FILE COPY Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. P-1783-PH

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED LOAN

TO

IHE REPUBLIC OF THE PHILIPPINES

FOR

THE CHICO RIVER IRRIGATION PROJECT - STAGE I

March 11, 1976

Thbs document bas a restricted distrIbufton and may be used by recipients only in the performance oftheir official duties. Its contenits may not otherwise be disclosed without World Bank authorzation.

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CURRENCY EQUIVALENTS

US$1.00 = Pesos 7.50

Pesos 1,000 = US$133.00

Pesos 1 million = US$133,000

FISCAL YEAR

In the Philippines the Fiscal Year coversthe period July 1. to June 30.

FOR OFFICIAL USE ONLY

REPORT AND RECOMMENDATION OF THE PRESIDENTTO THE EXECUTIVE DIRECTORS ON A PROPOSED LOANTO THE REPUBLIC OF THE PHILIPPINES FOR THECHICCI RIVER IRRIGATION PROJECT - STAGE I

I submit the following report and recommendation on a proposedloan to the Republic of the Philippines for an equivalent of US$50 million.The loan would have a term of 25 years, including 6 years of grace, withinterest at 8.5 percent per annum.

PART I - THE ECONOMY 1/

2. The most recent Economic Report - "Current Economic Position andProspects of the Philippines" (No. 568-PH of November 7, 1974) was circu-lated to the Executive Directors on November 11, 1974. A basic economicmission visited the Philippines in April/May 1975 and is now finalizingits report: the discussion below includes the findings of the mission.Annex I of this report contains country economic data.

3. During the 1960s, the economy grew in real terms at the rate of5-6 percent per annun. However, the rate of growth was less than the levelthat might have been achieved if the considerable natural and human resourcesof the Philippines had been exploited more effectively. Moreover, the bene-fits of growth were not distributed widely and unemployment rose. Low levelsof taxation resulted Ln inadequate -public investment in necessary infrastruc-ture and social services. Relatively weak export performance, combined witha failure to reduce the import dependence of domestic industry, resultedin a steady deterioration in the balance of payments position.

4. During 1970-*72, the authorities adopted policies of monetary andfiscal restraint in order to lay a firm basis for future growth. Withassistance from the Consultative Group, they succeeded in improving substan-tially the maturity structure of the external public debt. Real GNP duringthat period increased at about 5 percent a year. In 1972, following severefloods, the President began a series of social and economic reforms in thecountry including an agrarian reform program, tax reforms, and an adminis-trative reorganizatiorn. These programs are beginning to show results.

5. In 1973 there was a sharp increase in the level of economic acti-vity in the Philippines. This upsurge was led by the international commodityboom, which resulted in higher export incomes in the Philippines, a strongrecovery in agricultural and industrial production for the domestic marketand an expansion in public and private investment. The growth in real GNPdoubled to 10 percent.

1/ This part, except for paragraph 8, which has been updated, are the sameas in the President's Reports on the Second Livestock Project (Report No.P-1776-PH) and the Third Education Project (Report No P-1777-PH) bothdated March 4, 1976.

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

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6. Like most countries, the Philippines was profoundly affected bythe tumultuous events in the world economy that began with the jump in theprices for food and petroleum in late 1973. With international trade theequivalent of almost half of its GNP, the Philippines proved quite vulner-able to the impact of world inflation, the increase in oil prices and theprolonged recession in the industrialized countries. This sequence ofevents has temporarily frustrated the Government's attempt to acceleratethe rate of development, and in 1974 GNP increased by only about 6 percentin real terms. While adverse effects of the recession were cushioned some-what in 1974 by a modest improvement in the external terms of trade, thePhilippines has been even more seriously affected in 1975 by the continuedrise in import prices and reduced demand for Philippine exports. The realgrowth of GNP in 1975 is estimated to have been at about the 6 percent rate ofthe previous year. Improvement in the growth performance in 1976 can beexpected only if recovery takes place in the economies of the Philippines'main trading partners.

7. Agricultural production has grown at an average rate of 3.2percent per year during the 1970s, a period which has been affected by un-usually adverse weather conditions. Rice production increased by 25 percentin 1973-74, but due to serious damage by typhoons, it grew by only 1 percentin 1974-75, and the Government had to import 200,000 tons in the first halfof 1975 to ensure adequate stocks. However, initial indications are thatthe outlook for rice production in 1975-76 is bright. The Government isgiving the highest priority to increasing agricultural production and hasinitiated a number of programs designed to expand the use of fertilizer,irrigation and supervised credit. It has also intensified efforts to expandsocial services needed in rural areas, including rural electrification,health and family planning services as well as small-scale road and irri-gation projects.

8. Although progress has been slower than initially planned, theGovernment has moved ahead with its agrarian reform for the nation's onemillion tenant farmers who grow rice and corn. By December 1, 1975, theGovernment had issued Certificates of Land Transfer in respect of 208,000of the 424,000 tenants on holdings of over 7 ha; thus, title to 366,000ha of the total of 825,000 ha farms occupied by such tenants has been trans-ferred. The Government has raised the cash portion of the compensation packageto landlords to reduce their resistance to land reform, but strong administra-tive efforts will be necessary to ensure continued progress in the implement-ation of the program.

9. Industry accounts for almost 30 percent of net domestic product,one-third of total fixed investment and 15 percent of total employment.Industrial production, which grew by 12 percent in 1973, was adverselyaffected in 1974 by the world-wide economic slowdown and grew by only 3.6percent in 1975. This decline is primarily a result of depressed demandfor Philippine exports on the part of the country's main trading partnersand the concomitant slowdown in the rate of economic growth in the Philip-pines. Nonetheless, the long-term prospects for industrial growth arefavorable because of the natural and human resource endowment of the Philip-pines and a very active private sector.

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10. The Government has made significant progress in increasing publicinvestment. The ratio of public investment to GNP is currently about 3 per-cent compared with 1.8 percent in FY72. The Government has also imple-mented a series of long needed tax reforms and improvements in tax adminis-tration. These reforms, aided by the increased economic activity, the boomin export incomes, and domestic inflation, resulted in a 36 percent increasein national government: tax revenues in FY73, and an estimated 47 percent inFY74. As a result, the ratio of national government tax revenues to GNPhas increased from an average of 9 percent in recent years to an estimated12.3 percent in FY74.

11. In the latter part of 1973, inflation emerged as a major problemin the Philippines and in 1974 consumer prices rose by almost 40 percent.The rise was caused by the large increase in liquidity that came with theexport boom in 1973-74, and by a number of cost-push factors, including thehigher rate of world inflation. 'To deal with this problem, the Governmentadopted contractionary monetary and fiscal policies, and attempted toreduce the impact of inflation on consumers by subsidizing such essentialgoods as wheat, imported rice, and cooking oil. As a consequence of theGovernment's measures, the annual rate of inflation decreased to less than20 percent at the end of 1974 and less than 10 percent in 1975.

12. The rapid inflation in 1974 exacerbated the decline in real wageswhich had begun in 1970. Overall, there was a decline of about 20 percentin real wages during 1974. In order to offset the deterioration of realwages in urban areas, the Government increased the salaries of Governmentemployees and directed private firms to grant emergency cost of living ad-justments to employees earning less than P 600 per month. Neverthelessreal urban wage incomes declined and reduced the demand for manufacturedproducts, which contributed to the poor performance of the manufacturingsector in 1974. The depression in the urban areas was partly offset by theimprovement in rural incomes that stemmed from continued high prices foragricultural commodities.

13. On the external side, the Philippine balance of payments bene-fitted considerably from the international commodity price boom during 1973.High prices for the cOtntry's chief exports, including coconut products,sugar, copper and wood products resulted in a 70 percent boost 'in exportearnings and a balance of payments 'surplus of about $670 million. Sincemid-1974 the external trade position has deteriorated, due to the sharpincreases in the prices of oil and other imports, less favorable pricesfor Philippine exports, and reduced'volume of some exports'resulting fromthe recession in the economies of the Philipines' main trading partners. Asa result, the overall balance of payments surplus fell to about $100 millionin 1974, and a deficit of about '$400' million was recorded in 1975. Inter-national reserves stood at about $1.1 billion at the end of 1975, the equiv-alent of three months imports.

14. The outlook for 1976 is for exports to increase by about 12 per-cent in real terms on the assumption that there will be some internationaleconomic recovery. Imports will need to grow by about 7 percent in real

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terms in order to maintain the growth of the economy. Due to a modest de-terioration of the terms of trade, the current account deficit may reach about$1.0 billion compared to $860'million in 1974. Medium and long term capitalinflows are expected to finance most of this deficit, producing an overallbalance of payments deficit of about $200 million. Such a deficit can bemanaged without serious pressure on reserves through utilization of IMFoil facility and by short-term foreign borrowing by the Central Bank.

15. The overall level of debt of the Philippines is expected to remainwithin reasonable limits, as the ratio of debt service payments to exportsand non-factor services would average about 16-17 percent during the rest ofthis decade. At present, the Bank/IDA share in total debt outstanding isabout 10 percent and its share in debt-service is about 4 percent. Theseshares are expected to increase somewhat in the years ahead.

16. Foreign assistance is expected to continue to be of major import-ance in helping to finance the larger investment expenditures which will benecessary for the country's development. In order to ensure that disbursementof external assistance reaches levels'commensurate with the level of develop-ment expenditures which will be required during the latter part of the decade,total commitments will need to be maintained in real terms at least at thelevel of about $500 million which was achieved in 1974. The ConsultativeGroup for the Philippines at its meeting in Paris on October 1, 1975, agreedthat it would be reasonable for the Philippine Government to seek aid commit-ments of about $600 million during 1976.

Growth Prospects

17. Despite the slowdown in the growth of the economy which is primarilya result of worldwide economic conditions, the Government remains committedto regaining the growth momentum which began in 1973 to provide for a con-tinued increase in incomes and employment. High priority must be accordedto expanding employment opportunities - in the short-term as well as thelong-term - because unemployment and underemployment are still high, and thelabor force continues to grow at 3 percent a year.

18. Priority must also be given to expanding food production for thedomestic market, to expanding industrial export production and to acceleratingdevelopment of local energy resources. The difficulties experienced duringthe last two years in importing sufficient quantities of food at reasonableprices, especially cereals, have increased the Government's resolve toachieve self-sufficiency in rice and corn as soon as possible. The Govern-ment rightly recognizes that the increased cost of petroleum and otherimports cannot'be financed indefinitely by borrowing abroad, and it is active-ly encouraging both local and foreign investors to expand the productivecapacity of export industries and to undertake major new import-replacinginvestments. Because it will take time for these investments to have animpact on the balance of payments, the Government is seeking increasedsupport from the international financial community to help carry out itsdevelopment program and to ease the adjustment to higher petroleum and otherimport prices. Because of the 'substantial easing of the external debt burden

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which has taken place in the last several years, the Philippines now has thecapacity to borrow externally larger amounts of capital in support of itsdevelopment program.

19. Given the likely availability of resources and the expected growthin various sectors, it -s reasonable for the Government to plan for a longerterm growth in GNP of about 7 percent a year in real terms. To achievethis objective, increased investments will be needed in a wide range of in-dustries. Public investments also need to be increased. A new public in-frastructure program is being prepared, and the Government is putting emphasison developing nuclear and indigenous power sources and on irrigation, feederroads and other projects to support increased food production. The Governmenthas made considerable progress in recent years in building up the capacity ofpublic sector agenzies to prepare and execute projects. However, there willbe a need for continued efforts to strengthen this aspect of administration.The ratio of publi, investment to GNP will need to rise from the present levelof 3 percent to about 5 percent by 1980. To support the level of investment,the Government wilL need to intensify its tax efforts so that the ratio ofnational taxes to GNP rises from its present level of 11-12 percent to 14percent by 1980.

20. The Government's ambitious development program will continue torequire foreign resources in addition to the capital which would becomeavailable for the I-inancing of the foreign exchange component of develop-ment projects. Some financing of local costs is justified, especially forprojects of economijc and social importance which need only limited amountsof foreign exchange.

PART II - BANK GROUP OPERATIONS IN THE PHILIPPINES

21. By February 29, 1976, the Philippines had received 32 Bank loans andthree IDA credits totalling $791.2 million, net of cancellations. About 36percent of the Bank/IDA lending, $293 million, has been for infrastructureprojects in power, transportation, and water supply and $38 million has beenfor population and education. Of the remainder about $216 million has beenfor agriculture and about $250 million for industry. There has been a markedimprovement in the way Bank financed projects in the Philippines have beenexecuted in the last three years, compared with experience in the 1960s,when shortages of peso counterpart funds combined with poor administrationto cause serious problems. All these projects are now going reasonably well.Annex II contains a summary statement of Bank loans, IDA credits and IFCinvestments as of January 31, 1976 and notes on the execution of on-goingprojects.

22. The Bank's lending program has been designed to continue to supportthe Philippine development effort with its particular emphasis on agricultureand infrastructure. Shortages of domestic revenues led to low investment forthese purposes in the past. The last three years have seen major changeswhich have helped to overcome these constraints and both the ambitious

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Philippine development program and the Bank's lending program have beendesigned to make good past neglect and to meet future needs. Commitments inFY74 amounted to $165.1 million, and in FY75 $208 million compared to anaverage of about $30 million a year in the preceding five years.

23. Two loans, one of $42 million for the Magat River MultipurposeProject and one of $75 million for the Industrial Investment Credit Project,have already been approved by the Executive Directors in FY76. Two loans,($20.5 million for a Second Livestock Project and $25 million for a ThirdEducation Project) are scheduled for consideration by the Executive Directorson March 16. In addition to the proposed project, loans for fisheries, grainstorage and urban development may be ready for Board consideration in FY76.

24. IFC has made commitments in the Philippines totalling $76.2 millionfor investments in 13 companies in the fields of development banking, power,telecommunications, ceramic tiles, paper, petroleum products, nickel miningand refining, chemicals and synthetic fibers. Of these investments, as ofJanuary 31, 1976, $18.9 million had been sold, $0.4 million cancelled and $3.4million repaid, leaving a net portfolio of $53.5 million. On the same dateall commitments were fully disbursed. Preliminary proposals have been receivedfor an aluminum smelter and other projects in the pulp and paper, dinnerware,metal alloys and shipbuilding fields.

PART III - THE AGRICULTURAL SECTOR 1/

25. Agriculture is the predominant sector in the Philippine economyaccounting for approximately one-fourth of the gross national product, overone-half of total employment and about three quarters of export earnings.Over 70 percent of the total land under cultivation is used for production ofcereals, of which rice and corn are the most important. The remaining land isprimarily taken up by the major export crops: sugar, coconuts, abaca, pine-apples and tobacco.

26. The performance of the agricultural sector will be crucial indetermining whether the Philippines can increase income both rapidly andequitably. At present, the domestic market for industrial products is limitedby relatively low rural incomes. Although in recent years there has been asubstantial change in the internal terms of trade in favor of agriculture, theproblems of poverty and income distribution continue to be particularly acutein the rural areas; of the 15 million people in the bottom 40 percent of theincome scale, 12 million live in such areas. The Government is aware ofthese problems and is dealing with them by undertaking agrarian reform,by increasing investment and institutional support in the agricultural sectorto raise the productivity of small farmers, and by encouraging agriculturaldiversification.

1/ A detailed Report entitled "Agricultural Sector Survey - Philippines"(No. 39a-PH of May 2, 1973) was circulated to the Executive Directorson May 21, 1973 (R73-111).

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27. A major Government objective is to increase rice and corn produc-tion as a means of increasing incomes of small farmers and attaining nationalself-sufficiency in foodgrains, thereby strengthening the balance of payments.The ability to assure self-sufficiency in rice will depend to some extenton the bringing of additional land under cultivation, but largely on improvingyields through expansion of the area under irrigation, increased croppingintensity, the increased use of fertilizers and agro-chemicals and the provi-sion of adequate credit and other supporting services. High yielding varieties,which were helpful in increasing production since the late 1960s, require amuch higher degree of water control than is possible under rainfed conditionsor with the typicaL unimproved irrigation systems in the Philippines. Atpresent, only about 900,000 ha, or less than 30 percent of all land underrice, is irrigated with only about a fourth of this area having an assuredwater supply during the dry season. A program to upgrade and expand irrigationto cover an additional 50,000 ha of rice land a year for the remainder of thedecade would be needed to meet domestic rice demand. Investment in irrigationis therefore of high priority.

28. Over half of expected Bank lending for agriculture in the Philip-pines in the next five years is likely to be for irrigation. The proposedproject would be the fifth Bank-assisted project designed to provide improvedirrigation to increase rice production on the island of Luzon. The first fourprojects, three in Central Luzon and one in Cagayan Valley in Northern Luzon,1/ set the example for the type of irrigation rehabilitation, new constructionand operation needed for large-scale rice production in the Philippines.These projects are providing improved irrigation facilities, better roadsystems needed for efficient operation and maintenance and marketing of farmproducts, stronger supporting services to assist farmers in adopting the newtechniques needed to increase production, and technical assistance to help theNational Irrigation Administration (NIA) to expand and improve its irrigationprogram. These projects, together with the project now proposed, will bringabout substantial Lncreases in production on about 210,000 ha and will benefitabout 85,000 farmers, most of whom are smallholders. Implementation of theexisting projects lhas been satisfactory.

29. The proposed project would follow the same approach to improvingand expanding national irrigation systems in the Cagayan Valley. The Valleyexports rice to other regions of the Philippines and has large land and waterresources which can be developed to increase rice production. It is also oneof the poorest reglons in the country as per capita income is only about $80compared to the naltional average of $240. The National Irrigation SystemsImprovement Study, recently financed under the Tarlac Irrigation SystemsImprovement Projeci: (Loan 1080-PH), will help identify and prepare similarprojects in other regions for future Bank lending.

1/ Upper Pampanga River Irrigation Project, Aurora-Penaranda IrrigationProject, Tarlac Irrigation Systems Improvement Project and Magat RiverMultipurpose Project, financed by Loan 637-PH, Loan 984-PH/Credit 472-PH,Loan 1080 and Loan 1154-PH respectively.

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PART IV - THE PROJECT

Background

30. The proposed Chico River Irrigation Project is a logical develop-ment in the potentially rich, but underdeveloped Cagayan Valley in NorthernLuzon. It is adjacent to and an extension of lands to be irrigated under theMagat Project (Loan 1154-PH). The whole project is expected to be implementedin two stages over a nine year period. Stage I, which is now proposed, wouldirrigate 19,700 ha by gravity diversion from the Chico river, providing anassured water supply during the wet season and a dry season supply adequate toirrigate 17,000 ha. The diversion dam, intake structures and main canal wouldbe built with adequate capacity to serve both first and second stage irrigationdevelopment. Stage II would expand the irrigated area to 49,000 ha and wouldbe dependent on flow regulation provided by a multipurpose storage dam plannedfor construction on the Chico river about 20 km upstream from the diversiondam.

31. The Chico river irrigation project feasibility report was preparedby NIA. The Department of Public Highways (DPH) prepared the feasibilityreport for the provincial roads program, which is also included in Stage I. ABank mission appraised the Stage I project in October 1975 and negotiationswere held in Washington in February 1976. The leader of the Governmentnegotiating team was Ambassador Eduardo Z. Romualdez. The Appraisal Report(No. 1009a-PH) on the proposed project is being circulated separately to theExecutive Directors. Annex III of this report contains a loan and projectsummary.

The Project Area

32. The project is located in Cagayan, Isabela and Kalinga - Apayaoprovinces in the Cagayan Valley of Northern Luzon. Most of the projectarea is devoted to rainfed cultivation of rice during the wet season. Con-sequently rice yields are low, and adoption of high-yielding varieties hasbeen slow. On those lands which are now irrigated, the systems are notcompletely developed; water-distribution is poor and dry season water supplyis limited. There are a number of small towns with populations of lessthan 10,000 people within the area. Several of the larger towns providebanking, storage and processing facilities and supplies of inputs to theagriucltural area. The Cagayan Valley is connected by a national highway toCentral Luzon and Manila in the south and to the port of Aparri on the BabuyanChannel to the north, so that there will be adequate means of transportingrice produced under the project to major consumption areas, either by truck orby ship.

Agrarian Reform in the Project Area

33. The Department of Agrarian Reform has identified all tenantsand farm holdings in the project area. Some 8,000 families, or a totalof 44,000 people live in the project area. Of these, there are about

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4,100 tenant farmers on 8,470 ha and 3,950 owner operators cultivating11,230 ha. The traiisfer of landlord holdings larger than 7 ha will benefitsome 2,800 tenants. When the land transfer is complete, some 6,800 owneroperators, or 85 percent of the farmers in the project area, will cultivate17,100 ha or 87 percent of the land. Moreover, the remaining 1,300 tenantfarmers on holdings under 7 ha will no longer be sharecroppers but will beprotected by written lease agreements providing for equitable payments offixed rents.

Description of the Project

34. The proposed project would: (a) upgrade existing irrigationsystems and expand irrigation service to currently rainfed rice lands toserve a total of 19,700 ha; and (b) improve 65 km of provincial roads inthe area adjacent to the Magat Multipurpose project. The main componentsof the project are:

(a) Irrigation Development

(i) construction of a diversion dam and intake workson the Chico river;

(ii) construction of a catch dam and intake works onTalaca creek;

(iii) rehabilitation of the existing 1,400 ha NIA distributionsystem and construction of a drainage system;

(iv) construction of an irrigation and drainage systemfor small local communal systems totalling 3,200 haand for small pump irrigation systems totallinga further 3,200 ha;

(v) extension of an irrigation and drainage system to11,900 ha of presently rainfed rice lands; and

(vi) procurement of vehicles and equipment

(b) Provincial Road Program

(i) improvement of the Roxas-Gamu road (35.2 km);

(ii) improviement of the Cabatuan-Cauayan road(11.0 1cm); and

(iii) improvement of the San Mateo-Alicia road (18.9 km).

The project would also provide for preparation by NIA of a feasibility studyof Stage IT irrigation and technical assistance to help NIA undertake anerosion control study of the Magat and Pampanga river catchments, and to

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establish a system to monitor production inputs and the flow of projectbenefits for all Bank-assisted irrigation projects.

Project Cost and Financing

35. The project is estimated to cost a total of $84 million, of which$33 million or 40 percent would be in foreign exchange. The costestimates include provision for physical contingencies of 20 percent for theirrigation and road works and 10 percent for the erosion control study and themonitoring system. These also include price contingencies, amounting to 26percent of total project cost, which take into account the projected rate ofinternational and domestic inflation. The Bank loan of $50 million wouldfinance 60 percent of the total project cost; that is the foreign exchangecost plus US$17 million of local cost requirements. The need for some exter-nal financing of local costs was discussed in paragraph 20 above. The Govern-ment would finance the balance of $34 million from budgetary resources. Toensure a timely and continuous flow of funds, the Government would, as acondition of effectiveness of the Loan, cause NIA to set up a special fundfor implementation of the project (Sections 3.02 and 5.01(a) of the LoanAgreement). The Government would deposit money in the fund and replenish itat monthly intervals to a level equivalent to the estimated total amount ofpayments for goods and services required for the project during each subse-quent two month period less the estimated payments to be made by the Bankdirectly to suppliers, contractors and consultants.

Project Execution

36. All components of the project, except the provincial road pro-gram, would be implemented by NIA. The road program would be implementedby DPH. NIA was established in 1964 to develop, operate and maintain allnational irrigation systems in the Philippines. It is a well managed insti-tution which is successfully executing the other Bank-assisted irrigationprojects. However, NIA is being reorganized to meet the requirements of theGovernment's accelerated irrigation development program. One of the firstresults of the reorganization has been the creation of a Special ProjectsOrganization Office headed by an Assistant Administrator which would managemajor externally assisted projects, This office would be responsible forcarrying out the proposed project. The post of Assistant Administrator in thenewly created Special Projects Organization is presently being filled on atemporary basis. As a condition of effectiveness of the proposed loan, NIAwould designate an Assistant Administrator to serve on a full-time basis.NIA would consult with the Bank before making any appointment to this position(Sections 3.04 and 5.01 (b) of the Loan Agreement).

37. As the proposed project is adjacent to the Bank-financed Magatproject, a division of the Magat Project Office (which has a Project Managerwho reports directly to the Special Projects Organization) would be respons-ible for its execution. The Assistant Project Manager for the Chico Projectwould report to the Magat Project Manager and have responsibility for theirrigation facilities to be constructed under the proposed project. NIAwould provide additional support staff and facilities to enable him to carryout his responsibilities.

38. For operation and maintenance purposes, the Chico project wouldcomprise one district under the Magat project with support provided bythe three Magat divisions dealing with administration, equipment andagricultural development. To coordinate the provision of agricuturalservices to farmers, the Government is in the process of setting up anAgricultural Development Coordinating Council (ADCC) under the MagatProject, which would also have responsibility for the Chico project.(Section 3.05 of the Loan Agreement).

39. The Specinl Projects Organization of NIA would be responsiblefor the Erosion Control Study and for Input-Output Monitoring (a study toassess the adequacy of the supply of agricultural inputs and provide for awarning system to identify bottlenecks as well as to determine the magnitudeand distribution of benefits in Bank-assisted irrigation projects); NIAwould employ consultants, satisfactory to the Bank under terms of referenceacceptable to the Bank, to assist in both these activities (Section 3.06of the Loan Agreement). The Project Development Division of NIA would beresponsible for preparing the feasibility study for Stage II irrigation.The Department of Public Highways (Region II) would be responsible for theconstruction of the three provincial roads. After construction, maintenanceof the roads would become the responsibility of the Provincial Engineer,Isabela. Both DPH Region II and Isabela Province have adequate staff andequipment to carry out this work.

Cost and Benefit Recovery

40. NIA is autaorized to collect from the users of irrigation systems,fees to finance operation and maintenance of the systems and to recoverconstruction costs. Irrigation fees on the national irrigation systems haverecently been raised to the equivalent of two cavans (100 kilograms) of paddyper ha in the wet season and three cavans (150 kilograms) in the dry season tobe applied uniformly to all national irrigation systems. As an exception tothe uniform rate policy, the Government has agreed to raise the rates onthe Bank-assisted Centtral Luzon projects and the Magat Project to a levelequivalent to about 3.5 cavans (175 kilograms) of paddy per ha in the wetseason and 4.4 cavans (220 kilograms) in the dry season. These rates wouldbe reached gradually over a period of five years from completion of construc-tion. As the proposed project would be operated as a division of the MagatProject and cropping intensities and farm incomes at full development would besimilar, the level of irrigation fees agreed for the Magat Project wouldapply. These rates would be sufficient to cover operation and maintenancecosts and to recover (without interest) the total investment cost over areasonable period (Section 4.03 (b) (iii) of the Loan Agreement). Using a dis-count rate of 10 percent and a period of 50 years, the proposed level ofcharges would result in a cost recovery index (ratio of incremental paymentsby project beneficiaries to the incremental costs of construction, operationand maintenance) of 29 percent and a benefit recovery (ratio of incremental pay-ments by a typical farm family to incremental income) of 11 percent.

41. The collection rate of water charges has risen from 50 percentof the total amount collectible in 1969 to 66 percent in 1974; further

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improvement is required. NIA is aware of this need and is studyingcollection rates for all national systems, which vary considerably indifferent systems. The results of this study are expected early in 1977and would provide information on the level of service received by farmersand the reasons for differences in collection rates. On the basis of thisstudy and in consultation with the Bank staff, the Government expects tomake judgments about the appropriateness of the level of charges, the reasonsfor the relatively low rate of collections and the best method for designinga cost recovery system more consistent with overall fiscal policies. Inthe future, the government would consult with the Bank annnually about theadequacy of water charges and collection rates (Section 4.03 (b) (ii) of theLoan Agreement).

Procurement

42. The civil works contract for the Chico diversion dam and maindiversion canal ($19.1 million, or about 50 percent of the total irri-gation civil works cost) would be awarded on the basis of internationalcompetitive bidding in accordance with Bank Group Guidelines. Other civilworks in the project service area ($19.8 million) would be scattered overfive separate areas and include rehabilitation of a 1,400 ha canal system,construction of new systems for 11,900 ha of rainfed rice lands and a largenumber of individual communal and pump irrigation systems totalling some 6,400ha. These have to be planned and executed to avoid as far as possible boththe growing season and bad weather. This work would not be suitable forinternational competitive bidding as it consists of relatively small systemswhich are spread over a wide geographical area and would be phased over theproject implementation period. In the past, NIA has experienced considerabledifficulty in attracting local bids for such works. Several steps have beentaken under Bank-assisted projects to strengthen local contractors, includingfinancing of reconditioned equipment and providing higher mobilization allow-ances. Even with these steps, it is doubtful that all civil works could bedone by local contractors and some of them would therefore have to be carriedout by force account. NIA is presently carrying out a number of its otherprojects by force account, and it has built up considerable constructioncapability. However in the light of NIA's large work program in the yearsahead, it would not be desirable to rely too heavily on force account underthe proposed Chico project. Therefore NIA would investigate ways of expandingthe execution of civil works by contract, so that the amount of work done byforce account would not exceed 40 percent of the total cost of the civil worksnot subject to international competitive bidding (para B(b) of Schedule 4 tothe Loan Agreement). The balance of this work would be carried out on thebasis of competitive bidding procedures advertised locally in accordance withlocal procedures, which are acceptable.

43. Equipment and vehicles for force account construction, operationand maintenance, the erosion control study and the input-output monitoringprogram (about $3.3 million) would be procured after international biddingin accordance with Bank Group Guidelines. For purposes of bid comparison,a preference of 15 percent of the c.i.f. price of imported goods, or thecustoms duty, whichever is lower, would be extended to local manufacturers.

- 13 -

Off-the-shelf items costing less than $10,000 each would be procured throughlocal shopping because any advantage of international competitive biddingwould be clearly outweighed by the administrative costs involved. The totalcost of such items would not exceed $300,000. There is adequate local com-petition for such items and foreign firms are well represented in the Philip-pines and would be allowed to participate. The three roads to be improvedunder the provincial roads component of the project would be advertised by DPHin one package ($4.8 million), under international competitive bidding proce-dures following thE Bank's Guidelines, which would provide for the option to bidon one or all of the three roads.

Disbursements

44. The Bank loan would be disbursed for 100 percent of the c.i.f.cost of directly imported equipment vehicles and materials, 100 percent ofthe ex-factory cost of such items manufactured locally and 65 percent of thecost of such items imported but procured locally. For costs of consultantsand technical assistance, the loan would be disbursed for 100 percent ofthe foreign exchange cost or 60 percent of total cost. Disbursements forboth irrigation and provincial roads civil works would be for 60 percent ofcertified monthly progress payments or expenditures and for 100 percent of theforeign exchange cost of the contractors' mobilization expenditures.

Benefits and Justification

45. The proposed Stage I project would contribute to the PhilippineGovernment's objective of attaining self-sufficiency in rice, improvingthe productivity and incomes of small farmers and promoting regional balancein development. The project would provide better water control, improveddrainage and the necessary agricultural supporting services and thus increaserice yields and production on the 19,700 ha. It would increase dry seasonirrigation from 5,000 ha at present to 17,000 ha at full project developmentand in so doing wouLd provide the equivalent of an additional 4,700 full timejobs. Total paddy production in the project area would increase from thepresent level of 50,000 tons to 147,000 tons per annum. The increase wouldprovide enough rice to feed 600,000 persons per year and the net foreignexchange savings would be $20 million a year at projected world marketprices. The projecl:'s irrigation component would benefit directly some 8,000farm families and 2,,000 landless families, or a total of 55,000 people. Thegreat majority of these people currently have very low incomes. At fullproject development in 1986, per capita farm income in the project area wouldincrease from $55-$260 at present to $290-$535 compared to projected nationalaverage per capita GNP in that year of $465.

46. The road component (costing $9.1 million) would improve access linksbetween the irrigation service areas of the Magat and the proposed Chico pro-jects and existing n!ational highways and, thereby, reduce the costs of trans-porting farm inputs and production. The erosion control study would formulatecontrol measures and land use patterns to correct existing damage and preventfurther damage to thbe Pampanga and Magat catchments. The monitoring programwould assess the adequacy of the supply of agricultural inputs and provide for

- 14 -

a warning system to identify bottlenecks to their timely provision tofarmers; it would also provide information on the magnitude and distributionof benefits in Bank-assisted irrigation project ateas. This information wouldbe useful in formulating future policies.

47. In the economic analysis, the full costs of the diversion weirand the main canal, intended to serve both Stages I and II, are treatedas part of irrigation development in Stage I. Assuming the project wouldhave 50 years life, the full agricultural benefits would be attained in 1986,and applying farm gate prices for rice and fertilizer based on the Bank'scommodity forecasts for 1985, a shadow exchange rate of US$1 = P8.30, and aseasonally variable shadow wage rate for unskilled farm labor, the economicrate of return of the irrigation component (costing $74.9 million) of theStage I project would be 15 percent. Sensitivity analyses indicate that evenunder a number of adverse assumptions, the rate of return would not faIl below11 percent. If part of the costs of the diversion weir and main canal arecharged to Stage II of the Chico project, the economic rate of return on theStage I project would be 21 percent.

48. For the road component, assuming a 15-year project life, the econo-mic rate of return would be 20 percent for the Roxas-Gamu road, 18 percentfor the Cabatuan - Cauayan road and 15 percent for the San Mateo-Alicia road.The overall economic rate of return for the road component would be 17 percent.

PART V - LEGAL INSTRUMENT AND AUTHORITY

49. The draft Loan Agreement between the Republic of the Philippinesand the Bank, the Report of the Committee provided for in Article III, Section4 (iii) of the Articles of Agreement of the Bank and the text of the Resolu-tion approving the proposed loan are being distributed separately to theExecutive Directors. The setting up of the Special Fund referred to inparagraph 35 and the designation of the Assistant Administrator referred to inparagraph 36 would be conditions of effectiveness of the Loan. The draftAgreement conforms to the normal pattern for loans for irrigation projects.

50. I am satisfied that the proposed loan would comply with theArticles of Agreement of the Bank.

- 15 -

PART VI - RECOMMENDATION

51. I recommend that the Executive Directors approve the proposedloan.

Robert S. McNamaraPresident

by: J. Burke Knapp

Attachments

March 11, 1976

Armex IPag 1 of 3 pages

UITDATA - PHlUPPIN3

300,000 hey 39. (d-I )Ni otl arable lad

SO:I^L lUSllll

ePhlippineK

R PER CAUTA USI (AIIAS BLaS & 160 / 220 L 220 /b 370 l 310 /b

DU(CRAPUCCMRtA reto (per housum) * -5 4! 43 j 38 4.d 28

aude dath rate pr hwan) .. 12 , 1 0

13 7d 8Infant eastlity rat (per tbcumad lw births) .. 80 80-90 1U5. 7Life eeeotan at birth (yeas) 51 /f 58 59 55 65

Oros ro&rodauaQ rdohe 3.3 3.2 2.6 dR 2.5Plpotlon ro*bh rzt f 3.0 3.0 3.1 2.5 Zr 2.2 ZPepaatiou powtb rate - 3rbe .0 4 h 4.5 6.0Age structure (percent)

0-14 16 4 45 4215-61 51 5 52 5465 nd mre 3 3 3 4 3

Age dependency ratio 1.7 °.9 0.9 0.8 0.8 E-.,,wic d.wndeney r-ti. /1, 1.7 1.5 1.1 1.1 1.4Urbsn pophuation a persent of towal 30 ' 32 25A 39 A 411 4 aFamdil Planings 3Ik of acorpta. orml*tiw (thme.) *. .09 490 4N84.

No. of users (% of _rried U) 8 10 8.2

To; rMbor furr (timo-d.) 9,100 12,300 16,500 14,500 / 10,500Parrentag eloyed in griattre 61 51 81 67 48Perntage urployed 7 7 b .. 4 5k

Proent of nations' income romcived by hijbest 5% 29 /eA 25 ot 17 /t u 32 t.v 15 /o tPbrcent of national income roseived by biot 20% 56 7 54 7 46 Z 60 /j.j 37 7Peronet of national income rooived by last 20( 5 4 , 7 3 /etV 10 otPermant of national incons recived by lonmt 14 13 7 12 17 j 10 =et' v 24 1

MiSTI OF LAND 0bREI owoed b7- top 10% of -os * w. .. 53 28% o d by mrlloat 10% of o ra .. .. 0.9 2

AIUIH AND NINRITXUSi'o-i.ation peir pi'yirai .. 9,100 La 7,970 2,220 2,210 LaPplnation per rsiung pr .. 5,390 j 6,650 1,880 & 1,760 4LPopulation per hopital bed 1,180 i 850 ac 850 190 1,920

Per oapita clari sup ay S -r requirmntn Z 83 85 105 110 103 bPer cpi$t protein rupply, tot. (grys per daVT/6 84 L5 52 78 65 Zb

Of which, Waal and pulas 19 ad 22 ?ab 17 A 22 e 19 Death rate 1-4 years 8 9 77j. 15

epri ty cbool enro2lamot reti 91 112 b 80 111 & 1011Adjuatd s econdary school noilnt ratio 26 4 5 ab 13 s 28 4 1Y rm of s*booling ProVided, fl3t *nd *rowd level 10 10 12 13 12Vootin l nsrolnt *a % of aoa. sabl moll_ut 11 10 aah ai 12 / 1 1SAdmlt literacy rate % 72 7C0 55 91 7il

-rvea lNo. of purs par room (uran) .. . 1.9 2.7Porosot of occupied ita ibnut piped twr 80 66 an .. 64 E 80 /Acesa to electricity (as S of total poPltiln) 17 s 23 / 17 41 5SP sect orf 1ural populatis, oneoated to oatricity . 6 13 18 30

roiyers per 1000 populaton 22 46 083 / 17 g 128 /oPuasseger care per 1000 popalatiz 3 8 71 7 J0 . 2Electric power cme tion (bib p.c.) 101 255 169 i 3°. t 392Newptint onaPCtion p.c. kg Pei year 1.3 a 1 1. 1.S 2.2 3.7 7W

Notess Frlesa refer either to the Latest peiods or to a*osont of e n t tO WiFthe latest yar. Latent piod refer in priXnple to distribution by *p ad al of ptial popolatiae.the years 1956-60 or 1966-70 the latest years in pain- & PotAiin staEdrd. (repui wts) for oll eoatra" an Utab-ciple to 1960 nd 1970. liahd by mu _oonaio _eearob Sprevie Ptohlde far a edaheA The Per Capita GIP eetisete is al market prices for alLance of 60 vrse of toal protin per dqe, 2d SO SP of

years other the, 1960,zaLculated by the &ame 0 ramon anidal aO plserotbat, of b 1D0 rm dwd be mimi

technique a the 1972 World bSnk Atlas. protein. T_ee etndards am a ht IMW tim tims of 75Li Average nuber of daughters per rs,sn of reproductive prm of total protcin end 23 Pe of mniml protein as an

age. average for the vwold, proposed by PhD in the third Thild Sloada Population growth rates are for he decades ending in ubrvey.1960 and i97. 87...m *t.inea ha.e maggeted that orude death rate. of idsRatio of population under 15 nd 65 and over to popula- ae 1 througb V o be gad as a firet qp i _s ida oftion of ages 15-64 for age dependency ratio end t3 labor sLep-trition.force of ages 15-o4 for economic dependency ratio. * Perdetg euu d Of Goereepndifg papulation Of ash"I age

5 FAO reference stondarda represasn physiological re- defined for ech oomtry.quiresenta for normal activity aid health, taking

S Co"puted by applying to the l970 figure the growth rate of GNP/capita in real terms from 1960 to 1970; b 1972;h 1965-70 UN estimate; d DerLved from seple aurvey estimates (210,000 pereons) excluding 17 Eastern provincea0ei 1968; If 1916-49; & 1965-67; /k 1960-72; /i 1956-60; a For definition of urban see Us Dempgrgohic

Ye-rtook 1971 p. 156; /k O,er 10,000 population; & Adminiatrative centers of provinces ad districts (OVil"etnd "latan centers); Lo Sega city end municipalities of 5,000 or more inhabitantas; L Estimte; Lo 1971;

/P 1964-June 1971; La 86 percest being IUDm; Lr 15 years and over; /a 1961; t Householda; L Urban oal,;/ Diaposable inco-M; a Per_ dl in government ervicees only; L Including adistant nurses nd mideire;7r Nusber on the ger he country; Imports only; a 1962; /Sb 19691 Laa Including

rural hospitala; /ad 1960-6?; Lm 1964-66; l 1966-67; s Including overage students; La 1967;i Public education only; /k1 .Ita on vocational education refer to public schools and include technicaleducation at

post-secondary level; k 11) years and over; I Definition not available; Ls Water piped inside or outeide;Water piped inside; L Per:entage of dw llinge.

a 2orea has been aelected on th, bais of its similar population, location and incose level and like the Philippines,it is expected to grow rapidl'1 in the coming years.

87 June 5, 1975

ANIlX I

Page 2 of 3 pages

ECONOMIC INDICATORS -/

GROSS NATIONAL PRODUCT IN 1974 ANNUAL RATE OF GROWTH (,. constant prices)

US$ Mln. 5C 1960-65 1965-70 1971 1972 1973 1974

GNP at Market Prices 14,550 100.0 5.5 5.7 6.5 4-3 10.0 5.8Gross Domestic Investment 3,630 24.9 12.6 1.6 539 9.14 2)4Gross National Saving 3,1420 235 15.0 3.6 13.2 -. 49.1 -1.Current Account Balance -210 -1.5Exports of Goods, NIS 3,357 23.1 11.0 14.5 5.0 1.5 18.7 -24:1Imports of Goods, NFS 3,782 27.2 7.3 7.2 5.4 2.7 13.1 20.4

OUTPUT, LABOR FORCE AN1PRODUCTIVITY IN 197 4±

Value Added Labor Forcet/ V. A. Per WorkerUS$ Mln. Mln. %U

Agriculture 4,187 36.0 7.6 53.9 551 67.0Industry 3,850 33.1 2 17.0 1,604 i94.9Services 3:581 30.8 310 27.0 942 114.5 -Unallocated . . 0.3 2.1

Total/Average -2-3-

OOVERNMDIT FINANCEGeneral Government Central Governoent

( Sln. % of GDP pescs Mln.) Of GDP197 IY7 196 -7 ~ <LFP17-73

Current Receipts .. .. .. 10,370 12.2 9.0Current Expenditure .. .. . 93 8.CCurrent Surplus '.22.9 1.oCapital Expenditures 3.1 1.4External Assistance (net) .. ** 186 0.2 0.4

MONEY. CREDIT and PRICES L9a 1;9 1970 1971 1972 1973 1974{Hillion psw outstanding end periodT

Money and Quasi Money 5,136 8,959 10,140 11,720 13,243 16,837 19,766Bank credit to Public Sector 980 3,565 3,479 3,907 4,817 6,820 7,627Bank Credit to Private Sector 8,223 13,139 15,396 19 ,010 21,531 26,906 34,320

(Percentages or Index Numbers)

Money and Quasi Money as % of GDP 21.1 27.0 25.0 25. 2 2 15 4 IGeneral Price Index (1963 - 100) 100.0 111.4 131.7 15Y.3 17,.3 21u. 31Y.

Annual percentage changes insOeneral Price Index 2.2 1.3 23.6 15.7 13.0 24,6 54.5Bank credit to Public Sector .. 27.9 -2.4 12.3 22.3 41.6 11.8Bank credit to Private Sector .. 9.0 17.2 17.0 27.0 25.0 27.6

NOTE: All conversions to dollars in this table are at the average exchange rate prevailing during the periodcovered.

Y All current factor cost.

2/ Total labor fo-ce; un'm'7o7ed arc allocated to sector of th^:ir no-mal occupation. "Unallocated" consists mainly

of unemployed workers seeking their first Job.

3/ Covers credits from all important fiancial institutions.

.. not available

not applicable

ANN,4X I

Page 3 of 3 Pags

TA PATWMo AM CAPr?L 711

ML&XE OF PAYNTS wmEcAnISE KPOS lf Vf 1972-7 )

'M71 1972 1973 1974 U b

(HilUon US$) sugar Products 426 22Exports of Goods, NFS 1,432 2,443 3,357 Forest Products 337 17)?twports of Goods, NFS 1.484 2008 3782 mineral Products 393 20.7Resource Gap (deficit u -)5,e2 + -425 Fruits arid other agricultu-6

Rs~~Og?Ce Gap (deficit -) -52 +435 -425 Products auT6Other anfactzarac 224 11Interest Payments (net) -°2 -e3 - nftrs2 0.0

Workers' Reittances 7 Total 1,900 100.0Other Factor Payments (net) -33 -60Net Transfers 188 234 271Balance on OGurrent Account 1 3; -210

Direct Foreign Investment -22 77 59 ETNAL DEST. DEIMBER 31. 19*Net MLT Borrowing

Disbursements 390 377 Y2 US $ HlnAmortization 250 335 339Subtotal 140 42 63 Public Debt, incl. guaranteed 1,113

Cital Grnts 63 Non-Guaranteed Private Debt 985Other Capital (net) 1/ 15 -43 373 Total outstanding & DisbursedOther items n.e.i f/ -106 -38 4 I/Increase in Reserves (+) A/ , 3 7s TM M ET SERVICE RATIO for 191

t

Gross Reserves (end year) 4/ 735 1,416 1,978Net Reserves (end year) / 80 753 934 Public Debt. mncl. guaranteed 6.6Inter.Reserves (end year)5/ 282 676 1.165 Non-Guaranteed Private Debt 8.9

Total outstanding & Disbursed r;Fael and Related Nateri5sImports of Goods, NFS L,514 2,008 3,782

of which: eatroleum liz? 1514 653

IBRD/IDA LENDING, January 31, l $,Ot1im u

RATE OF EICHAMOE _1965-9 L970-71 outstanding & Disbursed

US$ 1.00 - Pe. 3.92 6.43 EtdisbursedPs. 1.00 - us$ 0.26 0.16 Outstanding incl. Ihdisbursed 22.2

April 1972-July 1975 Sinca Jul! 1975

USS 1.00 - Ps. 6.78 US$ 1.00 - Ps. 7.5Ps. 1.00 - US$ 0.15 Ps. 1.00 = US.r 0.133

l/ Includes SDRs, short-tera private loans, Central Bank liabilties and use of THE credit.2/ ~rrors and omissions

I IGI-adCs net conanercial bank holdings plus foreign exchange holdings of C,Xntral BEk and monetary gold.This entry is equivalent to the change in international reserves.

4/ Includes Central Bank and coirercial bank reserves./ Gross reserves of Central Bark plus net reserves of comnercial banks.

E61 Sxcludes short-tem debt and IMF standby credit and is on a disbursanmnt basis.7/ Ratio of Debt-Service to Exports of Goods and i.-::-factor 8.rvices.

ANNEX IIPage 1

PHIL?PIP'S

A. Statement of Bank Loans and ID Credits to the Phllippinesas of January 31, 1976

Loan or (US' millions)Credit Amount less CanceUationsNumber Year Borrower Purpose Bank IDA Undisbursed

13 loans and credits fully disbursed 191.0637-PH 1969 Republic of the Irrigation 34.0 1.0

Philippines720-P1h 1971 Rice Processing 14.3 11.0

and storage731-PH 1971 First Highway 8.0 1.1809-PH 1972 National Power Power 22.0 15.8

Corporation823-PH 1972 Republic of the Livestock 7.5 1.8

Philippines349-PH 1973 if ducation II 12.7 8.5891-P,H 1973 i Fisheries 11.6 8939-.H 1973 Ports 6.1950-PH 1973 Highway II 68.o 4400472-PH 197- 4 Aurora-Penaranda 9.5 6.4

Irrigation984-P.H 1974 " 9,5 9.4998-PH 1974 DFC - DBP I 50.0 26.7

1010-PH 1974 Third Pural Credit 22.0 2.1034-PH 1974 National Power Power 61.0 53.0

Corporation1035-P; 1974 depublic of the Population 25.0 24.8

Philippines104P-PH 1974 ' Shipping 20.0 20.01052-PH 1974 ?hilippine DFC 30.0 28.2

National Bank1080-PH 1975 iRepublic of the Tarlac Irrigation 17.0 16.9

Phili7pines1102-?H 1975 Rural Development 25.0 24.91120-PH 1975 Small and Medium 30.0 26.1

Industries1154-?H 1976 " Magat Irrigation 42.0 42.01190-PH 1976 DFC-DBF II 75.0 75.0

TOMAL 7 . 2.Of which has been rcpaid (Bank and 3rd I'arties) 78.6 -Total now outstanding 690.4 72-Amount sold 13 3Of which has been repaid (3rd Parties) 12.1 l:2 -

Total now held by Bank and IDA (prior to 689.2 2202exchiange rate adjusUnents)

TotaL unidisbursed 438.5 14.9 453.4

* Nqt yet effective.

ANNEX IIPage 2

B. Statement of IFC Investments in the Philippines as of January 31, 1976

(Amount US$ million)Fiscal Year Company Loan Equity Total

1963 & 1973 Private Development Corporation of thePhilippines 15.0 4.4 19.4

1967 Manila Electric Company 8.0 - 8.0

1967 Meralco Securities Corporation - 4.0 4.0

1970 Philippine Long DistanceTelephone Company 4.5 - 4.5

1970 & 1972 Mariwasa Manufacturing Inc. 0.8 0.4 1.2

1970 Paper Endustries Corporationof tl1e Philippines - 2.2 2.2

1971 Philipipine Petroleum Corporation 6.2 1.8 8.0

1972 Narindluque Mining and IndustrialCorporation 15.0 - 15.0

1973 Victorias Chemical Corporation 1.9 0.3 2.2

1974 Filipinas Synthetic Fiber Corporation 1.5 - 1.5

1974 Maria Christina Chemicals 1.5 .5 2.0

1974 Republ:Lc Flour Mills Corporation 1.2 - 1.2

1975 Philippine Polyamide IndustrialCorporation 7.0 - 7.0

TotaL 62.6 13.6 76.2

Less sold, acquired by others,repaid or cancelled 15.6 7.1 22.7

Now held 47.7 6.5 53.5

Undisibursed - - -

ANNEX IIPage 3

C. Projects in Execution -

Ln. No. 637-PH Upper Pampanga River Irrigation; US$34.0 million Loanof August 18, 1969; Date of Effectiveness: October 15,1969; Closing Date: June 30, 1976

This is the first major irrigation project in the Philippines andwill supply water year-round to nearly all its 84,000 ha command area. Theproject's on-farm development scheme is setting a pattern for future irriga-tion development in the country. Despite some delays caused by the 1972floods, the dam was commissioned on September 7, 1974 ahead of schedule. Mostof the work has been completed and the loan is expected to be entirely dis-bursed by June 30, 1976, the Closing Date. Project costs have increased 40%over appraisal estimates, largely as a result of rapid inflation, the effectsof successive devaluations of the peso, and design changes in the dam (whichaccounted for nearly half the increase in costs). The increase in costs isbeing financed by the Government. However, as a result of the close coor-dination established between irrigation and agricultural supporting services,the project is expected to reach full development in 7 years after comple-tion of construction, instead of 13 years which was the appraisal estimate.Also, nearly 7,000 ha have been added to the project, mostly by includinglands which were formerly under a private irrigation system. Finally, therehas been a considerable increase in the projected world market price of rice.As a result, the rate of return estimate is now more favorable than atappraisal.

Ln. No. 720-PH Rice Processing and Storage; US$14.3 million Loan ofFebruary 4, 1971; Date of Effectiveness: May 10, 1971;Closing Date: June 30, 1977

This project provides long-term credit through the DevelopmentBank of the Philippines to finance a program for the development and modern-ization of the rice and corn processing industry. Originally the projectwas restricted to rice and to the private sector, and the emphasis was onthe construction of new integrated rice mills with large capacities. Duein part to poor harvests and in part to large cost increases for rice mills,the demand for sub-loans for new integrated rice mills turned out to besmall, and, as expalined in the President's Memorandum dated June 8, 1972(R72-40), the loan agreement was amended to shift the project emphasis torehabilitation of existing rice milling facilities. In spite of this theproject made little progress. The loan agreement was amended again inApril, 1974 basically (i) to expand the scope of the project to include

1/ These notes are designed to inform the Executive Directors regardingthe progress of projects in execution, and in particular to reportany problems which are being encountered, and the action being takento remedy them. They should be read in this sense, and with theunderstanding that they do not purport to present a balanced evalua-tion of strengths and weaknesses in project execution.

ANNEX IIPage 4

corn in addition to rice, (ii) to enable local governments and the NationalGrains Authority to borrow funds under the project, and (iii) to streamlineprocurement procedures (President's memorandum SecM74-244 of April 15, 1974).As a result of these amendments, the project is now progressing satisfactori-ly and the loan is expected to be fully disbursed before the revisedClosing Date, June 30, 1977.

Ln. No. 731-PH Highway; US$8.0 million Loan of April 14, 1971;Date of Effectiveness: July 23, 1971; Closing Date:June 30, 1976

The projeot is financing the construction and improvement of theCotabato - Digos road in Mindanao (160 km.). Construction is only 55% com-plete based on the original scope of works, the delay being mainly due tocivil disturbances and army activity on part of the road representing about20% of the total roadworks. As there is little chance of the contractorbeing able to enter this area, the Bank has agreed to a Government proposalto delete this stretch of the road from the contract and eventually executethe work by force account; the undisbursed amount of the loan fund will beapplied to the balanace of works which can be completed by contract. Thetotal cost of the reduced project is estimated to be about US$16.4 millioncompared to appraisal estimate of US$15.8 million. The increase in cost isdue to a rise in construction costs which has been substantial since oilprice increases in Late 1973. The roadworks have been completed in December1975. The other comnponents of the project including UNDP-financed feas-ibility studies were completed in 1973. The closing date has been extendedfrom May 15, 1975 to June 30, 1976. Technical assistance to the Departmentof Public Highways Ls continuing with Bank financing under the Second High-way Project.

Ln. No. 809-PH Fifth Power; US$22.0 million and US$10.0 million Loanand and Credit of April 3, 1972; Date of Effectiveness:Cr. No. 296-PH July 1, 1972; Closing Date: June 30, 1978

The project is helping the National Power Corporation (NPC) tofinance the construction of a second thermal unit of 150-MW at Bataan andtransmission facilit:ies in Luzon. The project is proceeding satisfactorily,and the unit is expected to be commissioned during the second quarter of1976. The erection of transmission lines has been somewhat delayed due tounfavorable weather and poor soil conditions and is now expected to becompleted in June 1976. Further tariff increases were approved, effectiveJuly 1, 1974 and again in July 1, 1975, although this last increase stillhas not received Presidential approval. No major problems are anticipated.

Ln. No. 823-PH Livestock; US$7.5 million Loan of !!ay 25, 1972;Date of Effectiveness: November 9, 1972; ClosingDate: December 31, 1978

The project is assisting Government in carrying out its livestockdevelopment program through credit supervised by the Development Bank of the

ANNEX IIPage 5

Philippines. The start of DBP lending operations was delayed by about sixmonths because of late appointment of technical staff. Although sub-loancommitments were slow as a result of this, they improved so that all fundswere fully committed by December, 1975. The project has expanded thehgricultural credit capability of DBP into a new and important field thusmeeting a previously unsatisfied demand for small to medium scale livestockdevelopment finance.

Cr. No. 471-PH Aurora-Penaranda Irrigation; US$9.5 million Credit ofMay 14, 1974; Date of Effectiveness: August 22, 1974;Closing Date: June 30, 1979

Ln. No. 984-PH Aurora-Penaranda Irrigation; US$9.5 million Loan ofMay 14, 1974; Date of Effectiveness: August 22, 1974;Closing Date: June 30, 1979

This is the second irrigation development and rehabilitation pro-ject in the Philippines to be financed by the Bank. The project will divertwater from the Aurora basin into the Pantabangan Reservoir of the first pro-ject, to provide year-round irrigation for 25,300 ha of rice land in CentralLuzon. The project also includes an Irrigation Development Study for CentralLuzon to inventory water, land, and other resources and identify priorityirrigation projects. Although there has been some delay in constructing thetwo diversion dams because of the need for more extensive foundations andabutment area grouting than originally expected, most difficulties have beenovercome and the work is progressing satisfactorily. Diversion of 75% ofAurora water into Pantabangan Reservoir was achieved in September, 1975, oneyear ahead of the appraisal schedule. In the service area, lack of competi-tion and high bids have delayed awarding of contracts. Urgent work is beingdone by Government force account, although the Credit Agreement sets a forceaccount limit of about 20% on civil works in the service area. Project costshave increased about 54% over appraisal estimates, largely as a result ofrapid inflation. There would be added benefits from early diversion, however,resulting in additional water for irrigation sooner than planned, and therate of return is expected to fall from 17% at appraisal to 14%.

Ln. No. 998-PH Industrial Investment and Smallholder Tree-farmers:US$50.0 million Loan of June 12. 1974; Date ofEffectiveness: September 9, 1974; Closing Date:December 31, 1981

The proceeds of the loan are being relent to the Development Bankof the Philippines (DBP). The industrial portion of the loan (US$48 mil-lion) is being used by DBP to make sub-loans to finance direct imports formedium and relatively large industrial projects. DBP is using the balance(US$2 million) to finance about 1,300 smallholders in a pilot tree-farmingproject. As of December 31, 1975 commitments for sub-loans totalling $37million had been made.

ANNEX IIPage 6

Ln. No. 1010-PH Third Rural Credit; US$22.0 million Loan of June 1 7 , 19 7 4 L

Date of Effectiveness: _Dust 27, 1974; Closing Date:December 31 1977

The Central Bank relends the proceeds of the Loan (except fora small amount for an evaluation study) to participating banks. These on-

lend the funds to iarmers and rural entrepreneurs to finance investment infarm mechanization, on-farm transportation, farm support facilities andequipment, coastal and inland fisheries, small-scale livestock developmentand cottage-scale asgro-industry. The project also provides for a reviewof the effectiveness of the First, Second and this project. The loan becameeffective on August. 27, 1974, and is expected to be fully committed in 1976.

Collection of arrears by a sizeable number of participating banks from bene-ficiaries under the first and second projects is not satisfactory. This is

being watched closely by Bank staff and appropriate steps are being takento improve such collections.

Ln. No. 1034-Ph Sixth Power; US$61.0 million Loan of July 31. 1974;Date of Effectiveness: November 15, 1974; ClosingDate: December 31, 1978

The project is helping the National Power Corporation (NPC) tofinance a 100 MW hydro plant at Pantabangan and transmission lines for the

further expansion of the Luzon grid and feasibility studies by consultantsfor a future power project. Major equipment for the plant has been contracted

and project commissioning is expected in January 1977 - three months ahead

of original schedule. The transmission component of the project is pro-

ceeding in stages. Some lines are under construction and others are in

procurement process. The design work has been delayed due to NPC's heavyconstruction programn. It is now expected that this part of the project willbe completed by the end of 1978, i.e. one year behind schedule. NPC raisedits tariffs on July 1, 1974, to meet the covenanted rate of return of 8percent. But due to inflation NPC was not able to achieve this. NPCtherefore increased tariffs on July 1, 1975, but this increase still hasnot received Presidential approval.

Cr. No. 349-PH Second Education; US$12.7 million Credit of January 5,1973; Date of Effectiveness: April 11, 1973; ClosingDate: December 31, 1978

The Credil: is helping to finance a project for development oftechnical and vocati.onal education and for improvement in curriculum devel-opment and teacher t:raining. Construction has been about 12 months behindschedule mainly due to delays in the finalization of design/drawing of

buildings and recruitment of specialist services. This delay is beingreduced through effective management by the project unit. Procurement of

equipment is on schedule. Both the program and schedule of technicalassistance have beeri revised to suit the current needs of project institu-tions and to expedite implementation. Disbursements (US$4.9 million asof 2/11/76) are ahead of the appraisal estimate. Project costs areestimated at about l2 percent above the appraisal estimates. The Government

has agreed to finance the resulting overruns. Despite initial delays, the

project is expected to be completed on schedule.

ANNEX IIPage 7

Ln. No. 891-PH Fisheries; US$11.6 million Loan of May 21, 1973;Date of Effectiveness: December 5, 1973; ClosingDate: June 30, 1979

This project is designed to provide long term credit to theprivate sector through the Development Bank of the Philippines for marineand inland fisheries development. The loan became effective on December 5,1973. The demand for loans is adequate, and the organization to implementthem has been properly established. The project is progressing satisfactorily,and all funds are expected to be fully committed by June, 1976.

Ln. No. 939-PH Second Ports; US$6.1 million Loan of October 24, 1973Date of Effectiveness: December 19, 1973; : ClosingDate: December 31, 1977

This project provides for the rehabilitation and expansion of theports of General Santos and Cagayan de Oro in the island of Mindanao. TheContract for General Santos was awarded in May 1975 and work has started.For Cagayan de Oro, a bid has been selected and award of contract is awaitingGovernment approval.

Ln. No. 950-PH Second Highway; US$68.0 million Loan of December 12,1973; Date of Effectiveness: December 27, 1973;Closing Date: December 31, 1977

The project is helping the Government to implement its program ofconstruction, improvement and rehabilitation of highways and feeder roads,by financing the construction, improvement and rehabilitation of 1400 kms.of roads in Luzon. Work has begun on all fourteen contracts, ten of whichwere awarded to local contractors. In line with world-wide inflation, costshave increased sharply, but price adjustments are being awarded to contractorsby the Government to offset the sharp rises in costs of basic materials,fuels and labor. The UNDP financed Road Feasibility Studies (Phase II),for which the Bank is executing Agency, have been completed and a possibleThird Highway project has already been indentified and pre-appraised.Execution of other minor project items is proceeding generally on schedule.

Ln. No. 1035-PH Population; US$25.0 million Loan of July 31, 1974;Date of Effectiveness: November 13, 1974; ClosingDate: December 31, 1979

The project is assisting the Government in expanding rural healthinfrastructure, staff training facilities, and research and communicationscapacity. This will help the Philippines achieve their long-term goal offertility reduction. It is progressing satisfactorily.

Ln. No. 1048-PH Inter-Island Shipping; US$20 million Loan of October 29,1974; Date of Effectiveness: January 15, 1975; ClosingDate: June 30, 1979

The Government is relending the proceeds of the loan to the De-velopment Bank of the Philippines for onlending to beneficiaries for the

ANNEX IIPage 8

acquisition of new and used ships and for major repairs and conversions.The loan became efiective on January 15, 1975. It is progressing satis-factorily.

Ln. No. 1052-PH Private Development Corporation of the Philippines;US$30 million Loan of November 12, 1974; Date ofEffectiveness: February 7, 1975; Closing Date:June 30, 1979

The project assists in the financing of industrial sub-projectsin the Philippines, the bulk of which are expected to go to export-orientedmanufacturing projects. The project is progressing satisfactorily.

Ln. No. 1080-PH Tarlac Irrigation; US$17.0 million Loan of January 27,1975; Date of Effectiveness: April 27, 1975; ClosingDate: December 31, 1980

The project will assist the Government to improve and expand34,000 hectares of land in Central Luzon for wet season irrigation for ricegrowing. It will a!lso provide for a groundwater pilot scheme, a watermanagement training; program and a national irrigation systems improvementstudy. The project is progressing satisfactorily.

Ln. No. 1102-PH Rural Development; US$25.0 million Loan of April 16,1975; Date of Effectiveness: July 28, 1975; ClosingDate: June 30, 1981

The project will assist the Government to carry out a rural devel-opment project on the island of Mindoro, which will include infrastructureand irrigation improvements, and ecological and health improvement measures.The Loan became effective on July 28, 1975. It is progressing satisfactorily.

Ln. No. 1120-PH Small and Medium Industries Development; US$30.0 millionLoan of June 5, 1975; Date of Effectiveness: August 20,1975; Closing Date: August 31, 1979

The Government is relending $15 million of the loan proceeds to theDevelopment Bank of the Philippines (DBP) and $12 million to the IndustrialGuarantee Loan Fund (IGLF) to finance a wide range of small and medium indus-tries sub-projects; $2.3 million to the National Electrification Administra-tion (NEA) to finance the establishment of 24 industrial producer cooperatives;$0.7 million to the Department of Industry (DOI) to establish 7 Small BusinessAdvisory Centers to provide technical assistance to small industries. Theproject is progressing satisfactorily and as of December 31, 1975 disburse-ments for sub-loans totalling $3.9 million had been made.

ANNEX IIPage 9

Ln. No. 1154-PH Magat Multipurpose Project; US$42.0 million Loan ofAugust 7, 1975; Date of Effectiveness: November 4,1975; Closing Date: June 30, 1982

The project will assist the Government to improve and expand35,000 ha. of land in the Cagayan Valley, Northern Luzon, for wet and dryseason irrigation for rice growing. It will provide for the construction orupgrading of about 830 kms of project roads, construction of an airstrip,access roads and a bridge across the Magat River near the Magat River Irriga-tion System diversion dam. The project will also provide for detailedengineering studies and economic evaluation of the proposed Magat Dam andreservoir, a water management training program and technical assistance tothe National Irrigation Administration, the implementing agency, in systemsoperation and construction management. Consultants have been selected andhave begun work on the engineering and economic evaluation studies. The Loanbecame effective on November 4, 1975.

Ln. No. 1190-PH Industrial Investment: US$75.0 million Loan ofJanuary 28, 1976; Date of Effectiveness: Not yeteffective; Closing Date: March 31, 1980

The proceeds of the loan are being relent to the Development Bankof the Philippines (DBP) for sub-loans to finance direct imports formedium and relatively large industrial projects. The loan is not yeteffective.

ANNEX III

Page 1

PHILIPPINES

CHICO RIVER IRRIGATION PROJECT - STAGE I

Loan and Project Summary

Borrower: The Republic of the Philippines.

Amount: US$50 million equivalent.

Terms: The loan would be for a term of 25 years,including six year grace with interest rateat 8.5 percent per annum.

Project Description: The project includes:

(a) the construction of a diversion dam andintake works on the Chico river;

(b) the construction of a catch dam and in-take works on Talaca creek;

(c) the rehabilitation of an existing 1,400ha NIA system and construction of adrainage system;

(d) the construction of the irrigation anddrainage system for small localcommunal systems totaling 3,200 ha,and for small pump irrigation sytemstotalling a further 3,200 ha;

(e) the extension of an irrigation and drain-age system to 11,900 ha of rainfedrice; and

(f) the procurement of vehicles and equipment;

(g) the improvement of the Roxas-Gamu road,(35.2 km);

(h) the improvement of the Cabatuan-Cauayanroad, (11.0 km); and

(i) the improvement of the San Mateo-Aliciaroad, (18.9 km).

ANNEX IIIPage 2

The project would also provide for (a) afeasibility study by NIA of Stage IIirrigation, (b) an erosion control studyof the Magat and Pampanga river catch-ments, (c) an input-output monitoringsystem to monitor production inputs andthe flow of project benefits for allBank assisted irrigation projects coveringsome 210,000 ha and 85,000 farm families.

Estimated Cost:

ForeignLocal Foreign Total Exchange-------- $ Million------ %

Irrigation 27.1 16.3 43.4 38

Provincial Road Program 4.0 2.3 6.3 41

Erosion Control Study 0.8 0.8 1.6 55

Input-Output Monitoring 0.7 0.2 0.9 27

Feasibility Study of Stage IIIrrigation 0.1 - 0.1 30

0 & M Equipment - 0.9 0.9 95

Base Cost Estimate 32.7 20.5 53.2 39

Physical Contingencies 5.2 4.0 9.2 42

Expected Price Increases 13.1 8.5 21.6 39

Total Project Cost 51.0 33.0 84.0 39

Annual AccumulatedEstimated Disbursements: Disbursements Disbursements

(Fiscal Years) ------------- $ million------------

1977 1.0 1.01978 4.5 5.51979 15.0 20.51980 17.0 37.51981 11.5 49.01982 1.0 50.0

ANNEX IIIPage 3

Procurement: The following procedures have been agreed: 1/

(a) Equipment and vehicles for force accountconstruction, operation and maintenance,the erosion control study and the inputand output monitoring programs costingabout US$3.3 million would be procuredafter international competitive biddingin accordance with Bank Group Guidelines.A preference limited to 15 percent of thec.i.f. price of imported goods, or thelevel of customs duty, whichever is thelower, would be extended to local manufac-turers in the evaluation of bids. Localshopping is appropriate for off-the-shelfitems costing not more than US$10,000 each.The total cost for such items would notexceed US$300,000.

(b) Civil works contracts for the Chico diver-sion dam and main diversion canal ($19.1million) would be awarded on the basis ofinternational competitive bidding inaccordance with Bank Guidelines.

(c) Other civil works in the project servicearea total US$19.8 million. About 60percent would be carried out by contractsawarded on the basis of competitivebidding in accordance with local proce-dures which are satisfactory. Foreigncontractors would be eligible to partici-pate in the bidding. NIA would carry outthe balance of the work, not exceeding 40percent, by force account.

(d) The three roads would be advertised inone package (US$4.8 million) under inter-national competitive bidding proceduresin accordance with Bank Guidelines,with the option to bid on one or allthree roads.

1/ All costs are before contingencies.

ANNEX III

Page 4

Consultants: NIA would employ consultants to assist themwith the erosion control study (65 man-months), to assist in formulating andimplementing the input monitoring program(20 man-months) and to advise on a surveyprogram to monitor project benefits andassist in the implementation of the program(10 man-months).

Rate of Return: The economic rate of return would be 15 percentfor irrigation works, including constructioncost of diversion dam and major canals attri-butable to Stage II. The economic rate ofreturn for the three provincial roads wouldbe 17 percent.

Appraisal Report: No. 1009a-PH dated March 9, 1976.

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