 891-PH, US$11.6 millionFirst Livestock Development Project, Loan 832-PH, US$7.5 millionFirst Industrial and Small Holder Tree Farmers Project Loan 998-PH,

US$50.9 million (US$2.0 million for tree farming)Second Livestock Development Project, Loan 1225-PH, US$20.0 millionSecond Grain Processing Project, Loan 1269-PH, US$11.5 millionSecond Fisheries Projects, Loan 1270-PH, US$12.0 milli-on

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2.14 Interest Rates. The annual interest rate for credit from Govern-ment sources is normally 12% for loans secured by land, and 14% for others.An exception is the 12% interest rate for supervised credit made availableunder Masagana 99 and other Government food grain production credit programsfor which real estate collateral is not required. Recently the MonetaryBoard has raised the ceiling interest rates to 17% for loans less than twoyears and 19% for loans over two years which is not applicable to ruralbanks 1J. The effective cost of credit from agricultural input suppliers isbetween 15% and 25% per annum; from private moneylenders the cost is muchhigher.

2.15 Development Policies for the Agricultural Credit Sector. InSeptember 1975, the Presidential Committee on Agricultural Credit (PCAC) andits working group, the Technical Board on Agricultural Credit (TBAC) wereestablished. 21 Their establishment and composition attest to the Government'sintention to address carefully and vigorously issues surrounding the futureof this sector. TBAC has its own staff of about 30 persons who conduct studiesof various aspects of the rural credit sector under the direction of the Boardand review studies conducted by CB, Government agencies and special committees.Over the past year a useful dialogue has been established between members ofthese units and representatives of the Bank, and attention is now being givento issues which ought to determine the nature of future Bank support for thesector. Among these are; the identification of target groups with clearlydefined credit needs, determination of the most suitable long-term roles forvarious credit institutions, the coordination of credit and technical assist-ance to borrowers, new sources of funds such as supplier's credit, and thefinancing of marketing and storage facilities.

1/ These ceiling interest rates include commissions, premiums, fees, andother charges of 3%. Loans over two years may not exceed 80% and 100%,respectively, of time deposits and deposit substitutes with a remainingmaturity of more than two yeats.

2/ The members of PCAC are: Governor, Central Bank (Chairman); Secretary,Department of Agriculture (Vice-Chairman); Director-General, NationalEconomic and Development Authority; Secretary, Department of Local Govern-ment and Community Development; Secretary, Department of National Resources;Secretary, Department of Agrarian Reform; President, Philippine NationalBank; Chairman, Development Bank of the Philippines; and President, LandBank of the Philippines.

The members of TBAC are representatives of: Central Bank (Chairman),Department of Agriculture (Vice-Chairman), Department of Local Governmentand Community Development, Department of Natural Resources, NationalEconomic and Development Authority, Philippine National Bank, NationalFood and Agriculture Council, Department of Agrarian Reform, AgriculturalCredit Administration, Development Bank of the Philippines, Land Bank ofthe Philippines and a separate representative from the DRBSLA, CentralBank.

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III. RURAL BANKING INSTITUTIONS

3.01 Although commercial banks provide over one half of the insti-tutional credit for agriculture, the rural banking system (presently with786 individual banks) has the largest network of banking facilities serv-ing the rural areas and is capable of financing a large number of mediumand small farmers. In providing medium- and long-term loans for ruraldevelopment, rural banks and SSLAs, which supplement the rural bankingsystem to extend its coverage to rural areas, have proved successful ascredit channels for the three Rural Credit Projects and would continue tobe the credit channels for the proposed Fourth Project.

3.02 Rural banks and SSLAs are private banks, supervised by CB'sDepartment of Rural Banks and Savings and Loan Associations (DRBSLA)OMost are established, capitalized and managed by close family groups,although cooperatives are now entitled to acquire shares of rural banks upto a maximum of 40%. In some cases, banks and SSLAs are owned by thesame group of investors.

Rural Banks 1/

3.03 Organization. Establishment of rural banks is authorized bythe Monetary Board and the Government may at the time of establishmentassist them by subscribing in the form of preferred shares up to an amountequal to shares subscribed by private individuals. At the end of 1975,shares held by the Government had decreased to 26% of paid-in capital throughacquisition by private shareholders. DRBSLA provides rural banks with train-ing for management and staff, technical assistance in lending and administra-tion, and funds through Special Time Deposits. It also supervises and examinestheir operations. Funds are also provided by CB's Department of Loans andCredits (DLC) through rediscounting facilities. During the first two yearsof a Four-Year Development Program for the rural banking system (1974-77),140 new rural banks were established compared to a target of 100 each yearfor the plan period. This very rapid expansion has placed a heavy bur-den on training and supervision staff of CB. Rural banks are typicallyestablished by prominent financial or professional members of the smallercommunities they serve. Their investment portfolios, which average P 3 mil-lion, consist of loans to borrowers within a small radius, perhaps concentra-ted within 20 km. Staffed by a manager, an accountant, a cashier, one or twotechnicians, and support staff, they rely heavily on an intimate knowledgeof local conditions and borrower reputations to protect the quality of theirportfolios. Types of loans reflect the predominant credit needs of therespective communities, but, in the main, short-term agricultural productionloans constitute the majority of their portfolios.

i/ A more detailed description of rural bank operations appears asAnnex 6.

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3.04 Financial Resources. As of December 30, 1975, rural banks'total resources were P 2,749 million (US$377 million), consisting ofP 276 million (US$38 million) in paid-capital, P 150 million (US$20 million)in surpluses, reserves and undistributed profits, P 678 million (US$93million) in deposits, and P 1,489 million (US$204 million) in borrowing,the bulk from CB. In the past three years, total liabilities more thantripled from P 694 million at the end of 1972 to P 2,323 million at theend of 1975. This increase was primarily due to the introduction of thefood grain production programs (Masagana 99 and Masaganang Maisan) and toincreased disbursements under the Rural Credit Projects.

3.05 A large portion of borrowings is made through CB's rediscountingfacilities. CB rediscounts promissory notes up to 100% of face value undersupervised production schemes (rice, corn and sugar) a: 1% per year and (80%at 5% per year for non-supervised ordinary schemes), with a limit of 500%of the borrowing bank's net worth plus 100% of its average monthly savingdeposits over the preceding four months for supervised ciredit (100% and 50%respectively for non-supervised credit). The terms are up to 180 days forcommercial loans, 270 days for agricultural and industrial loans, and 360days for loans to cooperatives. Another facility provided by CB is theadvancement of funds as Special Time Deposits to finance special programsincluding the Rural Credit Projects. These deposits are secured by promis-sory notes from the recipient banks.

3.06 Deposits are another major source of funds for rural banks auth-orized by the Monetary Board. Annual interest rates as of January 1976vary from 7.5% for savings deposits to 9% and 12.5% for time deposits of90 days and 2 years, respectively. National and regional savings campaignssupported by CB in the past year have been very successful.

3.07 Lending Operations. The loan portfolio of rural banks increasedrapidly in recent years; from P 770 million (US$103 million) at the end of1972 to P 2,324 million (US$310 million) at December 31, 1975; an increaseof over 300%. More than 90% of these loans were to agriculture. The numberof loans exceeded 1,000,000 in both 1974 and 1975 and the average loan sizein 1975 was P 2,220 (US$296). Medium- and long-term financing is limitedalmost entirely to that supported by the Bank through the CB:IBRD programand accounts for less than 10% of rural bank loan portfolios.

3.08 Arrears. The overdues position of rural banks is not satisfactory.As of December 31, 1975, arrears amounted to 21.4% of outstanding portfolio,an increase from 16.7% at December 31, 1974. In absolute terms, arrearsincreased from P 287.0 million at the end of 1974 to p 503.4 million at theend of 1975. During the appraisal of the proposed project a more detailedanalysis was conducted of 268 banks, including those participating in theThird Project as of December 31, 1975. As of March 31, 1976, overdues amongthese banks accounted to 36% of demand. Only 111 were below the 20% criterionwhich was to have been introduced April 1, 1976, had funds not been fullycommitted prior to that date. In the case of 112 banks arrears were found toexceed 40% of demand. Measures presently being taken to improve this situa-tion and implications for the proposed projects are discussed in para 6.09.

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3.09 Profits. Although rural banks' income and expenditure both increasedby about three times, net income and return to common stocks have shown someimprovement in 1974 and 1975. However, the profitability of individual banksseems to differ widely, even without considering adequacy of reserves for baddebts. The generally high level of returns to common stock despite seriousarrears problems is a reflection of the very high degree of leverage encour-aged by the present CB financial assistance to the system. Commitments to re-ducing arrears can be expected to increase meaningfully only as CB creditfacilities are more stringently tied to collection performance.

Stock Savings and Loan Associations (SSLAs) 1/

3.10 Organization, SSLAs are registered as stock corporations afterapproval by the Monetary Board and the Securities and Exchange Commission.They can accept deposits from the public and make loans to the public.They are now classified as banking institutions and, unlike rural banks,may open branch offices with approval of the Monetary Board. They do notenjoy exemption from taxes and Government fees and charges and cannotreceive capital assistance from the Government. At the end of December1975, there were 44 SSLAs (compared with 67 non-stock savings and loanassociations), including about 20 in the Greater Manila area.

3.11 Financial Resources. At December 31, 1975, the total paid-upcapital of all SSLAs was P 54.4 million (17% of total resources). Themain source of funds is savings and time deposits collected from stock-holders and the public. Savings contributed about a half of total resourceswhile time deposits contributed 18%. SSLAs insure their savings and de-posits with the Philippine Deposit Insurance Corporation and, in addition,they have organized their own Guaranty Fund to ensure the liquidity ofindividual associations. Borrowings were mainly from CB for participationunder the Rural Credit Projects (11% of total resources).

3.12 Lending Operations. In the past, SSLAs lent prlrLarily forcommercial and housing purposes, but lending to agriculture has graduallyincreased during 1974 and 1975 (13% in 1974; 31% in 1975). About two-thirds of SSLA loans are secured by collateral.

3.13 Collection and Profits. Collection of loans to date is satis-factory. Net income of all SSLAs is improving gradually and in 1975, itwas P 4.5 million or 8% of the paid-up capital compared to P 1.7 million(5% of paid-up capital) in 1972.

1/ A more detailed description of SSLA operations appears as Annex 7.

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IV. REVIEW OF PREVIOUS RURAL CREDIT PROJECTS

a. Performance under First, Second and Third Rural Credit Projects

4.01 First Rural Credit Project (Loan 432-PH). This loan of US$5.0million assisted in establishing for the first time a nationwide system tochannel medium- and long-term credit through the rural banks to farmers andfishermen. Between 1965 and 1969, 148 rural banks participated in theproject and financed about 2,600 farmers for the purchase of farm machineryand irrigation pumps, and for development of fisheries and livestock as inthe following table:

No. of Amount in Amount as AverageCategory Sub-loans Million Pesos % of Total Sub-loan Size

Farm Machinery 2,118 19.1 89.3 9,000Irrigation Pumps 279 1.0 4.6 3,600Fisheries, Livestock 197 1.3 6.1 6,600

Total 2,594 21.4 100.0 8,250

4.02 Second Rural Credit Project (Loan 607-PH) This loan of US$12.5million financed basically the same sub-loan categories as the First Projectbut included, in addition, storage and processing facilities and on-farmtransportation equipment. Because of the low demand for term credit duringthe initial stage of project implementation, caused primarily by the effectof the peso devaluation as well as several natural disasters, final disburse-ment was completed in June 10, 1974, a delay of 18 months. From 1969 to1974, project funds were channeled through 228 rural banks to about 4,000farmers. The breakdown by major components is given in the following table:


Farm Mechanization 2,997 109.1 74.3 35,400Processing & Storage 161 4.7 3.2 29,200Transportation 229 12.8 8.7 55,900Fisheries 265 9.1 6.2 34,350Livestock 413 11.1 7.6 26,900

Total 4,065 146.8 100.0 36,100

4.03 Third Rural Credit Project (Loan 1010-PH). Under this loan ofUS$22.5 million a number of new sub-loan categories were added, the majoradditions being farm machinery repairshops, reconditioned trucks, fishmealplants and woodcraft plants. Other new categories were fishpens and small

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dairy farming. Stock savings and loan associations (SSLAs) were includedto provide additicnal channels to project beneficiaries. The strong demandfor tractors, power tillers and trucks continued under the third loan and CBfully committed project funds during December 1975, about 18 months ahead ofschedule. Sub-loans were provided to 4,200 farmers through about 245 ruralbanks and 13 SSLAs as in the following table:


Farm Mechanization 2,930 182.3 72.4 62,200Farm Transportation 566 40.5 16.1 72,700Farm Support Facilities 293 4.9 1.9 16,600Fisheries 184 10.4 4.1 57,000Livestock 213 13.0 5.2 60,900Cottage and Agro-Industries 25 0.7 0,3 26,600

Total 4,211 251.9 100.0 60,000

4.04 Regional Distribution of Proceeds. The flow of funds under thethree projects has been concentrated in Luzon as shown in the following table,although there is a trend toward more even distribution among regions.

First Loan Second Loan Third LoanNo. Amount No. Amount No. Amount

Luzon 66% 66% 61% 66% 50% 50%Visayas 18% 17% 20% 22% 23% 30%Mindanao 16% 17% 19% 12% 27% 20%

4.05 Financing Pattern. Under the First Project, the Bank's share intotal cost of sub-projects was limited to 55%, rural banks were required tocontribute 10% and sub-borrowers, 30%. In the Second and Third Projects, theBank's limit was reduced to 50%, the rural banks' contribution was the same10%, and sub-borrowers' contribution was lowered to 10%. The following tablepresents the actual shares in sub-project financing:

First Loan Second Loan Third Loan

IBRD 55% 47% 47%Central Bank 25% 28% 27%Rural Banks /a 5% 9% 9%Sub-borrowers 15% 16% 17%

/a Rural bank contributions did not reach the required minimum 10% becausethe condition was waived during project implementation (the First andSecond Projects) and because contributions in some cases was mistakenlycalculated on the basis of sub-loans instead of total sub-project costs(the Third Project).

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4.06 Participation of On-Lending Institutions. Participation under theRural Credit Projects was constrained primarily by arrears criteria and bythe operating radius of Loan Teams (nine operated under the Third Project)to process sub-loans. Actual participation under the three projects was asfollows:

First Loan Second Loan Third Loan

Rural Banks 148 228 245SSLAs - - 13

b. Issues Arising from Previous Projects

4.07 Overall Assessment. The Rural Credit Projects have been instru-mental in mobilizing domestic funds for medium- and long-term investments inagriculture and related industries. As a result of previous projects, ruralbanks began term lending, and the rules and operations of rural banks generallyhave been improved. Farm mechanization under previous projects has increasedcrop yields and cropping intensity by facilitating the adoption of improvedtechnology and efficient use of irrigation facilities. Farm incomes and ruralemployment opportunities have been increased among the beneficiaries. However,progress in lending to smaller farmers has been disappointing. While large-scale mechanization is an important factor in the growth of the rural economy,the distribution of project proceeds among sub-loans categories has been heav-ily weighted in favor of four-wheel tractors and due attention does not appearto have been given to other categories. The impact of previous projects onparticipating institutions has been positive and there is scope for the use ofthis mechanism to further strengthen the lending capacity and procedures andthe financial control of on-lending institutions. It is difficult to assesswith any precision the extent to which project funds have been additional orsubstitutive. However, in view of the fact that rural banks depended almostentirely on previous projects for term-lending resources and recognizing theshortage of investment credit in rural areas, it is reasonable to assume thatfunds have been additional. Substitution may have occurred in the case ofsome sugarcane tractors, and this category would be reduced under the proposedproject.

4.08 Project Beneficiaries. Recipients of sub-loans have usually beenowners of 5 ha to 50 ha, the upper limit of farm size for which rural banksare authorized to extend credit. The majority of sub-loans have gone to bor-rowers at the upper end of the size spectrum whose business contacts affordthem the best knowledge of credit opportunities and whose financial positionenables them to provide the most attractive collateral. The major benefit ofprevious projects to small farmers has been the custom hire services, parti-cularly in land preparation, which are offered by the recipients of sub-loans.The credit needs of small farmers are difficult to serve through private,commercially-oriented credit systems such as the networks of rural banks and

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SSLAs, and due regard must be given to the financial strength and developmentof the onlending institution. 1/ Nevertheless there are financially viableinvestments which can be tailored to the needs of small entrepreneurs. Thenature and size of most components of the proposed project have been determinedwith this objective in mind and, in addition, it is proposed that a minimumshare of project proceeds be directed to this target group (para 5.02). 2/

4.09 Sub-Loan Components. The financing of four-wheel tractors hasdominated previous projects to a significantly greater degree than projectedduring appraisals, reflecting only in part the financial merits of suchinvestments. Other factors have been the relative ease of processing suchsub-loans, the aggressive promotional activities of the industry, theattractiveness of a chattel mortgage on tractors in terms of ease and valueof resale, and the prominance of typical tractor purchasers in the ruralcommunities. Efforts on the part of the Bank to encourage the promotionof other investments have not succeeded in overcoming these forces and, inorder to provide for the financing in greater numbers of other types ofinvestments, the proposed project would limit the funds available for four-wheal tractors (para 5.03).

4.10 Farm Mechanization. Under certain conditions it has been demon-strated that some types of farm mechanization displace labor, an economicconsideration the more serious by virtue of the fact that it is generallyunskilled labor with few alternative employment opportunities that is effected.Mechanization in the Philippines has been introduced primarily in land prepar-ation and evidence available to date indicates that in fact the result hasbeen to increase labor requirements over the total cropping operation. In-creased yields, cropping intensity and area have been facilitated, therebygenerating additional employment in planting, harvesting and post-harvestoperations. Land preparation and harvesting typically occur at the sametime in multiple cropping areas, and mechanization has to some extent alle-viated labor shortages in land preparation when priority for manual labormust be given to harvesting standing crops. The extent of the labor im-pact of mechanization in the Philippines and the most appropriate typesof mechanization from an employment standpoint have not been adequatelyexamined as a basis for long-term investment policy, however, and theproposed project would include such a study (para 5.10).

4.11 Tractor and Tiller Prices. During appraisal of the proposed proj-ect it was a matter of concern that tractor and tiller prices had risenrapidly in recent years. While this reflects to some extent increases in

1/ OED Report, Agricultural Credit Program, November 1976, ... thefarm development strategy must not succeed at the expense of thechannel's capacity for effective performance", p. 76.

2/ Annex 1 presents a survey of small-scale agriculture in thePhilippines and develops the definition of the proposed targetgroup for the project.

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the c.i.f. prices of this imported equipment, CB ceiling price policy andits administrative supervision of machinery procurement for financing underthe CB:IBRD program were found to be unsatisfactory. One detrimental effect ofhigh prices in addition to the impact on sub-borrowers has been the attractioninto the industry of a large number of brands and agencies competing for smallshares of a relatively small, scattered market. The resulting diseconomies, interms of dealer network, for example, are significant. Under the proposed proj-ect ceiling price guidelines for tractors and imported tillers would be modi-fied (para 5.19) and procurement practices improved (para 5.18).

4.12 Interdependence with Other Credit Programs. With the diversific-ation of lending under previous projects and the increased total flow ofcredit to agriculture the interdependence of the CB:IBRD program and othercredit programs, both production and term, has greatly increased in recentyears. Financing under the proposed project must be monitored in the contextof the total impact of credit programs on the financial well-being of on-lending banks and sub-borrowers. Institutional aspects of the project suchas training, CB organization, bank eligibility, and sub-borrower appraisalwould be modified to insure that they complement and take into considerationthe impact of other credit programs on banks and sub-borrowers participatingin the proposed project (Chapter VI).

4.13 Institutional Development. Measures under previous projects suchas the establishment of the Technical Support and Evaluation Unit and LoanTeams and the expansion of Agricultural Credit Supervisors in the field haveresulted in substantial enhancement of CB's capacity to develop and superviseterm credit portfolios in rural banks and SSLAs. However, the expanding numberand diversity of sub-loans placed an increasing burden on CB. With the accu-mulation of experience in term lending on the part of on-lending institutions,it is feasible now to begin a transfer of more responsibility directly tothem. With the Government's desire to promote this development, a numberof training and organizational measures under the proposed project wouldassist in a gradual transfer of lending authority to rural banks and SSLAs(para 5.12 and Chapter VI).

4.14 Repayment Performance. The Government and CB have now acknowledgedthat every effort must be made to reduce high arrearages, and a number ofremedial actions have been taken. The National Commission on CountrysideCredit and Collection (NCCC) chaired by CB's Governor, has been establishedto review the large overdues existing under Government-assisted lendingprograms. Together with its working unit established in CB, it is expectedto assist banks in their collection efforts and to formulate educationalprograms to improve repayment habits in rural areas. CB is implementinga special scheme under which teams of one examiner and one agriculturistwould reside in local areas to strengthen supervision and technical assist-ance to four and eight rural banks, respectively. CB has also decided todeny, as of November 1, 1976, all rediscounting facilities to rural bankswith arrears in excess of 25% of their loan portfolio. 1/ This is not a new

1/ As a result of this action, 257 rural banks were temporarily disqualifiedfrom rediscounting on November 1, 1976.

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criterion although it has not been enforced with respect to food productionloans since 1973. It is also proposed that Government undertakes a detailedstudy of the causes of arreazs to assist in the developing measures for theirreduction. Together with improved financial management assistance to banks,it is expected that these measures will reduce present arrears substantially.Arrears criteria for the proposed project are discussed in para 6.09.

V. THE PROJECT

5.01 The project would be a continuation of the Third Rural Credit Proj-ect to provide medium- and long-term credit for another three years. Quali-fied rural banks and SSLAs would lend project funds to about 16,000 farmersand rural entrepreneurs for investment in: (a) farm mechanization; (b) lighttransportation; (c) cottage and agro-industries; (d) coastal and inland fish-eries; and (e) small-scale livestock development. The project would alsoinclude funds for: (f) a study to assess the impact of farm mechanizationin the Philippines; (g) an Agricultural Machinery Testing, Evaluation andStandardization Project to standardize the quality of farm machinery; (h) atraining program to improve the lending capability of CB and rural bank staff;and (i) service vehicles for CB field staff engaged in the project.

5.02 Emphasis would be given to increasing the share of project proceedsaccruing to smaller borrowers above that realized in previous projects. Assur-ances were obtained that a minimum of US$11 million I/ of loan proceeds wouldbe on-lent to small beneficiaries whose total self-earned income per year isless than P 7,500 2/, or whose total self-earned income per year is P 7,500or more and who earn 75% or more of such income from one of the following: aland holding, owned or leased, of not more than seven ha; a fishing enterprise,operated on the basis of ownership or leasehold, consisting of not more thanfive ha of fishponds or fishpens, or not more than one fishing vessel, suchvessel not to exceed five tons; or a cottage or agro-industrial enterpriseowned and operated by them, and consisting of fixed assets of less thanP 100,000, excluding the value of land.

Detailed Features

(a) Farm Mechanization (Annex 8)

5.03 Four-Wheel Tractors. The project would finance about 1,775 tractorsand implement packages for rice, corn and sugarcane farmers. The trend towardthe purchase of larger tractors in the Philippines has resulted in excess

1/ Equivalent to 56.6% of proceeds allocated to sub-projects other than four-wheel tractors or 30.6% of total sub-loan proceeds.

2/ Financing under the project of a small-scale livestock enterprise ofnot more than 10 sows, 200 layers, 400 broilers, or five cattle orcarabaos would usually be for this category of small beneficiaries.

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power and reduced cost effectiveness of tractor investments, particularly inrice and corn areas (Annex 8, para 18). Under the Third Project a limit of80 hp was placed on tractors to be financed, irrespective of crops cultivated.To further reduce the financing of excess capacity, tractors to be used inrice and corn production, where draft requirements are significantly less,would be limited to a maximum of 68 hp under the proposed project. However,this limitation would be imposed only after a period of 18 months from thedate of the Loan Agreement or after the financing of 1,000 units of tractorsin excess of 68 hp each, whichever should occur first, in order to facilitatethe adjustment of the trade and the reduction of present inventories of largetractors. Assurances were obtained that financing of four-wheel tractors inexcess of 68 hp each would be limited to 1,000 units, of which a maximum of450 units would be financed to be used in sugarcane growing areas, where pur-chasers are typically in a better position to use alternative sources offinancing, 1/ and that loan proceeds used to finance four-wheel tractorsirrespective of horsepower would be limited to US$16.5 million. 2/ One addi-tional limitation would be imposed on tractor financing: for tractors to beeligible for financing under the project, retail prices would not be permittedto exceed ceilings presented in the discussion of procurement (para 5.19).These limitations would be monitored by Loan Teams and the Technical Supportand Evaluation Unit (TSEU).

5.04 Power Tillers. About 7,800 tillers would be financed under theproject. The financial viability of small cultivators is marginal in termsof additional output under normal conditions. However, a major advantage,although difficult to quantify, is the assurance of cultivation capacity incontrast to the uncertainty resulting from the vulnerability of draft animalsto debilitating diseases and their need for prolonged periods of rest. Thisprotection can be afforded by the smaller locally manufactured units and theevaluation of higher cost imported models has been subjected to more stringentfinancial criteria. At present price levels, purchase of imported modelscannot be justified, and financing under the project would be limited to thosewhich conform to ceiling price guidelines presented in procurement paragraph5.19. This limitation would be monitored by Loan Teams and TSEU.

5.05 Other Farm Mechanization. Other items would include about 400small irrigation units, 600 portable threshers of 100-300 cavans per hourcapacity, about 240 implement packages for owners of tractors purchasedoutside of the project, and a small allocation for miscellaneous equipmentsuch as back-pack sprayers. Demand for small-scale irrigation facilitiesis limited at the present time because of uncertainty surrounding waterrights and the absence of detailed groundwater surveys. Some of thislimited demand is now being met by Government agencies such as the NationalIrrigation Authority, the Farm Systems Development Corporation and thePublic Works Department through separate programs offering credit on morelenient, inexpensive terms than can be offered by commercial credit

1/ Under the Third Project, it is estimated that about 600 tractors werefinanced for sugarcane growers.

2/ US$16.5 million, consisting of $14.0 million base cost estimate plus amaximum share of price contingencies of $2.5 million.

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institutions. In the case of portable threshers, technical merit in termsof recovery rates is not reflected in large demand since minimum utilizationrates to assure viability generally require the grouping of farmers or ex-tensive custom work. For both irrigation pumps and portable threshers,our estimates of units to be financed reflect these limitations despitethe potential contribution to increase production.

(b) Light Transportation (Annex 8)

5.06 This category would include about 400 light trucks having a grossvehicle weight of less than 2,500 kg which would be used in rural areas ascargo vehicles for small-scale entrepreneurs and for transportation of mixedcargo and passengers. These multi-purpose vehicles, owned and operated bylocal entrepreneurs, are the traditional means used by small farmers to markettheir produce and to transport production inputs to their farms. No financ-ing of light trucks would be undertaken in the Greater Manila area, to mini-mize the likelihood of project vehicles being used exclusively for passengertransportation. Despite an apparent need for more cargo transportation capa-city in most areas in the Philippines, financing of heavy and medium truckswould be discontinued under the project because of the relatively good finan-cial position of cargo businesses, enabling them to use other sources offinancing.

(c) Cottage and Agro-Industries. (Annex 9)

5.07 This category would include about 225 sub-projects covering awide range of cottage and agro-industries such as rice milling, farm implementmanufacturing, woodworking, handicrafts and manufacturing of concrete pipesand tiles. It would enable rural banks to diversify their lending operationsand serve a wider segment of the rural population. The Bank's Small andMedium Industries Development Project (Loan 1120-PH, US$30.0 million) alsoprovides funds for agro-industries through rural banks but the scale of sub-loan under the proposed project would be smaller. The number of rural banksable to extend and supervise smaller sub-loans would be significantly higherthan those eligible to participate in the Bank's Small and Medium IndustriesDevelopment Project through CB's Industrial Guarantee and Loan Fund (IGLF).

(d) Coastal and Inland Fisheries. (Annex 10)

5.08 Fisheries sub-projects would include about 45 small coastal fishingboats (basnig boats ) and equipment, and about 1,200 inland fishponds andfishpens with a total area of 6,000 ha. Boats of simple traditional designwould be manufactured in small local yards, purchased by local entrepreneurs,and crewed by local fishermen usually on a catch-sharing basis. The maximumsize of a boat financed would be increased from 20 gross tons under the ThirdProject to 40 gross tons in order to permit access to better, more distantfishing grounds. The average size of fishponds and fishpens would be 5 ha.The Bank's Second Fisheries Credit Project (Loan 1270-PH, US$12.0 million)presently administered by DBP would finance larger boats (of 45 gross tonsand above) and fishponds (an average size of 24 ha) and would have no over-lap with the proposed project.

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(e) Small-Scale Livestock Development. (Annex 11)

5.09 About 3,240 small-scale livestock sub-projects (1,240 for poultry,1,000 for pig and 1,000 for cattle breeding and fattening) would be includedunder the project to meet the cost of initial stock, pens and shelters,feed and other inputs. Poultry and pig sub-projects financed under theproject would generally be smaller than those to be financed by the Bank'sSecond Livestock Project (Loan 1225-PH, US$20.0 million) administered byDBP. The scale of backyard cattle breeding/fattening farms financed underthe project would be similar to that under the Livestock Project but only200 such sub-loans are included under the latter project, and geographiccoverage by rural banks, being more extensive than that of DBP branches,would permit the proposed project to meet demand not served through theLivestock Project.

(f) Study of Farm Mechanization (Annex 12)

5.10 The benefits of farm mechanization in terms of increased food pro-duction have been demonstrated in some countries to be offset to some extentby detrimental economic and social effects, particularly the displacement ofunskilled labor. Economic and social patterns within the area in questionand the nature of mechanization taking place are key determinants of theseundesirable effects, and evidence that has been acquired for the Philippinessuggests that labor displacement on an annual or area basis is not takingplace. However, a thorough study of the impact of mechanization, both itsadvantages and disadvantages, has not been conducted on a sufficiently largescale to form the basis for long-term Government policy on mechanization.The project would therefore include a study to assess the financial, economicand social impact of farm mechanization. Assurances were obtained that quali-fied consultants would be engaged on terms and conditions acceptable to theBank to conduct this study and that terms of reference for the study would beacceptable to the Bank. Also, a preliminary draft of the study would be sub-mitted to the Bank for its comments.

(g) Agricultural Machinery Testing, Evaluation and Standardization Project(Annex 8)

5.11 With the rapid expansion of farm mechanization in recent years,there has been a proliferation of local manufacturing firms and importers.The proposed project would include an Agricultural Machinery Testing, Evalua-tion and Standardization Project to set quality standards for agriculturalmachinery and to conduct performance testing against such standards. TheProject would be located on the campus of the University of the Philippinesat Los Banos (UPLB) and be directed by a senior member of the Department ofAgricultural Engineering. The following would be the principal objectivesand activities: (i) develop quality and performance standards for Philippinesfarming conditions and types of equipment used in the Philippines; (ii) con-duct field, shop and laboratory testing of equipment to determine capacityand conformity with relevant standards; and (iii) evaluate post-purchase partsand service support. The Project would issue its factual results in bulletinform and would not recommend any products or processes. Assurance were

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obtained that the Project would be established at UPLB with organization,staff and facilities acceptable to the Bank, and would thereafter be main-tained beyond the period of the proposed Bank project.

(h) Training

5.12 The project would provide funds to augment the ongoing trainingprograms of CB for its own staff and staff of rural banks and SSLAs.Areas of concentration under the project would include: the evaluationof cottage and agro-industrial sub-projects, for which courses would bedesigned for both CB and on-lending bank staff; and farm budgeting and plan-ning, for the technical staff of on-lending banks. Courses would bedesigned and conducted by CB with the use of non-CB resource staff asappropriate. A handbook would also be prepared for the field staff ofon-lending banks and CB, covering all phases of lending operations. Thepurpose of this handbook would be to standardize the quality and natureof design, appraisal and supervision of production and term credit loans.Assurances were obtained that qualified consultants would be engaged onterms and condition acceptable to the Bank to assist in preparation ofthe handbook and that the outline of the handbook would be acceptable tothe Bank. A preliminary draft of the handbook would also be submitted toBank for its comments.

(i) Service Vehicles

5.13 Under the Second Loan in 1969, 61 service vehicles were financedfor CB field staff. Since that time, field staff have more than doubled,and an additional sixty vehicles would be provided to meet the needs ofthese officers in their bank and sub-project review work.

Summary of Sub-Loan Items

5.14 The following summary of sub-loan items is presented in termsof December 1975 prices.

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Number of ------ Total Cost ----------------Items Units Million Pesos Million US Dollars

Tractors 1,775 259.9 34.7Power Tillers 7,800 64.8 8.6Portable Threshers 600 8.0 1.1Irrigation Pumps 400 7.0 0.9Other Implements 240 6.8 0.9Light Trucks 400 8.8 1.2Coastal Fishing Boats 45 13.4 1.8Fishponds 1,165 80.0 10.7Fishpens 50 6.3 0.8Poultry 1,240 20.1 2.7Pigs 1,000 22.0 2.9Cattle Breeding/Fattening 1,000 5.3 0.7

Cottage and Agro-Industries 225 39.2 5.2

Total 15,940 541.6 72.2

Project Area

5.15 The project would be country-wide in scope although coverage interms of individual communities would depend on participation by ruralbanks and SSLAs. Only about 100 rural banks are expected to participatein the project during the first six months as a result of the enforcementof arrears criteria. Participation may be expected to increase graduallyas more rural banks reduce arrears to acceptable levels (para 6.09). Thedistribution of on-lending institutions will remain approximately as it wasunder the Third Project: two-thirds in Luzon, and the balance evenly dis-tributed in the Visayas and Mindanao. The expanded coverage of cottage andagro-industries is likely to induce greater participation among SSLAs in thesmall municipal centers of the country.

Cost Estimates

5.16 Total project cost is estimated to be US$91.3 million. Toensure sufficient funds for a steady flow of sub-projects over the pro-posed three year period, a price contingency of 13.7% has been added tothe December 1976 base cost estimates. I/ The estimated foreign exchangecomponent is US$29.4 million (32%).

1/ Financial and economic evaluation has been conducted on the basis ofcost prevailing at the time of project preparation, December 1975. How-ever, for this aggregate cost table, the base cost estimate has beenadjusted to December 1976 levels by adding estimated cost increases of9% for equipment and 11% for civil works. To December 1976 costs, pricecontingencies have been added as follows:

1977 1978 1979

i. Equipment 8% 8% 8%ii. Civil works 11% 12% 12%

Commitment Ratio 80:20 65:35 55:45(i:ii)

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Million Pesos Million US$ Foreign

Local Foreign Total Local Foreign Total Exchange

Farm Mechanization 228.8 154.9 377.7 29.7 20.7 50.4 42Light Transportation 5.8 3.8 9.6 0.8 0.5 1.3 40Fisheries Development 94.3 15.4 109.7 12.6 2.0 14.6 14Small-Scale Live-

stock Development 46,7 5.2 51.9 6.2 0.7 6.9 10Cottage and Agro-

Industries 31.7 11.7 43.4 4.2 1.6 5.8 27

Sub-Total 401.3 191.0 592,3 53.5 25.5 79.0 32

Training 1.8 - 1.8 0.2 - 0.2 0Study 0.7 - 0.7 0.1 - 0.1 0Vehicles 1.6 1.7 3.3 0.2 0.3 0.5 50Agricultural

Machinery

Testing, Evaluation 3.1 0.7 3.8 0.4 0.1 0.5 19and Standardization

Project

Sub-Total 7.2 2.4 9.6 0.9 0.4 1.3 24

Base Cost Estimate 408.5 193.4 601.9 54.4 25.9 80.3 32Price Contingency 56.1 26.4 82.5 7.5 3.5 11.0 32

Total Project Cost 464.6 219.8 684.4 61.9 29.4 91.3 32

Financing

5.17 Total project costs of US$91.3 million equivalent would be financed

as follows:

Million US$ Million Pesos Percent

IBRD 36.5 273.8 40CB/Government 36.6 273.8 40Rural Banks/SSLAs 9.1 68.4 10 /a

Beneficiaries 9.1 68.4 10

Total 91.3 684.4 100

/a Average figure. Rural Banks in operation for less than three years

and with a net worth not exceeding P 500,000 may be authorized to

contribute only 5%.

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Bank funds would be lent to CB. Together with the Government and CB contri-bution, loan proceeds would be onlent to rural banks and SSLAs in the form ofSpecial Time Deposits. A minimum contribution of 10% would be required ofrural banks and SSLAs except in the case of recently established rural bankswith limited resources (net worth less than P 500,000), in which case theminimum contribution would be 5%. The minimum sub-borrower's contributionwould be 10%. Terms and conditions for the release of project funds wouldbe set out in the Rules and Regulations governing the program, and assuranceswere obtained that the Rules and Regulations, and changes thereto, would besubject to Bank approval. Funds for AMTESP would be transferred from CB tothe Department of Agriculture which would in turn allocate them to AMTESP.

Procurement

5.18 As in the Third Project, machinery and equipment, including trucks,irrigation pumps, engines and equipment for fishing boats, and machinery andequipment for cottage and agro-industries would be purchased locally by sub-borrowers under initial supervision of the on-lending institution. There isadequate representation of major international manufacturers. Sufficientprivate contractors are available for construction of boats, buildings andother civil works. Building materials, including lumber and cement, are pro-duced locally. The size of individual contracts would be too small for inter-national competitive bidding and bulking of contracts would not be practicablebecause of their wide dispersal both in location and time. All sub-projectcontracts would be made through ordinary commercial channels and assuranceswere obtained that at least three price quotations would be required forall sub-project contracts in excess of P 10,000 except in remote areas wheresupplier representation is insufficient, in which case a certified statementto that effect by the financing institution would be required. The purchaseof service vehicles by CB would be through local competitive bidding in accord-ance with the procedures acceptable to the Bank.

5.19 CB would modify its present ceiling price guidelines on four-wheeltractors and imported power tillers so that the maximum retail prices to beconsidered for financing under the project would be 170% of the bodega (ware-houses) cost for four-wheel tractors and 175% for imported power tillers, thebodega cost being defined as the sum of (a) c.i.f. Manila, (b) 30% of c.i.f.Manila (42% for imported power tillers) primarily to cover duties and taxes butalso including miscellaneous costs, and (c) the direct cost of local content 1/,Prices would vary by models. Monitoring of these tractor and tiller priceswould continue to be the responsibility of DRBSLA.

1/ The approximate effect of these price revisions would be to reducetractor prices on average by 11% and imported tiller prices on aver-age by about 15%.

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Disbursement

5.20 Disbursement of loan proceeds to CB would be as follows:

(i) 45% of the sub-loans disbursed by rural banks and SSLAs,against certified statements of expenditures;

(ii) 40% of the costs of instruction, materials and rental offacilities for training and the preparation of a credithandbook, against certified statements of expenditures;

(iii) 100% of the c.i.f., ex-factory cost of vehicles, or40% off-the-shelf, against invoice;

(iv) 40% of the cost of the farm mechanization study, againstcertified statements of expenditures; and

(v) 66% of the cost of civil works and equipment contracts forthe Agriculture Machinery Testing, Evaluation and Standardi-zation Project, against invoice, to be passed on to theDepartment of Agriculture.

5.21 In the case of disbursement against certified statements ofexpenditures, supporting documentation would not be submitted for review butwould be retained by CB and available for inspection by the Bank during thecourse of project supervision. An estimated quarterly schedule of disburse-ments appears in Annex 14.

VI. ORGANIZATION AND MANAGEMENT

6.01 The credit component of the project together with related trainingand support facilities would, as with previous Rural Credit Projects, be theresponsibility of CB's DRBSLA. Funds for the Agricultural Machinery Testing,Evaluation and Standardization Project would be channelled through theDepartment of Agriculture to the University of the Philipines at Los Banos(UPLB).

Department of Rural Banks and Savings and Loan Associations.

6.02 Organization. DRBSLA is headed by a Director who is supported inoverall department management by an Associate Director. The Department'seight operating divisions responsible for supervision and sub-loan assistanceunder special schemes are grouped according to geographic jurisdiction and,together with the Accounting and Special Services Division, are placed underone of the three Assistant Directors. DRBSLA is the largest department in CBwith over 700 staff. Its functions are distinguishable broadly into two dis-tinct categories; credit activities, and audit and examination of rural banksand SSLAs. Although present policy within CB limits management of departments

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to only one Associate Director, the size and nature of DRBSLA's responsibili-ties appears to warrant positions for two Associate Directors. Field-basedstaff such as Agricultural Credit Supervisors and members of Loan Teams areunder the direct supervision of the Division responsible for the territoryto which they are assigned. Training, legal services, statistical operationsand other required services are separately managed within the Department. TheTechnical Support and Evaluation Unit was established under the Third Projectin the Office of the Director. Members of the Unit have developed good work-ing ties with field staff, particularly Loan Teams, and this organizationalarrangement would continue under the proposed project.

6.03 Project Implementation. The Director, DRBSLA would assume overallresponsibility for implementation of all aspects of the project exceptAMTESP (para 6.12). At the outset, the following cycle and responsibilitieswould apply to sub-loans: a technician of the on-lending institution wouldprepare the sub-project, generally with the assistance of a CB AgriculturalCredit Supervisor or Loan Team member; the on-lending institution wouldconduct credit and collateral checks, assemble the sub-loan application andsupporting documentation, and submit these to the Loan Team; the Loan Teamwould conduct an appraisal of the proposal and, if it is approved, wouldsubmit its recommendation to DRBSLA together with documents of obligation onthe part of the on-lending institution; upon release of Special Time Depositsby the Accounting and Special Services Division, which would be released underthe proposed project by four Loan Teams located at three regional offices andat headquarters, in the name of the on-lending institution, disbursementagainst sub-borrower contracts would be made by the on-lending institution,direct to suppliers where possible. The authorities and responsibilitiesdescribed above would change gradually under the project as the Departmentbegins to introduce more decentralized decision-making and administrativeprocesses.

6.04 Decentralization of DRBSLA Operations. It is the intention of theDepartment to decentralize its operations increasingly to regional offices ofCB in order to expedite the release and recovery of funds and improve thesupervision of financial institutions. In the context of term lending opera-tions and the CB:IBRD program, decentralization would take several specificforms.

(a) Evaluation of sub-loan proposals would be graduallytransferred to selected rural banks from Loan Teams.This transfer must be gradual, establishing in effectfree limits for qualified banks within which they wouldbe authorized to approve specific types of sub-loans,subject to technical support and post-approval audit byLoan Teams. Such authority would be granted and amendedon a bank by bank basis by the Director, DRBSLA, actingon recommendation of the Loan Team of the region. Assur-ances were obtained that steps would be taken to imple-ment this tranfer.

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(b) Funding authority under the program is to be decentralizedto the four Loan Teams located at the three CB regional officesand at headquarters to reduce delays in the flow of fundswhich tend to arise as a result of fund releases taking placein Manila. Supervision of sub-loan collections from bankswould be undertaken by Loan Teams. In effect the role of LoanTeams is to shift toward program management and technical back-stopping from the present function of direct operational involve-ment with each sub-loan application.

6.05 Loan Teams. The number of Loan Teams would be the same, but thenumber of officers in each would increase from three to six (eight for Teams incharge of issuing Special Time Deposits). In addition, one clerical positionwould be created in each Team. Although actual sub-loan appraisal will grad-ually become the responsibility of the financial institutions, the work ofthe Loan Team will become increasingly important in on-the-job training ofrural bank and SSLA appraisal and supervision staff. The technical expertiserequired for individual Teams will vary depending on the prevalent types ofsub-loans being extended within respective regions. The composition of LoanTeams would also shift to include a higher calibre of financial management toperform the program management functions envisaged for the Teams in the longrun.

6.06 Technical Support and Evaluation Unit (TSEU). TSEU's role withrespect to the CB:IBRD Program would continue to be essentially one of mon-itoring, evaluation and technical support for field operations. The Unithas developed a high standard of work. Under the Fourth Project the Unitwould, in addition to its ongoing supervision, oversee requirements withrespect to the share of loans extended to small farmers, and the regionaldistribution of sub-loans. To date the work of TSEU has been limited to termlending under the CB:IBRD program. In keeping with the objective of integrat-ing all credit operations in the Department, and to meet a growing need forstaff support of CB representation in multi-agency credit bodies, assuranceswere obtained that the Unit would, coincident with the beginning the FourthProject, undertake responsibility for staff support pertaining to the Depart-ment's short-term production credit activities as well. This would includethe following functions:

(a) to serve as a permanent secretariat for the Department'srepresentative to the Technical Board on AgriculturalCredit, the National Food and Agriculture Council and theNational Commission on Countryside Credit and Collection.This function will be particularly important in the pre-paration of background papers in support of CB positions tobe taken in these bodies. Such work is now done on an adhoc basis by staff borrowed from operating divisions.

(b) to develop operating policies and procedures for specialfinancing schemes for which the Department is chargedwith implementation responsibility.

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(c) to evaluate on-going and pilot schemes such as the Inte-grated Agricultural Financing scheme which is now undertrial through 18 rural banks. 1/

6.07 Management Advisory Unit (MAU). This Unit would be established toprovide assistance to rural banks in areas of management in which widespreador critical weaknesses have been encountered. It would not assume routinesupervisory responsibilities but rather would work closely with field andhead office staff to identify problems for its attention and would respondto requests by rural bank or SSLA management for special assistance on anindividual basis. Despite the fact that CB staff, as representatives ofthe regulatory and major financing agency of rural banks, would probably en-counter difficulty in gaining the confidence and candor of rural bank managers,there are several problem areas in which such a Unit could provide effectiveassistance, for example: budgeting, solicitation of deposits, cash managementand cash flow projections, staff utilization, sub-loan supervision, and col-lection procedures. MAU, to be responsible to the Director, DRBSLA, would beheaded by an Assistant Director. A Technical Assistant, three officers of therank of Division Chief (two certified public accountants and one agricultura-list) and four to eight additional officers plus two clerical support positionswould comprise the Unit. It would be essential to the effectiveness of theUnit's work that officers of these senior ranks be selected on the basis ofextensive experience in the managerial problems of rural banks. Assuranceswere obtained that this Unit would be established and staffed by experiencedofficers and would thereafter be maintained.

Lending Policies, Terms and Criteria

6.08 CB has established minimum standards for the participation ofrural banks and SSLAs in the Rural Credit Projects. The criteria include:

(a) character, competence and integrity of officers;

(b) past performance as to soundness of investments andcompliance with the law, regulations and generallyaccepted banking practice;

(c) soundness of financial position, based on liquidity,adequacy of equity and profitability;

(d) period of operation not less than one year;

(e) rediscounting facilities with CB not withdrawn; and

(f) maximum arrears limitation.

1/ Under this scheme the overall credit needs of individual farmersare provided on the basis of a farm plan and continuing evaluationand supervision in contrast to the traditional crop- or project-specificextension of credit.

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6.09 The arrears criteria for participation under the proposed projectwould be specified as maximum allowable percentages of arrears to total loanportfolio and of arrears to demand on medium- and long-term loans. Assuranceswere obtained that the following criteria would be applied without prejudiceto efforts to further reduce levels of non-payment:

(i) arrears not exceeding 25% of total loan portfolio;

(ii) arrears on term loans not exceeding 30% of demand,arrears being defined as "amounts due at the endof a twelve month period as a percentage of demand",and demand being defined as "principal and interestfalling due during the period plus overdues at thebeginning of the period";

(iii) effective January 1, 1978, arrears not exceeding25% of demand as defined above (ii); and

(iv) effective July 1, 1978, arrears not exceeding 20%of demand, as defined above (ii).

Assurances were obtained that the Government would undertake a detailedstudy of the causes of arrears in rural bank and SSLA portfolios and thatthis study would be completed and made available to the Bank for discussionby December 31, 1977, together with a plan of action for the reduction ofthese arrears.

6.10 The Bank loan would be for a period of 15 years, including a fourand one-half year grace period, at standard Bank rate of interest. The pro-posed grace period would be appropriate, allowing for a four and one-half yeardisbursement period and possible slippage in project implementation. The lend-ing rate to the ultimate beneficiaries would be 14%, 2% higher than the ratecharged under Government supervised food grain production credit programs,with the exception of 12% to agrarian reform beneficiaries. The participatinginstitutions would be charged a blended rate of not less than 9%, with theexception that, for sub-loans to finance agrarian reform beneficiaries, therate would be 7%, thus maintaining a margin of 5%. This spread is reasonableto cover the high administrative cost of dealing with small term loans. Theperiod of CB loans to participating institutions would coincide approximatelywith those for sub-loans to the ultimate beneficiaries. Foreign exchange riskwould be born by CB, while the financial risk of sub-loans would be the res-ponsibility of the participating financial institution. The amount of sub-loans would not exceed 70% of the value of titled properties or 50% of thevalue of untitled properties offered as security.

6.11 Audit. Auditing procedures are satisfactory with respect to theenforcement of regulations and accounting practices. However, there isscope for improving the effectiveness of CB auditing as a means of improvingmanagement information in rural banks and advising on the use of availableinformation in portfolio management. As required by law, DRBSLA would auditeach rural bank and SSLA every year; special examinations would also be con-ducted of rural banks and SSLAs with serious operational difficulties or

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management problems. In addition, the resident examiner system under imple-mentation now would allow monitoring of operations on a daily basis as well.The records of audit of participating banks would be retained on file at CB.

Organization of Agricultural Machinery Testing, Evaluation and StandardizationProject (AMTESP)

6.12 AMTESP would be operated as a separate activity of the Department ofAgricultural Engineering, the University of the Philippines at Los Banos (UPLB)and would be governed by a Board of Trustees or Advisory Council consisting ofrepresentatives of UPLB, Department of Agriculture, International Rice ResearchInstitute, Agricultural Machinery Dealers Association, and Government financialinstitutions engaged in the financing of farm machinery. The Project, to belocated at UPLB, would be managed and operated by UPLB under a budget andpolicy decisions set by the Board (Council) and using full and part-time staffappointed by the University's Department of Agricultural Engineering. Fundsfor the Project would be channeled through the Department of Agriculture budgetwhich would also provide counterpart funds. Quarterly payments would be madeby the Department against the Project's approved budget, adjusted for short-falls in actual expenditure. Proceeds of the Bank loan would be used tofinance equipment and civil works. Assurances were obtained that the Projectwould be established with organization, staff and facilities acceptable to theBank and would thereafter be maintained beyond the period of the proposed Bankproject.

Project Monitoring

6.13 The reporting of progress under the Third Project by DRBSLA wasgenerally satisfactory and the overall pattern of reporting would continueunchanged. However, assurances were obtained that TSEU would undertake areview of present reports and propose changes as appropriate for discussionwith the first Bank supervision mission with respect to the following consid-erations:

(i) Improvements in the procedures for data collectionand the report formats themselves to reduce thelarge volume of paper flow and the extent ofduplication in report content;

(ii) Inclusion of pre-investment characteristics of sub-borrowers in routine reporting; and

(iii) Increased timeliness of reporting of project accountsin individual banks.

TSEU would also be responsible for the monitoring of sub-loans to res-tricted categories, to ensure compliance with price ceilings on tractors andtillers, volume limitations on tractors, and the requirement that a minimumof US$11 million of sub-loan proceeds accrue to the small beneficiariesdefined in para 5.02.

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VII. MARKETS AND PRICES

Markets

7.01 The Philippines is expected to continue to be a net importer of riceduring the project period. Prices for domestic rice have more than doubled inthe past five years and now often exceed the floor price of P 1.00 per kg.imposed by the National Grains Authority. Domestic production of white cornfor human consumption is sufficient to meet present demand, but substantialimports of yellow corn will continue to be required to meet rapidly increasingfeed grain requirements. In 1974, the Government assumed monopoly control ofsugar marketing, establishing The Philippine Exchange Company (Philex) as thesole exporter of sugar. Sugar production has increased steadily in recentyears and at the present time there is a surplus of sugar in the Philippines.However, this surplus is primarily a result of marketing and shipping problems.Philippine sugar exports go primarily to the United States and it is reasonableto assume that sales to the country in the near future could rise above presentlevels. Domestic demand for livestock products is expected to grow at 6% peryear over the next few years and production based on present investment pro-grams would not keep pace (Annex 11). The same is true of fisheries production,although it has doubled in the past ten years (Annex 10).

Prices

7.02 Prices used in the financial evaluation of sub-projects are thosewhich prevailed in December 1975, unless otherwise stated on grounds ofabnormal prices during that period. These market prices of inputs and outputshave also been used in the economic analysis of the proposed project althoughadjustments were made in investment costs to reflect estimated duties andtaxes. The relative prices of factors and products have been assumed constant.

Item Price(farm gate or ex-factory

depending on model)

Rice (palay) P 50/cavan (P 1.00 per kg)Corn (yellow) P 45.6/cavan (P .8/kg)Sugarcane P 158.25/ton (cane equivalent)Beef P 6/kg (liveweight)Pork P 7/kg (liveweight)Feeder Hogs P 180 each (at 60 days)Broilers P 8/kg (dressed weight)Eggs P .40 eachFish: Assorted open sea - P 3,000/ton

Average fishpond/fishpen - P 4,000/tonShrimp - P 10,000/ton

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VIII. BENEFITS AND JUSTIFICATION

8.01 Production. Project investments in farm mechanization and live-stock and fisheries development would result in substantial increases in theproduction of a number of agricultural commodities, notably rice, for whichGovernment policy is directed at attaining self-sufficiency. Investments incottage and agro-industries would expand production of a range of consumerand small capital goods for domestic and export markets, and transportationand machinery sub-projects would provide needed services in rural areas.Total annual incremental output at full development (ranging from four toten years) is summarized in the following table:

Incremental Gross ValueProduction Million Pesos Million US$

Rice 39,825 tons 39.8 5.3Corn 7,130 tons 5.7 0.8Fish 18,326 tons 85.4 11.4Eggs 1,102 tons 8.8 1.2Poultry Meat 1,799 tons 14.4 1.9Pork 150 tons 1.1 0.1Beef 847 tons 5.1 0.7Weanlings 67,000 heads 12.1 1.6Cottage & Agro-Industries (various) 98.3 13.1ServicesLand Preparation 314,130 ha 97.9 13.0Transportation(Excluding passengers) 4.8 million 1.4 0.2

ton/kmRice Threshing 144,000 tons 7.2 1.0Rice Milling 37,500 tons 2.2 0.3

Total Value 379.4 50.6

8.02 Financial Viability. Financial rates of return on sub-projectcategories other than power tillers range from about 13% to over 100%.As discussed in para 5.04 the financial return on tiller investments undernormal conditions is not attractive, estimated at 8.2%. However, protectionagainst probable incapacitation of the alternative animal draft power is amajor advantage which has not been quantified in our model due to the widerange of reasonable assumptions which might be made. To illustrate thepossible impact, however, an assumption that one-half of one crop could notbe planted due to animal power shortage one out of five years would result ina rate of return, ceteris paribus, of 43%. Rates of return on tractors arelower than those which may be realized since they are based on 1,500 hrsannual use whereas actual utilization is often 1,800 hrs or more. Rates ofreturn on fixed investments are very high for poultry, cattle, and cottageand agro-industrial sub-projects. However, net cash flows for these sub-projects are reasonable when viewed in terms of owner/operator labor

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and management inputs and the total fixed and working capital at risk in theseventures. A summary of estimated financial rates of return is presented inthe following table:

Category Financial Rate of Return

Tractor - sugarcane 17%- rice 13%

Power Tiller 8%Portable Thresher 58%Fishing Boat 31%Fishpond 31%Fishpen 45%Backyard Cattle Raising over 100%Piggery 36%Poultry - 200 Layers over 100%

- 400 Broilers over 100%Cottage and Agro-Industries 44% to over 100%

The results of sensitivity analysis on these models is presented in Annex 16.

8.03 Economic Viability. Economic costs of investment have been derivedby deducting duties and taxes from financial investment costs. Such dutiesand taxes range between 10% and 20% on the landed cost of imported items, andwe estimate them to amount to 8% of total project cost, equivalent to about25% of the foreign exchange component. Market prices of fertilizer and petro-leum products approximate their economic costs and no shadow pricing of thesecommodities has been undertaken. Similarly, unskilled labor has been costedat its market rate since the majorty of the project's employment creationwould occur in accordance with the crop cycle, the primary determinationof employment in the rural Philippines. Including contingencies and the costsassociated with all supporting services financed by the project, and overalleconomic rate of return of 21% has been estimated. A 10% increase in operatingcosts would reduce the rate to 16% (Annex 17).

8.04 Foreign Exchange Impact. The foreign exchange cost of the projectwould be about US$29.2 million. In addition, spare parts, fuel and lubricantswould be about US$7.5 million per year. The project would generate some ex-ports from cottage industries, about US$ 3.7 million per year. However, thePhilippines is a net importer of rice and fish, and the project's major contri-bution to the balance of trade would be reduction in the import requirementsof these commodities. At a c.i.f. Manila price of $230 per ton, rice productionunder the project would save about US$9.2 million per year in foreign exchange.Assuming that only one-third of project fish production would substitute forimported products a further US$3.8 million per year would be saved. On thebasis of these assumptions, the project would have a net impact on foreignexchange of about US$9.2 million per year.

8.05 Employment Effect. The project would create about 10,280 jobsas a direct result of sub-loan investments. Indirect employment throughintensified agricultural production would be substantial - 4,600 man-years

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per year in rice production alone - and productivity of labor would also beincreased. The majority of direct employment and all indirect agriculturalemployment would be of an unskilled nature and therefore potentially avail-able to the lowest income groups in the rural areas.

8.06 Benefits to Small Farmers and Fishermen. Fifty seven percent of all

sub-projects other than tractors, amounting to about 31% of total sub-projectcosts would go to small beneficiaries defined in para 5.02. Direct employ-ment associated with these sub-loans would be about 2,200 man-years peryear. The total net income per year to these owners at full development isexpected to be P 54 million, or an average of P 5,445 per owner. In addi-

tion, a major benefit to smaller farmers under the project would be increasedavailability of custom hire services, primarily for land preparation. Weestimate that the majority of the 310,000 ha per year custom hire capacitygenerated by the project would be utilized on farms of less than seven ha.

8.07 Institutional Development. The project would strengthen the capacityof CB to provide technical and managerial support for the term credit opera-tions of on-lending institutions. This assistance, together with projectsupported training, would enhance the ability of participating institutionsto undertake sound appraisal and supervision of their own term credit loans.In addition, more intensive supervision of rural banks would result on im-proved overall portfolio management.

8.08 Project Risks. Since this would be the fourth in a series of proj-ects implemented through CB and rural banks and the second in which SSLAshave participated, we do not envisage procedural delays in project imple-mentation. The estimated schedule of disbursements takes into considerationthe likely effect of the enforcement of arrears criteria on the number ofrural bank participation in the project. Realization of the specific bene-fits attributed to the proposed project however would depend on the extentto which the Government and on-lending institutions can affect the followingshifts in emphasis from previous projects; an increase in the share of pro-ceeds accruing to smaller borrowers, and greater sub-loan appraisal and super-vision capacity on the part of on-lending institutions. These are difficultundertakings and, while risks have been minimized in project design, successwill depend primarily on continuing commitment and effort on the part of thoseresponsible for project implementation.

IX. RECOMMENDATIONS

9.01 Assurances were obtained from CB on the following matters:

(a) That at least US$11 million of loan proceeds would beextended to small beneficiaries as defined in para 5.02for purposes of the proposed project (para 5.02);

(b) That the financing of four-wheel tractors would notexceed (para 5.03):

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(i) US$16.5 million in loan proceeds for tractor sub-loans; and

(ii) 1,000 units of tractors in excess of 68 hp each;

(c) That qualified consultants would be engaged on termsand conditions acceptable to the Bank to conduct astudy of the financial, economic and social impact offarm mechanization, that terms of reference for thestudy would be acceptable to the Bank, and that apreliminary draft of the study would be submitted tothe Bank for its comments (para 5.10);

(d) That Rules and Regulations governing the use of proj-ect proceeds, and changes thereto, would be acceptableto the Bank (para 5.17);

(e) That the maximum retail prices for four wheel tractorsand power tillers, including their optional equipmentand implements, would be determined in accordance withguidelines set out in para 5.19 (para 5.19);

(f) That necessary steps would be taken to gradually transferlending authority, including evaluation, approval andsupervision of sub-loans to qualified rural banks and SSLAs(para 6.04);

(g) That the Technical Support and Evaluation Unit wouldbe expanded to function as the departmental planningunit covering both short- and long-term lending programs(para 6.06); and

(h) That a Management Advisory Unit would be established inDRBSLA and staffed with experienced senior officers, andwould thereafter be maintained (para 6.07).

9.02 Assurances were obtained from the Government on the followingmatters:

(a) That an Agricultural Machinery Testing, Evaluation andStandardization Project would be established at UPLB withorganization, staff and facilities acceptable to the Bank,and would thereafter be maintained beyond the period ofthe proposed Bank project period (para 5.11); and

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(b) That a detailed study would be conducted of the causesof arrears in rural bank and SSLA portfolios and thatthis study would be completed and made available tothe Bank for discussion by December 31, 1977, togetherwith a plan of actions for the reduction of thesearrears (para 6.09).

9.03 The proposed project is suitable for a Bank loan of US$36.5 millionat standard Bank lending rate of interest repayable over 15 years, includinga grace period of 4-1/2 years.

ANNEX 1Page 1

PHILIPPINES


Small-Scale Agriculture in the Philippines

I. Background

1. The Rural Sector. About 71% of the Philippine population lives inrural areas. While there is a slow steady decline in this proportion, theactual rural population is increasing at an annual rate of 2.7% standing atapproximately 30 million in 1975, of whom almost 20 million are engaged inagriculture and 2 million in fisheries and forestry. Average rural familyincome in 1971 was P 4,400 (US$680), about 75% of the national average. Atthe same time, the share of earnings of the 40% of rural families with thelowest incomes amounted to only 13%, while the earnings of the highest 20%amounted to 51%. More recent data are not available but there is no evidenceof improved equity in income distribution. There are approximately 3 millionfamilies engaged in agriculture in the Philippines (45% of total population)of which 1.8 million are classified in the lower 40% income bracket; 1.4million self-employed and 0.4 million wage earners.

2. Farming Pattern. There are about 6.7 million ha under cultiva-tion in the Philippines (1974), of which about 30% is fully irrigated.10.1 million ha are devoted to agricultural crop production. As shown inTable 1, rice is the major crop, occupying 33% of total area, followed bycorn and coconuts. Together, these crops account for 93% of total area underagricultural production. 1/

3. The preponderance of small farmers grow rice or corn as theirprimary crop, the former if irrigated, the latter otherwise. These servesubsistence needs and may yield sufficient surplus for cash sale, particu-larly if there is sufficient moisture for double cropping. Otherwise, cashincome is generated by a crop with lower moisture requirement that may begrown immediately after harvest of the rice or corn. Particularly in Luzon,vegetables are fitted into the cropping pattern in this manner, althoughcorn is also widely used as a second crop after rice.

4. Farm Size. Current data on farm size are not available. Figurespresented in this section should be viewed in the context of a historicaltrend toward increased numbers and smaller sizes of farm holdings. TheAgrarian Reform Program will accelerate this trend.

1/ Figures refer to total area planted to individual crops in a one-yearperiod.

ANNEX 1Page 2

Distribution of Farm Holdings by Size(1960)

Number of Farms Total Area('000) % ('000 ha) %

Under 1 ha 250 11.5 125 1.61 - 1.9 ha 642 29.6 796 10.2

2 - 4.9 ha 864 39.9 2,426 31.25 - 9.9 ha 290 13.4 1,845 23.710 -24.9 ha 109 5.0 1,396 10.0Over 25 ha 12 0.6 1,184 15.3

2,167 100.0 7,772 100.0

5. Forty-one percent of the total number of farms in the Philippineswere less than two ha in size and occupied in total only 12% of the cultivatedarea. In the opposite extreme, 0.6% were more than 25 ha and accounted for15% of the total cultivated area. More than 86% of farm holdings fell withinthe limit of 7 ha placed on rice and corn lands under the Agrarian ReformProgram, and these account for 53% of cultivated area. More than 90% of farmson which rice or corn are the major crop are less than 7 ha in size. 1/

6. Land Tenure. Approximately 45% of agricultural land holdings inthe Philippines are owner-operated (based on most recent census data, 1960)and these account for 53% of total area. Forty percent are tenant-operated,accounting for 26% of area. Tenant cultivation, however, is much more pre-valent in rice and corn areas where 46% and 51% of holdings, respectively,are operated in this manner.

Land Tenure Pattern(1960)

Number of Farmers Total Area('000) % ('000 ha) %

Owner 968 45 4,133 53Part Owner 311 14 1,140 15Tenant 864 40 2,000 26Other 23 1 499 6

Total 2,166 100 7,772 100

1/ This survey was conducted 12 years before the 7 ha limit on rice andcorn holdings was announced under the Agrarian Reform Program; dataare not so likely therefore to be misrepresentative.

ANNEX 1Page 3

7. Since the 1960 census, two pertinent developments have taken place:the continued slow increase in total number of holdings as a result of landsbeing divided among heirs; and, the introduction of agrarian reform legisla-tions, RA 3844 in 1963 and Presidential Decree 27 (P.D. 27) in 1972.

8. As of December 31, 1975 only 354 tenants had entered into purchaseagreements with the Land Bank of the Philippines (LBP) for lots totalling 279ha under RA 3844. As of the same date, 17,941 tenants had received Certifi-cates of Land Transfer in respect of a total area of 34,229 ha under P.D. 27.Based on 1960 data, this represents less than a 2% shift in both numbers andarea from tenancy to ownership. It should be noted that Operation Land Transferunder P.D. 27 is accelerating; by May 15, 1976, total area financed was 65,514ha and the number of beneficiaries was 30,528. The area implicitly covered byP.D. 27 is 780,000 ha with an estimated tenant family population of 418,000.The average size of new owner holdings to date under P.D. 27 is 2.1 ha although,in the event all areas and tenants are covered, this would be reduced to 1.9ha.

II. The Small Farmer - A Problem of Definition

9. There is a host of definitions of the small farmer in the Philippines.For example:

Rural Banks Act (RA 720) Section 5 - "Loans or advances extendedby Rural Banks.. .shall be primarily for the purpose of meeting thenormal credit needs of any small farmer or farm family owning orcultivating, the aggregate, no more than fifty hectares of landdevoted to agricultural production..."

Agrarian Reform Law (P.D. 27) - "... one who is the actual tiller

whether owner, amortizing owner or lessee, of not more than 7hectares of rice or corn land".

Land Bank of the Philippines - "... a small farmer ... owns,

leases or holds a Certificate of Land Transfer to the land hetills and ... is dependent for his survival on more than oneagricultural or agriculture-based activities. On average hetills an area of not more than 7 hectares and earns a dis-posable income of not more than F 3,000 per annum".

Lower 40% - On the basis of population, average income, and incomedistribution figures for 1971, the income limit to define the lower40% in rural areas would be about F 2,100 per annum. Were size ofland holding to be taken as a proxy for the earning potential ofcultivators, the lower 40% would be defined as those whose holdingsare less than two hectares.

ANNEX 1

Page 4

Minimum Needs - Minimum cash requirements for a rural family ofsix in the Philippines, assuming staple foods are home grown,amounts to about P 4,000. Such a figure inevitably sparks con-troversy because of regional variations and the concept of whatconstitutes minimum needs. After rather extensive 4inquiry aroundthe Philippines we are satisfied that it is at least an appro-priate order of magnitude. On the basis of models presentedelsewhere in this report we estimate that net income of P 4,000would require 4 ha of single crop corn land or 1 ha of doublecrop rice land, assuming the availability of appropriate seed,fertilizer, water, and technical assistance inputs as well astimely cultivation. (We have omitted the potential for non-farm income). These areas would represent minima beneathwhich both cultivation and development programs would haveto focus on off-farm income opportunities.

10. These examples hint not only at the difficulty of arriving at ageneral purpose definition of the small farmer, but also perhaps at themeaninglessness of trying to do so. Definitions ought to be geared tospecific purposes. The Bank's Rural Development Sector Policy Paper pointsout that, "The notion of target groups ... provides that necessary focus ongroups of the rural population in terms of whose well being ... program canbe designed and evaluated." It is at this point that we revert to the projectcontext in which our work was undertaken and develop a definition of the smallfarmer for purposes of the Fourth Rural Credit Project. We hasten to addhowever, that several of the considerations used in arriving at this dcfini-tion may well be appropriate for other Bank lending for agricultural creditin the Philippines.

Small Farmer Definition for Fourth Rural Credit Project.

11. Considerations:

(i) Our purpose is to identify a group of potential borrowersat the lower end of the income scale to whom project bene-fits can be directed in greater measure than has beenachieved in the past.

(ii) The project will finance primarily medium- and long-termcredit needs. The greatest need of most of the smallestcultivators at present is production credit and the pro-vision of term credit to them may well be a financialdisservice.

(iii) Rural banks and savings and loan associations are private,commercially oriented institutions, the inherent character-istics of which do not suit them to serve as channels forprograms primarily of a social or economic nature.

ANNEX IPage 5

(iv) The scope for introducing meaningful substitutesfor conventional loan collateral is very limited atpresent, and financial intermediaries will continueto depend heavily on real estate and chattel mortgages.

(v) To avoid undue risk in the portfolio of financial inter-mediaries, a significant portion of loans must not bedirected to borrowers whose holdings do not afford thema measure of financial stability. The target group mustbe sufficiently broad to record economic success withoutforeshadowing financial failure.

(vi) The break-even point for many of the investment items ingreatest demand exceeds the volume of work to be performedon the smaller holdings. Time available for custom hiringis limited, as is the requisite entrepreneurial skill, amongthe smaller cultivators.

(vii) The limits incorporated in the definition must describe anenterprise which constitutes the primary source of income.

12. Definition. For purposes of directing the CB:IBRD program moretoward small-scale agriculture, it is proposed that about 31% of sub-loanproceeds under the Fourth Rural Credit Project be designated for the follow-ing small beneficiaries:

(i) A sub-borrower whose total self-earned income peryear is less than P 7,500 1/, or

(ii) A sub-borrower whose self-earned income per year is P 7,500 ormore and who earns 75% or more of such income from the following:

- agricultural operations carried out on a total land-holding, owned or leased, of less than 7 ha;

- a fishing enterprise, owned or leased and operated by him,an consisting of not more than 5 ha of fishponds or fishpens,or of not more than one fishing vessel, such vessel not toexceed 5 tons; or

- a cottage or agro-industrial enterprise, owned andoperated by him, and consisting of fixed assets ofless than P 100,000, excluding the value of land.

1/ A small scale livestock enterprise of not more than 10 sows, 200 layers,400 broilers or five cattle or carabaos would usually be for thiscategory of small beneficiaries.

ANNEX 1Page 6

13. Scope of Definition. While data are not precise and current, thedefinition would include the following approximate percentages of total agri-cultural enterprises in the Philippines:

- 99% of rice farms- 90% of corn farms- 60% of sugar farms- 65% of coconut farms- the majority of livestock operations outside

Greater Manila- 69% of fishpond operations- 70% of fishpen operations- 99% of fishing vessel operations

14. In its simplicity, the proposed definition clearly ignores a numberof factors other than total size of enterprise which affect income: forexample, quality of soil, seeds, or water; whether land is irrigated or not;etc. However, these omissions are intentional. We believe that a simpledefinition is much more readily implemented and monitored, and since suchconstraints on lending have not previously been imposed, ease of enforcementwill be critical to any effective redirection of the CB:IBRD program.

15. Comment. Unfortunately, no data have been compiled on the size ofenterprise to which sub-loans were made under the previous three Rural CreditProjects. However, the size of sub-loans gives a fairly clear picture that,despite the overwhelming size of the proposed target group, small farmersdid not benefit substantially from the previous loans, other than throughcustom services. For example, under the Second Project, 56% of total loanswere in excess of P 16,000 ($2,105) each; 27% were in excess of P 40,000 ($5,480)each, and only 20% were less than P 8,000 ($1,095) each. Adjusted to mid-1975price levels, these figures would be approximately doubled. Under the ThirdProject, the average size of sub-loans (through December 31, 1975) was morethan P 59,800 ($7,970). Statements of objectives for these previous projectswere consistent with Bank policies at the time of appraisal. However, thesub-loan size figures above indicate that a change in project design and theintroduction of limits on certain categories will be necessary if significantresults are to be achieved in our present efforts to extend greater assistanceto small-scale agriculture. Under the Fourth Project, the average size of asub-loan is projected to be P 42,280 ($5,637), and a limit on the total volumeof larger sub-loans for tractors would also be imposed.

16. Credit. 1/ The total supply of institutional credit to agriculturehas fluctuated during the last ten years with insignificant overall growth inreal terms. In current dollar terms credit rose by about 60% between 1972and 1974 primarily as a result of the introduction of Masagana 99 and Masaga-nang Maisan - supervised crop production credit programs. About 45% of the

1/ An overview of the agricultural credit sector in the Philippines ispresented in the Philippines Basic Economic Report, Vol. II, pp. 123-130.

ANNEX 1Page 7

funds of these programs are channeled through rural banks and 50% throughPhilippine National Bank (PNB). As a result of their participation inthese programs, the share of rural banks in total lending rose from 16% in1972 to 22.9% in 1974. PNB's participation in these programs appears to havebeen at the expense of increases in other lending since its share of totallending remained approximately the same (26% in 1972; 27% in 1974). Themajority of lending by commercial banks has been for sugar production and thefinancing of sugar and copra stocks.

17. Availment of institutional credit by small farmers has been verylimited, the majority constraint being lack of real estate or acceptablechattel collateral. The introduction of supervised credit together withconcommitant guarantee schemes was intended to compensate for the inadequacyof collateral on the part of small borrowers. However, private financialinstitutions have been reluctant to set aside collateral requirements andwhere this has been done preference has been given to larger borrowers. Forexample, the average size of holding financed under Masagana 99 (rice) is2.5 ha compared to the average size of rice farm of 1.7 ha. The guaranteesystem has not functioned effectively. Despite compulsory participation inthe scheme and widespread repayment default, approved bank claims under thescheme are very small (P 13 million in 1975, or 1.6% of the value of loansguaranteed).

18. It has been estimated that about 2/3 of all credit for agriculturecomes from non-institutional sources. While some credit from relatives isfree of interest, traditional practice involves rates as high as 300% peryear equivalent, often paid in kind. It is to these sources of funds thatmost small farmers must resort. Despite the high rates of interest and,frequently, the tying up of product marketing on very poor terms, thereare significant advantages to the use of this credit: it is available onshort notice with few or no formalities, it may be used for a wider rangeof production and consumption needs, and repayment periods are oftenflexible. It is highly unlikely that non-institutional credit sourcescould be rendered obsolete by changes in the modus operandi of creditinstitutions. Nevertheless, the credit needs of small farmers could be metto a much greater extent in the formal sector.

Desirable Characteristics of Credit for Small Farmers

19. The financial affairs of the great majority of small farmers inthe Philippines have traditionally been overseen by a landlord or merchantwith whom the borrower usually has a lasting business tie. Despite theadvantage which might be taken of the borrower in such situations, he hasnot developed in many cases even rudimentary money management skills. Hehas a very high time preference for money and inadequate knowledge of cashflow and repayment capacity. The concept of voluntary repayment has beenobviated by the forceful presence of the lender at the time loans fall due.The first and most difficult feature of a good credit system for smallfarmers is therefore that it be accompanied by practical education in theuse of credit.

ANNEX lPage 8

20. To the extent that smaller farmers have been able to avail them-

selves of institutional credit, a somewhat surprising problem has arisen,namely that they have been able to obtain too much credit, and the debt burdenon a great many farmers now exceeds repayment capacity within a reasonable pe-riod of time. It is not uncommon for example to find small farmers who, inaddition to land amortization payments under the Agrarian Reform Program, arecarrying a current crop loan under Masagana 99 as well as one or two restruc-tured crop loans from previous seasons, and a medium-term loan for a powertiller. The total annual payments in such a situation would range betweenP 9,000 and P 12,000 for a 2 ha farm. Additional unfinanced production expensescould be as high as P 2,000-P 3,000 depending on the availability of familylabor. When compared with an estimated gross income of about P 15,000 assumingappropriate inputs and average good yields, net income would range from 0 toP 4,000, the latter just equalling the estimated family requirements for mini-mum essential purchases. Despite the desirability and public appeal of extend-ing credit to small borrowers, a good credit program must recognize and avoidthe disservice inherent in excessive debt burden.

21. Another essential feature of effective small farmer credit is thatit provides the appropriate balance of production and term credit. In manycases, where financial stability of an enterprise is limited as is thescope for diversification (for example, a small holding of a cultivator whohas depended heavily on a now displaced landlord and has therefore notdeveloped financial and technical skills) the appropriate balance for anumber of years may be 100% production credit. Capital goods typicallyrequire more sophisticated management, a longer time perspective, abilityto plan, and the assured timely supply of a number of production inputs ifthey are to be financially successful. In the absence of these, capitalassets may become a serious unproductive burden. Power tillers and backyardlivestock facilities are among the investments most commonly failing inthis respect, despite their potential utility in elevating the standardsof small farmers under the appropriate conditions.

ANNEX 1Table 1

PHILIPPINES


Area and Production of Major Crops(1974)

Area % of Total Production(Million ha) Quantity Value

(Million M.T.) (Billion Pesos)

Rice 3.4 33 5.6 5.0

Corn 2.8 28 2.3 1.5

Coconut 2.2 22 Various 1.7

Sugar .5 5 3.4 3.0

Vegetables .2 2 Various .5

Abaca .2 2 .1 .4

Tobacco .1 1 .06 .3

Coffee .1 1 .1 .3

Banana .2 2 1.2 1.0

Other Fruitsand Nuts .1 1 .9 1.1

Other Crops .3 3 Various .3

Total 10.1 100 17.5 17.8

Source: Department of Agriculture

ANNEX 2Page 1

PHILIPPINES


Cottage and Agro-Industries in the Philippines

The Manufacturing Sector

1. Of the 10,248 firms covered in the 1971 Annual Survey of Manufac-tures (ASM), 8,203 (80%) were cottage industries made up largely of handi-craft and traditional nonfactory units. They employed 16% of the laborforce and, with a notably low level of labor productivity, contributedslightly less than 5% to gross value added in manufacturing. The ASM dataon cottage industries, however, are not complete, and do not include thesmallest "unorganized" firms with 1-4 workers. Unofficial estimates 1/indicate a much larger role of cottage units in manufacturing employment(75%) and value added (10%). The data are very weak for comparative pur-poses. The remaining 2,045 establishments, those with 20 or more workers,covered in the 1971 ASM make up, in contrast to the cottage sector, the"modern" manufacturing sector.

TOTAL MANUFACTURING BY SIZE ESTABLISHMENTS, 1971 ASM(Current Prices)

Gross LaborScale Establishments Employment Value Added Productivity

No. of Workers No. % No. % R Million % (Annual Valueper Worker in P)

Cottage 5-19 8,203 80.0 68,209 16.2 324 4.3 4,750

Small 20-99 1,363 13.3 56,489 13.4 693 9.3 12,270

Medium 100-199 291 2.8 40,222 9.6 790 10.6 19,650

Large 200+ 391 3.8 256,297 60.8 5,641 75.7 22,010

Total 10,248 100.0 421,217 100.0 7,448 100.0 17,680

1/ Estimated by Ranis Mission for the ILO Report, Sharing in Development,Geneva, 1974 (p. 142).

ANNEX 2Page 2

2. More reuant data on small industries as a group (here defined asall firms with less than 50 workers) show that in 1973/74, they employednearly I million people or 68% of the total industrial labor force, andaccounted for 12-13% of total industrial value added. Of this share oftotal industrial value added, about 6% was accounted for by firms with1-4 workers, 3% by firms with 5-19 workers and 3-4% by firms with 20-49workers. The respective shares of the same groups in total industrialemployment were estimated at 60%, 5.5% and 2.5%.

Historical Trends

3. In the 1956-73 period, the importance of cottage industries employ-ing 1-4 workers declined steadily in terms of industrial value added andemployment, while that of firms with 5-19 workers stagnated. However, duringthe 1962-68 period (Table 5), firms with 5-19 workers grew at 13.8% in grossvalue added compared to 8.2% for large-scale industry, at 5.8% compared to2.2% in labor productivity, at 3.4% compared to 1.5% in number of establish-ments, and at 6.3% compared to 5.9% in employment. Firms with 1-4 workersgrew at 1.3% per year in employment during those years but declined by 3.0%per year thereafter. But in spite of the reversal of the 1962-68 period,which appears to have been caused by special incentive laws passed at thesame time and a relaxation of foreign exchange controls, firms with lessthan 20 workers not only declined in terms of their relative share in manu-facturing compared to large-scale industries, but in the aggregate experienceda decrease in their absolute rates of growth.

4. As Table 5 indicates, during 1968-73, despite the stagnation in out-put and the decline in employment, the number of firms with 5-19 workers rosesharply; it grew at a rate of 4.3% a year compared to 3.4% in 1962-68 and 2.7%in 1956-62. Between 1956 and 1973, the size of an average firm employing 20or more workers doubled in employment terms (from 82 to 156 workers), andgrew 250% in terms of gross value added (from P 836,000 to P 2,043,000 at con-stant 1967 prices). During the same period, the average firm in the small-scale group (5-19 workers) declined in size from 10.2 to 7.6 workers in termsof employment and from P 34,000 to P 20,000 in terms of gross value added.There are no data available on firms with 1-4 workers. The increasing numberof small-scale firms, their diminishing average size, and the absolute decreasein cottage industry employment noted in paragraph 3 seem to reflect the exist-ence of both favorable and unfavorable factors: a continuous effort to improvethe industrial climate and encourage the emergence of vigorous local entrepre-neurs, but at the same time a policy-induced proliferation of inefficientunits and the lack of a normal process of consolidation and growth from small-to medium-sized units.

Factor Use

;5. As in these and other countries, there is a definite pattern inindustries' proportional use of productive factors in the Philippines,depending on the size of firm. The larger a firm, the more capital inten-sive (in terms of fixed capital per worker) it tends to be and the higher

ANNEX 2Page 3

level of labor productivity (in terms of value added per worker) it tendsto have.

FACTOR INTENSITY AND PRODUCTIVITY IN MANUFACTURING 1971

Size of Firms Capital per Value Added per Capital ValueNo. of Workers Worker P'000 Worker P'000 Added Ratio /a

9- 19 5.1 5.9 0.8520- 99 11.4 12.3 0.9100-199 14.0 19.6 0.7200+ 22.3 22.3 1.0

/a Book value of fixed assets.

Source: CSO

6. The effect of the size of the firm on its capital productivity(fixed capital needed to produce one unit of value added) is not clear above.But when fixed assets are expressed in terms of replacement costs instead ofbook value, small-scale firms definitely tend to need less capital for thesame amount of output. 1/

Regional Distribution

7. Industry (except mining) and commerce are overwhelmingly concen-trated in Region IV, which includes Metropolitan Manila (44.7% of GDP). Thereis no other comparable concentration of activity, Small- and medium-scaleindustries, which tend to cluster close to supply and demand and suitableinfrastructure and other services, are even more highly concentrated. About65% of these firms are in Region IV, and of the balance 23% are found in thefive regions of greatest overall economic activity and urbanization. Firmswith 1-4 workers are by far the most dispersed. They are less dependent onpower and tend to process locally available materials for local markets.Approximately three quarters of these smallest firms are in the food indus-tries (milling, bakeries, etc.) and wearing apparel (garments, dressmaking,etc.). There are fairly large numbers (about 5% of the total) in the textiles,metal products, electrical machinery and transport equipment and repair shopswhere they provide services as well as fabricating small parts and components.

Constraints on Cottage Industry Development

8. In addition to the industrial policy constraints under which largerscale industries have easier access to financial incentives and to industrialfinancing and high levels of protection and inducements enabling the import

1/ See ILO Report, Sharing in Development, Geneva, 1974 (p. 144).

ANNEX 2Page 4

of capital goods, components, and industrial raw materials at concessionaryrates, firms with less than 20 workers face problems of market accessibility,domestically and in exporting, a frequent lack of adequate infrastructureand support services, and have to meet complicated institutional requirementsto incorporate and to obtain financing and technical assistance.

9. These constraints have been recognized by the Government and, inkeeping with the new policy of encouraging the growth of small-scale and cot-tage industry in less developed regions, both financial and technical assist-ance programs are now in operation and appear to be fairly effective, wherethey reach the entrepreneurs. A major financing difficulty which remains isthe insistence by banking institutions on adequate collateral requirements.Although the Department of Industry (DOI) has done notable work in implement-ing technical assistance programs for small- and medium-scale industry, otherGovernment departments such as the Department of Trade, the Design Ceniter ofthe Philippines, and the National Cottage Industries Development Authority(NACIDA) have lacked the staff and funding to date to energetically improvetheir technical assistance services particularly for export and nationalmarketing assistance, product quality and design standardization and in easinginstitutional requirements for the establishment of a business firm. In par-ticular, the separation of cottage industries administered by NACIDA and smalland medium industries in general, has left largely ignoted the need to multi-ply the linkages between small- and large-scale industries, and has effectivelyexcluded cottage industries from the Government's SMI program. Thus, questionson the organization of cottage industries, the need for industrial estatesprograms, the value of producers and marketing cooperatives have been ignoreduntil very recently. In recent years the Government has greatly acceleratedits program to improve and develop basic infrastructure and supporting services.Major highways and farm to market roads, ports, inter-islands shipping andshipbuilding, rural electrification, water development and manpower trainingare all being vigorously pursued. Much of the progress to date, has beenmaking good on the low levels of public investment which prevailed in the1960s, but it should provide the necessary conditions under which the Govern-ment's programs of industrial dispersal and small industry development cansucceed.

Conclusions

10. It is clear from the previous discussion that the cottage andsmall-scale industrial subsector has been and will remain an importantcomponent of Philippine industry. The development of these sectors is highlydesirable on the grounds of their low capital use, their favorable produc-tivity, and their role in maintaining the level of existing employment andin generating new employment. A variety of policy, institutional and othermeasures need to be changed, accelerated or begun. To revive and sustainthe growth in modern small-scale industries and to maintain the presentemployment level in the cottage industry sector, policies will have to bedeveloped that eliminate the artificially-induced distortions in factor useand which do not hinder Government programs to promote and develop small

ANNEX 2Page 5

and medium industry. The cottage industry sector itself will have to receive

greater attention in order to find out where the potentials for sound growth

lie and which production units should be supported by Government programs if

the declining trend in this subsector is to be arrested. For it must beclearly understood that the potential for growth in the cottage industrysubsector is very limited and that cottage industry cannot assume a majorrole in future industrialization. In many fields of production, cottageindustry is not adequately suited to provide goods and services at a costand of a quality competitive with larger scale manufacturers using moreefficient production methods. If cottage industry is on balance able tomaintain its present employment levels over the next 10 years, itself anoptimistic assumption, it would result in a sharp drop in the subsector'srelative share in total industrial employment from 60% in 1974 to 42% in1985.

PHII.IPPINES

FOURTH-RURAL CREDIT PROJECT

Investment and Gross Output for Large Manufacturing Industries by Size of Establishment Based on Employment 1962, 1968, 1971, 1973(percentages)

Scale Number of Establishments Gross Output Fixed Assets at Book Value Net Investment1962 1968 1971 1973 1962 /a 1968 1971 1973 1962 1968 1971 1973 1962 1968 1971 1973

Small Scale

20-49 Employees 58.1 52.2 46.7 48.9 7.1 7.3 4.6 5.8 6.7 5.8 4.6 3.2 11.5 3.8 2.1 3.750-99 16.9 21.2 19.9 20.4 7.2 8.5 7.6 8.5 7.7 7.4 4.7 5.5 7.7 4.6 4.6 5.4

Subtotal 75.0 73.4 66.6 69.3 14.3 15.8 12.2 14.3 14.4 13.2 9.3 8.7 19.2 8.4 6.7 9.1

Medium Scale

100-199 Employees 10.3 11.7 14.2 11.7 10.8 13.8 13.0 13.1 11.0 14.5 8.1 7.5 16.9 8.1 8.4 7.2

Large Scale

200-499 Employees 10.8 9.1 11.1 9.1 48.3 30.5 29.2 28.1 49.7 28.8 30.5 39.2 36.6 21.5 32.6 25.0500 and above 4.0 5.8 8.0 9.9 26.6 39.9 45.5 44.5 24.9 43.5 52.1 44.6 27.3 62.0 52.3 58.7

Subtotal 14.8 14.9 19.1 19.0 74.9 70.4 74.7 72.6 74.6 72.3 82.6 83.8 63.9 83.5 84.9 83.7

Grand Total

All Manufacturing 100.1 100.0 99.9 100.0 100.0 100.0 99.9 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

/a Unadjusted, therefore it excludes work in progress which is included in the data in later years.

Sources: Bureau of the Census and Statistics, Annual Survey of Manufactures: 1962, 1968 and 1971, Manila, Philippines.Bureau of the Census and Statistics, Preliminary Report on Annual Survey of Manufactures: 1973, Manila, Philippines.

November 17, 1976

-P

PHILIPPINES

FOURT11 RURAL CREDIT PROJECT

Employment and Wages for Large Manufacturing Industries by Size of Establishments Based on Employment 1962, 1968, 1971, 1973

Payrolls & Extra Benefits Wages per Worker /a Wages as % of Value

Scale Employment (as X) for Paid Employees (%) (P '000) Added

1962 1968 1971 1973 1962 1968 1971 1973 1962 1968 1971 1973 1962 1968 1971 1973

Small Scale

20-49 Employees 10.6 10.6 7.9 9.8 7.3 7.4 5.4 6.8 1.6 2.2 2.9 3.2 33.1 31.5 30.5 26.2

50-99 " 8.4 10.7 8.1 9.3 7.1 9.1 6.6 7.5 2.0 2.7 3.6 3.8 32.9 31.5 24.o 24.5

Subtotal 19.0 21.3 16.0 19.1 14.4 16.5 12.0 14.3 1.8 2.4 3.3 3.5 33:0 31.5 26.6 25.2

Medium Scale

100-199 Employees 10.1 11.8 11.4 10.8 10.0 11.7 10.5 10.2 2.3 3.1 4.0 4.4 32.9 22.8 20.3 19.9

Large Scale

200-499 Employees 42.8 21.2 20.1 19.1 45.7 23.1 22.2 21.3 2.5 3.5 4.8 5.2 23.7 21.3 20.2 16.6

500 and above 28.1 45:6 52.5 51.0 29.9 48.7 55.3 54.2 2.5 3.4 4.6 5.0 24.6 24.4 21.4 19.7

Subtotal 70.9 66.8 72.6 70.1 75.6 71.8 77.5 75.5 2.5 3.4 4.6 5.1 24.0 23.3 21.0 18.7

Grand Total

All Manufacturing 100.0 99.9 100.0 100.0 100.0 100.0 100.0 100.0 2.4 3.2 4.3 4.7 25.7 24.3 21.5 19.5

/a Based on current prices.

Sources: Bureau of the Census and Statistics, Annual Survey of Manufactures: 1962, 1968 and 1971, Manila, Philippines.

Bureau of the Census and Statistics, Preliminary Report on Annual Survey of Mlanufactures: 1973, Manila, Philippines.

November 17, 1976

PHILIPPINES


Contribution to Value Added, Factor Intensity and Productivity for Large Manufacturing IndustriesBy Size of Establishments Based on Employment, 1962, 1968, 1971, 1973

(In thousands pesos based on current prices)Scale Census Value Added (%) Value Added per Fixed Assets (O/K) Value Added per Worker (O/L) Fixed Assets per Worker (K/L)

1962 1968 1971 1973 1962 1968 1971 1973 1962 1968 1971 1973 1962 1968 1971 1973

Small Scale

20-49 Employees 5.7 5.7 3.8 5.0 1.1 1.1 0.8 1.4 4.9 7.0 9.6 12.o 4.3 6.6 11.3 8.650-99 " 5.5 7.0 5.9 6.0 1.0 1.0 1.3 1.0 6.0 8.5 14.9 15.5 6.2 8.4 11.4 15.7

Subtotal 11.2 12.7 9.7 11.0 1.1 1.0 1.1 1.1 5.4 7.8 12.3 13.8 5.1 7.5 11.4 12.0

Medium Scale

100-199 Employees 7.9 12.4 11.1 10.1 1.0 0.9 1.4 1.2 7.1 13.7 19.6 22.3 7.4 15.0 14.0 18.4

Large Scale

200-499 Employees 49.6 26.4 *23.6 25.1 1.3 1.0 0.8 0.6 10.6 16.2 23.7 51.4 . 7.9 16.6 29.8 54.3500 and above 31.3 48.5 55.6 53.8 1.7 1.2 1.1 1.1 10.1 13.8 21.4 25.1 6.0 11.7 19.4 23.1

Subtotal 80.9 74.9 79.2 78.9 1.5 1.1 1.0 0.8 10.4 14.6 22.0 26.8 7.1 13.2 22.3 31.6

Grand Total

All Manuifacturing 100.0 100.0 100.0 100.0 1.3 1.1 1.0 0.9 9.1 13.0 20.2 23.8 6.8 12.2 19.6 26.4

Sources: Bureau of the Census and Statistics, Annual Survey of Manufactures: 1962, 1968 and 1971, Manila, Philippines.Bureau of the Census and Statistics, Preliminary Report on Annual Survey of Manufactures: 1973, Manila, Philippines.

November 17, 1976

r:r z

{5 w

PHILIPPINES


Basic Data for Large Manufacturink Industries by Size of Establishments Based on Employment, 1973(current prices)

(In thousand pesos)Payrolls

Working Production and and Extra Fixed FixedNumber of Owners and Related Workers Total Benefits for Assets at Assets per Net Gross Census

Establishments Unpaid Family Plus Others Employment Paid Employees Book Value Establishment Investment Output Value Added

Small Scale

20-49 Employees 1,453 888 43,615 44,605 82,574.1 318,439.8 333.1 23,086.2 858,579.0 270,262.150-99 606 141 42,770 42,411 101,611.6 323,059.4 793.8 51,502.0 *1,419.072.2 422,960.9

Subtotal 2,059 1,029 86,385 87,016 184,185.7 641,499.2 470.6 74,588.2 2,277,651.2 693,223.o

Medium Scale

100-199 Employees 349 18 48,554 49,172 160,230.7 562,163.7 1,931.8 93,993.6 2,425,205.5 790,328.4

Large Scale

200-499 Employees 272 7 87,289 87,096 340,323.9 2,108,464.3 9,247.6 362,588.1 5,431.021.6 1,680,300.4500 anid above 293 70 232,536 232,609 845,946.9 3,597,624.8 22,071.3 581,320.4 8,470,499.2 3,960,343.3

Sujbtotal 565 77 319,825 319,705 1,186,270.8 5,706,089.1 14,593.6 943,908.5 13,901,520.8 5,640,643.7

Grand Total 2,973 1,124 454,764 455,893 1,530,687.2 6,909,752.0 3,378.8 1,112,490.3 18,604,377.5 7,124,195.1

Sources: Bureau of the Census and Statistics, Annual Survey of Manufactures: 1971, published 1973, Manila, Philippines.Bureau of the Census and Statistics, Preliminary Report on Annual Survey of Manufactures: 1973, Manila, Philippines.

November 17, 1976

H1

PHILIPPINES


Growth of Manufacturing Industries, 1956-73

Annual Growth Rates(in percent)

Category 1956 1962 1968 1973 1956-62 1962-68 1968-73 1956-73

Number of firms20 or more workers 1,833 2,180 2,385 2,912 2.9 1.5 4.1 2,85-19 workers 5,375 6,289 7,673 9,469 2.7 3.4 4.3 3.4

Total 7,208 8,469 10,058 12,381 2.7 2.9 4,2 3.2

Employment (in thousands)20 or more workers 150.9 230.5 325.1 454.4 7.3 5.9 6.9 6.75-19 workers 54.9 48.0 69.2 72.4 -2.2 6.3 0.9 1.61-4 workers 829.2 845.5 912.7 788.2 0.4 1.3 -3,0 -0.3

Total 1,035.0 1,124.0 1,307.0 1,315.0 1.4 2.5 0.1 1.4

Value added (in millions ofpesos at 1967 prices)

20 or more workers 1,532.8 2,769.9 4,457.2 5,948.0 10.3 8.2 5.9 8.35-19 workers 181.8 132.3 266.9 191.3 -5.4 13.8 -7.0 0.3

Total 1,714.6 2,902.2 4,724.0 6,139.3 9.2 8.5 5.4 7.8

Value added per worker (in thousandsof pesos at 1967 prices)

20 or more workers 10.2 12.0 13.7 13.1 2.8 2.2 -1.0 1.55-19 workers 3.3 2.8 3.9 2.6 -3.0 5.8 -7.3 -1.4Average 8.3 10.4 12.0 11.7 3.8 2.4 -0.5 2.0

Note: The implicit GDP deflator from the national accounts (revised April 23, 1975) was used in value addedcomputations.

Sources: Bureau of Census and Statistics (BCS), Annual Survey of Manufactures, 1969; preliminary resultsof the Annual Survey of Manufactures, 1973; and national accounts.

November 17, 1976

X Z,_m

(D n

1HI11LIPPINES


Total Lending and Loans Granted to Agriculture, Fisheries and Forestry

by Principal Lending Institutions 1973-75

(Pesos Million)

1973 1974 1975

Loans to Loans to Loans to

Agriculture Agriculture Agriculture

Total Fisheries & Percent Total Fisheries & Percent Total Fisheries & Percent

Institutions Lending Forestry of Total Lending Forestry of Total Lending Forestry of Total

Commercial Banks I 31,745.1 2,026.8 4.0 56,592.4 3,261.2 5.8 n.a. n.a. n.a.

Philippine National Bank 3,782.4 901.2 24.0 10,060.4 1,954,2 19.4 18,554.4 2,182.5 11.8

Rural Banks 1,073.7 976.9 91.0 1,824.7 1,669.5 91.5 2,310.2 2,117.5 91.7

BANCOM and Private DevelopmentCorporation 2,132.4 22.4 1.0 3,002.0 44.3 1.5 3,678.6 26.8 0.7

Development Bank of the Philippines 248.4 119.2 48.0 731.5 195.2 26.7 2,633.0 727.2 27.6

Private Development Banks 326.5 160.2 49.1 122.8 60.5 49.3 189.9 95.2 50.1

Stock Savings and Loan Associattons 149.7 8.4 5.6 221.1 29.0 13.1 343.8 107.8 31.4

Agricultural Credit Administration 55.6 55.6 100.0 64.3 64.3 100.0 40.7 40.7 100.0

Total 39,513.8 4,270.7 10.8 72,619.2 7.278.2 10.0 27,750.6 5,297.7 19.1

Source: Central Bank of the Philippines, Annual Reports; Philippines National Bank,

Annual Reports; CB, DRBSLA Statistics on Stock Savings and Loan Associations,

Rural Banks and CB-DER.

I/ Credits granted by commercial banks in 1974 (January-September).Commercial bank figures in all yeara include large volume of trade financing in sugar and copra.

EAP Projects Department

July 6, 1976


Percentage of Agricultural Credit Lending by Principal Institutions

1973 1974 1975

Including Excluding Including Excluding Excluding

Commercial Commercial Commercial Commercial Commercial

Bank Bank Bank Bank Bank

Government Agencies

Philippine National Bank 21.1 40.1 26.9 48.7 41.2

Development Bank of Philippines 2.8 5.3 2.7 4.9 13.7

Agricultural Credit Administration 1.3 2.5 9 1.6 8

Sub-total 25.2 47.9 30.5 55.2 55.7

Private Institutions

Commercial Banks 47.4 - 44.8

Rural Banks 22.9 43.5 22.9 41.5 40.0

Private Development Banks 3.8 7.2 8 1.5 1.8

Bancom and Private DevelopmentCorporation of the Philippines 5 1.0 6 1.1 5

Stock Savings and Loan Associations 2 4 4 7 2.0

Sub-total 74.8 52.1 69.5 44.8 44.3

Total 100.0 100.0 100.0 100.0 100.0

1/ Data not available for commercial banks.

EAP Projects Department

October 13, 1976

ANNEX 4Page 1

PHILIPPINES


Summary of Previous Rural Credit Projects

The First Rural Credit Project

1. IBRD contributed US$5.0 million to the First Rural Credit Project(Loan 432-PH), which became effective on January 27, 1966 and was fullydisbursed by September 30, 1969. The project was a breakthrough in pro-viding farmers, through qualified rural banks, with medium- and long-termloans under supervised credit for the purchase of tractors, power tillersand farm implements; swine, poultry and fishery development; and the con-struction of private on-farm irrigation systems. Sub-projects with a totalcost of P 38.5 million were financed for about 2,600 farmer beneficiariesthrough 148 rural banks. IBRD contributed P 21.4 million (55.4%) to projectcost, the Government and CB P 9.7 million (25.0%), rural banks P 1.8 million(4.8%) and farmers and others P 5.7 million (14.8%). Of IBRD's contribution,P 19.1 million (89.3%) was for 2,118 farm mechanization sub-loans and thebalance for irrigation, livestock and fishery development sub-projects.

The Second Rural Credit Project

2. Loan Purpose and Volume. To continue the First Project, a secondIBRD loan of US$12.5 million was provided under the Second Rural CreditProject (Loan 607-PH) which became effective on August 14,1969. The loancomponents remained basically the same with some diversification to enlargethe number of crops to be financed and to include such items as storage andprocessing facilities, which were introduced during project implementation.As of the Closing Date, June 30, 1974, total credit extended through 228participating rural banks to 4,065 farmer-borrowers amounted to P 146.8million, summarized as follows:

Total Amountof Sub-loans % of Total

(P'000)

Farm Mechanization 105,387 71.8Irrigation 2,911 2.0Spraying Equipment 763 .5Storage 4,658 3.2Transportation Equipment 12,813 8.7Livestock 11,098 7.6Fisheries 9,132 6.2

146,762 100.0

ANNEX 4Page 2

3. Project Financing. The total cost of sub-projects under the SecondProject amounted to P 174.6 million of which the Bank contributed P 82.2 mil-lion (47%), Government and CB P 49.1 million (28%), rural banks P 15.5 million(9%), and borrowers P 27.8 million (16%). Rural bank contributions amountedto less than the original 10% requirement primarily because during the courseof project implementation, the requirement was waived to encourage wider par-ticipation by rural banks.

The Third Rural Credit Project

4. Loan Purpose and Volume. A third loan of US$22.0 million (1010-PH)became effective on August 27, 1974. The project included financing of far-mers, fishermen and rural entrepreneurs for farm mechanization, transporta-tion, farm support facilities, coastal and mainland fisheries, small-scalelivestock and cottage industries. Funds were also provided for a study ofthe financial and economic impact of the Rural Credit Projects. ClosingDate of the project is to be December 31, 1977, although final disbursementof funds will probably precede that date, all funds having been committedby the end of December 1975. Despite rapid price increase during the proj-ect period demand for tractors and trucks far exceeded appraisal estimates.Intensive promotion efforts by farm machinery dealers resulted in a shiftof project emphasis away from other components with the result that finalresults of the project did not reflect the degree of diversification soughtat the time of appraisal.

Total Amountof Sub-loans % of Total

(P'000)

Farm Mechanization 182,329 72.4Irrigation 2,527 1.0Sprayers, Driers and Threshers 1,345 .5Storage 753 .3Repair and Machine Shops 234 .1Transportation Equipment 40,513 16.1Livestock 12,975 5.2Fisheries 10,497 4.1Cottage/Agro-Industries 666 .3

251,839 100.0

Fifty percent of all sub-loans, accounting for 50% of total loan value, wereextended to sub-borrowers in Luzon; 23%, accounting for 30% of total value,went to sub-borrowers in Visayas; and 27%, accounting for 20% of total valuewere in support of projects in Mindanao.

ANNEX 4Page 3

5. Project Financing. The total cost of sub-projects under the ThirdProject was P 342.7 million (US$46.9 million). The Bank contributed P 159.6million equivalent (US$21.8 million) to sub-projects amounting to 47%; theGovernment and CB, P 94.7 million or 27%; financing institutions, P 309 mil-lion or 9%; and sub-borrowers, P 57.5 million or 17%.

6. The maturities of the notes executed by a rural bank in favor of CBcorresponded approximately to the schedule of repayment by end-user borrowers;the maximum period varied from 2 to 10 years, depending on sub-loan purposesas follows:

Farm Implements 2-4 yearsLight Machinery 3-5 yearsHeavy Machinery 7 yearsLight Trucks 5 yearsIrrigation Equipment 5 yearsIrrigation Civil Work 10 yearsLivestock Development 3-7 yearsFishing Boats 10 yearsFishponds and Fishpens 3-10 yearsAgro-Industries 7 yearsCottage Industries 3-5 years

7. Disbursement. Full disbursement is expected to be completed soon.As of January 31, 1977, IBRD disbursements amounted to about US$21.98 mil-lion. The balance outstanding of about US$20,000 is the unused portion offunds allotted for the study to evaluate the impact of the CB:IBRD program.A request for transfer of these funds to the sub-loan category is expectedshortly. Therefore, the original Closing Date of December 31, 1977 is ex-pected to be accelerated to March 31, 1977.

Repayments under Previous CB:IBRD Projects

8. As of April 30, 1976, arrears amounted to 24.6% of total outstand-ing loans under the program (Table 3). Eighteen hundred and seven borrowerswere delinquent, about 950 of those under the Third Project representingabout 28% of borrowers under that project. The balance of 857 were borrowersunder the First and Second Projects and arrears under those projects accountfor 70% of all arrears under the program. The major category of arrears istractor loans, accounting for 50% of arrears by number and 67% by amount.While these numbers approximate the share of tractor loans in total financing,such a default rate warrants serious examination. Borrowers for tractorsare usually large-scale entrepreneurs and farmers with more stable incomefrom several sources; custom hire service generates substantial cash flow.In short, it is difficult to understand these high arrears without presumingwillful default.

ANNEX 4Table 1

PHILIPPINES


Summary of Previous Rural Credit Project

Summary of Sub-loans Released Under SecondRural Credit Project (607-PH) 1/(August 1969 - June 30, 1974)

No. of % of TotalCategory Sub-Loans Amount Amount

(F' 000)

Farm Development

Four-Wheel Tractors 1,694 92,910 63.3Power Tillers 942 12,477 8.5Irrigation Pumps 313 2,687 1.8Spraying Equipment 43 763 .5

2,992 108,837 74.1

Storage and Processing 161 4,658 3.2Wells and Distribution Works 5 225 .2Cargo Trucks and Trailers 229 12,813 8.7

395 17,696 12.1

Livestock Development

Poultry 188 5,334 3.6Service 225 5,764 3.9

413 11,098 7.5

Fisheries Development

Fishing Boats 35 1,844 1.3Fishponds 230 7,287 5.0

265 9,131 6.3

Total 4,065 146,762 100.0

1/ Source: Central Bank of the Philippines.

ANNEX 4Table 2

PHILIPPINES



Summary of Sub-loans Released Under the ThirdRural Credit Project (1010-PH) 1/

(As of April 30, 1976)

No. of % of TotalCategory Sub-Loans Amount Amount

(F'000)

Farm MechanizationTractors 1,761 157,900 62.7Power Tillers 1,169 24,429 9.7

2,930 182,329 72.4

On Farm Transportation EquipmentNew Trucks and Trailers 550 39,444 15.7Reconditioned Trucks 16 1,069 0.4

566 40,513 16.1

Farm Supplies, Facilities & EquipmentStorage Facilities 10 753 0.3Private Irrigation Facilities Including

Pumps 218 2,527 1.0Sprayers, Grain Driers, Threshers 59 1,345 0.5Farm Machine Service & Machine Shops 6 234 0.1

293 4,859 1.9

Fisheries DevelopmentCoastal Fishing Boats 28 1,893 0.7Fishponds & Fishpens 156 8,604 3.4

184 10,497 4.1

Small-Scale Livestock Farm DevelopmentPoultry Facilities & Initital Stock 64 4,976 2.0Swine Facilities & Initial Stock 149 7,999 3.2

213 12,975 5.2

Cottage Agro-IndustriesF-Meal Plants w/ or w/o Feed Mix Equipment 13 150 0.1Woodcraft Manufacturing Facilities 12 516 0.2

25 666 0.3Total 4,211 251,839 100.0

1/ Source: Monthly Status Report on the CB:IBRD Agro-Industrial FinancingProgram, DRBSLA.

ANNEX 4Table 3

PHILIPPINES



Arrears of Previous Projects as of April 30, 1976

No. of Original No. of PercentDelinquent Amount Amount Delinquent Total ofBorrowers of Loans Outstanding Amortizations Past Due Arrears

(P'000) (P'000) (P'000)

Tractors 909 59,007 51,670 1,883 13,529 67

Tillers 366 16,469 13,674 769 2,232 11

Trucks 126 7,640 6,027 128 1,323 6

Threshers 29 521 406 52 180 0

Irrigation Pumps 145 1,764 1,410 218 437 2

Rice Mills 13 725 577 35 286 1.4

Poultry 30 1,162 696 53 236 1.2

Piggery 92 2,727 2,384 171 731 3.7

Fishponds 82 2,994 2,328 163 357 1.8

Fishing Boats 25 2,001 1,706 33 487 2.4

Other 15 345 307 29 167 .8

Total 1,807 95,355 81,185 3,534 19,965 100.0

ANNEX 5Page 1

PHILIPPINES


The Central Bank of the Philippines

A. Organization and Management

1. The Central Bank of the Philippines (CB) is a governmental fiscalinstitution established and governed by the Central Bank Act (RepublicanAct No. 265, as amended) to administer the monetary, banking and creditsystem of the Philippines. Its major objectives are defined to: (a) main-tain internal and external monetary stability; (b) preserve the internationalvalue of peso and its convertibility into other freely convertible currenciesand (c) foster monetary, credit and exchange conditions conducive to a bal-anced and sustainable growth of the economy.

2. CB is governed by a seven member Monetary Board composed of theGovernor of CB as chairman, the Secretary of Finance, the Director Generalof the National Economic Development Authority, the Chairman of the Board ofInvestments, and three part-time members from the private sector. The chiefexecutive is the Governor, who is assisted by a Senior Deputy Governor, upto five Deputy Governors, and staff at headquarters in Manila and threeregional offices in Cebu, Davao and La Union.

3. According to Section 46 of the Central Bank Act, the Commissionerof Audit acts as the ex-officio Auditor of CB and is authorized to appointa representative as the Auditor of CB. The Office of the Auditor now employsa total staff of about 110 auditors, of which two are posted at the Depart-ment of Rural Banks and Savings and Loan Associations (DRBSLA), the depart-ment responsible for the administration of the Rural Credit Projects. Thesalaries and other expenses of maintaining the Office are paid by CB. Theaudit performed is considered satisfactory.

B. Operational Aspects

4. The paid-up capital is still P 10 million as at inception, but thetotal net worth has increased to P 341 million at the end of December 1975.During the preceding four years, liabilities increased to P 25,633 million,while assets increased to P 25,974 million, an increase of almost four timesreflecting the rapid expansion of CB money supply. The major changes arethe increase of international reserves to P 10,205 million (570% increase),and loans and advances to P 5,516 million (330% increase). The most signifi-cant growth in liabilities has been in Certificates of Indebtedness, which

ANNEX 5Page 2

rose to P 7,110 million (1,685%). Demand deposits from banking insti-tutions also increased to P 3,648 million (300%).

5. CB supports the supervised credit schemes mainly for food grainproduction, by advancing Special Time Deposits (STDs) or by providingrediscounting facilities to eligible banking institutions. The release ofSTDs and provision of rediscounting in 1975 were as follows:

Special Time Deposits Rediscounting------------Pesos Million------------

Masagana 99 209.6 567.0Masaganang Maisan 22.7 24.2Vegetable 14.7 -Livestock 97.4 269.3Cotton 0.7 -Tobacco 6.7 0.8Coconut - 88.7Fiheries - 24.9Abaca - 1.5Sugar - 51.7Others 3.7 257.3

Total 355.5 1,285.4

C. Department of Rural Banks and Savingsand Loan Associations (DRBSLA)

Organization

6. DRBSLA regulates and supervises the activites of rural banks andsavings and loan associations. With a reorganization implemented in 1976,DRBSLA established three Supervised Credit Groups responsible for lendingoperations on a regional basis. There were previously two function-wiseGroups, one responsible for short-term credit, and the other medium- andlong-term lending programs. The new structure is expected to unify andimprove departmental supervision of individual rural banks. Each Group isheaded by an Assistant Director and organized into several Divisions againprimarily along regional lines. In the context of the proposed project,the Agricultural Credit Supervisors who would assist in the preparation offarm and home plans and feasibility studies for loan proponents and the LoanTeams who would be engaged in processing and sanctioning loan applicationsare among the staff of these Groups.

7. In addition to lending operations, one of the Groups also includesthe Accounting and Special Services Division and the Technical Evaluation andSupport Unit (TSEU) is responsible directly to the Office of the Director.

ANNEX 5Page 3

The former would be responsible for handling of counterpart funds, claim for

reimbursements from the bank and preparation of periodic reports on progressof project implementation and collection of overdues. (Release of funds underthe proposed project to participating banking institutions is to be trans-ferred from the Division to four Loan Teams located at the three regional

offices and at headquarters). The latter is the planning unit of the Depart-ment. Other Divisions and units in the Department would supervise and auditrural banks and stock savings and loan associations (SSLAs) participating under

the Rural Credit Projects and would provide other necessary supporting services

such as training and legal services.

Management and Staff

8. DRBSLA is managed by a Director and an Associate Director with sub-

stantial experience in dealing with rural banks and SSLAs. They are assistedby twelve Assistant Directors and a staff of about 700. DRBSLA is the largest

department in CB and its functions are distinguishable broadly into two dis-tinct categories; credit activities, and audit and examination of rural banks

and SSLAs. Although present policy within CB limits management of departments

to only one Associate Director, the size and nature of DRBSLA's responsibil-ities appears to warrant positions for two Associate Directors.

9. The three Supervised Credit Groups have a total staff of about 200,

of which about 70% are stationed in the field as Agricultural Credit Super-visors, and members of Loan Teams. There are now nine Loan Teams, includingthe Manila Loan Team responsible for areas not covered by the eight Loan Teams

stationed in Cauayan for Isabela and the Cagayan Valley; San Fernando (LaUnion) for Pangasinan, Tarlac and Ilocos; Cabanatuan City for Nueva Ecija;Naga City for Bicol; Bacolod City for Negros; Iloilo City for Panay; Cebu City

for eastern Visayas and northern Mindanao; and Davao for southern Mindanao.Loan Teams presently process and sanction loan applications filed to partici-

pating banking institutions, Each team is headed by a Loan Officer who is acertified public accountant with considerable experience in banking; othermembers include one or two Loan Processors who are also certified publicaccountants, and one or more Loan Evaluators who are usually agriculturalistsor agricultural engineers. Under this project, CB is planning to provide addi-tional staff to Loan Teams to improve project implementation and supervision.

10. At present, about 110 Agricultural Credit Supervisors are locatedin the field besides those at headquarters; most are agriculturalists although

some are trained in agro-industries, fisheries, livestock and engineering.Their qualifications and capability are considered satisfactory and DRBSLArecruited 80 Supervisors in 1975 for replacement and expansion of this com-

plement. Nevertheless, the adequacy of technical field staff to cope with theexpected increase of participating banks and loan applications will depend onthe effective use of Government technical services and the gradual transfer oflending authority to participating banks. In particular, increased employmentof technicians by participating banks to take over field work presentlycarried out by CB staff would be essential to maintain the quality of lendingunder the project.

ANNEX 5Page 4

Loan Processing Procedures

11. Under the Rules and Regulations enforced by CB, applicants wouldfile loan applications on a prescribed form with a qualified rural bank orSSLA , preferably the one nearest the project to be financed. The bankconducts the initial investigations (i.e. verification of the project tobe financed, and inspection and assessment of the collateral offered)and, when satisfied with the findings, requests CB Agricultural CreditSupervisors to prepare farm and home plans and feasiblility studies.The application is then submitted to the Loan Team assigned to the area,together with the bank report on collateral and a complete set of support-ing documents (including statements of financial condition and income andexpenditure of the bank). The Loan Team first checks the current eligibiltyof the bank to participate in project financing by examining for example itsarrears position. The application and supporting documents are scrutinizedand a member of the Team may visit the proposed project site. The LoanOfficer will finally sanction or reject the application without referenceto headquarters. On his notification, the Loan Teams located at the threeregional office and headquarters will release funds for the sub-loan to thebank according to the approved disbursement schedule, which under previousprojects had been released by the Accounting and Special Services Divisionin headquarters.

12. Under the Third Project, rural banks and SSLAs were authorized toprocess and approve loan applications of less than P 10,000. The preparationof farm plans and feasibility studies by their own technicians has become afeature of many participating institutions, but loan approvals have been veryfew. Several reasons were given for this: the present maximum ceiling ofP 10,000 excluded most items to be financed; Loan Teams were not enthusiasticin promoting this approach because of the immediate need for intensive checkingof individual banks with their limited staff; and while banks were willing toprocess applications there seemed to be reluctance to hire or train techni-cians to the level of competence upon which investment decisions could berisked with review by CB staff.

13. CB is now aware that to serve the increasing number of partici-pating banks and loan applications, it would require an unacceptable staffexpansion to continue under the present system. Therefore, it has beenagreed to promote the transfer of lending authority to participating banksas rapidly as they become qualified. Additional training for CB and bankstaff to this end would be financed in part under the project. The firststep would be to require all the participating banks to prepare the farm andhome plans and feasibility studies using their own technicians. Then lend-ing authority would be gradually transferred according to the capability ofindividual participating banks. Those banks without a technician would berequired to agree to hire one on their own. Loan Teams would be expectedto provide intensive assistance for this development and to gradually reducetheir direct involvement in loan processing. They would also be expectedto prepare annual plans for this transfer to banks in their respective areas,including required strengthening of individual banks, measures to be takenby Loan Teams, and target levels of authority for transfer to banks probablyby type and complexity of sub-loans.

ANNEX 5Page 5

14. Loan Teams would be strengthened and their expertise adjustedtoward program management to enable them to perform these functions. Asthe banks become capable, field supervision by CB staff would be less fre-quent and at the final stage only random post-investment audit would berequired.

15. Management Advisory Unit. (MAU) In addition to provision ofadequate incentives to encourage voluntary participation in the program,there is a need to provide assistance to rural banks in areas of managementin which widespread or critical weaknesses have been encountered. Despitethe fact that CB staff as representatives of the regulatory and major financ-ing agency of rural banks would probably encounter difficulty in gaining theconfidence and candor of rural bank managers, there are several problem areasin which such a Unit could provide effective assistance, for example: budget-ing, solicitation of deposits, cash management and cash flow projections, staffutilization, sub-loan supervision, and collection procedures. MAU, to beresponsible to the Director, DRBSLA, would be headed by an Assistant Director.A Technical Assistant and three officers of the rank of Division Chief (twoCPA's one Agriculturalist) and four to eight additional officers plus twoclerical support positions would comprise the Unit. It would be essential tothe effectiveness of the Unit's work that officers of these senior ranks beselected on the basis of extensive experience in the managerial problems ofrural banks. Professional credibility alone will gain the confidence ofbankers in this service.

16. Technical Support and Evaluation Unit. (TSEU) TSEU's role withrespect to the CB:IBRD program would continue to be essentially one of mon-itoring, evaluation and technical support for field operations. The Unithas developed a high standard of work. Under the Fourth Project the Unitwould, in addition to its ongoing supervision, oversee requirements withrespect to the share of loans extended to small farmers, and the regionaldistribution of sub-loans. To date the work of TSEU has been limited toterm lending under CB:IBRD projects. In keeping with the objective of inte-grating all credit operations in the Department, and to meet a growingneed for staff support, the Unit would, coincident with the beginning theFourth Project, undertake responsibility for staff support pertaining tothe Department's short-term production credit activities as well. Thiswould include the following functions:

(a) to serve as a permanent secretariat for the Department'srepresentative to the Technical Board on AgriculturalCredit, the National Food and Agriculture Council andthe National Commission on Countryside Credit and Col-lection. This function will be particularly importantin the preparation of background papers in support ofCB positions to be taken in these bodies. Such workis now done on an ad hoc basis by operating Divisions.

ANNEX 5Page 6

(b) to develop operating policies and procedures forspecial financing schemes for which the Departmentis charged with implementation responsibility.

(c) to evaluate on-going and pilot schemes such as theIntegrated Agricultural Financing scheme which isnow under trial through 18 rural banks.

Service Vehicles

17. Under the Second Rural Credit Project, 61 vehicles were financedfor the CB field staff and still operating to make visits to sub-borrowersand participating rural banks. As CB technicians stationed in the field havebeen increased by 80 in 1976, additional vehicles has become necessary tocontinue effectively the field operation, in particular supervision and on-the-spot check required with the transfer of lending authority. It was agreedthat about 60 vehicles would be financed under this project.

Training

18. DRBSLA provides and organizes several training courses mainly forthe staff and management of rural banks and SSLAs such as a special three-week course for officers and employees of new rural banks (usually followedup by a short on-the-job training program), a six-week basic banking coursefor rural bank staff, a supervised credit course for rural bank technicansand a one-week management seminar for directors and managers. These courseshave contributed significantly to the success of rural bank and SSLA opera-tions, but additional training programs are needed in certain subject areassuch as term lending.

19. Under the project additional training would focus on improving theterm lending capability of CB and rural bank credit staff. The programwould include preparation of a credit handbook (covering the necessary stepsfor lending, from project identification to preparation, processing, approval,fund disbursement, supervision and repayment). In addition to its use as atextbook for training, this handbook would serve as a manual for field staffof CB and rural banks. After completion of the handbook, a series of train-ing courses would be organized by regions or provinces to introduce to orreview with rural bank and SSLA credit staff the methods and proceduresrecommended.

20. Lending Terms. For this project, the Bank would contribute 40% oftotal project costs, the Government and CB 40%, rural banks 10% and ultimatebeneficiaries 10%. Bank funds would be onlent to CB at 8.5%, 1/ and, Govern-ment counterpart funds at no interest; therefore an average cost of 4.25% toCB. Rural banks and SSLAs would be charged a rate of 9.0%, with the exceptionof 7% for sub-loans financing agrarian reform beneficiaries, for funds onlent by

1/ For illustration, the interest rate for the third quarter of 1977FYis used.

ANNEX 5Page 7

CB's interest margin would be 4.55%. Including the returns from the First,Second and Third Projects, this margin should be sufficient to cover admin-istrative expenses.

21. Maturities of sub-loans to rural banks approximately coincide withthose to the ultimate beneficiary so that rural banks would be required torepay CB immediately after collection. CB may relend principal repaymentsreceived from rural banks not required to amortize Bank loans under theFirst, Second, Third or proposed Projects.

22. CB would establish Rules and Regulations governing the Fourth RuralCredit Project in agreement with the Bank. Such Rules and Regulations estab-lish criteria for participation by rural banks and SSLAs (Annexes 6 and 7,respectively) and regulate the administration of the project. Any changeof the Rules and Regulations would be subject to approval by the Bank.

23. Examination and Auditing. Under the provisions of the Rural BanksAct, and the Savings and Loan Associations Act, the Monetary Board has thepower to supervise the businesses and corporate operations of rural banks andSSLAs. More than 170 staff of DRBSLA are engaged in examination and auditingof rural banks and SSLAs. A regular audit is supposed to be carried out atleast once a year. However, this goal was not achieved in 1975. Out of 760rural banks, 315 were audited and 30 SSLAs were audited out of a total of 44.The new concept of resident examiners aims to implement the required auditfrequency. Special examinations are conducted whenever CB deems it necessaryto check cash or other transactions, to follow up corrective measures recom-mended during the previous audit or to investigate irregularities in theoperations of the institutions. In 1975, DRBSLA made 855 special examina-tions: 852 for rural banks and 3 for SSLAs. By the end of 1975, 37 ruralbanks were found to be in need of rehabiliation or liquidation; 15 wereunder close supervision, 6 under CB management, and 16 under receivership,or liquidation. The records of participating rural banks and SSLAs wouldbe retained on file at GB.

ANNEX 5Table 1

PHILIPPINESFOURTH RURAL CREDIT PROJECT

Comparative Statement of Condition of theCentral Bank of the Philippines

November 30, i973 to December 31, 1975(Pesos Million)

11/30/1973 12/31/1974 12/31/1975

ASSETS

International Reserv s 6,117 10,629.5 10,204.9Domestic Securitiea7 3,534 4,144.7 4,426.5Loans and Advances- 1,684 3,428.6 5,516.2Special a/c - Foreign Exchange Differentials 1,361.2 1,414.5Account to Secure Coinage 34 34.5 34.5Govtt. Note - Treasury Cert. Account 24.3 27.3Bank Premises, Furniture, Equipment 191 321.9 665.1Monetary Adj. Account - Gov't. Note 88.1 330.9Other Assets 2,240 1,237.9 3,354.3

Total Assets 132801 21,273.6 25,974.2

LIABILITIES

Currency Issue 3,645 4,975.5 5,644.6Demand Deposits 3,384Banking Institutions 2,629.7 3,647.7International Monetary Fund 1,245 1,074.9 2,135.4National Gov't. 3,367.7 1,250.1IBRD and IDA 118 - -Other Deposits - 66.2 74.0Asian Development Bank - Account F 0 - -Allocation of Special Drawing Rights - 439.5 453.1Notes and Loans Payable 1,656 2,930.5 4,509.1Revaluation of Int. Reserves 308 311.9 193.0CB. Cert. of Indebtedness 2,340 4,006.5 6,006.8CB. Cert. of Indebtedness (F. Currency) - 595.6 1,103.8Other Liabilities 592 549.4 615.2

Total Liabilities 13,288 20,947.4 25,632.8

NET WORTH

Capital 10 10.0 10.0Surplus 279 283.2 290.1Reserve for Currency Insurance 4 5.2 -Reserve for Refund of Margin Fee 0 0.3 -Undivided Profits 219 27.5 41.3

Total Net Worth 513 326.2 341.4

Total Liabilities and Net Worth 13,801 21,273.6 25,974.2

- Excluding Treasury note and bonds against RP-Japan commodity loanb/ but including Gov't. note on TCA (1975 and 4/31/76).- Including advances under the repurchase agreements starting June 1974.

Source: Central Bank of the Philippines, Annual Report 1975

PHILIPPINES


Central Bank

Partial Structure of Department of Rural Banks and Savings and Loan Associations(Supervised Credit Groups)

| Director

AssociateDirector

Management Technical SupporAdvisory Unit- |& Evaluation Unit

~~~~AdIsrUi - _&

| Assistant l l Assistant AssistantDirector Director Director

Agricultur Loan Agricultur Accounting Loan Agriculture LoanD.visions Teams Divisions Division Teams Divisions Teams

I Cagayan IV Manila VI IloiloII Cabanatuan V Naga VII BacolodIII San Fernando (La Union) VIII Cebu

Davao

rtaF

-To be established under the Fourth Project. n

ANNEX 6

Page 1

PHILIPPINES


Rural Banks

A. Background, Organization and Functions of the Rural Bank System History

1. The Rural Bank Program is the culmination of almost half a centuryof Government sponsored efforts to establish a banking system that wouldprovide credit facilities to small farmers and small commercial and industrialentrepreneurs in rural areas. Since 1907, some 15 legislative measures havebeen adopted by the Government, among which were those authorizing the estab-lishment of Agricultural Credit Banks (1908), a system of agricultural creditcooperative associations (1915), the Philippine National Bank (1916), and ruralbanks and commodity corporations which engaged mostly in marketing loans.On June 6, 1952, the Congress of the Republic of the Philippines passed theRural Banks Act 1/, the foundation for the present rural banking system,which has become an effective instrument for the provision of banking facil-ities to a large number of producers in rural areas.

Objectives and Legal Basis

2. The Rural Banks Act states the Government's policy to "promoteand expand the rural economy on an orderly and effective manner by providingthe people in the rural communities with the means of facilitating and im-proving their productive activities and to encourage cooperatives. Towardsthis end, the Government encourages and assists in the establishment of asystem of rural banks which will place within the easy reach and access ofthe people credit facilities on reasonable terms". In addition, Presiden-tial Decree No. 27 of November 19, 1972 on agrarian reform requires ruralbanks "to provide immediate source of funds to augment loans/credits to bemade available to the tenants and/or farmers cooperatives..."

3. The Rural Banks Act requires the Monetary Board of the Central Bankof the Philippines (CB) to formulate Rules and Regulations governing theestablishment and operations of rural banks. Pursuant to this power, theMonetary Board has promulgated several sets of Rules and Regulations which areintended to implement the Rural Banks Act and which, together with the MonetaryBoard's letters of instruction and CB circulars, form the bank's main opera-tional basis. The provisions of the General Banking Law and the Central BankLaw are also part of the laws governing rural banks in so far as they areapplicable and not in conflict with any provision of the Rural Banks Act.

1/ Republic Act No. 720 of June 6, 1952, as amended.

ANNEX 6Page 2

As rural banks are organized in the form of stock corporations, the provi-sions of the Law on Private Corporations are supplementary to the above laws.

The Role of the Central Bank

4. CB acts as a refinance institution of rural banks (paras 15-16)and through DRBSLA provides them with technical assistance, training ofmanagement and staff, and supervises and examines rural bank operations (Annex5, paras 6-19 and 23).

Privileges and Exemptions

5. Privileges. Rural banks enjoy the advantage of free training ofofficers and employees (Annex 5, paras 18-19) and free technical assistanceto accounts staff and inspectors when opening a bank. Since the intro-duction of supervised credit, agricultural and fisheries technicians,directly or indirectly paid for by CB, assist rural banks in processingloan applications and supervise the use of funds by borrowers. The Depart-ment of Agriculture, the Department of Natural Resources, the Department ofTrade and Tourism and other appropriate Government agencies are enjoined tocooperate with rural banks and provide advice to their borrowers. Up toJanuary 1973, rural banks did not share in the cost of supervision by DRBSLA,but since then they have been required to pay, as any other bank, an annualfee not exceeding 1/20% for their assets (excluding cash reserves). Financialprivileges comprise the provision of supplemental capital in the form of pre-ferred stock (para 12), liberal rediscounting facilities (para 15) and theparticipation in special financing programs (para 16).

6. Exemptions. Rural banks and their borrowers or mortgagors areexempted from any fees, charges and documentary stamp taxes relative toloans or transactions of less than P 5,000. In addition, the Rural BanksAct grants rural banks absolute exemption from any taxes, charges and feesif the bank's net assets do not exceed P 1 million (excluding paid-in Gov-ernment counterpart capital). If the net assets are between P 1 and 3 mil-lion, the taxes, charges and fees are levied in proportion to the excess

ANNEX 6Page 3

over P 1 million. Rural banks with net assets of more than P 3 milion paytaxes and fees like any other bank. 1/

Number and Distribution of Rural Banks

7. As of December 31, 1975, there were 768 licensed rural banks.Seven hundred and thirty-two of these were active and under regular exam-ination. These figures compare to 622 and 606 respectively at the time ofappraisal cf Third Project, October 31, 1973. The Four-Year Development Pro-gram for the rural banking system (1974-77) provides for the establishment ofan additional 100 rural banks annually. One hundred and forty-six wereestablished during the first two years of the program. Out of the 704 ruralbanks operating over one year, 245 (35%) were participating in the CB:IBRDprogram as of December 31, 1975. The breakdown by region was as follows:

Total No. No. of Participating Rural BanksRural Banks

Luzon 458 159 (35%)Visayas 148 55 (37%)Mindanao 98 31 (32%)

Total 704 245 (35%)

The Rural Bankers Association of the Philippines

8. In 1955, 18 banks formed an unincorporated association which in1975 was incorporated as the Rural Bankers Association of the Philippines(RBAP) and almost all rural banks now belong to the Association. There isa Rural Bankers Federation in most provinces, representing the link betweenindividual banks and the Association. RBAP actively represents its members'

1/ (a) Under the Internal Revenue Code, the income tax rate fordomestic corporations is 25% of the taxable net income upto P 100,000 and 35% of that over and above P 100,000.

(b) The Privilege Tax on Business and Occupation for banks isa fixed amount of P 500 a year.

(c) The Tax on Banks is 5% of gross receipts derived frominterest, discounts, dividends, commissions and othergross income realized during the calendar year.

(d) The annual Residence Tax amounts to P 5.00 plus a tax notexceeding P 2,000 on the basis of (a) P 2.00 for everyP 5,000 worth of real property and P 2.00 for every P 5,000gross receipts or earnings derived by the corporation dur-ing the preceding year.

ANNEX 6Page 4

point of view in all dealings with CB and the Government and participates inthe formulation of laws and policies affecting rural banks. It liases withorganizations such as the Agricultural Machinery Dealers Association (AMDA)and plays an important role in public relations on behalf of its members. Itorganizes seminars and training courses for the staff and management of mem-ber banks, drawing resource people from Government agencies such as CB, fromuniversities, and from the private sector.

B. Organization and Operations of Rural Banks

9. Persons of Filipino citizenship and/or cooperatives or barrio asso-ciations 1/ can establish a rural bank, provided that a majority of stock-holders are actual residents of the community where the bank is to be locatedand own the controlling stock therein. The initial authorized capital must beat least P 100,000. No individual family group can own more than 20% of thevoting shares, no interlocking directorate with other rural banks is allowed,and the directors and key officers should not be relatives within the thirddegree of consanguinity or affinity.

10. Rural banks are stock corporations, managed by a board of 5-11directors who must be Filipino citizens and shareholders of voting commonstock. The executive officers are the president, vice-president, man-ager, treasurer or cashier, and secretary. To ensure managerial qualifica-tions, the Monetary Board requires directors to be at least 25 years old,college graduates or having at least 5 years of business experience or anacceptable banking training. The president is the chief executive and pre-sides over all stockholders' or directors' meetings, unless the bank haselected a chairman of its board; if the bank is small, the president may alsobe concurrently the manager.

Financial Resources

11. The resources of rural banks consist of their own capital (preferredand common stock and reserves), deposits from the public, and borrowings fromCB through rediscounting of notes and participation in special financing pro-grams.

12. Preferred Stock. The Development Bank of the Philippines (DBP) holdspreferred stock in rural banks, because CB cannot directly invest in stock cor-porations. 2/ Its purpose is to match the private investment with Government

1/ A barrio (village) association or Samahang Nayon is a form of a pre-cooperative; membership is mandatory for participation in theAgrarian Reform Program.

2/ DBP is still appointed as the Government's agent for this purpose butpreferred stock issued prior to 1972 has been transferred to the LandBank of the Philippines (LBP).

ANNEX 6Page 5

counterpart capital assistance up to a 50:50 ratio at the time of establish-ment. DBP, subject to availabillty of funds, furnishes this supplementarycapital not exceeding P 1 million per bank, and the rural bank issues thepreferred stock. The capital assistance is to be utilized solely for lend-ing under supervised credit programs. The banks, within three years fromthe start of operations, must set up a sinking fund for the retirement of thepreferred shares. DBP or LBP is entitled to dividends of not more than 2%each time the bank declares dividends on common stocks. If, in the MonetaryBoard's opinion, a rural bank has accumulated enough capital strength, or theprivate sector offers to replace the Government investment, the Monetary Boardmay require the retirement of preferred shares.

13. Common Stock. As required by the Corporation Law, incorporatorsmust subscribe to at least 20% of the authorized capital stock (minimumP 100,000). Only common stockholders exercise management, proprietary andremedial rights. A recent development initiated by the Govenment is thatbarrio associations and cooperatives may buy shares in existing rural banks.The aim is to broaden the capital basis of the banks and to change their gen-erally conservative attitude towards lending to small farmers. The extentto which cooperative organiztions may buy shares in any existing bank maynot exceed 40%. Five percent of the value of Masagana 99 loans through ruralbanks is placed in the rural bank as a special deposit in the name of theborrower's Samahang Nayon (cooperative). One of the purposes of this fundis the acquisition of Government-owned shares in the rural bank. 1/

14. Deposits. Rural banks are entitled to accept savings and time de-posits (with the exception of about 50 authorized by 1972, rural banks can nolonger accept demand deposits in accordance with Presidential Decree No. 77),after having received specific authority from CB to do so. Banks with apaid-in capital of not less than P 100,000 and adequate facilities and staffnormally qualify. The maximum rate of interest is 7-1/2% p.a. for savingsdeposits and up to 12-1/2% p.a. for time deposits of two years. Demanddeposits do not earn any interest. There are three measures to protectrural bank depositors: (a) deposit accounts not exceeding P 10,000 perdepositor must be insured with the Philippine Deposit Insurance Corporation;(b) the bank must maintain reserve against deposit liabiliites (14% of demanddeposits, 12% of savings deposits and 10% of time deposits); and (c) it mustmaintain a minimum capital of 10% of its assets (excluding cash reserves,contingent assets and supervised (guaranteed) credit). Although interestrates do not seem very attractive in a country with very high interest ratesfor non-institutional credit, rural banks suceeded in obtaining a total of

1/ To date, no such acquisition has taken place. Rural bankers are reluctantto release deposits while Masagana 99 arrears are high and they do notwant cooperative ownership in their banks (another decree gives coopera-tives third priority after existing shareholders and displaced land ownersfor stock purchases). For their part, cooperatives prefer to establishtheir own rural banks. One cooperative rural bank was established atCabanatuan in December 1974, and began operations in early 1975.

ANNEX 6Page 6

P 678.3 million in deposits (83% of which was savings deposits) as ofDecember 31, 1975 compared to P 577.5 million as of December 31, 1974, andincrease of 17%.

15. Rediscounting. CB rediscounts eligible papers (promissory notes)up to 80% of the outstanding balance of the unpaid portion of such papersat the time of rediscounting. The rediscount rate charged for non-supervised loans is 5% p.a. For supervised production loans for rice, cornand sugar, the maximum amount granted may be 100% and the rediscount ratecharged is 1% p.a. In addition, banks are required to set aside the equiv-alent of 2% p.a. of rediscounted loans to meet the cost of supervision. Theuse of new supervsion funds has not been policed satisfactorily in the pastbut a proposal is now under consideration to require the separate accountingof such moneys. A rual bank may not rediscount with CB more than 500% of itsnet worth plus 100% of its monthly average savings deposit liabilities forthe four months preceding the date of rediscounting in the case of supervisedcredit (100% and 50% respectively in the case of non-supervised credit).Officially, rural banks with past due loans exceeding 25% of their total out-standing loans (exclusive of loans granted to beneficiaries of the AgrarianReform Program and under the Agricultural Guarantee and Loan Fund and CB:IBRDprograms) are disqualified from rediscounting. However, this restriction hasnot been enforced with respect to rediscounting food production loans forseveral years. A circular was issued in June 1976, announcing CB's intentionto enforce it again as of November 1, 1976.

16. Special Financing Programs. CB channels funds for short-term(up to 1 year), medium-term (1-5 years) and long-term (over 5 years) loansthrough qualified rural banks under special financing programs. The fundsare lent to the banks as Special Time Deposits secured by promissory notes.The first of such programs was the First Rural Credit Project (Loan 432-PH),followed by the Second (Loan 607-PH) and the Third (Loan 1010-PH). Otherspecial programs - mostly with USAID participation - include the AgriculturalGuarantee and Loan Fund (AGLF) for medium- and long-term loans for farmersand cooperatives, which also protects participating banks against losses (upto 70%); the Small Fisherman's Special Credit Fund for the acquisition offishing boats, engines, accessories, nets and other fishing gear by smallmarine fishermen; the Special Agricultural Loan Fund for granting produc-tion loans for a maximum period of three years to farmers who form a "compactfarm" 1/ of at least five farmers who assume joint and several liability forthe loan; the Agricultural Loan Fund for agrarian reform beneficiaries

1/ Unregistered group of farmers with contiguous farms of approximatelyequal productive capability, fully irrigated, for purposes of consol-idating individual resources, methods and activities by cultivatingthe aggregate consolidated area as one unit under a single management.This concept has not been adopted on any significant scale since itsintroduction.

ANNEX 6Page 7

organized in cooperatives or "seldas" 1/; Guarantee Fund for loans andguarantees to rural banks/farmers in areas affected by the devastatingfloods and drought of June and July 1972; the Agricultural Loan (Calamity)Fund - Hand Tractor and Work Animal Loan Program for loans to farmersfor the purchase of hand tractors and work animals; the "Masagana 99" RiceProduction Program, for the production of high yielding rice varietiesin 43 major rice producing provinces covering more than 500,000 ha of irri-gated and 100,000 ha of rainfed lands during the crop year 1973/74; andthe Industrial Guarantee and Loan Fund for the establishment, expansionor refinancing of small-scale export-oriented or cottage industries, Eachof these programs has a set of rules and regulations governing itsadministration.

17. Status of Financial Resources. The rural banking system continuesto show growth (a statement of comparative balance sheets, 1970-1975, isattached as Table 1 and income statements for the same period appear asTable 2). The status as of December 31, 1975 is summarized as follows:.

AmountCapital P M (US$ M) % of Total

Preferred Stock 56.7 2%Common Stock 219.4 8%Surpluses, Reserves,Undivided Profits 149.9 6%

426.0 (58.4) 16%

Liabilities

Demand, Savings andTime Deposits 678.3 25%

Central Bank andOther Banks 1,645.0 2,323.3 (318.3) 59% 84%

Total 2,749.3 (376.7) 100%

The increase of total resources over December 31, 1974 amounted to P 638.6million (US$85.1 million) or 30% during the 12 month period. Rural banks'own resources increased by about 18% annually over the five years endingDecember 31, 1975 while total liabilities increased at a simple rate of88% annually during the same period. The rapid increase in liabilitieswas primarily due to the introduction of the "Masagana 99" Rice Production

1/ Synonymous with compact farm, except that members cultivate their farmsseparately and individually. Serious repayment problems have arisenwith this concept with the willful default of one or more of the coop-erators.

ANNEX 6Page 8

Program and the resultant rise in CB notes payable from P 123.7 million atDecember 31, 1970 to P 1,009.9 million at December 31, 1975.

Lending Operations

18. Limitations. According to the Rural Banks Act, loans and advancesby rural banks must be primarily for the purpose of meeting the credit needsof small farmers or farm families (defined as those owning or cultivating, inthe aggregate, not more than 50 ha of land dedicated to agricultural pro-duction). They may also attend to the normal credit needs of cooperativesand small merchants and small business enterprises whose capital investeddoes not exceed P 50,000 (under review to be increased to P 100,000) and theneeds of "essential rural industries" irrespective of capital investment.(Essential rural industries are those the goods and services of which areneeded by and normally purchased by low income groups). Medium- and long-termloans may be extended by banks with an unimpaired capital of not less thanP 100,000 and savings and time deposits of at least P 100,000, Investmentin equities of other enterprises are only allowed for minority holdings inallied undertakings up to 25% of the banks net worth. Otherwise, rural banksprovide normal banking facilities as required by rural communities. For thepurpose of determining the need for prior authority from CB, rural bank lend-ing is classified into ordinary and special. Newly organized rural banks areauthorized to make ordinary short-term loans without the need of further CBauthority, whereas for special medium- and long-term loans, such permissionis required. Apart from the normal requirements for ordinary lending, ruralbanks have to fulfill additional conditions before they qualify to participatein the various special financing programs (paras 16 and 24).

19. Volume. Total lending operations by the rural banking systemhave increased substantially over the last five years. The following tablehighlights the expansion from 1970 to 1975. (Sector-wise details for 1975appear as Table 3):

ANNEX 6Page 9

Number of Loans Loan Amount('000) (Pesos Million)

Increase(Decrease) IncreaseAgainst Increase Against Increase

During Previous (Decrease) During Previous (Decrease)Year Year Year % Year Year ____%

1970 437.5 15.6 3.7 558.8 86.6 18.31971 371.7 34.2 7.8 678.7 119.9 21.51972 527.9 56.2 11.9 785.2 106.5 15.71973 749.3 221.4 41.9 1,073.7 288.5 36.71974 1,045.6 296.3 39.5 1,824.7 751.0 69.9

The table illustrates the accelerated increase in the number of loans madeas well as in the amount lent. Average loan size increased during theperiod from about P 1,275 to about P 2,220 between 1970 and 1975. Thedramatic increase in lending beginning in 1973 is primarily a result of theintroduction of Masagana 99, the supervised credit program for rice pro-duction.

20. Distribution. Lending in 1974 and 1975 to different sectors ofthe economy is summarized in the following table:

1974 1975No. % of Amount % of No. % of Amount % of

'000 Total P M Total '000 Total P M Total

AgriculturalLoans 972.4 93.0 1,669.5 91.4 966.2 92.9 2,117.5 91.7

CommercialLoans 53.2 5.1 108.9 6.0 53.3 5.1 131.0 5.7

IndustrialLoans 8.4 .8 32.6 1.8 9.4 .9 44.9 1.9

Other Loans 11.6 1.1 13.7 .8 10.8 1.1 16.8 .7

Total 1,045.6 100.0 1,824.7 100.0 1,039.7 100.0 2,310.2 100.0

21. Loan Sizes. A total of about 749,300 loans were granted by allrural banks in 1973 (the last year for which size data are available) for anaggregate amount of about P 1,074 million. A classification of loans accordingto size is provided in the following table (data for 1970 through 1973 areshown in Table 4).

ANNEX 6

Page 10

No. % of Amount % of

1973 ('000) Total (E M) Total

Total Loans Granted 794.4 100.0 1,073.7 100.0

Cumulative up to P 2,000 (US$ 295) 629.3 84.0 524.7 48.9Cumulative up to P 5,000 (US$737) 726.3 96.9 843.0 78.5P 5,000 to P 10,000 (US$737 to 1,475) 16.7 2.2 109.9 10.2

P 10,000 and above (US$1,475 and above) 6.3 .9 120.8 11.3

About 96.9% of all loans, accounting for 78.5% of the total amount advanced

during the year, were made in small loan amounts of up to P 5,000. This

illustrates that rural banks in fact reach a large number of small operators

and fulfill their role of serving the less affluent sections in rural com-

munities, apart from assisting larger and progressive farmers with a higher

absorptive capacity. The pattern of loan distribution by size has been

fairly constant in recent years.

22. Securities. The following table shows, in a summarized form, loans

granted in 1973 by type of security (details for 1970-1973 appear in Table 4):

Type of Security No. of Loans % of Total Amount P M % of Total

Real Estate Mortgage 384,300 51 680.9 63

Chattel Mortgage,Guarantees, Sureties,Bank Deposits, Pledgesof Crops 306,400 41 332.5 31

Unsecured 58,600 8 60.3 6

Total 749,300 100 1,073.7 100

This demonstrates the generally conservative attitude of rural bankers con-

cerning collateral but also indicates their flexibility in granting loans on

securities other than land and even in advancing unsecured loans.

23. Loan Periods. In 1974, the last year for which data are available,

rural banks made an estimated 970,000 loans amounting to P 1,577 million for

short-term agricultural purposes. This amounted to 93% and 86% of loan

numbers and loan amount, respectively, in their portfolios. There were about

4,200 agricultural loans for medium- and long-term purposes amounting to about

P 85 million, almost all of which were funded through the CB:IBRD program.

ANNEX 6Page 11

Medium- and long-term agricultural loans amounted to 0.5% and 5% of totalloans and amounts, respectively, in rural bank portfolio.

24. Qualifications for Participation in CB:IBRD Lending. According tothe Rules and Regulations governing loans under the CB:IBRD project, DRBSLAevaluates the creditworthiness of rural banks that wish to participate inthe project, taking into account the following: the bank must have been inoperation for at least one year; it must have sufficient liquidity to meetobligations to creditors and depositors; have sound loan investments as tocollateral, capacity to pay and character of borrowers; arrears may notexceed specified limits 1/; has established a credit reputation with CB;has a management of competence and integrity; and has sufficient unimparedcapital and adequate reserves as well as positive operating results. Qua-lified banks enter into a credit line agreement with CB. Each rural bankassumes the credit risk of sub-loans extended by it. The bank executes apromissory note covering each loan received from CB and, as security for suchsub-loans, endorses in favor of CB promissory notes executed by individualborrowers covering the total amount borrowed from the bank.

25. Interest Rates. Recently the Monetary Board has raised the ceil-ing interest rates, which are not applicable to rural banks, to 17% for loansless than two years and 19% for loans over two years 2/. But the annualinterest rate for credit made available under Masagana 99 and other Governmentfood grain production credit programs is 12%. The effective cost of creditfrom agricultural input suppliers is between 15% and 25% per annum and it ismuch higher from private moneylenders.

C. Operational Results

Repayments

26. Collections from Sub-Borrowers. Agricultural credit has a poorrecovery record in the Philippines. Not only do collections from farmersleave much to be desired, but, consequently, also repayments by rural banksto CB (para 29). Collections for all rural banks' operations show a con-tinous decline as illustrated in the following table. As of December 31,1975, arrears amounted to 21.5% of portfolio (Table 5). This figure wouldbe higher were it not for rapid portfolio expansion and widespread avail-ment of restructuring privileges for production loans (para 27).

1/ The arrears limits proposed for this project are:

(i) arrears not exceeding 25% of total portfolio, and

(ii) arrears on terms loans not exceeding 30% of demand; reducingto 25% from January 1, 1978 and 20% from July 1, 1978 (para 6.09).

2/ These interest rates include a 3% charge or fee. The higher rate forloans over two years can only be charged when such loans are matched bytime deposits in excess of two years.

ANNEX 6Page 12

Year Total Demand Total Recoveries Recoveries/Overdues…(P----------(p M) …(Z) …_______

1970 582.0 479.3 82.4 / 17.61971 695.0 567.3 81.6 / 18.41972 808.0 648.7 80.3 / 19.71973 978.8 786.0 80.3 / 19.71974 1,464.0 1,176.5 80.4 / 19.61975 2,184.6 1,681.0 76.9 / 23.1

Performance under different programs varies considerably. Surprisingly,repayment under non-supervised credit operations was much better than undersupervised credit schemes with collection rates of 82% and 62%, respectively.These figures relate to short-term credit only. Medium- and long-term cre-dit amount to only 15% of rural bank portfolios, and present reportingmethods do not permit direct comparison. Repayments under the CB:IBRDprojects are discussed in Annex 4, para 8.

27. Restructuring. Under existing rules, rural banks may rescheduleloans in deserving cases where borrowers have not made any amortization pay-ment for two consecutive periods and where the reason for non-payment isbeyond the borrower's control as verified by the bank and confirmed by CB.Eligible causes for non-payment may be losses due to natural hazards in areaswhich the Government has declared as "calamity areas". Restructuring ofCB:IBRD loans would normally be within the original period of the loan,although extensions may be granted up to one half of the original loan period,provided the defaulter repaid all penalties and interest due. In the caseof short-term loans, defaulters have to pay at least 30% of principalbefore the unpaid balance may be extended by one half of the originalperiod of the loan. Rescheduling on this formula may be repeated once.The penalty is 5% p.a. on the past due account over and above the originalinterest rate. Very few rural banks have made use of the possibility toreschedule overdue accounts. This may be due to the fairly cumbersome pro-cedure, but more likely because it is more profitable to have overdue accountson which an extra 5% p.a. can be charged. 1/ The psychological pressure ofdelinquency is also a factor. On several occasions during interviews withthe mission bankers cited this reason for not rescheduling. The policiesregarding penalties for late payments need to be reviewed and it should beensured that farmers are fully aware of the additional charges. Borrowerswho are able to pay should feel sufficient pressure to fulfill their commit-ments on time or even have incentives to repay in advance.

28. Arrears Criteria for Project Participation. In keeping with theunderlying objective of linking CB:IBRD lending more closely to other creditactivities of financing institutions, the arrears criteria for participation

1/ Banks will often meet maturing obligations to CB from their ownresources to avoid penalty charges. The sub-loan then earns aneffective 17% plus fees.

ANNEX 6Page 13

under the proposed project would include consideration of performance onentire protfolio rather than exclusively the term credit portion. On theother hand, term lending is usually a very small component of total loanportfolio and repayment on term loans could be very poor without materiallyaltering the ratios on total loan portfolio. It is therefore desirableto have two criteria, as follows:

(i) total arrears not exceeding 25% of total loan port-folio (the ceiling imposed by CB for access to redis-counting faciliites);

(ii) arrears on term loans not exceeding 30% of demand("arrears" being defined as amounts due at the endof a twelve-month period as a percentage of demand,and "demand" as principle and interest falling dueduring that twelve month period plus overdues at thebeginning of the period.)

The 30% limitation on term credit arrears would be reduced to 25% of January 1,1978 and 20% of July 1, 1978. At the time of full commitment of funds underthe Third Project a 25% limitation was in effect. As a result of the newcriteria, the first 25% limitation at the present time would exclude 257 1/of the 768 rural banks. The second 30% limitation would only permit parti-cipation initially by about 100 banks and sub-projects could be undertaken forperiod of six to nine months while arrears are being reduced to acceptablelevels and more banks become eligible for participation.

29. Rural Banks Repayments to CB. As of December 31, 1975, total arrearswith CB amounted to P 17.5 million compared to P 10.5 million on December 31,1974. Arrears under CB:IBRD projects were P 3.8 million and P 3.4 million onthose dates, respectively. In the repayment of loans from CB, rural banksgive priority to obligations arising from rediscounting operations for short-term production loans since default on such obligations effects their continuedaccess to rediscounting facilities. On the other hand, loans under SpecialFinancing Programs such as the CB:IBRD projects are excluded from the calcula-tion of arrears ratios on which eligibility for rediscounting is, in part,determined. Efforts by CB to reduce the overall arrears situation of ruralbanks must begin with improvements in the financial reporting system to in-crease the timeliness of information available to CB. It is also essentialthat information be shared promptly and routinely between, DRBSLA and theDepartment of Loans and Credits (DLC), the department responsible for redis-counting operations.

1/ Out of these rural banks, 245 have agreed to restructure loans inarrears eligible for restructuring; some of them may be able to reducearrearages to less than 25% and become eligible for rediscounting.

ANNEX 6Page 14

Profits

30. Income and expenditure increased substantially in volume over thelast five years (Table 2). Gross operating income totalled P 234.4 millionduring 1975 against P 153.7 million in 1974, an increase of 53% which wasmainly due to increased lending. The gross operating expenses totalledP 158.5 million and P 114.7 million, respectively, during the same period;the increase of 38% was largely caused by higher salary and interest pay-ments. Net income increased steadily from 1970 to 1973, then showed dramaticincreases of 61% and 95% in 1974 and 1975, respectively.

31. Between 1974 and 1975, commmon stock increased by 47% and preferredstock decreased by 44%, resulting in a net increase in paid-in capital of10%. The average rate of return on shareholders investment increased from10% to 18% before tax during the same period while net income as a percentof common stock rose from 26% to 35%. Net income amounted to 48% of grossincome and 3.2% of average interest - earning assets in 1975 compared to34% and 2.2%, respectively, in 1974.

32. These income and profit figures reflect the high degree of leverage inrural banks (5.5:1 nominal, but 6.5:1 when Government preferred shares arededucted from equity). The high arrears and default levels in rural bankportfolios would have begun by now under normal conditions to take a serioustoll of profits and bank stability. However 64% of all rural banks liabili-ties are accounts with CB, and the latter's leniency in deferring paymentsand encouraging debt restructuring has enabled banks to continue to show pro-fits and expand portfolios. This policy is now under serious question inthe Philippines, since it has merely postponed and aggravated by virtue ofincreased magnitude the problem of sub-borrower arrears. Serious efforts atimproved collections coupled with more stringent conditions for rural bankto qualify for CB credit will be essential to avoid further damage to therural banking system.

ANNEX 6Table 1

PHILIPPINES -

FOURTH RURAL CREDIT. PROJECTRURAL BANKS

COMPARATIVE 9ALANCE SHEETS DECEMBER 31, 1970 - DECEMBER 31, 1975(Pesos Million)

1970 1971 1972 1973 1974 1975(Dec. 31) (Dec. 31) (Dec. 31) (Dec. 31) (Dec. 31) (Dec. 31)

ASSETS

Cash in Hand and Banks 72.6 76.0 113.6 191.2 21,3.9 216.iLoans Outstanding (Net) 1/ 526.1 636.0 769.8 1,055.8 1,701.7 2,323.8(of which IBRD) ( 17-.) ( 21.1) ( 44.2)Government Securities 12.9 17.0 26.0 50.6 72.0 68.6Bank Premises, Furniture, Fixtures,

Transport Equip., Office Supplies B.14 20.3 23.9 25.7 35.0 ".6Other Assets 2L.8 34.3 49.0 58.3 58.1 66.2

-_5_._O 763.6 9623 1,382.6 3 2,110.7 27.3

LIABILITIES

Demand Deposits 7.7 8.5 9.3 14.4 16.9 20.8Saving Deposits 214.8 267.7 293.9 392.5 506.0 561.7Time DepositsSpecial Time Deposits: AGLF 2407 234.9 312.7

IBRD) 2.4 3.6 15.4 161.1

Special Savings Depositso 2.6 91.3

Loans Payable: CS: IBD17.1 20.5 37.5 I 55 8. 6.Others 0.1 1.6 2.4 5819 89.2 166.9

Notes Payable: CB Rediscounts123 123173 354 688 1099Others 1203. 112.3 179.3 325.4 689.8 1,009.9

Other Liabilities 27.1 29.9 70.2 34.8 13.3 61.2

428.7 528.2 694.1 1,059.9 1,735.3 2,323.3

NET WORTH

Capital Stock: Common 94.4 107.2 120.3 131.0 1149.3 219.1Preferred 66.1 69.2 76.7 89.7 101.1 56.7

Reserve for retirement of preferredstock 33.4 38.2 43.6 47.2 18.6 17.0

Surplus and other reserves 16.4 19.9 22.3 29.0 37.6 56.1Undivided Profits 16.0 20.6 25.0 25.8 38.5 76.8

226.3 255.3 287.9 322.7 375-. 426.0

TOTAL LIABILITIES + NET WORTH 655.0 703.6 982.3 1,382.6 2,110.7 2,7L9.3

1/ Loan investments less reserves for bad debts (about 1.6% of loans outstanding, detailed in Appendix 8).

Source: DRBSLA Annual Reports.

EAP Projects DepartmentJuly 6, 1976

KNNEX 6Table 2

PHILIPPINES


RURAL BANKS

CONSOLIDATED PROFIT AND LOSS ACCOUNTS, 1290-197(Pesos Million)

12270 1971 1972 1973 1974 1975

GROSS INCCMF.

Interest on Loans:Agricultural Loans

Ordinary 47.4 55.9 61.5)CB-IBRD Program 3.5 4.5 6.1) 48.9 109.5 145.9

Commercial Loans 2.4 2.5 3.2 2.4 6.3 8.1Industrial Loans 1,1 1.0 1.5 11 2.4 2,9

Other Loans 0.5 o.8 0.9 2,6 7.1 22.0Interest on Bond Investments 0.5 0.7 1.6 lol 4.4 4.4Commissions 0.2 0.4 0,5) 78 -

Other Earnings 6.0 2- 8.7) 1.1

Total Gross Income 61.6 7.7 84.0 153.7 234

EPENDITURES

Interest on:Deposits 10.6 14.0 15.8 90C 27.2 37.2Special Time Deposits 1.2 1.5 2.1 2.3 7.9 10.6Notes and Loans Payable 3.3 3.6 4.4 .>1 11.3 16.9

Guarantee Fees 0.2 0.3 0.4 0.4 - -

Depreciation 2.2 2.3 2.7 2.1 4.0 5.3Salaries 13.8 16.1 18,5 11,2 26.4 33.5Travel Expenses 1.7 1.8 2.0 173 3.3 5.0Stationery, Supplies 0.8 0.9 1.3 2.3 5.6 4.9Other Operating Expenses 10 1 14.6 37.2 29.0 45.1

Total Expenditure 44.2 61.8 77-1 114.7 158.5

NET INCOME 17.4 20.8 22.2 24.2 39.0 75.9

Source: DRBSLA, Annual Reports

ANNEX 6Table 3

PHILIPPINES


RURAL BANKS

STATUS OF LOANS OUTSTANDING, DECEMBER 31, 1975

% ArrearsItems in (Past Due and

Current Past Due Litigation Total Litigation)

Agricultural

Short Term Non-Supervised 1/ 597.7 117.0 15.9 730.6 18.2

Short TermSupervised 1/ 824.7 309.2 14.2 1,148.1 28.2

Medium and Long TermSupervised 1/ 310.8 8.9 4.1 323.8 4.0

Sub-Total 1,733.2 435.1 34.2 2,202.5 21.3

Commercial 62.5 19.4 2.1 84.0 25.7

Industrial 38.4 5.8 0.5 44.7 14.1

Other 10.3 6.0 0.3 16.6 38.0

TOTAL 1,844.4 466.3 37.1 2,347.8 21.5

1/ Breakdown extrapolated from 560 reporting banks.

ANNEX 6Table 4

PHILIPPINES


Rural Banks

Summary of Loans Granted According to Size and SecurityDuring the Years 1970-1973

1970 1971 1972 1973Number Amount Number Amount Number Amount Number Amount('000) (T million) ('000) (P million) ('000) (P million) ('000) (H million)

Loan Classification

Size

Up to o100 21.2 1.8 18.6 1.6 19.6 1.6 17.5 3.0P101 to P200 58.2 10.3 52.4 9.4 52.1 9.4 65.6 20.3P201 to P500 124.1 48.4 127.8 50.1 143.8 56.3 193.5 88.2P501 to l1,000 91.8 78.1 105.7 88.7 124.2 102.9 200.8 169.2P1,000 to P2,000 84.6 142.8 89.2 150.8 100.7 167.2 151.9 244.0P2,001 to P5,000 47.0 166.5 60.4 214.0 69.2 240.2 97.0 318.3P5,001 to P10,000 7.5 58.5 11.2 83.1 12.8 96.8 16.7 109.9P10,001 to P20,000 2.4 35.2 3.5 50.4 3.8 57.7 3.9 57.8Over P20,000 0.7 17.2 2.9 30.6 1.7 53.1 2.4 63.0

Total 437.5 558.8 471.7 678.7 527.9 785.2 749.3 1,073.7

Security

Real Estate Mortgage 307.6 450.2 334.4 549.7 348.4 608.0 384.3 680.9Chattels Mortgage:Growing Crops 37.7 37.2 45.1 44.7 80.9 78.2 240.0 249.7Farm Animals 26.1 5.8 22.7 7.5 29.3 15.1 38.0 44.4Farm Equipment 0.9 2.4 1.4 4.0 1.6 7.9)

Guarantee/Sureties 22.8 22.8 23.3 23.8 22.4 26.3) 28.4 38.4Bank Deposits 3.1 3.3 4.1 6.2 4.6 6.7)Pledge of Stored Crops 1.9 5.4 1.7 5.2 2.5 6.0)Unsecured 37.4 31.7 39.0 37.6 38.2 37.0 58.6 60.3

Total 437.5 558,8 471.7 678.7 527.9 785.2 749.3 1,073.7

EAP Pro)ects DepartmentJuly 13,1976

ANNEX 6Table 5

PHILIPPINES


RURAL BANKS

STATUS OF LOANS OUTSTANDING, DECEMBER 31, 1975

(Pesos Million)% Arrears

Items in (Past Due andCurrent Past Due Litigation Total Litigation)

Agricultural

Short Term Non-Supervised 1/ 597.7 117.0 15.9 730.6 18.2

Short TermSupervised 1/ 824.7 309.2 14.2 1,148.1 28.2

Medium- and Long-TermSupervised 1/ 310.8 8.9 4.1 323.8 4.0

Sub-Total 1,733.2 435.1 34.2 2,202.5 21.3

Commercial 62.5 19.4 2.1 84.0 25.7

Industrial 38.4 5.8 0.5 44.7 14.1

Other 10.3 6.0 0.3 16.6 38.0

TOTAL 1,844.4 466.3 37.1 2,347.8 21.5

Less Reserves forBad Debts - - - 37.6

Net Outstanding Loans 2,310.2

1/ Breakdown extrapolated from 560 reporting banks.

ANNEX 6Table 6

PHILIPPINES


RURAL BANKS

COLLECTIONS AND ARREARS OF ALL RURAL BANKS

1971-1975

(P Million)

Financial Year

1971 1972 1973 1974 1975

1. Loan Portfolio 646.2 782.7 1,070.4 1,718.6 2,347.8

2. Dues and Collections

a) Amount due (principal and interest)at beginning of financial year 102.8 127.8 159.4 192.8 287.5

b) Instalments fallen due during theyear 592.3 680.2 819.4 1,271.2 1,897.1

c) Collections during the year 567.3 648.6 786.0 1,176.5 1,681.0

d) Amount due (principal and interest)at the end of financial year 127.8 159.4 192.8 287.5 503.6

3. Ratios

a) Collections as percent of dues 81.6% 80.3% 80.3% 80.4% 76.9%

b) Arrears as percent of dues 18.4% 19.7% 19.7% 19.6% 23.1%

c) Arrears as percent of loan portfolio 19.8% 20.4% 18.0% 16.7% 21.4%

4. Arrears under Litigation 13.3 16.2 18.3 22.5 37.2

5. Write-Offs during Financial Year Nil Nil Nil Nil Nil

6. Provisions for Bad Debts

a) Total Provisions 10.2 12.9 14.6 16.9 24.0

b) As percent of total arrears 8.0% 8.1% 7.6% 5.9% 4.8%

c) As percent of loan portfolio 1.6% 1.6% 1.4% 1.6% 1.4%

Source: DRBSLA, Annual Reports

ANNEX 7Page 1

PHILIPPINES


Stock Savings and Loan Associations

A. Background, Legal Basis and Organization

1. Savings and loan associations have now reached the stage in thePhilippines where they are considered an effective instrument for encouragingsavings especially from small savers. Together with the capital in the caseof stock corporations, such savings can be channeled to productive purposesin industry, commerce and agriculture or loaned for home-building or personalconsumption needs of members and the public. The accumulated funds may alsobe invested in securities of productive enterprises and the Government or itsagencies. In the beginning, associations were formed without proper supervi-sion of their activities and protection of savers. In 1963, there were 254non-stock savings and loan associations which were more in the nature ofborrower's clubs than credit institutions. Their aggregate resources ofabout P 30 million were primarily invested in consumer loans to borrowers withfixed salaries. Public confidence in them was low as a result of widespreadabuses and mismanagement. Recognizing the important potential of the asso-ciations, Congress passed the Savings and Loan Associations Act 1/ on June 22,1963, which empowered the Monetary Board of the Central Bank of the Philip-pines, (Annex 5) to supervise and regulate the activities of the associations.

2. The Central Bank of the Philippines (CB), during the initial yearsof its supervision, concentrated on introducing discipline within the systemand setting up minimum standards. Pursuant to the Savings and Loan Associa-tions Act, detailed Rules and Regulations governing the establishment andoperations of savings and loan associations were issued. These efforts re-sulted in the dissolution of all associations operating below standards: atthe end of 1966, the number of non-stock associations was down to 72 withaggregate resources of P 23.5 million. At the same time, the first fourlicensed stock savings and loan associations cautiously started operations.

3. To effectively supervise and promote the industry, CB establishedthe Department of Savings and Loan Associations. In early 1973, it wasmerged with the Department of Rural Banks into the Department of Rural Banksand Savings and Loan Associations (DRBSLA), which is described in Annex 5,paras 6-8. It is of considerable advantage that both proposed lending

1/ Full title: An Act to Provide for the Regulation of the Organizationand Operations of Savings and Loan Associations, Republic Act No. 3779of June, 1963; amended by Republic Act No. 4378 of June 19, 1965, andPresidential Decree No. 113 of January 20, 1973.

ANNEX 7Page 2

channels, rural banks and SSLAs fall under the same management. The auditof associations is carried out by the three Divisions of the Supervision andExamination Group IV. Other supporting services such as training (Annex 5,paras 18 and 19) are provided by other sections of DRBSLA. As in the case ofrural banks, on-lending and administration of project funds would be handledby the three Supervised Credit Groups of the Department. Loan processing wouldfollow the same procedures as applied to rural banks (Annex 5, paras 11-13).

4. Participation in Proposed Project. Only stock associations operatingoutside the Greater Manila area would qualify to participate under the project.As of December 1975, there were 44 SSLAs throughout the Philippines, of whichabout half are located in the Greater Manila area. The right to open branchoffices is an advantage the associations have over rural banks. SSLAs wouldbe required to fulfill the same qualifications as rural banks (Annex 6, para24). They would follow the same Rules and Regulations and lending terms,including at least 10% contribution from their own resources. It is anticipa-ted that about 20 SSLAs would participate in the project. They would sup-plement the rural banking system, increase the area covered by the project,and provide some competition to established rural banks. On the basis ofexperience under the Third Project it is estimated that disbursements by SSLAswould not exceed 10% of project funds.

5. Stock savings and loan associations and non-stock associations areorganized in the Philippine League of Savings and Loan Associations, Inc.(PHILSLA) which is the equivalent to the Rural Bankers Association of thePhilippines (Annex 6, para 8). PHILSLA represents its members' point ofview in dealings with CB and the Government and maintains public relations.

B. Organization and Operations

Organization and Management

6. SSLAs are registered as stock corporations under the CorporationLaw, once CB and the Securities and Exchange Commissioner have approved theirestablishment. Opening of a branch office or agency requires a license fromthe Monetary Board. Stock associations are authorized to accept deposits from,and extend loans to, the general public, whereas non-stock associations arepermitted to do business with members only. Since the effectiveness of Pres-idential Decree No. 71 on November 29, 1972, stock associations are classi-fied as banking institutions. However, they do not enjoy the same privilegesas rural banks, such as exemption from taxes and Government fees and charges(Annex 6, para 6) and neither do they receive Government capital assistancenor have they access to CB rediscount facilities or special financing programsother than the CB:IBRD projects. Their major sources of funds are theirpaid-up and accumulated capital, deposits and, to a limited extent, borrow-ings from CB and other credit institutions.

ANNEX 7Page 3

7. SSLAs are managed by a board of directors. At least two thirdsof the board must be citizens of the Philippines and a director must own aminimum of P 5,000 of stock at par value. The executive officers are thepresident, vice-president, manager, cashier and treasurer, who may not beofficials of the Government or its agencies.

Financial Resources

8. Capital and Reserves. The minimum paid-up capital is determinedby the Monetary Board but shall not be less than P 100,000. At present,it is P 750,000 with an additional P 250,000 for every branch office. Atleast 70% of the voting stock must be held by persons of Filipino citizen-ship. Stock may be issued in the form of common or preferred stock. Largeassociations have as many as 200 stockholders with a minimum share ofP 100 par value. The total paid-up stock capital for SSLAs was P 54.4 mil-lion as of December 31, 1975, which was 17% of total resources. As of thesame date, surplus, reserves and undivided profits were only 3.0 millionor 0.9% of all resources (comparative statement of condition as of Decem-ber 31, 1974 and 1975 is attached as Table 1, and, for the years 1973-1975, as Table 2).

9. Deposits. The main strength of the SSLAs lies in their abilityto collect funds from stockholders and the public in the form of savingsor time deposits. The interest rates are in line with other banking institu-tions: 7% p.a. for savings deposits and for time deposits from 8-1/2% p.a.(90 days) to 12% p.a. (730 days). As of December 31, 1975, savings depositsof all stock associations totalled P 213.0 million (66% of total resources).Savings deposits rose by P 36.6 million (31%) and time deposits by P 26.6million (84%) during the year (Tables 1 and 2). Every association must main-tain a reserve against its savings and time deposits equivalent to 6% of theaggregate deposits. At least 20% of the reserve must be held in cash withCB and the rest in bonds or securities of the Government or its agencies,provided these are fully guaranteed by the Government. Deposits shall beinsured with the Philippine Deposit Insurance Corporation. In addition, thesystem has its own Liquidity Guarantee Fund which assisted the associationsagainst the heavy withdrawals during the floods in July/ August 1972 and therun on deposits immediately after the imposition of martial law in September1972.

10. Borrowings. The law provides for savings and loan associationsto borrow from CB or, subject to the Monetary Board's approval, rediscountnotes and bills of exchange or other commercial papers at the same interestrates charged to rural banks although no such discounting has yet been done.

ANNEX 7Page 4

Under the proposed project SSLAs would borrow from CB. The associationsare permitted by law to borrow up to 20% of total assets (or 30% with specialapproval of the Monetary Board) from public lending institutions such as thethe Development Bank of the Philippines, Philippine National Bank, the Govern-ment Service Insurance System, the Social Security System, and from privatelending institutions as may be approved by the Monetary Bcard', Such borrow-ings are in fact very small.

Lending Operations

11. Loan Portfolio. The following table shows loans granted in 1975and oustanding as of December 31, 1975 (loans granted by purpose for 1973-75are in Table 3 and by purpose, size and security for 1974 and 1975 are inTable 4).

Loans Granted Loans Outstanding1975 December 31, 1975

Loan Purpose Amount % of Total Amount % of Total(Pesos (PesosMillion) Millicn)

Agricultural 106.0 30.8 72,8 32.8Industrial 6.3 1.8 4d2 1.9Commercial 150.1 43.7 66e4 29.9Real Estate 34.9 10.2 35.4 15.9Consumption 46.5 13.5 33L3 19.5

Total 343.8 100.0 222.1 100.0

Agriculture has risen to become the largest category in lending operations,followed closely by commercial loans. With increasing pressure in thePhilippines to provide more credit for housing, real estate loans may increasesubstantially in coming years.

12. Loan Size. During 1975, 11% of loans granted were below P 1,000and 34% below P 5,000; 37% exceeded P 25,000 (Table 4). Participation underthe Third Project contributed significantly to the increase in large loanssince the great majority of CB:IBRD lending was for 4-wheel tractors.

13. Loan Periods. Stock associations are directed to accommodate thenormal credit needs of the consuming public, of industry, coIrnmerce andagriculture. Therefore, they have primarily provided short-l-erm advancesfor a maximum period of one year. Under the law, 1/ the maximum periodpermitted was three years except for loans secured by unencumbered realestate which may be granted up to 20 years. However, this provision wasamended by Presidential Decree to enable SSLAs to grant medium-term dev-elopment loans making them eligible to participate under CB:IBRD projects.

1/ Republic Act No. 3379, Section 5(a).

ANNEX 7Page 5

14. Interest Rates. The associations may charge up to 12% p.a. or1% p.m. on loans wholly or partly secured by titled real estate and a maximumof 14% p.a. or 1-1/6% p.m. on loans otherwise secured or without security.Actual rates vary from 9% p.a. to 14% p.a. Interest may be collected inadvance. During the period January 1 to December 31, 1975, 96% of all loansgranted bore interest rates of 12% to 14% per annum (Table 4). Reasonableapplication and service fees may be charged as prescribed by the MIonetaryBoard. Interest rates and fees charged for sub-loans made under the proposedproject would be equal to those charged by rural banks.

15. Securities. Loans mav be granted up to 70% of the fair marketvalue of property accepted as collateral on first mortgage basis. The limitfor salary loans is the berrower's dc?eoit plus four months' salary or regularincome. The association's own stock may not serve as security. During 1975,72% )f all loans granted were sccurea by real estate or chattel mortgage.

Investments

I'). Savings and loan associationt may invest their funds in any soundnon-speculative enterprise, as well as In bonds, securities and other obliga-tions issued by the Government or its agencies. however, total investments inequities must not exceed 25% of the association's net worth, and equityinvestment in any single enterprise may not exceed 15% of the association'snet worth and should remain a minority holding in that enterprise, exceptwhere the enterprise is not a financial intermediary. Investment in alliedenterprises fall under CB control which may impose additional limitations.Aggregate investments in bonds and securities are limited to 10%, and those inreal estate and improvements thereon to 5% of total assets. Total investmentin Government securities as of December 31, 1975 amounted to P 11.5 million(3.6% of total resources).

C. Operational Results

17. Repayments. Collections by SSLAs as of September 30, 1973 were98.9% of dues as well as of loan portfolio. Only P 1.0 million was due andnot repaid. As of December 31, 1975, only four of the 167 loans grantedunder the CB:IBRD program were in arrears and total arrears were P 25,000 or0.2% of loans outstanding. In justifiable cases, SSLAs may reschedule theirloans under the following conditions: (a) for productive loans, the extensionmay not exceed half the original period, provided that 30% of the loan hasbeen paid; a second extension may be allowed, provided that it does not exceedhalf the period of the first extension; (b) loans for medical purposes may beextended by the original period, provided 30% of the loan has been paid; and(c) the extension of consumer loans shall not exceed half the original period,provided that 50% of the loan has been repaid.

ANNEX 7Page 6

i8. Profits. The net income of the system shows a positive trend overthe last three years (Table 5) although 1973 performance was only marginallyhigher than that of 1972. Net income for 1975 amounted to -3 4.5 million,an increase of 62% over the P 2.8 million in 1974. The largest items on theincome side are interest on commercial loans (18%), interest on agriculturalloans (17%), and fees and charges on agricultural loans (16%); revenue fromagricultural loans amounted to only 5% of gross income in 1973.

19. During 1975, paid-up capital increased from P 41.7 million asof December 31, 1974 by P 12.7 million or 30% to P 54.4 million. The averagereturn on shareholders' investment increased from 6.7% in 1974 to 8.3% in1975. The net income of percent of interest and dividend earning assets(loan portfolio, Government securities and equity investments) was 1.6% and1.8% respectively for the two years. In terms of gross income, the netincome was 11.4% in 1975 against 10.5% in 1974. Although profitability isstill modest, all indicators shown an upward trend.

20. Audit. The Supervision and Examination Group IV of DRBSLA isresponsible to examine all SSLAs at least once a year, and conduct specialexaminations as necessary. In fact 30 audits were conducted in 1975 of the38 associations in existence at the beginning of that year. If as a resultof any examination, CB finds that an association is viola-- ng any law,charter or Rules and Regulations, it may order corrective measures or dis-continuance of operations, or may even take over possession of assets.In the first three years after CB assumed supervision of savings and loanassociations in 1963, 177 non-stock associations were dissolved or liquidated,but no stock associations have yet failed, in part because CB supervisionincludes technical assistance and training of personnel. DRBSLA also checksauditing contracts between stock associations and independent auditors.

ANNEX 7

PHILIPPINES


STOCK SAVINGS AND LOAN ASSOCIATICNS

COMPARATIVE STATEMENT OF CCNDITION

DECEMBER 31. 1974 AND DECEMBER 31, 1975(PESOS MILLION)

December 31, 1974 . December 31 1975 2Chanes 2/Ambunt X of Total Amount of Total Amount %

ASSETS

Cash and Due from Banks 15.4 7.3 28.7 8.9 13.3 86.JDue from Central 3ank 3.1 1.5 3.3 1.0 0.2 6.4Government Securities 13.1 6.2 11.5 3.6 (1.6) -(12.2)Loans and Discounts 145.0 68.8 222.0 68.8 77.0 53.1Other Investments 18.8 8.9 19.1 5.9 0.3 1.6Furniture, Fixture, EquipmentLeasehold Improvements (Nets 7.7 3.7 12.5 3.9 4.8 62.3

Other Assets 7.6 3.6 25.6 79 18.0 236.8

Total Assets 210.7 100.0 322.7 100.0 112.0 _3.2

LIABILITIES

Savings Deposits 113.2 56.o 154.8 48.o 36.6 31.0Time Deposits 31.6 15.1 58.2 18.0 26.6 84.2Borrowings 4.7 2.2 34.8 10.8 30.1 640.4Accounts Payable - - - -Unearned Interest/Discount 7.1 3.3 8.4 2.6 1.3 18.3Other Liabilities 4.9 2.4 9.1 2.8 4L2 85.7

Total Liabilities 166.5 79.0265.3 82.2 98.8 9.3

NET 4ORTH

Paid-Up Capital 41.7 19.7 54.4 16.9 12.7 30.5* ithdrawable Share Resarva - - - - - -curplus and Surplus Reserves o.6 0.3 o.6 0.2 Undivided Profits 1.0 2.4 0.7 o.

Total Net ,Jorth 44. 2 21.0 17.8 13.2 29.9

Total Liabilities and Net Worth 210.7 LJ.0. 322.7 100.0 122.0 L3.2

1/ To total assetsI/ Ratio of net change to December 1974 (base period)

Source: SSLA, Annual Reports

ANNEX 7Table 2

PHILIPPINES


STOCK SAVINGS AND LOAN ASSOCIATIONSCOMPARATIVE STATEMENT OF CONDITION

AS OF DECEMBER 31, 1973-1975(Pesos Million)

1973 Change 1974 Change 1975 ChangeAmount 1972/73 Amount 1973/74 Amount 1974/75

ASSETS

Cash and Due from Banks 11.5 30.6 15.4 33.9 28.7 86.4Due from Central Bank 1.1 - 3.1 181.8 3.3 6.4Government Securities 8.7 148.5 13.1 50.5 11.5 (12.2)Loans and Discounts 99.2 41.1 145.0 46.1 222.0 53.1Other Investments 13.8 (9.8) 18.8 36.2 19.1 1.6Furniture, Fixtures, Equipment,Leasehold Improvements (Net) 5.0 100.0 7.7 54.0 12.5 62.3

Other Aseets 4.9 96.0 7.6 55.1 25.6 236.8

Total Assets 144.2 40.1 210.7 46.1 322.7 53.2

LIABILITIES

Savings Deposits 82.4 57.2 118.2 43.4 154.8 31.0Time Deposits 17.9 36.6 31.6 76.5 58.2 84.2Borrowings 1.3 (7.1) 4.7 261.5 34.8 640.4Accounts Payable _ _ _ _ _ _Unearned Interest/Discount 4.6 53.3 7.1 54.3 8.4 18.3Other Liabilities 2.9 207.1 4.9 157.9 9.1 85.7

'Total Liabilities 109.1 51.9 166.5 52.6 265.3 59.3

NET WORTH

Paid-up Capital 33.9 12.2 41.7 23.0 54.4 30.5Withdrawable Share Reserve - - - - -Surplus and Surplus Deserves 0.2 100.0 0.6 200.0 0.6 -Undivided Profits 1.0 25.0 1.9 90.0 2.4 26.3

Total Net Worth 35.1 12.8 44.2 25.9 57.4 29.9

Total Liabilities and Net Worth 144.2 40.1 210.7 46.1 322.7 53.2



ANNEX 7.Table 3

PHILIPPINES


STOCK SAVINGS AND LOAN ASSOCIATIONS

COMPARATIVE SUMMARY OF LOANS GRANTED AND OUTSTANDING (BY PURPOSE)DURING THE YEARS 1973-1975

(Pesos Million)

Change From Change FromLoans Granted Previous Year Loans Outstanding Previous Year

Year Loan Purpose Amount % of Total Amount b Amount I of Total Amount %

1973 Agricultural 8.4 5.7 0.1 1.2 7.8 7.9 2.3 41.8Industrial 4.3 2.9 2.6 152.9 2.3 2.1 1.7 283.3Commercial 65.3 44.4 12.6 23.9 36.2 36.2 10.7 42.0Real estate 40.9 27.8 12.0 41.5 39.3 39.3 13.0 49.4Consumption 28.1 19.2 9.2 48.6 14.7 14.6 2.3 18.5

Total 147.0 100.0 36.5 33.0 100.3 100.0 30.0 42.7

1974 Agricultural 29.0 13.0 20.6 245.2 23.4 16.1 15.6 200.0Industrial 2.0 0.9 (2.3) (53.5) 1.8 1.2 (0.5) (217)Commercial 105.2 47.4 39.9 61.1 50.3 34.7 14.1 38.9Real estate 40.8 18.4 (0.1) (0.2) 29.5 20.4 (9.8) (25)Consumption 45.1 20.3 17.0 60.5 40.0 27.6 25.3 172.1

Total 222.1 100.0 75.1 51.1 145.0 100.0 44.7 44.6

1975 Agricultural 106.0 30.8 77.0 265.5 72.8 32.8 49.4 211.1Industrial 6.3 1.8 4.3 215.0 4.2 1.9 2.4 133.3Commercial 150.1 43.7 44.9 42.7 66.4 29.9 16.1 32.0Real estate 34.9 10.2 (5.9) (14.5) 35.4 15.9 5.9 20.0Consumption 46.5 13.5 1.4 3.1 43.3 19.5 3.3 8.2

Total 343.8 100.0 121.7 54,8 222.1 100.0 77.1 53,2



ANNEX 7Table 4

PHILIPPINES


STOCK SAVINGS AND LOAN ASSOCIATIONSLOANS GRANTED JANUARY 1 - DECENBER 31, 1974-1975

kresos Million)

January 1 to January 1 toDecember 31, December 31,

1974 1975 ChangeLoan Classification Amount % Amount % Amount _

A, Loans by Purpose 222.1 100.0 343.8 100.0 121.7 54.8

Agricultural 29.0 13.0 106.0 30.8 77.0 265.5Supervised 0.9 0.4 15.8 4.6 14.9 1,655.6Non-supervised 28.1 12.6 90.2 26.2 62.1 221.0

Commercial 105.2 47.4 150.1 43.7 44.9 42.7Industrial 2.0 0.9 6.3 1.8 4.3 215.0Real estate 40.8 18.4 34.9 10.2 (5.9) (14.5)Consumption 45.1 20.3 46.5 13.5 1.4 3.5

B. Loans by Size 222,1 100.0 343.8 100,0 121.7 54.8

Up to P1,000 36.8 16.6 36.2 10.5 (0.6) (1.6)P1,O0l-R5,000 57.2 25.8 79.6 23.2 22.4 39e25,001-B10,000 25.6 11.5 32.7 9.5 7.1 27.7P10,001-P25,000 37.8 17.0 69.6 20.2 31.8 84.1Over P25,000 64.7 29.1 125.7 36.6 61.0 94.3

C. By Type of Security 222.1 100.0 343.8 100.0 121.7 54.8

Unsecured 78.8 35.5 97.4 28.3 18.6 23.6Secured 143.3 64.5 246.4 71.7 103.1 71.9

D. By Interest Rate 222.1 100.0 343.8 100.0 121.7 54.8

Below 6% - - - - -

6% but less than 8% - - 1.8 0.5 1.8 8% but less than 10% 2.0 0.9 0.1 0.1 (1.9) (95.0)10% but less than 12% 24.1 10.8 12.1 3.5 (12.0) (49.8)12% and above 196.0 88.3 329.8 95.9 133.8 68.3

Source: SSLA Annual Reports


ANNEX 7Table 5

PHILIPPINES

FOURTH RURAL CREDIT PROJECT -

STOCK SAVINGS AND LOAN ASSOCIATIONSCOMPARATIVE STATEMENT OF INCOME AND EXPENSES

FOR THE YEARS ENDED DECEMBER 31, 1973-1975

(Pesos Thousand)

1973 % 1974 'h 1975 7.Amount Change Amount Change Amount Change

GROSS INCOME

Interests onAgricultural Loans 873 17.6 1,660 90.1 6,601 297.6Industrial Loans 145 (37.5) 173 19.3 519 200.0Commercial Loans 3,962 5.5 6,069 53.2 7,309 20.4Real Estate Loans 3,386 21.3 3,783 11.7 4,202 11.1Consumption Loans 2,757 35.6 5,588 102.7 5,738 2.7

Interests on Bank Deposits 354 56.6 409 15.5 1,029 151.6Interests/Dividends on Investments 2,874 81.7 3,407 18.5 4,282 25.7Fees and Other Charges 1,098 61.7 2,752 150.6 6,474 135.2Other Earnings 1,878 374.2 2,588 37.8 31.3

Total Gross Income 17,327 39.3 26,429 52.5 39,552 49.6

EXPENSES

Salaries 3,763 38.1 4,849 28.9 6,332 30.6Per Diems, Allowances 961 59.3 1,641 70.6 2,460 49.9Meeting and Election Expenses 20 (86.6) 27 35.0 78 188.9Interests on Deposit Liabilities 5,056 55.1 8,601 70.1 13,984 62.6Interests on Borrowings 182 19.7 238 30.8 516 116.8Taxes 254 109.9 416 63.8 556 33.6Organization Expenses 91 19.7 135 48.4 147 8.9Stationery and Supplies 526 42.9 1,075 104.4 1,200 11.6Bond/Insurance Premiums 262 79.4 348 32.8 452 29.9Postage, Telephone and Telegraph 109 37.9 141 29.4 177 25.5Rent 706 11.7 769 8.9 1,028 33.7Light and Water 270 32.3 549 103.3 768 39.9Depreciation 661 45.6 977 47.8 1,452 48.6Other Operating Expenses 2,750 55.8 3,886 41.3 5,907 52.0

Total Expenses 15,611 45.4 23,652 51.5 35,057 48.2

NET INCOME 1,716 0.8 2,777 61.8 4,495 61.9



ANNEX 8Page 1

PHILIPPINES


Farm Mechanization Component

A. Introduction

Previous Bank Financing of Farm Mechanization

1. The three previous Rural Credit Projects contained major componentsin support of mechanization as follows:

Mechanization Share of TotalLoan Appraisal Estimate Final Result

Effective Completed Amount Amount % Amount %---------- (Us$ Million)---------------

Project I (432-PH) 1965 1968 5.0 2.0 40% 4.5% 89

Project II (637-PH) 1969 1972 12.5 9.0 72% 10.6 85

Project III (1010-PH)/a 1974 1976 22.0 15.8 72% 19.4 88

/a Details of the mechanization financing under the Third Project appearin Table 1 of this Annex.

The largest share of farm mechanization funds has gone to four-wheel tractorfinancing. About 57% of all four-wheel tractor sales in the Philippinesin 1975 were financed by the CB:IBRD program. This category consumed 64%of the total proceeds under the Third Project. About 9% of single axletractor sales were financed by the CB:IBRD program in 1975, and this categoryaccounted for over 8% of project proceeds. Table 2 summarizes tractor salesin CB:IBRD financing in recent years.

B. Role and Status of Mechanizationin Philippine Agriculture

2. The Government has a goal to achieve and maintain self-sufficiencyin rice and corn while at the same time increasing the production levels ofother crops. There is a particular desire to increase sugar production sincethis is a major foreign exchange earning commodity in the country. Production

ANNEX 8Page 2

in all three of these crops can be increased if appropriate mechanizationis selected and correctly utilized. Mechanized cultural practices willimprove the quality of tillage, permit increase cropping intensity and moreefficient use of irrigation, and will complement the increased application offertilizers, insecticides as well as adoption of high yielding varieties ofrice and corn. Rice, corn and sugarcane are the three crops for which ad-ditional mechanization would be provided under the Fourth Rural Credit Project.The total land area of the Philippines is 30 million hectares of which 9.8million are covered by farm holdings. 1/ The cultivated acreage has beenestimated to be 6.7 million hectares with approximately 30% under full irri-gation. A comparison of the areas harvested and the corresponding productionof rice, corn and sugarcane is presented below for the years 1961 and 1971.

Comparison of Areas Harvested and Production of Rice,Corn and Sugarcane for 1961 and 1971. /a

Area Harvested Production('000 ha) % ('000 m tons) %

Crop 1961 1971 Change 1961 1971 Change

Rice 3,198 3,113 - 2.6 3,704 5,343 44.3

Corn 2,046 3,392 65.8 1,210 2,005 65.7

Sugarcane 232 442 90.5 1,709 2,980 74.4

/a Adopted from IBRD Agricultural Sector Survey Philippines, Vol. (I).The General Report, May 1973.

3. With the exception of the decrease in the area of rice harvestedduring the period there is a marked increase in both area and productionof these major crops. While a portion of the increase can be attributed tothe application of improved agricultural cropping technology involvingimproved seed varieties (HYV's), fertilization and weed control, there isno doubt that mechanization also played a significant role through itseffect on cropping intensity, tillage quality and timeliness of planting.

4. Land preparation is the task on which the great majority of farmmechanization in the Philippines has been focused. Increased power avail-able from four-wheel tractors and to a lesser extent from power tillershas provided the capability of preparing relatively dry soils for plantingin advance of, or in early stages of the rainy season, which could not beaccomplished by the use of carabaos. This early beginning coupled with ashorter time requirement for land preparation (one hectare requires 5 to 6hours by a four-wheel tractor, 5 to 7 days by a power tiller and up to 20 days

1/ IBRD Agricultural Sector Survey, Philippines, Vol. (I), The GeneralReport, May 1973.

ANNEX 8Page 3

by carabaos) permits a greater degree of selection for the time of seeding.Timely seeding is critical to yields in both rainfed and irrigated crop-ping, and speed of preparation is especially important to the intensityof cropping under irrigated conditions.

5. The International Rice Pesearch institute (IRRI' has, in its farmmachinery research program, placed emphasis on the design and development ofequipment to meet the needs of small farmers. Equipment which has been or isbeing developed and improved includes: single axle tractors (commonly andperhaps incorrectly termed power tillers), a low cost four-wheel riding tractorin the 15-20 hp range, a manually-drawn deep placement 1iould fertilizerinjector, a deep placement granular applicator, low lift Je- water pumps, handdrawn seeders and weeders, portable threshers, grain drye-s and rice millingequipment. Among the machines being developing at IRRI, 9ajor attention hasfocused on the power tiller.

Power Tillers

6. Power tiller sales in the Philippines between 1965 and 1975 withsales projections to 1980 are displayed in Table 2. A surprisingly largenumber of these units (7,000 units in 1974 and 11,000 in 1975) were acquiredby individual farmers. The sales in 1975 received impetus from the outbreakof Hoof and Mouth Disease when 14,000 work animals were infected. This out-break led to a special financing program under which the Land Bank of thePhilippines financed 2,900 power tillers while the Development Bank of thePhilippines undertook to finance 600 four-wheel tractors. Liberalized financ-ing terms employed under the program may not result in a t--rue economic assess-ment of the merits from the single axle tractor. In any e3vent the power tillerpopulation by the year end 1975 approached a total of 28.300 -units. There arenow 32 manufacturers of local tillers and 13 distributors of local and importedmodels.

7. There are three types of power tillers used in -_ Philippines:

Type I: Single Axle Power Tillers - These locally manu-factured units are lightweight, usually with 4 to 6 hpgasoline engines. Rotary tiller blades are mounted on atransverse main axle which is driven by the engine througha chain and sprocket drive. These tillers are not usuallyused for dryland work or for hauling applications. T-hey arenot equipped with differertial mechanisms or steering clutches.

Type II. General Power Tillers -his type of tiller --usually equipped with an air cooled engine having up Lo 8 hpcapacity. Usually imported, it is fitted with wheels ^nd canperform several farm operations by attaching conventio-aldraft dependent farm implements such as plows, harrows andcultivators. The tillers are equipped with differentialmechanisms or steeriog clutches.

ANNEX 8Page 4

Type III: Double Axle Power Tillers - These imported unitshave two drive wheels and the tilling mechanism consists of aseries of knives attached to a rotating shaft installed behindthe main wheel axle. These tillers are not as versatile as theother two types but they are well suited to tilling heavy claypaddy fields because of their construction and larger poweredengines which range from 6 to 14 hp capacity.

Four-Wheel Tractors

8. The number of four-wheel tractors in the Philippines reached 12,500by year end 1975 and based on a straight line projection would approach 20,000tractors by 1980. Farm tractor sales are summarized for 1970-1975 in Table 2,and presented by power class between 1967 and 1975 in Table 3. All four-wheeltractors sold in the Philippines are imported and the general trend in tractorproduction in exporting countries is toward larger capacity machines. Thistrend has been carried over into the Philippines as represented by 76% ofthe recent sales in the medium 67 to 80 hp class.

9. Four-wheel tractors marketed in the Philippines are classifiedaccording to horsepower capacity as noted below. 1/

(a) Heavy Class - over 80 hp.

(b) Medium Class - 67 to 80 hp, weight 5,000 to 6,999 lbs.

(c) Medium Light Class - 50 to 66 hp, weight 4,000 to 4,999 lbs.

(d) Light Class - less than 50 hp, weight less than 4,000 lbs.

All four-wheel tractors marketed in the Philippines are imported models andthe trend in exporting countries is towards the development and productionof larger machines to meet domestic requirements and to export the samemachines. Even a 30 to 40 hp tractor is too large for the small holdingstypical of the Philippines and the purchase of four-wheel units requiresin most cases that custom hire services be undertaken to justify the invest-ment. This, however, is a common practice. The machinery industry in the

1/ The 1975 Annual Report of the Agricultural Machinery Dealers Associationin the Philippines (AMDA) gives the classification to be: Heavy Class -90 hp and up, weight over 7,000 lbs; Medium Class - 70 to 89 hp; MediumLight Class - 50 to 68 hp, weight 4,000 to 4,999 lbs. In our appraisal,however, we have retained the ranges presented in the test above.

ANNEX 8Page 5

Philippines has popularized medium class tractors (67-80 hp) and there hasbeen a follow-the-leader trend within the industry. Salesmanship within theindustry is competitive and the various dealers are very aggressive in pro-moting the sales of their product lines. Tractors are sold by nine majorcompanies in the country and the major portion of sales has been shared byfour of these. In 1974, 82% of the sales were accounted for by these fourcompanies while in 1975 a similar larger percentage was shared by fivecompanies.

10. As of July 1, 1976 there were about 1,100 tractors in dealers'stocks in the Philippines. Based on AMDA estimates of irrevocable agree-ments to purchase, this number will rise to about 2,300 by March 3, 1977,less interim sales. About 85% of these units are in the 80 hp range. Whilethis inventory seems inordinately large, in fact it results from a six monthperiod in which CB:IBRD funds were not available, during which time as many as650 units might have been sold under the program. The balance of 450 units isequivalent to 20% of annual sales in 1975, and a turnover rate of five timesper year is reasonable under Philippine conditions. Commitments as of thatdate for subsequent delivery conform to a similar pattern and were based onthe expectation of speedy processing of the Fourth Project and a retroactivefinancing component.

11. The fulfillment of the long-term development objectives of theproposed project must not be jeopardized by short-term considerations suchas large inventories. However, with a revised pricing policy for all futuresales (para 21) and a consequent reduction in tractor prices, a deferment oftractor size limitations for a period of 18 months from the date of the LoanAgreement or financing of 1,000 units of tractors in excess of 68 hp, which-ever shall come first, would be appropriate in order that some of the largerunits in stock may be sold to rice and corn growers as well as to sugarcanegrowers (para 18).

C. Need for Mechanization

12. Despite the inherent economic and social dangers which accompanymechanization, in a typical developing country context, (Section B), thisdevelopment is essential to the realization of Government's stated objectivesof increased agricultural production and efficiency. There are a number ofconstraints on agricultural productivity in the Philippines which can beeliminated through mechanization:

(i) The benefits of high-yielding rice varieties can only beachieved to the greatest extent with irrigation and increasedcropping intensity, both of which increase the importance ofspeed and timeliness of land preparation. The preparationof one ha of paddy land using a carabao requires 17-20 dayscompared to five to seven days using a hand tractor and fiveor six hours using a four-wheel tractor;

ANNEX 8Page 6

(ii) The carabao is unable to sustain peak output forlonger than a few hours each day, and requiresrecovery periods of months between work periods;he is susceptible to debilitating diseases such asFoot and Mouth, and theft of work animals is a wide-spread problem. With increased cultivation, parti-cularly in densely populated areas, feed is inlimited supply;

(iii) With increased multiple cropping an acute laborshortage occurs in many areas at the time whenharvesting of one crop and land preparation forthe next crop are taking place simultaneously;not only is the execution of such the completionof these primary task jeopardized, but weeding,dike repair, and other productive activitiesmust frequently be foregone; and

(iv) A number of special operations require draft powerwhich is only reasonably supplied by machines:deep tillage for sugar production; land forming andlevelling in irrigated areas; and land clearingand initial cultivation in previously undevelopedareas.

13. The major economic concern surrounding the mechanization of agri-culture in countries of high population density and unemployment pertainsto the displacement of labor. Mechanization in the Philippines has beenfocused on land preparation which, with increasing crop intensity, occursat the same time as the more labor-intensive harvesting, and in facttrends to compensate for labor shortages at that time. Increased intensity,area, and production with mechanization in fact increase total labor perunit of area and per year according to available evidence 1/. The proposedproject includes a comprehensive study of this issue (Annex 12).

D. Technical and Financial Assessmentof the Proposed Project

14. CB proposal included sub-categories to finance four-wheel tractorsto be used for sugar, rice and corn production, power tillers, farm implements,irrigation pumps, trucks and threshers. The discussion which follows willdeal with each sub-category in order.

1/ For example, Table 4 presents a comparison of labor utilizationby a sample of farmers with and without tractor.

ANNEX 8Page 7

Four-Wheel Tractors for Sugarcane Production

15. Tractors in the medium and heavy classes are used for land prepara-tion in sugarcane growing areas, of which approximately 600 units were pur-chased by sugar growers under the Third Project. Implements used with thesetractors include sub-soil moldboard plows, heavy duty subsoil cultivators,disk plows and disk harrows. Cultural practices pertaining to land prepara-tion for sugarcane involve deep tillage plowing and cultivating with attendanthigh power requirements and tractors of up to 80 hp are needed for these oper-ations. Farmers engaged in sugarcane production are, generally, in a moreaffluent position because of favorable prices and operating margins and asecure market in the export quota. (The Philippines does not currently meetits export quota). There is therefore a desire to increase sugar productionto raise the level of foreign exchange earnings, but at the same time, theBank must consider the relative importance of supporting this activity on alarge scale and, alternatively, shifting the project focus toward less priv-ileged beneficiaries.

16. A small sugarcane farmer cultivating 7 ha or less could not justifythe purchase of a medium tractor on the basis of his own requirements.Custom hire services of the volume required to make the investment viablecould be undertaken but it is unlikely that many small farmers possess thecollateral or management ability to undertake such a loan. A model for a 15ha sugarcane farm is presented in Table 5. A financial rate of return of16.6% was obtained from the model assuming reasonable custom hire utilization.The break-even point was found to be just over 500 hours (503). This timerequires the cultivation of at least 85 ha including the owner's own farmarea. Custom hire on any excess area will enable him to turn a profit atprevailing custom rates. Annual use of tractors in sugar areas up to 1,500hours including custom work is practical and commonly observed and much of thecustom work now done in the Philippines is performed on small farms.

17. The mission's recommendation to support financing of sugarcane trac-tors is based on, (i) their viability and (ii) their utilization (actual) forcustom work on small farms. However, we recommend only 450 units (75% of thevolume financed under the Third Project) as a step in phasing out support inview of the generally more favorable financial condition in which sugarcanegrowers find themselves compared to that of other potential beneficiaries ofproject funds.

Four-Wheel Tractors for Rice and Corn Production

18. Use of four-wheel tractors for land preparation in rice and cornproducing areas has achieved a remarkable degree of acceptance in thePhilippines. Implements commonly used with tractors include plows, diskharrows and rotovators. Puddling wheel attachments are required on tractorsused for rice paddy culture. Purchasers of tractors together with com-plementing implements have been generally influenced by the recommendationof dealers in selecting the power class and the great majority of units arein the 67-80 hp (medium) range. However, field observations and interviews

ANNEX 8Page 8

with farmers have led the mission to conclude that tractors having powercapacities above 68 hp represent an excess power requirement for landpreparation operations in rice and corn producing areas using the plows,rotovators and disk harrows currently being matched with these tractors.The appraisal report for the Third Rural Credit Project, 1/ in considera-tion of the horsepower requirement, contains the paragraph:

The Project proposes to exclude financing of tractorswith horsepower in excess of 80 hp since the efficiency of thetractor depends primarily on the size of the implements usedrather than on the motive power available. In rice productionfour-wheel tractors are used mainly for rotovating whichrequires a constant low speed of 3 to 6 km/hr, regardless ofthe size of the power unit. Philippine farmers generally usea 50-60 inch rotovator with tractors ranging from 45-80 hp, andobtain little or no increase in capacity with the increase intractor hp class. It is only in extensive upland (rainfed)agriculture that it is possible to increase output by in-creasing ground speed (with the same size of implements);however on small plots and in paddy conditions, this is notpractical or possible."

We concur completely with the judgement that many tractors in the Philippinesare overpowered for the operations they perform and further propose to extendthe constraint to exclude financing of tractors with power capacity in excessof 68 hp for rice and corn cultivation. The agricultural engineer on theprevious mission agrees with this proposal, pointing out that the 80 hp limitunder the Third Project was intended as a step in phasing out the financingof excess power under the CB:IBRD program. However, in view of the inventorysituation described in para 10, imposition of this horsepower limitation wouldbe deferred until 18 months after the date of the Loan Agreement or financingof 1,000 units of tractors in excess of 68 hp, whichever shall come first(para 11). Present utilization rates are sufficiently high to support theadditional investment and the continued sale of such units, while not optimumin terms of cost effectiveness, would alleviate a serious foreign exchangeand trade problem.

19. A small farmer cultivating 7 hectares or less of rice or corncannot justify the purchase of a medium light tractor on the basis of workrequired on his own farm. For reasons similar to those offered in thecase of sugar tractors, we believe farmers with larger holdings are morelikely to avail themselves of credit for these tractors. A rice farm ispresented in Table 6. A financial rate of return 12.5% was obtained fromthe model. The break-even point was found to be just over 500 hours (506).This time requires the cultivation of approximately 90 hectares of land

1/ Philippines: Appraisal of the Third Rural Credit Project, ReportNo. 428a-PH, Annex 8, p. 8.

ANNEX 8Page 9

including the owners's own farm area. This volume of work is feasible andoften observed with existing tractors. Funds would be provided under theproject for about 1,325 tractors for rice and corn areas. We estimate thatabout 550 of these units would be in the 80 hp range, being sold before thepower limit deadline and reflecting available stocks and dealer influence oncustomer preference. While somewhat less cost effective, investments in theselarger units would still be viable.

20. Pricing Policy. Price guidelines for four-wheel tractors wereestablished by AMDA in 1967. A limit on gross margins was set at that time at100%, a figure which reflects the willingness of the market to bear high prices.Actual margins at present range among models from a low of 58% to a high of 82%over total bodega (warehouse) cost. There are characteristics of the Philippinemarket which justify margins greater than those encountered in some westerncountries: relatively low volume, a scattered market, and a two-tiered distri-butor/dealer system in most cases. Nevertheless present margins appear to beexcessive, and conducive to the proliferation of brands and the support ofhigh-cost, low volume distribution systems for which the ultimate buyers paysthe price. There are at present 16 brands of four-wheel tractors sold in thePhilippines: one brand accounted for about 41% of sales in 1975, and 91% ofsales was made up of only 6 brands. The majority of firms uses a franchisedealership network rather than the lower-cost alternative of multi-product,multi-brand outlets. High margins per unit permit such a system at low salesvolume, but in economic terms the pattern is to be seriously questioned.

21. Ceiling Price Guidelines. On the basis of detailed cost informationacquired for the first time during appraisal of this project, continued Banksupport of tractor sales at present price levels was considered as inappro-priate. During discussions with Government officials in Manila, we foundtheir concern over price levels and desire to proceed with measures of reduc-ing tractor prices. Under the Fourth Project, therefore, the present ceilingprice guidelines would be modified so that the maximum retail price would be170% of the bodega (warehouse) cost; defined under the project as the sum of(a) c.i.f. Manila, (b) 30% of c.i.f. Manila primarily to cover duties andtaxes but also other miscellaneous costs, and (c) the direct cost of localcontent. 1/ This limit would also be applied on options and implements.Rules and Regulations governing the project would specify these ceiling prices2/ and further state that pricing policy on spare parts would not be adjustedso as to result in higher margins than those in effect during 1975. Monitor-ing of this system would be the responsibility of TSEU. Cost data in theformat presently furnished by all participating companies to TSEU would besufficient for monitoring purposes, although certain cost items such as localassembly would require more explicit definition so as to prevent de factomargins within cost data. The effect of these ceiling prices would be toreduce average tractor prices by about 11%.

1/ The reduction in ceiling price will result primarily from a redefinitionof total bodega cost to exclude all but basic documented costs which areconsistent with normal trade practices.

2/ A separate memorandum will be issued to specify the maximum retailprices by models.

ANNEX 8Page 10

Power Tillers

22. A model for a locally manufactured single axle machine on a 3-hectare farm is presented in Table 7. A financial rate of return of 8%was obtained from the model. It has been estimated that land preparationcan be carried out over total period of 90 days of the year in irrigated,multiple cropping areas. Based on this assumption and a normal capacityof 6 days per ha (complete preparation), a tiller owner would cultivate15 ha per year. At 175% intensity, an owner's farm of three ha would beequivalent to 5.2 ha, leaving custom hire capacity of 9.8 ha, slightly lessthan the area of two similar farms with the same cropping intensity. Insome areas of the Philippines, tractor and tiller population is nearing thepoint at which custom hire opportunities may be limited. Sub-loan appraisalmust therefore consider the probability that such opportunities remain suffi-cient to ensure satisfactory utiliztion rates.

23. Financial returns alone are insufficient to justify investmenton power tillers as a priority or to explain the large volume of sales ofthese units. In addition to the benefits for which financial returns havebeen conservatively estimated in our model, there are other real benefitsto be considered. Land preparation period requires less time than withcarabaos (tiller time 6 days, carabao time 20 days) which is significantrelating to timeliness of planting. Planting two weeks earlier during theplanting season may very well be a significant factor in raising the yieldfrom the crop by ensuring sufficient moisture at the time of seed filling.From a work drudgery and calorie consumption point of view, the operatorspends fewer arduous hours on a hectare working behind a tiller than hedoes behind a carabao. This time saved can be profitably spend doing othernecessary farm tasks related to crop care such as timely application offertilizer, weeding or repairing paddy field dikes as required. In otherinstances, the time saved may be utilized in other wage earning activities.While we have used an estimated increase in cropping intensity from 150%to 175% with a tiller to account for several of these factors, the increasemay be significantly higher in some cases. The investment also resultsin elimination of risk associated with carabao disease or loss, 1/ and theforage requirements of work animals - a serious problem in some areas.Custom hire services are a source of cash which frequently keeps ownersfrom the need to borrow for essential purchases between harvests. Conse-quent savings on interest are often considerable, especially since most ofthis borrowing takes place in the informal sector (Annex 1, para 18).

24. Price Guidelines on Tiller Financing. The tiller model presentedin Table 7 is based on a locally manufactured single axle unit. Larger,diesel-powered tillers with rotovators are imported into the Philippines andhave been included under previous projects. However, in recent years the

1/ The occurrence of Foot and Mouth Disease in 1975 infected 14,000 workanimals in the Philippine.

ANNEX 8Page 11

cost of these units has risen to present levels of P 25,000-35,000 comparedto P 7,000-9,000 for local units. Capacity is only about one-third higher -about 4 days per ha compared to six days - although economic life is consid-erably longer - 8 to 10 years compared to 4 to 5. These imported models havea significant status appeal for buyers which explains to a great extenttheir popularity despite the fact of their non-viability when analyzed onthe standard marginal investment basis. The c.i.f. Manila cost of importedunit is approximately equivalent to the retail price of local units, the bal-ance of retail price for the imported units consisting of local assembly andtransport costs and dealer's margins. Imported units do possess productivefeatures not available on local models and a consequent price differential isto be expected. However, the present difference of as much as 4 times is, inthe judgment of the Government, not justified either by machine characteris-tics or the structure of the industry. The question of price is particularlyimportant in view of the marginal viability of tiller investments. The maxi-mum retail price to be considered for financing under the project would be175% of the bodega (warehouse) cost; defined under the project as the sum of(a) c.i.f. manila, (b) 42% of c.i.f. Manila primarily for taxes and dutiesbut also including other miscellaneous costs, and (c) the direct cost oflocal content. It would be the responsibilities of TSEU to this system. Theeffect of these ceiling prices would be to reduce tiller prices on an averageby about 15%.

Farm Implements

25. The project would also include financial assistance to current four-wheel tractor owners for the purchase of additional or alternate implementsto increase the efficiency of their tractor utilization. In addition to CBrequest for 140 rotovators for this purchase, an allocation has been includedfor about 100 units of other tractor drawn implements and P 100,000 for thepurchase of broader range of implements by small farmers owning carabaos.

Irrigtion Pumps

26. The need and scope for irrigation development in the Philippinesis substantial. However, present conditions are not conducive to significantfinancing of this investment under the project. A number of Government agen-cies including the National Irrigation Authority, the Farm Systems DevelopmentCorporation, and the Public Works Department have separate small-scale irri-gation financing programs on terms more lenient than can be offered by commer-cial credit institutions. Furthermore, legislation with respect to waterrights is inadequate to encourage a large number of borrowers into irrigationinvestment, and groundwater resources have not been surveyed in sufficientdetail to permit sound judgements on water availability for intensive exploit-ation. Despite these constraints, there is a small regular demand on ruralbanks to finance irrigation pumps and the project would finance about 400 unitsunder conditions of reasonable certainty as to water availability and rights.

ANNEX 8Page 12

Trucks

27. Despite an apparent overall need for additional commercial transportvehicles in the Philippines, the financing of heavy trucks under this projectis not recommended. The mission found that prospective purchasers of theheavy trucks were in a relatively good position to acquire and expand theirfleets from current earnings or to avail themselves of other sources offinance including dealer financing. Large trucks are principally used forcommercial hauling sugarcane to mills. In sugarcane growing areas, very longlines of loaded trucks were observed waiting their turns to be unloaded atsugar centrals, indicating primarily a need for greater efficiency and capacityin mills rather than additional trucking capacity.

28. Light trucks (1/2 - 1-1/2 tons) in the rural areas of the Philippineshave evolved into an essential and efficient link in transport services forsmall farmers. Carrying mixed loads of passengers and small-lot cargo, theseunits are purchased and operated by small entrepreneurs, and are the most widelyused means of hauling improved inputs for cultivation and marketing products bysmall farmers whose requirements and output typically do not justify the useof large or specialized cargo trucks. It is customary for the cultivatoror a member of his family to take one or two sacks of produce to the markettown, dispose of the produce, purchase consumer items and production inputs,and return the same day. Outside Greater Manila, there is a need to expandthe fleet of vehicles serving this function. In addition, the project wouldinclude the financing of light trucks for small business such as fishpondsand small rice mills which have a regular need for transport facilities.There are at least few brands of light trucks assembled in the Philippineswith imported chassis and engines. The proposed project would include thefinancing of 400 units of light trucks (with a gross vehicle weight of lessthan 2,500 kg) with the restriction that none be financed in the Greater Manilaarea and the understanding that sub-loan applications would be screened toverify the likely use of each unit at least in part for haulage of small far-mer inputs and produces or the agriculture-related production of the borrower'sbusiness.

Rice Threshers

29. Traditional manual threshing methods in the Philippines are in-efficient in labor utilization and also result in excessive grain losses.The National Grains Authority estimates that losses due to threshing opera-tions represent as much as 8% of the annual crop harvested. Ramos, 1/ asreported in the CB's Fourth Project proposal, found that small portablethreshers incurred losses of 4.42% while those of the McCormick-type were4.12%, resulting in savings of about 3.6% and 3.9%, respectively, over theestimated losses in manual threshing.

1/ Ramos, B. M. 1975. Utilization and Local Production of Paddy RiceThreshers in the Philippines, IRRI, Los Banos.

ANNEX 8Page 13

30. There is, frequently, a labor shortage during harvest time, par-ticularly in intensive cropping patterns under irrigation, when threshingof the first crop coincides with land preparation and planting for the secondcrop. A survey of post-production practices among 211 rice farmers in centralLuzon conducted by Toguero and Duff 1/ found 120 farmers or 57% of thoseincluded in the survey reporting problems during threshing operations, includ-ing: unavailability of mechanical threshers when needed by farmers; unfavor-able weather; objection to the time consuming and laborious task of manualthreshing; the necessity of the owner's presence to insure the securityof the paddy; and delay of threshing due to the lack of man or animal laborwhen required.

31. A cash flow projection model for a three hectare rice farm using aportable thresher with a capacity of 25 cavans per hour is contained inTable 8. It is estimated in this model that 60 days could be-devoted annu-ally to rice threshing. The prevailing rate for custom threshing in thePhilippine is 5% of the daily output. The break-even point was found tooccur at 53 hrs annual usage, equivalent to the threshing of palay from 15 ha.A potential of 240 hours of threshing time is available in the 60-day thresh-ing period giving rise to a significant profit potential from custom thresh-ing operations. The proposed project would include funds for 600 portablethreshers. It is likely that some of these will be purchased by farmers'groups and cooperatives.

32. In respect to McCormick-type threshers, the appraisal missionconcluded that the use of this type of machine was not compatible with small-scale farming in the Philippines. Investment cost, capacity, and the needfor four-wheel tractor power are constraints which limit these units to largeroperations. We do not, therefore, recommend their inclusion in the proposedproject.

Agricultural Machinery Testing, Evaluation and Standardization Project

33. With the rapid expansion of farm mechanization in recent years therehas been a proliferation of local manufacturing firms and importers. A buyertoday are faced with a number of alternative brands for any type of equipment,and several different systems of operations, for example rotovating vs. plow-ing, vie for his purchase with competing and sometimes conflicting claims.After purchase, he is faced with the need for parts and service and is verydependent on the quality of manufacturer, which, particularly in the case ofnew local firms, he is not in a position to assess through reputation. Theproposed project would include, therefore, an Agricultural Machinery Testing,Evaluation and Standardization Project (AMTESP), to set quality standards foragricultural machinery and to conduct performance testing against such standards.

1/ Toguero, Z.F. and B. Duff, Survey of Post-production Practices AmongFarmers in Central Luzon, a paper presented to Saturday Seminar, IRRIAgricultural Engineering, September 1974.

ANNEX 8Page 14

34. Objectives and Activities. (AMTESP) would have the followingprincipal objectives and activities.

(i) Develop quality and performance standards for Philippinefarming conditions and types of equipment used in thePhilippines;

(ii) Conduct field, shop and laboratory testing of equipmentpicked at random to determine capacity under selectedconditions and conformity with standards set for suchequipment; and

(iii) Evaluate parts and service support of brands and modelstested.

Priority in the first several years' operations would be given to the follow-ing:

(i) Establishment of performance and quality standards formajor types of equipment;

(ii) Assessment of power requirements for primary farmingtasks such as land preparation based on typical fieldconditions and implements;

(iii) Testing and evaluation of locally manufactured powertillers; and

(iv) Evaluation of parts and service support for four-wheeltractors and power-tillers (for which the Project wouldprobably draw on field staff of Government agencies toassist with field surveys).

35. Organization and Management. AMTESP would be operated as a separateactivity of the Department of Agricultural Engineering, the University of thePhilippines at Los Banos (UPLB) and would be governed by a Board of Trustees orAdvisory Council consisting of representatives of UPLB, Department of Agricul-ture, International Rice Research Institute, Agricultural Machinery DealersAssociation, and the Government financial institutions engaged in the financingof farm machinery. The Project to be located at UPLB would be managed andoperated by UPLB under budget and policy decisions set by the Board (Council)and using full and part-time staff appointed by the University's Department ofAgricultural Engineering. Funds for the Project would be channelled throughthe Department of Agriculture budget wherein counterpart funds would also beplaced. Quarterly payments would be made by the Department against the Pro-ject's approved budget, adjusted for shortfalls in actual expenditure.

ANNEX 8Page 15

36. Staff. The Project would be headed by a Project Director appointed

on a part-time basis from the Power and Machinery Section of UPLB's Departmentof Agricultural Engineering. Full-time staff would consist of test engineers(two in 1977 to four in 1979), researchers (two in 1977 to four in 1979),clerk/typists (two), technicians (three in 1977 to six in 1979), and a driver.

37. Facilities. While the Project would benefit from its affiliationwith and proximity to the Department of Agricultural Engineering, it wouldbe essential for it to have its o minimum facilities. A shop/laboratory/office/storage building of 1,000 M would be constructed on the UPLB campusto house the Project. Adjacent thereto, a block of 20 ha of irrigated anddrained land has been made available to the Project at no cost. Testingin upland, rainfed conditions would be undertaken on University lands severalkilometers from the Project.

38. Costs. A total capital cost of P 2,062,500 would be required forthe Project. In addition, operating costs of P 343,500 in the first yearrising to P 525,000 in the third year would be included in project costs. Asummary of cost estimates appears as Table 9. While details have not beenfinalized, it is planned that financial support from industry members andassociations would meet part of ongoing costs at the Project. Agreement wasreached with the Department of Agriculture to ensure the continuation of theProject after the period of the proposed Bank project.

PHILIPPINES


Third Rural Credit Project - Mechanization Component

Proposal and Commitment Comparison

Proposed Total Project Estimate Including Realized - Based on CB Summary of Loan ReleaseContingencies = P297,200,000.00 under the 3rd CB:IBRD Program May 15, 1974 to

April 30, 1976 Total Proj. Cost = P342,696,000.00

Percent of Percent ofPercent of Total Cost Percent of Total Cost

Total Cost Mechanization Project Total Cost Mechanization ProjectItem Description Number ('000) Component Estimate Number ('000) Component Estimate

1. Tractors

1.1 80 hp) 1,800 152,369 71.70 51.26 1,761 218,409 72.42 63.731.2 68 lip)

2. Power Tillers

2.1 Localre 1,000 6,579 3.10 2.21 1,169 28,686 9.51 8.37

3. Tractor Implements 250 2,574 1.21 0.87 - - - -

4. Irrigation Pumps 300 5,100 2.40 1.72 218 3,269 1.08 0.96

5. Trucks

5.1 Hy (New) 250 30,800 14.50 10.36 550 48,256 16.00 14.035.2 Hy (Recond) 200 12,900 6.07 4.34 16 1,378 0.45 0.405.3 Light - - - - - - - -

6. Threshers

6.1 McCormick - - - - - - -6.2 Portable 125 1,875 0.88 0.63 59 1,621 0.54 .48

7. Grain Dryers 50 300 0.14 0.10 - --

3,725 212,497 100.00 71.49 3,773 301,614 100.(0 87.97

aXM

ANNEX 8Table 2

PHILIPPINES


Farm Mechanization and Transport

Sales and CB:IBRD Financing of Tractors

4 Wheel Tractors Power Tillers

CB:IBRD CB:IBRE

Total CB:IBRD Share Total CB:IBRD Share

Sales Increase Financed of Sales Sales Increase Financed of SaleYear (Units) (%) (Units) (M) (Units) (%) (Units) (%)

-------------------------------------ACTUAL----------------------------------

1970 974 - 150 15.4 475 - 42 8.8

1971 1,083 11.2 251 23.2 680 43.2 103 15.2

1972 1,120 3.4 472 42.1 1,239 82.2 330 26.6

1973 1,517 35.5 520 34.3 3,500 182.5 289 8.3

1974 1,666 9.8 705 42.3 7,000 100.0 425 6.1

1975 2,176 30.6 1,200 57.0 11,000 57.1 1,000 9.1

…-------------------------------…ESTIMATES-----------------

1976 2,332 7.2 0 0.0 12,000 9.1 0 0

1977 2,605 11.7 600 23.0 13,000 8.3 2,235 17.2

1978 2,878 10.5 600 20.9 14,000 7.7 2,235 16.0

1979 3,152 9.5 600 19.0 15,000 7.1 2,235 14.9

1980 3,485 10.6 0 0.0 16,000 6.7 2,235 14.0

ANNEX 8Table 3

PHILIPPINES



Four-Wheel Tractor Sales by Class

Total Light Medium-LiRht Heavy HeavyYear Sales Less than 50 HP 50- 66 HP 67-80 HP Over 80 HP

(M) (M) (%) (%)

1967 1,531 19.6 24.4 45.2 10.8

1968 1,575 12.6 24.9 54.7 7.8

1969 1,353 9.3 20.0 57.5 13.2

1970 974 8.1 20.6 61.7 9.6

1971 1,083 11.8 17.7 64.3 6.8

1972 1,120 12.6 15.5 66.7 5.2

1973 1,517 8.6 11.1 69.9 10.4

1974 1,666 9.4 12.7 71.2 6.7

1975 2,176 5.9 8.0 76.1 10.0

ANNEX 8Table 4

PHILIPPINES


Labor Inputs Per Hectare for Rice FarmingUsers of Tractors vs Non-Users a/

(In Man/Days)

Tractor Non-Users Tractor Users b/With 150% With 172.5%Cropping Cropping

Per Crop Intensity Per Crop IntensityTotal Hired Total Hired Total Hired Total Hired

Land Preparation 13.5 2.3 20.3 3.4 6.6 2.1 11.4 3.6

Pulling & Transplanting 13.6 13.5 20.4 20.2 18.4 18.4 31.7 31.7

Weeding 9.4 2.0 14.1 3.0 8.0 6.4 13.8 11.0

Other Pre-Harvest 9.1 3.5 13.7 5.2 6.1 4.5 10.5 7.8

Harvesting & Threshing 20.6 17.1 30.9 25.6 24.0 24.0 41.4 41.4

Total Labor Input 66.2 38.4 99.4 57.5 63.1 55.5 108.8 95.5

Yield (mt/ha) 2.5 3.8 2.8 4.8

Number of Farms 39 37

Average Area 2.4 2.7

a/ Based on Central Luzon-Laguna Survey data for 1970 wet season.

b/ Most tractor users still use the carabao for at least some of the harrowing.

Source: Adapted from Guino and Meyers. The Effect of The New Rice Technology onFarm Employment and Mechanization, IRRI, Los Banos, December 4, 1971.

ANNEX 8Table 5Page 1 of 2

PHILIPPINES

IURTH RURAL CREDIT PROJECT

Cash Flow Pro3ections for a Heavy (Qreater Than 68 HP) 4-Wheel Tractor1/

Illustrative Sugar C;ne Farm(in PesosJ

'With ProjectWithout Project Years

=______ 2-7 8-10

I. Cash Inflow2/

Qross Income: Sugar Sales 3/ 189,000 189,000 189,000 189,000Hauling Allowance 9,000 9,000 9,000 9,000Custom Service_v 70,200 70,200 70,200

Qross Income Total 5T (1) 198,000 26h,000 26L,o00 261i,000Sash from Previous period - 17,600loan: 90% of investment cost 158, 00

Total Inflow (2) 198,000 44o,ooo 264,000 26Lj,000

II. Cash Outflow -

Operating Cost 6/Land preparation 1,o8O 876 876 o76Cane points 7/ 400 400 1,202 1,202

Hauling points 8/ 175 175 525 525Cutting points 71 250 250 750 750PlantinglO/ 675 675 2,025 2,025CroD Care I1/ 3,600 3,600 3,600 3,600Harvest 12 T 9,600 9,600 9,600 9,600Hauling 17/ 36,0oo 26,000 36,ooo 36,000Milling TI' 66,465 66,L

65 66,465 66,165

Fertilizer 15/ 28,552 28,552 28,552 28,552Fuel 16/ - 11,672 11,672- 11,672Lubricants 17/ 2,335 2,335 2,335Repairs 18/- 8,507 8,507 8,507Operators wages 19/ 2,900 2,900 2,900Taxes, insurance and implement

shed 20/ 3,520 3,520 3,520

Total Operating Cost (3) 1L7,552 176,L51 176,651 176,451Investment Cost (4) 176,000 -Debt Service 21/ 36,938 36,9383ervice Fee 227 4,752 2,785

Total Outflow (5) 147,552 394,141 216,174 176,5L1

III. Net Cash Flow ((2)-(5) (6) 50,hh8 45,859 47,826 87,h59

IV. Financial Benefit/Cost

Incremental Qross Income (7) 66,000 66,ooo 66,000Incremental Cost (8) 20L,899 28,899 28,899Net Benefit (7)-(8) (138,899) 37,101 37,101

V. Financial Rate of Return: 16.6%

1/ The model is for a i5 ha sugar cane farm. Mechanization consists of a medium power class (greater than 68 HP importedL-wheel tractor which is matched with a disk plow and trailing disk barrow. The cost of the tractor and implementset is P176,000. The tractor and implements are assumed to have a 10-year life. Mechanization is used for landpreparation only on a 3-year rotation such that 5 hectares will be prepared annually. (Additioral benefits accruing fromthe project as a result of weeding and other farm operations have not been included in the model.)

2/ Sugar cane production is at the average rate of 80 tons of cane per hectare recognizing a variation between the plantedand ratoon crops. Sugar yield is 1.5 piculs per ton of cane. Etport and reserve sugar is 70 percent of production atP125 per picul. Domestic sugar is 30 percent of production at P60 per picul.

Income from Sugar Sales from 15 ha.Composite price per picul - (0.70 x 125) + (0.30 x 60) - 105.5Income * 80 Tons Cane x 1.5 x 15 ha x 105.5 -189,000

3/ Hauling allowance paid by sugar central to the farmer, average P7.5 per ton of canes. Income 80 x 15 ha x 7.5 - 9000i/ Custom Service - The tractor is assumed to have an annual use of 1500 hours per year of which 80 percent is productive

usage. The custom charge for land Dreparation is P200 per hectare for plowing, P100 per hectare for disking andP60 forfurrowing. Time required for land preparation is reckoned at 6 hours per hectare.

Productive usage 1500 x .6 - 1200 hrs.Annual time required on the owner's15 ha farm (5 ha/yr) 5 x 6- 30 hrs.

Time available for custom service '70hs.

Income from custom serviceNo. of ha 1170

-=- - [Y5 ha.Income ' 195 x 360 . P70,200


(Footnotes continued)

5/ The beneficiary's 10 percent contribuztion to-the investment cost = 0.1 x 17,6000 =176o0i1 -and preparation consists of one plowing (P200/ha), one harrowing (P100/ha) and one furrowing (P60/ha) on

one third of the far;:Without project 5 x 360 - 1800With proiect Tractor and inplement operational cost to cover

5 ha (allow 50 hrs of tractor operation):fuel = 50 x 7 x.1.15 - 402.5oil & grease = 0.2 x 402.5 * 80.5Repairs 50 x .05 x 176000 - 293-33

1 00Operator's wages = 2 x 50 100.00

876.337/ Cane points require 45000 cane points per hectare at P1.78 per thousand, 5 ha seeded per year

Cost = '5 x 1.78 x 5 = 400.58/ Hauling cane points at P35/ha, for 5 ha = 5 x 35 = 1759/ Cutting cane points at P50/ha, for 5 ha 5 x 50 = 250

10/ Planting at P135/ha, for 5 ha = 5 x 135 - 675f/ Cron care: Animal cultivation P100 per hectare and manual weeding P140 per hectare,

dost = 15 x 240 = 360012/ Cutting and loading cane at PB/ton,cost = 80 x 8 x 15 = 9600.Ti/ Hauling - from the farn to the central at P30 per ton, cost = 80 x 30 x 15 = 36,000M/ M'illing - The central retains 35 percent of the milled sugar, cost = 80 x 1.5 E 15 x 105.5 x 0.35 = 66,465IT/ Fertilizer: 2 1/2 bags/ha 21-0-0 at P75 per bag

12 bags/ha 16-20-0 at P103 per bag8 bags/ha 0-0-60 at P60 per bag

Cost = 2.5 x 75 x 15 - 2812.5012 x 103 x 15= 185L0.006 x 60 x 15= 7200.00

2b552.5016/ Fuel-consumotion of 7 liters per hour at F1.15 for 1450 hours, cost - 7 x 1450 x 1.15 = 11672.517/ Lubricants reckoned at 20 percent of fuel = 0.2 x 11672.5 = 2334.5WT/ Repairs - reckoned at 5 percent of investment, cost 5 0.05 x 176000 - 8506.6

19/ Operator's wages: P2 per hour for 1450 hrs - 290070/ Taxes, insurance and imn]ement shed at 2 percent of investment cost = 0.02 x 176,000 3,5202 / Debt Service: is an equal sum amortized over 7 years on the loan principal.

- 156,00 x 0.2331924=36,99822/ Service Fee is 3 percent of the outstanding yearly balance.

Year Principal Interest (12%) Amortization Balance Ser.Fee (3%)

1 14,762 22,176 36,938 158,400 4,7522 16,829 20,109 36,938 143,638 4,3093 19,185 17,753 36,938 126,809 3,8044 21,871 15,067 36,938 107,624 3,2295 24,933 12,005 36,938 85,753 2,5736 28,423 8,515 36,938 3Z,397 1,8257 32,402 4,536 36,938 32,397 972

158,405

Average Service Fee for years 2-7 16,712 _ 2,7856



Cash Flow Projections Using a Medium (50-.68 HP) L-Wheel Tractor1/

Illustrative Rice Farm (15 hectare area)(In Pesos)

With ProjectWithout Project Years

I. 'ASH INFLCi 1 2-7 6-102/

,ross Income: Rice S.ies 86,250 101,250 101,250 101,250Custom Service 3/ 36,315 36,315 36,315

Gross Income Total (1) 86,250 137,565 137,565 137,5653ash from Previous Period UW 14,350Loan: 90% of investment cost 129,150

Total Inflow (2) 86,250 281,065 137,565 137,565

II. CASH OUTF10W

Operating Cost:Land preparation 5/ 6,750 1,260 1,260 1,260Seedbed preparation 6/ 1,350 1,575 1,575 1,575Pulling, hauling and transplanting 7/ 4,140 4,830 L,830 4,830HJeeding b/ 1,800 2,100 2,100 2,100Harvest and threshing 9/ 12,937 15,187 15,187 15,187Drying and hauling LOF 863 1,013 1,013 1,013Seed 11/ 1,575 1,837 1,837 1,837Fertilizer 12/ 9,000 10,500 10,500 10,500InsecticidesL3/ 1,500 5,250 5,250 5,250Irrigation 147 2,625 3,187 3,187 3.187Fuel 15/ 9,315 9,315 9,315Oil and grease 16/ 1,863 1,863 1,663Repairs 17/ 6,457 6,h57 6,4157OperatorTi wage Lb/ 2,700 2,700 2,700Taxes, insurance and irplement shed 19/ 2,870 2,870 2,870

Total Operating Cost 20/ (3) 45,5L0 70,944 70o944 70,9144Investment Cost (4) 143,500Debt Service 21/ 30,117 3C0117Service Fee 227 3,874 2,271

Total Outflow (5) U5,5h0 21X8,505 103,332 70,9U4

III. NET CASH FLOW (2)-(5) (6) [40,710 32,560 34,233 66,621

IV. FINANCIAL BENEFIT/COST

Incremertal Gross Income (7) 51,315 51,315 51,315Incremental Cost (b) 168,90h 25, W01, 25,101,Net Benefit (7)-(b) (9) (117,589) 25,911 25,911

V. FINANCIAL RATE OF RETURN: 12.5%

1/ The model is for a 15 ha rice farm. Mechanization consists of a light-medium power class (68 HP) imported 4-wheeltractor equipped with paddy wheels and matched with a 60 inch rotovator, and trailing disk. The cost of the tractor andimolement set is P143,500 and both tractor and imolement are assumed to have a 10-year life.

2/ Rice sales are computed for a yield of 75 and 80 cavans per hectare for wet and dry (irrigated) seasons respectivelyon a 15 ha rice farm. Cropping intensity without and with project is 150 and 175 percent respectively. Thefarm gate selling price for rice is P50 per cavan.

Gross Income from Rice Sales without project

Wet Season, 15 ha x 75 cav. x P50 - 56,250Dry Season, (15 ha x 1.5 c. into - 15 ha x 80 Cav. x P50 - 30 000

86:250

Gross Income from Rice Sales -with project

Wet Season, 15 ha x 75 cav. x P50 56,250Dry Season, (15 ha x 1.75 c. int.) - 15 ha x 80 cav. x P50- U5 000

3/ The tractor is assumed to have an annual use of 1,500 hours, of which 70 percent is productive usage. The customcharge for land preparation is P200 oar hectare for rotovating and P1100 per hectare for harrowing or P300 per hectarefor complete preparation. Time required for land preparation is 5.7 hours per hectare.

Productive usuage is 1500 x 0.7 - 64D hoursTime required on 15 ha farm is 15x1.75x5.7- 150 hoursTime available for custom service 690 hours

Income from custom service is 6o 300 - 36,315

LW The beneficiary's 10 percent contrihution to the investment cost - 0.1 x 1"3,500 - 1L,350


(Footnotes continued)

5/ Lend preparation consists of one rotovation and one harrowing at P300 per ha.Without project * 15 x 1.5 x 300 - 6,750With project - Operating cost for tractor and implements for 150 hours.

Fuel = 6 x 150 x 1.15 - 1,035Oil & Grease- 0.2 x 1,035 - 207

Repairs m 7,175 718 -

Operators wage 2 x 150 - 3001,260.0

6/ Seedling nursery to seed 1 ha at P60.

Without project - 15 x 1.5 x 60 a 1,350With project - 15 x1.75 x 60 - 1,575

7/ Pulling, hauling and transplanting at P1So per ha:. Without project - 15 x 1.5 x 184 - 4,140With project - 15 x1.75 x 184 - 4,830

9/ Weeding at P80 per ha.Without project - 15 x 1.5 x 80 * 1,800With project - 15 xl.75 x bO * 2,100

9/ Harvest and threshing at 15 percent of gross harvestWithout project - 0.15 x 86,250 * 12,937With project - 0.15 x 101,250 - 15,187

I0/ Drying and hauling at Po.50 per cavan of gross harvestWithout project

Wet season - 1< x 75 x 0.50 563Dry season = (15x1.5)-15 x8oxo.50- 300

With projectIWet season - 1 x 75 x .50 - 563Dry season - (15x1.75)-15 x8O x .50 - 450

1Q13

11/ Seeding rate is one cavan per ha at P70 per cavan.

Without project 15 x1.5 x70 - 1,575

With project - 15 xl.75 x 70 - 1,837

12/ Fertilizer cost PI00 per ha.Without project - 15 x 1.5 x 400 - 9,000With project - 15 x 1.75 x 400 -10,500

13/ Insecticide cost - F200 per ha.Without project - 15 x 1.5 x 200 14,500With project - 15 x 1.75x 200 5,250

14/ Irrigation fee is 3 cavans for dry season and 2 cavans for wet season:Fee without project

WIet season 15x 2 x P50 - 1,500Dry season (15 x 1.5)-15 x 3 x 50 , 125

With projectWet season - 15 x 2 x 50 =1,500Dry season - (15 x 1.75)-15 x 3 x 50-i 687

15/ Fuel consumption 6 liters per hour at P1.15 per liter for 1,500 hours - 6 x 1,350 x 1.15 * 9,315IT/ Oil andi grease reckoned at 20 percent of fuel - 0.2 x 9,315 = 1,863.17/ Repairs reckoned at 5 percent of investment cost -. 1350

18/ Operator's wage at P2.00 per hour - 1,350 x 2 - 2,7 0371/ Taxes, insurance and implement shed is computed at 2 percent of investment cost - 0.02 x 143,500 = 2,870.70/ The Barrio savings fund and the Barrio guarantee fund have not been included in operating cost in the model.'E/ Debt Service is an equal sum amortised over 7 years on the loan principal - 129,150 x 0.2331924 - 30}11727/ Service Feeis 3 percent of the outstanding ye____ balance.

- 77 Frinclpal Interest T4 Amortisation Balance Ser. Fee (3'

1 12,036 18,081 30,117 129,150 3,8742 13,721 16,396 30,117 117,114 3,5133 15,642 14,475 30,117 103,393 3,1024 17,832 12,285 30,117 87,751 2,6335 20,328 9,789 30,117 69,919 2,0986 23,174 6,943 30,117 49,591 1,4887 26,419 3,698 30,117 26,417 793

129,152

Average Service Fee Years 2-7 - 2,271


PHILIPPINES



Cash Flow Projection for Power Tiller (Rice Production)-(in Pesos)

Without Project Year 1 Years 2-4 Year 5

Cash Inflow

Gross Income: Rice Sales 2/ 18,000 21,000 21,000 21,000Custom Work 3/ - 2,228 2 228 2,228

Total Inflow 18,000 23,228 23,228 23,228

Cash from Previous Period 4/ - 750 - -Loan (90% of Investment) - 6,750 - -

18,000 30,728 23,228 23,228

Cash Outflow

Operating Costs

Wages: 5/Land Preparation 306 -Planting 650 759Crop Care 268 313Harvest/Threshing 6/ 3,000 3,501

Tractor Operator 7/ - 303Fertilizer 8/ 1,800 2,106Insecticides 9/ 900 1,053Seed 10/ 315 368Fuel 11/ - 896Oil and Lubricants 12/ - 179Tractor Repairs & Maintenance 13/ - 900Insurance & Taxes - 175Draft Animal Maintenance 14/ 100 -Levies and Charges 165 185Miscellaneous 15/ 360 466

Total Operating Cost 7,864 11,204 11,204 11,204

Investment 1/ - 7,500 - -Debt ServiceAmortization - 2,317 2,317Service Charge 16/ 135 75 -

Total Outflow 7,864 21,156 13,596 11,204

Net Cash Flow 10,136 9,572 9,632 12,024

Incremental Gross Income 5,228 5,228 5,228Incremental Cost 10.840 3,340 3,340

Net Benefit (5,612) 1,888 1,888

Financial Rate of Return - 8.2%

1/ Model based on 3 ha rice farm and custom hire services. An 8-hp single axle local tiller with associatedimplements constitute the investment in mechanization. Estimated cost is P7,500 and economic life isassumed to be five years.

2/ Based on 150% cropping intensity before investment; 175% thereafter. Yield is assumed to be 80 cavans per ha,and farmgate price, P50/cavan.

Footnotes/continued


3/ In an irrigated, multiple cropping area, it is assumed that a total of 100 days are available for landpreparation work, on the owner's land as well as custom hire, on all crops. We have assumed 80% efficiencyduring the 100 available days. At six days per ha (1 plowing and 2 harrowings), 31.5 days would berequired for tillage of the own'ers 3 ha @ 1.75 intensity, leaving capacity to undertake 8.1 ha ofcustom work. The current rate for complete land preparation is P275/ha.

4/ 10% equity contribution.

5/ 45% of total labor required assumed to be hired; seed bed preparation, drying and hauling assumed to beentirely family labor.

6/ Based on one-sixth of crop.

7/ Operator's wages P12 per day; assume only 50% of custom work done by hired operator.

8/ P400 per ha per crop.

9/ P200 per ha per crop

I0/ Seeding rate of one cavan per ha @ P70/cavan.

11/ One liter per hour @ P1.4 and 576 hrs. (720 x. 8).

12/ 20% of fuel costs.

13/ 12% of investment per year, consisting of simple average of Year 1, 5%; Year 2, 10%; Year 3, 25%, Year 4,10%, and Year 5, 10%.

14/ Maintenance of one carabao and shed.

15/ 2% of gross income.

16/ 2% of outstanding balance; averaged for Years 2 to 4.

ANNEX 8Table 8

PHILIPPINES



Cash Flow Projection for Portable Rice Thresher -

(in Pesos)

Year 1 Years 2-4 Years 6-10

Cash Inflow

Services 2/ 12,000 12,000 12,000Cash from previous period - 1,500 - -Loan (90% of investment) 13,500 - -

Total Inflow < 27,000 12,000 12,000

Cash Outflow

Operating CostsLabor 4/ 1,020 1,020 1,020Fuel 5/ 336 336 336Oil & Lubricants 6/ 67 67 67Maintenance & Repair 7/ 1,500 1,500 1,500Overhead 8/ 300 300 300

Total Operating Costs 3,223 3,223 3,223

Investment 1/ 15,000 - -

Debt ServiceAmortization 4,633 4,633Service fee 9/ 270 150 _

Total Outflow 23,126 8,006 3,223

Net Cash Flow 3,874 3,994 8,777

Financial Benefit/CostBenefit 12,000 12,000 12,000Cost 18,223 3,223 3,223Net Benefit (6,223) 8,777 8,777

Financial Rate of Return 58%

1/ Portable thresher powered by 7 HP engine with rated capacity of 25 cavans perhour; cost, F15,000, economic life, 10 years.

2/ Gross time available estimated to be 60 days per year; assume 50% utilizationallowing for down time, relocation, etc. and 80% efficiency during operations,i.e. 60 x .5 x .8 x 8 hrs. x 25 cavans per hour, or 4,800 cavans per year.Service charge is 5% of value of throughput, assumed to be F50/cavan.

3/ Ten percent of investment.4/ One feeder and 3 baggers, 30 days @ P8.50 each.5/ Twenty percent of fuel costs.

7/ Ten percent of investment includes replacement rollers.R/ Two percent of investment.

9/ Two percent of outstanding balance; averaged for years 2 to 4.

ANNEX 8Table 9

PHILIPPINES


Farm Mechanization

Agricultural Machinery Testing and Evaluation Center

(US$'000)

Year 1 Year 2 Year 3

Capital Costs

Building 2/ 175.0Equipment -

Crop Production Machinery Testing 35.0Materials Testing 15.0Post Production Machinery Testing 20.0Electrical Testing 10.0Office 20.0

Sub-Total 275.0

Operating Costs

Wages and Salaries 17.2 26.7 35.9Benefits 4/ 2.6 4.0 5.4Office Supplies 5.3 5.3 5.3Overhead and Maintenance 8.8 8.8 8.8Local Travel 1.3 1.5 1.6Lab and Shop Supplies 5.3 5.9 6.5Sundry 5.3 5.9 6.5

Sub-Total 45.8 58.1 70.0

Total 320.8 58.1 70.0

1/ 1,000 M2 multipurpose building at P1,300/M2

2/ Detailed lists of individual prices of equipment are under preparation.3/ Project Director (part-time) P18,000 per year.

Test Engineer - P18,000Researcher - P12,000Technician - P 9,600Clerk-Typist - P 7,200Driver - P 7,200

4/ 15% of wages and salaries.

ANNEX 9Page 1

PHILIPPINES


Cottage and Agro-Industry Component

Summary

1. Under this part of the project, sub-loans up to a total amountof $4.7 million would be made by rural banks for about 225 sub-projectsto assist proponents expand existing projects or begin new ones. The cate-gories of cottage and agro-industries eligible for financing under this partof the project would be:

No. of Unit Cost of Total CostCategory Sub-projects Sub-projects of Component

($ Thousand) ($ Million)

Rice Mills 30 25.7 .77

Farm Implement Manufacturing 30 35.5 1.06

Woodworking 30 16.7 .50

Concrete Products 25 33.3 .83

Handicrafts 50 17.0 .85

Others /a 60 20.0 1.20

Total 225 5.21

/a Include feedmills (very small capacity), coconut shell charcoalmanufacturing, food processing, textiles and garments.

However this loan would not be used to finance expansions or improvement ofprojects already financed by other IBRD loans through CB, DBP or theIndustrial Guarantee Loan Fund.

2. Sub-projects to be financed under this part of the project wouldnot exceed P 350,000 ($46,700 equivalent). A minimum size of P 10,000 ($1,340)equivalent), including permanent working capital and cost of land, would alsobe applied. About 50% of the 225 sub-projects would exceed P 200,000 ($26,700equivalent) and the average size of sub-projects is expected to be about

ANNEX 9Page 2

P 172,500 ($23,000 equivalent). Rural banks would be able to absorb this levelof industrial lending and these sizes of sub-projects. In 1975, 1.9% of thetotal loan portfolio of rural banks was classified as industrial, and arrearson the industrial loans of 260 surveyed rural banks amounted to about 16% ofthe industrial portfolio by amount compared to arrears of 24% on the total loanportfolio of rural banks. To prevent excessive concentration of risk in a fewlarge projects, individual loans by rural banks are limited by CB regulationsto 15% of net worth. Consortium financing can be done for the larger loans ifnecessary and rural banks have reported favorably on their experience to datewith this type of corporation.

3. To ensure effective sub-project implementation and help minimizethe risk to the rural banks from cottage and agro-industry sub-projects,technical assistance would be available from a variety of sources. The co-ordinator of promotion efforts and of technical assistance would be the localCB Loan Teams. Files and a small library would be maintained by Loan Teams,containing information on all types of technical assistance provided byvarious Government and quasi-Government agencies as well as lists of localand other consultants and experts. Loan Teams would be backed by a smallnumber of CB industrial technicians located in Manila, and would also workvery closely with the local Rural Bankers Federations in spotting problemsthat member rural banks or their industrial clients face. Apart from thelocal CB Loan Teams, the 50 Medium and Small Industry Coordinated ActionProgram (MASICAP) teams, located throughout the country except the Metro-politan Manila area, will make a substantial technical assistance contri-bution to the project. 1/ For every sub-project of P 50,000 ($6,700 equiv-alent) or more, a feasibility study would be conducted by a MASICAP team. Theteam would also assist rural banks with promotional efforts and with projectidentification, and, if the local MASICAP team has the appropriate skills,provide technical assistance to sub-borrowers. A few of the larger ruralbanks with sizeable industrial portfilio in a province may jointly employan industrial technician of their own. DRBSLA and the Department of Loansand Credits of CB are studying the possibility of providing a salary subsidyfor a fixed period only to such rural banks. This would both strengthen therural bank's industrial lending capability and educate them on the need foradequate project appraisal and follow-up.

4. Lending terms for this part of the project would be identical tothe rest of the project with two exceptions: grace periods would be somewhatlonger, up to a maximum of 2 years on the fixed capital portion and up to6 months on the working capital portion as justified on the basis of sub-project cash flow and income projections; and because of the characteristical-ly low capital intensity of cottage industries and their financial require-ments, the working capital portion may account for the majority of the sub-loan to a maximum of 80% as required.

1/ MASICAP is discussed in detail in its appraisal report of the Small andMedium Industries Development Project (1120-PH).

ANNEX 9Page 3

Rice Mills

5. The project would include about 30 units of small (100 and 300 cavan/day) cono rice mills. At present, there are about 10,200 "kiskisan" mills and2,700 cono mills in the Philippines. The units in the project would replacethe traditional kiskisan mill, which has a recovery rate of about 60 percentcompared to about 65 percent for a cono mill. The units would also be sitedin provinces with a deficit milling capacity. Because of their small capacityand the relatively low capital outlay required, they would be attractive tosmall entrepreneurs and could be expected to be sited in outlying rural areasnot adequately served at present. The project would enable small entrepreneurslacking adequate capital to expand and modernize their operations. It wouldalso enable small grain traders to move into processing. The units wouldcomplement other grain processing programs being carried out by the Govern-ment which support rice mills of 1/2 ton capacity and above. The total cost ofthis part of the project would be $0.8 million. The principal investment itemswould be the rice mill, engine and building, and a light truck. The estimatedfinancial rates of return are 73 percent on a 100 cavan/day mill and over 100percent on a 300 cavan/day mill.

Farm Implement Manufacturing

6. About 30 farm implement manufacturing enterprises would be financedunder the project. At present, there are 92 such enterprises of which 18 manu-facture exclusively farm implements designed by the International Rice ResearchInstitute (IRRI). The units financed would manufacture the simpler so calledType I IIRI design implements (Annex 8, paras 5 and 7) as well as other de-signs of implements. It is not proposed to finance the manufacture of themore sophisticated "Type II" IRRI design implements, because it is expectedthat very soon these will be mass produced by large-scale manufacturers. Aspart of increased emphasis on quality control, the project would finance anAgricultural Machinery Testing, Evaluation and Standardization Project (Annex8, paras 33-38) which would develop standards for locally manufactured imple-ments. Sales of locally manufactured tillers, threshers and dryers have grownfrom less than 1,000 units in 1972 to an estimated 11,000 units in 1976. De-mand is projected to grow at an average rate of 20 percent per year thereafter.Implements locally manufactured enjoy a very substantial price advantage overimported models, and in general, are simpler, smaller machines well adaptedto local conditions. Marketing and financing are the two principal problemsfacing the industry, particularly the smaller manufacturers. Careful atten-tion needs to be paid to the market area selected and then to promotion andfield demonstration tests. The project is expected to ease the difficultiesof finding suitable financing. The principal items of investment would be thebuilding and machinery and equipment. Each sub-project is estimated to cost$35,500 for a total cost of $1.1 milion for this part of the project. Theestimated financial rate of return is 77 percent.

ANNEX 9Page 4

Woodworking

7. The project would include 15 woodcraft and 15 furniture makingenterprises. There are about 5,700 registered units in the Philippines.Woodcraft exports, which totalled about $7 million in 1971 grew to $30 mil-lion in 1974, an average annual growth rate of about 65 percent. Althoughexports in 1975 fell by 60 percent due to the recession, they are expected torecover in line with the recovery of the world economy. Exports of furnituregrew from $1 million in 1971 to almost $5 million in 1974 No reliable dataexist on the domestic market, but it absorbs a large part of the industries'output for which the rapid expansion of the construction sector has provideda strong cushion. Growth prospects for both woodcraft and furniture makingare considered good and exports are expected to recover and show substantialgrowth between 1976 and 1980.

8. The woodcraft industry faces problems of quality control and lackof standardization. It also faces export marketing problems, which arisepartly from the first problem described and partly from a lack of organizationand establishment of effective marketing arrangements. To develop qualitycontrol and standardization, the industry needs to acquire equipment andtools more sophisticated than the hand tools in common use now. A similardevelopment is needed in the furniture industry which has considerable exportpotential if it can standardize its products and fill large export orders.The principal items of investments would be the building, equipment and tools,and a light delivery truck. Each sub-project is estimated to cost $16,700 fora total cost of $500,000 for this part of the project. The estimated financialrates of return for woodcraft and furniture making respctively are 67 percentand 71 percent.

Concrete Products

9. Included in the project would be 25 concrete products enterprises.There are 240 registered concrete product enterprises in the Philippines,and a similar number of non-registered enterprises. Although reliable datado not exist, their estimated production amounted to about 9 million piecesof hollow and decorative block and 170,000 linear meters of concrete pipes,and showed an average annual growth rate in production of about 35 percentbetween 1972 and 1974. Demand will remain strong, stimulated by very activepublic and private construction programs. No reliable data are availableon the value of production or employment, but the industry is highly laborintensive, even when the more sophisticated hollow block machines are used.

10. The principal problem faced by the industry is how to induce andspread technical developments to produce consistently high quality productsas well as new product lines. The National Institute for Science and Tech-nology is making a small but very valuable attempt to fill the technicalgaps. The principal items of investment would be the building, a recon-ditioned truck, machinery and moulds. Each sub-project is estimated tocost $33,000 for a total cost of $800,000 for this part of the project.The estimated financial rate of return is 57 percent.

ANNEX 9Page 5

Handicrafts

11. The project would include about 50 handicraft enterprises. Cate-gories to be included would be embroidery, needlecraft, fibercraft, shellcraft,rattancraft and ceramics. Handicraft exports have enjoyed extraordinarygrowth in recent years. In 1971 exports of the categories above totaled $5.7million equivalent. In successive years, they nearly doubled to total $31.2million in 1974. Exports for the first half of 1975 were running ahead of1974. Principal markets are the United States, Japan, West Germany andAustralia. This growth in exports has sprung from increases in volume andvalue as well as noticeable product and market diversification, the latterparticularly in the European Common Market countries and in Australia.

12. The principal problems faced by the handicraft industry include,some raw materials shortages (in particular fibers), quality control andmarketing, and financing. Production of fibers is expected to increase inresponse to the strong demand of recent years. Synthetic fibers are alsobeing imported from Japan. Quality control is likely to remain a problemfor some time to come. The Design Center of the Philippines established in1973 is doing some work in the area of standardized designs as is NationalCottage Industries Development Authority but both are hampered by lack offunds and staff. Handicraft producers in Manila are organized into a fairlyeffective association for purposes of quality control and export marketing,and the establishment of regional and national industry associations withcooperative or common marketing arrangements is probably the most effectiveway to organize the industry properly. At present, only a very small numberof the largest producers export either directly or sell to an export whole-saler in Manila. The principal form of financial assistance required isworking capital to finance sales and purchase of stocks of raw materials. Anumber of firms in these industries are forced because of a lack of workingcapital to operate on a peddler system whereby they manufacture for a period,then sell for a period in order to obtain working capital to recommence manu-facturing operations.

13. The principal items of investments would be the building, machineryand equipment and in many cases a small utility vehicle. Sub-project costsare expected to range from $10,000 for a rattancraft sub-project to $27,000for an embroidery sub-project. The estimated financial rates of return rangefrom 44% for shell-craft to over 100% for needlecraft, fibercraft, and rattan-craft. These high rates are primarily a result of the low fixed capitalinvestment in most cases. Actual rates will be very sensitive to changes incosts or benefits.

Others

14. In addition to the specific industries discussed previously, theappraisal mission considered a number of other cottage and agro-industrieswould provide sub-projects suitable for financing under this part of the

ANNEX 9Page 6

project. These would include, but not limited to, small-scale feed mills,coconut shell charcoal manufacturing, food processing, textiles and garments.These were all industries which have promising potential but which the missionwas not able to examine in depth. Therefore, these and other sub-projectswould be appraised on a case-by-case basis and if found to be justified, finan-cially and economically, they would then be eligible for financing under theproject. A total cost of $1.2 million equivalent would be considered for thispart of the project. It is not possible to estimate financial and economicrates of return prior to financing but the Technical Support and EvaluationUnit in DRBSLA would carry out post-appraisal evaluation to determine theoverall viability of sub-projects financed under this category.

ANNEX 9Table 1

PHILIPPINES


Cottage and Agro-Industry

Financial Rates of Return and Sensitivity Analyses

Financial Rate of ReturnAt Best At 10%

Estimates On InvestmentInvestment Cost Cost Overrun

Rice Mill (300 cavan capacity) Over 100 94

Rice Mill (100 cavan capacity) 73 57

Farm Implement Manufacturing 77 61

Wood Working

Woodcraft 67 58

Furniture Making 71 66

Concrete Products 57 46

Handicrafts

Embroidery 76 62

Needlecraft Over 100 Over 100

Fibercraft Over 100 92

Shellcraft 44 41

Rattancraft Over 100 Over 100

Ceramics 46 40

Weighted Average 86 75

ANNEX 10Page 1

PHILIPPINES



1. Fish is the main source of animal protein for the majority ofFilipinos. Rich in edible species, the territorial waters of the Philippinescover 705,000 square miles, and the country has an additional area of some230,000 ha of freshwater lakes and rivers.

2. The coastal and inshore seas have been heavily exploited by smallfishing vessels for commercial and subsistence fishing, but as yet there hasonly been limited harvesting of fish from the deeper offshore waters. Inaddition, according to the Bureau of Fisheries and Aquatic Resources (BFAR),large parts of the coastlines of the more than 7,000 islands have shallow-water sheltered bays lined with brackish and salt water swamps, often man-grove covered, suitable for the development of fishpondse However, partiallyor fully developed fishponds at present only occupy about 33% of the availablearea.

Existing and Potential Fishpond Area (1974) /

Developed Fishponds Additional Areas Suitable for Development

Privately Owned 85,000 ha Freshwater 41,000 haLeased from Government 91,000 ha Coastal 310,000 ha

Total 176,000 ha Total 351,000 ha

/1 From: 1974 Fisheries Statistics of the Philippines. Fishery Economicsand Information Division, Bureau of Fisheries and Aouatic Resources.Manila.

3. More recent evaluations indicate that the potential for the develop-ment of fishponds in coastal areas, is much less than 310,000 ha citedin the above table. Many of the mangrove swamps suggested as being suitablewould be very expensive to develop because they are in areas where the tidalrange would be unsuitable for complete filling and draining of the ponds.Pond draining and drying are important in the production of food algae forfish. There are no reliable estimates of the true extent of land suitablefor fishpond development, but it appears that some further 80,000 ha (26% ofthe BFAR projected 310,000 ha) might be suitable. The IBRD Second FisheriesProject (1270-PH) will finance the development of about 2,700 ha of this areathrough DBP.

4. A recent development has been the establishment of fishpens in someof the inland lakes. Comparatively shallow and shelted water is required for

ANNEX 10Page 2

fishpens, and only three localities are suitable of which Laguna de Bay inLuzon offers the greatest potential.

5. The production of fish has not been sufficient to meet home require-ments although the deficit has been decreasing.

Production DeficitTotal Annual Annual Fish Based on per

Year Production Increase Requirement Capita Requirement /a(Metric Tons) (%) (Metric Tons) (%)

1970 989,000 5.1 1,339,000 261971 1,023,000 3.5 1,386,000 261972 1,122,000 9.7 1,435,000 221973 1,205,000 7.3 1,491,000 191974 1,268,000 5.0 1,318,000 4

/a Based on estimates by the Food and Nutrition Research Centel- -s given as36.5 kg in 1968 and 31.8 kg in 1974.

6. Fish caught in coastal waters by small boats of three tons grossweight and less, together with that from subsistence fishing without boats,accounts for somewhat more than half of the total production. The remaindercomes from the activities of fishing vessels exceeding three tons gross weightand from fishponds. While no statistics are available, production fromfishpens is probably less than 0.5% of total.

FISHERIES PRODUCTION BY TYPE OF OPERATION(Metric Tons)

Municipal FisheriesCommercial Fisheries By small boats (less than 3By vessels greater tons gross) and subsistence

Year than 3 tons gross Fishponds fishing without boats Total

1970 382,000 96,000 511,000 989,0001971 382,000 98,000 543,000 1,023,0001972 425,000 98,000 599,000 1,122,0001973 465,000 100,000 640,000 1,205,0001974 471,000 113,000 684,000 1,268,000

ANNEX 10Page 3

7. During the period 1970-74, considerable quantities of fish were im-ported into the Philippines and small quantities of fish and fish productswere exported.

Exports and Imports of Fish (1970-74)(Metric Tons)

Year Exports Imports

1970 3,400 63,0001971 7,300 69,0001972 11,000 64,0001973 18,000 41,0001974 23,000 56,000

8. Using the 1973 consumption of 1.3 million tons as the base, thedemand for fish is expected to increase by at least 6% per year. The sustain-able yields from the municipal fisheries and the commercial fisheries are es-timated to be at least 1.7 million tons (municipal fisheries 700,000 tons;commercial fisheries I million tons) 1/ compared to 1974 production of 1.2million tons. Production from fishponds and fishpens is additional to the1.7 million tons. Thus the resource base is not a constraint on meetingexpanded programs of production; the inshore seas used for municipal fisheriesthough would play little part in any increase.

9. The volume of fisheries development financing was small under theFirst, Second and Third Rural Credit Projects. There are no specific recordsof the amount actually loaned under the First Project; only P 9 million andP 13 million under the Second and Third Projects, respectively, went tofisheries development; this was 6% of total loan funds disbursed during theSecond Project, 5% during the Third Project.

10. The mission found that rural banks in coastal areas began to receivelarge numbers of requests for sub-loans after project funds under the ThirdProject had been fully committed. In view of the great potential, the marketdemand and the need for financing, P 100 million would be allocated for thispurpose under the proposed project.

11. The performance and standards for fisheries investment promotion,project appraisal and supervision by BFAR and CB must be improved to effect-ively absorb these funds. The lack of an adequate number of suitably trainedfisheries technicians stationed outside of Manila in direct contact withproducers has been a constraint on funding under the previous Rural CreditProjects. Recognizing the need to improve the quality and effectiveness ofits extension service, BFAR has planned in-service training programs. The

1/ IBRD. Philippines: Appraisal of the Second Fisheries Project, May 1976.

ANNEX 10Page 4

Bureau also plans to assign some additional technical staff to its fieldoperations. 1/

Fishing Boats

12. For the greater part it appears that inshore marine waters arepresently being well exploited by small fishing vessels of less than 3 tonsgross weight including, as of 1970, 271,000 bancas, some 20% of which weremotorized. However, to date there has been little exploitation of the deeperoff-shore waters. The potential of non-traditional fishing grounds such asthe southern part of the Sulu Sea, the northern side of the Celebes Sea, theSouth China Sea off Luzon and the Pacific Ocean off Bicol and Samar is stressedby BFAR. 2/ Present official Government policy appropriately stresses the needfor bigger numbers of larger, better-equipped vessels to exploit these deeperwaters.

13. Fishing vessels in the size range 3 to less than 10 tons grossweight have become less popular in recent years. Their activities are con-fined to the heavily exploited in-shore waters where they compete with motor-ized bancas which have lower capital and operating costs. The following tablealso shows that the average yearly catch from vessels of 100 tons gross weightand over has not been significantly greater than from vessels in the 50 to 100ton class in spite of the higher capital and operating costs of the largevessels.

Numbers of Commercial FishinA Vessels and Production by Tonnage Class (1970-1974)

AverageFish Catch (tons)

Class by Production by VesselTonnage 1970 1971 1972 1973 1974 (tons) in 1974 in 1974

3 to 5 No No 261 266 205 6,630 32record record

5 to 10 666 664 358 426 450 26,000 5810 to 20 478 443 466 529 480 57,000 11920 to 50 426 422 444 534 468 106,000 22650 to 100 478 440 458 495 427 164,000 382100 to 200 192 211 195 203 195 78,000 400200 to 500 44 No 40 51 61 25,000 410

record

1/ Expanded Fish Productior Program, 1975-76 (Operational Plan). BFAR,Manila.

2/ Source: Philippine Fisheries in the 1970's. BFAR, Manila, November 1974.

ANNEX 10Page 5

14. in view of the above considerations the most suitable vessels

capable of exploiting the deeper waters would appear to be in the range of

10 to 100 tons. 1/ However, because the Fourth Rural Credit Project is

aimed at helping smaller operators, sub-loans would be restricted to vessels

of up to 40 tons. Furthermore, priority would be given to financing vessels

that would operate in off-shore waters with greatest potential as designated

by BFAR and where there is adequate infrastructural support, including port,

fish storage and marketing facilities. Some indications of BFAR priorities

for additional numbers of vessels by region are set out in the publication

"Expanded Fish Production Program (Operational Plan)", BFAR, Manila.

15. Tables 1 and 2 present a model for a wooden hulled vessel of 40 tons

gross weight, fully equipped. Wooden hulls of the type required are con-

structed often on a custom basis in make-shift backyard sites in the

Philippines. Forty-five such vessels would be constructed under the project

at a unit cost of about P 298,000.

Fishponds

16. The total area of fishponds in the Philippines increased by only

4.7% during the period 1970-1974 while production of fish from ponds increased

by almost 18%. In spite of this improvement in the efficiency of operation

the mission found that there was a great need for technical assistance to on-

going operations. Many fishpond operators only received assistance at the

time of project appraisal. In many cases, simple procedural changes and minor

innovations would significantly increase production. For example, it was

often observed that the water in the ponds was badly stained by organic

matter, a condition caused by low PH that could be corrected by liming. Pro-

duction of algal fish foods is inhibited by the dark color of the water which

restricts entry of light and therefore photosynthesis. Furthermore, the fish-

pond industry has not been given sufficient priority in the distribution of

chemical fertilizers needed to promote algal growth.

17. Information on the sizes of fishponds was available only for central

Luzon (below). About 69% of the ponds are 5 ha or less in extent and the

average size of this group is only about 1.2 ha.

ANNEX 10Page 6

Fishpond Areas, Central Luzon

5 Ha and Below 5.1 to 10 Ha More Than 10 HaNo. of

Area Operators Area Operators Area Operators

Pampanga 1,110 912 1,206 136 6,894 269Pangasinan 1,147 942 1,246 141 7,107 277Bulacan 1,954 1,606 2,124 241 12,122 473Bataan 374 308 407 46 2,319 91Zambales 241 199 262 30 1,497 58Aurora Sub-

Province 12 10 13 2 75 3

Totals 4,838 3,976 5,258 596 30,004 1,171

18. A model for a new 5 ha fishpond in mangrove swamp is piesented inTables 3 and 4. The total investment cost for such a sub-proje is P 68,630million. Eighty million pesos would be allocated to fishpond de opment whichwould allow the funding of about 1,165 sub-projects with a total area of 5,800ha. The financial rate of return is 37.7%.

19. There are economies of scale in fishpond operations but thesewould be foregone to some extent in form of suggesting smaller units. Forexample, the investment cost per ha decreases from P 13,700 in a 5 ha projectto P 11,000 in a 10 ha unit, and the estimated financial rate of return in-creases from about 38% to about 48%. However, in an effort to direct projectproceeds to small new enterprises, emphasis would be placed on the smallerunits.

Fishpens

20. A comparative recent development is the raising of milkfish in fish-pens. Each pen has a double outer (perimeter) wall consisting of nylon netattached to bamboo poles, anchored to the bottom, and built in relativelyshallow water (1.5 to 3 M deep). The main advantage over fishponds is thatfish grow on nutrients available in the water, so that operating costs areminimal. Higher yields are also possible per unit area. However, a majordisadvantage is that the pens are more vulnerable to storm damage; many inLaguna de Bay were extensively damaged by typhoon Didang in May, 1976, re-leasing much of the nilkfish population. Research is needed into improvingthe design of the pens. Under conditions of eutrophication, too, algal bloomsmay occur resulting in fish losses through reduced oxygen content of thewater. Information supplied by BFAR shows that 87% of the operators havepens of 10 ha or less in extent, the average size being 3.3 ha. A model fora 5 ha fishpen, with a total investment cost of P 126,770 appears in Tables 5and 6. In view of the geographic concentration of suitable areas, the recentdevelopment of this practice, the higher risk due to storm, and the need fordesign research before major expansion can take place, only P 6.5 millionwould be included under the project for fishpens. This would provide fundsfor about 50 5-ha enterprises.

MN=EX 10Table 1

PH{IIaPPjizS

FOURTH RURAL CRaI1T PLRO)JKT

Inve-stient Cost L(Pesos)

Number Unit pecif1cation Net Caah Price

1 Unit WoAoden Hull g 2/ P100,000

1 Unit Marine Diesel &gine 96-102 H.P.3standard specification for multi-purpose fishing with completeinstrument panele 98,000

6 Sets Fishing nets of monofilament,Kuralon nylon twines for pelagicand demnersal fishing 50,O00

1 Set Accessories 31 50000

Total F298,000

1/ Initial capital investzrment required for the p-urch az of one ( I ompieLset of multi-purpose fishing outfitG A possible cc rb`zi natiLon of trawl,Epurse seine and bagnet.

2/ Wlooden vessel (hull), 4)0 tons gross, diLt-h or withoc:. cut riggero

3/ Accessori es consisting of fuel arks , propeller, S .r tube. tail shaftstuffing box, sea. cocks, winches, generators, elect-riCal materials,charts, barometers, etc.

ANNEX 10

Table 2

PHILIPPINES


Fisheries Component

Cash Flow Projection for 40-Ton Multipurpose Fishing Boat -

(Pesos)

Year 1 Year 2-9 Year 10

Cash Inflow

Gross Sales /3/ 243,000 243,000 243,000Cash from Previous Period - 29,800 - -Loan (90%) 268 200 - -

Total Inflow 541,000 243,000 243,000

Cash Outflow

Operating CostFuel 4/ 63,600 63,600 63,600Engine overhaul - 5/ - 3,000 3,000Maintenance and repair - 6,300 12,600 12,600Crew salaries 30,360 30,360 30,360Ice 15,000 15,000 15,000Food 6/ 6,000 6,000 6,000Insurance - 7/ 11,886 6,534 1,188Registration and license - 650 650 650Contingencies 8/ 6,378 6,378 6,378

Total Operating Cost 140,174 144,122 138,776

Investment 298,000 - (298,000)Debt Service

Amortization 51,418 51,418 51,418Service fee - 8,046 5,448 1,35

Total Outflow 497,63B 200,988 191,547

Net Cash Flow 43,362 42,012 51.453

Financial Benefit/Cost

Benefit 243,000 243,000 243,000Cost 438,174 144,122 138,776

Net Benefit (195,174) 98,878 104.224

Financial Rate of Return: 31.0%

1/ This vessel wood consist of the following components:wooden hull (40 gross tons) F100,000diesel engine (96-102 hp) and instruments 98,000nylon nets and lines (six sets) 50,000accessories (tanks, propeller, winches,

generator, electricals, charts, etc.) 50,000

P298,000

2/ Estimated total catch of 90 tons at P3,000 per ton assorted fish.3/ Borrower's 10% cash participation to the investment cost.4/ Engine overhaul undertaken during the 2nd year and thereafter at 3,000 per annum.5/ Estimated as follows:

emergency engine repair P150/monthrepair of gears, boxes, etc. P500/monthrepair of hull P400/month(assumed 50% of these levels in Year 1)

6/ Calculated at 6% annual premium based on outstanding balance.7/ Issued by the Bureau of Fisheries for commerical fishing boats of more than

3 tons gross.8/ Five percent of the operating cost.9/ Three percent of balance outstanding (Average used for Year 2-9).

ANNEX 10Table 3

PHILIPPfIES


Five-Hectare Fishpond /

Investment Cost 2(Pesos)

9becification Cost

1. Cost of Development

Clearing of the fishpond site 5,000Uprooting of stumps 4/ 2,500Levelling of the cleared pond bottom 1,500Construction of the main dike 6/ 8,400Construction of the secondary dike 1,800Construction of the nursery dike 8 330Construction of one (1) concrete gate 15,000Constructionof three(3) secondary wooden gate 9/ 6,000Construction of three (3) tertiary wooden gates 10/ 3,000Simple caretaker's hut and storehouse

Sub-total 60,530

2. Additional Investments for Miscellaneous Ecuipment

One (1) wooden dugout ij 750Fish corrals 12/ 400Set gill net for marketable fish 950Bangus fingerlings suspension net 1,000One (1) inboard motor complete with accessories 4,000Digging blades (2), rakes (2), axes (5), bolos (5) 1.000

Sub-total 8,1oO

Total Investment Cost §1.630

1/ Development of five (5) ha swampland for fishpond proJect nsw project)./ Initial capital investment, needed to develop a five k5) ha fishpond.3/ Total clearing of the area at F1,000.00 per ha./ Estimated 500 big and sall stumps at P5.00/stump.

§/ Levelling that include removal of mounds and excavation.Computed at 7 cu. m./meter dike (5 m. base x 2 m. crown x 2 zi. high)Computed at P4.00/cu. m. - 300 meters long.

/ Computed at 3 cu. m./ meter dike (3.0 m. base x 1 m. crown x 1.5 meter high)Computed at f4.00/cu. m. - 150 meters long.

8/ Computed at .56 cu. m./meter dike (1.5 m. base x 1 m. crown x 1.5 meter high)at P4.00/cu. m. - 150 meters long.

9/ Secondary wooden gates will cost P2,000 each.L/ Tertiary wooden gates, will amount to F1,000 each.L/ Wooden dugout (15' - 20' x 3' x 1.5').L2/ One (1) fish corral at P200 each.


P}IILIPPINES


Five Hectare Fishpond

Cash Flow Projection I/

(Pesos)

PROJECT YEAR

Category I 2 3 4 5 6 7 8 9 10

Cash Inflow

Gross sales 20,000 31,000 35,000 55,000 55,000 55,000 55,000 55,000 55,000 55,000Cash from previous period 2/ 6,863 - - - - - -Loan: 90/. of investment 3/ (1) 61,767 -_ _ _

Total Inflow (2) 88,630 31,000 35,000 55,000 55,000 55,000 55,000 55,000 55,000 55,000

Cash Outflow

Operating costSalary of caretaker 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000Annual rental 50 50 50 50 50 50 50 50 50 50Milkfish and prawn fry 3,900 6,090 7,050 14,700 14,700 14,700 14,700 14,700 14,700 14,700Fertilizer - - 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500Chemical pesticides - - 400 400 400 400 400 400 400 400Supplementary feeds 3,500 3,500 3,500 3,500 3,500 3,500 3,500 3,500 3,500 3,500Share of caretaker 1,000 1,550 1,750 2,750 2,750 2,750 2,750 2,750 2,750 2,750Miscellaneous expiration 845 1,119 1,525 2, 390 2,390 2 ,390 2,390 2,390 2,390

Total Operating Cost (3) 13,295 15,309 19,775 29,290 29,290 29,290 29,290 29,290 29,296 29,290

Investment Cost (4) 68,630 - - - _ - - - -

Debt serviceAmortization 4/ - 13,986 13,986 13,986 13,986 13,986 13,986 13,986 13,986 13.986Service charge 5/ 1 853 20o75 1,946 1799 1,632 1,440 1,2 974 91 368

Total Outflow (5) 83,778 31,370 35,707 45,075 44,908 44,716 44,499 44,250 43,967 43,644

Net Cash Inflow (6) 4,852 (370) ( 707) 9,925 0 0092 10,284 10,501 10,750 11,033 11.356


Benefit (1) (7) 20,000 31,000 35,000 55,000 55,000 55,000 55,000 55,000 55,000 55,000Cost (3) + (4) (8) 81,925 15,309 19,775 29,290 29,290 29,290 29,290 29,290 29,290 29,290

Net Benefit (7) - (8) (9) (61,925) 15,691 15,225 25,710 710 25,710 25,710 25,710 25,710 25,710

Financial Rate of Return - 31.0%

I/ An eotimated cost of P68,630.2/ The beneficiary's 10/. participation from the total investment cost.3/ CB:IBRD loan for 90/. of the investment cost.

4/ Interest for the grace period (year 1) is capitalized 45/ Service fee is 3% of the outstanding annual balance. 0

EAP Project DepartmentJuly 9, 1976

ANNEX 10Table 5

PHILIPPINES


Fisheries Component

Investment Cost for 5-ha Fish Pen

(Pesos)

Cost

Bamboo Poles -/ 18,000Net 2/ 52,500Rope 9,250Twine 750Bamboo Pins 500Motorized Boat 5,300Small wooden Boat 750Caretaker's Hlut and Storage 3,500Installation Labor _36,220

Total 126,770

'/ 3,000 pieces for perimeter, partitions, batter poles, and etc.

2/ Four layers of 100 mesh net. 875 meters, @ P15/m.

ANNEX 10Table 6

PHILIPPINES


Fisheries Component

Cash Flow Projection for 5-ha Fish Pen(Pesos)

Year 1 Year 2 Year 3 Year 4

Cash Inflow

Gross Sales 1/ 183,750 183,750 183,750 183,750Cash from Previous Period 2/ 12,677 - -Loan (90% of investment) 114,093 - - -

Total Inflow 310,520 183,750 183,750 183,750

Cash Outflow

Operating CostsSalaries 18,000 18,000 18,000 18,000Fry 3/ 75,000 75,000 75,000 75,000Feed 4,000 4,000 4,000 4,000Repairs 4/ 3,500 3,500 3,500 3,500Transportation 2,500 2,500 2,500 2,500Miscellaneous 5/ 7,500 7,500 7,500 7,500

Total Operating Cost 110,500 110,500 110,500 110,500

Investment Cost 126,770Debt Service

Amortization 49,143 49,143 49,143Service fee 3P423 2,428 1,293 _

Total Outflow 289,836 162,071 160 936 110,500


Benefit 183,750 183,750 183,750 183,750Cost 237,270 11O,500 110,500 110,500

Net Benefit (53,520) 73,250 73,250 73,250


1/ Based on two four-month croppings per year. Total fingerlings, 300,000;estimated mortality, 30%; estimated prices of fish per ton, 4,000 units;and price per ton, P3,500.

2/ Ten percent of investment cost as borrower's contribution.3/ 300,000 per year @ P25 per hundred.4/ Materials only; estimated 5% of investment cost of net and poles.5/ Including fuel, oil and lubricants.

ANNEX 11Page 1

PHILIPPINES



1. At present the livestock sub-sector contributes about 18% of thegross value of agricultural production. In addition, carabaos (water buffalos)and steers are an important source of draft power. In January 1973 the live-stock population was estimated to be 2.1 million beef cattle, 5 millionbuffalos, 9.7 million pigs, and 100 to 110 million poultry. Pig raising isthe most widespread livestock activity in the Philippines, with some 80 to90% of the pork production coming from small backyard producers.

2. Domestic demand for livestock products is expected to grow at about6% p.a. through 1985. The rate of increase of production of pigs, cattle andpoultry meat has been such as to only just keep up with the poulation in-crease, so that the per capita annual intake has remained at about 14 kg,compared with the 41 kg recommended by the Food and Nutrition Research Center.The Government places high priority on the development of the livestock sub-sector not only to meet the increasing domestic demand for meat, but also asa means of diversifying small-holder production and providing further employ-ment for farm families. One problem facing the pig and poultry industries isthe inadequate availability of reasonably priced good quality feedstuffs.However, the Philippines has great potential for increasing feedgrain produc-tion, particularly corn and sorghum.

3. Under the Second Rural Credit Project, sub-loans totalling about P 5million were made for poultry and almost P 6 million for pigs. 1/ Sub-loansof P 10 million and P11 million were disbursed for, poultry and pig development,respectively, under the Third Rural Credit Project. 2/ Under the proposedproject, the following allocations would be made for livestock development:

1/ Summary of sub-loan releases under the Second Project from August 6, 1969to June 30, 1974.

2/ Summary of sub-loan releases under the Third Project from May 15, 1974 toApril 30, 1976.

ANNEX 11Page 2

No. of Sub- Cost per Sub-Projects Project Total

(Pesos) (P Million)

Poultry-broiler 700 14,450 10.1Poultry-layer 540 18,500 10.1Pigs 1,000 22,050 22.1Beef Cattle 1,000 5,300 5.3

Backyard and Small Farm Beef Cattle Breeding/Fattening

4. The beef industry is divided into four main production systems:(1) hill farming, (2) integrated cattle and coconuts, (3) backyard and smallfarm cattle raising, and (4) commercial feedlots.

5. Some 75% of the cattle in the Philippines are kept by small farmers.Fattening operations are generally more profitable than the breeding of feederstock. The animals are handfed with rice, bran, corn, pigeon peas, ipil-ipiland Napier grass. Farm waste materials including sugarcane tops are alsoimportant feed components. Backyard cattle raising usually involves very lowcapital investment, consisting of simple enclosure and/or tethers and somewater troughs, and labor is frequently supplied entirely by the family.

6. Shortage of feeder stock is the major constraint on the expansionof domestic beef production, in turn a result of low reproductive efficiencyof the breeder hers and the small natural breeder stock based. Improvementas a result of the Second Livestock Development Project (1225-PH) will nottake place in time to alter this position as far as the Fourth Rural CreditProject is concerned. Only limited use is made of artificial inseminationand the impact of breed improvement programs has been poor. The technicaladvisory services are entirely inadequate to extend improved management tech-niques to the very large numbers of small enterprises. In view of theseconstraints, only 1,000 sub-projects of four heads would be included in theproject. Finance would primarily be for a heifer and 3 feeder steers, a unitwhich would build up to 8 animals. Other minimal investment would be for asmall corral, legume seed, animal health, concentrate feeds and bull servicefees. The total investment cost for each sub-project would be about P 5,300or a total of P 5.3 million for the projected 1,000 sub-projects. It isassumed that the smallholder would have some feed available from his generalfarming operations and that family labor would be available to tend thecattle (Tables 1 through 3).

Pig Breeding/Fattening

7. Slaughter estimates for 1974 vary between 6.5 and 7.5 million hogs.The latter figure is consistent with estimates of pork production and con-sumption for 1974, namely 350,000 tons and 8.3 kg per capita. Assuming apopulation growth of 2.8% and constant per capita consumption, a conservative

ANNEX 11

Page 3

estimate of the additional annual demand for pork would be about 9,300 tons,equivalent to the production from about 23,300 sows. Current financing ofpiggery loans by DBP, including that provided under the Second LivestockDevelopment Project will increase the supply by about 14,000 sows per year.

8. About 98% of the pigs produced in the Philippines comes from herdsof less than 50 animals and although large commercial piggeries may supplyan increasing share of the pork market in future, particularly in large urbanareas, there is ample scope for pig production by smallholders. There iswidespread experience in the raising of pigs by small farmers who usually keep5 to 10 sows. In general breeding and fattening are combined but some back-yard producers fatten purchased weaners. On-farm mixing of feed from agri-cultural by-products is common. The climate of the Philippines reduces pighousing requirements to a minimum, permitting the use of simple shelters.Feed accounts for about 80 to 90% of pig production costs in the Philippinesand to improve returns in the long run feed conversion efficiency must beimproved by an effective breeding program. Although all of the common pigdiseases are present in the Philippines, they can be prevented or controlledby appropriate hygiene and by vaccination and veterinary drugs that arereadily available throughout the country. However, a major constraint in thisregard is the inadequacy of technical assistance to small farmers.

9. The proposed project is based on a model of 5 sows. The estimatedinvestment cost for each sub-project is P 22,050 and the total allocation forpig production would be P 22 million. (Tables 4 through 5). Up to 30% of thetotal allocation may be used in multiples of the 5-sow model up to a maximumof 15 sows for new larger operations and, for expansions, up to a totalpost-investment herd size of 25 sows.

Poultry

10. Poultry production has not kept pace with demand. The National Eco-nomic Development Authority-(NEDA) estimated that the per capita consumptionof poultry meat was only 2.8 kg in 1972, and the per capita consumption ofeggs, 3.2 kg. Assuming that the per capita consumption remains at the 1972level, and that the population is increasing at a rate of 2.8% per annum, theadditional annual demand for poultry meat and eggs would be about 3,100 and3,800 tons respectively. This is equivalent to the production of about 2.85million broilers and about 360,000 layers. Current DBP lending and thatprovided under the IBRD Second Livestock Development Project would supportan annual incremental production of about 1.6 million broilers and about185,000 layers.

11. A small number of large integrated poultry firms have been estab-lished in recent years, operating units that have between 30,000 and 100,000layers or broilers. This integrated production is based on contracts be-tween producers and several large milling firms. Typically the feed mill, orintegrator, supplies chicks, feed and some veterinary supply services while

ANNEX 11Page 4

the producer undertakes to provide housing, labor and management. The pro-ducer returns the broilers to the integrator when they are 8 weeks old, atwhich time he currently receives about P 1.20 per bird. The integrators havetaken over many of the hatcheries, with the result that the supply of chicksto the independent producers is unreliable in some areas. Furthermore, themillers control the supply of feeds and in times of shortage give preferenceto their own contract producers. One facet of sub-loan appraisal would there-fore be to examine the extent to which these constraints might jeopardize sub-projects in any given locality. Most of the production from the integratedenterprises goes to the large cities like Manila and Cebu.

12. There is a significant market in the rural towns and barrios forbroilers and eggs. These markets are supplied from backyard enterprises withless than 500 birds and by large commercial poultry farms with flocks rangingfrom a few hundred to a few thousand birds. In fact it is estimated thatabout 15% of the eggs and 60% of the poultry meat consumed in the Philippinesis still produced by small backyard enterprises. A common problem observedby the mission in backyard poultry enterprises was poor design and sitingof poultry houses, leading to inadequate ventilation in summer and resultingin lower production rates and significant mortality. Common faults were thesiting of fowlhouses against buildings and high walls. Often alternativemore suitable situations were not available because of the small size of thebackyards, but in many cases the environment for the poultry could have beenmade more favorable by raising the structure clear of surrounding obstructions.Design of some fowlhouses too was such that little air could circulate throughthe side walls. These examples of basic faults in production techniques illus-trate the inadequacy of the technical support services.

13. Feed cost in 1973 represented about 80% of the total operatingcosts 1/ and the position does not appear to have changed much since the time.However, the present ratio of feed cost per kg to the price received per kg ofbroiler meat and eggs is favorble to the producer and allows a good level ofprofitability. Poultry financing under the proposed project would be limitedprimarily to small backyard enterprises. Models are presented in this respectfor a 200 layer operation and 400 broiler enterprise. It is proposed thatfinancing be made available for 540 layer sub-projects at unit cost P 18,500and 700 broiler sub-project at unit cost P 14,450. (Tables 6 through 9).

1/ Feedmill Industry Report, Manila, July 1973. Economic Research Unit,DBP.

ANNEX 11Table 1

PHILIPPINESFOURTH RURAL CREDIT PROJECT

Livestock ComponentBackyard Cattle Breeding and Fattening Model

Investment Cost

Unit Year 1Investment Cost No. Cost

Item Unit (p) Units (P)

Fixed

Ipil Ipil Seed (HYV) kg. 10 1 10Corral no. 500 1 500Maiden Heifers 1-2 yrs. no. 1,200 1 1,200Miscellaneous (5%) 85

Sub-Total 1,795

Working Capital

Bull Service Fee no. 20 1 20Feeder Steers 1-2 yrs. no. 1,000 3 3,000Animal Health 1/ AU 15 4 60Concentrate Feeding- kg. 0.45 960 432Miscellaneous 50

Sub-Total 3,562

Total Investment: 5,,357

1/ 2 kg. rice bran/AU/day for 4 months.

PHILIPPINES


. Livestock Component

Backyard Cattle Breeding and Fattening Model

Herd Projection

Without---------------------------------At End of Year-----------------------------------------Project 1 2 3 4 5 6 7 8 9 10 11-20

Herd CompositionBreeding Cows and

Replacements - - 1 1 1 1 1 2 2 3 3 3Calves Weaned - - - I - 1 - 1 1 2 2 2Heifers 1-2 yrs - 1 - - - - 1 - 1 - 1 1Steers 1-2 yrs - 3 3 3 3 3 3 3 3 3 2 2

Total Animals - 4 5 4 5 5 6 7 8 8 8

Total Animal Units - 4 4 4 4 5 5 5 6 6 6 6

PurchasesHeifers 1-2 yrs - 1 - - - - - - - - - -Steers 1-2 yrs - 3 3 3 2 3 3 3 3 2 1 1Breed Heifer - - 1 -

MortalityCows and Replacements - - - _ - - - - - - - -

SalesCull Cows - - - - _ - - - - - 1 -Weaners - - - - - - - - - - - -

Animals 2-3 yrs - - 3 3 3 3 3 3 3 3 3 3

Total Sales 3 3 3 3 3 3 3 4 3

Technical Coefficients through Project LifeC5Plves weaned (%) - 60Mortality - Cows (%) - 3Cull Rate - Cows (%) - 10

Steer liveweight gain (gms/day) - 300Steer purchase liveweight (kg) - 160 @ p6 .25/kgSteer sale liveweight (kg) 271i @ P6 .00/kg =Pl,6h)

PhILIPPINES


Livestock Component

Backyard Cattle Breeding and FatteningCash Flow Projection

(Pesos)

Year Year Year Year Year Year Year Year Year Year Year1 2 3 4 5 6 7 8 9 10 11-20

Cash Inflow

Sales-/ - 4,932 4,932 4,932 4,932 4,932 4,932 4,932 4,932 6,132 4,932!/Cash from Previous Period 536 - - - - - - - - -Loan (90% of Investment) 4,821 - - - - - -

Total Inflow 5,357 4,932 4,932 4,932 4,932 4,932 4,932 4,932 4,932 6,132 4,932

Cash Outflow

Operating Expens2Feeder3 Steers- 3,000 3,000 3,000 2,000 3,000 3,000 3,000 3,000 2,000 1,900 1,000Health- 60 60 60 60 75 75 75 90 90 90. 90Bull Service yees- 20 20 20 20 20 20 40 40 60 60 60Concentrates5- 432 432 432 432 540 540 540 648 648 648 648Miacellaneous 50 50 50 50 60 60 60 70 70 70 70

Total Operating Expenses 3,562 3,562 3,562 2,562 3,695 3,695 3,715 3,848 2,868 2,768 1,868

6/Investment in Fixed Assets- 1,795 - - - - - :

Debt ServiceAmortization 1,124 1,124 1,124 1,124 1,124 1,124 1,124 - - -

S.rv!ce Charge 96 87 77 66 52 37 20 - - -

Total Outflow 6,577 4,773 4,763 3,752 4,871 4,856 4,859 3,848 2,868 2,768 1,868

Financial Benefit Cost

Benefit - 4,932 4,932 4,932 4,932 4,932 4,932 4,932 4,932 6,132, 4,932Cost 5,357 3,562 3.562 2 562 3,695 3 695 3,715 3,848 2,868 2,768 1,868

Net Benefit (5,357) 1,370 1,370 2,370 1,237 1,237 1,217 1,084 2,064 3,364 3,064

Internal Rate of Return - over 100% (based on first five years)

I/ Average live weight 274 kg. e P6/1g. or P1,664/head.2t Estimated purchase price P1,000/head

+15/Animal Unit- *20/Female per year

2 kg. rice bran per animal uniit per day for 4 months at P.45/kg.- Includes fixed cost items from Table 1.

Excludes rendered value of herd at Year 20 of }8,000.

ANNEX 11Table 4

PHILIPPINES


Livestock Component

Backyard Pig Project - 5 Broodsows

Investment Cost

Year 1

Item Unit Cost Number Cost(P) of Units (P)

Fixed

Piggery and Pens (60 sq. m.) 160 1 9,600Fixtures and Appliances - - 600Stock (gilts) 900 5 4,500

Sub-total 14!700

Working Capital

Feeds and Feed Additives 6,500Veterinary 300Boar Service 250Other 300

Sub-total 7,350

Total Investment 22,050

ANNEX 11Table 5

PHILIPPINES


Livestock Component

Cash Flow Projection for 5-Sow Piggery Project

(Pesos)

Year 1 Year 2-7 Year 8-10

Cash Inflow

Sales -/ 7,170 13,110 13,110Cash from Previous Period 2 2,205 - -Loan (90% of Investment) 19,84_5_ __

Total Inflow 29,220 13,110 13,110

Cash Outflow

Operating ExpensesFeeds and Additives 6,500 6,500 6,500Veterinary 300 300 300Boar Service Fees 250 250 250Miscellaneous 300 300 300

Total Operating Expenses 7,350 7,350 7,350

Investment in Fixed Assets 31 14,700Debt Service

Amortization 4,628 4,628 _Service Fee 397 233 _

Total Outflow 27,075 12,211 7,350


Benefit 7,170 13,110 13,110Cost 22,050 7,350 7,350

Net Benefit (14,880) 5,760 5,760


1/ Weanlings @ 50 to 60 days P180 2; F6,120 in Year 1; 12,060 thereafterplus cull sows, 150 kg. @ P7/kg. liveweight (1 per year)

2/ Ten percent equity contribution.3/ Includes fixed cost items from Table 4.

ANNEX 11

Table 6

PHILIPPINES


Livestock Component

Poultry Project -- 200 layers

Investment Costs

No. of Cost per Totalunits unit (P) Cout (P)

Fixed

Housing and Facilities -/ 1 3,000 3,000

Stock - 200 18.00 3,600

Sub-total 6,600

Working Capital

Feeds -/ 11,180

Medicines, Vaccines, Supplements - 220

Other 500

Sub-total 11,190

Total Investment Cost 18,500

1/ Based on UPLB and Vitarich Corporation estimates of Pl5 per bird space.

2/ 18 week old pullets at P18 per bird.

3/ Feed at P65 per 50 kg bag; 43 kg per layer per year.

4/ 2% of feed costs.

ANNEX 11

Table 7

PHILIPPINES


Livestock Component

Cash Flow Projection for 200-Layer Poultry Project

(Pesos)

Year Year Year1 2-5 6-10

Cash Inflow

Sales -/ 16,879 17,854 17,854Cash from Previous Period 1,850 - -Loan (90% of Investment) 16,650 - -

Total Inflow 35,379 17,854 17,854

Cash Outflow

Operating CostsFeeds 10,965 11,180 11,180Health Suppliers 615 670 670Light and Water 220 220 220Miscellaneous 100 100 100

Total Operating Cost 11,900 12,470 12,470

Investment in Fixed Assets 6,600 - -

Debt ServiceAmortization 4,850 4,850Service Fee 333 188 -

Total Outflow 23,683 17,508 12,4.70

Net Cash Flow 11_696 346 5,384

Financial Benefit Cost

Benefit 16,879 17,854 17,854Cost 18,500 12,470 12,470

Net Benefit (1,621) 5,384 5,384

Financial Rate of Return - Over 100%

l/ Eggs: 17/bird/month @ P.40Culls: P9.75 eachManure: P215/yearFeed bags: P2 each

AuNNEX I1Table 8

PHILIPPINES


Livestock Component

Poultry Project -- 400 Broilers

Investment Costs

No. of Cost per TotalUnits Unit (P) Cost (R)

Fixed

Housing and Facilities -/ 1 180 5,700

Initial Stock 2/ 400 2.30 920

Sub-total 6,620

Working Capital

Feeds -/ 7,250

Medicines, Vaccines, Supplements - 435

Light and Water -/ 145

Sub-total 7,830

Total Investment Cost 14,450

1/ Housing at P180 per sq. m. at 14 birds per sq. m. 5,143.

2/ Day old chick P2.30 each. 400 + 2%.

3/ Feeds - starter 408 x 1.45 = 591.6 kg at P1.45 kg)finisher 408 x 1.80 = 734.4 kg at Fl.30/kg)

4/ 6% of feeds = 1,813 each

5/ 2% of feeds

ANNEX 11Table 9

PHILIPPINES


Livestock Component

Cash Flow Projection for 400-Broiler Sub-Project

(Pesos)

Year Year Year1 2-7 8-10

Cash Inflow

Sales 1/ 15,808 19,760 19,760Cash from Previous Period 1,445 - 227Loan (90% of Investment) 13,005 - 3k3

Total Inflow 30,258 19,760 20,350

Cash Outflow

Operating CostsFeeds 7,250 9,063 9,063Health Supplies 435 544 544Light and Water 145 145 145Miscellaneous 100 100 100

Total Operating Costs 7,830 9,852 9,852

Investment in Fixed Assets 6,620 - -Debt Service

Amortization 2,850 2,850 -Service Fee 260 150 -

Total Outflow 17,300 12,852 9,852

Net Cash Flow 122958 6_908 9,908


Benefit 15,808 19,760 19,760Cost 14,450 9,852 9,852

Net Benefit 1,358 9,908 9,908

Financial Rate of Return - Over 100%

l/ First year: 4 batches of 400 birds less 5% mortality; 1.3 kg/bird@ P8/kg, manure, 181; and feed bags, P 290Thereafter: 5 batches; manure, p 227; and feed bags, P 363

PfE ILIPPI"NES


Monitoring and Evaluation

introduction

During the course of project implementation, routine reporting ofprogress would continue to be undertaken by CB. In addition to this projectmonitoring, an evaluation would be conducted of the impact of the project'sfarm mechanization components on the rural economy. While the TechnicalSupport and Evaluation Unit (TSEU) and Loan Teams of CB would be involvedin field work related to this evaluation, funds would be provided for therecruitment of qualified consultants to design the study and carry out anal-ysis and report writing. This approach is preferred to the use entirely ofCB staff for the following reasons: the study would constitute an inordinatefixed-term workload on CB staff; a range of economic skills and resourceswould be required which CB has no regular call to maintain within its staffand facilities; and, the separation of responsibility between executing agentand evaluator would facilitate an essential degree of objectivity in the study.

A. Proiect Monitoring

2. The reporting of progess under the Third Project was generallysatisfactory and the overall pattern of reporting would continue unchanged.However, TSEU would undertake a review of present reports and propose changesas appropriate for discussion with the first Bank supervision mission withrespect to the following considerations:

(i) improvements in the procedures for data collection and thereport formats themselves to reduce the large volume ofpaper flow and the extent of duplication in report content;

(ii) inclusion of pre-investment characteristics of sub-borrowersin routine reporting; and

(iii) increased timeliness of reporting of project accounts in indi-vidual banks.

TSEU would also be responsible to monitor sub-loans to restricted categories -tractors, for price and total volume; tillers, for price; and sub-loans tosLmall beneficiaries to ensure that a minimum of US$11 million of loan proceedsaccrue to the target group.

ANNEX 12Page 2

3. As part of project implementation, it is also the responsibility ofCB to establish, enforce and review sub-loan appraisal standards and proce-dures. While these are agreed with the Bank in general at the time of ap-praisal, it is essential that they be periodically reviewed and amendedto insure efficient appraisal and viable sub-projects, not only under con-ditions of changing costs and prices, but in view of the gradual developmentof financial and technical capacity within the on-lending agencies themselves.This is one of the most important functions of TSEU, for which they will beexpected to establish an annual program of work. Such a program would includebut not be limited to the following:

For each sub-loan category:

(i) cost, price and capacity utilization assumptions and regionalvariations in each;

(ii) demand projections for investment output and comparison withanticipated supply, the balance of these two to be assessedon the basis of geographic areas of markets served;

(iii) other constraints such as availability of inputs, parts orservice which might affect the success of sub-projects;

(iv) the type and availability of requisite technical assistance;and

(v) the appropriateness of the share of project proceeds accruingto the category in view of its financial and economic potential.

For each region:

(i) the appropriateness of the share and blend of project proceedsaccruing to the region in view of its potential as well as itsshare of population and relative degree of development.

For each lending agency (individually or by group classification):

(i) the appropriateness of the degree and type of delegation ofauthority;

(ii) the key constraints on further delegation of authority; and

(iii) measures to be taken, probably in the form of specifictechnical assistance, to remove these constraints.

4. Price Control. Under previous projects, a staff of the operationalDivisions without the required qualification was given the task to approveprice increases for tractors, tillers and their implements. In view of theimportance now placed on the reduction and monitoring of these prices, thistask has been transferred to TSEU and it would be imperative that the Unit

ANNEX 12Page 3

assigns to this function a qualified engineer who would be expected to haveor acquire the necessary background with which to scrutinze applications forprice increases. An additional function of this officer, which would be com-patible with the above task, would be to act as a liaison officer with theAgricultural Machinery Testing, Evaluation and Standardization Project.

B. Evaluation

5. There is widespread concern among those engaged in rural develop-ment that farm mechanization may result in a number of adverse social effects,particularly unemployment. Economic and social patterns within a particularlocale and the nature of the mechanization in question are crucial factorswhich preclude broad generalizations, but some evidence has emerged fromrecent studies within the Bank and elsewhere to confirm that under particularcircumstances those adverse effects do occur.

6. The Bank has for a number of years been supporting a farm mechani-zation program in the Philippines but on the basis of evidence available todate this investment has not been found to have led to these undesirable sideeffects. Taking into account the initial findings of the study conductedunder the Third Project, we concluded that empirical evidence on the resultsof mechanization of the type supported should be sought in a sufficientlycomprehensive manner to provide conclusive evidence. A study of the impact offarm mechanization on the rural economy of the Philippines has therefore beenincluded in the Fourth Rural Credit Project.

Purpose of the Study

7. The proposed study is intended to provide empirical evidence of theimpact of specific types of farm mechanization on the following:

(i) financial results of the enterprise to which machinery isprovided (assumed to be the major benefit against whichpossible drawbacks would be considered);

(ii) cropping intensity, area cultivated and adoption of otherimproved technology, for example the use of fertilizer,pesticides and high yielding varieties;

(iii) factors and risks associated with weather;

(iv) employment; in the operation(s) mechanized, in other essen-tial operations, and in supporting, productive on-farmactivities;

(v) type of employment; family or hired, skilled or unskilled;

(vi) season variations in employment patterns;

ANNEX 12Page 4

(vii) extent of custom hire opportunities; and

(viii) income distribution, social mobility andsocial stratification.

Three types of mechanization would be examined separately with respect tothese issues: hand tractors including power tillers, four-wheel tractorsand portable rice treshers.

Methodology

8. The study would be based on pre- and post-investment surveys. Pre-investment surveys would be conducted at the time of sub-loan appraisal, inmost cases as part of the appraisal process by the evaluating officer of thefinancial institution or CB. 1/ Post-investment surveys would be conductedby the consultants after three to four crops seasons. Survey design andanalytical methodology would be developed by the consultants in consultationwith representatives of DRBSLA and the Bank. 2/

\ ,,,z'.

Organization

9. Subject to confirmation of interest, it is proposed that the studybe conducted by the University of the Philippines at Los Banos (UPLB). Fundswould be channelled through DRBSLA in accordance with an agreed schedule ofwork. A steering committee would be established to oversee the study,specifically to:

(i) agree on a timetable for its execution;

(ii) agree on and coordinate the inputs to be made by agencies otherthan UPLB;

(iii) provide administrative support in terms of contractual agree-ments and flow of funds; and

(iv) receive and comment on progress reports and draft findings ofthe study.

This committee would consist of one senior representative each from theInstitute of Agricultural Development and Administration (UPLB), DRBSLA(CB), International Rice Research Institute (IRRI), the Department of Agricul-ture, Technical Board on Agricultural Credit, and representatives from theBank. Responsibility for Bank participation (in person or by correspondence)would be undertaken by the Rural Credit and Agro-Business Division, East Asia

1/ The consultants responsible for the study would conduct a sample numberof these surveys to develop a familiarity with field level conditionsand to establish a control base against which to identify biases whichmight arise in the balance of the data.

2/ Mechanization which has taken place outside of the proposed project,including that under previous CB:IBRD projects might also be examinedin the study.

ANNEX 12Page 5

and Pacific Projects Department, although participation by staff outside theDivision, notably the Central Project Staff (CPS) would be requested from timeto time.

Timing and Procedures

10. The study is expected to take place over a period of about threeyears. Pre-investment surveys would be conducted during the first six totwelve months of the implementation of the Fourth Project, beginning March1977 and follow-up surveys and analysis would begin as investments reachedan age of 18-24 months. Results of the study would be available by early1980 and could therefore be used in appraisal should another credit projectbe undertaken at the completion of disbursement of the Fourth Project.

11. Preliminary discussions among Bank, DRBSLA and UPLB representativeswill be undertaken in early 1977. Subject to agreement at that time, adetailed study outline and the pre-investment survey design would be dis-cussed during the first project supervision, mid-1977. Thereafter, review ofprogress would be undertaken primarily in the course of project supervision.Participation of representatives of CPS in supervision would be invited fromtime to time for this purpose. A draft report of the study would be circu-lated to member agencies for comment prior to the submission of the finalreport.

Estimated Costs

12. Pending further discussions in the Bank and with UPLB, detailedcost estimates cannot be prepared. A tentative estimate of the cost of UPLBservices including report production is US$25,000. This estimate assumes theavailability of CB and Bank staff time for purposes described without directcharge cost to the study.

ANNEX 13

PHILIPPINES


Project Cost Estimate

Million Pesos Thousand US Dollars Foreign% of Exchange

Local Foreign Total Total Local Foreign Total (x)

Farm Mechanization

Tractors 169.4 138.5 307.9 45.0 22,587 18,466 41,053 45Power Tillers 55.4 24.6 80.0 11.7 7,387 3,280 10,667 31Irrigation Pumps 5.3 3.4 8.7 1.3 693 467 1,160 40Portable Threshers 6.5 3.4 9.9 1.4 867 453 1,320 35Other Equipment 4.2 4.1 8.3 1.2 560 547 1,107 50

Sub-total 240.8 174.0 414.8 60.6 32,094 23,213 55,307 42

Light Transportation

Light Trucks 6.6 4.3 10.9 1.6 866 587 1,453 40


Fishing Boats 10.4 7.0 17.4 2.6 1,386 934 2,320 40Fishponds 95.5 10.6 106.1 15.5 12,734 1,413 14,147 10Fishpens 7.7 0.8 8.5 1.2 1,013 120 1,133 10

Sub-total 113.6 18.4 132.0 19.3 15,133 2,467 17,600 14


Poultry 24.3 2.7 27.0 4.0 3,240 360 3,600 10Pigs 26.5 3.0 29.5 4.3 3,533 400 3,933 10Cattle 6.4 0.7 7.1 1.0 854 93 947 10

Sub-total 57.2 6.4 63.6 9.3 7,627 853 8,480 10

Cottage & Agro-Industries

Rice Mills 4.7 3.1 7.8 1.1 627 413 1,040 40Farm Implements 6.5 4.3 10.8 1.6 867 573 1,440 40Woodcraft 4.0 1.0 5.0 0.8 534 133 667 20Concrete Products 6.7 1.7 8.4 1.2 893 227 1,120 20Handicraft 6.9 1.7 8.6 1.2 920 227 1,147 20Others 9.6 2.4 12.0 1.8 1,280 320 1,600 20

Sub-total 38.4 14,2 52.6 7,7 5,121 1,893 7,014 27Total (Sub-Loans) 45L_I 217.3 673.9 98.5 60,841 29,013 89,854 32

Project Support

Training 2.1 0 2.1 0.3 280 0 280 0Mechanization Study 0.8 0 0.8 0.1 107 0 107 0Service Vehicles 1.7 1.7 3.4 0.5 226 227 453 50Testing Project 3.4 0.8 4.2 0.6 454 106 560 19

Sub-total 8.0 2.5 10.5 1.5 1,067 333 1,400 24Grand Total 464.6 219.8 684.4 100.0 61,908 29,346 91,254 32

ANNEX 14

PHILIPPINES


Estimated Quarterly Schedule of Disbursements

CumulativeIBRD FY and Quarters Commitments Disbursements Disbursements

-------------- US$1,000

1977

4th 3,300

1978

1st 3,200 1,650 1,6502nd 3,200 3,250 4,9003rd 3,100 3,200 8,1004th 3,100 3,150 11,250

19791st 3,100 3,100 14,3502nd 2,600 3,100 17,4503rd 2,500 2,850 20,3004th 3,000 2,550 22,850

1980

1st 3,000 2,750 25,6002nd 3,200 3,000 28,6003rd 3,200 3,100 31,7004th - 3,200 34,900

1981

ist 1,600 36,500

PHILIPPINES


I/Phasing of the Lending Program -

(Pesos Million)

Year 1 Year 2 Year 3 Total

No. of Project No. of Project No. of Project No. ot Project

Sub-Projects Costs Sub-Projects Costs Sub-Projects Costs Sub-Projects Costs

Tractors (less than 68 hp) 95 13.9 250 39.4 430 73.2 775 126.5

Tractors (68 to 80 hp) 700 124.7 3oo 56.7 0 0 1,000 181.4

Power Tillers (local made) 2,000 16.9 2,300 21.0 3,000 29.6 7,300 67.5

Power Tillers(imported) 100 2.2 150 3,7 250 6,6 500 12.5

Irrigation Pumps 80 1.6 160 3.4 160 3.7 400 8.7

Portable Threshers 120 1.8 240 3.9 240 4.2 600 9.9

Other Implements 48 1.5 96 3.3 96 3.5 240 8.3

Light Trucks 80 2.0 160 4.3 160 4.6 400 10.9

Coastal Fishing Boats 8 2.7 18 6.8 19 7.9 45 17.4

Fishponds 350 28.2 350 31.3 465 46.6 1,165 106.1

Fishpens 10 1.5 20 3.3 20 3.7 50 8.5

Poultry 248 4.8 496 10.5 496 11.7 1,240 27.0

Pigs 200 5.1 400 11.5 400 12.9 1,000 29.5

Cattle Breeding 200 1.2 400 2.8 400 3.1 1,000 7.1

Rice Mills 3 0.7 11 2.7 16 4_4 30 7.8

Farm Implements 3 0,9 11 3.8 16 6.1 30 10.8

Woodcraft 3 0.4 11 1.8 16 2.8 30 5.0

Concrete Products 2 o.6 10 3.2 13 4.6 25 8.4

Handicraft 5 0.8 19 3.1 26 4.7 50 8.6

Others 6 1.0 24 4.6 30 6.4 60 12.0

Total 4,261 212.5 5,426 221.1 6,253 240.3 15,940 673.9

1/ The implementation of the project in terms of percentage of the number of sub-loans would take place as follows:

Year 1 __ Year 2 Year 3

1st 2nd 3rd 4th 1st 2nd 3rd 4th 1st 2nd 3rd 4th

Qtr Qtr Qtr Qtr Qtr gq Qtr Qtr Qtr Qtr Qtr Qtr

6 6 7 8 8 8 9 9 9 10 10 10

Estimates are based on December 1975 prices and include the following contingencies:

1977 1978 1979

i) Equipment 17% 8% 8%

ii) Civil Works 23% 12% 12%

Commitment Ratio 80:20 65:35 55:45

i) :ii)

fin

PHILIPPINES

FOURTH CREDIT PROJECT

Sunwiary of Financial Rates of Return forAgricultural Components I/

OperatingBeat Investment Operating Benefits Benefits Costs + 10 Other SourceEstimate Coat + 207 Cost + 10 + 10% - 10°. Benefits - 10

Tractor - Sugarcane 16.6% 11.3% 14.4% 21.2% 12.0% 9.7% Annex 8 Table 5

- Rice 12.5 8.2 10.0 17.2 7.4 4.6 (Investment -10%) 15.2 Annex 8 Table 6

Power Tiller 8.2 1.6 1.2 18.2 .0 .0 Annex 8 Table 7

Portable Thresher 58.0 46.4 55.7 66.5 49.5 47-5 Annex 8 Table 8

Fishing Boat 31.0 24.6 25.4 39.9 21.4 15.4 Annex 10 Table 2

Fishpond 31.0 25.0 22.0 40.0 22.0 18.0 Annex 10 Table 4

Fishpen 44.6 32.6 33.8 61.8 26.3 14.4 Annex 10 Table 6

Backyard Cattle Raising over 100 - Annex 11 Table 3

Piggery 36.0 29.0 29.0 47.0 24.0 17.0 Annex .11 Table 5

Poultry - 200 Layers over 100 - - - - 44.0 (Benefits -20%) 33.0 Annex 11 Table 7

Poultry - 400 Broilers over 100 - _ _ _ 4.2 (Benefits -207.) 24.0 , Annex 11 Table 9

1/ A summary of financial rates of return for cottage and agro-industrial sub-projectsappears as Table 1 to Annex 9.

ANNEX 17

PHILIPPINES


Economic Evaluation

1. The economic impact of the proposed project is presented in ChapterVIII, including incremental production, employment generation, foreign ex-change impact and benefits to smaller borrowers. The purpose of this Annexis to present cost and price assumptions for the analysis and supportingtables.

2. Costs and Prices. Economic costs of investment have been derivedby deducting duties and taxes from financial investment costs. Such dutiesand taxes range between 10% and 20% on the landed cost of imported items, andwe estimate them to amount to 8% of total project cost, equivalent to about25% of the foreign exchange component. Market prices of fertilizer andpetroleum products approximate their economic costs and no shadow pricing ofthese commodities have been undertaken. Similarly, unskilled labor has beencosted at its market rate since the majority of the project's employmentcreation would occur in accordance with the crop cycle, the primary deter-mination of employment in the rural Philippines. In the absence of strongevidence to the contrary, we have assumed that the relative prices of bothfactors and products would remain constant.

3. Summary of Benefits. Incremental production as a result of theproject is estimated to have an annual value of P 379.4 million at full dev-elopment (Table 1). Direct employment resulting from sub-loan investmentswould reach 10,000 jobs (full-time equivalent) at full development (Table 2).About 2,200 man years per year would be associated with loans to small bene-ficiaries. About 31% of total sub-loan proceeds would be directed to invest-ments by small beneficiaries whose net income from such investments wouldaverage P 5,445 per year. In addition, small farmers would be the majorrecipients of custom hire services generated by the project, the most sub-stantial of which would be cultivation capacity of about 310,000 ha per year.The net foreign exchange earnings of the project at full development would beUS$9.2 million from investment with an initial foreign exchange cost ofUS$29.4 million.

4. Economic Rate of Return. In view of the fact that shadow pricingof factors and products was not considered justified in the sub-project,analysis, economic and financial rates of return would differ only slightlyas a result of adjustments for duties and taxes on investment costs. Eco-nomic rates of return were not, therefore, calculated for each sub-project.An overall economic rate of return of 21% was determined for the project,including contingencies and costs associated with supporting services (Table3). A 10% increase in operating costs of all components would result in arate of return of 16%.

C3449/J3476/D661/A-1

PHILIPPINES


Economic Evaluation

Annual Incremental Production

No. of Increase Annual Gross ValueProduct Sub-project Units per Unit Increase P Million $ Million

Rice Tractors 1,325 15.0 MT 19,875 MT 19.88 2.65Rice Tillers 6,650 3.0 MT 19,950 MT 19.95 2.66Corn Tillers 1,150 6.2 MT 7,130 MT 5.70 0.76Fish Fishing Boats 45 90.0 MT 4,050 MT 12.15 1.62Fish Fishponds 1,165 7.5 MT 8,738 MT 34.95 4.66Shrimp Fishponds 1,165 2.5 MT 2,913 MT 29.13 3.88Fish Fishpens 50 52.5 MT 2,625 MT 9.19 1.22Eggs Poultry (layer) 540 2.04 MT 1,102 MT 8.81 .1.18Poultry Meat Poultry (layer) 540 0.13 MT 70 MT 0.53 0.07Poultry Meat Poultry (broiler) 700 2.47 MT 1,729 MT 13.83 1.84Pork Pigs 1,000 .0.15 MT 150 MT 1.05 0.14Beef Cattle Breeding 1,000 0.85 MT 847 MT 5.08 0.68Weanlings Pigs 1,000 67 Heads 67,000 Heads 12.06 1.61Various Cottage and 225 - - 98.30 13.11

Agro-Industries(Services)Land Preparation Tractors (rice) 1,325 121.0 Ha 160,325 Ha 48.10 6.41Land Preparation Tillers (rice) 6,650 8.1 Ha 53,865 Ha 14.81 1.98Land Preparation Tillers (corn) 1,150 10.6 Ha 12,190 Ha 3.35 0.45Land Preparation Tractors (sugar) 450 195.0 Ha 87,750 Ha 31.59 4.21Cargo Transportation Light Trucks 400 12,000 Ton/Km 4.8 M Ton/Km 1.44 0.19Threshing Portable Threshers 600 240 MT 144,000 MT 7.20 0.96Milling Rice Mills 30 1,250 MT 37,500 MT 2.25 0.30

Total Value 379.35 50.58

- -F m

C3449/J3476/D661/A-2

ANNEX 17Table 2

PHILIPPINES


Economic Evaluation

Direct Employment Effect of the Project

Employment No. of IncreasedSub-projects per Unit Units Employment

Tractors 1.0 1,775 1,775Power Tillers 0.1 7,800 780Light Trucks 2.0 400 800Irrigation Pumps - - -Other Farm Equipment - - -Coastal Fishing Boats 9.0 45 405Fishponds & Fishpens 1.2 1,210 1,452Poultry - - -PigsCattle Breeding!Fattening -

Rice Mills 4.0 30 120Farm Implements 20.0 30 600Woodworking 25.0 30 750Concrete Products 12.0 25 300Handicrafts & Others 33.0 110 3,300

Total 11,455 10,282

FOURTH RURAI CREDIT PROJECTRCONC(IIC RATE OF RETURN CALCULATION

(Peo mfiltio.)

een-I Y1 r 2 Year 3 Year 4 year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12INCREMENTAL BENEFITS

Tn.ct-t- (Rtet fPrduetio ) 218 469 669 669 669 669 669 669 669 669 451 200Tractore (S-gar Feodant-on) 330 330 330 330 330 330 330 330 330 S ITIller. 114 239 406 406 406 291 177 26 26 16Fartolle ftreeher 14 43 72 72 72 72 72 72 72 72 58 29Irrigation FPapa 13 38 63 63 63 51 25Light Truake 18 54 90 90 90 72 36FiahJng Bonte 19 63 109 109 109 109 109 109 109 109 90 46Fi.hpond. 70 179 324 459 548 641 641 641 641 641 44B 256Fi.lehp- 18 55 92 92 74 378.ckWd C-ttle Re-ring 'O 29 49 49 49 39 20Ftiger1er 14 55 107 131 131 131 131 131 131 131 105 52Foultry 40 127 221 233 233 233 233 233 233 233 186 93Cnttnge and Agro-Indnetrie_ 42 78 113 117 119 119 119 119 119 119 71 36

Tatal Inere.nntel Benefit, 920 1759 2645 2820 2893 2794 2562 2330 2330 2320 1409 712

INCREMENTAL COSTS

Tr-ntor- (Rice Prod-ctl on) 125 260 351 351 351 351 351 351 351 351 226 91Trac or, (Sager PredutiLon) 145 145 145 145 145 145 145 W. 5 145 145Tiller. 73 152 257 257 257 185 112 17 17 10Panlable Threher. 04 12 19 19 19 19 19 19 19 19 15 08IrrIgation F.aapF 11 33 55 55 55Light Track. 11 33 55 55 55FlahIng Bo-ta 12 37 65 65 65 65 65 65 65 oS 53 27Flehpe-d! 47 100 185 243 297 341 341 341 341 341 239 136Ft.hp. 11 33 55 55 44 22Bankyard Cattle Recring 07 22 36 36 36 29 14PFggaIle. 15 44 74 74 74 74 74 74 74 74 59 30PFultry 28 83 139 139 139 139 139 139 139 139 111 56Cntt.ge e-d ASrn-Iadaatrlea 35 58 83 81 82 82 82 82 82 80 48 23

Total Inr-ental Cant. 524 1012 1519 1575 1619 1540 1386 1233 1233 1224 751 371

ESTIIATEDINVESEMENT COSTS DUTIES 6

(AdJ.et.d far D0tte- and Te-) TAXES1. S0b-Len CLtegeele .

TrentOr. (Ric Frednenion) 107% 614 692 465Trantar. (Sgafr Frodacttan) 10X 713

Tiller 5/107. 157 193 261Portt.bl Threch.et 10 16 35 38Irrigatlan FueepF 10% 14 31 33Light Tr-cke 10% 18 39 41piehtig BSnt. 5% 25 65 75FIthp-nd. 282 313 466Fi hpe.. 15 33 37BSckgra..d Cattle Reari.g 12 28 31FIg;ert1e 51 115 129P-eltry 48 105 117Celtage *nd Agre-Ieda.ttle. 5% 42 173 261

S.b-Tnt.l 2007 1822 1954

2. SppFrtinhg Ine-t ..ntr

Tr-ietng - 04 06 06VahteIe* far Field St.ff 10% 13 -Stady - 01 03 02Kachinery Tint. PraJert - 24 02 02

S.b-tetel 44 11 10

rteal In.e-..-t C.t 2051 1i3 1960

396 747 1126 1245 1274 1254 1176 1097 1097 1096 658 341

tconnn.l ERte ef B.t.rn 212

IBRD 12585120° 124° FEBRUARY 1977

CLASSIFICATION OF PROVINCES PhilIPPINES1 boosNorte 37 Akan FOURTH RURAL CREDIT PROJECT

-20° 2 Abra 38 CCpiz C E3 Itocos Sur 39 Antique 8 ROADS4 Moontain 40 Iloilo

R5 La Union 41 Negros Occidenta l -h-. f--I-I- RAiLWAYS6 eensuet 42 Cebu7 Pangasinan 43 Negros Oriental8 Batanes 44 Bohol - ' AIRPORTS9 Cagavan 45 Siquijor : PROVINCIAL BOUNDARIES

10 Kalinga-Apayao 46 Northarn Samar .

11 isabeia 47 Samtar £1abvay, Cheas el - - INTERNATIONAL BOUNDARIES12 Ifugao 48 Eastern Samar San Vicente13 Nueva Vizoaw 49 Leyte Lao14 Quirino 50 Southern Leyte Lao . / p15 Nueva Ecija 51 Zamboanga del Norte t s'16 Tarlac 52 Zomboanga del Sur "-7 \17 Zambales 53 Basilan I Tog a rhe boundvo*e sown on this manp do not18 Parmpanga 54 Sulu 1nply endoenent or acceptace boy the

19 Bolotan 55 T~~~~~~~~~~~~~nonn~~~~ - >~~~~/~~ ( ~World Bazk and it aff*tateL19 Bulaan 55 Tawiuw,i { ty > 20 Bataan 56 Surigoo del Norte 3( ' logan21 0uezon 57 Camig.in - ' " nil22 Rizal 58 Agusan del Notte San Fernmn S )/23 Caoite 59 Mioamis Oriental Bol ' /24 Laguna 60 Misamis Occidental S3 14 O 100 15 200 250 30025 Sanasga 61 Lanao del Norte D 4 KILOMETERS 1 6026 Marinduque 62 Lanmo del Sur ; \________________0______________ 20_ _27 Mindoro Oriental 63 Bukidnon . 1& / ai o nt MILES28 Mindoro Occidenul B4 Agusan del S., 5}(Ci 7MaaVtg

29 Rombl-o 65 Sorigao del Sur i (\ W t30 Pabwan 66 Maogindnao .31 Camarines Norte 67 North Cotabtao32 Camarinet Sur 68 Davao D r i 233 Catandanes 69 D0ao Oriental '2 P H I IPP IaN E Mf A34 AlbaY 70 Owa. del Sur35 Sonsogon 71 Sultan Kudarat lganibn 336 Masbate 72 Southr Cotubato Na

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SOUTH CHIINA '21 UYA SEA

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Philippines: Appraisal of - Fourth Rural Credit Project

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