RESTRICTED Report No. PA-47a This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION RICE PROCESSING PROJECT PHILIPPINES January 11, 1971 Agriculture Projects Department CURREXY EQUIVALENTS US$ 1 = P 5.80 - 6.5 - P 1 = US$ 0.17 P 1 million = us$ 16,667 WEIGHTS AND MEASURES (Metric System) 1 km = 0.62 mi 1 m = 3 ft, 3.37 in 1 m ton = 2,2o5 lb 1 kg = 2.2 lb 1 ha = 2.47 ac 1 cavan (paddy) = 44-46 kg = 97-101 lb 1 cavan (milled rice) = 56 kg = 123 lb 1 ganta = 2.43 kg = 5.36 lb ABBREVIATIONS DBP = DeveloDment Bank of the Philippines RCA = Rice and Corn Administration NFAC = National Food and Agriculture Council 'Pi = Bureau of Plant Industry .,.Pr, = Agricultural Productivity Commission I lI = International {ice Aesearch Institute 1/ T'he peso has Jeen allowed to F"loat as of February 1 970 as Part of the exchanze rate reform a.reed to )y . t -3 L 12. PHILIPPINES RICE PROCESSING PROJECT TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS ..................i - ii I. INTRODUCTION ............................. 1 II. BACKGROUND .......... ............................ 2 A. General ......... ............................ 2 B. Rice Production ...... ....................... 2 C. Rice Processing and Marketing ............... 4 Paddy Dryi,ng ...... ...................... 5 Rice Milling ...... ...................... 5 Storage ........ ......................... 6 Credit ........ .......................... 6 Transportation ...... .................... 6 Policies ....... ......................... 7 III. THE PROJECT. 8 A. Project Description. 8 Technical Features. 8 Training. 9 B. Project Areas .10 C. Cost Estimates and Financing .10 Project Cost .10 Procurement .12 Disbursement .13 IV. ORGANIZATION AND MANAGEMENT ..... ................ 13 A. Development Bank of the Philippines ......... 13 B. Subborrowers and Terms of Subloans .... ...... 14 C. Financial Procedures and Auditing .... ....... 16 This report ia based on the findings of a Bank appraisal mission to the Plilippines in March/April 1969, composed of Messrs. M.J. Walden, G. von Gontard and T. Friedgut (of the Bank) and Messrs. L. Svoboda and N. Bond (Consultants). -2- Lage~ No- V. BENEFITS AND JUSTIFICATION ..... ................... 16 A. Operating Arrangements and Financial Returns 16 Revenue Generation and Taxation of Subborrowers ............................ 17 B. Farmers' Benefits ...... ....................... 18 C. Economic Justification ..... ................... 18 VI. RECOMMENDATIONS ....... ............................ 19 ANNEXES 1. Rice Production Problems and Prospects 2. Rice Marketing and Processing in the Philippines 3. Outline Specifications 4. Training Aspects 5. Project Cost 6. Project Cash Flow 7. Estimated Disbursement Schedule 8. The Development Bank of the Philippines 9. The Grain Processing Section 10. Financial Projections for Typical Project Facilities 11. Financial Rates of Return 12. Economic Analysis of the Project MAP PHILIPPINES RICE PROCESSING PROJECT SUMMARY AND CONCLUSIONS i. This report appraises a project for the construction, equipment and operation of modern rice processing, storage and handling facilities in the Philippines, for which a Bank loan of US$14.3 million is proposed. The loan would be made to the Government of the Philippines, which would on-lend the proceeds to the Development Bank of the Philippines (DBP) under a subsidiary loan agreement. DBP would be responsible for administering the project and would supplement the proceeds of the Bank loan with its own funds to provide long-term loans to qualified traders and millers in the private sector. The project is expected to remove a significant bottleneck to the further growth of rice production in the Philippines. ii. Most grain processing and storage facilities are in the private sector and many are in need of repair, replacement or modernization. How- ever, lack of credit on suitable terms and inadequate training of plant operators, superintendents and managers have hindered private investment in improved marketing systems. The proposed project would provide long-term credit to private owners and operators for setting up modern, integrated processing units. Working capital credit would be provided by commercial banks and the DBP. Training would be provided by the University of the Philippines with UNDP assistance. iii. Processing capacity created by the project is expected to be distributed among 6 large units and about 60 small units. In total, the proposed project is expected to provide mechanical drying capacity of about 225 ton/hour, modern milling capacity of about 60 ton/hour, bulk storage capacity of about 150,000 ton, together with complementary sack warehousing and ancillary handling, aeration and transportation equipment. These facil- ities would be able to handle about 480,000 ton paddy per annum, 15-20% of what is presently estimated to go through commercial channels. The bulk of project capacity is expected to be located in the highly productive paddy growing regions of Central Luzon and the Cagayan Valley, near major consum- ing centers, and in Mindanao. iv. Need for improved grain processing and marketing has long been recognized in the Philippines. However, the scope for productive invest- ment in modern marketing infrastructure was limited until the mid-1960's when new high yielding paddy varieties were introduced. In combination with fertilizer and assured irrigation, the new paddy varieties have led to production advances which, in turn, have brought out serious deficien- cies in marketing systems. Lack of mechanical drying equipment is hindering efficient processing of paddy varieties maturing in the wet season, and traditional milling and handling techniques are proving in- creasingly inadequate for handling commercial paddy flows in major pro- ducing areas. Finally, inadequate storage facilities are contributing - ii - to relatively high spoilage losses and to producer price instability. The project would produce substantial direct benefits by adding to the coun- try's milling capacity, reducing grain spoilage, and increasing the effi- ciency of paddy and grain processing through bulk handling. The economic rate of return of the project, as customarily calculated for agricultural projects, is estimated at about 25%. v. Estimated project cost is about US$21 million, including contin- gencies. The cost estimate is based on engineering consultants' drawings and preliminary designs. Construction and equipment contracts would be awarded on the basis of international competitive bidding. The proposed Bank loan would cover foreign exchange costs, estimated at 68% of total cost. Subborrowers would contribute 21% from their own resources. The balance would be covered by DBP. Loans to subborrowers under the project would carry 11% interest and run for 14 years, including approximately one year of grace. vi. Subloans would be made to qualified entrepreneurs according to guidelines that would be approved by the Bank. A special Grain Processing Section, to be set up in DBP, would appraise loan applications and be re- sponsible for procurement operations. This Section would be supported by expatriate consultants suitable to the Bank. Hiring of such consultants would be a condition of effectiveness of the loan. vii. Need for the loan arises in part from the progress achieved under new Government policies emphasizing technological change in agri- cultural production. The proposed loan would be the fifth Bank operation designed to strengthen implementation of these policies. Loan 393-PH (US$6 million) contributed to the growth and improvement of the country's higher agricultural education by providing facilities to the College of Agricul- ture of the University of the Philippines. Loans 432-PH (US$5 million) and 607-PH (US$12.5 million) have provided funds for on-farm development through privately owned rural credit banks. Finally, Loan 637-PH (US$34 million) will finance priority irrigation works in Central Luzon. viii. Subject to various assurances and conditions, the project is suit- able for a Bank loan to the Government of the Philippines of US$14.3 mil- lion at the standard interest rate for a term of 19 years, including a 4-year grace period. PHILIPPINES RICE PROCESSING PROJECT I. INTRODUCTION 1.01 The Government of the Philippines has requested a Bank loan of US$14.3 million to finance the establishment of modern rice processing and storage facilities in the private sector. The loan would be made to the Government which would on-lend the proceeds to the Development Bank of the Philippines (DBP) under a subsidiary loan agreement. DBP would provide long-term loans to qualified grain traders and millers. The Bank loan would finance construction of bulk storage and purchase and installation of paddy drying, rice milling and bulk handling equipment as well as technical serv- ices required for project administration. Six large, integrated rice pro- cessing units, providing about 5,000 tons of bulk storage each, and 60 small units, providing about 2,000 tons of bulk storage each, would be set up under the project. 1.02 The proposed Bank loan would be the fifth for agricultural de- velopment in the Philippines. Loan 393-PH supported the expansion of modern higher agricultural education at the University of the Philippines (Los Banos). Loans 432-PH and 607-PH provided credit funds for minor irrigation, mechaniza- tion and other on-farm improvements. Finally, Loan 637-PH will help spread new farming technologies through finance of expanded and improved irrigation in an important rice producing region of Central Luzon. The performance to date of the project financed under Loans 393-PH, 432-PH and 637-PH has been satisfactory. However, disbursement under Loan 607-PH is falling behind schedule, due mainly to the effects of the floating exchange rate which was introduced in early 1970. The de facto devaluation led to cost increases of about 65% for imported items while farm product prices have increased only by 25-30%. 1.03 In October 1968, the Government of the Philippines sent the Bank a project proposal prepared by DBP for financing grain storage and processing facilities. In March/April 1969, an appraisal mission composed of Messrs. M.J. Walden, G. von Gontard and T. Friedgut (of the Bank) and L. Svoboda and N. Bond (Consultants) visited the Philippines. This report is based on the findings of the mission. It draws on several grain mar- keting and storage studies, including a study by a US firm, Weitz-Hettel- sater Engineers, issued in June 1968. Furthermore, it is based on under- standings reached with the Philippine Government during a visit of Messrs. M. J. Walden and E. de Alba (of the Bank) in February/March 1970. Finally, in order to assess the effects of the de facto devaluation of February 1970 on the project costs, the cost estimates were updated in the Philip- pines by Mr. P. Pohland (of the Bank) in August 1970. 1.04 The project as first presented by the Government included the con- struction of 8 terminal bulk silos and about 100 small up-country silos and warehouses, together with complementary driers, modern milling equipment and other ancillary facilities. During appraisal of the project the need for some alterations became apparent. The project as now proposed would give emphasis to integrated drying, storage and milling systems. It would not - 2 - include processing facilities for corn as originally proposed. These altera- tions have been agreed with the Government of the Philippines. II. BACKGROUND A. General 2.01 The population of the Philippines, currently estimated at 39 mil- lion, is growing at an annual rate of about 3.5%. Agriculture employs around 60% of the labor force, produces about a third of the GNP, and generates about 80% of foreign exchange earnings. 2.02 The country consists of some 7,000 islands stretching over 1,600 kilometers from near the equator northwards. Luzon in the extreme north, on which the capital (Manila) is located, is the largest island of the archipelago. Mindanao in the far south is the next largest and with Luzon, makes up two-thirds of the land area. These two, with nine others, make up 95% of a total area of 30 million ha. 2.03 The mountainous terrain and the lack of adequate transport infra- structure restrict thie area suitable for farming. About 8.5 million ha are cultivated. Another 2.5 million ha of land suitable for cultivation are still unopened. Approximately 10 million ha are under commercial forests. 2.04 With the tropical climate, year-round cultivation is possible as long as an adequate supply of water is available. Although rainfall is generous (average is 2,540 mm), it is highly variable and, in most areas, there is a pronounced dry season. The present irrigated area represents only 10% of the cropped land, less than a third of which has dry season irrigation. Considerable surface and ground water resources remain unex- ploited. 2.05 Although timber, coconuts and sugar are the major export commod- ities, about 6 million ha (70% of the cultivated area) are devoted to food crops for the local market. Of these, some 3 million ha produce rice and 2 million ha, corn. This foodgrain cultivation is small-scale: the aver- age farm area is only 2 to 3 ha. About half of the paddy and corn farms, representing a third of the paddy and corn acreage, is farmed by tenants. B. Rice Production I/ 2.06 Rice is the staple food for about three-fourths of the population and corn for the balance. During most of this century, rice production merely kept pace with population growth. In particular, between 1920 and 1960, yields stagnated and production gains resulted mainly from extension of the cropped area. Since 1960, on the other hand, hectare yields have risen and the growth in cropped areas has tapered off. The mediocre growth 1/ Annex 1 gives further details on Philippine rice production problems and prospects. - 3 - performance of rice production till the mid-1960's reflected inadequate investment in rural infrastructure, which, in turn, was a result of the unduly high premium put on rapid industrialization by past Government policy. As a result, substantial grain imports were necessary (435,000 ton on average during 1963-65). 2.07 In 1966, foodgrain self-sufficiency became a major objective of public policy. The concomitant release of new high yielding paddy va- rieties developed at the International Rice Research Institute (Los Banos) and their rapid acceptance by farmers in areas of assured water supply con- stituted a turning point for Philippine agriculture (Annex 1). Through the activities of the National Food and Agriculture Council (NFAC), closer coordination of Government and private agricultural efforts and increased allocation of scarce inputs to areas enjoying favorable physical character- istics have been achieved. In these areas, the new paddy varieties are capable of outyielding the traditional varieties at least twofold, under normal farming conditions. Following their release to cultivators, paddy production recorded gains of over 10% in 1967/68, compared to an annual growth rate averaging less than 1% over the previous 4 years. A drought in 1968/69 brought a slight setback, which would have been much greater were it not for the new varieties. However, estimates for 1969/70 indicate a growth rate of over 10% over the previous year. In 1969/70, the new varieties were estimated to have covered 21% of the paddy area. No com- parable breakthrough is in sight for corn. 2.08 The advent of a new biological base for paddy production is significant, but it represents only one requisite for development of the Philippine rice economy. During the period 1965-68, output expressed in milled rice equivalent averaged 2.8 million ton while annual rice imports stood at about 170,000 ton on average. Average paddy yields in the Philip- pines are among the lowest in Asia. They average 1.3 ton/ha, compared to 3.7 ton/ha in Taiwan and 1.8 ton/ha in Ceylon. The low average productivity of rice production in the Philippines reflects not only inadequate genetic paddy materials but also restrictive environmental factors, particularly a low proportion of irrigated acreage relative to the total paddy area -- less than 30%. It also results from primitive field water management and lack of terminal field channel systems. 2.09 Timely availability of current production inputs (certified seed, fertilizer, pesticides) is an important requisite for rapid growth of paddy output; the new dwarf paddy varieties manifest high fertilizer responses at relatively high application levels. However, effective production per- formance depends on the use of pure seed and on whether adequate protection is provided against disease and insect pests, the incidence of which is increased by high fertility. 2.10 The new paddy varieties mature in a shorter time than traditional varieties (100 to 130 days compared to 140 to 180 days). This increases opportunities for multiple cropping. However, adequate field drainage and timely land preparation (sometimes calling for increased mechanization of farm operations) are particularly important for achieving this potential. 2.11 Although the net return of the new paddy technology is usually much higher than that obtained with traditional varieties, cultivation risks are considerable. The provision of adequate incentives to increase - 4 - the marketable surplus of rice is therefore a further requisite of continued progress in rice production. This hinges partly on the results of research now underway and aimed at varietal improvements with respect to grain qual- ity, cooking features and milling characteristics. It also depends on the implementation of favorable policies regarding rice procurement, imports and prices. Finally, it requires modernization of rice transport, processing, handling and storage. 2.12 On the whole, the present technological breakthrough and current policy trends in the Philippines offer the opportunity for accelerated growth in the productivity of rice cultivation. Assuming continuing policy emphasis on food crops, foodgrains self-sufficiency in the early 1970's is possible. Looking further ahead, rice surpluses are likely to arise in good weather years. However, the very success of the foodgrains production program is likely to increase the scope for further diversification of agricultural production and regional specialization in the Philippines. (Profitable avenues for diversification into export crops and livestock development exist.) Furthermore, keen competition from other Asian producers is expected in the world rice market for the next several years. All in all, it is highly unlikely that long-run production trends in the Philip- pines will be such as to result in consistently large rice exports. Al- though the proposed project is expected to improve the competitive position of Philippine rice production on the world market, its success is not de- pendent on the Philippines becoming an exporter of significant quantities of rice in the future. C. Rice Processing and Marketing -/ 2.13 Because of transportation bottlenecks, the rice processing and marketing industry is widely dispersed, involving the services of inter- mediaries and buying agents. The isolation of farmers from markets and price information during part of the paddy season has contributed to the proliferation of buying agents, paddy traders and other wholesalers who benefit from farmers' immobility and lack of knowledge of prices, buying at relatively low prices and selling at substantial profits. In some cases paddy changes hands two or more times before arriving at the mill and a new set of transactions occurs between the mill and the consumer. To some extent, vertical integration is being developed by the more progressive entrepreneurs. To date, most of this activity has taken place adjacent to Manila, the main area of demand and also the best endowed with roads and other services. 2.14 Retailing of rice is handled mainly by small shops and by vendors in public markets who sell out of open bags and bins. Usually the unit of sale is not standardized, although lately some processors and retailers have 1/ Annex 2 gives further details on the structure of rice marketing and processing in the Philippines. begun packaging rice in 1-ganta (2.43 kg) or 2-ganta bags. Brand names are of little importance, but the various varieties are each classified into "ordinary", "fancy" or "special" categories. Customers are very much aware of the difference, and relative prices asked and paid reflect this. 2.15 The amount of land planted to a second crop is only a fifth of the area planted to the first crop. This implies a seasonal pattern of production which has a major impact on rice marketing and storage systems. Over three-fourths of the total crop is harvested from October to January and behavior of paddy prices at farm level is highly seasonal. Paddy farm prices are usually highest around May-July and lowest around November- January. On the average, there is a 20% difference between ruling high and low prices. However, in areas poorly connected to urban markets, sea- sonal price swings can exceed 40%. Over the long run, seasonal peaks in supplies and prices are likely to become less pronounced as the marketing infrastructure improves and year-round rice cultivation becomes more prevalent. Paddy Drying 2.16 For adequate storage and milling performance, the moisture con- tent of harvested paddy must be reduced from 18-35% (depending on weather) to 14%. Where the dry season is pronounced, paddy is allowed to dry in the fields before being threshed. However, since most farmers sell the bulk of their paddy crop soon after harvesting, the drying operation is usually left to middlemen and millers. Sun drying on pavement areas or bamboo mats adjacent to the warehouse or the mill is the rule. This tech- nique leads to grain loss due to rats, birds, etc. In many cases, it also leads to overdrying, which results in a high cracked grain proportion and in significant mill losses. Furthermore, solar drying is largely ineffec- tive for short duration varieties harvested during the wet season. On the other hand, late drying causes discolored grains and reduces mill recovery. In many areas, lack of feeder -oads passable during the wet season limits possibilities for centralized paddy drying. Rice Milling 2.17 Although about 6,000 establishments are engaged in rice milling throughout the Philippines, less than 200, each employing 10 people or more, account for over 60% of the business. Over half of the milling ca- pacity is located in Central Luzon, reflecting the close link between high yields and commercialization of paddy output. Paddy that does not go through rice mills is pounded by hand or milled with primitive stone grind- ers. 2.18 Two types of milling machines, both locally made, are commonly used in the Philippines -- the Kiskisan and the Cono. Both use crude hull- ers which break much grain while dehusking. Very few mills are equipped with modern Japanese-type rubber hullers. The Kiskisan is a small machine (capacity, 2 ton/12-hour day) consisting of a huller/polisher. It is inef- ficient and much of its output is broken rice. On the other hand, its - 6 - operatioa requires limited financial resources anid allows milling close to the farm. Milling is often done in small lots and paid for in kind. Kiskisan mills cater mainly to the needs of rural dwellers. 2.19 The Cono is a larger machine (capacity, 6 to 9 ton/12-hour day), usually located in commercial centers and towns. It is Imore elaborate and lhandles the hulling and polishing functions separately. if is equipped withi graders, separators and other accessories. As a result, it is more efficient, averaging a weight recovery of 65 to 70'Z; (compared to 50 Lo 60% for the Kiskisan). However, its performance falls considerably slhort of the modern quality and efficiency standards of imported mills which couinon- ly average 70-75% weight recovery. Storage 2.20 Reliable data on available storage facilities are scarce; however, most warehouses are small, less than 700 ton )n the average. Furthermore, most facilities are designed for sack rather chan bulk storage. The most recent official estimate puts total storage at 2.6 million ton, over 80% of which is privately owned. This probably overrates actual storage re- sources, since it includes deteriorated old facilities. A recent survey found a substantial proportion of warehouses in poor condition, with rusted walls, broken windows, inadequate ventilation and damaging levels of moisture. By contrast, a few more recently constructed warehouses, having structural steel and open rigid frames, were in relatively good condition. On the whole, quality storage was found to be in short supply. Credit 2.21 Lack of credit for financing paddy stocks is retarding moderni- zation of rice production and marketing in the Philippines. Paddy stocks are readily secured from farmers only if millers are able to extend pro- duction credit to their suppliers. While DBP and commercial banks engage in financing operations for paddy stocks, credit available for such pur- poses is inadequate for the country's increasing needs. Without adequate stocks, modern silos and mills cannot be used at capacity. Thus, increased provision of working capital to entrepreneurs engaged in modern rice mill- ing and processing is essential to ensure full benefits from investments in improved marketing. Transportation 2.22 An important factor limiting productive investment in modern rice processing systems (and, hence, the size of the proposed project) is the inadequate network of roads, isolating many important grain areas of the Philippines from their markets. Without a good road system, paddy farmers have access to few buyers able to lift their marketable surplus before it deteriorates. As a result, they often receive low prices for their produce, both on account of high transfer costs and a, a result of the lack of com- petition among buyers. Although Manila is tie center for a significant net- work of first class roads, much if the rice produced in Central Luzon and the Cagayan Valley must flow to the city through narrow and poorly main- tained arteries, often made of crushed rock and difficult to travel on. Road networks on the other islands are even more primitive. 2.23 As part of a UNDP-finance.l transp3rt survey for which the Bank acts as executing agency, feasibility studi!s of high priority roads were undertaken, including the highway Cabanatuai - Tuguegarao, about 225 km, passing one of Luzon's important rice produ:tion areas and connecting it with the Philippines' main rice milling and consuming region in Central Luzon, including Manila. On completion, this trunk road would greatly improve rice transportation in an area which is expected to benefit from the proposed rice milling project. 2.24 In the absence of a good road network, water transport assumes a major role. Much water traffic is to and from small ports servicing small, isolated areas, a situation that leads to costly inter-island shipping with numerous stops and small cargoes. Rail service is limited and available on only two islands (Luzon and Panay). Given the poor state of transport facilities, regional price var4ations are wide. In remote areas poorly connected to major urban cente-s, e.g. Western Visayan, South and West Mindanao, etc., price suppor: operations are ineffective. Policies 2.25 Government marketing policy for rice and corn is implemented by the Rice and Corn Administration (RCA). RCA is the sole importer of grain in the Philippines. It also operates a price support scheme. The bulk of its domestic marketing is accomplisied through the private sector. Under the so-called "quedan" system, RCA pr cures paddy and corn from farm- ers against receipts (quedans) issued by botded warehouses, redeemable in cash at RCA agent banks. Warelousemen and tillers accepting the paddy are entitled to any rice recovery 'ver and above 63% of dry paddy weight as well as to by-products. UJnder the quedan s-'stem, RCA is able to deal with warehousemen, millers, traders, individual farmers or farmers' cooperatives with access to processing and storage facilities meeting RCA standards. RCA purchases directly from farmers only where private or cooperative fa- cilities are not available. 2.26 RCA operations inave so far failed in fully stabilizing a market beset by erratic weather and undergoing rapid technological change. RCA lacks operational flexibility, good market connections and financial resources. As a result, paddy prices have sometimes fallen below the support level of P34.8 per quintal (equivalent to US$60 per ton of grain) after harvest. Iowever, RCA's policies have, on the whole, been pragmatic and generally responsive to producers' interests. - 8 - III. THE PROJECT A. Project Description 3.01 The project, part of the Government's grain processing and stor- age development program, would consist of the construction, equipment and operation of modern rice processing facilities, involving approximately 150,000 ton of bulk storage as well as complementary drying and milling machinery and other ancillary facilities and equipment. Training for man- agement and operating personnel of project facilities and consulting ser- vices to DBP required for effective project administration would also be provided under the project. Technical Features 3.02 While all 6 large processing units would likely be entirely new, it is expected that half of the small processing units set up under the project would incorporate existing sack warehouses and mills into their designs. Outline specifications and drawings are given in Annex 3. The major features would be: Small Facility Large Facility Total No. Aggr. Cap. No. Aggr. Cap. No. Aggr. Cap. … ----------- ton/hour ------------------------ Paddy driers 60 180 6 45 66 225 Rice mills 30 36 6 24 36 60 -------------------------- ton --------------------------- Bulk Silos 60 120,000 6 30,000 66 150,000 Warehouses 30 15,000 6 9,000 36 24,000 Annual Through- put of Paddy 60 360,000 6 120,000 66 480,000 3.03 The proposed driers would be continuous and column-type. The rice mills would include modern rubber hullers. The small silos would be made of steel and the large silos of steel or concrete. In addition to drying, storage and milling facilities, the project would include com- plementary buildings and ancillary equipment for bulk handling, aeration and fumigation as well as vehicles needed for paddy collection and rice distribution. - 9 - 3.04 Project facilities would be owned and operated by private Philippine entrepreneurs active in grain milling and trade. Finance for the facilities would be provided by the Bank, DBP and subborrowers (para 3.09). Consultant services required by DBP for appraisal and supervision of subloans and for technical assistance to subborrowers would be provided under the project. The project is expected to be executed over a period of 4 years. Training 3.05 Training is required to provide subborrowers' managerial and operating personnel with the skills that would enable them to operate project plants efficiently (Annex 4). The estimated categories and numbers of trainees for whom training would be required under the proposed project are approximately as follows: Small Fac. Large Fac. Total Enterprise managers and owners 60 6 66 Plant superintendents /1 30 6 36 Shiftleaders and operators /2 90 12 102 Total 180 24 204 /1 It is expected that only about half of the small facilities would em- ploy plant superintendents. The balance would be run by owners. /2 2 shifts for large facilities; 1-2 shifts for small facilities. 3.06 Training facilities and course administration would be provided by a proposed training center for grain processing being set up at the University of the Philippines College of Agriculture with UNDP assistance. Equipment and tuition would be provided by the center, while costs of sub- sistence and wages of staff during training would be borne by subborrowers. A Government request to the UNDP, formulated in consultation with the Bank, was recently approved by UNDP. Approval of the plan of operations is expected before the proposed loan becomes effective. The Bank has obtained assurances from the Government that, in case there is a delay in finalizing a plan of operations satisfactory to the Bank, alternative arrangements, acceptable to the Bank, would be made with the Philippines College of Agri- culture (UPCA). It would be a condition of effectiveness that suitable training facilities had been provided to subborrowers' managerial, technical and operational personnel. - 10 - B. Project Areas 3.07 Site selection would be left to the discretion of project bene- ficiaries. However, the adequacy of proposed locations with respect to paddy supply sources, the state of local grain storage and processing in- frastructure, communications facilities, available utilities, labor sUp- ply conditions and subsoil features would be reviewed by DBP in the course of appraisal of each subproject. As a result, the majority of facilities would probably be erected in the highly productive paddy growing regions of Central Luzon, the Cagayan Valley and in Mindanao. Generally, the project areas are expected to coincide with areas receiving priority under Government agricultural development programs and, hence, should enjoy supporting agricultural services of relatively high standards (see Map). C. Cost Estimates and Financing Project Cost 3.08 Cost estimates for construction and equipment of processing and storage facilities are based on preliminary engineering specifications for typical facilities proposed to be set up under the project. In order to evaluate the effects of the de facto devaluation of February 1970, the cost estimates were updated in August 1970. The cost estimates include provision for consulting services required for effective project adminis- tration by DBP (para 4.04). Adequate contingencies of approximately 10% for possible cost increases during the construction period have been provided. The total estimated cost amounts to about US$21 million, includ- ing contingencies. The estimated foreign exchange component amounts to about US$14.3 million, 68% of the total cost. Detailed estimates appear in Annex 5. A summary follows: - 11 - ----Pesos '000------- ----US$ -oo--- For. Local Foreign Total Local Foreign Total Exch. 1. Processing & Storage Facilitie:; 1.1 Driers 1,134 6,9h8 8,082 189 1,158 1,347 86 1.2 Mills 3,060 9,108 12,168 510 1,518 2,028 75 1.3 Bulk Silos 9,084 13,932 23,016 1,514 2,322 3,836 61 1.4 Grain handling equipment 7,884 32,580 40,464 1,314 5,430 6,744 81 1.5 Sack warehouses & mill buildings 2,766 1,764 4,530 461 294 755 39 1.6 Other construction, equipment & land 4,116 5,700 9,816 686 950 1,636 58 1.7 Vehicles 1.950 3,000 500 825 61 Sub-total 29,994 73,032 103,026 4,999 12,172 17,171 71 2. Administrative Costs 2.1 Consultant's fees 1,464 4,800 6,264 244 800 1,044 77 2.2 DBP's staff costs 4,438 - 4,438 740 - 740 - 3. Contingencies (10%) 3 7,968 U1558 98 1,328 1.926 68 Total Project Cost 39,486 85,800 125,286 6,581 14,300 20,881 68 Financing 3.09 The Bank loan would be made to the Government of the Philippines, which would on-lend the proceeds under a subsidiary loan agreement to the Development Bank of the Philippines. The Government would bear the foreign exchange risk. A Bank loan of US$ 14.3 million, representing 68% of total cost, is proposed. Bank finance would cover the entire foreign exchange component of the project. DBP would lend supplementary funds from its own resources to subborrowers to meet local construction costs amounting to P 6.6 million (US$ 1.1 million equivalent). This would, together with DBP's local project administrative costs of about P 6.5 million (US$ 1.1 million) over the project's lifetime, represent 11% of total project cost. Subborrowers would provide the balance of P 26.4 million (us$ 4.4 million), 21% of total project costs. In addition, subborrowers would bear subsistence and wage cost of their employees during training. The following financing plan has been agreed with DBP during negotiations: - 12 - Pesos '000 US$'000 Sub- Sub- Bank borrow- Bank borrow- Loan DBP ers /1 Total Loan DBP ers /1 Total Processing, stor- age facilities & vehicles 73,032 5,994 24,000 103,026 12,172 999 4,000 17,171 Administrative costs 4,800 5,902 - 10,702 800 984 - 1,784 Contingencies 7,968 1,190 2,400 11,558 1,328 198 400 1,926 Total 85,800 13,086 26,400 125,286 14,300 2,181 4,400 20,881 z 68 11 21 100 68 11 21 100 ,1 70 to 90% of local project costs. 3.10 Working capital required for effective utilization of project facilities (para 2.21) could amount to a maximum of US$9.0 million, although the average outstanding would be US$4.5 million. It would be provided by subborrowers from their own resources, from comercial banks and DBP. DBP has proposed, and during negotiations, assurance has been obtained, that DBP would meet working capital requirements beyond those obtainable from subborrowers' own resources and/or commercial banks. Working capital aspects are considered further in para 4.07. 3.11 The Bank loan to the Government would be for a duration of 19 years including 4 years of grace. These terms take into account lending terms expected to apply to subborrowers and the time required for dis- bursement of the Bank loan, plus one year for possible setbacks or delays. No rollover of Bank funds is int3nded. 3.12 A financial projection of the estimated project cash-flow is set forth in Annex 6. The project would be self--liquidating (para 4.08), the interest rate charged to subborrowers (11Z) leing sufficient to cover DBP's project administrative costs, including rese-ves for bad debts, as well as the interest costs of the subsidiary loan fr.m Government to DBP. Procurement 3.13 Contracts would be awarded on the basis of international competi- tive bidding. DBP would prepare designs and specifications for drying, milling, conveying and aeration equipment on behalf of subborrowers. Bids would be requested in separate calls for tenders based on suitable bulking of approved subprojects, 15 to 30 at a time. Although equipment required for smaller facilities is now being manufactured in the Philippines, it is expected that uost equipment contracts would be awarded to foreign suppliers - 13 - since imported equipment tends to be of superior quality at competitive prices. This has been taken into account in determining the foreign ex- change component of project costs. A price preference of 15% or the level of customs duties, whichever is less, would be allowed for all local manu- facturers supplying equipment under the project. Civil works contracts would be relatively small under each subproject and at scattered sites throughout the Philippines. They would thus be unlikely to attract foreign bidders. On the other hand, substantial competition among local bidders is likely; a large number of experienced civil works construction firms is available in the Philippines. Disbursement 3.14 Disbursements of the Bank loan, over a 4-year period (see Annex 7), would be made against import documentation for the cif value of equipment and other goods and services procured for the project. For equipment con- tracts awarded to local manufacturers, the Bank would disburse 60% represent- ing the estimated foreign exchange component. For construction contracts, the Bank would disburse 50% of costs, representing the estimated foreign ex- change component. Disbursement would take place on presentation by DBP of evidence of payments. If the project were completed for less than the loan amount, the surplus would be used to extend the number of facilities to be financed under the project. IV. ORGANIZATION AND MANAGEMENT A. Development Bank of the Philippines 4.01 A detailed review of DBP's finances and organization is given in Annex 8. With total resources of P 2,740 million (US$457 million), DBP is the leading development bank in the Philippines and an important channel for public finance for development of agriculture and industry. Its professional staff is over 1,200 strong, including more than 350 agriculturists and engineers. 4.02 DBP has maintained a measure of independence in the conduct of its day-to-day business affairs. Nevertheless, it has not always been success- ful in fending off political pressures and its investment decisions have not always been based on strictly economic considerations and sound bank- ing principles. Furthermore, DBP's financial prospects are clouded by the fact that its portfolio includes a large volume of long-term loans backed by medium- and short-term borrowings. - 14 - 4.03 The Bank loan would be made to the Government for relending to DBP on the same terns under a subsidiary loan agreement. This agreement would specify the main operating procedures to be followed under the project, including the establishment of a separate project account. Receipts atnd payments for or in connection with project implementationi would be recorded exclusively in this account. Tlat a subsidiary loan agreement between thle Government and DBP, satisfactory to the Bank, had been executed, would be a condition of effectiveness of the Bank loan. 4.04 In order to ensure suitable subloan appraisal and supervision under the project, a special Grain Processing Section (Annex 9) would be set up in the office of DBP's chairman. While most loan departments still rely more on security than on sound development criteria, DBP's Investment Bank- ing Department has developed appropriate appraisal and supervision procedures for industrial lending. A number of DBP's staff to be appointed to the Grain Processing Section would have had experience in this department. It would be a condition of effectiveness of the proposed loan that consultants acceptable to the Bank had been appointed to assist the Section in imple- menting the project. The Section would be headed by an experienced and qualified senior officer of DBP whose appointment would be made after con- sultation with the Bank. Assurances to this effect have been obtained during negotiations. B. Subborrowers and Terms of Subloans 4.05 Each subloan application would be filed with one of DBP's 26 branches, nearest the subproject to be financed. The application would give details of the applicant's past experience in grain milling and trading, the status of his processing and storage operations and facili- ties, the purpose of the loan and the collateral security offered. This information would be sent to DBP's Grain Processing Section for further investigation. The selection of subborrowers from available applications would be made by DBP's Board of Governors, on the basis of DBP's findings regarding such factors as managerial competence, prior grain processing or trading experience, technical capacity of proposed mid-level super- visory personnel and suitability of location (para 3.07). During negotia- tions, assurances have been obtained that DBP would employ appropriate se- lection criteria for subborrowers. There is currently a substantial unsat- isfied demand for finance of rice processing facilities in the Philippines. There should be adequate genuine demand for the kind of investment financing provided under the project. - 15 - 4.06 Detailed design of selected rice processing and storage sub- projects would be prepared by the technical staff of the Grain Processing Section and its consultants. Assurances have been obtained during negotia- tions that a subloan or combination of subloans to the same subborrower, in excess of US$250,000, would be subject to approval by the Bank. Such sub- loans would be submitted to the Bank together with DBP's feasibility reports demonstrating the technical and organizational soundness of each subproject as well as its financial justification. The form of these reports and the major covenants to be included in the subloan contracts have been agreed with DBP. Under the subloan contracts, subborrowers would be required to submit periodic progress reports and financial statements to DBP. Further- more, DBP would be empowered under the contracts to request periodic audit of subborrowers by independent accountants or its own staff. 4.07 In the appraisal of potential subborrowers, the Section would pay particular attention to the requirements for working capital and the intended sources. Total seasonal requirements are large, potentially as high as US$ 9.0 million at any one time (para 3.10). The Grain Process- ing Section would, as far as possible, endeavor to assist subborrowers in arranging financing with private commercial banks, since this source would be the most suitable. Insofar as it may be insufficient for project pur- poses, however, the Government and DBP have proposed, and the Bank has obtained assurances during negotiations, that DBP would, wherever required, provide credit for working capital to individual subborrowers on terms not less favorable than normal for such finance (currently 10% interest per annum). 4.08 Subborrowers would repay their loans to DBP at interest of 11% over 14 years, including a grace period covering the construction period of approximately one year. An interest rate of 11% is considered appropriate; it is somewhat above DBP's current lending rate in thie agricultural sector (usually 9%), but it is approximately in line with terms of on-lending to ultimate beneficiaries under previous Bank loans. The Private Development Corporation of the Philippines, to whichi three Bank loans have been made, currently charges 11% on its loans which are mainly industrial. The loans for rural credit projects made by the Bank carry an interest rate to farm- ers of 12%. The proposed lending rate of 11% would leave DBP with a spread of 3.75% on Bank funds, an adequate margin given the relatively high average size of proposed subloans. It would also allow satisfactory incentives for subborrowers to participate (see Section V below and Annex 10). The surplus funds which would accrue to DBP over the project life are adequate to cover the default risk of subborrowers (Annex 6). Assurances have been obtained during negotiations that adequate funds, on suitable terms, would be pro- vided for project implementation. - 16 - C. Financial I'rocedtires and Auditfnj' 4.09 During negotiations, assurances have been obtained that financial procedures ensuring timely availability of funds wouild be followed. Fur- thermore, the following assurances have been obtained about auditing pro- cedures for DBP's project account: (a) DBP's project account would be kept in a suitable form and be audited annually by a firm of independent accountants acceptable to thie Bank; (b) a copy of the audited account would be sent to the Bank within three months of the close of the fiscal year until the end of the disbursement period of the Bank loan. V. BENEFITS AND JUSTIFICATION 5.01 Tle proposed project facilities would eliminate major marketing deficiencies in the areas in which they would be established. The driers would facilitate the spread of high yielding varieties maturing in the wet season. The storage structures would minimize grain losses and help sta- bilize inter-seasonal farm prices. The mills would raise both the quantity and the quality of the grain produced and allow better utilization of by- products. Generally, the project is expected to contribute significantly to rural growth in the Philippines by providing more secure outlets for rising production of paddy farmers, many of whom are small-scale. Effec- tive design and location of project facilities would ensure adequate fi- nancial returns to subborrowers as well as a suitable economic return to the country as a whole. A. Operating Arrangements and Financial Returns 5.02 The ability of project facilities to accept wet paddy would tend to even out peak paddy inflows at the mills. Mechanical handling equipment would allow faster movement of grain within the mills than the manhandling methods used in warehouses. This, combined with the ability to handle wet paddy, would enable project facilities to turn over their stocks at a rela- tively high rate. Whereas existing warehouse facilities currently process only approximately two turnovers of their storage, the small project facil- ities are each expected to process 6,000 m ton of paddy per annum (3.2 turnover of static storage capacity), while the large project facilities are each expected to process 20,000 m ton of paddy per annum (4.0 turnover of static storage capacity). - 17 - 5.03 Millers would receive paddy from farmers, either directly or through buying agents, and would immediately test for moisture content. This, and the time elapsed since harvest, would influence the price payable. Approximately two-thirds of paddy purchased is expected to require mechan- ical drying; the remainder would have been solar dried to a satisfactory level by farmers. It is expected that the solar-dried paddy would have suffered fermentation damage equivalent to 25% of stocks. M4echanical drying would not totally eliminate fermentation damnage because poor trans- portation between farm and mill would still result in some deterioration, but the incidence would be reduced to about 10% of stocks. 5.04 Differences in climate, farming and marketing patterns would result in variations between facilities' patterns of grain flows. However, given the strict appraisal procedures proposed, it is expected that ade- quate financial and economic returns will be obtained for all subprojects. Expected cash flows for typical project facilities, and the assumptions on which they are based, are shown in Annex 10. The estimated gross income and associated expenditures are based, as far as possible, on the present experience of millers in the Philippines. However, as there are at pres- ent no comparable facilities involving bulk handling and storage, certain expenditure estimates are based on experience gained in other countries, adjusted for Philippine prices and costs. 5.05 Due to the floating exchange rate as of February 1970, project cost and financial returns had to be recalculated since appraisal. The ex- change rate of US$1 = P6.0 has been used as a standard assumption. Annex 11 provides an analysis of the sensitivity of the financial returns to changes in costs and benefits. The financial rates of return on total assets vary between 12.9% and 23.5% for a small facility and between 17.9% and 28.6% for a large facility. Rates of return on equity would be signi- ficantly higher and provide adequate incentives to participate in the project. Under standard assumptions, the most likely financial return of a small facility would be 18.9% on total assets over its life of 15 years and the long-term debt service coverage would be 1.3 during the 13-year period of loan repayment. The most likely financial return of a large facility would be 24.1% on total assets over its life of 20 years and the long-term debt service coverage would be 1.7 during the 13-year period of loan repayment. Revenue Generation and Taxation of Subborrowers 5.06 Tthe foregoing financial returnis are calculated after payment of income taxes. Details of the incidence of this taxation are shown in Annex 10; the totals estimated to be received by the Government in respect of all project facilities would be about p4.0 million per annum (US$0.7 million) in the years of loan repayment rising to P7.2 million (US$1.2 million) tlhereafter. - 18 - B. Farmers' Benefits 5.07 In order to cope effectively with an increasing rice production due to new varieties, the Philippines needs mechanical drying equipment, effective milling equipment and bulk handling and storage facilities. Tle proposed project facilities would improve this situation in selected areas where they would be established and would thus provide a strong impetus to the further dissemination of new farming technologies. Witlh lower operating costs and increased competition due to the project, a lower marketing margin for the miller would be realized which would benefit farmers in project areas. Far more important is the fact that new high yielding paddy varieties are early maturing and in some cases, must be harvested before the end of the wet season. The supply of these varieties now exceeds the capacity of drying at harvest in most regions. The provision of mechanical drying equipment under the project would allow millers to accept increased quantities of wet paddy, which could be dried without delay. This would significantly improve the farmers' market position. Based on an expected annual production of about 230,000-280,000 tons of new variety paddy which would be dried under the project in the wet season, and on a farm gate price increase of about P50 per ton over current wet paddy prices, increased farmers' income due to the project is estimated at P11.5 -- 14 million (US$1.9-2.3 million) annually. C. Economic Justification 5.08 When all facilities are constructed, project processors would han- dle about 480,000 ton of paddy per year producing 322,000 ton of milled rice. This represents 15-20% of what presently is estimated to pass through commercial channels. The value of milled rice produced by the project, based on projected world prices, would be between US$30 and US$40 million. 5.09 The economic evaluation of the project has been done in two parts. The first relates costs and benefits arising from the proposed project in- vestments to those which would arise from traditional storage investments. This is necessary to establish that investment in the more expensive bulk handling and drying facilities is justified. The second is the more custom- ary economic return analysis which relates all benefits and costs to the economy attributable to the project. 5.10 The first calculation is based on the assumption that, in an economy such as that of the Philippines, with substantial entrepreneur- ial initiative, a realistic alternative to investment in the proposed project facilities would be investment in traditional sack warehouses equipped as in the past. Such facilities would be justified economically, simply on the basis of being necessary to prevent the losses of rice that otherwise would occur from birds, rodents, spoilage and reduced milling recovery if paddy were stored in the open. However, as shown below, investment in the proposed project facilities is more attractive. The major quantifiable economic bene- fits of the project that would be obtained by not investing in traditional warehouses but in modern facilities, include: - 19 - (a) reduction in spoilage from fermentation of rice; (b) improved milling recovery resulting from early drying and modern equipment. The quantitative analysis presented in Annex 12 relates the additional costs of building bulk storage facilities, complemented by continuous-flow driers, to the additional benefits to be obtained from employing efficient equipment. On this basis, the economic rate of return on investment, including costs of training and consultants to DBP, would be about 17% (Annex 12). 5.11 If, on the other hand, as is customary, the entire value added by processing were considered as a benefit attributable to the project, the overall rate of return would be about 25% (Annex 12). This return is sa- tisfactory. It does not include substantial intangible benefits which would result from demonstration of improved grain processing tecliniques, and adoption of new farming technologies outside the project areas. Savings in rice storage losses are substantial under the project and when evaluated at projected world market prices (Annex 12) amount to about US$3.0 million per annum once all project facilities are fully operational. VI. RECOMMENDATIONS 6.01 The proposed project is suitable for a Bank loan of US$14.3 mil- lion at 7-1/4% interest, repayable over 19 years, including a 4 year grace period. 6.02 During loan negotiations, agreement was reached on the following principal points: (i) DBP would ensure sufficient credit to subborrowers for working capital needs arising from each subproject (paras 3.10 and 4.07); (ii) all subloan contracts involving subloans of more than US$250,000 would be subject to agreement by the Bank (para 4.06); 6.03 Conditions of effectiveness of the proposed loan would be that: (i) suitable training facilities had been provided to subborrowers' managerial, technical and operational personnel (para 3.06); (ii) expatriate consultants had been appointed to assist the Section (para 4.04); (iii) a subsid-iary loan agreement satisfactory to the Bank had been executed (para 4.03). January 11, 1971 ANNEX 1 PHILIPPINES RICE PROCESSING PROJECT Rice Production Problems and Prospects 1. Except for a few commercial farms, grain farming in the Philippines is a small-scale operation, based on about 2 million family holdings that produce rice and corn for home consumption and the market. Their crop pat- terns, mainly conditioned by environmental factors and subsistence consider- ations, have little flexibility for the cultivation of alternate crops. Usually, the larger part of a holding is under rice or corn, or both, de- pending on area and season, and whether soil moisture is adequate. Cereal monoculture of rice in the flood plains of Luzon, and corn in Mindanao, is characteristic for many low-land regions. 2. Land, human labor and animal power are the most significant grain farm resources. The current rice farming pattern involves a highly season- al demand for labor. In general, farm labor supply appears to be adequate to satisfy the demand arising from rice cultivation in Luzon and the Visayan Islands. In Mindanao, however, where holdings are larger and population density is low, labor shortage at planting and harvesting of rice and corn is a limiting production factor. The productivity of farm management and labor is satisfactory, though hampered by a lack of efficient tools and im- plements. 3. The dependable, but slow, work animal is the water buffalo (carabao). Where farm mechanization has been introduced, it has mainly supplemented the carabao to improve the timeliness of cultivation. More sophisticated farm mechanization is often limited by lack of capital re- sources, small farm sizes, and fragmentation of holdings. All of these factors make the economic use of expensive power tools problematic. There is some progress in small-scale mechanization, as evidenced by the increas- ing number of walking and light tractors, and mechanical weeders acquired by farmers in recent years. This type of farm mechanization is expected to increase in line with the adoption of improved cultivation practices, in- cluding multiple cropping. 4. Fertilizer consumption in the Philippines is particularly low for rice and corn. Together these crops occupy about 62% of the total cultivated area, yet they used only 29% of the estimated fertilizer supply in 1967. Past fertilizer supply patterns and consumption trends would, however, be doubtful indicators of the sector's future performance. The growth of the industry has been hampered by import privileges that were granted to spe- cialized crop interests; an arbitrary subsidy policy that resulted in a multiple fertilizer pricing system; and technological problems that slowed domestic fertilizer production. Fertilizer consumption has also been limited ANNEX I Page 2 by a lack of adequate marketing facilities; inadequate sales and credit pro- motion; and the traditional predominance of fertilizer-unresponsive grain crop varieties, particularly in rice varieties. 5. The future presents a different pattern. Fiscal privileges are being removed gradually and Government distribution of fertilizers is slowly phasing out; technological problems of domestic producers are likely to be overcome; and manufacturers have built up a wide distribu- tion network of about 2,000 appointed dealers, selling to farmers and cooperatives. The network is backed by industry-owned fertilizer ware- houses located at strategic points. Distributors and consumers are as- sisted by the industry's field staff in technical and credit matters. One major fertilizer producer is currently organizing credit workshops in collaboration with Government institutions, DEP, private banks, rural banks, cooperatives, dealers and farmers to work out the mechanics of pro- viding fertilizer credit to the trade and consumers. These measures are expected to play an increasingly important role in the marketing of fer- tilizer in the widely dispersed grain sector. The increase in adoption of high yielding paddy varieties by farmers and the progressing consolida- tion in the industry are further favorable factors for greater fertilizer use on paddy. 6. A major yield breakthrough took place only after the release of the International Rice Research Institute (IRRI) variety IR-8, in 1966. This variety, which is photoperiod insensitive, was tested in a wide range of yield trials throughout the rice groving regions. With fer- tilizer its maximum is 1 to 2 tons per ha above the best alternative va- riety and 3 to 4 tons above traditional varieties. Even without fertil- izer, IR-8 does better than most other varieties. 7. In the initial effort to establish a plant type with high yield- ing ability, cooking and eating quality were of secondary importance to breeders. However, now that physiologically efficient plant type has been developed the emphasis has turned to breeding for grain quality changes to suit Philippine taste preferences and to disease and insect resistance. Progress in this direction has already been made and new varieties of superior grain quality, with improved disease and pest resistance, are ready for release. 8. The introduction of new rice varieties has already shifted the comparative advantage in rice production throughout the major rice grow- ing regions of the Philippines. However, the initial speed with which the new technology was received is likely to taper off. The availability of an adequate water supply vill be a major factor influencing the rate and extent of further adoption. The preferable rice producing areas are likely to be those that combine a climate of high light intensity with a relatively favorable water supply, such as in the lowlands of Luzon. If the infrastructure is improved, these regions are likely to become the major producers of rice. Further, if continued technological progress leads to ever-increasing rice yield per ha, it would eventually be possible to reduce the total rice area in these areas and divert resources to other ANNE.X 1 Page 3 field crops without affecting increases in rice production. Other factors that would influence the rate of growth of rice production would be main- ly improvement of the farm institutional structure; the availability of farm labor and thie quiality of farm management; the availability of com- plementary inputs including seeds, fertilizer, chemicals and credit, and, further, the availability of modern rice processing facilities such as proposed to be set up under the project. ANNEX 2 PHILIPPINES RICE PROCESSING PROJECT Rice Marketing and Processing in the Philippines Sales of Paddy 1. Harvesters and threshers are paid in kind; they receive from 6 to 18% of the output. The landlord's share varies according to indi- vidual agreements but probably averages about one-third of output. The balance, approximately one-half of the total amount harvested, is left for the operator to sell or consume. Since the average farm is about 3 ha, most farmers market the small quantity they have to sell at one time. When two sales are made in a crop year, it is usually because of double cropping. Multiple deliveries are much more common with larger farmers, who have better farm storage and do not have as pressing a need for cash. According to 1967 figures, average volume of paddy sales per farm in the Philippines was only 35 cavans, or slightly more than 1.5 m tons. 2. It is usually profitable for a farmer to store paddy for a few months after harvest and thus obtain an increase of between 8 and 40% of the average price (depending on the harvest and its distribution within a given year) and an increase of up to 50% over the lowest price, the one generally prevailing at the height of the harvest season. In general, however, most farmers must sell their paddy immediately to obtain cash for debt repayment, living expenses or purchase of inputs for other farm operations. Still others have to fulfill sales contracts signed with moneylenders or grain traders and millers who supplied them with produc- tion credit during the growing season. Paddy Drying 3. Few farmers have adequate storage facilities on the farm. Those who do store paddy keep it in burlap bags, large woven baskets, jars or boxes. Larger farms may have a small bodega (barn or shed) where they can keep a few tons. However, more often than not, grain is simply spread in one or more rooms of the farm house. 4. Satisfactory drying of paddy immediately after harvest is a problem because of high humidity and possible rainfall during harvesting. Drying is particularly urgent with new varieties, which mature earlier than traditional varieties and which may need harvesting long in advance of the close of the wet season. Sun drying is common practice throughout the Philippines and, although it is efficient and economic on sunny days, it is inadequate to cope with the present and future flow of paddy from new varieties. AtNEX 2 Page 2 5. Probably the best long run arrangement for rice drying in the Philippines would be large, efficient driers at mills, combined with rapid transport from field to mill. However, because of the poor feeder road network, this is not practicable everywhere. 6. Mechanical warm air driers are not extensively used at present, except in research institutions, a few Rice and Corn Administration (RCA)- owned facilities, and some private warehouses and mills. 7. RCa recognizes the importance of mechanical drying and will not contract with warehousemen to purchase paddy harvested in the rainy sea- son unless they can dry the paddy they purchase mechanically. Even this is insufficient to ensure safe storage for an indefinite period of time, since studies show that paddy should be dried within 6 to 12 hours after harvest. This again points to the need for driers at farm and community levels. Transport to Mill 8. Paddy can be transported by the farmer to the warehouse of his choice by carabao sled, cart, jeep or truck, but in areas without all- weather roads it is not uncommon for farmers to be stranded with wet paddy, which can deteriorate rapidly if not dried. In such areas, buying agents provide an important service by purchasing produce on the farm and carry- ing it in trucks to the warehouse or to an interim storage shed (sometimes called a buying station) on a main road. When sufficient quantities have been collected at the interim storage shed, the buyer will load a truck and deliver several tons of paddy, either to a local mill or warehouse, or if the price differential is large enough, to a larger town that serves as a processing and distribution center. Milling 9. Milling transform the unhusked, rough paddy into the polished rice demanded by the consumer. Two types of mills are co_on in the Philippines: the small, inefficient "kiskisan" and the larger "cono". A third and much more efficient type, found only in a very few facilities, is the rubber huller mill. 10. The rubber huller type mill uses tvo rubber rollers rotating at different speeds to remove the hulls, which are iuediately aspirated by a blower. The brown rice (that is, the bran-coated kernel) then drops to a rotating ribbed cylinder, encased in a screen similar to a kiskisan mill. The force of attrition caused by the rubbing of the grains against each other and against the screen removes the bran and polishes the grain. Rice and Corn Administration 11. RCA, an autonomous Government agency, attempts to purchase about 10% of total production in each year throughout the country. ANNEX 2 Page 3 12. Only in the event of a scarcity or total lack of bonded ware- houses in a region does RCA purchase grain directly from producers. Most of its operations are carried out through bonded warehousemen. Two months before the regular rice planting season, RCA announces floor prices, which differ regionally according to the varying cost of production, but which never fall below P16 per cavan of clean and dry paddy weighing 46 kg gross. These prices remain in force for 1 year. RCA also enters into an agency contract with traders, the Farmer's Cooperative Association (FACOMA), and farmers with acceptable warehousing and milling facilities. Upon signing a contract and establishing a performance bond for 10% of the contract value of the paddy or rice, RCA opens a domestic letter of credit in favor of the contractor, covering the total value of the paddy or rice to be purchased for and on its behalf. 13. Republic Act 4643, which amended the charter of RCA (RA 3452), enunciates the system of procurement of paddy and corn through payment against warehouse receipts, commonly called quedans; authorizes the RCA Board of Administrators to determine the price of paddy and corn for various producing regions, taking into consideration the varying costs of production, but not less than P16.00 per cavan of paddy and not less than P 13.00 per cavan of corn; and directs RCA to sell rice and/or corn grits through the Rice and Corn Board (RICOB) registered retailers, barrio 1) councils, and in places where there are neither RICOB retailers nor barrio councils, through retailers appointed by RCA upon recomendation of muni- pal treasurers. 14. Under the quedan system, a farmer deposits his produce (paddy of corn) in any RCA-designated bonded warehouse of FACOMA and endorses the quedan issued to him. He may be paid cash on the spot, or, if he so pre- fers, can cash the quedan with the RCA agent bank in the locality. Recovery in excess of 63% accrues to the warehouseman/miller as his profit, together with proceeds from sale of all by-products and, in certain circumstances, a storage fee paid by RCA. 15. To stabilize the retail price of rice, RCA has fixed the price of its stocks, milled from paddy purchased to support farm prices, at no more than P 1.40 per ganta for the "ordinary" varieties. Sales for "fancy" and "special" rice are at higher prices, based on normal price differen- tials. RCA sells this rice only at times and in areas where the free play of supply and demand forces the market price above the prescribed ceiling. Otherwise, it does not release rice from storage to its authorized retail outlets. 1/ Barrio - small community. ANNEX 2 Page 4 Warehousing 16. The average capacity of existing warehouse facilities is rela- tively small and is an indication of the very low level of concentration within the industry. In the private sector, the average size of ware- houses is less than 700 m tons. Average size of those owned by the Agri- cultural Credit Administration (ACA) is almost double that of private facilities. ACA-owned facilities were meant to serve the cooperative FACOMA; however, a number of these ceased their activities and subsequent- ly rented to individuals from the private sector. Largest of all are the RCA-owned warehouses, which have an average capacity of close to 3,000 m tons, but these are only about 1.5% of the total number of facilities in the country. 17. Warehouses are often attached to rice mills, or situated very close to them. There are some cases, though, where storage facilities are to be found rather far removed from towns where the mills are situat- ed. Some of these serve as up-country collection depots for buying agents employed by the millers. Others belong to paddy traders. 18. If the estimate of 2.6 million m tons of storage capacity were correct and if the warehouses were in reasonable condition, it is probable that storage capacity would only be adequate on a national basis for 1969 harvest requirements. However, the estimate is suspected of being high and the warehouses are in relatively poor condition. Further, production is increasing and present capacities are already insufficient in favor- ably situated areas, including those where private and national irrigation schemes are being developed. Wholesaling 19. Millers and warehousemen have begun to appreciate that "vertical integration" can overcome some of the problems of their industry. Vertical integration implies that one group purchases, stores and mills paddy, and transports any surplus rice to deficit areas for sale to wholesalers or, preferably, to retail outlets. Vertical integration is not yet widespread, although some entrepreneurs are now undertaking two or more links in the chain between farmer and consumer. 20. If production increases faster than demand, competition will in- crease at the wholesale and retail levels. Some of the larger millers, mainly in Mindanao and parts of Luzon, foresee this and have begun to or- ganize and integrate horizontally. They have formed a nucleus group called the Rice and Corn Exchange of the Philippines (RICOREX), which aims to combine operations at the retail level and capture a large share of the Manila market. They propose to offer both convenience and quality by offering home delivery of packaged rice of higher quality than that pre- sently available on the market. If RICOREX and similar groups of producers and processors succeed, more of the industry can be expected to integrate both vertically and horizontally. The result would be a more efficient ANNEX 2 Page 5 production and marketing system. It would also facilitate entry into the world market, where quality is a far more important factor than it has been in local rice processing and marketing. Retail Marketing 21. The majority of rice sales to consumers is made by retail stores. The balance comes from rice mills and direct from farmers. Retail outlets comprise specialty and general stores and, most importantly, public market vendors. Most retail outlets average about 20 to 25 cavans of 56 kg weekly. ANNEX 3 PHILIPPINES RICE PIOCESSING PROJECT Outline Specifications 1. The outline specifications given in this Annex indicate the main features of typical small and large facilities to be set up under the project. They were used as the basis for estimating project costs. A. Small Facilities 2. The general layout of small facilities is shown in Drawing 1. The main features are: Storage bins - Six bins of 315 m ton capacity each, total capacity 1,890 m tons. Working bins - Eight bins of 38 m ton capacity each, total capacity 304 m tons. Capacities - The maximum total capacities of the storage and working bins would be 2,194 m tons. The total capacity for working purposes would be approxi- mately 2,000 m tons. Construction materials - The storage and working bins would be of welded sheet or corrugated steel with bolt fastenings. Aeration and grain handling characteristics of bins - The storage bins would have flat bottoms. Aeration would be provided by axial flow fans (one per two bins) powered by individual electric motors. The tempering and working bins would have hopper bottoms and no aera- tion. Drier - Continuous flow column type of three m tons per hour net capacity when drying palay from 25% to 14% moisture. Oil burner with safety devices. Mill - Between 1 and 1.3 m tons per hour capacity of modern design (average 1.2 m tons per hour). Maximum continuous output at peak periods approximatley 700 m ANNEX 3 Page 2 tons per month. Mill power provided by diesel engine with line shaft and belt drive. Grain handling equipment (i) Receiving pit. (ii) Screw conveyor - receiving pit to receiving elevator 15 m tons per hour. Receiving elevator 15 m tons per hour capacity to cleaner. (iii) Cleaner (rotating screen or vibrating bar type) with aspiration and cyclone-type dust collection, 15 m tons per hour capacity. (iv) Relift elevator - cleaner to conveyor above bins, 15 m tons per hour capacity. (v) Two screw conveyors above, and one below, storage bins, each of 15 m tons per hour capacity. (vi) Two screw conveyors above and two below working bins each of 15 m tons per hour capacity. Two elevators to service working bins and drier, each of 15 m tons per hour capacity. (vii) Spout flow to rice mill. (viii) Two receiving hoppers of eight m tons capacity each in rice mill. (ix) Spout flow to palay shipping facility. (x) Power for the grain handling equipment would be provided by a diesel powered electric generator. Warehouse and mill building - Building to house mill and provide 500 m tons sack storage capacity. Dimensions of 90 ft long x 60 ft wide x 14 ft high to eaves. Framework of structural steel. Walls and roof of galvanized iron. Screened ventilation louvres in walls and roof. Local con- struction. Office and laboratory - Dimensions, 20 ft x 50 ft, metal frame, steel clad, sealed. Single storage. Foundations and roadways - Bin and machine footings of re- inforced concrete based on average expected soil conditions to extend approximately 2 ft below surface. Slab foundations for buildings to have grade beans around perimeter extending 12" below surface, for rodent control. Earth roadways. ANNEX 3 Page 3 Security fence and gate - Chain link topped with barbed wire overhang. 8 ft high. One gate 12 ft wide with guardhouse. Land required - One hectare of level, well-drained land with good road access. B. Large Facilities 3. The general layout of large facilities is shown in Drawing 2. The main features are: Storage bins - Eight bins of 534 m ton capacity each, total capacity 4,272 m tons, plus a pack factor of 5%. Working bins - Seven bins of 104 m ton capacity each, which are interstitial spaces between the eight circular bins, plus three small bins at the headhouse end of the storage bins, of 28 m tons capacity each. Total capacity is 812 m tons. Capacities - The maximum total capacities of the storage and working bins would be 5,084 n tons, plus a pack factor of 5%, or a total maximum capacity of 5,338 m tons. The capacity for working purposes would be approximately 5,O0O m tons. Construction materials - The storage and working bins would have hopper bottoms. Aeration would be provided to the storage bins only by two permanently installed blower systems. Drier - Continuous flow column type of 7 m tons per hour net capacity when drying paddy of 25% moisture to 14% mois- ture. Oil burner with safety devices. Mill - The rice mill shall be of modern design, with 4 m tons per hour capacity of palay. Milled rice sorting equipment of suitable capacity to be compatible to milled rice production. Characteristics: milling machinery shall utilize a combination of the attrition and friction tech- niques of bran removal. Maximum continuous output at peak period approximately 2,800 m tons per month. Grain handling equipment (i) Two receiving pits; (ii) Receiving conveyors - receiving pit to receiving elevator 50 m tons per hour capacity. Receiving elevator of 50 m tons per hour capacity; ANNEX 3 Page 4 (iii) Cleaner (rotating screen or vibrating bar type) with aspiration and cyclone type dust collection, 25 m tons per hour capacity; (iv) Relift elevator - cleaner to conveyors above bins, 50 m tons per hour capacity; (v) Two conveyors above bins, of 50 a tons per hour capacity, and two below storage bins, each of 50 m tons per hour capacity; the same conveyor system handles both storage bins and working bins; (vi) Spout to rice mill; (vii) Three receiving hoppers of 24 m tons capacity each in rice mill; (viii) Spout to palay shipping facility; (ix) One bagging hopper of 8 m tons capacity for bagged shipments of palay; (x) Power for the grain handling equipment would be provided by a diesel powered electric generator. Warehouse and mill building - Buildings to house mill and provide 1,500 a tons sack storage capacity. Dimension of 130 ft long x 90 ft wide and 14 ft high to eaves. Framework of structural steel. Walls and roof of galvanized iron. Screened ventilation louvres in walls and roof. Local con- struction. Office and laboratory - Description: 20 ft x 50 ft metal frame, steel clad, sealed, 1 story. Securiry fence and gate - Chain link topped with barbed wire overhang. 8 ft high. One gate 12 ft wide with guard- house. Land required - 2 hectares of level well-drained land with good road access. PHILIPPINES: GRAIN PROCESSING PROJECT /5 rON/HW SMALL BULK SILO CONVEYOR UPPER EERN 3/5 TON S/N A COR SECTION OR IR 8 TON MILL SINS MILL N/GINGI Li~~~I 10- C C> ELEVATON B//V PLAN MARCH 1970 IBRD 2624RI ANNEX 3 DRAWING 2 PHILIPPINES GRAIN PROCESSING PROJECT LARGE BULK SILO Concrete toppet on /V Scal_e onv" Steel Hopper I _ _1 _ . . . _ _ 7 r . _ _ ~~~~~B/N BOTTOMS 26I L~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ WM 1 [ 1 r 1 r 1 r /- ~~~~~~~~~~~~~~~~~~~9 Interstxrw Storop 9in7s _._~~~~~~~~~~~ 'K. / We/ SECTJ/ON L V- -1 L Drier BII FLAN _o __ ._ _ __ ____.___ , ___ ......._. __ ____, _F _ _ ___ __ _ ._ _ 1_ ANNEX 4 PHILIPPINES RICE PROCESSING PROJECT Training Aspects A. Introduction 1. Efficient functioning of the Philippines' grain processing in- dustry will largely depend upon its operating personnel. It is therefore important that they receive the best possible training to carry out their duties. Training of operating personnel would, therefore, be a condition of the proposed grain processing project. Besides meeting the requirements of a growing and more complex industry, training would improve the opera- tional efficiency of existing grain processing enterprises. B. Present Research and Training 2. Research work combined with graduate courses in the technology of grain utilization is carried out primarily at the University of the Philippines College of Agriculture (UPCA) by the Department of Agricul- tural Engineering. Related subjects covered by the UPCA's research pro- gram include grain drying problems, storage, milling, grain chemistry and utilization, feeds and feed quality, and ancillary aspects. The on-going research and teaching program is sufficiently broad to support a training program for operation staff of grain processing enterprises. UPCA's De- partment of Agricultural Engineering will soon occupy new quarters with modern facilities which will allow the extension of scope of grain pro- cessing research. Research, experimentation and laboratory work in grain processing are also done by BPI, while supply of field driers and exten- sion in grain drying is provided by APC. 3. Training of operating personnel in grain processing is also provided by UPCA's Department of Agricultural Engineering. It currently conducts a standard and short-term course for Farmers' Cooperative Mar- keting Association (FACOMA) personnel and a basic information course for warehouse and mill managers. The emphasis is laid on skill training of improved practices, including theoretical subject of grain processing. 4. The training program of IRRI provides personnel of other research and educational organizations concerned with rice development with an op- portunity to work under the guidance of eminent specialists in the major phases of rice research including grain utilization and processing. The program includes trainees of three types: (i) research scholars; (ii) research fellows; and (iii) other trainees. The last are accepted by ANNEX 4 Page 2 special arrangements and follow a program of study designed to meet the needs of the employing organizations, whether it be in rice research or instruction. 5. Two expatriate experts, provided under a UNDP technical assist- ance project, which is executed by FAO, are presently advising RCA and the industry in grain drying, and warehousing and milling improvement, and their services would be available under the current project until the end of 1970. The government applied for a UNDP/SF project for the estab- lishment of a grain processing center for applied research and training. The request has been approved by UNDP in June 1970. The center would be administered by UPCA (Department of Agricultural Engineering) under the policy guidance of an inter-ministerial committee. C. Proposed Training Program 6. The proposed program would train senior staff and operating personnel employed by project subborrowers. 7. The program would include three types of trainees: (i) Enterprise managers (or owners) (ii) Plant superintendents (iii) Shift leaders (operators) Managers and owners would be relatively mature persons with experience in managing conventional grain processing units, or potential managers who have a higher educational background. They would require training to fa- miliarize themselves with modern principles of grain processing. A resi- dential course of several weeks duration would be adequate for this cate- gory of trainee. Besides theoretical and technical subjects in grain processing, this course would also teach economic and legal aspects of the grain industry, and marketing and logistics. The course for plant superintendents of the larger facilities is shown as Attachment 1. It would require a period of about three months in residence and another three months practical experience. Shift leaders would pursue a similar course but with more emphasis on operating skills. 8. The estimated numbers of trainees in the three categories for whom training would be provided under the proposed project are: ANNEX 4 Page 3 Small Fac. Large Fac. Total Enterprise managers and owners 60 6 66 Plant superientendents 30 6 36 Shiftleaders and operators 90 12 102 Total 180 24 204 9. A candidate for admission to the training program under any of the three trainee categories would meet the following qualifications: (i) is the owner, or staff member, of a grain processing enterprise or of an agency concerned with the devel- opment of grain processing; (ii) has an adequate basic educational background; (iii) is reconnended by the organization where the candidate is employed; and (iv) is assured a leave-of-absence from his employment during the period of training, and a position on his return. Normally, a candidate for the training program would be proposed or nomi- nated by his employer. During appraisal of subprojects, the Grain Process- ing Section would determine which subborrowers' staff required training and would be able to benefit from it. 10. Equipment and tuition would be provided by the center and the costs borne by the UNDP or government as appropriate under UNDP/SF rojects. Costs of subsistence and wages during training would be borne by sub-irrowers. 11. The government's request to the UNDP/SF for a grain processing center (para. 5) was formulated in consultation with the Bank and the project training requirements could be satisfactorily met by the Center. ANNEX 4 Attachment 1 page 1 PHILIPPINES RICE PROCESSING PROJECT PROPOSED TRAINING OF SUPERVISORY PERSONNEL PHASE I Theoretical and Laboratory Training 1.01 Recognition of different varieties of rough rice and corn. 1.02 Physical properties of rough rice: (i) Very abrasive 1.03 Constituents of rough rice: (i) Hull (ii) Brown rice: (a) Indosperm (b) Bran (c) White rice 1.04 Physical properties of corn. 1.05 Reaction of rough rice and corn to external forces: (i) Temperature (ii) Humidity (iii) Physical impact (iv) Time, in relation to exposure of (i)-(iii) 1.06 Conditions conducive to safe grain storage: (i) Grain moisture content (ii) Equilibrium grain moisture studies (iii) Temperature (iv) Ventilation (v) Aeration (vi) Disease, insect and rodent activity 1.07 Materials of bin construction. Advantages and disadvantages of: (i) Concrete (ii) Steel (iii) Wood ANNEX 4 Attachment 1 page 2 1.08 Grain drying methods. Advantages and disadvantages of: (M) Solar drying (ii) Mechanical drying (iii) Drier types: (a) Shallow bed batch dryer (b) Deep bed batch dryer (c) Continuous dryer 1.09 Conveying and elevating equipment: (i) Advantages, disadvantages and limitations of: (a) Screw, belt, drag, pneumatic, and other conveyors (b) Bucket, screw, drag, and other elevators (ii) Power, power transmission, speeds, etc.: (a) Speeds of equipment (b) Speed reducers, line shafling, motors, engines, etc. 1.10 Laboratory equipment: (i) Theoretical importance of laboratory equipment: (a) Probes, automatic samplers, stream splitters (b) Laboratory cleaners and dockage testers (c) Moisture testers (d) Laboratory sample dryers (e) Scales and balances (f) Laboratory shellers (g) Laboratory mills (h) Laboratory graders (i) Laboratory aspirtors (ii) Practical Laboratory exercises in the use of (i)(a)-(b) 1.11 Grain Sanitation: (i) Dust control (ii) Housekeeping (iii) Fumigation (iv) Rodent control (v) Insect control ANNEX 4 Attachment 1 page 3 1.12 Grain aeration: (i) Air flows and requirements (ii) Shedds curues (iii) Equilibrium moisture (iv) Use of psychometric charts 1.13 Air Handling: (i) Types of fans and blowers (ii) Blower selection (iii) Interpretation of fan performance tables (iv) Air measurement 1.14 Grain flows and interpretation: (i) Understanding of the mechanical operations in processing facilities (ii) Assignment of personnel 1.15 Plant maintenance: (i) Spare parts (ii) Preventive maintenance (iii) Repairs PHASE II Field Training 2.01 Scheduled visits to units in operation to observe production procedures and problems: (i) observation of drying methods, both solar and mechanical; (ii) observation of grain being stored in different types of bins; (iii) observation of conveying and elevating equipment during operation; and grain flows and processing operations; (iv) observation of dust control and solution of problems; and sanitation problems and solutions; (v) field measurement of fan and blower performance; and study of duct systems and control measures; (vi) observation of maintenance and their solutions; and (vii) observation of personnel requirments at operating plants, with a study of possible ways to greater efficiency. ANNEX 4 Attachment 1 page 4 2.02 It is also proposed that trainees would visit construction sites of processing units with particular observation in the following fields: (i) receiving of incoming construction materials; (ii) machinery installation; and (iii) installation of electrical controls. ,ANNEX 5 Page 1 PHILIPPINES RICE PROCESSING PROJECT Project Costs A. Small Facility (complete); 30 Uni;ts Item Local Foreign Total Local Foreign Total - Pesos '000--= --- US '0000------ 1. Processing and storage faci- lities '.1 Drier 14 102 116 2.4 17.0 19.4 1.2 :Iills 68 216 284 11.3 36.0 47.3 1.3 Bulk silos 49 192 241 8.2 32.0 40.2 1.4 Grain handling equipment 107 450 557 17.8 75.0 92.8 1.5 Sack warehouses and mill buildingo,s 63 42 105 10.5 7.0 17.5 1. Other construction, equipmenL and land and vehicles 64 110 174 10.6 18.4 29.0 3ub--total 365 1,112 1,477 60.8 185.4 246.2 2. Contingencies (10,0) 36 111 148 6.1 18.5 24.6 Tota,l individu,-Jl prcject cost 401 1,223 1i625 66.9 203.9 270.8 (Of hliich duties) (162.0) _ (162.0) (27.0) - (27.0) '3. Sriall Facii-,'es (expansion); 30 7hi_its 1. Processing ard storage faci- lI ties 1.1 Drier 1l4 102 116 2.4 17.0 19.4 1.2 Bulk silo 49 192 241 8.2 32.0 40.2 1.3 Grairn handling ecuipment 107 450 557 17.8 75.0 92.8 1.4 Other construction, equip- ,,Lent, arid land 64 110 174 10.6 18.4 29.0 Sub--total 234 854 1,088 39.0 142.4 181.4 2. Contingencies (10,';) 23 85 109 3.9 14.2 18.1 To-'a' individual project, cost 257 939 1,197 42.9 156.6 199.5 (Of which duties) (108.0) - (108.0) (18.0) - (18.0) ANNEX5 Page 2 Local Foreign Total Local Foreign Total C. Large Facilities (ocmplete). 6 units ------Pesos '000 ------ -----US$ '0o0------ Item 1. Processing and Storage facilities 1.1 Drier 49 138 187 8.2 23.0 31.2 1.2 Mills 170 438 608 28.3 73.0 101.3 1.3 Bulk Silos 1,024 402 1,426 170.7 67.0 237.7 1.4 Grain handling equipment 244 930 1,174 40.7 155.0 195.7 1.5 Sack warehouses and mill building 1146 84 230 24.3 114.0 38.3 1.6 Other construction,equipment land and vehicles 371 350 721 61.8 58.3 120.1 Sub-total 2,004 2,342 4,346 334.0 390.3 724.3 2. Contingencies (10%) 200 234 435 33.4 39.0 72.5 Total individual project cost 2,204 2,576 4,781 367.4 429.3 796.8 (Of which duties) (312) (312) (52.0) (52.0) D- Total Project Cost % Local Foreign Total Local Foreign Total Foreign Exchange ------ Pesos '000 ------ ------uS$t '000------ 1. Processing and Storage facilities 1.1 Drier 1,134 6,948 8,082 189 1,158 1,347 86 1.2 Mills 3,060 9,108 12,168 510 1,518 2,028 75 1.3 Bulk Silos 9,o84 13,932 23,016 1,514 2,322 3,836 61 1.4 Grain handling equipment 7,884 32,580 40,464 1,314 5,430 6,744 81 1.5 Sack warehouses and mill buildings 2,766 1,764 4,530 461 294 755 39 1.6 Other construction )equipment and land 4,116 5,700 9,816 686 950 1,636 58 1.7 Vehicles 1,950 3,000 4,950 325 500 825 61 Sub-total 29,994 73,032 103,026 4,999 12,172 17,171 71 2. Administrative Costs 2.1 Consultant's fee 1,464 4,800 6,264 244 800 1,0144 77 2.2 DBP's staff costs 4,438 - 14,438 740 - 740 - 3. Contingencies (10%) 3,590 7,968 11, 558 598 1, 328 1,926 68 Total Project Cost 39,486 85, 800 125, 286 6,581 14, 300 20, 881 68 (o0 which duties) (6,972) (6,972) (1,162) (1,162) PHI LIPPINEr ANNEX o RICE PROCESSING PROTECT Projected Project Cash ltow (P '000) <4't'nF JtR >«237 1 0 3 - 5 6 7 8 9 10 U' 12 13 14 15 16 17 18 19 20 Total 1. lrr C Fh-oge -ocp-oent 450 1,800 1,770 1,200 - - - - - - - - - - - - - - - - 5,280 Lro-L 'u-rency C.oapoo-t 53b 536 536 - - - - - _ _ _ _ _ 1,_O8 *Oralsirs .ricxccacOo Sction 270 540 577 5o3 1§t l92 196 19 16 19b 9 196 196 196 196 196 196 - 4,438 .. epFsco - to .Joveersrent l> 0 Csaur'n>act Foss 520 so.) 415y 00e0 14 - - _ _ - _ - _ _ _ _ _ - _ _ 1,599 4.2 Isreaft Dsriog ostrscrloo 16 357 1,790 4,291 2, 973 _ - _ _ _ _ - _ _ _ _ _ - _ 9,433 4.3 Debt 3erelce - '4 36 9' .47° ),474 9.470b 9,47b 9,476 9,476 9,476 9,476 4,476 9 4768 142,140 rOtal Applicatiors 1,594 11,0(b 34,523 43,5 7 15,574 9,672 3,072 9,67'2 9,o72 9,632 9,072 9,672 9,672 9,672 9,672 9,672 9, 672 9,4'76 9,4(b 4,738 246,118 let Cash Tnfloo (Ostflo.r) (1,144) (2,039) (2,309) 357 2,887 2,255 2,255 2,255 2,255 2,255 2,255 2,255 2,255 2,255 2,255 1,199 (3,097) (9,357) (9,476) (4,738) (4,167) Csnslatlre Saab lot lowo (sIC lows) including R.sI.e,toeat at 7% p.o. (1,184) (3,377) (6,0033 (6,051) (3,49G) (1,400) 936 3,229 5,789 8,528 11,459 14,595 17,951 21,542 25,384 28,4o2 27,185 20,439 I2,063 8,002 8,002 '0 TE S: 1/ F-rasis,o no TBRD loan on the baais sC 13%, 40% and 4(I in the llt, 2ad and 3rd year and allowing for a sLippage of 3 ronths. 0/ nL--rest during grace pe-ioi af loans to oubborro-ero io capitled and a-aorti-ad over the os-c-cdihg 13 years at 11% p.a. t'.ILlriK F' -IJ 1.l il.002301130 .tOJ22 `sti%r,ated .)isbursemann Sch-dule --- (esos '00) -------------------------------------- -----------U13 '000 ---------- ---------------------------------------------- Disibursenient"' 2otal ''r Asburseir.ent Ii sburse- o 'A: A 1 -S e * for r ldito)-l -oisburs3enr t urtn .'o; t lot l o t -iL for cartal uo for Totaotal Totai fotal { .c-,i wicinu for )Usbu, sourrOu ldALsbuaLs u Aui '- n t tjonsui tante .,uartcrly isbursed Undisbursed ..vl iorlcs Consultants (curl.) (cum.j Civil _orka _isbursement (cum.) lSt - - - - - _ _ _ - 1971 | 2nd - - _ _ _ 3rd - - - - 85,300 -- _ 14,300 4tli - 450 410 410 '35,350 75 75 75 14,225 .Vnnu.al Total 45O 1,0 4516 85,350 - 75 75 75 14,225 1st - 450 40 450 900 .04,900 - 75 75 150 14,150 1572 2nd - 450 450 1,350 04,450 - 75 75 225 14,075 3rd 4,oci 4510 4. 3O 5,830 79,920 680 75 755 980 13,320 4th 3,060 450 3,510 ),3Y0 76,410 510 75 585 1,565 12,735 nnuial Total 7,14v0 1,o00 8,9410 i,390 7_, 413 1,190 300 1,4L90 1,565 12,735 1st 3,030 450 3,510 12,900 72,900 510 75 585 2,150 12,150 11)73 "rd 3,720 410 10,170 23,070 .2,730 1,620 75 1,695 3,645 10,455 3rd 9,720 450 10,170 33,240 ,2,0 1,620 75 1,695 5,540 8,760 IOtis 3,460 420 ,, )00 40,140 43, n6W 1,030 70 1,150 6,690 7,610 .mnual Totai 23,9)00 1,770 30,750 40,140 45,660 4,830 295 5,125 6,690 7,610 1st 6,)430 420 6,900 4,7,04 33,7W0 1,080 70 1,150 7,840 6,460 1974 2nd 11,+00 420 11,020 :,O '6,940 1,900 70 1,970 9,010 4,490 3rd 11,400 420 11,820 70),60o 15,120 1,900 70 1,9/0 11,780 2,520 0th 7,60 - 7,5W (0,210 1,560 1,260 - 1,200 13,040 1,260 A.nnual Total 36,j40 1,260 38,100 7(,240 1,560 6,140 210 6,350 13,040 1,260 19756 1st 7t,4o0 - 7,560 05d(,ou 0 1,260 ,2O0 114,300 0 snU, 2vonly :ccor()ing to amnounts disbursed. ANNEX 8 Page 1 PHILIPPINES RICE PROCESSING PROJECT The Development Bank of the Philippines A. Introduction 1. The Development Bank of the Philippines (DBP) is a long-term finance institution wholly owned by the Philippine Government. It pro- vides credit facilities for the development and expansion of agriculture and industry and for broadening and diversifying the national economy. With the Government's full support and financial backing, DBP in recent years has become one of the most important finance institutions channel- ing public funds into key sectors of the economy. 2. Established under Republic Act No. 2081 of June 14, 1968, DBP was the successor of the Rehabilitation Finance Corporation (RFC), which had been set up in 1946 to provide credit facilities for the reconstruc- tion of war-damaged property. The RFC, in its turn, had succeeded the Agricultural and Industrial Bank (AB), which had been created in 1935 from the National Loan Investment Board (NLIB). With each of the changes, the newly-formed institution took over the assets and liabilities of its predecessor as well as accepting new responsibilities. 3. Management of DBP is vested in a Board of Governors appointed by the President of the Republic. DBP may finance: (a) agricultural, industrial or public utility enterprises; (b) self-liquidating or income-producing projects of pro- vincial or municipal authorities; (c) purchasing, production and marketing activities of co- operatives; and (d) acquisition of shares in corporations by their employees. 4. DBP may grant long-term loans or purchase redeemable preferred shares or obligations; underwrite and do business in securities of firms eligible for financing; extend guarantees; rediscount medium- or long- term loans of the Philippines National Bank (PNB) or the private devel- opment banks; and subscribe to the capital of private development banks. Subject to the approval of the President, DBP may issue bonds, debentures, securities, collateral and other obligations, which are fully guaranteed by the Government. It may guarantee acceptance credits, loans and other ANNEX 8 Page 2 obligations, local or foreign. The aggregate of DBP's direct obligations must not exceed 10 times its capital and surplus. B. Sources 5. DBP has an authorized capital of P2 billion; paid-in capital; reserves and surpluses on December 31, 1969 amounted to t 479.88 million. Apart from these resources, DBP administers various public trust funds assigned to it by Government; on December 31, 1969, DBP had at its disposal a total of t 2,738.50 million as follows: Million Pesos Paid-in capital, reserves and surplus 479.88 Long-term liabilities 947.70 Progress bonds 498.42 Time and saving deposits 262.26 Other liabilities 377.88 Total Own Resources 2,566.14 Trust funds 172.36 Total Resources 2,738.50 C. Organization and Management 6. The Chairman and eight members of the Board of Governors are appointed by the President of the Republic, with the consent of a Par- liamentary Committee, for a term of 7 years. However, in the event of a change in the Administration, the Chairman and the entire Board usually resign to enable the incoming President to make new appointments. The Chairman is an ex-officio member of the Monetary Board and sits in cabinet meetings. The Secretary of Justice is the ex-officio legal adviser, and the Auditor General, ex-officio auditor. Four of the Governors serve full time and are in charge of operational departments. 7. DBP maintains a large head office in Manila and a network of 26 branches throughout the country. Tables 1 and 2 list professional and supporting staff and indicate their distribution within the bank organization. ANNEX 8 Page 3 8. Operational duties are allocated by functions among several loan departments dealing with industry, agriculture, government, real estate, rural banking, etc. Other departments provide supporting pro- fessional services to loan operations, including legal, financial, bank- ing and administrative services. An auditor appointed by Government, with his staff, carries out his functions both in the head office and the bank's branches (Figure 1). 9. Most loan departments rely upon assistance from the Credit De- partment in appraising proposed loans. In general, these appraisals are confined to an analysis of credit standing and to a check on collateral security. Little attention is given to the financial or economic aspects of projects, and only cursory consideration is given to their technical features. 10. The Investment Banking and Research Department, the only self- contained operational unit, bases its recommendations on proposed loans on a complete and comprehensive study of the project. However, at pres- ent its activities are confined to large industrial projects. 11. Each loan department is responsible for disbursement, collection and maintenance of borrowers' accounts for the loans it recommends. How- ever, supporting services are provided by the separate Treasurer's Depart- ment and Accounting Department. 12. DBP operations are guided by a continuous flow of instructions and directions based on Board resolutions dealing with all principal as- pects of the bank's activities. They evolve within a pattern of operat- ing and administrative procedures related to the activities of all depart- ments, at head office and branch levels. 13. In communications with clients DBP makes extensive use of cir- culars and standard forms covering various aspects and phases of the loan operation. Invariably, this will include application forms for loans and related questionnaires concerning information on the applicant, his fi- nancial condition and credit standing and proposed security arrangements for the loan. 14. All loan applications in excess of P 5,000 are subject to Board approval. The findings and recommendations of the staff on each project are normally incorporated in a brief report channeled through the super- visory Governor to the Chairman who, in turn, submits it to the Board for final approval. 15. The security documents of the loans normally consist of a Promissory Note and a Mortgage Deed, the latter containing standard loan covenants concerning normal loan conditions, such as requiring the borrower to maintain his investment in the enterprise, to keep ac- counting records and to provide for insurance coverage. ANNEX 8 Page 4 16. DBP operating procedures are considered unduly burdensome by its clients, and thiere have been complaints from various quarters about some of the DBP's practices in the processing of loan applications. Follow-up at present is greatly limited and mainly concerned with r:ke collection of loans and the performance of delinquent borrowers. Project supervision is weak. 17. There was a hieavy concentration of executive responsibilities ir the person of the Chairman and an apparent lack of active involvement on the part of other senior officers in decision-making. hlowever, recently efforts have been made to decentralize decision-making. D. Lending Operations 18. DBP's lending policies, within the provisions of its Charter, are influenced by the economic guidelines set by the Central Bank, the National Economic Council and, more recently, the Investment Board. This has called for a rapid increase in operations. In order to meet these increased requirements within the limits of its resources, the bank has had to develop new financial techniques involving, in large measure, non- cash transactions. Two of these, the issue of Progress Bonds (in lieu of cash) and the granting of guarantees of foreign exchange loans, have be- come outstanding features of the bank's operations. 19. As a Government-owned and controlled institution, DBP maintains close contact with Government on top policy levels and continuing coopera- tion with all Government agencies concerned with the various aspects of its activities. DBP has been instrumental in the implementation of im- portant Government policies and has embarked on new activities in agri- culture and agriculturally-related industries. 20. The terms of DBP loans range from 1 year for special product credits, such as paddy and fertilizer, to 5-10 years for capital invest- ments. These terms are either fixed by law for financing of special pro- grams or they are determined in the light of project requirements and related security considerations. DBP records show a large incidence of delayed repayments on some of the production loans, particularly on credits for paddy, and the extension of the terms of such loans by one or several years appears to be the bank's normal practice. 21. DBP normally charges an interest rate of 9% on loans up to P 100,000 and 10% on loans over P 100,000. Loans approved under special programs for agriculture aid industry carry preferential rates of 4%; loans to the cottage industry, 6%; and small agricultural loans and loans for real estate under the low-cost housing scheme, 8%. A commitment fee of 1/4 of 12 is charged on all loans not availed of within 90 days. For loans guaranteed, an initial charge of 1% is assessed on the principal amount, plus 1% per annum on the unavailed portion and 1.5% on the availed amount outstanding. Advances made by DBP under loan guarantees carry an interest rate of 12%, plus an initial service charge of 1/2 of 1% on each advance made. ANNEX 8 Page 5 22. DBP operations are characterized by a very large number of small loans reflecting an emphasis on agricultural credit and on assistance to small-scale industries. In the period January 1, 1966 to December 31, 1969, DBP approved 66,568 loans and equity participation totalling 1 1,910.56 million. Most of the loans were in amounts of 1 5,000 or less. 23. DBP operations show a great concentration in Luzon. However, effort are underway to achieve a better geographical balance in the dis- tribution of financial assistance and, at the same time, various govern- mental programs are being implemented to accelerate development of some of the other islands that bear promise of increased productivity. This in particular should benefit Mindanao, the second biggest island in the group, which offers great potential given its fertile soil, favorable climate and other untapped natural resources. 24. Sector-wise, industry and agriculture have been the largest bene- ficiaries of DBP financial assistance, representing 67% and 19%, respec- tively, by value of loans and investments. Within the agricultural sector, loans for food and commercial crops accounted for 84% of total loan amounts approved. 25. Approvals from January 1, 1966 to December 31, 1969 are summa- rized in the table below. Further details on DBP's operations appear in Appendix A. Equity Loans Participation Total Sectors No. Mil. P No. Mil. P No. Mil. P Agriculture 53,363 377.49 - - 53,363 377.49 Industry 4,451 1,095.37 28 200.82 3,592 1,296.19 Government 115 46.21 - 115 46.21 Development & Rural Banks 173 46.31 374 20.58 547 66.89 Real Estate 8,064 123.78 - - 8 064 123.78 Total 66,166 1,689.16 402 221.40 66,568 1,910.56 E. Financial Position 26. The assets owned and controlled by DBP as of December 31, 1969 reached a total of P 2.74 billion, representing an increase of 109% over their P 1.31 billion level of January 1, 1966. Loans outstanding increased by P 898 million to P 1,869 million with agriculture sharing 20% and industry 66% in the total as compared to 24% and 66%, respectively, record- ed on January 1, 1966. Investments in industrial equities for the first time reached a significant figure of P 201 million, raising the industry share in the bank's total financial engagement in loans and equities to 72%. ANNEX 8 Page 6 27. DBP, as of December 31, 1969, had a total indebtedness of P 2,259 million, showing an increase over the 4-year period of P 1,166 million. Liabilities (mostly short-term) increased by P 408 million, deposils ly P 243 million, progress bonds by P 498 million and trust funds by P 17 million. Net worth stood at P 480 million, an increase of P 264 million. 28. DBP's total indebtedness on December 31, 1969, P 2,259 million, was 4.7 times its net worth compared to 5.1 times on January 1, 1966. If account is taken of outstanding contingent liabilities amounting to P 1,000 millionn, total commitments as of December 31, 1969 were 6.8 times the net worth, remaining withiin thie bank's debt limitation, provided *nder its Charter, of 10 times capital and surplus. Cash and near cash resources, totaling P 236 million, or almost 9% of total assets, were considered adequate for the current level of operations. 29. DBP's racords on loans in arrears, covering a period of 21 years, do not fully reveal the bank's position, as no data are readily available on the amount and quality of loans taken over from the Rehabilitation Finance Corporation (RFC) on its termination in June 1958. Judging by the number of matured loans presently on record, there may be a substantial carryover of bad debts, dating back to RFC operations. 30. The slow rate of loan recoveries has been a constant problem with DBP and a matter of continous concern to its management. A cursory review of the position in the head office (representing about 80% of total opera- tions) indicates that, as of December 31, 1968 (after completion of the refinancing program), P 116.2 million was past-due in payments of principal and interest in respect to 10,005 loans to agriculture and industry. This represented about 6.5% of total loans outstanding in the two sectors. 31. The largest number of loans overdue (60%) was in the agricultural sector, while industry shared a greater portion of their total value (87%). The greatest incidence of arrears, P 89.7 million, was in the category of loans on short or medium term for working capital and trade credits repay- able in quarterly instalments. Included therein are loans for grain storage and milling, showing arrears in principal and interest in the amount of P 8.6 million in regard to 728 accounts, representing 61% of the total amount and 74% of the number of loans outstanding in this category. Over one-third of these loans, totaling P 6 million, had been overdue from over 1 year up to 6 and over, and 63 loans had surpassed their maturities. 32. During 1968, 41 loans were foreclosed by the bank. Payments were overdue for principal and interest totaling P 2.3 million, including P 1.4 million for agriculture and P 0.9 million for industry. This, how- ever, represents only a fraction of defaulted loans on maturity, which, for the two sectors, are stated as P 35.9 million, represented by 1,316 accounts. While no details have been made available on these defaults, it appears that a large part thereof dates back to the RFC operations. ANNEX 8 Page 7 33. This generally unsatisfactory condition is apparently due to a number of factors that in various degrees bear on DBP's widely spread fi- nancial activities, depending on the type and size of the investment and creditworthiness of the borrower and the viability and financial soundness of the project financed. The large number of defaults of agricultural loans in general reflects the higher risks involved in this area of credit activity and DBP's increased promotional efforts directed to financially weak production sectors in need of Government support. The larger amounts of industrial loans in default, inherent in the nature of this kind of investment, seem to reflect the difficulties encountered by the distressed industries during the period of adverse economic conditions and DBP's large financial involvement in financing these industries. 34. Perhaps some of the financial problems could have been alleviated, if not resolved, by a proper study of the projects and a close and timely follow-up on the loans. The measures recently introduced by DBP for a more thorough appraisal of larger industrial projects by the Investment Banking and Research Department are a step in the right direction. Complemented by DBP's increased efforts in loan collections and loan follow-up, it should in time yield results. 35. Resulting from the greatly expanded business activities in the past fiscal years, there has been an improvement in DBP's profitability. Accordingly, net income for the fiscal year 1968/69 of DBP proper represented 4.7% of its average net worth as compared to 2.3% in fiscal 1965/1966. The following table shows the operating results over the 4 years as percent of average investments: 1965/66 1966/67 1967/68 1968/69 _____- -- --- ---__ --( - -)… -… _ …-___ ___ Gross Income 6.7 8.4 8.6 10.2 Operating costs 2.1 2.5 2.4 2.9 Financial expenses 3.5 3.6 3.9 4.9 Net income 1.1 2.4 2.3 1.7 The increase in financial expenses indicates the bank's growing indebted- ness in recent years. However, increases in overall lending margins have more than offset these financial and operating cost increases, with the result that the rate of net income has doubled between 1965/66 and 1967/68. However, recently, increased financing expenses led to a decline in net income. The increase in operating costs reflects the increased activities and field work related to technical assistance to small borrowers and to loan follow-up. 36. Dividend payments to the Government were started in 1966/67, representing in each year approximately 20% of earned surplus. DBP's surplus and reserve 1969 stood at P 85.9 million, representing 5.0% of loans outstanding. ANNEX 8 Page 8 37. During the period January 1, 1966 to December 31, 1.969, DBP raised a total of P 1,430 million for the financing of current operations, repay- ment of maturing debts and replenishment of cash resources. A Government capital contribution and retained surplus, together with loan collections, provided P 264 million or 18% from own funds, the balance being covered from new deposits and borrowings as follows: Million Pesos Long-term liabilities 55.47 Other liabilities 351.98 Progress bonds 498.42 Time and saving deposits 243.24 Trust funds 16.57 1,165.68 F. Financial Prospects 38. DBP's sharply expanded credit activities have greatly taxed the bank's administrative capacity and have imposed a heavy strain on its limited resources. In the absence of any appreciable Government contri- butions to its capital DBP has had recourse to the Central Bank to meet current debt repayments and to supplement its borrowings in the market, local and foreign, most of which is on medium and short term. The situa- tion is aggravated by the slow recovery and the large incidence of loans in arrears, in particular in the agricultural sector. 39. A continuation of these financing methods would tend to further accentuate an unsound situation characterized by a large volume of long- term or frozen loans, backed by largely medium- and short-term borrowings, with heavy maturities falling due in the near future. Central Bank fi- nance on medium term may provide relief in the bank's precarious liquidity situation, although it cannot help solve what is basically an unsound fi- nancial position. This calls for an early review and substantial strength- ening of the capital structure. 40. In January 1969, DBP submitted for Government approval a financial program based on a revised forecast of operations for the fiscal years end- ing June 30, 1969, 1970 and 1971. Briefly, the proposal seeks the follow- ing objectives: (a) orderly refunding of the medium-term (5 years) dollar borrowings of 1961 to 1965, which were reloaned in peso on long term (10 years); (b) sustained adequate peso financing from non-inflationary domestic sources and maintenance of adequate redemption reserves; ANNEX 8 Page 9 (c) establishment and maintenance of reserves for DBP's guarantee on foreign loans; (d) insurance of DBP's capacity to meet the growing demand from new and expanding enterprises on its resources, in addition to the normal year-to-year credit requirements; and (e) increased reliance of DBP's growth on sources drawn from the investing public rather than on financial support of the Central Bank. 41. For the fiscal years 1968/69, 1969/70 and 1970/71, DBP estimates that it would provide for loans and investments totaling P 1,727 million, compared to P 996 million recorded in the preceding 3 fiscal years. This represents a substantial increase, although at a considerably lower rate than that of the preceding 2-year period. While no details are available on the program, industry and agriculture remain on top of the list, with increased emphasis on the latter (25% of total loans as compared to 18% previously). 42. Based on the planned level of business, DBP's assets proper would increase from P 1.94 billion to P 3.02 billion. To support this program, it is estimated that P 2,630 million will be required over the 3-year pe- riod for current operations and debt repayments. Almost half of this amount would be covered from loan recoveries, increased savings and time deposits and accumulated surplus, and the balance by borrowings. No capital sub- stantial contributions by the Government are contemplated. 43. The DBP Charter authorizes the bank to issue "bonds, debentures, securities, collateral and other obligations and/or the renewal or refund- ing of the same ... in no case to exceed at any one time an aggregate amount equivalent to ten times of its paid-in capital and surplus." Base(' on this criterion, DBP has set its debt ceiling at P 4 billion, one-half, oi P 2 billion, for peso obligations, the other half, or approximately US$ 500 million, for direct DBP dollar borrowings and outstanding dollar guarantees. Assuming that the programmed resources are fully realized, DBP, on comple- tion of the program, would remain well within the set limitation, leaving a comfortable margin for an additional increase in both classes of obliga- tions. Moreover, DBP intends to split out its proposed dollar borrowings over 10 years for a maximum dollar exposure of US$ 50 million per annum in regard to direct borrowings and contingent liabilities on guarantees. 44. While these arrangements would appear to ensure the DBP a con- tinued liquidity, their effectiveness in the end will depend on the bank's capability for raising the amounts of additional funds required and rolling over continuously the large portion of short- and medium-term debt accu- mulated over the years and substantially added by the program. An early increase in capital would seem the most appropriate and needed action to provide adequate protection and to ensure a sound basis for future expan- sion. ANNEX 8 APPENDIX A Page 1 Details of DBP Operations Agriculture 1. In support of the Governmentts drive for self-sufficiency, DBP has intensified its lending to agriculture, particularly in the past 3 years. In addition to its normal loan operations, DBP in 1967 adopted a program of special supervised agricultural financing plans designed to support large-scale agricultural promotion schemes lead- ing to increased foreign exchange earnings and yielding greater food production to meet the growing local demand. 2. A summary of the major sectors served by DBP's agricultural credits during the 4-year period ending December 31, 1969 is given below: No. Millions of P Rice and corn 25,799 112.97 Commercial crops (mainly coconut) 17,800 105.13 Livestock (including fisheries) 6,139 99.18 Other products 3,625 60.21 Total 53_363 377.49 3. Of the total P 377 million in loans approved for agricul- ture, P 115 million was granted for the special supervised agricultural plans. These cover large-scale production of rice and corn, beef cattle, hogs, poultry and fish; coconut and banana plantations; and vegetable production. The Greater Manila Terminal Food Market (GNTFM) 4. DBP has been entrusted with the promotion of this large-scale venture, which, in its larger part, is planned to be passed on eventually to the private sector. The project involves the establishment of a combined producer transit-wholesale market complex in Port Bonifacio, Manila, to serve the farmers/producers and the wholesale trade by providing storage facilities and related grading and marketing services. Located in an area of 120 ha, GMTFM is intended to become an entrepot - a vast storage and distribution center - for produce such as rice, cereals, fruit, vegetables, poultry, fish and meat. It will serve initially some 1 million farmers from 27 principal supplier provinces in Luzon, Visayas and Mindanao. Work on the infrastructure is in progress, and building construction is scheduled to start soon. 5. The enterprise has been formally set up as Greater Manila Terminal Food Market Inc., with authorized capital stock of P 100 ANNEX 8 APPENDIX A Page 2 million, of which P 20 million has been subscribed, almost entirely by DBP. The initial cost of the project is estimated as P 180 million, part of which is to be financed by deferred credits and the balance from equity and progress bond issues. This is, as yet, the greatest single industrial venture promoted by DBP Industry 6. During the 4-year period, DBP approved P 1,296 million for financing industry, including P 201 million in equity investments in the form of preferred shares. 7. The food processing industry and trade, with a total of P 353 million, took the biggest portion of the financing. This was divided among the rice and corn sector (P 195 million), sugar (P 92 million) and other food processing industries (P 66 million). Most of the 1,532 loans approved for the rice and corn industry was for working capital (paddy) and a smaller portion for capital investments in rice and corn mills, warehouses, drying equipment and transportation facilities. In the manufacturing sector, textiles were on top of the list, with P 211 million in loans and equity investments, followed by cement, P 127 million, and metal and electrical industries, P 132 million. Transportation absorbed P 121 million, including P 73 million for shipping. 8. The above figures include the refinancing of distressed industries, particularly in cement and textile subsectors. By June 30, 1968, when the program was formally terminated, P 678.4 million had been approved for the purpose, involving 3,831 accounts. This represented roughly 50% of the value of industrial and agricultural loans outstanding as of June 30, 1968. 9. The Bank continued to implement its program of refinancing of industries through the securities market. The program, which consisted of the issue of DBP Progress Bonds, refinancing of industries in its loan portfolio and foreign exchange financing of imported machineries and materials, met requirements not only of companies which are financially distressed, but also those which have expansion programs as well as new ones in need of initial capitalization. 10. Up to December 31, 1969, financing has been extended to 69 companies in the form of: Direct purchase of preferred shares P 200.81 New or additional loans 197.84 Long-term guarantees 1,116.19 Short-term guarantees 250.24 Total P 1,765.08 ANNEX 8 APPENDIX A Page 3 Loans to Local Authorities 11. A total of P 46 million was approved to provincial governments, cities and municipalities in respect to 115 self-liquidating projects, mainly markets and slaughterhouses, P 32 million; water works, P 8 million; and telephone systems, P 3 million. Real Estate Loans 12. This category comprises loans for construction of residential, public and commercial buildings. Of the P 124 million approved for the purpose, P 33 million was for local housing in respect to 7, 036 pro- jects, P 28 million for hospitals, and P 22 million for first class tourist hotels. 13. Apart from its contribution to local housing, DBP has also extended support to the Government's housing program by an initial subscription of P 5 million to the capital stock of the National Housing Corporation and the guarantee of a loan from Germany for construction of a prefabricated low-cost housing units and school buildings factor. Private and Rural Development Banks 14. As part of a program for expansion of institutional credit to rural area, DBP has given its support to 460 private development banks and rural banks involving P 66 million, including P 34 million in the form of subscriptions to capital stock and P 32 million in rediscount facilities to the private development banks. Guarantees 15. The guarantee of loans, introduced by DBP in 1964, has become a major instrument of the bank's credit operations. It has been made use of to facilitate imports of machinery and raw materials financed by foreign loans. The total of such guarantees during the period 1964 through 1969 was P 3 billion. 16. Availments on guaranteed loans amounted to P 1,469.88 million of which P 1,104.00 million was outstanding as of December 31, 1969 (P 884.54 million in long-term and P 219.46 million in short-term guarantees). Re- payments on guarantees are staggered over a period of thirteen years up to fiscal year 198111982 with highest repayment in fiscal year 1970-71 of P 278.68 million. This, however, includes guarantees renewable yearly in the amount of P 135.56 million. 17. Guarantees approved were for highly essential and basic industries such as barb wire manufacturing, car and applicance assembly, cement manu- facture, corn trading and warehousing, chemical products, communications, construction (highway), fertilizer, food manufacturing, flour mills, glass manufacturing, hotels, hospitals, lumber, mining, paper mills, steel mills, sugar mills, textile mills, tobacco, transportation, leather manufacturing housing and others. ANNEX 8 APPENDIX A Page 4 18. In evaluating its loan guarantee operations, the DBP places particular emphasis on their economic significance. Through these operations, DBP acts as a channel for foreign financing of imports of capital goods and essential raw materials, which were traditionally paid for in cash and therefore unduly strained the country's international reserve. DBP guarantees have helped to extend payments for these items on an instalment basis, thereby relieving the immediate pressures on the country's international reserve and providing it sufficient time to realize dollar benefits or savings from the operations of the newly established or expanded agricultural and industrial projects so financed. 19. These guarantees no doubt have fulfilled an important function in extending the country's foreign loan resources and strengthening its international credit standing. However, prudent financial policy would not appear to warrant a further rapid expansion at the present rate of the bank's already large financial exposure, particularly at this early stage when the borrowers' performance under loans has not yet been sufficiently established and tested. ANNEX 8 Table 1 PHILIPPINES RICE PROCESSING PROJECT Status of Personnel (1969) Distribution of Professional and Supervisory Staff Head Office Departments Number Agriculture 92 Industrial 62 Real Estate 65 Government Loans and Acquired Assets 34 Treasury 20 Credit 44 Accounting 24 Administrative 18 Branches and Agencies 41 Secretarial 2 Development and R.ural Banks 24 Investment Banking and Research 37 Securities Marketing 59 Medical-Dental 15 Auditing 56 Legal 29 Office of the Chairman and Board of Governors 52 Total 674 Branches and Agencies 595 Total 1,269 ANNEX 8 Table 2 PHILIPPINES RICE PROCESSING PROJECT Status of Personnel (1969) Distribution of Personnel by Qualification Head Office Branches and Agencies Total Accountants 295 35° 645 Engineers 86 86 Economists 24 - 24 Agriculturalists 69 185 254 Statisticians 12 - 12 Lawyers 93 60 153 Security Marketing Officers 50 - go Architects 12 12 Journalists 9 9 Personal Assistants 9 9 Doctors 5 - 5 Dent ists 4 - 4 Nurses 4 - 4 Pharmacists 2 - 2 Clerical 484 340 824 Service Personnel 247 178 425 Total 1,405 1,113 18 PHILIPPINES RICE PROCESSIWi PROJECT DEVSLnOPMlN IK W CF ,-i PHI! IPP.,NS DiGkYTGZAr-ON CONtl OARD OF UOVUEROBS CHIEr LEGAL COUNSFL LsP. ASSM. -O Supervls-1c~~ 3q-- *5:rO sin Suywrr.sing 3,| ervising Governor I voernor G IaAI overor I securitis Invest.: bkg. & r Rs ea' E.State Acctg. Branhas & Ind. Agr0.Got. L.,anc f et o e.A5 Se. ejt edaL *wktK. Dept. | | Researh D De. | Dept. Dep t. Agjncmes Dept. | ep t. AcqxirLd Assets | Rqra1 Banks | Dept e & e D ra.achcs LZZ I 1 I- ANNEX 9 Page 1 PHILIPPINES RICE PROCESSING PROJECT The Grain Processing Section A. Introduction 1. The Grain Processing Section which would be established at head- quarters of the Development Bank of the Philippines (DBP) would be concerned only with execution of the proposed rice processing project. 2. DBP does not itself possess technical competence in modern grain processing facilities construction and operation. Consequently, it would be necessary for it to be supported by consultants who would enjoy wide ex- perience in the design and operation of grain processing facilities. B. Organization 3. The head of the Grain Processing Section would be a permanent and experienced officer of DBP, assigned full time to the Section. Other officers of DBP would also be assigned full time. Services of DBP branch and other head office would be made available on a part time basis as re- quired. 4. DBP would charge the project account with the full employment costs of all DBP staff assigned full time and their direct expenses such as travel and subsistence. 5. The consultants and the DBP staff of the Section would be located in the same offices. These are expected to be: in Manila, DBP head office; in the field, in DBP branch offices. 6. The Grain Processing Section would be established in the office of DBP's chairman. 7. Day to day matters would be handled by the Section but the Board would be directly responsible for the following: (a) Approval of sub-borrowers (b) Bid opening (c) Award of suppliers' contracts ANNEX 9 P;ige 2 C. Procedures 8. DBP branch offices would canvass their respective areas for applications. All applications thus obtained would be screened by the Graini Processing Section with regard to managerial and technical competence, prior business experience, credit standing and suitability of location. All screened applications would then be submitted to scrutiny from general, preliminary technical and financial standpoints. 9. The general review would ascertain whether facilities should be constructed at the locations proposed by the applicants. Particular attention would be given to the need for facilities in the specific area and the extent to which it would be met economically by existing facilities. 10. The preliminary technical review would check the suitability of the facilities proposed. This would inclu(le operational aspects and requirements for qualified staff. The primary obje(tive would be to ascertain whether the total plant of the subborrower (as set up or expanded by the project) would be the most efficient for subborrowers' requirements. 11. The financial review would provide an estimate of the cash flow. and of the financial return on investment. The working capital needs of each subborrower would also be assessed. 12. Detailed design of subproject facilities would only be undertaken after the investment priority and feasibility of a suitable number (15 to 30) of applications has been established. During this phase, the Grain Process- ing Section would endeavor to arrive at a large quantity of individual units with a low number of different design types. Consultants would then fit the required units into an individual design for each plant adapted to the particular circumstances of each subproject. They would also review tech- nical staff requirements and make recommendations for training and finally, they would draw up specifications for bidding and assist the Grain Process- ing Section in supervision of subproject execution. 13. Prior to bidding for each phase, the Section would submit to each sub-borrower of that phase the detailed proposals for his sub-project on which bids would be sought. These would be accompanied by an estimate of the expected maximum cost of his sub-project. He would then sign his sub- loan agreement. Amongst other covenants, the sub-loan agreement would: (a) empower DBP to act as agent for the sub-borrower for foreign procurement, including invitation of bids, awards and contracts; (b) limit the power of DBP with regard to (a) to a specified maximum sum. ANNEX 9 Page 3 14. After signature of the sub-loan agreement the Section would invite bids internationally. The awards made by DBP would be followed by contracts between DBP and the suppliers. DBP would be acting as agent of its sub- borrowers. Payments made by DBP (directly or through IBRD's disbursement procedures) to the various suppliers would be apportioned appropriately between sub-borrowers and charged to their individual loan accounts. D. Consultants 15. Consultants would be required for two to three years. While there are several firms of consulting, engineers in the Philippines with extensive structural engineering experience, their knowledge of modern rice processing and storage construction is liDlited. Therefore, in order to provide such experience and ensure access to a wide range of basic design forms, it would be necessary to engage qualified expatriate consultants. In order that local knowledge is also brought to bear on subproject appraisal and design, it would be desirable to have the foreign consultants act in association with a local firm. Duties of Consultants 16. These would be as follows: (i) For each phase of the project, the consultants would be given details of potential sub-borrowers already screened by DBP. (ii) The consultants would ascertain wiether the sub-borrowers' proposals met the sub-borrowers' technical needs and would recommend such amendments as might be necessary. (iii) After (ii) for all sub-borrowers of a phase, the consultants would standardize the phase requirements as far as possible and agree any suggested alterations with relevant sub-borrowers; (iv) The consultants would then prepare detailed drawings for each applicant. (v) Trhe consultants would app raise the qualifications and experience and ability to benefit from training of sub-borrowers' staff. (vi) Resulting from (v) the consultants would make recommendations regarding existing staff suitability, necessity for any additional staff and training required. ANNEX 9 Page 4 (vii) Based upon the total of the facilities' requirements for each sub-borrower of a phase derived out of (iii) and (iv), the consultants would draw up specifications and other bid documents and, under the authority of DBP, organize the bidding. (viii) The consultants would submit to DBP their technical evaluation of bids received and assist in drafting contract documents. (ix) The consultants would supervise construction and handover of facilities to sub-orrowers and advise sub-borrowers on technical aspects durLng initial operations. 17. The consultants would be required for a period of between two and three years. The following expatriate staff is likely to be required. (i) Chief of consultants' staff (ii) One senior rice processing engineer (iii) Three field engineers. ANNEX 10 Page 1 PHILIPPINES RICE PROCESSING PROJECT Financial Projections for Typical Project Facilities A. Assumptions -/ 1. Production Volume (Small Facility): 6,000 m ton of paddy per annum (i.e. 3.2 turnovers). Present facilities of about 2,000 ton storage capacity each have about two turnovers per annum (Annex 2). However, this was based on former rice varieties giving a greater peaking effect (Annex 1) and does not include the benefit of bulk handling facilities. 2. Production Volume (Large Facility): 20,000 m ton of paddy per annum (i.e. h turnovers). No relevant previous data. 3. Gross Profits on Sales: P 117 per ton of paddy processed, of which P 22 from sale of by-products. 4. Purchasing and Selling Commission: P 0.25 per cavan of grain bought and sold. 5. Trucking Expenses (Including fuel and maintenance cost): Assumed at P 4.30. 6. Fuel (Small Facility): (a) Mill Engines. 52 hp 3.8 gallons per hour at P 0.83 per gallon. Fuel cost P 3.15 per ton of paddy processed. (b) Drier. On average 1/3 hour operation per ton paddy dried, W.l2 gallons per hour at P 0.83 per gallon. Fuel cost P 1.78 per ton of paddy dried. (c) Generator. 100 KW. Average turnover requires 700 hours operation. 6.4 gallons per hour at P 0.76 per gallo Fuel cost P 1.86 per ton of paddy processed. 7. Fuel (Large Facility): (a) Mill Engines. 150 hp. 9.5 gallons per hour at P 0.86 per gallon. Fuel cost P 2.72 per ton of paddy processed. 1/ Except where specifically stated, these apply to both small and large facilities. ANNEX 10 Page 2 (b) Drier. Same as for small facility. (c) Generators. 300 KW. One turnover requires 700 hours operation on average (i.e. 0.14 hour/ton of paddy processed). 18 gallons per hour at ' 0.83/gallon. Fuel cost is R 2.09 per ton of paddy processed. B. Fumigants. R 1.03 per ton of paddy processed. Based on present Philippine average in hygienic mills. 9, Bags. Based on present millers average of P 9.80 per ton of paddy processed. 10. Taxes. (a) Residence tax: from P 5.00 p.a. to P 2,000 p.a. (b) Fixed tax based on mill capacity 1. Small - 12 ton/hr, R 900 2. Large - 4 ton/hr: p 4800 (c) Real Estate tax - 1% on assessed value of property (land & building) (d) Licenses - variable 11. Salaries and Wages. Original estimates prepared by IBRD + 30% increase to cover increase in labor cost. (a) Small facility: B 90,327 total labor cost (b) Large facility: e 154,463 total labor cost 12. Repairs and Maintenance. 1% p.a. for bins and buildings and 2% for machinery and equipment. 13. Insurance. 1% of capital assets 14. Depreciation. (a) Bins and buildings - 30 years (b) Machinery and equipment - 15 years (c) Others - 10 years 15. Interest Rates. (a) Capital assets 11% (b) Working capital 10% 16. Income Taxes. (a) 25% on first P 100,000 taxable income (b) 35% in excess of P 100,000 B. Estimated Staff and Labor Requirements and Costs 5/ 2,000 TONS BULK SILO AND MILL 1/ 5,000 TONS BULK SILO AND MILL 2/ No. Man-Months Cost No. Man-Months Cost per year per Man-Month 2/ Total per Yr / per year per Man-Month Total per Yr __ _ _ _ _ _ _ _ _ _ ____P__________ p-------------- Job Classification Management Manager (Owner) 1 12 1,073 14,801 1 12 1,300 17,940 Plant Superintendent _ - - 1 12 975 13,455 Administration Accountant 1 12 286 3,947 2 24 286 7,894 Clerk-Typist 2 24 260 7,176 3 36 260 10,764 Messenger 1 12 195 2,691 1 12 195 2,691 Guard 2 24 234 6,458 3 36 234 9,687 Plant Operation Shift Leader ) 3 36 325 13,455 2 24 390 10,764 Operator (Drier, Mill,) 48 286 15,787 etc.) )4 Weighmaster-Grader 2 24 260 7,176 3 36 260 10,764 Maintenance (Mechanic, Electrician) 1 12 286 3,947 2 24 286 7,894 Labor : Permanent 4 48 234 12,917 7 84 234 22,604 Casual (11)/ 66 234 17,76i (15)X4 go 234 24,219 TOTAL 175' 270 - 90,329 29 !g/438 - 154,463 6 months per year double shift working; 10 working hours per shift. Basic monthly pay. 3/ Includes 15% fringe benefits. Permanent jobs only. 2/ These estimates have been prepared in March/April 1969. Following the increase of the minimum wages by 30% in m early 1970 it is conservatively assumed that the entire wage and salary structure will be adjusted accordingly. (D LO 0 ANNEX 10 Page 4 C. Income Statement - Small Facility (Pesos '000) Production volume (m ton paddy) per annum 6,000 Gross Profits on sales (F 117 per m ton) 702 Variable Costs Purchasing commission 3 Selling commission 19 Trucking expenses 26 Fuel and lubricants 41 Fumigants 6 Bags 59 Licences 4 Miscellaneous 5 Total Variable Costs 194 Fixed Costs Salaries and wages 90 Repairs and maintenance 25 Insurance 18 Office .upplies etc. 3 Total Fixed Costs 136 Total rariable and Fixed Costs 330 Net profit before Depreciation, Interest and In7ome Taxes 372 Depreciation --ff Interest: on subloan 96 on working capital 45 Net Erofit Before Income Taxes 143 Income tax 40 Net Profit to Proprietors 103 10 Page , D. C1sh 1-low Statement - Small Facility ('esos 1000) Construction Years Years Period 1-13 "-15 Source of vTunds lNet Profit before Depreciation, Tnterest and Income Taxes l/ 1,376 372 372 Suibloans (IBRD .° DBP) 1/7 Subborrowers contribution 321 - - Total Sources 1,697 372 372 '.lpoiA,ations of Fumnds '5ebt Service of Subloans - 20 - Debt Service of Working Capital Loan 45 45 .Total. Debt Service 249 45 Income Taxes - 0 74 Cost of Project Facility 1,697 - - Tctal Applications 1,697 289 119 S;bborrowers' ITet Cash Inflli- - 83 253 .on-term Debt Service Coverge 1.3 !/ ½'.l^d'ls P 72,000 interest during construction ;8ANNEX 10 Page 6 S. Income Statement - Large Facility (Pesos '000) ?rodnction Volume ('ri ton paddy) per annum 'S0I00O Gross Profits on Sales (P 117 per m ton) 2,3JL0 V- ri.-ble Costs Purchlsinp Co-mission I111 Selling Commission 63 Trading Expenses 81 Ise>3 Lubricqnts 132 .'nA.ants 21 Phm gs 196 T.icences 11 TMI scell-neonis 10 Total Variable Costs 628 Tixed Costs SaTlhries and. Wages 1 55 RePairs and Mlainten-nce 80 Tnsur¸ance 48 Office Suonlies, etc. 9 Total Fixed Costs 292 Total Variable and Fixed Costs 920 Net Profit before Deprecintion, Interest and Income Taxes 12,420 De-reciation 271. Inte,rest on subllloan 282 on working ca.nitl 11?I co ? rofitss be2ore Income Taxes 7 Tncorme Ta" 25) E'pt, Pro,1it to Proprietors 5ci MINIE X _I; Page 7 Cash Flow Statement - Large Facility (Pesos '000) Construction Years vears Period 1-13 1.'-l. Source of Funds T4et Profit before Depreciation, Interest and Income Taxes - 1,420 1,420 Subloans (ITRD Vt D9P) -3,184 3ubborrowers' own contribution 1,763 Total Sources L,947 1,420 1,420 _n.icntion of Funds Tlebt Service of Sublouns - 472 Debt Service of Working Capital Loan - 112 112 Total Debt Service 584 112 Incr-me Taxes 254 4148 'ost of Project Facility 1 -947 Total Applications ,947 838 560 &ibborrowerst Net Cash Inflow 582 860 TLongterm D Zbt Service Coverage 1.7 : Includes P 165 000 interest during construction ANNEX 11 PHILIPPINES RICE PROCESSING PROJECT Financial Rates of Return 1. The estimated financial rates of return on the basis of conservative estimates of turnover, gross margin and costs detailed in Annexes 5 and 10 are 18.9% for a small facility and 24.1% for a large facility. The financial rate of return of a small facllity is lower because its fixed investment costs and operating costs are higher as a proportion of annual turnover than those of a larger facility. The exchange rate of US$ 1 = P 6.0 has been used as standard exchange rate. A change in the exchange rate of about 10% (Us$1 - P6.5 and US$1 - P g;.wdwulcMead to a variation in the rates of return of about 4% (Rates of return: 2. An analysis of the sensitivity of the project facilities to alternate assumptions regarding the costs and benefits is presented below. Financial rates of return of a small facility : (a) Standard assumptions as presented in Annexes 5 and 10 Rate of Return: 18.9% (b) Construction cost overrun of 15% Rate of Return: 13.1% (c) Operating costs 25% higher Rate of Return: 12.9% (d) Benefits 10% higher Rate of Return: 23.5% (e) Benefits 10X lower Rate of Rieturn: 14.1, Financial rates of return of a large facility (a) Standard assumptions as presented in Annexes 5 and 10 Rate of Return: 241,41 (b) Construction cost overrun of 15% Rate of Return: 17.9`- (c) Operating costs 25% higher Rate of Return: 19.0% (d) Benefits 10% higher Rate of Return: 28.6% (e) Benefits 10,% lower Rate of Return: 19.50 The above returns on total assets would provide satisfactory incentives go grain traders and millers to participate given the debt leverage on equity provided by the project. ANNEX 12 PHILIPPINES RICE PROCESSING PROJECT Economic Analysis of the Project 1. The economic evaluation of the proposed project calls for two rates of return. The first return relates costs and benefits arising from proposed project investments to those which would arise from traditional storage inveetments. This is necessary to establish that investment in the more expensive bulk handling and drying facilities is justified. The second, and more customary, evaluation relates total costs and benefits to the economy attributable to the project. 2. In the first instance it was assumed that without the project local entrepreneurs would meet additional demand for rice storage by con- structing traditional sack warehouses. Under this assumption an alternative project to the proposed Bank project was formulated in which storage facili- ties consist of warehouses instead of bulk silos. 3. Warehouses would have a capacity of 2,000 mt and 5,000 mt res- pectively. Their total handling capacity would be 480,000 mt paddy per annum as would the bulk silos. This is a conservative assumption since at present, traditional warehouses would not be capable of employing effective drying equipment and hence would have difficulties in solar drying large quantities of paddy harvested during the rainy season. For the comparative analysis it nevertheless was assumed that solar drying is employed. 4. Investment cost for the small and large bulk silo facilities appears in Annex 5. For the purposes of the economic analysis all duties and local taxes were deducted. A comparison of investment cost for tradi- tional warehouses and project facilities appears in Table 1. Annual labor costs for traditional warehouses and bulk silos appear in Table 2. Compar- ison of annual operating cost for each type of operation is in Tables 3 and 4. 5. Incremental benefits attributable to mechanical drying were calculated as shown in Table 5. 6. The price of milled rice produced by project facilities was assumed at $107 per mt for 38% broken rice, while that for 45% broken rice in traditional warehouse-mill complexes was valued at $100 per mt, the projected world market prices. 7. Benefits due to reduced fermentation were based on the example of paddy flow in northern Luzon. ANNEX 12 Page 2 8. The aggregate incremental project costs include construction of 60 small bulk silo complexes, 6 large bulk silo complexes, as well as cost of consultants, training and vehicles. The aggregate incremental benefits are based on employing more effective milling equipment and reduced fer- mentation due to mechanical drying. 9. The annual incremental cost and benefit flows were arrived at by assuming that 17%, 33% and 50% of the total project facilities will be constructed in the 1st, 2nd and 3rd year respectively; general project costs for consultants, training, etc., were divided accordingly over the first three years of the project (Table 6). 10. Table 7 indicates the estimated incremental costs and benefits stream of the 23 years of the project. The economic rate of return based on the net incremental benefit stream is about 17%. 11. Table 8 gives the net benefit stream used for calculating the cus- tomary economic rate of return. The net benefit stream was derived from Annex 5 (project investments) and Annex 10 (gross profits). The project in- vestments were adjusted for duties and costs of training. Under these assump- tions the overall economic rate of return of the proposed project is about 25%. ANNEX 12 Table 1 PHILIPPINES RICE PROCESSING PROJECT investment Cost of_2000mt and 5SOU mt Facilites Standard Sack Warehouse 3 (P'OOO) 1. Warehouse Capacity: 2,000 mt Total Cost 693.6 Less Taxes 19.6 Less Machinery (Drier) 2/ 116.4 Plu,s Mills a' 312.0 (Of which duties) (62.4) Cost for Econcmic Evaluationt 807.2 2. Warehouse Capacity: 5,000 mt Total Cost 4/ 613.8 Plus Mills :/ 668.4 Less Taxes 18.6 1,263.6 (Of which duties) (133.7) Cost for Economic Evaluationt 1,129.9, 3. Incremental Investment Cost (without du (a) Small Facility: 655.8 (b) Large Facility 3,339.1 1/ Based on Weitz-Hettelsater re?ort - (Table 85 page 343) and updated following the introduction of the flEaaing exchange rae, 2/ Estimated amount for drying equipment. Mechanized drying seems not to be possible for this traditional storing in the near future, see Annex 5. 3/ Based on estimates for the bulk silo (2,000 mt); US$ 52,000,see Annex 5 Iv Without machinery 5/ Based on estimates for the bulhs silo (5o000 mt);US$1ll,,400 see Annex 5 ANNEX 12 Table 2 PHILIPPINES RICE PROCESSING PROJECT Calculation of Cost of Labor for 2,000 mt and 5,000 mt Sack Warehouses 1. Permanent labor requirements are based on Annex lOB - Income State- ment, and adjusted for differences in operation of a sack warehouse and a bulk silo (in P's): Standard Standard Bulk Silo Warehouse Bulk Silo Warehouse (2,000 -t) (2,000 mt) (5,000 mt) (5000 mt) Management 14,801 14,801 31,395 31,395 Administration 20,272 20,272 31,036 31,036 Shift leader & operator 13,455 13,455 26,551 26,551 Weightmatter - Grader 7,176 7,176 10,764 10,764 Maintenance 3,947 1,303 - 7,894 2,632 1/ Labor - permanent 12,917 12,917 22,604 22,604 Labor - variable 17,761 38,640 21 24,219 129,200 2U Total 90,329 108,564 154,463 254,182 1/ Maintenance Costs have been assumed at 1/3 of silo maintenance costs. 2/ Variable labor requirements were calculated on the basis of manual handling of a cost of P 0.08 per movement: (a) Off-loading to drier, (b) Drier to stack, (c) Stack to mill, (d) Mill to truck. ANNEX 1. Table 3 PHILIPPINES RICE PROCESSING PROJECT Comparison of Annual Costs of Processing 6,000 mt of Paddy in a 2,000 mt Warehouse and in a mall Bulk Silo (in Pesos) Variable Costs 2100( mt Silo 2,000 mt Warehouse Differences Conmm'issions same same Trading expenses same same Fuel: Mill salve same Drier 10,700 10,700 Generator 11,200 1,000 10,200 Lubricants 300 75 225 Fumigants same same Bags same same Taxes same same labor (variable) 17,761 38,640 - 20,879 Miscellaneous 8,000 4,000 4,0O0 Total variable cost difference .4,246 Fixed Costs Salaries & Wages 72,613 69,92it 2,689 Repairs and Maintenance 25,000 8,700 16,300 Insurance 18,000 8,700 9,300 Miscellaneous same same Total fixed cost difference ... 28,289 Total operating cost difference: P 32,$35 ANNEX 12; Table 1 PHILIPPINES RICE PROCESSING PROJECT Comparisons of Annual Costs of Processing 20,000 mt of 1kaddy in a 5YO00 nt Warehouse and in a 5,000 mt Bulk Silo (in Pesos) 5,000 mt 5,000 mt Difference Variable Cost Silo Warehouse Commissions same same Trading Costs same same Fuel: same same Mill same same Drier 35,600 - 35,600 Generator 41,800 4,000 37,800 Lubricants 1,000 250 750 Fumigants same same - Bags same same - Labor (variable) 24,219 129,200 - 104,981 Miscellaneous 19,000 9,500 9,500 Total variable cost difference ...... _ 2,33i Fixed Cost Salaries & Wages 130,244 124,982 5,262 Repair and Maintenance 80,000 11,300 68,700 Insurance 48,000 11,300 36,700 Miscellaneous same same 110,662 Total perating cost difference: P 89,331 ANNEX 12 Table 5 PHILIPPINES Page 1 RICE- PROCESS')ING PROJECT Benefits Attributable to Mechanical Drying and Bulk Storage Traditional, Bulk Traditional Bulk Warehouse Silo Warehouse Silo 2,000 mt 2,000 mt 5S,000 mt 5,000 mt 1. Annual turnover mt 6,ooo 6.000 20,000 20,000 2. of which: Solar dIied " 6,000 2.000 20,000 6,700 3. Mechanically ,y,000 - 13,300 Dried 4-0 3,0 i. Fermentation: 5. 25% of solar dried 1L,500 500 5,000 1,675 6. 10% of mechanicall10 1,330 7. Total fermented 1,500 900 5,000 3,005 8. Proportion of turnover % 25 £5 25 15 9. Ylling recovery: 651, on solar dried m,t 3,900 1,300 13,000 14,355 10. 67% on remainxider 2- 2680 - 8,911 11l. Total milled, rice 3,900 3!,980 13,000 13,266 12. Value of mailled rice if unfermented $ 390,00C) 1416,760 1,300,300 1,388,977 13. Losses due to fermentation 22,500 ')t0 5,ooo 45,07'7 111, Market value of rice 1$ 3Y7`60O 1ho3Tl T,222>s000 41. 5 Incremental benefits attributable to buLlk handling and dxring d 351760 118,900 P 2i 4,560 71L3,)ho ANNEX 12 Table 5 Page 2 Notes for Table "Benefits Attributable to Mechnaical Drying and Bulk Storage" Lines 2 and 3: Amounts mechanically dried in bulk silos were determined from quantities delivered in predominantly rainy months in each region according to paddy and milled rice flow models. Line 5: Based on information gathered in the field that 25% of sacks in storage may have 2-8% fermented grains in them. Line 6: Based on assumptin that solar dried paddy arriving at the bulk facilities would continue to be 25% infested with fermented grains but that only 10% of the mechanically dried paddy would be fermented. Lines 9 and 10: Based on rule of thumb that harvested paddy, left undried, loses 2% in milling recovery for every 24 hours it remains in this state. Average milling recovery is assumed to be 65% and a conservative estimate of 2% increased milling recovery due to availability of mechanical driers was attributed to the bulk facilities. Line 12: Calculated on the assumption that the normal proportion of broken grains in traditional facilities is 45% and that mechanically dried rice would yield only 38% broken grains- a difference of 7%. Expected world prices for rice between 1970 and 1975 are $ 100/mt for 42% broken Burmese rice and $ 140/mt for 5% broken Thai rice. On the average $1/mt is the deduction for each additional percent of broken rice. Hence line 12 = $100 x line 9 + $107 x line 10. Line 13: Fermentation reduces the value of a sack of milled rice by P 5-8. Taking the lower value for the purpose of calculation, the reduction in the value of a ton of milled rice due to fermentation, would be P 5 x 17.86 sacks at 56 kg per ton, or P 89.30 which at P6 per $ equals $14.88, say $15 per ton. Therefore: Line 13 = $15 x line 7 ANNEX. J1 Table 6 PHILIPPINES RICE PROCESSING PROJECT Allocation of Incremental Investment Costs 1. Silo construction 'o000 60 small silos @ p 655.8 39,384 6 large silos (9 P 3,339.1 20,035 2. Vehicles 1/ 5,115 i. Training 1,655 4. Consultants & Overheads 11,772 Total......... 77,961 Total additional Investment for each of the first three,yearst lst year (17%) s 13,253 2nd year (33%) : 25,727 3rd year (50%) s 38,981 1/ Total investment costs of vehicles is estimated at US$ 907,5OC '(P5445L090) of which 10% of the foreign exchange component has been deducted as the duty conponent. 2/ Estimated total costs of the UNDP Project is US$ 827,600. One third is estimated to be attributable to the proposed project. PHILIPPINES RICE PROCESSING PROJECT Aggregate Incremental Cost and Benefit Streams Pesos (million) Incremental Flow 1 2 3 4 5 17 18 19 --- 22 23 Incremental Investment 13.30 25.70 39.00 - Incremental Operating Costs - Small Facility - 0.33 0.99 1.98 1.98 1.65 0.99 - - - Incremental Operating Costs - Large Facility _009 0.26 0.53 0.53 0.53 0.53 0.53 -- 0.414 0.26 Total Incremental Project cost 13.30 26.12 40.25 2.51 2.51 --- 2.1b 1.53 0.53 --- 0.144 0.26 Incremental Benefits: Small Facility - 2.15 6.45 12.90 12.90 --- 10.75 6.45 - - - Large Facility - 0.71 2.13 4.26 4.26 --- 4.26 4.26 4.26 3.55 2.13 Total Incremental Benefits - 2.86 8.58 17.16 17.16 --- 15.01 10.71 4.26 --- 3.55 2.13 Net Incremental Benefits -13.30 -23.26 -31.67 14.65 14.65 --- 12.83 9.19 3.73 -3.11 1.B7 ANNEX 12 Table 5 PHILIPPINES RICE PROCESSING PROJECT Net Benefit Stream for Economic Rate of Return Calculation Pesos (million) Investment Gross Profits Gross Profits Net Benefits Year Small Facility Large Facility 1 20.37 - - (20.37) 2 39.54 3.72 1.42 (34.40) 3 59.90 11.16 4.26 (44.48) 4 - 22.32 8.52 30.84 5 - 22.32 8.52 30.84 6 _ 22.32 8.52 30.8h 7 - 22.32 8.52 30.84 8 - 22.32 8.52 30.84 9 - 22.32 8.52 30.84 10 - 22.32 8.52 30.84 11 - 22.32 8.52 30.81 12 - 22.32 8.52 30.84 13 - 22.32 8.52 30.84 14 - 22.32 8.52 30.84 15 - 22.32 8.52 30.84 16 - 22.32 8.52 30.84 17 - 18.60 8.52 27.12 18 - 11.16 8.52 19.68 19 - _ 8.52 8.52 20 - _ 8.52 8.52 21 - 8.52 8.52 22 - - 7.10 7.10 23 - 14.26 4.26 1/ Adjusted for duties and training costs. 0 CAGAYAN VALLEY KLOCOS & MOUNTAIN PR9V, logan g. J Son Ftsrnn do Pagupan City _ I Cobanctuan ~~~~~~~~~~SULU jarlac I\\_ < CETRl.LUZON Son Fernondo 4* WESTERN V[SAYA~~SOUTHERN | aGALOG {$Puer; C CEIEBES gJfe ;/ I f - j J- J__ (} %~~~~~~~~~~~~~~~~~MIsANILA 11 ) SA ; M- LEGtONAL SOUNOARISC C' aJ a - a 25 50 75 100 rf _i_ \ ~~~~~~~~~0 a) arsagon n ~~~~EASTERN VISAYAS I, 0 I_S- '9.~~~~~~~~~~~~~~~~~~~~~~~~. RN VISAYAfP A N A YOzrnsHIN1AN N RICE PROCESSING PROJ~~~~ECT RGLOMETNDRS C HARCI-, 1970 1800 - 28235