Document of The World Bank L S CO F v FOR OFFICIAL USE ONLY Report No. 2189-PH STAFF APPRAISAL REPORT PHILIPPINES SMALL FARMER DEVELOPMENT PROJECT LAND BANK OF THE PHILIPPINES November 27, 1978 Projects Department East Asia and Pacific Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (At the time of Appraisal and Used in this Report) US$ 1 = Pesos 7.25 US$ 1 million - Pesos 7.25 million Peso 1 = US$0.14 Peso 1 million = US$137,931 WEIGHTS AND MEASURES All in metric system GLOSSARY AND ABBREVIATIONS EDC - Estates Development Coordinator CIDARE - Committee on Infrastructural Development for Agrarian Reform Estates CLT - Certificates of Land Transfer FMG - Farm Management Groups FOD - Field Operations Department FU - Farmers Undertaking LBP - Land Bank of the Philippines MA - Ministry of Agriculture (formerly Department of Agriculture - DA) MAR - Ministry of Agrarian Reform (formerly Department of Agrarian Reform - DAR) MLGCD - Ministry of Local Government and Community Development - formerly DLGCD) MPH - Ministry of Public Highways (formerly Department of Public Highways - DPH) NGA - National Grains Authority NIA - National Irrigation Authority FOR OFFICIAL USE ONLY PHILIPPINES SMALL FARMERS DEVELOPMENT PROJECT LAND BANK OF THE PHILIPPINES TABLE OF CONTENTS Page No. 1. BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 General . . . . . . . . . . . . . . . . * * * * * * * * * * * 1 Agricultural Sector . . . . . . . . . . . . . . . . . . . . . 1 Tenure System and Agrarian Reform . . . . . . . . . . 2 2. PROJECT'S TARGET GROUP AND SUB-SECTORS. ........ . . . *.. 6 Target Group . . . . . . * * * . . ..........* * * * 6 Economic Conditions ........ . . . . . . . . . . . . 6 Project's Sub-Sectors . . . . . . . . . . . . . . . . . . . 7 Agricultural Credit and Debt Problems . . . . . . . . . . . 7 Light Farm Mechanization . . ......... . . . . * * 9 Post-harvest Facilities . * * * * 9 Diversification Opportunities: Pigs and Cattle*.. .... 10 Diversification Opportunities: Poultry. . . . . . . . . . . 10 Diversification Opportunities: Cottage Industries . . . . . 11 Infrastructure . . .................* * . . 11 Field Extension Services . . . . . . . . . . . . . . * * * 11 Economic and Social Research . . . . . . . . . . . . . . . 12 3. LAND BANK OF THE PHILIPPINES (LBP) . . ....... . . . . . 12 Significance of LBP's Role in Agricultural Credit . . . . . . 13 Organization and Management . . . . . . . . . . . . . . . . 13 Staffing . . . . . . . . . . . . . . . . * * . * * * * ...* 13 Financial Structure and Conditions . . . . . . . . . . . . . 14 Earning Performance and Resources Flow . . . . . . . . . . . 14 Financial Prospects . . . . . . . . . . . . . . . . . . . . . 16 Principal Operations and Policies . . . * . * * . . 17 Lending Operations........... .... . . . . . . 17 Commercial Banking . . . . . . . . ....... . . 18 4. THE PROJECT . . . . . . . . . . . . . . . .. . . . . . . . . 19 Project Area . . . . . *. . . . . . . . . . . . * . . . . . . 19 Project Components . . . . . . . . . . . . . . * . . . * * * 19 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. - 11 - Page No. Cost Estimates . . . . . . . . . . . . . . . . . . . . . . . 22 Financing . . . . . . . . . . . . . . . . . . . . . . . . . 24 Procurement . . . . . . . . . . . . . . . . . . . . . . . . 25 Disbursement . . . . . . . . . . . . . . . . . . . . . . . . 25 Accounts and Audit .......... . . . . . . . . . . 26 5. ORGANIZATION AND MANAGEMENT . ..... . . . . . . . . . . .. 26 A. Credit Operations . . . . . . . . . . . . . . . . . . . 26 Field Operations Department - LBP . . . . . . Organizational Structure . . . . . . . . . . . . . 26 Staffing and Training . . . . . . . . .. . . . . 27 Operational Strategies and Procedures . . . . . 27 B. Minor Infrastructural Works ..... . . . . . . . 29 C. Research and Studies . . . . . . . . . . . . . . . 29 D. Monitoring and Evaluation .. . . . . . . . . . . . . 29 6. MARKETING AND PRICES. . . . . . . . . . . . . . 30 Marketing . . . . . . . . . . . . . . . . . . . . . . . . . 30 Prices . . . . .. . . . . . * * . o . . . . . . * . . 30 7. BENEFITS, JUSTIFICATION AND RISKS ..... . . . . . . . . 32 General . .. ........ . . . . .. . . . . . . . . 32 Production 32 Financial Returns. . ....... . . . .. ... . ... 33 Aggregate Financial and Economic Rates of Return . . . . . 34 Employment Impact . . . . . . . . .. . . . . . . . . . . . 35 Public Revenus Impact . . . . . . .. . . . . . . . . . . . 35 Foreign Exchange Impact . . . . . . . . . . . . . . . . . . 36 Institutional Impact . . . . . . . . .. . . .. . . . . . . 36 Project Risks . . . . . . . . . . . o. . . . . . o . *. . 38 8. AGREEMENT REACHED AND RECOMMENDATIONS . . . . . . . . 38 - iii - Page No. TABLES 1. Scope of Agrarian Reform . . . . . . . . . . . . . . . . . . . 3 2. Operation Land Transfer: Progress . . . . . . . . . . . . . . 5 3. Indicative Family Income: Agrarian Reform Farmers . . . . . . 7 4. LBP: Financial Structure . . . . . . . . . . . . . . . . . . . 15 5. LBP: Earnings and Expenses . . . . . . . . . . . . . . . . . . 16 6. LBP: Loans Granted, 1977 . . . . . . . . . . . . . . . . . . . 17 7. LBP: Past Due Loans . . . . . . . . . . . . . . . . . . . . . 18 8. LBP: Deposit Generation . . . . . . . . . . . . . . . . . . . 18 9. Summary of Cost Estimates . . . . . . . . . . . . . . . . . . . 23 10. Project Financing . . . . . . . . . . . . . . . . . . . . . . 24 11. Prices: Project's Outputs and Inputs . . . . . . . . . . . . . 31 12. Main Incremental Production . . . . . . . . . . . . . . . . . . 33 13. Financial Rates of Return . . . . . . . . . . . . . . . . . . . 34 14. Aggregate Financial and Economic Rates of Return . . . . . . . 35 15. Incremental Public Expenditure and Revenues . . . . . . . . . . 36 16. LBP's Net Income from the Project . . . . . . . . . . . . . . . 37 17. Cash Flow Projection: LBP . . . . . . . . . . . . . . . . . . 37 ANNEXES 1. Operation Land Transfer, Table 1 2. Agricultural Credit, Tables 1-3 3. LBP Organization and Performance 4. Detail Project Cost Estimates, Table 1 5. Project Organization and Management 6. Costs and Benefits Analyses 7. Financial Impact on LBP MAPS IBRD 13740, July 1978: Main Project Areas SPECIAL REFERENCE DOCUMENTS AND REPORTS 1. General Economy: The Philippines; Priorities and Prospects for Development Bank Country Economic Report: pages 11-38 2. Agricultural Sector The Philippines: Priorities and Prospects for Development Bank Country Economic Report: pages 20-22 3. Tenurial System and Agrarian Reform: Pre-appraisal Mission Report June-July 1977; Project File 4. Livestock and Poultry: Completion Report; Loan No. 823-PH: September 1977 6. Land Bank of the Philippines: Preappraisal Mission Report; June-July 1977; Project File 7. Market and Prices: Preappraisal Mission Report; February-March 1978; Paper prepared and submitted by the Land Bank of the Philippines: Project File.  PHILIPPINES SMALL FARMER DEVELOPMENT PROJECT LAND BANK OF THE PHILIPPINES /1 1. BACKGROUND General 1.01 The Government of the Philippines has requested Bank assistance in financing a program of credit, supporting services and facilities for small- scale farmers especially those subject to the Agrarian Reform Program (see paras. 1.08-1.11). The project is estimated to cost US$37.0 million of which the Bank would contribute US$16.5 million, and would include: (i) production credit primarily for rice, corn and vegetables; (ii) term credit for light farm mechanization, post-harvest facilities, backyard livestock and poultry, and selected cottage industries; (iii) strengthening of the field operations of LBP; (iv) minor infrastructural works in agrarian reform concentration areas; and (v) studies aimed at a better understanding of the economic and social conditions of smallscale agriculture. The project would be implemented by the Land Bank of the Philippines (LBP) except for the infrastructural works which would be implemented by the appropriate line agencies. 1.02 In addition to being complementary to other Bank supported projects, particularly the proposed National Extension project (Staff Appraisal Report No. 2049-PH), this project would address itself to the range of development needs (technical assistance, infrastructure and credit) of the lower strata of the small-scale farmers, generally eschewed by the other institutional credit sources. It would also promote increased production of the staple food crops as well as foster diversification of farming activities and rural employment. 1.03 The project would be spread throughout the country but concen- tration would occur in certain areas according to the geographical distri- bution of the agrarian reform. Its scope is geared to the present and proposed capacity of LBP's field staff. The Agricultural Sector 1.04 Agriculture is the predominant sector of the Philippine economy, accounting for about 30% of GDP, slightly more than 50% of total employment, and 55-60% of the foreign exchange earnings. Nearly three quarters of the land under cultivation is devoted to grains production, notably rice and /1 The present report reflects the findings of Bank mission which visited the Philippines in July-August 1977 (Messrs. J. Brown, I. Moreithi and Ms. H. Schaengold - IBRD: Messrs V. Raswant and R.W. Jessup - Consultants); February-March 1978 (Messrs J. Brown and I. Moreithi); and May-June 1978 (Messrs. J. Brown, I. Moreithi - IBRD; and R.W. Jessop - consultant). The project was prepared by the Land Bank of the Philippines assisted by Bank staff. - 2 - corn; other principal crops are sugar, coconuts, abaca, pineapple and tobacco. About 70% of the Philippines population of 42.5 million lives in the rural areas, with 60% depending directly on agriculture. 1.05 After recovering from severe weather conditions during 1970-73, the sector has been growing remarkably well at about 5% p.a. between 1974-77, and significant growth is also expected in 1978. The high rate of growth was particularly buoyed by record rice and corn harvests resulting from Government sponsored production credit programs (see paras. 2.07-2.10), better weather conditions, expansion and improvement of irrigation facilities, and more favorable producer prices. 1.06 The Government has been committed to a policy of self-sufficiency in food and feed grains since the mid-1960s. After the 1970-73 production setbacks, rice imports have been steadily declining and the country realized token exports in 1977. It is estimated that exports would reach 100,000 tons in 1978./1 The overall performance of the agricultural sector has also contributed to a more favorable growth rate of rural family incomes compared to those of urban families. Nonetheless of the 15 million people in the lower 40% of the income scale, 12 million are found in the rural areas. 1.07 Structurally, Philippine agriculture is overwhelmingly small-scale. The national average landholding is about 3.6 ha. Most of the nonmarginal lands, especially in the lowland areas, are under cultivation. Agricultural development and improvement of farm incomes therefore critically depend on increased productivity of the already cultivated lands. Improved technology for rice cultivation has considerably raised the production potential of the irrigated areas, and appreciable progress has been made towards full exploi- tation of this potential. However, no comparable technological base exists at present for yield improvement in the rainfed upland areas where corn is the major crop. The development of the upland areas therefore remains problematical, though some diversification opportunities do exist. Tenure System and Agrarian Reform 1.08 About 29% of all farms in the Philippines are under tenancy and another 12% are under part-ownership (1971 Philippines Agricultural Census). The tenancy and part-ownership incidence is heavily concentrated in rice lands where it amounts to 53% of all farms. Tenancy terms include payment of cash rentals and fixed amount of produce but the most common one is 50-50 share cropping. Landlords typically provide a wide range of services to their tenants: production and consumption credit, assistance in procurement of farm inputs and marketing of the produce, and guidance on farm management. In some cases, the landlords also share in the production costs. /1 A recent Bank Sector Review Mission estimates that the Philippines would attain sustainable self-sufficiency in rice by early 1980s. Meanwhile, there may be periodic imports depending on the weather conditions. - 3 - 1.09 Since 1972, the Government policy has aimed at establishing family- owned smallholdings as the foundation of the Philippine agriculture. All tenanted rice and corn farms were therefore declared land reform areas under Presidential Decree No. 27 of October 1972. The reform falls into two parts: Operation Land Transfer /1 applicable to all farms (Estates) above 7 ha, whereby the tenants become owner-cultivators undertaking to pay for the land over a period of 15 years; and the Leasehold Enforcement Program /2 for all farms (Estates) up to 7 ha. Table 1 shows the overall scope of the reform, while Annex 1, Table 1 shows the regional distribution of Operation Land Transfer. Table 1: SCOPE OF AGRARIAN REFORM Size of tenanted Total Average holding estates area Tenants Landlords per tenant (ha) ('000) ('000) ('000) (ha) Operation Land Transfer 100 and over 213.3 93.3 2.2 2.3 50 - 99.9 86.0 44.7 1.5 1.9 24 - 49.9 98.0 57.3 3.7 1.7 7 - 23.9 361.7 198.5 32.3 1.8 Total 759.0 393.8 39.7 1.9 Leasehold 7 and less 644.0 521.1 371.1 1.2 Total 1,423.0 914.9 410.8 1.6 Source: Ministry of Agrarian Reform (MAR). 1.10 The Ministry of Agrarian Reform (MAR) is responsible for the overall administration and implementation of the program, /3 while LBP is concerned with the financing of land acquisition under Operation Land /1 Covering 759,000 ha and 393,000 tenants. /2 Covering 664,000 ha and 521,600 tenants. /3 Under Operation Land Transfer, MAR's responsibilities include: identi- fying tenants and landlords and initiating the transfer process; surveying the land parcels; ensuring proper land valuation; documenting land titles; and issuing Certificates of Land Transfer (CLT) which certifies that the holder is the actual tiller of the land parcel he claims. Transfer./l Completion of land transfer was originally expected to require only five years from October 1972. But after a briefly rapid pace during 1973, the implementation progress slowed down considerably principally as a result of poor land survey and records causing long delays in title documenta- tion, prolonged haggling over land valuation, inadequate institutional frame- work and resources within MAR, and opposition by the landlords. The progress has improved slightly since mid-1977. 1.11 Table 2 shows the progress achieved by the end of March 1978. About 226,800 farmers cultivating 444,900 had been issued Certificates of Land Transfer (CLT). The farms fully and partially compensated by LBP amounted to 96,200 ha involving 49,900 tenants, of whom about 37,600 had signed Farmers' Undertakings./2 While the implementation progress may remain slow, a significant number of farmers have already become amortizing owner-cultivators; the number will continue to increase. These farmers need specialized attention to move them to the point where they can be self- sustaining after the severance from the landlords upon whom they previously depended for a wide range of assistance (see para 1.08). /1 LBP verifies land documents submitted to it by MAR; arranges for the signing of Farmers Undertaking; and pays the affected landlords at 10%-20% cash and the balance in LBP bonds. /2 A Farmer's Undertaking commits the farmer to pay LBP the land amortizations; they signify the end of the land transfer process, the only remaining task being the collection by LBP of the amortizations receivable. - 5 - Table 2: OPERATION LAND TRANSFER: IMPLEMENTATION PROGRESS (CUMULATIVE) 1972 1973 1974 1975 1976 1977 1978/a CLTs Issued Tenants ('000) 0.4 144.5 189.1 208.0 224.1 258.1 262.8 Area ('000 ha) 0.7 259.3 337.0 365.9 390.4 444.9 453.9 Land Valuation/b Received by LBP Tenants ('000) - - 6.4 27.7 49.3 72.6 79.2 Area ('000 ha) - - 9.7 39.9 70.3 111.8 123.3 Cost (P million) - - 59.1 254.6 476.5 779.7 868.8 Land Compensated/c By LBP Tenants ('000) - - 0.4 11.2 16.9 46.9 49.9 Area ('000 ha) - - 0.9 20.3 30.8 90.1 96.2 Cost (P million) - - 6.2 133.2 230.5 617.9 663.2 Farmer's Undertaking Signed Land Parcels ('000)/d n.a. n.a. 20.0 41.8 50.8 Tenants ('000)/e - - n.a. n.a. 14.8 30.9 37.6 Area ('000 ha) - - n.a. n.a. 28.1 58.7 71.5 Cost (P million) - - n.a. n.a. 196.5 410.9 500.2 /a Up to end of March 1978. /b Officially at 2.5 times the average gross production for the three normal cropping years to October 1972, at official paddy price of P 35 per cavan; but in fact negotiated according to the prevailing market prices. /c To landlords affected by transfer; paid 10% cash and the balance in LBP bonds at 6% tax-free interest. /d Most tenants have more than one land parcel. /e Mission estimate at average landholding of 1.9 ha. Source: Land Bank of the Philippines. - 6 - 2. THE PROJECT'S TARGET GROUP AND SUB-SECTORS The Target Group 2.01 The bulk of the project's target group would consist of agrarian reform farmers. Other project's beneficiaries would include: owner-culti- vators who acquired land by other means, as well as leaseholders; rural entrepreneurs engaged in enterprises of direct benefit to small-scale farmers; and cottage industries entrepreneurs. 2.02 Economic Conditions: The average size of the agrarian reform farms is about 1.9 ha. Rice accounts for 80-90% of farm income in the lowlands while corn predominates in the uplands. Such supplementary sources of farm income as are available to the farmers consist of fruits and vegetables, especially in areas near to the urban centers, and backyard livestock and poultry. The level of productivity is generally lower than national averages due to inadequate and/or improper application of farm inputs, low standards of crops and animal husbandary, and infrastructural deficiencies. Wide variations in yields exist from farmer to farmer, even under similar produc- tion conditions, suggesting correspondingly varying farm management capabili- ties and the need for more rigorous technical extension services. The family's need to ensure self-sufficiency in staple food grains inhibits the adoption of cash crops, some of which, on account of their higher unit value, would appreciably raise farm cash incomes and reduce the risks associated with monocropping. 2.03 Table 3 illustrates the economic conditions typically facing the agrarian reform farmers. Family income amounts to about P 4,600 while per capita income is about P 800 per annum. This compares with the poverty line per capita income estimated at about P 1,124 for the rural Philippines. - 7 - Table 3: INDICATIVE NET FAMILY INCOME: AGRARIAN REFORM FARMERS (1975) : Pesos Other Off-Farm No. of Palay Farm and Area farmers Production Income Non-Farm Total Tarlac 36,000 4,000 10 800 4,900 Isabela 70,000 5,600 - 900 6,500 Pampanga 24,000 1,200 900 2,100 4,200 Bulcan 29,000 3,500 - 1,800 5,400 Camarines Sur 74,000 1,200 300 1,060 3,000 Nueva Ecija 60,000 2,500 100 900 3,500 Iloilo 75,000 3,900 200 660 4,700 Average per farm family /a 4,600 Average per capita: /b 800 /a Average weighted by the total number of farmers in the concerned area. /b Based on average farm family size of six persons. Source: Mission calculations based on primary data from a survey concluded by BAECON for the Department of Agrarian Reform in 1975. 2.04 Adequate irrigation facilities in many lowland areas permit multiple cropping and more or less continuous employment. The situation is different in rainfed areas and those with inadequate irrigation facilities, particularly the uplands. In such areas the need for diversification is real and impera- tive; some diversification opportunities exist and include the cultivation of high value crops such as vegetables, development of backyard livestock and poultry, and cottage industries using locally available raw materials. Project's Sub-Sectors 2.05 Agricultural Credit and Debt Problem. Despite the lower cost of credit now available from institutional sources compared to that previously extended by the landlords and other informal sources, the debt condition of smallholders has in many cases deteriorated in the last five years (see para. 2.08). The informal loans had highly flexible repayment schedule; while share-cropping was expensive, it involved risk sharing with the landlords since the absolute amount of payment varied with actual production. Now the farmer must meet fixed obligations for land amortization or rentals, and for Government-sponsored credit. -8- 2.06 Annex 2, Table 1 shows the trend in agricultural credit during the first half of the 1970s. The total volume rose considerably, in monetary terms,/l for all subsectors. However, the Philippine agricultural credit system still reflects the dualistic nature of the sector, with food crops accounting for only about one quarter of production credit./2 2.07 The increase in lending for food crops was a result of Government sponsored production credit programs, notably Masagana 99 for rice and Masaganang Maisan for corn and feed grains./3 Annex 2, Tables 2 and 3 show the performance of the two programs. While the programs have succeeded in reaching a vast number of small-scale farmers (the average Masagana 99 borrower had an average landholding of about 1.9 ha) and in boosting total production, they have been characterized by sharp declines in all respects since 1974./4 2.08 Poor loan repayment has been the main problem, partly due to crop losses caused by natural calamities but also due to the over-stretching of the credit delivery and recovery system in pursuit of emergency production targets dictated by the 1970-73 crisis. Credit was extended generously to borrowers ill-equipped to use it effectively and Masagana 99 ended its ninth phase (May - October 1977) with loan arrears amounting to P 799.7 million, and Masaganang Maisan P 110.0 million. A correspondingly large number of farmers are now burdened by debt servicing loads in some cases exceeding the gross value of their farm production./5 In effect, the number of borrowers has /1 From an annual average of P 7,018.7 million during 1972-73 to P 17,977.8 mil- lion during 1975-76. /2 During 1975-76, about 62% of the loans went to export and large-scale enterprises, while the food crop subsector, on which the majority of farmers depend, received 24%. /3 These programs were launched in 1973 as a reaction to the decline in grains production caused by the 1970-73 adverse weather conditions. Other production credit programs launched during the same period include: Gulayan sa Kalusugan for vegetables; and cotton and tobacco production schemes. /4 After reaching the peak of 468,000 borrowers and P 715.9 million in loans during its third phase, Masagana 99 steadily declined to only 72,600 borrowers and P 135.0 million of loans in its ninth phase (May-October 1977); Masaganang Maisan has similarly been on a sharp decline since its first phase; from 183,000 borrowers and P 171.9 mil- lion loans in Phase one to only 16,200 borrowers and P 15.5 million loans in Phase six. /5 At an average loan of P 1,600 per borrower, the number of farmers still in debt to Masagana 99 is about 499,900, and 110,000 for Masaganang Maisan at average loan of P 900. - 9 - fallen sharply as defaulters are disqualified from further loans. But many of the farmers still need seasonal credit, if they are to take full advantage of the available technology. 2.09 Now that rice production is no longer a crisis issue, the Government policy is shifting to more selective lending, according to the debt repayment capacity of the would-be borrowers, coupled with more rigorous technical and farm management support to ensure better use of the resources available to the farmers. Seasonal credit under the proposed project would be governed by this new policy (see para. 5.07). 2.10 Light Farm Mechanization: The majority of the small-scale farmers in the Philippines depend on animal traction (carabaos) and manual labor for farm work. Although underemployment is wide spread in the rural areas, labor bottlenecks are a constraint during the land preparation, planting and har- vesting seasons especially in areas where multiple cropping is practised. The carabaos are disadvantaged by inability to work for long hours without prolonged rest intervals, susceptibility to disease which may strike at the critical moment in the cropping cycle, and inability to cope with dryland tillage. 2.11 An increasing proportion of farmers is accordingly turning to power tillers, either self-owned or on custom service./l The use of power tillers, however, raises the problem of ensuring full utilization of effective capacity in addition to difficulties arising from unavailability of spare parts and main- tenance facilities particularly in the more remote rural areas. The proposed project would aim at minimizing these problems through group planning approach within the concept of "Estate Development Planning" (see para. 5.06) and provision of farm machinery repair and maintenance workshops. 2.12 Post-harvest Facilities: An appreciable amount of grain production in the Philippines is lost annually due to poor post-harvest facilities and handling. The heaviest losses are attributed to inadequate drying expecially in the wet season./2 Though at the national level there is over capacity of milling and warehousing facilities, their geographical distribution leaves some areas without conveniently located facilities. The proposed project would support initiatives to make such facilities available, taking into account the already existing capacity. /1 Locally manufactured power tillers are now readily available. While the use of power tillers would result in reduced labor usage in land prepara- tion per crop/ha, increased cropping intensity facilitated by more speedy land preparation would have a counter-balancing effect. /2 Apart from physical losses, grains with moisture content in excess of 14% fetch lower prices. - 10 - 2.13 Diversification Opportunities: Pigs and Cattle: It is estimated that 80-90% of the pork consumed in the Philippines comes from small backyard pig enterprises. There is, therefore,'widespread experience in pig husbandry among small farmers. Although the usual pig diseases are prevalent, the necessary veterinary services and supplies are readily available throughout the country. A range of farm by-products exists which, with about 50% prepared feeds, could provide an adequate diet. While the supply of improved breeds is still insufficient, this would not have a serious impact on the development of the backyard piggeries. Backyard piggeries therefore offer scope for considerable expansion subject to technical advisory services and credit being made available. 2.14 Backyard beef-cattle raising Al accounts for over 70% of the national cattle population. But the system is generally characterized by poor husbandry and management which, in addition to the inferior types of animals kept, result in low productivity. Most of the cattle diseases are well under control. The main development constraints include: inadequate supply of fattening stocks, relatively poor knowledge regarding the proper nutrition regimes, and deficient marketing facilities in the more remote rural areas. Owing to the quicker turn-over, the majority of the smallholders prefer fattening to breeding operations, but there is scope for modest expan- sion of both types of operations. 2.15 Diversification Opportunities: Poultry: The constraints are less binding for the development of small-scale poultry keeping compared to livestock, particularly since it is much easier to import foundation stock for which local multiplication facilities are well established. The usual poultry diseases and pests are prevalent,/2 and the mortality from Newcastle's disease is high; but preventive measures are readily available and widely used. While the domestic supply of poultry feed is insufficient and has to be supplemented by imports it is unlikely to pose insuperable problems to backyard poultry keepers as feedmills in most areas of the Philippines offer a wide range of mixed feeds. 2.16 The number of large-scale poultry producers ("integraters") using very modern production techniques has been rising steadily. The majority are fully vertically integrated from feed milling, hatcheries, broilers production to processing and marketing. Many of them enter into contracts with small-scale out-producers, supplying day-old chicks to the out-producers and repurchasing mature birds for processing and marketing. /1 There are three beef cattle raising systems in the Philippines: upland ranching; cattle-coconut integration; and the backyard system which is the common one among small-scale farmers. /2 Ducks have the advantage of being less susceptible to diseases than layers and broilers. - 11 - 2.17 Diversification Opportunities: Cottage Industries: The need for the development of cottage industries in the Philippines is underscored by the mounting number of landless and the high growth rate of the labor force (2.6% per annum). The probable growth of the agriculture sector would not be adequate to productively accommodate such a high increase of the labor force. 2.18 The Philippines has a variety of thriving cottage industries. The majority use locally available raw materials and produce mostly for the domestic market. Exports have grown rapidly from P 129,000 in 1970 to P 1.08 million in 1975, especially for shell craft, needlework, fibrecraft and bamboo-rattan products. Many of the cottage industries have a long tradition behind them and expertise is wide spread; nonetheless, training is constantly needed especially for the industries aiming at the more sophisti- cated export markets./1 The proposed project would support these initiatives, giving special emphasis to charcoal production, making of concrete products, fibercraft, and embroidery and garments. 2.19 Infrastructure: Some of the agrarian reform areas are handicapped by infrastructural deficiencies particularly in irrigation facilities, feeder roads and flood control structures. Many of these deficiencies can be alleviated with minor civil works such as distribution canals, village roads and water control dykes. Small irrigation pumps would also help to expand irrigation facilities./2 The development of pump irrigation is, however, restricted by inadequate groundwater survey and undefined water use rights. In some communities overexploitation of groundwater has lowered the water table to inaccessible levels, leaving pumps idle; this highlights the import- ance of cautious and limited support for further investments of this type./3 Some scope, however, exists for low lift pumps tapping surface sources. 2.20 Field Extension Services: Appreciable progress has been made towards the improvement and intensification of the extension services, particu- larly under Masagana 99. Major problems however remain as to how best to coordinate the many extension agencies, in contrast to the previous one /1 The National Cottage Industries Development Authority provides the needed training in addition to undertaking other activities to promote the development of these industries. /2 It is estimated that privately owned irrigation pumps now cover about 60,000 ha. /3 The Bank is supporting groundwater surveys in Tarlac through Loan 1080-PH, and in parts of Nueva Ecija and Pangansinan through Loan 1526-PH. - 12 - landlord, demanding the attention of the farmer. From the proposed project's viewpoint, the immediate needs are, at the level of the day-to-day contact with the farmer: to make the extension services more rigorously attuned to the imperatives of effective credit delivery and recovery system; to ensure effective coordination among the various agencies; and to focus more intensely on the project's target group. To accomplish these ends, the project would include the strengthening of LBP's field staff, particularly with the appoint- ment of Estate Development Coordinators for each 300-500 farmers in the project area. These officers would depend on the technical support functions of line agency field staff; their presence is intended to provide a focus for coordination, and an additional dimension of financial management assistance and supervision for the project's beneficiaries (see para. 5.04). 2.21 Economic and Social Research: The current state of knowledge, in the Philippines as elsewhere in the developing world, regarding the economic and social conditions of small-scale agriculture leaves major gaps, many of which have strong bearing on effective use of credit and other resources available to small-scale farmers. Little empirical evidence exists to guide policies and procedures (on, for example, marketing, inputs delivery, options in the development administration processes, and farm planning and management) relating to small-scale agriculture in general and agrarian reform farmers in particular. The project would therefore support action- oriented studies to be undertaken by the University of the Philippines (Centre for Policy and Development Studies) under contract with LBP (see paras. 4.12 to 4.13). 3. THE LAND BANK OF THE PHILIPPINES (LBP) 3.01 LBP would be responsible for implementing the project except for infrastructural works to be executed by line agencies. Annex 3 presents details regarding its functions, structure, financial conditions, and operat- ing policies and procedures. 3.02 The Land Bank of the Philippines was established by Republic Act No. 3844 in 1964 and its authority and mandate were considerably broadened by Presidential Decree No. 251 in 1973. In addition to the general powers vested in it under the Corporation Law and the General Banking Act, LBP is specifically authorized to accept deposits, issue debt instruments, extended loans and guarantees, invest in commercial paper, and to act as trustee. Its credit activities may be "for the establishment, development or expansion of agricultural, industrial, home building or home financing projects or other productive enterprises. Its primary responsibility is to serve as the financial arm of agrarian reform, to make cash payments and to issue bonds to former landlords, to effect and hold farmers' amortization agreements and to provide credit in support of the productive activities of beneficiaries. Its commercial banking activities are intended to generate revenue to offset a portion of the public sector cost of agrarian reform. - 13 - Significance of LBP's Role in Agricultural Credit 3.03 LBP started lending operations in 1974 and its agricultural lending remains comparatively modest, though it has been rising sharply./1 Nonetheless, LBP is the only banking institution specifically charged with assisting the lower strata of the small-scale farmers, and current management policies are moving the Bank positively toward this area which remains inadequately served by other credit institutions in the Philippines. LBP also has uniquely high financial stakes in the development of the small-holder owner-cultivators on whom it entirely depends to liquidate the liabilities arising from land transfer operations. 3.04 Its corporate goals accord high priority to assisting the former tenants now owner-cultivators to increase farm productivity and incomes. To this end, LBP has reoriented its operations towards increased agricultural lending and developmental support. Underlying this move are three innovative measures taken in the past year: the creation of a separate department to implement the expanded agricultural program; the strengthening of the field support services; and the proposed establishment of lending and loan collection offices located in truly rural areas (see paras. 5.02 to 5.04). Organization and Management 3.05 The activities of LBP are controlled by a Board of Directors con- sisting of: the Minister for Finance (Chairman); LBP's President (Vice-Chairman); the Minister for Agrarian Reform; and the Minister for Labor. As part of a consolidation program after a period of rapid expansion, LBP restructured its organization during the first half of 1978. The new structure reflects a more rigorous delineation and delegation of functional responsibilities, and identification of profit and cost centers. Annex 3, Chart I, presents LBP's current organization and outlines the functions of the various depart- ments and divisions. Staffing 3.06 LBP's total staff amounts to 703 (May 30, 1978), of which 215 are in the field. Though LBP has succeeded in building up a sizeable cadre of qualified, experienced and well motivated staff, there have been substantial and critical staff shortages at all levels and departments. Of particular importance to the proposed project are the recruitment of Estate Development Coordinators (see para. 5.04) and field loan appraisers. LBP is fully aware of these deficiencies and successful efforts have recently been made to recruit a satisfactory number of Estate Development Coordinators, enough to ensure efficient launching of the proposed project. Recruitment measures are underway to fill all the critical positions in anticipation of expanded lending operations (see para. 5.05). /1 P 1.2 million of outstanding loans in 1975; P 3.2 million in 1976 and P 79.3 million in 1977. - 14 - Financial Structure and Conditions 3.09 Financial Structure: LBP's authorized capital is P 3 billion of which the Government contribution will eventually amount to P 1.8 bil- lion./l The paid-in capital was P 1,120.8 million at the end of 1977 (see Table 4). LBP is heavily dependent on governmental funds. In addition to the entire paid-in capital, the Government accounts for more than 90% of deposits; however, private deposits have risen sharply from less than P 1 mil- lion in 1974 to P 43 million as of December 31, 1977. LBP's financial struc- ture is sound, with the debt-equity ratio remaining satisfactory, while the liquidity ratio has continued to be high (See Table 4). The high liquidity reflects LBP's policy of maintaining a substantial reserve as a precautionary measure against an upsurge in land transfer operations. 3.10 Earning Performance and Resources Flow. Table 5 summarizes opera- tional results for the last three years. Net income dropped from P 61.9 mil- lion in 1976 to P 58.1 million largely due to higher increase in costs, but rose slightly to P 58.6 million in 1977. The debt-service ratio remains adequate though it has fallen from 2.2 in 1975 to 1.6 in 1976 and 1977. Investments in short-term securities remain the major source of total gross earnings. However, income from loans has risen sharply reflecting the increas- ing share of the loans in the total portfolio of earning assets. 3.11 Annex 3, Table 5 presents the sources and uses of funds. Deposits, most of them govermental, were the single largest source of funds in 1975 and 1977 but the probability of withdrawal, as happened in 1976, is a major destabilizing factor in the flow of resources. Bonds payable in connection with Operation Land Transfer rank second and are characterized by a steady growth. Amortizations receivable are at present not very significant but will progressively become so and increasingly constitute, in the absence of effective measures to improve their collection, the highest risk assets in LBP's portfolio. Among the uses of funds, current assets predominate in keeping with the LBP policy of maintaining high liquidity. Allocation of funds to loans has risen steadily from P 20.4 million in 1975 to P 338.2 mil- lion in 1977. /1 After the initial contribution of P 400 million plus annual contri- bution of P 100 million, the total to amount to P 1.8 billion around during the next seven years or so. - 15 - Table 4: FINANCIAL CONDITION (at End of Year) 1975 1976 1977 P (million) % P (million) % P (million) % Assets Cash and due from Banks 54.3 3 68.4 3 95.3 3 Marketable Securities 649.5 31 611.8 26 1,354.6 42 Loans 20.4 1 140.1 6 338.2 11 Amortization rec. 214.3 10 403.7 17 586.6 18 Other 1,157.0 55 1,160.4 48 819.2 26 Total Assets 2,095.5 100 2,384.4 100 3,193.9 100 Liabilities Deposits 809.4 39 774.8 33 1,070.6 33 Bills/Notes Payable 80.3 4 68.7 14 218.2 7 Bonds Payable /a 191.9 9 326.5 3 518.7 16 Others 46.8 2 106.0 4 150.7 5 Total Liabilities 1,128.4 54 1,276.0 54 1,958.2 61 Equity Paid-in Capital 872.6 41 1,005.8 42 1,120.8 35 Surpluses + Reserves /b 94.5 5 102.6 4 114.9 4 Total Equity 967.1 46 1,108.4 46 1,235.7 39 Total Liabilities and Equity 2,095.5 100 2,384.4 100 3,193.9 100 Debt/Equity Ratios: 1.17:1 1.15:1 1.58:1 Liquidity ratios 1.20:1 1.30:1 2.20:1 /a Arising from the land transfer acquisitions. /b Including undistributed earnings. - 16 - Table 5: EARNINGS AND EXPENSES 1975 1976 1977 P (million) % P (million) % P (million) % Earnings Interest (loans) 0.9 1 8.3 5 20.0 11 Investment income 115.3 93 153.7 92 162.2 84 Others 7.7 6 4.8 3 10.4 5 Total 123.9 100 166.8 100 192.6 100 Expenses Financial 50.4 81 89.8 83 107.4 80 Others /a 11.6 19 18.9 17 26.6 20 Total 62.0 100 108.7 100 134.0 100 Net Income 61.9 58.1 58.6 Debt-Servicing Ratio 2.2 1.6 1.6 Net Return on Assets 3.0 2.4 /b 1.9 /a Personnel and other administrative expenses /b Compares with national average for commercial banks of 1.7% (1976). 3.12 Financial Prospects. Annex 3, Table 5 shows the long-term resources at the end of 1977. LBP has no long-term debt maturing before 1986; its financial prospects depend primarily on: the land transfer implementation rate; land amortization collection rate; commercial banking growth rate; and growth rate in its investment portfolio./1 The progress of the land transfer operations is unpredictable as it depends on socio-political climate, though it is unlikely that it could be completed before another 15 years. Land amortization collection has been very low at 20% in 1976 and 16% in 1977, and, at those levels, poses serious implications for LBP financial future. It is however expected that the new measures now underway (see paras. 5.03- 5.04) and the proposed project will improve the prospects by increasing farm income and by strengthening the collection machinery at the field level. /1 The mission estimates that with 15 years to complete the land transfer, amortization collections at about 30% of amounts due per year, growth of deposits at 5% and investment portfolio at 2.5%, LBP would maintain positive cash flows throughout the period of its land transfer obligations. These are attainable performance targets. - 17 - Principal Operations and Policies 3.13 Lending Operations. LBP has set three orders of preference for its lending operations: first priority, agrarian reform farmers and landlords/LBP bondholders; second, borrowers engaged in businesses of benefit to the agrarian reform farmer or otherwise promoting the objectives of the reform; third, nonpriority clients. The general policy is to allocate the loanable funds so that 35% goes to each of the first two groups and 30% to the third one, but these allocation targets have not as yet been achieved. Nearly 76% of loans granted in 1977 went to commercial and industrial clients (see Table 6). Lending to the third priority group is of a wholesaling nature to prime corporations. Table 6: LOANS GRANTED, 1977 Head office Branches Total Type of Loan ------------- P million ----------- % Agricultural Short term 0.49 5.05 5.54 3.9 Medium/long term 16.68 11.95 28.63 20.2 Subtotal 17.17 17.00 34.17 24.1 Industrial/commercial Short term 34.91 3.40 58.31 41.1 Medium/long term 45.41 4.04 49.45 34.8 Subtotal 100.32 7.44 107.76 75.9 TOTAL 177.49 24.44 141.93 100.0 3.14 Total outstanding loans rose from P 140.1 million in 1976 to P 338.2 million in 1977, while agricultural loans increased sharply from only P 3.2 million to P 79.3 million in the same period. Loans repayments have been satisfactory especialy for the agricultural loans in respect of which the delinquency rate fell from 9.5% in 1976 to 7.5% in 1977 (see Table 7); this compares most favorably with the prevailing situation in the Philippines regarding repayment of agricultural loans (see Annex 2, Tables 2 and 3). - 18 - Tablq 7: PAST DUE LOANS End Juhe, 1976 End December, 1977 Past due % /a Past due % /a Type of loans (P million) (P million) Agricultural 0.31 9.5 5.98 7.5 Industrial 0.03 0.1 26.12 12.4 Commercial 0.71 7.4 6.95 14.4 TOTAL 1.05 1.6 39.05 11.5 /a Percentage of total loans outstanding as per Annex 3, Table 4. 3.15 In addition to a service charge now at 3% p.a. in all cases, LBP interest charges are currently at 10% p.a. for cooperatives; 12% for individual borrowers under first priority; and 15% p.a. for second category borrowers. For the nonpriority borrowers, the interest rate depends on the total profitability from the overall transactions with the borrower. Maximum interest rates and service charges are determined by the Monetary Board and administered by the Central Bank; they are generally uniform for similar institutions and types of credit. 3.16 Commercial Banking. Total deposits fell from P 809.5 million in 1975 to P 774.7 million in 1976 (due to withdrawal of governmental deposits) but rose to P 1,070.6 million in 1977. Though still relatively small, demand deposits have been growing rapidly from P 2.5 million in 1975 to P 29.7 mil- lion in 1977. About 96% of total deposits in 1977 were governmental (see Table 8). Table 8: DEPOSIT GENERATION 1975 /a 1976 1977 Govern- Govern- Type (P million) (P million) ment % /a (P million) ment % /b Demand 2.5 18.1 n.a. 29.7 37.4 Savings 557.7 502.4 n.a. 626.9 96.6 Time 249.2 254.2 n.a. 414.0 99.0 TOTAL 809.5 774.7 92.2 1,070.6 95.8 /a No breakdown available regarding governmental share. /b Other depositors are: farmer (P 0.31 million in 1977); Landlords/LBP bondholders (P 2.26 million in 1977), cooperatives (P 4.08 million in 1977); and unspecified others (P 36.42 million in 1977). - 19 - 3.17 Efforts to pursue agrarian and commerical banking objectives through a common network of branches have not proven satisfactory, in large part due to the need to locate branches in urban centers where commercial banking opportunities are more available. LBP has realized this shortcoming and has begun to establish small low-cost field offices in truly rural areas. The main function is to serve needs of small-scale farmers, free from preoccupation with commercial banking. 4. THE PROJECT 4.01 The objective of the proposed project is to increase rural incomes by enhancing the productivity of small farms and generating off-farm employment opportunities. A key feature would be the coordinated delivery of technical assistance, improved infrastructure and credit to beneficiaries of the agrarian reform program. Development efforts in the selected project areas would be based on a careful assessment of needs by farmers and the field staff of concerned agencies. While the project would be small in relation to need, the complexity of issues to be addressed, the poor financial condition of most potential beneficiaries, and the limited field capacity of the Land Bank require cautious initial efforts. However, the project is designed in terms of both financial and manpower inputs to be widely replicable as experience and capacity increase. Support would also be included for Land Bank's ongoing traditional small-scale credit operations wherein individual or group credit is extended for investments not constrained by infrastructural or managerial deficiencies. Project Area 4.02 During project preparation, initial profiles were prepared of all estates that have been transferred to tenants under the Agrarian Reform Program. On the basis of need, potential, contiguity and proximity to existing or proposed Land Bank field offices, 60 areas have been selected for project assistance during the next three years. Each consists of one or more former estates with a total population of 300 to 500 farm families, and in many cases constitutes a distinct geographic unit. While this represents less than 5% of the declared Agrarian Reform area of the country, project scope has been constrained by its innovative features, by the present implementation capacity of the Land Bank, and by the absorptive capacity of beneficiaries with respect to financial and managerial undertakings. Manpower and financial commitments to these areas have been kept to levels which are replicable on a wide scale as experience and capacity increase. Project Components 4.03 The credit and infrastructure components described in the following paragraphs have been determined on the basis of field surveys. While estimates of the number of individual loans have been made for purposes of project cost allocation and phasing (see Annex 4, Table 1) the actual distribution of proceeds will vary according to the demand of the borrowers and the results of detailed infrastructure surveys. 4.04 Production Credit. In many cases short-term credit for fertilizer, crop protection chemicals, seed and hired labor is the most critical need of small farmers. The project would provide such credit primarily for rice, - 20 - corn and vegetables over ad area that is expected to grow to about 30,000 ha in the third year. Individual loans would be based on a farm plan and budget and credit needs would be determined on a yearly basis with disbursements and repayments phased to coincide with the cash flow pattern over that period. While there are sufficient farmers in the project area without serious debt problems to absorb the proposed credit, efforts would be made to assist some who do have such problems. Arrangements would be made on a case-to-case basis between LBP and other creditors with respect to supervision responsibility, rescheduling, and distribution of collection proceeds. 4.05 Marketing Credit. The Land Bank's credit support of palay marketing would be expanded under the project./1 Authorized Samahang Nayons and Area Marketing Cooperatives which meet criteria of financial and managerial capability and which procure palay in project areas would receive working capital loans. One current practice that would be encouraged under such loans is the advance of funds to farmers against deposited stocks, which enable producers to meet urgent financial obligations while postponing final sale of their produce until seasonal price fluctuations favor disposal. 4.05 Light Farm Mechanization. The project would finance mechanical draft power, primarily locally manufactured power tillers of 7-10 hp capable of ploughing and double harrowing one ha in 40 hours. The project would also finance a limited number of shallow well irrigation pumps (4" diameter and capable of irrigating 7 ha) at a cost of P 8,800 installed set, including about P 3,000 for shallow tubewells where necessary. Rehabilitation and improvement of existing surface pumps, of which there are many at present unused, would be another important feature of the project. Other minor items (sprayers and hand tools) would be included as required. 4.06 Post-harvest and Other Farm Support Facilities. These would include: portable rice threshers powered by a 10 hp engine with a capacity of 20 cavans per hour; portable rice driers equipped with a 3 hp engine, with a capacity of 23 cavans in 5 hours; small rice mills (10 cavans/hour capacity) and warehouses in areas not conveniently serviced by the existing facilities. The project would also include light cargo trucks (0.5 to 1.5 tons), and agricultural machinery repair and mintenance workshops, where such facilities are not available. 4.07 Backyard Livestock. Particularly in unirrigated areas this activity represents a very important source of productive family employment and cash income. The appropriate size and type of enterprise would vary considerably among regions but typical investments to be financed under the project would be: piggeries - 2 sows and 15 fatteners; poultry - 200 layers and 100 broilers; ducks for eggs and meat - 200 birds; and cattle fattening - one breeding cow and three fatteners. 4.08 Cottage Industries. The rural labor force is growing much faster than the potential absorbtive capacity of agriculture, and nonfarm employment /1 In addition to its own credit support, particularly to SN's and AMC's, the Land Bank is the channel for a P 200 million line of credit to the National Grains Authority (NGA) for palay procurement through private traders. - 21 - opportunities must develop to fill this gap. While the long term development strategy of the sector and a number of important issues such as marketing have yet to be considered, there is considerable scope for a number of activ- ities depending primarily on local markets. Indicative project enterprises are: concrete products, embroidery and garments, and fibercraft and charcoal making. 4.09 Minor Infrastructure. On the basis of development plans for project areas and feasibility studies by appropriate line agencies, the project would finance minor infrastructure works such as feeder roads, irrigation canals and flood control dykes when these are critical to economic development. Although ongoing programs of responsible agencies, some of which presently receive Bank support, do include the type of works envisaged, the component is included in this project to facilitate, through supplementary budget allocation, the execution of works which are small and scattered and have not been given adequate attention in the national budgeting process of the agencies concerned. It is estimated that the infrastructural works would involve roughly 120 km of feeder roads, improvement of flood control structures serving about 2,700 ha, and rehabilitation of irrigation systems for about 4,100 ha. 4.10 Strengthening LBP Field Operations. It is considered essential for LBP to strengthen its presence among the farmers particularly among those who can benefit from credit undertakings in addition to their land amortization commitments under agrarian reform. Field representatives to be known as Estate Development Coordinators (EDC) would be assigned to each project area of 300-500 farmers. Over a three year period, they might be expected to develop a credit portfolio of 150-300 loans. Their responsibilities would be primarily in financial supervision and management and in coordinating the activities of the other agencies with respect to planning and agricultural extension (para. 5.05). Incremental costs of these personnel would include salaries and allowances, vehicles (mostly motorcycles), as well as office facilities, equipment and supplies. 4.11 Because of the lead time necessary to ensure staff availability for project start-up, LBP has already recruited 30 EDCs, effective from April 1978, and conducted the necessary training for them (see para. 5.05). The personnel and training costs arising from these advance measures constitute an essential preparation towards the success of the proposed project and would be eligible for retroactive financing. (Total retroactive IBRD financing would amount to about US$120,000). 4.12 Socio-Economic Research. This would involve action-oriented studies on: agricultural credit prospects and delivery mechanism in the main project areas; marketing of rice, pigs and poultry; development of appropriate farmer supporting services and mechanism to attain farmers participation in the developmental efforts; and the appropriate role of the local institutions in the development of agrarian reform estates. Terms of reference for all studies would be subject to Bank agreement. 4.13 The Center for Policy and Develpment Studies, University of the Philippines at Los Banos (UPLB), would carry out these studies in addition to providing training for LBP staff connected with the project as well as - 22 - general consultancy under a contract signed in May 1978. Securing qualified staff for this research work has necessitated release of local funds as of July 1, 1978, and their costs would be eligible for retroactive financing under the project. Cost Estimates 4.14 Annex 4, Table 1 presents detailed project costings which are summarized in the following Table 9. The total project costs are estimated at P 268.0 million (US$ 37.0 million) to be committed over a period of three years. The costs are based on price information prevailing at the end of May 1978. - 23 - Table 9: SUMMARY OF COST ESTIMATES % Total Local Foreign Total Local Foreign Total project % - P million ---- --- US$ million ---- cost F.E. Seasonal Credit Production 19.6 24.0 43.6 2.7 3.3 6.0 16 55 Marketing 10.4 2.6 13.0 1.4 0.4 1.8 5 20 Subtotal: seasonal credit 30.4 26.6 56.6 4.1 3.7 7.8 21 47 Term Credit Livestock & poultry 55.6 6.2 61.8 7.7 0.8 8.5 23 10 Farm mechanization 15.4 11.2 26.6 2.1 1.6 3.8 10 42 Postharvest facilities 13.0 8.6 21.6 1.8 1.2 3.0 8 40 Cottage industries 14.8 5.5 20.3 2.0 0.8 2.8 7 27 Subtotal: term credit 98.8 31.5 130.3 13.6 4.4 18.0 49 27 Total Credit 128.8 58.1 186.9 17.7 8.1 25.8 70 33 Field Support Services Personnel & training 6.3 - 6.3 0.9 - 0.9 2 100 Service vehicles 0.3 0.3 0.6 0.1 0.1 0.2 - 50 Office equipment 0.1 0.1 0.2 - - - - 40 Miscellaneous 1.4 0.3 1.7 0.2 - 0.2 - 20 Research studies 1.1 - 1.1 0.1 - 0.1 - 0 Consultancy 0.5 - 0.5 - - - - 0 Subtotal: field support 9.7 0.7 10.4 1.3 0.1 1.4 4 Minor Infrastructure Feeder roads 9.3 8.9 18.2 1.3 1.2 2.5 7 49 Flood control 1.1 1.1 2.2 0.2 0.1 0.3 1 49 Irrigation 9.4 9.1 18.5 1.4 1.2 2.6 7 49 Subtotal 19.8 19.1 38.9 2.9 2.5 5.4 15 49 Base costs 158.3 77.6 236.2 21.9 10.7 32.6 89 Physical contingencies /a 2.9 2.8 5.7 0.4 0.4 0.8 2 49 Price increases expected /b 18.5 7.6 26.1 2.5 1.1 3.6 9 29 Total Project Cost 179.7 88.3 268.0 24.8 12.2 37.0 100 33 /a At 15% of infrastructural works. /b Expected inflation rate compounded as follows: Year Livestock & poultry Machinery & equipment Civil Works 1979 7.0% 6.5% 7.5% 1980 6.5% 6.0% (13%) 7.0% 1981 6.5% 6.0% (20%) 7.0% - 24 - Financing 4.15 The Bank's contribution would be US$16.5 million amounting to 45% of the total project cost, equivalent to all foreign exchange costs, estimated to total US$12.2 million (33% of project cost), plus $4.3 million of local currency costs. Local cost financing is recommended in view of the high proportion of local currency in small farmer credit needs and the emphasis of the project on serving a group of beneficiaries, almost all of whom are within the lower 40% of income levels in the Philippines. Proceeds of the Bank loan to support LBP activities would be on-lent to LBP by the Government at the same interest rate specified in the proposed Bank loan. The financing of the project would, therefore, be as follows: Table 10: PROJECT FINANCING (US$ million) Project Components Borrowers /a LBP /b Government World Bank Total Credit 1.8 14.8 - 12.3 28.9 LBP field staff - 1.1 - 0.1 1.2 Infrastructure - - 2.8 3.9 6.7 Research, studies consultancy - - - 0.2 0.2 Total 1.8 15.9 2.8 16.5 37.0 /a In kind and/or cash, at 10% for term credit. /b From internally generated funds and rediscounting within Central Bank. Conditions for the release of funds to the term credit subborrowers would be as spelled out in the LBP terms and conditions of lending (see Annex 5, Appendix A). Formal assurance was obtained from LBP that these terms and conditions would not be materially altered or abrogated without approval by the Bank. LBP's contribution under the project would be equivalent to only 13.5% of its liquid assets as of December 31, 1977. Counterpart funds for the infrastructure component would be made available as budgetary allocation from the Government. 4.16 Loan proceeds would be channelled through the Ministry of Finance for on-lending to LBP, in the case of credit, research, training and LBP establishment, and released to executing agencies in the case of infrastruc- ture as approved by the Budget Commission. - 25 - Procurement 4.17 The various equipment and machinery for onfarm development and farm support facilities would be purchased locally by the sub-borrowers under the overall supervision and guidance of LBP to ensure that the prices is reasonable. To this end, LBP maintains a system of accredited suppliers for equipment and machinery as well as seasonal farm inputs, based on such consid- erations as purchase price and the availability of parts and after-sale service. Where feasible, borrowers would be required to solicit three price quotations for equipment purchases. The procurement of service vehicles for LBP field staff would be done through local competitive bidding while equipment for LBP field offices, which would be procured in small lots, would be purchased through-prudent shopping. Other works would be carried out as follows: (a) Infrastructure. Civil works would be widely scattered in small jobs (estimated maximum US$100,000 equivalent) and would therefore not be suited to international competitive bidding. The works would be executed by the appropriate line agencies under force account or through local contracts in accordance with standard bidding procedures acceptable to the Bank. (b) Training, Research and Consultancy. These would be carried out by the University of the Philippines (Centre for Policy and Development Studies) subject to Bank approval of curricula, terms of reference, and conditions of consultant employment. 4.18 While all these project components would be procured locally, foreign firms are well represented locally and therefore have the opportunity to participate should they consider it in their interest. The number of foreign and local firms is adequate to ensure effective competition in all cases except in a few remote areas. Disbursement 4.19 The disbursement of the loan proceeds would be as follows: (a) on-lending for term credit: 65% of loans disbursed by LBP against quarterly statements of expenditure; (b) LBP Field Support Services: vehicles and office equipment at 100% of foreign exchange or ex-factory cost or 50% of off-the-shelf cost, against normal documents; (c) infrastructural works: 55%, against certified quarterly statements of expenditure if executed by force account, or against normal documents if executed by local contract; (d) training, research and studies: 100% of total costs of Bank-approved research and studies, against normal documents. - 26 - In all cases where disbursement is to be made against certified statement of expenditure, the supporting documents will be retained by the borrower or the Land Bank and held available for inspection during the course of super- vision missions. An estimated schedule of expenditure, disbursement and envisaged allocation of funds is shown in Annex 4, Table 1. Accounts and Audit 4.20 Separate accounts would be maintained for all project's funds and annually audited by the Commission on Audit. Assurance was obtained from the Government (for infrastructural works) and LBP (for credit, field staff, research, training and consultancies) that separate accounts, adequate to reflect the purpose and use of all funds under the project, would be maintained and annually audited by the Commission on Audit and together with the auditor's comments and opinion be submitted to the Bank within six months after the close of the financial year. 5. ORGANIZATION AND MANAGEMENT A. Credit Operations 5.01 LBP would be responsible for implementing lending operations, and would also assume the primary role in coordinating the various field agencies particularly the technical extension services provided by the Ministry of Agriculture (MA). To this end, LBP would strengthen its own field support staff (Estate Development Coordinators) and undertake overall planning of the proposed estate development program. More specifically, the LBP's Field Operations Department (FOD) would take charge over the day-to-day implementation of the project. Land Bank Field Operations Department: Organizational Structure 5.02 Annex 5, Chart 1 shows the details relating to recent restructuring of FOD, now being implemented. Central to this restructuring are the establishment of FOD as a full-fledged department, the proposed creation of Area Offices, Field Offices (Land Bank sa Bukid), strengthening of LBP's own field support staff (Estate Development Coordinators), and formalization of arrangements whereby MA would provide technical extension specifically in support of LBP's activities. As a department, FOD is now under the Agrarian Reform Section Senior Vice-President. The restructuring places FOD at a better footing to serve the credit and other developmental needs of the small farmers. In particular, FOD is now well constituted to enable efficient channelling enlarged volume of resources to the small farmers, and to further the reorientation of LBP's priorities towards this end. It is expected that FOD will be accorded sufficient authority, manpower and financial support commensurate with the responsibilities attendant to the project. Assurance was obtained from LBP that the Field Operations Group, including FOD, will be adequately staffed and annually allocated sufficient funds as would enable it - 27 - to efficiently implement the proposed project. Assurances were also obtained that LBP would not materially alter internal organization with regard to project implementation without prior consultation with the Bank. 5.03 The Area Offices, at provincial level, would concentrate on lending operations and amortization collection; under the Area Offices and for the same objective, would be Land Bank Sa Bukid offices (field offices) located in truly rural areas. Estate Development Coordinators would in most cases be responsible to a Land Bank Sa Bukid office. 5.04 The Estate Development Coordinators (EDC) would constitute the critical level of staff, as they would be responsible for the day-to-day implementation of the project and coordination of the activities of the other field agencies. Their overriding responsibilities would be in financial supervision and farm management assistance. While EDCs would endeavor to ensure that the farmers receive the required technical assistance, the substantive technical work relating to crops and livestock development would be carried out by the staff assigned to the project area by MA under a Memorandum of Agreement. The staff so provided by MA and other relevant agencies would form a Farm Management Group (FMG) for the project area. Assurance was obtained from the Government that MA will provide technical field staff to project areas in accordance with the Memorandum of Agreement between LBP and MA, and dated July 5, 1978. Staffing and Training 5.05 Successful efforts have been made to strengthen the EDC staff complement; and as of May 1978, 30 EDCs were at post. They are all of suitable calibre and form a solid core which should be adequate to initiate the implementation of the project. The number will need to be increased by at least another 50 candidates by the third year of the project but no serious difficulties are envisaged in recruiting this number. Efforts are underway to recruit other critical staff and by May 1978, 20 project analysts and credit examiners were at various stages of recruitment processing. LBP has arranged with the University of the Philippines at Los Banos to conduct periodic short courses for all LBP field and selected head office senior staff; the first course took place during May 1978, lasting for two weeks. Assurance was obtained from LBP that it would provide staff for the project in accordance with a staffing plan acceptable to the Bank. Such a plan will provide, inter alia, qualified and experienced EDCs to the areas of project concentration, at an average ratio of at least one EDC to 500 farmers, and loan appraisers and examiners in the field and branch offices sufficient to ensure expeditious processing of loan applications. Operation Strategies and Procedures 5.06 Estates Classification and Development Planning. LBP has already carried out a broad classification of all the lands acquired under the Opera- tion Land Transfer. A number of criteria are used (See Project File, Paper No. 2) but the general purpose is to identify the farms which have major physi- cal (irrigation, floods, siltation, feeder roads) and institutional (agrarian - 28 - reform disputes and farmers organizations) problems serious enough to make credit assistance ineffective, and those with no or only minor infrastructural problems. The proposed project would concentrate on the latter category, though some of the former category areas would be included under the project components which are not seriously hampered by the infrastructural problems. 5.07 For development planning and administration, the farms are grouped into estates, an estate being the piece of land that used to be owned by one landlord; the estates are then zoned into farmsteads involving 300-500 farmers and consisting of one or more contiguous and/or nearby estates. Each estate would have a master, and an annual, development plan and budget worked out by the EDC in consultatiion with FMG and the farmers. The plans will constitute the basis for production credit and sub-projects to be financed by the proposed project; they would also enable LBP to determine areas where lending for farm machinery and post-harvest facilities would not create or aggravate excess capacity. Assurance was obtained from LBP that prior to financing farm machineries and post-harvest facilities, LBP will ensure that conveniently available capacity is adequately utilized. 5.08 Lending Operations. A major consideration for loan qualification would be the capacity to service the loan, taking into account other indebted- ness and financial obligations of the would-be borrower. All loan applica- tions would be assessed against the master development plan for the concerned estate. The FOD would be allocated funds annually according to the planned program under the proposed project and would have full authority in the detailed use and disbursement of these funds. The Area Office would have authority to approve loans of up to P 100,000, while the Field Office (Land Bank Sa Bukid) would approve up to P 25,000; EDC's would have lending authority for individual loans of P 5,000 or less. 5.09 Group borrowing would be encouraged, particularly on the items for which the economic capacity is beyond the scope of the individual farmer. Disbursements would be made directly to the suppliers for most farm inputs, as well as machinery and equipment. Annex 5, Appendix A, contains the terms and conditions which would govern sublending for term credit. Assurance was obtained from LBP that these terms and conditions of lending will not be materially altered or abrogated without prior approval by the Bank. Loans to individual borrowers would bear interest of not less than 12% p.a. This is comparable to rates charged on similar loans by other institutions in the Philippines and, with an expected inflation rate of 8% p.a. over the next three years, would yield a positive real interest rate. 5.10 Loan repayments would be in cash, except that in some cases repayment in kind may be undertaken for grains through collection arrangements with the National Grains Authority (NGA) or its agents. An interest penalty of 2% p.a. would apply for all past dues, except when repayment has been rescheduled for reasons such as natural calamities. All rice production loans would be covered by the newly formed Philippines Crop Insurance Corporation (see Project File Paper No. 9). - 29 - B. Minor Infrastructural Works 5.11 The overall planning, coordinating and implementing of the minor infrastructural works would be the responsibility of the national Committee on Infrastructural Development for Agrarian Reform Estates (CIDARE) /1 and its provincial bodies (see Project File Paper No. 3). A Memorandum of Agreement has been signed by LBP and each of the agencies responsible for carrying out the various works envisaged under the project. LBP, through its EDCs, would undertake the general identification of the works. Initial feasibility work would be done by the field officer of the relevant agency, and proposals submitted to the CIDARE. Detailed planning and execution would be done by the relevant line agency. 5.12 The funding would be from Government's budgetary allocations, as recommended by CIDARE and approved by the Budget Commission, directly to the appropriate line agency. Assurance was obtained from the Government that counterpart funds, as recommended by CIDARE and approved by the Budget Commission, would be made available to the executing agency. C. Research and Studies 5.13 This would be undertaken by the University of the Philippines at Los Banos (Centre of Policy and Development Studies - CPDS) under a contract signed in May, 1978 with LBP in consultation with Bank staff. CPDS would also provide consulting service to LBP on monitoring and evaluation and project implementation. The contract is for three years during which time it is expected that LBP staff, as they gain experience and expertise, would gradually assume full responsibility for these functions. Assurance was obtained from LBP that terms of reference and terms of employment relating to research and consultancy tasks would be submitted to the Bank for evaluation and approval. D. Monitoring and Evaluation 5.14 LBP would strengthen its monitoring and evaluation capacity, partly through increased staffing (EDCs) and more so through the consultancy services by the University of the Philippines (see para. 5.13). In addition to under- taking baseline surveys on economic and financial conditions of the farmers, EDCs would carry out periodic household surveys with a view to determining the incremental benefit to the project's sub-borrowers, and establishing as well as updating input-output coefficients, identifying the major constraints and monitoring the progress of the project. Assurance was obtained from /1 The Committee's membership consists of: LBP (providing secretariat services); Department of Agrarian Reform (DAR); Department of Local Government and Community Development (DLGCD); National Irrigation Authority (NIA); Bureau of Public Highways (BPH); Department of Public Works (DPW); and Budget Commission. CIDARE functions are: facilitation, identification, preparation, funding and implementation, coordinating and monitoring all infrastructural works pertaining to the agrarian reform areas. - 30 - LBP that it will carry out, in a manner, scope and form to be agreed with the Bank, monitoring and evaluation of the project activities, and submit reports thereof to the Bank. 6. MARKETING AND PRICES Marketing 6.01 Grains. Rice consumption in the Philippines is expected to increase at about 3.5% in the foreseeable future, and the country is not likely to attain sustainable self-sufficiency before the mid-1980s. Reliance on imported feed grains for the expanding livestock and poultry industries will continue beyond that time. No difficulties are therefore envisaged regarding the absorption of incremental grain production generated by the project. 6.02 Livestock and Poultry Products. The domestic market would also readily absorb the increased production of meat and eggs, in part as import substitutes but more so as a result of increased demand arising from population growth and improvements in per capita income. In the case of broiler produc- tion for large urban markets, it would be an essential part of sub-loan eval- uation to establish satisfactory market tie-ups such as those now existing in many cases through integrated commercial operations; similar importance would be placed on the marketing aspects of vegetables in areas where production is likely to be substantial. 6.03 Cottage Industries. Most of the products would be marketed locally, and care would be exercised regarding the possible over-supply of certain items, especially concrete products, the demand for which has tended to fluctuate widely in sympathy with the construction sector. Export prospects for various handicraft products are fairly bright for sales to the USA, Europe and Japan, as well as local sales through tourist outlets. Prices 6.04 The prevailing grain prices, especially for rice and corn, approximate the world prices. However, although the seasonal variation of the officialy quoted prices for rice and corn has dampened during the last three years, the actual farmgate prices are characterized by a wider amplitude, partly as a result of heavier sales immediately after harvesting and the higher moisture content due to the lack of proper drying facilities. The prices of the other commodities to be produced under the project are generally satisfactory. Table 11 shows the set of current prices applied in the financial and economic evaluation of the principal project components and projected prices based on the Bank's latest indications. - 31 - Table 11: SUMMARY - MAIN OUTPUT AND INPUT PRICES Financial Economic (a) Current Prices Outputs Palay: P/cavan 55.00 62.00/a Corn: P/cavan 45.00 42.00/a Pigs (live): P/kg 8.60 8.60 Broilers (live): P/kg 8.40 8.40 Ducks (live): P/kg 4.00 4.00 Eggs: P/dozen Chicken 5.40 5.40 Ducks 7.20 7.20 Inputs Labor: P/man-day 10.00 4.30 Fertilizer: P/kg Nitrogenous (urea) 1.64 1.46 Phosphatic (16-20-0) 1.44 1.28 Agro-chemicals: P/ha (Rice) 200.00 224.00 (Corn) Fuel: P/liter (Petrol) 1.81 1.35 (b) Future Prices /b 1979/80/c 1981/82/c 1985 Palay (P/cavan) Financial 68.00 82.00 110.00 Economic 75.00 91.00 128.00 Corn (P/Cavan) Financial 59.00 69.00 88.00 Economic 55.00 65.00 82.00 Fertilizer (P/kg) Urea Financial 1.90 2.26 3.48 Economic 1.71 2.02 3.10 TSP Financial 1.86 2.28 3.54 Economic 1.66 2.02 3.15 Petrol (P/liter) Financial 2.10 2.39 2.93 Economic 1.52 1.79 2.19 /a Based on f.o.b. Bangkok. /b Based on World Bank projected commodity prices trends. /c Annual sample averages. - 32 - 7. BENEFITS, JUSTIFICATION AND RISKS General 7.01 The project would be exclusively directed towards the lower strata of small-scale farmers and rural entrepreneurs with focus on beneficiaries of the on-going agrarian reform program. Due to high risks conventionally associated with small-scale credit, these farmers have hitherto been left out of the mainstream of institutional credit in general and term credit in particular; furthermore they have not been provided with sufficient technical and managerial assistance to make effective use of such facilities. They have historically depended on the landlords and other sources of noninstitu- tional credit for a wide range of needs. They will now be increasingly severed from the support they have been getting from the landlords, and an effective substitute must be made available to these farmers. 7.02 The majority of project beneficiaries live below or on the verge of the poverty line (see para. 2.03). While the adjustment period from tenant to owner-cultivator may be fraught with difficulties, the long-term benefits are likely to be substantial. But, as experience has shown elsewhere, the realization of these benefits may be aborted or unduly delayed in the absence of dedicated and rigorous efforts to provide the external resources that these farmers need to fully exploit the agricultural potential of the land and other resources already at their disposal. The Land Bank of the Philippines is statutorily and operationally committed to undertake such efforts and has demonstrated a commendable degree of proficiency in its initial activities directed to this segment of the population. Production 7.03 As Table 12 illustrates, the project would generate a significant increase in production of goods and services, especially rice, well in keeping with the national policy of self-sufficiency and improved living standards in the rural areas. The cottage industries would provide widened employment opportunities as well as enhancing the supply of consumer and industrial goods, some of which have fairly good prospects for export. The project would also increase the availability of services (rice milling, transportation, and marketing) essential in the agricultural development process. Additionally, the project would improve infrastructural facilities /1 and farm mechanization,/2 the costs and benefits of which have been incorporated in rice production financial and economic analysis for purposes of this report. /1 About 120 km of feeder roads, irrigation rehabilitation for about 4,100 ha, and flood control for about 2,700 ha. /2 Irrigation pumps for about 7,100 ha, power tillers for about 15,300 ha, threshers for about 34.6 thousand tons of paddy, and driers for about 92.5 thousand tons of paddy. - 33 - Table 12: MAIN INCREMENTAL PRODUCTION /a Net Value /b Pesos Million US$ Million Crops Paddy 36.5 5.0 Corn 1.3 0.2 Livestock and Poultry /c Pork 11.3 1.6 Broilers and eggs 25.6 3.5 Ducks and eggs 2.6 0.4 Beef 1.5 0.2 Cottage Industries Charcoal making 1.4 0.2 Concrete products 8.2 1.1 Embroidery and garment 8.5 1.1 Fibercrafts 3.6 0.5 Services Rice milling 0.4 - Transportation 4.0 0.6 Agricultural machinery 0.6 0.1 Repairs and maintenance 4.1 0.6 Marketing 1.9 0.3 Total 111.5 15.4 /a Annual value at full development. /b Net value but without depreciation allowances; based on estimated net-benefit per subproject. /c Based on liveweight values. /d Estimated at 15% of the total marketing credit. Financial Returns 7.04 The financial returns on the various subprojects range from 8.5% in the case of power tillers to over 100% for several of the others (see Project File Paper No. 4)./l The rates of return for power tillers are only partial as they do not reflect the full range of benefits such as the value of time saved /1 Returns over 100% are due in part to the difficulty of "with and without", analysis in those cases. It is also recognized that standard parameters used in such models will not prevail in all cases. - 34 - by the family labor, total incremental value of cropping intensity over and above custom-service charges, and the better quality of life resulting from the lessened drudgery of the farm work. Estimated cash flows and financial rates of returns for the various subprojects are presented in Project Paper No. 4, Tables 1-15, and summarized below: Table 13: FINANCIAL RATES OF RETURN Financial Rates of Return Subprojects Per subproject Piggeries 73.6 Chicken Greater than 100.0 Ducks Greater than 100.0 Cattle 22.1 Irrigation pumps 27.2 Power tillers 8.5 Portable rice threshers Greater than 100.0 Portable rice driers 82.7 Rice mills 35.2 Light cargo trucks 21.3 Agr. machinery repair shops Greater than 100.0 Charcoal making Greater than 100.0 Concrete products Greater than 100.0 Embroidery and garments Greater than 100.0 Fibercrafts Greater than 100.0 Aggregate Financial and Economic Rates of Return 7.05 Table 14 below shows the estimated aggregate financial and economic rates of return for the principal categories of the subprojects (see Project File, Paper No. 5 for details). The financial rates range from 23.2% for cattle to over 100% for piggeries, chickens and ducks, while the economic rates range from 14% for cattle to over 100% for most of the other subproject categories. The economic rate of return for the project as a whole, exclusive of research and consultancy costs, is about 47%. However, this figure must be viewed in the context of weather-related and project-related risk (paras. 7.12- 7.14). - 35 - Table 14: AGGREGATE FINANCIAL AND ECONOMIC RATES OF RETURN Financial Economic Rate rates of return of Return Subproject Categories % % Rice production 65.1 Over 100 Corn production 33.5 54.5 Piggeries Over 100 Over 100 Chicken Over 100 Over 100 Ducks Over 100 Over 100 Cattle 23.2 14.0 Light cargo trucks 31.1 Over 100 Embroidery and garments 92.8 Over 100 Employment Impact 7.06 The project would create incremental employment rising from 300 man-years in the first year to about 11,900 man-years in the sixth year (see Annex 6, Table 1). Although farm mechanization, especially the power tillers for land preparation, would reduce the overall labor inputs for rice cultivation during the first and the second year, the reduction would be more than offset in subsequent years by increased cropping intensity and higher rice yield facilitated by the expansion of irrigation and increased farm inputs; furthermore, hired labor would increase as a result of the general inclination on the part of the farmers to hire more labor as credit is made available. This would directly benefit the mounting number of landless as well as farmers with land holdings too small to provide full employment during the peak seasons. Virtually all the employment opportunities created by the project are for unskilled labor and would therefore be available to the rural poor. Public Revenues Impact 7.07 Annex 6, Table 2 shows details on the estimated impact that the project would have on the public revenues as summarized in Table 15 here below. The incremental net public primarily revenues would reach a deficit of P 7.3 million during the third year (mainly because of the infrastructural works relating to feeder roads, irrigation and flood control), transforming into a surplus of P 11.8 million in fourth year and settling to an annual level of P 9.8 million in the fifth year. The cumulative deficit would be recovered in the fifth year and a surplus of P 14.1 million would be attained during the sixth year. - 36 - Table 15: INCREMENTAL PUBLIC EXPENDITURE AND REVENUES (P million) Net Revenues Year Expenditure Revenues Annual Cumulative 1 6.4 1.3 (5.1) (5.1) 2 12.9 5.6 (7.3) (12.4) 3 17.4 11.9 (5.3) (17.7) 4 1.4 13.2 11.8 (5.5) 5 1.4 11.2 9.8 4.3 6 1.4 11.2 9.8 14.1 Foreign Exchange Impact 7.08 The Philippines has been a net importer of rice, until last year, and corn. It is estimated that the country may reach sustainable self- sufficiency by mid-1980 (see para. 1.06) for rice but much later for corn and feed grains. In the interim, there would be periodic net imports of rice and persistent imports of corn. Rice and corn produced under the proposed project would therefore result in savings of foreign exchange expenditures. At full development (3rd year), the project would generate incremental rice production valued at P 96.6 million and corn production valued at p 1.0 million FOB Manila. Furthermore, opportunities exist for export of fibercraft and to a lesser extent charcoal from the cottage industries financed by the project. The total foreign exchange expenditure is estimated at P 86.7 million during the development period (see Table 9) while the recurrent expenditures (mostly fuel, spare parts, fertilizers and agro-chemicals) are estimated at P 34.1 million at full development. Thus, the project will result in a recurrent net surplus of P 63.7 million in terms of foreign exchange at full development. Institutional Impact 7.09 General Operations. The project would reinforce the recent initia- tives taken by LBP to make its agricultural credit delivery and recovery system more responsive to the needs of the lower strata of the small-scale farmers. It would provide the financial and institutional framework for a coordinated effort among various agencies to address the peculiar needs of this group. It is expected that the strenthening of the LBP field support staff would appreciably enhance its overall credit delivery and recovery capabilities and its capacity to promote sound farm management practices. 7.10 Financial Impact on Land Bank. Annex 7, Tables 1 shows LBP's estimated income and expenses (on accrual basis) arising from the project, as summarized in Table 16 here below. On accrual basis, the project would have a favorable impact on the earnings of LBP. - 37 - Table 16: LBP's NET INCOME FROM THE PROJECT (ACCRUAL BASIS): P million Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Income Net of: Operating Expenses (2.3) 5.8 20.2 23.3 9.0 5.1 2.0 0.8 Financial Costs (4.7) 0.1 9.2 7.7 0.5 5.0 2.0 0.8 Bad debts: (5.6) (2.4) 4.1 4.5 (0.8) 4.9 1.9 0.1 Cumulative (5.6) (8.0) (3.9) 0.6 (0.2) 4.7 6.6 6.7 Debt-Servicing Ratio 1.9:1 4.3:1 5.3:1 3.1:1 1.8:1 - - - Including an allowance for bad debts at 3% of loans granted, net income would be in a deficit during the first two years and the fifth year (if seasonal credit is discontinued); cumulatively, the deficit would be recovered in the sixth year and a surplus of P 6.7 million attained in the eighth year. The debt-service ratio would remain satisfactory throughout the period under consideration. 7.11 Annex 7, Table 2 presents the cash flow on an accrual basis while Table 3 presents it assuming an annual collection (for both principal and interest earnings) of 55% for three years with the uncollected balances written off in the fourth year; this gives an effective collection rate of about 91% of total loans and compares with LBP's achievement of 94.0% in 1976 and 92.5% in 1977 for agricultural loans (see Table 7). The following summarizes the two cases: Table 17: CASH FLOW PROJECTIONS ARISING FROM THE PROJECT (P million) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Accrual Basis 0.5 7.1 18.8 14.7 49.9 22.9 12.9 6.9 0.1 91% Collection Rate (0.6) 3.2 11.0 (15.3)/a 6.7 57.3 27.2 10.3 3.7 0.8 /a After offsetting against IBRD Loan P 25.1 million repaid by the term credit subproj ects. - 38 - In either case the cash flow to LBP would remain satisfactory. However, at the effective collection rate of 91%, the debt write-off would place a burden on the LBP resources as it would amount to nearly P 33.6 million. Given the average 7.7% cost of the project's funds, LBP cannot sustain a write-off much in excess of 5% of outstanding loans without incurring losses and erosion of the loanable funds. It is expected that the streng- thening of the LBP field staff under the project would help to obviate unbearable default rates. Project Risks 7.12 The ma"in factors which might impinge on the success of the project are: the present high level of delinquency among rural borrowers; difficul- ties encountered by field extension services in stimulating increased crop yields; and, the limited experience of LBP and other agencies in the Philippines in packaging and supervising a program expressly for small farmers. 7.13 The first two types of risks are interdependent to the extent that low yields reduce repayment capacity; this underscores the critical importance of field support services and it is expected that both of these risks would be substantially reduced by the proposed measures to strengthen the LBP's field staff and coordinate the efforts of other agencies. The separation of the FOD from commercial banking functions to concentrate wholly on loan delivery and collection should appreciably help in maintaining high collection rates. 7.14 In partial recognition of low yield risks, the project has adopted a yield of 75 cavans/ha (3.75 tons) for rice as compared to in 80 cavans/ha (4 tons) generally thought attainable, and used in the analysis of other Bank- financed projects in the Philippines. With respect to LBP's implementation capacity, the scope of the project has intentionally been kept modest and is within the existing and programmed capabilities of LBP. While we foresee no significant increase in the pace of agrarian reform, there are already 37.6 thousand farmers cultivating 71,400 ha who have acquired land ownership through the program, as compared to the 27,600 estimated project beneficiaries, some of whom would be nonagrarian reform farmers. Accordingly, the progress of the agrarian reform program would not affect the proposed project. 8. AGREEMENTS REACHED AND RECOMMENDATIONS 8.01 Assurances were obtained from the Government that: (a) the Ministry of Agriculture (MA) would provide technical field staff to project areas in accordance with the Memorandum of Agreement signed between LBP and MA, and dated July 5, 1978 (para. 5.04); and (b) counterpart funds would be made available, as recommended by CIDARE and approved by the Budget Commission, to the line agencies responsible for the infrastructural works under the project (para. 5.12). - 39 - 8.02 Assurances were obtained from LBP that: (a) LBP would not materially alter its internal organization with regard to project implementation without prior consultation with the Bank (para. 5.02); (b) LBP would adequately staff its field offices in accordance with a staffing program satisfactory to the Bank (para. 5.05); (c) prior to financing farm machinery and post-harvest facilities, LBP would ensure that conveniently available capacity is adequately utilized (para. 5.07); and (d) terms and conditions of term credit subloans would not be materially altered or abrogated without approval by the Bank (para. 5.09). 8.03 Retroactive financing of up to US$120,000 is recommended for expenses incurred on training, vehicles and research contracts (see para. 4.11). 8.04 Subject to the above assurances, the proposed project is suitable for a Bank loan of US$16.5 million for a period of 20 years, including a grace period of 5 years. - 40 - ANNEX 1 Table I Page 1 PHILIPPINES SMALL FARMERS DEVELOPMENT PROJECT LAND BANK OF THE PHILIPPINES Geographical Distribution of Agrarian Reform (Operation Land Transfer) Area Farmers Average Regions & Provinces '000 ha Percent. '000 ha Percent holding (ha) I. Ilocos Region Abra 0.4 0.1 0.3 0.1 1.3 Benguet 0.6 0.1 1.1 0.3 0.6 Ilocos Norte 7.0 0.9 7.4 1.8 0.9 Ilocos Sur 2.5 0.3 3.4 1.0 0.7 La Union 4.0 0.5 8.0 1.9 0.5 Mountain Province 6.5 0.9 1.8 0.5 3.6 Pangasinan 30.8 4.1 22.5 5.7 1.4 Subtotal 51.8 6.9 44.5 11.3 1.2 II. Cagayan Valley Region Cagayan 29.2 3.8 13.0 3.3 2.3 Ifugao 0.3 - 0.2 - 1.5 Isabela 32.0 4.2 16.4 4.2 2.0 Kalinga-Apayao 4.2 0.6 2.2 0.6 1.9 Nueva Vizcaya 3.2 0.4 2.4 0.6 1.3 Quirino 1.0 0.1 0.6 0.1 1.7 Subtotal 69.9 9.1 34.8 8.8 2.0 III. Central Luzon Region Bataan 4.1 0.5 2.2 0.6 1.9 Bulacan 28.1 3.8 12.1 3.1 2.3 Nueva Ecija 115.7 15.2 48.4 12.3 2.4 Pampanga 41.1 5.4 17.3 4.4 2.4 Tarlac 42.0 5.4 20.4 5.3 2.0 Zambales 3.7 0.5 2.9 0.7 1.3 Subtotal 234.7 30.8 103.6 26.4 2.3 IV. S. Tagalog Region Batangas 6.7 0.9 4.7 1.2 1.4 Cavite 8.5 1.1 3.3 0.8 2.6 Laguna 4.4 0.6 2.8 0.7 1.6 Marinduque 0.3 - 0.3 0.1 1.0 Occ. Mindoro 32.5 4.3 6.1 1.6 5.j Or. Mindoro 6.1 0.8 3.3 0.8 1.9 Palawan 8.8 1.2 2.1 0.5 4.2 Quezon 7.3 1.0 4.7 1.2 1.6 Rizal 4.0 0.5 2.6 0.7 1.5 Romblon 4.8 0.6 4.2 1.1 1.1 Subtotal 83.4 11.0 34.1 8.7 2.5 V. Bicol Region Albay 7.9 1.0 7.0 1.8 1.1 Camarines Norte 1.3 0.2 0.9 0.2 1.4 Camarines Sur 29.9 3.9 21.5 5.5 1.4 Catanduanes 0.2 - 0.2 - 1.0 Sorsogon 3.4 0.5 3.2 0.8 1.1 Masbate 23.1 3.0 6.7 1.7 3.5 Subtotal 65.8 8.6 39.5 10.0 1.7 - 41 - ANNEX 1 Table 1 Page 2 Area Farmers Average Regions & Provinces '000 ha Percent '000 ha Percent holding (ha) VI. W. Visayas Region Aklan 0.5 0.1 0.5 0.1 1.0 Antique 2.5 0.3 1.6 0.4 1.6 Capiz 10.0 1.3 7.4 1.9 1.4 Iloilo 29.8 3.9 17.9 4.6 1.7 Negros Occidental 16.3 2.2 7.8 2.0 2.1 Subtotal 59.1 7.8 35.2 9.0 1.7 VII. C. Visavas Region Bohol 2.8 0.4 4.2 1.1 0.7 Cebu 27.6 3.6 15.0 3.8 1.8 Negros Oriental 14.7 1.9 10.7 2.7 1.4 Subtotal 45.1 5.9 29.9 7.6 1.5 VIII. E. Visavas Region Leyte 10.6 1.4 9.0 2.3 1.2 S. Leyte 0.1 - 0.1 - 1.0 E. Samar 0.8 0.1 0.3 0.1 2.7 N. Samar 2.7 0.4 1.0 0.3 2.7 W. Samar 2.2 0.3 1.7 0.4 1.3 Subtotal 16.4 2.2 12.1 3.1 1.4 IX. W. Mindanao Region Sulu 3.9 0.5 2.6 0.6 1.5 Zamboanga del Sur 11.1 1.5 6.7 1.7 1.7 Zamboanga del Norte 1.0 0.1 1.1 0.3 1.0 Tawi-Tavi - - - - - Basilan - - - - - Subtotal 16.0 2.1 10.4 2.6 1.5 X. N. Mindanao Region Agusan del Norte 3.2 0.4 2.0 0.5 1.6 Agusan del Sur 5.8 0.8 2.9 0.7 2.0 Bukidnon 28.9 3.8 7.9 2.0 3.7 Camiguin 0.2 - 0.1 - 2.0 Misamis Oriental 3.3 0.4 3.6 0.9 1.0 Misamis Occidental 2.3 0.3 1.7 0.4 1.4 Surigao Norte 4.8 0.6 4.5 1.1 1.1 Subtotal 48.5 6.3 22.7 5.6 2.1 XI. S. Mindanao Region Davao Oriental 0.5 - 0.3 0.1 1.7 Davao del Norte 5.4 0.7 2.3 0.6 2.4 Davao del Sur 3.8 0.5 2.3 0.6 1.7 S. Cotabato 18.7 2.5 5.1 1.3 3.7 Surigao del Sur 1.4 0.2 0.9 0.2 1.6 Subtotal 29.8 3.9 10.9 2.8 2.7 XII. C. Mindanao Region Lanao Norte 6.7 0.9 2.6 0.7 2.6 Lanao del Sur 1.2 0.2 1.2 0.3 1.0 N. Cotabato 13.9 1.8 6.2 1.6 2.2 Maguindanao 7.0 1.0 2.0 0.5 3.5 Sultan Kudarat 9.8 1.3 3.6 0.9 2.7 Subtotal 38.6 5.2 15.6 4.0 2.5 GRAND TOTAL 759.1 100.0 393.3 100.0 1.9 - 42 - ANNEX 2 Table 1 PHILIPPINES SMALL FARMERS DEVELOPMENT PROJECT LAND BANK OF THE PHILIPPINES AGRICULTURAL CREDIT: LOANS GRANTED 1972-73 1975-76 Annual Average Annual Average (P million) % (P million) % Food Commodities Rice 815.8 11.6 1,880.9 10.5 Corn 78.6 1.1 173.8 1.0 Fruits & vegetables 249.0 3.5 954.9 5.3 Livestocks 232.6 3.3 813.3 4.5 Fisheries 214.6 3.1 489.4 2.7 Other 69.5 1.0 104.5 0.6 Subtotal 1,660.1 23.7 4,416.8 24.6 Export & Commercial Commodities Sugar 2,383.8 34.0 9,037.5 50.3 Coconuts 476.6 6.8 874.1 4.8 Others 540.8 7.7 1,204.1 6.7 Subtotal 3,401.2 48.5 11,115.7 61.8 Forestry 1,850.4 26.4 2,116.0 11.8 Others 107.1 1.5 329.3 1.8 Grand total 7,018.7 100.0 17,977.8 100.0 Trend (monetary) 100.0 256.1 - 43 - ANNEX 2 Table 2 PHILIPPINES SMALL-SCALE FARMERS CREDIT PROJECT LAND BANK OF THE PHILIPPINES MASAGANA 99: RICE PRODUCTION PROGRAM No. of Loans Loans Repayment Phases borrowers granted repaid rate ('000) (P million) (1 million) (%) I. May '73 - Oct '73 383.0 368.9 346.3 93.9 II. Nov '73 - Apr '74 227.5 231.2 214.7 92.9 III. May '74 - Oct '74 468.4 715.9 596.2 83.3 IV. Nov '74 - Apr '75 319.4 595.3 476.2 80.0 V. May '75 - Oct '75 251.0 571.8 418.0 73.1 VI. Nov '75 - Apr '76 118.6 256.8 190.4 74.1 VII. May '76 - Oct '76 134.8 274.6 178.2 64.9 VIII. Nov '76 - Apr '77 81.2 156.0 85.4 54.7 IX. May '77 - Oct '77 72.6 135.0 0.2 - X. Nov '77 - Apr '78 - - - - Total 205.65 3,305.5 2,505.6 75.8 Loans in arrears 799.9 Average loan per borrower, Pesos 1,600. Probable number of borrowers in default: 499,900. - 44 - ANNEX 2 Table 3 PHILIPPINES SMALL FARMERS DEVELOPMENT PROJECT LAND BANK OF THE PHILIPPINES MASAGANANG MAISAN: CORN PRODUCTION PROGRAM No. of Loans Loans Repayment Phases borrowers granted repaid rate ('000) (P million) (P million) (%) Phase I. 183.0 171.9 142.8 83.0 Phase II. 102.7 102.8 76.1 74.0 Phase III. 38.6 42.7 29.7 69.5 Phase IV. 28.5 36.9 19.6 53.0 Phase V. 22.8 19.5 9.6 49.4 Phase VI. 16.2 15.5 1.6 10.4 Total 391.8 389.3 279.3 71.7 Loans in arrears: 110.0 Average loan per borrower: Pesos 990. Probable number of borrowers in default: 111,100 -45 - ANNEX 3 Page 1 PHILIPPINES SMALL FARMERS DEVELOPMENT PROJECT LAND BANK OF THE PHILIPPINES LBP ORGANIZATION AND PERFORMANCE Under PD 251, LBP is empowered to engage in normal commercial banking, as well as: (a) "to hold, purchase, acquire and own real estate and personal property, introduce necessary improvements thereon ...; (b) "to ... make contracts, negotiate and secure loans from both local and foreign sources. Before undertaking any such credit operation, the bank, through the Secretary of Finance, shall request the opinion, in writing, of the Monetary Board of the monetary implica- tions of the contemplated action. All loans from foreign sources shall be subject to approval by the President of the Philippines and shall be fully guaranteed by the Government of the Philippines; (c) "to grant short- and medium-term loans ...; (d) "to grant loans to farmers' cooperatives/loan associations to facil- itate production, marketing of crops and acquisition of essential commodities; (e) "to finance and/or guarantee the acquisition, under PD 85, of farm lots transferred to tenant farmers pursuant to PD 27; (f) "to underwrite, hold, own, purchase, acquire, sell, mortgage, ... invest in stocks, bonds ...; (g) "to guarantee acceptances, credits, loan transactions or obliga- tions of any person or partnership ...; (h) "to borrow from or rediscount notes, bills of exchange ...; (i) "to act as trustee, or administer any trust or hold property in trust ...; (j) "to exercise general powers mentioned in the corporation law and the general banking act." - 46 - ANNEX 3 Table 1 PHILIPPINES SMALL FARMERS DEVELOPMENT PROJECT LAND BANK OF THE PHILIPPINES ACTUAL BALANCE SHEET AS OF DECEMBER 31, 1973 TO 1977 (P million) 1977 1976 1975 1974 1973 ASSETS Current assets Cash & due from banks 95.34 68.44 54.32 25.81 13.53 Marketable securities 1,354.60 611.81 649.45 312.44 80.54 Interest receivable 52.19 35.15 26.15 16.33 8.37 Short-term loans 193.70 87.09 3.40 0.77 - Foreign securities - 18.07 58.67 - - Current portion of amortization receivable 57.69 3.76 3.43 - - Current portion of long-term loans 66.73 4.24 1.48 - - Current portion of Government bonds 14.82 78.07 60.08 4.40 - Other current assets 9.86 10.72 2.39 1.64 0.12 Total current assets 1,844.93 917.35 859.37 361.39 102.56 Long-term portfolio Loans & advances Amortization receivable 586.62 403.72 214.27 39.18 0.12 Agricultural loans 65.39 31.33 12.90 0.51 - Commercial/industrial loans 79.10 21.67 4.10 1.74 - Total 731.11 456.72 231.27 41.43 0.12 Leas: current portion 124.42 8.00 4.91 - - Total loans & advances (net) 606.69 448.72 226.36 41.43 0.12 Investments Equity 179.48 170.40 135.29 102.13 0.30 Government bonds (net of current) 371.49 709.03 736.82 552.50 465.88 Total investments 550.97 879.43 872.11 654.63 466.18 Total long-term portfolio 1,157.66 1,328.15 1,098.47 696.06 466.30 Fixed assets (net of depreciation) 36.57 23.85 22.55 9.37 0.24 Other assets Other real properties 45.02 32.12 29.13 43.23 31.41 Land purchased under RA 3844 66.05 69.04 69.56 70.09 68.61 Sinking fund for LB bonds 12.37 6.41 3.11 2.13 1.22 Others 31.29 6.50 12.76 0.04 - Total other assets 154.73 115.06 115.11 115.59 101.24 TOTAL ASSETS 3,193.89 2,384.41 2,095.50 1,182.42 670.34 LIABILITIES & EQUITY Current liabilities Deposits (local) Government 920.37 714.25 746.64 256.84 1.55 Private Industrial 28.66 13.95 2.54 0.45 - Individual 14.26 5.84 1.50 0.51 - Total local deposits 963.29 734.04 750.68 257.80 1.55 Less: deposits subject to rollover (548.00) (212.25) (187.00) (63.00) - Foreign currency deposits 107.35 40.70 58.67 - - Short-term borrowings (dep. subs) 183.21 47.35 63.09 13.57 - Accounts payable and acc. exp. 32.66 21.38 17.25 4.29 5.48 Others 90.46 63.94 42.88 4.50 1.39 Total current liabilities 828.97 695.16 745.57 217.16 8.42 Long-term borrowings Bonds payable 518.72 326.54 191.89 89.42 54.86 Others 58.04 40.44 3.43 6.72 - Total 576.76 366.98 195.32 96.14 54.86 Add: deposits subject to rollover 548.00 212.25 187.00 63.00 - Total long-term borrowings 1,124.76 579.23 382.32 159.14 54.86 Deferred credits 4.44 1.64 0.53 0.19 - Total liabilities 1,958.17 1,276.03 1,128.42 376.49 63.28 Equity Paid-in capital 1,120.81 1,005.79 872.57 762.23 603.86 Surplus reserves Adm. 13.35 13.35 13.35 - - Growth & contingencies 8.18 17.12 17.12 - 0.30 Sinking fund 6.41 3.44 2.36 1.22 0.05 Total surplus reserves 27.94 33.91 32.83 1.22 0.35 Retained earnings 23.29 10.63 - 0.53 1.40 Undivided profits 63.68 58.05 61.68 41.94 1.45 Total equity 1,235.72 1,108.38 967.08 805.92 607.06 TOTAL LIABILITIES & EQUITY 3,193.89 2.384.41 2,095.50 1,182.41 670.34 Total debt to equity 1.6:1 1.2:1 1.2:1 0.5:1 0.1:1 Current ratio 2.2:1 1.3:1 1.2:1 1.7:12 12.2:1 - 47 - ANNEX 3 Table 2 PHILIPPINES SMALL-SCALE FARMERS CREDIT PROJECT LAND BANK OF THE PHILIPPINES ACUTAL INCOME STATEMENT YEAR ENDING DECEMBER 31, 1973 to 1977 (X million) 1973 1974 1975 1976 1977 Income Interest on loans (a) /a - 0.08 0.61 6.33 15.99 Interest on SEFP loans (a) - - 0.04 0.47 0.56 Interest on amortizations (a) b - 0.01 0.24 1.48 3.42 Interest on securities & deposits (b) /c 5.42 50.95 115.26 153.73 162.24 Rental income (a) /d 0.15 0.67 1.30 1.31 2.60 Service & commitment fees & commission (a) /c - 2.58 4.22 1.47 6.62 Capital gains on sales of securities & real estate (a) /f - 0.02 1.25 0.04 0.16 Additional interest & penalties Other income (a) /g 0.01 0.24 0.97 1.95 1.02 Total Income 5.58 54.55 123.89 166.78 192.61 Expenses Financial expenses (b) Interest on bonds 3.16 4.07 8.12 17.22 26.17 Interest on borrowings lh - 0.55 4.93 9.65 10.25 Interest on savings deposits - 2.75 23.61 41.00 41.02 Interest on time deposits - 1.47 11.68 18.98 26.32 Interest on 343 deposits - - 2.05 2.88 3.54 Interest on special deposit accounts - - nil 0.10 0.12 Other /i - - - 1.04 - Subtotal 3.16 8.84 50.39 90.87 107.42 Salaries & other personnel expenses (b) 0.56 3.29 5.92 9.72 14.58 Other administrative expenses (b) 0.41 1.03 3.71 5.62 8.56 Depreciation 0.01 0.90 1.93 2.52 3.40 Provisions for doubtful accounts L - - - - 0.03 Total Expenses 4.14 14.06 61.95 108.73 133.99 Net Income 1.44 40.49 61.94 58.05 58.62 (a) Cash basis. (b) Accrual basis. /a Interest income on time loans and bills discounted. /b Interest on amortizations under PD 27 and RA 3844. jcL Includes interest on bills purchased and bills purchased with resale agreement. jI Income from assets acquired and rental of bank equipment. /e Includes commission income from sale of government bonds and securities; foreign exchange commission and profits; and miscellaneous income - SEFP loans. jf Includes gains on sale of treasury bills, real properties and other government securities. lJ Includes income on sinking fund and other income. jh Interest expense on bills payable and deposit substitutes. /i Discount charges on sale of government bonds and on acceptance facilities granted to the Bank. J1 Provision for uncollected accrued interest receivable on loans. - 48 - ANNEX 3 Table 3 PHILIPPINES SMALL FARMERS DEVELOPMENT PROJECT LAND BANK OF THE PHILIPPINES SECTORAL DISTRIBUTION OF LOAN PORTFOLIO (December 31, 1977) (In P million) Head Office Branches Total Amount % Amount % Amount % Agriculture Palay 6.36 2.21 10.07 19.84 16.43 4.86 Corn/feedgrains 0.93 0.32 0.41 0.81 1.34 0.40 Sugar 1.10 0.38 1.12 2.21 2.22 0.66 Fruits/vegetables 0.18 0.06 0.27 0.53 0.45 0.13 Livestocks 11.97 4.17 2.38 4.69 14.35 4.24 Fisheries 0.36 0.13 0.77 1.52 1.13 0.34 Others 15.80 5.50 27.53 54.26 43.33 12.81 Total - Agriculture 36.70 12.77 42.55 83.86 79.25 23.44 Industrial Textile 24.19 8.42 0.04 0.07 24.23 7.17 Leather products 3.70 1.29 - - 3.70 1.09 Food processing 1.15 0.40 0.02 0.04 1.17 0.35 Printing/publishing 3.93 1.37 - - 3.93 1.16 Chemical products 12.45 4.33 - - 12.45 3.68 Petroleum - - - - - - Paper products 0.63 0.22 - - 0.63 0.19 Metal products 0.03 0.01 - - 0.03 nil Rubber products 25.65 8.92 - - 25.65 7.59 Electrical machineries & appliances 9.89 3.44 - - 9.89 2.92 Machinery equipment & parts 38.64 13.44 0.12 0.24 38.76 11.46 Mining & quarrying 73.26 25.49 - - 73.26 21.67 Transportation equipment & parts 5.02 1.75 0.06 0.12 5.08 1.50 Other manufactures 11.36 3.95 0.10 0.20 11.46 3.39 Total - Industrial 209.90 73.03 0.34 0.67 210.24 62.17 Commercial Contribution/Govt. loans 5.01 1.74 0.42 0.83 5.43 1.61 Public utilities 0.39 0.14 0.62 1.22 1.01 0.30 Services 27.89 9.70 2.72 5.36 30.61 9.05 Bank & other financial institutions 0.67 0.23 0.40 0.79 1.07 0.32 Real estate 1.89 0.66 1.90 3.74 3.79 1.12 Consumption 0.44 0.15 0.79 1.56 1.23 0.36 Equity investments 4.07 1.42 - - 4.07 1.20 Others - - 0.94 1.85 0.94 0.28 Total - Commercial 40.36 14.04 7.79 15.35 48.15 14.24 Educational loans 0.45 0.16 0.06 0.12 0.51 0.15 Total 287.41 100.00 50.74 100.00 338.15 100.00 ANNEX 3 Table 4 PHILIPPINES SMALL FARMERS DEVELOPMENT PROJECT LAND BANK OF THE PHILIPPINES LONG-TERM RESOURCE POSITION AS OF DECEMBER 31, 1977 (In P million) Domestic Sources P million Equity Paid-in capital 1,120.81 Reserves and surplus 114.91 Subtotal 1,235.72 Borrowings (net of repayments): Bonds and notes: .LBP bons 6% p.a. due 1992-2002 518.72 Notes payable (to Central Bank 9-1/2% p.a. due 1986 /a and other Long-term Borrowing) 58.04 Subtotal 576.76 Time and savings deposit subject to rollover, average 8% p.a. /b 548.00 Subtotal 548.00 Total 2,360.48 Foreign Sources none Total Resources 2,360.48 Less: Loans outstanding Ic and Land Amortization 606.69 Equity & long-term security /d 550.97 Acquired assets 45.02 Fixed assets & other long-term assets /e 146.28 Subtotal 1,348.96 Resources available for disbursement 1,011.56 Less: Undisbursed commitments /f 183.14 Resources available for commitments 828.38 /a Proceeds used for investment in stocks of the Philippine Commercial and Industrial Bank. /b Government deposits. It is not clear as to how much of the government deposits are subject to roll over. Two estimates were given by two separate departments. / Medium/long-term loans outstanding as of 12/31/77. /d Includes investments in treasury notes, bonds and other government bonds and securities excluding trading account securities. /e Includes bank premises, furniture, fixtures and equipment, land purchased expropriated under RA 3844, LB bonds sinking fund. Jf Medium/long-term loans approved but not yet released.  힙州쨍X 3 애湍천z앴溫믄rT「HuE謬；溫l천騙새T cll&Irt I 커긷  - 50 - ANNEX 4 Table 1 PHILIPPINES SMALL FARMERS DEVELOPMENT PROJECT LAND BANK OF THE PHILIPPINES PROJECT'S COST ESTIMATES /a Year 1 Year 2 Year 3 Total Area Borrowera/ Area Borrowers Area Borrowers/ Area Borroweral P mil (ha) subprojects P lmn (ha) subprojects P mn (ha) subprojects P min (ha) subprojects Production Credit /b Rice 3.9 2,900 1,500 10.3 7,600 4,000 23.1 17,100 9,000 37.3 27,600 14,500 Corn 0.7 750 300 1.4 1,500 600 3.4 3,750 1,500 5.5 6,000 2,400 Vegetables 0.1 60 120 0.2 100 200 0.5 250 500 0.8 410 820 Subtotal 4.7 1,920 11.9 4,800 27.0 10.000 43.6 17,7Z0 Marketing Credit /c 1.4 3.5 8.1 13.0 Subtotal 6.1 15.4 35.1 56.6 Term Credit /d Livestock & Poultry Piggery 4.5 300 10.5 700 13.4 900 28.4 1,91)0 Chicken 4.1 500 7.8 950 8.3 1,000 20.2 2,450 Ducks 1.4 100 2.1 150 3.5 250 7.0 500 Cattle 1.2 150 1.9 250 3.1 400 6.2 800 Subtotal 11.2 1,050 22.3 2,050 28.3 2.550 61.8 5.6.0 Farm Mechanization Irrigation pumps 4.5 250 6.3 350 9.0 500 19.8 1,11)0 Power tillers 1.1 150 2.3 300 3.4 450 6.8 900 Subtotal 5.6 350 8.6 550 12.4 800 26.6 1 7(10 Post-Harvest Facilities Threshers 0.3 20 0.6 40 0.9 60 1.8 120 Driers 1.0 100 1.4 150 2.4 250 4.8 500 Mill/warehouse 0.1 2 0.4 8 0.5 10 1.0 10 Truck 1.8 50 5.2 150 7.0 200 14.0 400 Subtotal 3.2 172 7.6 348 10.8 520 21.6 1.0L Total Machinery & Equipment 8.8 16.2 23.2 48.2 Cott!Ee, Idustries Machinery repair shop 0.1 5 0.2 10 0.4 25 0.7 40 Charcoal 0.2 20 0.5 40 0.7 60 1.4 120 Concrete products 1.0 50 2.0 100 3.0 150 6.0 300 Embroidery & garments 1.3 100 2.5 200 5.0 400 8.8 700 Fiber crafts 0.5 50 1.0 100 1.9 200 3.4 350 Subtotal 3.1 225 6.2 450 11.0 835 20.3 1 5.5 Total Term Credit 23.1 3,717 44.7 8.198 62.5 14.706 130.3 2760 Total Credit 29.2 60.1 97.6 186.9 Field_upport Services Personnel /e 1.2 1.8 1.8 4.8 Training f 0.3 0.3 0.1 0.7 Office rental fA 0.1 0.2 0.2 0.5 Miscellaneous /h 0.2 0.3 0.3 0.8 Subtotal 1.8 2.6 2.4 6.8 Serv ice vehicles /i 0.2 0.2 - 0.4 Office equipment 0.1 0.1 - 0.2 Miscellaneous 11 0.1 0.1 0.1 0.3 Total Field Support Services 2.2 3.0 2.5 7.7  Table 1 Page 2 Project's Cost Estimates Jg (Continued) Year 1 Year 2 Year 3 Total Area Borrowers/ Area Borrowers/ Area Borrowers/ Area Borrowers/ P min (ha) subprojects P aln (ha) subprojects P m1n (ha) subprojects P sln (ha) subprojects Retroactive Costs fk Personnel fe 0.5 - - 0.5 Training f 0.3 - - 0.3 Office rental /1 0.2 - - 0.2 Miscellaneous /1 0.1 - - 0.1 Subtotal 1.1 - - 1.1 Total Suport Services 3.3 3.0 2-5 8.8 Research & Studies / Personnel 0.2 0.2 - 0.4 Travel 0.1 0.1 0.2 Miscellaneous 0.1 0.1 - 0.2 Subtotal 0.4 0.4 0.2 1.0 Retroactive costs 0.1 - - 0.1 Total 0.5 0.4 0.2 1.1 Consultancy /m Personnel 0.1 0.1 - 0.2 Miscellaneous 0.1 0.1 - 0.2 Subtotal 0.2 0.2 0.1 0.5 Total Research & Consultancy 0.7 0.6 0.3 1.6 Minor Infrastructure Barangay roads /n 2.6 5.2 7.8 15.6 Flood control /o 0.4 0.8 1.0 2.2 Irrigation works /p 4.5 6.8 7.2 18.5 Subtotal 7.5 12.8 16.0 36.3 Base costs 40.7 76.5 116.7 233.6 Physical contingencies /q 1.1 1.9 2.4 5.4 Expected price increases /r 2.2 7.8 15.9 25.9 Total Cost 44.0 86.2 134.7 264.9 /a All costs on incremental basis. /b At P 1,350/ha for rice, P 900/ha for corn and P 2,000/ha for vegetables; number of borrowers determined at average of 1.9 ha/borrower for rice, 2.5 ha for corn and 0.5 ha for vegetable production; credit for rice based on the main growing season only. /c Determined at about 30% of total production credit. /d Investment costs per subproject as follows: Pesos Pesos Pesos Pesos Piggery 14,950 Irrigation pump 17,950 Mill/warehouse 53,800 Concrete products 19,850 Chicken 8,250 Power tiller 7,500 Truck 35,000 Embroidery & garments 12,500 Duck 14,010 Thresher 14,800 Repair shop 15,690 Fiber crafts 9,540 Cattle 7,750 Drier 9,600 Charcoal 11,130 Je Personnel costs at P 11,160 salaries and P 12,474 COL, p.a. f Training provided at P 299,000 per year for all field staff under contract with the University of the Philippines (CPDS). I& Office rentals for sOe of the field staff only. /h Includes office supplies and travel allowances. /i Motorcycles, 100 cc, at about P 8,000. fI Includes vehicles' operation and maintenance. /k Retroactive finance required for expenditures incurred between January 1, 1978 and November 30, 1978 (estimated Board date). fT Research and studies to be undertaken under contract by the University of the Philippines (CPDS) for 3 years at estimated annual cost of P 0.4 million; only first year costs are determined; costs for the other two years based on mission projections. Ln To be provided by the UP (CPDS) under contract; second and third year costs are mission projections. (P 10,000/man-month including expense.) /n A total of about 120 km based on estimated 2 km per each of the 60 poroject areas; work schedule assumed: Year 1 - 20 km, Year 2 - 40 ka, Year 3 - 60 ka; unit cost at P 130,000 average. /o Estimated total work about 2,700 ha (10% of the production credit area) at a cost of P 800/ha; work schedule: Year 1 - 500 ha, Year 2 - 1,000 ha, Year 3 - 1,200 ha. JR For estimated total of 4,100 ha; work scheduled at: Year 1 - 1,000 ha, Year 2 - 1,500 ha, Year 3 - 1,600 ha at cost of P 1,600/ha; mostly rehabi- litation of canals and drainage systems at an overall average cost of P 4,500/ha. fA At 15% of infrastructural works. fr Expected inflation rate compounded as follows: Livestock Machinery Civil Year & &oultry equipment works 1979 7.0% 6.5% 7.5% 1980 6.5% 6.0% (13%) 7.0% 1981 6.5% 6.0% (20%) 7.0% - 52 - ANNEX 5 Page 1 PHILIPPINES SMALL FARMERS DEVELOPMENT PROJECT LAND BANK OF THE PHILIPPINES PROJECT ORGANIZATION AND MANAGEMENT Field Operations Department (FOD): Organizational Structure 1. Table 1 hereto shows the reorganized structure of FOD now being implemented, effective May 1978. At the Head Office level, FOD would remain essentially the same, the only changes being: separating it from the purely commercial banking operations; upgrading it to a full-fledged department with loan approving powers; and moving it from the general management and admin- istration section to the agrarian reform section. Its seven divisions would remain the same, with the responsibilities of the Facilities and Supplies Division, Communications, Records and Manpower Division, and Accounting and Statistics Division being as suggested by the respective names. The Field Services Division would be primarily responsible for loans and amortization collection (in areas not covered by the branches or Area Offices), land transfer documentation and infrastructural problems in agrarian reform areas. The Estates Development Division's functions would include: monitoring and evaluation of the lending program, technical backstopping and training of the field staff, and promotion of farmers organizations. However, at the field level, FOD would be radically restructured with a view to sharpening its focus and making it more responsive to the developmental needs of the small- scale agriculture. 2. Area and Field Offices. Area Offices would be established more or less on provincial basis (sharing facilities with existing branch banks or otherwise located separately if no existing branch banks are conveniently situated for the purposes of Area Offices) as the volume of expected business warrants. Freed from preoccupation with purely commercial banking considera- tions, their primary functions would be to serve the developmental credit needs of the smallholders, and to undertake loan and amortization collections. Under Area Offices would be the Land Bank Sa Bukid (Field Offices) located in truly rural areas (barrios), and furthering, at the grass root level, the development reorientation of the field activities; they would focus exclusive on the lending operation but would also seek to encourage savings among the smallholders. Although both the Area and Field Offices would assume collection as one of their major activities, the organizational structure is designed to ensure a good measure of separation between the collection and the develop- mental field personnel. 3. Farmstead Offices: (EDCs Offices). These would be manned by the Estate Development Coordinators, each being responsible for 300-500 farmers. They would come directly under the Field Offices on all matters relating to credit delivery and recovery and under Area offices JEstate Development Division) in all non-financial developmental matters. The EDC would be the - 53 - ANNEX 5 Page 2 most critical LBP's link with the farmers and other field agencies and his effectiveness would bear strongly on the success of the proposed project, as he would be responsible for the day-to-day project implementation functions and coordinating the work of the other field agencies especially MA's extension staff. 4. The main functions of an EDC are: providing overall financial planning and management, activating and coordinating the activities of the other field agencies, especially MA; identifying the constraints facing the farmers and referring them to the appropriate line agencies, assisting the farmers in farm planning and budgeting, procurement of inputs and marketing of the produce; establishing and maintaining appropriate economic and social data; and, by virtue of his intimate knowledge of the farmers, assisting in screening borrowers and helping to ensure that LBPs policies reflect the real conditions facing the farmers. 5. Farm Management Groups (FMG). These would consist of the field technical staff, especially MA's extension staff, designated by the various agencies /1 to support LBP's field activities. The EDCs would work hand in hand with the Farm Management Group and while EDCs would assume the leading role in ensuring that adequate technical services are made available to the farmers, the substantive technical work would be provided by the technical agencies' members of the FMG. To this end, LBP and the agencies have already signed a Memoranda of Agreement under which the agencies would provide the required technical support. The farmers would be organized into groups of 15-20 under the general leaders of one of them (the Farmers Group Leader - FGL). The Farmers Groups would constitute the operational units with regard to credit delivery, supply of farm inputs and marketing of the produce, and the focal point of the extension services. The FGL would serve as the liaison person between the farmers and FMG in general and EDC in particular. Staffing and Training 6. The following table shows the staff situation directly relevant to FOD's activities: /1 The Ministry of Agriculture (MA); the National Irrigation Authority (NIA); the Ministry of Agrarian Reform (MAR); the Ministry of Local Government and Community Development (MLCD); Ministry of Public Highway (MPH); etc. - 54 - ANNEX 5 Page 3 Table 1: STAFF SITUATION DIRECTLY RELEVANT TO FOD (April 1978) Filled Vacant Total For Not for immediate immediate filling filling Type of Staff Head Office General field services 14 14 3 31 Loan appraisors 6 3 - 9 Loan releasers 4 3 1 8 Accounting 6 5 2 13 Subtotal 30 25 6 61 Field General field services 52 38 - 90 Loan Appraisors 54 40 - 94 Loan releasers & accounting 24 28 - 52 EDCs /a 30 52 138 220 Subtotal 160 158 138 256 Grand total 190 183 144 317 /a Refers to LBP total requirement, not restricted to the needs of the proposed project. 7. The general shortage of staff is apparent from the above table, especially at the field level. However, for the immediate future, the creation of FOD, a separate department would largely involve redeploy- ment of the existing staff. At the field level, most of the immediate staff needs would be filled by staff already in the branches. As far as the proposed project is concerned, the critical staff would be the EDCs, loan appraisers and examiners whose number must be increased as the project expands. With regard to EDCs, 12 were at post during 1977 and 18 more were recruited during the first quarter of 1978, thus giving a total of 30. The calibre of the present EDCs is satisfactory. The proposed project requires about 13 EDCs during the first year, 27 during the second year, and 50 during the third year (based on 300 subprojects per EDC). No serious problems are anticipated in securing this number of staff. With regard to the other critical staff, recruitment efforts are well underway to ensure that the staff - 55 - ANNEX 5 Page 4 will be at post in keeping with the needs of the project. As of May 1978, additional 20 project analysts and appraisers were at various stages of recruitment processing: 3 of them just appointed, 5 awaiting Board's approval, and 12 pending security clearance; this would be more than strictly required for the project's activities in the immediate future. 8. LBP has already contracted with the University of the Philippines (Centre for Policy and Development Studies) for the training of the field staff with particular reference to EDCs, branches, area and field office managers. The first training course, lasting four weeks, was held in May-June 1978 for a total of 25 EDCs. It is intended to organize periodic courses relevant to all the middle management personnel of LBP including operational managers, project supervisers, credit investigators, and project analysts, and selected farmers and farmers' group leaders. The training would be conducted by both the LBPs senior staff and University staff specialized in various disciplines. Lending Operations 9. The conditions and terms of lending would remain consistent with the LBPs approved practices (see Annex 5, Appendix A), and a Field Operations Manual would be made available to all the field staff. - 56 - ANNEX 5 Appendix A Page 1 SMALL FARM DEVELOPMENT PROJECT LAND BANK OF THE PHILIPPINES Credit Terms and Conditions Preliminary Statement A portion of the proceeds of a loan from the International Bank for Reconstruction and Development (IBRD) to the Government of the Philippines will be made available to the Land Bank of the Philippines, hereinafter called the Land Bank, to assist in the expansion of the small-scale rural credit activities of the Land Bank. The purpose of such credit and the loan in support thereof is to increase the productivity of small-scale agriculture and rural enterprises and the efficiency of related processing and marketing. The following lending policies and procedures are hereby prescribed by the Board of Directors of the Land Bank and shall govern the credit program of the Land Bank for which proceeds of the IBRD loan are to be used. Unless otherwise specified, the following terms have the following meanings wherever used in these Credit Terms and Conditions: Section I - Eligible Borrowers 1.01 First Priority (i) Agrarian reform beneficiaries who are holders of Emancipation Patents, Certificates of Land Transfer, Contracts to Sell or Order of Awards and those potential holders of any of the aforementioned certificate of ownership, each of whom shall be a member of a Samahang Nayon; (ii) Small farmers who own not more than seven (7) hectares of arable land situated in an area served by the Land Bank; (iii) Farmer's Associations, Samahang Nayons and Cooperatives composed of a majority of members qualified under the preceding categories, and registered with either the Securities Exchange Commission or the Bureau of Cooperatives Development, MLGCD; and (iv) Landowners/Land Bank bondholders whose sub-projects would directly benefit individuals qualified under (i) and (ii) above. 1.02 Second Priority Other borrowers whose sub-projects would directly benefit individuals qualified under (i) and (ii) above. 57 ANNEX 5 Appendix A Page 2 Section II - Purpose of Sub-loans 2.01 Only viable sub-projects wherein the potential for increased produc- tion or increased marketing or processing efficiency is clearly established will be eligible for financing. Investments eligible to be financed under sub-loans shall be: 2.02 Medium and long-term loans, normally including provision for adequate working capital may be obtained for the establishment, expansion or improvement of economically viable and technically feasible on-farm and off-farm projects falling within the following categories will be eligible: (i) Farm Mechanization, such as - power tillers and accessories - 4 wheel tractors and accessories - irrigation pumps and engines - complete development of minor irrigation systems - wells and distribution works - sprayers, dusters, weeders, etc. (ii) Farm Support Facilities, such as - storage and processing facilities for agricultural produce - threshers and combines - driers and silos - warehousing - feedmills - light transportation equipment - agricultural machinery service and machine shops (iii) Livestock and Poultry, such as - poultry layers and broilers - swine fattening and breeding - cattle fattening and breeding - carabao fattening and breeding - duck and quail raising - goat raising - rabbit raising (iv) Agri-Business Cottage and Small-Scale Industries, such as - woodcraft manufacturing - handicrafts - garment and embroideries - metalcrafts - cement and ceramic products - charcoal manufacturing ANNEX 5 - 58 - Appendix A Page 3 - sawali making - machine shops and repair facilities - food processing (v) Others Such other investments within or beyond the above categories as the Land Bank, shall determine to be within the purpose and eligibility criteria of the present credit program. Section III. - Sub-loan Conditions 3.01 Amount of the Loan In general, the amount of the loan that may be granted to any borrower shall depend on: (i) the actual needs of the project; (ii) the viability and cash flow of the projects; (iii) the credit worthiness of the borrower; (iv) the managerial competence of the borrower in undertaking the project; and (v) the borrower's excess of assets over liabilities (net worth). 3.02 Equity Participation Borrowers of medium or long-term sub-loans shall be required to put up a minimum equity participation equivalent to 10% in cash or kind of the total cost of the project to be financed. 3.03 Collateral Requirements /1 /1 Specific Loan Values applied against security objects in this paragraph may be altered by the Land Bank without prior agreement of the World Bank. - 59 - ANNEX 5 Appendix A Page 4 (i) Specific Collateral and Loan Values Collateral Loan Value - Immoveable or real estate 60% of the acquisition properties covered by Certi- cost in the case of ficates of Land Transfer or CLT's Order of Awards/Contracts to Sell - Real estate covered by Tax 50% to 70% of the Declarations or Titles appraisal value - Buildings and other improve- 50% of the appraisal ments on the preceding value or depreciated value - Machinery and equipment 50% of the appraisal value or that which appears in the bill of sale - Land Bank bonds 80% of the face value - Other government securities 50% of the face value or shares of stocks (ii) The object of financing in term loans shall in all instances be the subject of a mortgage to the Bank. Where livestock and poultry stocks are objects of financing, a chattel mortgage shall be secured thereon. However, since no insurance coverage is obtainable for such stocks, no corresponding loan values shall be given to them; (iii) In the case of untitled lands or those which are covered by Tax Declarations, additional documents may be required, including, for example: - lot plan duly approved by the Bureau of Lands; - a certification from the Bureau of Lands that the property is not within a civil, military or watershed area; or - Land Registration Commission Certification to the effect that the land is not within, or does not overlap with and decreed property. - 60 - ANNEX 5 Appendix A Page 5 (iv) All medium and long term loans to individual agrarian reform beneficiaries or groups thereof shall be guaranteed by the Samahang Nayon of which they are duly registered members, such guarantee to constitute a legal claim on the respective SN's Barrio Guarantee Fund. 3.04 Loan Maturities The term of the sub-loan for different project components shall vary depending upon the cash flow and economic life span of the project to be financed. The following are the maximum maturity periods of sub-loans by sub-project component: Component Term Short Term: (a) Production Loans Minimum of 6 months and maximum of 18 months (b) Commodity Loans Maximum of 4 months Medium and Long-Term: (c) Farm Mechanization (i) power tillers Maximum of 4 years (ii) four-wheel tractors Maximum of 7 years (iii) irrigation pumps and engines Maximum of 4 years (iv) complete development of an Maximum of 10 years irrigation system (v) wells and distribution works Maximum of 4 years (vi) sprayers, dusters, weeders, Maximum of 3 years etc. (d) Farm Support Facilities (i) ricemills/cornmills/ Maximum of 10 years feedmills (ii) storage and processing Maximum of 10 years facilities (iii) threshers and combines Maximum of 7 years (4 years maximum for portable types) - 61 - ANNEX 5 Appendix A Page 6 (iv) driers and silos Maximum of 7 years (v) warehouse Maximum of 7 years (iv) trucks; light and heavy Maximum of 4-5 years (vii) agricultural machinery Maximum of 10 years service and machine shops (e) Livestock and Poultry Projects (i) cattle fattening Maximum of 3 years (ii) cattle breeding Maximum of 10 years (iii) carabao fattening Maximum of 3 years (iv) carabao breeding Maximum of 10 years (v) swine fattening Maximum of 3 years (vi) swine breeding Maximum of 5 years (vii) poultry layers Maximum of 5 years (viii) poultry broilers Maximum of 3 years (ix) duck and quail raising Maximum of 5 years (x) goat raising Maximum of 3 years (xi) rabbit raising Maximum of 3 years (f) Agri-business, Cottage and Small-Scale Industries (i) woodcraft manufacturing Maximum of 5 years (ii) handicrafts Maximum of 5 years (iii) garment and embroideries Maximum of 3 years (iv) metalcrafts Maximum of 5 years (v) cement and ceramic products Maximum of 5 years (vi) charcoal manufacturing Maximum of 3 years (g) Other As determined by the Land Bank Group. -62 - ANNEX 5 Appendix A Page 7 3.05 Grace Period Grace periods may be granted when they are found to be essential based on the project cash flow of the proposed project. However, such grace periods shall apply only to the principal portion of the loan, and the maximum maturity period stipulated in para 3.04 shall include any such grace period. 3.06 Interest Rates and Other Charges (a) Interest Rates (i) medium and long-term loans shall be subject to an interest rate of not less than 12%. (ii) all interest charges shall be determined on the basis of the outstanding balance of the sub-loan from time to time. (b) Service Fees An annual service fee of 2% of the outstanding balance, subject to a minimun of P 150, or as otherwise specified by the Central Bank. (c) Processing fees shall be collected from all applicants for loans in accordance with prevailing Land Bank regulations. (d) Penalty charges in accordance with Land Bank regulations shall be paid on all unpaid amortizations or portions thereof that remain past due for more than 60 days. Such charges shall be in addition to regular interest charges. (e) In the event of a suit for collection of an unpaid balance of a subloan, an attorney's fees shall be collected in accordance with prevailing Land Bank regulations. 3.07 Insurance/Guarantee Coverage (a) As available, short-term production loans shall be covered by guarantee or insurance on production losses from the appropriate agency, the coverage of which shall be the maximum coverage avail- able. (b) In the case of commodity loans, evidence shall be required that the stipulated place of deposit possesses adequate insurance against fire and other fortuitous events. (c) For medium and long-term loans, evidence shall be required of adequate insurance coverage of all fixed and moveable assets insurance shall at all times be acceptable to and endorsed in favor of the Land Bank. - 63 - ANNEX 5 Appendix A Page 8 Section IV - Sub-loan Releases 4.01 Upon documentation and registration of the loan documents, the loan proceeds shall be released in accordance with the approved loan application, Project Plan and Budget. Where more than one release is specified, subsequent releases shall only be allowed upon certification of an authorized representa- tive of the Land Bank as to actual need and as to the use of previous releases in strict accordance with the terms and conditions of the approved loan. Should there be a need to deviate from the approved schedule and amount of releases, a justification and recommendation to that effect from any authorized representative of the Bank favorably acted upon by the authorized approving authority, shall be required. 4.02 In the case of loans involving machinery and material inputs, the loan proceeds shall not be released to the sub-borrower but instead Purchase Orders shall be issued in his favor to effect the delivery and purchase from the designated supplier. For any individual purchase estimate to cost P 10,000 or more, the request shall be accompanied by at least three price quotations from local suppliers. Section V - Sub-loan Repayment 5.01 Term loans shall be amortized in equal payments monthly, quarterly, semi-annually or annually as fixed by the Land Bank on the basis of anticipated sub-project cash flow. In no case shall the interval between installments exceed 12 months. 5.02 In the case of loans pertaining to palay production, it is the policy of the Land Bank that marketing tie-ups be entered into by and between the borrower and on Area Marketing Cooperative or other Bank-designated marketing outlet, the latter establishments to serve both as a marketing and collection arm of the program. Sub-borrowers are thereby required to deliver and deposit all their marketable produce (that which has been partly or wholly financed by the Land Bank) to the AMC or accredited outlets for marketing. As soon as the deposited produce is marketed by the trading outlets, the amount corresponding to that due to the Land Bank on account of the sub-loan shall be remitted by the seller to the Bank. Sales proceeds in excess of the sub-borrower's current obligations to the Bank shall be sub- sequently disbursed to the sub-borrowers concerned. Section VI - Restructuring of Loans Affected by Calamities 6.01 The restructuring of sub-loans may be justified whenever loss or damage results from fortuitous events or force majeure, i.e., typhoons, earthquakes, or other cause of loss/damage verified to fall beyond the control of man. Such restructuring shall consist of the granting of an appropriate extension period on the maturity date of the sub-loan in the case of short-term production loans, or of one or more installments in the case of term loans. The Land Bank may also provide, depending on need and repayment capacity, - 64 - ANNEX 5 Appendix A Page 9 additional financing for the purpose of rehabilitating the sub-project to the extent of substantial recovery. However, both rescheduling of maturity dates and the provision of additional financing shall be subject to confirmation by the Land Bank of the continued earning capacity of the project sufficient to service the debt so restructured. 6.02 As a matter of policy, however, the extension periods that are to be granted under normal conditions shall not exceed the equivalent of the original maturity periods of the affected sub-loans or installments. Moreover, amounts to be granted for the purpose of refinancing, if any, shall be limited to actual and reasonable needs for rehabilitation taking into consideration the ultimate effects on the cash flow of the sub-project. 6.03 All restructuring of loans shall be subject to existing policies and procedures on the matter as may be prescribed by the Central Bank. ANNEX 5 Chart I LAND BANK OF THE PHILIPPINES FIELD OPERATIONS DEPARTMENT (FOD): ORGANIZATION STRUCTURE F ield Operations Managm r AreOffice l Assistant F ield E xecutive Assistont iOperation Manager |Adrnin. & Accounting Chief states Loans & Discount DivisionF e Div, De-lopmnt Div Senior Project Sup /Sr. F Pojet Superiso Analyst Reeset (Technical) Agrerian Junior Feld Analyst Represntative Credit Project Project Loan Loan investigat.on Appraiser Analyst Examiners Procesors L,F ield S-ervc Aida Estates Dvelopent F arm Mange OfficeiManager Coordinator (EDC) ment Groupi Fd ofic Farstead Office (F MG) Farmer, armer Groups & Coopervtives Cash CerC1k AayExmn P World Banik - 19222  LAND BANK OF THE PHILIPPINES ANNEX 5 FIELD OPERATIONS DEPARTMENT (FOD): ORGANIZATIONAL STRUCTURE Chart 2 Senior Vice-President Agrarlan Secto Vice-Preiid t FielddOpOfficern Departrt (FOD} Assistant Vice-President Serner S eieei IeFMiekdfiManager PrjcSniroje ojec Project /FpeidcManagel -AAssstant AnalyrtlAssistant FinancTpt ProcrdurW Proj et FrffcrAnauytnyt An A rrooneirig Econo mic SeniorerAAgriculturalt Fieed OfficrpRiterchrlele k/Ty ist A alys -JFedOffirFil Ai nMan Aia n Mnag.r AstnF Mlngr Fleld Servics En e D lopment Admin. &Lqgstc AidhfChief Chief; DivisionChief Chief Chi~Se frr Che rNI d.n& 1.k Ciin -1roj- Fcii i s&C cas A c & &, F dA i .ti nta& Ag uturel D Mion Suple Diiso & Manpowe Div-sion DDvisio || Monltoing & Sup-ri.ing Prject Agr6cutura SupervWig Custodian AaytCusodian A.:.ounn StaisicanP Senior -i Fid Field Operaion S"n~rCl-sArclua e' Seniorlar Prpry.e.ne.usigBok cper ttsiin ¯ 4 Rpeett Sup,arvisora Adjuser A lytAgriculturelist LE SCeim MarketingI Seniort S,~ ~ ~ ~~~Jno FieldrdBn 122Wol ak 96  - 65 - ANNEX 6 Table 1 PHILIIPPINES SMALL FARMERS DEVELOPMENT PROJECT LAND BANK OF THE PHILIPPINES COSTS AND BENEFITS ANALYSIS Direct Employment Impact ('000 man-years of 250 days) Present Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Production Credit /a Rice Ia 15.7 14.2 15.2 16.8 16.8 15.5 15.5 Corn lb 0.4 0.5 0.5 0.6 0.6 0.5 0.5 Subtotal 16.1 14.7 15.7 17.4 17.4 16.0 16.0 Term Credit /c Livestock Piggery /d 0.1 0.5 1.1 1.4 1.4 1.4 1.4 Chicken /e 0.2 0.8 1.6 2.0 2.0 2.0 2.0 Ducks /f - 0.1 0.2 0.3 0.3 0.3 0.3 Cattle fg - 0.1 0.2 0.3 0.3 0.3 0.3 Subtotal 0.3 1.5 3.1 4.0 4.0 4.0 4.0 Machinery & equipment operations /h Power tiller - - 0.1 0.3 0.4 0.4 0.4 Thresher - - - 0.1 0.1 0.1 0.1 Drier - - 0.2 0.3 0.4 0.4 0.4 Mill/warehouses - - - 0.1 0.1 0.1 0.1 Trucks - 0.1 0.5 0.6 0.8 0.8 0.8 Subtotal - 0.1 0.8 1.4 1.8 1.8 1.8 Cottage industries /i Machine repair shop - - - - 0.1 0.1 0.1 Charcoal - - 0.1 0.2 0.3 0.3 0.3 Concrete products - 0.1 0.6 1.5 2.4 3.0 3.6 Embroidery & garments - - 0.2 0.6 1.1 1.4 1.5 Fibercraft - - 0.2 0.5 0.7 0.7 0.8 Subtotal - 0.1 1.1 2.8 4.6 5.5 6.3 Infrastructural works /4 Roads - - 0.1 0.2 - - - Flood control - - - 0.1 - - - Irrigation - 0.3 0.4 0.4 0.1 0.1 0.1 Subtotal - 0.3 0.5 0.7 0.1 0.1 0.1 GRAND TOTAL 16.4 16.7 21.2 36.3 27.9 27.5 28.3 Incremental - 0.3 4.8 9.9 11.5 11.1 11.9 /a See Project File, Paper No. 5, Tables 1 and 4. /b See Project File; Paper No. 4, Table 16 (footnotes on labor) and Annex 4, Table 1 on corn area. Jc All investment subprojects assumed to be only 1/2 operational during the year of financing. /d At 4 hours per day per subproject for 365 days a year. /e At 4-1/2 hours per day per subproject for 365 days a year. f At 3 hours per day per subproject for 365 days a year. fg At 2 hours per day per subproject for 365 days a year. /h As per relevant cash flow projections models. /i As per relevant cash flow projections models; for embroidery-garment and fibercrafts, labor inputs based on equivalent of P 10 daily wages. 1 Labor inputs assumed at 25% of road costs and 60% for flood control and irrigation works for both construction and maintenance. - 66 - ANNEX 6 Table 2 PHILIIPPINES SMALL FARMERS DEVELOPMBT PROJECT LAND BANK OF THE PHILIPPINES COSTS AND BENEFITS ANALYSIS Direct Public Revenue Impact /a Present Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Public Expenditure /b Capital cost Roads - 2.6 5.2 7.8 - - - Flood control - 0.4 0.8 1.0 - - - Irrigation - 4.5 6.8 7.2 - - - Subtotal - 7.5 12.8 16.0 - - - Recurrent costs fb Roads 0.8 0.2 0.6 1.1 1.1 1.1 1.1 Flood control 0.1 0.1 0.2 0.2 0.2 0.2 0.2 Irrigation 0.9 0.4 1.2 1.9 1.9 1.9 1.9 Subtotal 1.8 0.7 1.9 3.2 3.2 3.2 3.2 Total Public Expenditure - 8.2 14.7 19.2 3.2 3.2 3.2 Incremental - 6.4 12.9 17.4 1.4 1.4 1.4 Public Revenue /c Irrigation charges Jd 5.4 5.6 6.1 6.7 7.2 7.2 7.2 Excise, duty and fees Fertilizers /e 1.2 1.4 1.9 2.9 2.9 1.5 1.5 Agro-chemicals /a 0.5 0.5 0.7 1.0 1.0 0.6 0.6 Irrigation pumps f - 0.2 0.3 0.4 0.1 0.1 0.1 Power tiller ff - 0.2 0.5 0.9 0.9 0.9 0.9 Thresher - - - 0.1 0.1 0.1 0.1 Drier /f - 0.1 0.4 0.8 0.9 0.9 0.9 Piggeriesjg 0.1 - - 0.1 0.1 0.1 0.1 Chicken /h - 0.2 0.7 1.4 1.7 1.7 1.7 Ducks h - - - - - - - Cattle fi - - - - - - - Rice mills /I - - - 0.1 0.2 0.2 - Trucks fk - 0.1 1.1 1.5 1.3 1.3 - Workshops -/ - - - - - - - Charcoal /1 - - 0.1 0.2 0.3 0.3 - Concrete products La - - - 0.1 0.2 0.2 0.2 Garments & embroidery Jn - 0.1 0.7 2.1 2.2 2.2 - Fibercrafts /o - 0.1 0.3 0.8 1.1 1.1 - Total Public Revenue 7.2 8.5 12.8 19.1 20.4 18.4 18.4 Incremental - 1.3 5.6 11.9 13.2 11.2 11.2 Incremental net public revenues: Annual - (5.1) (7.3) (5.3) 11.8 9.8 9.8 Cumulative - (5.1) (12.4) (17.7) (5.5) 4.3 14.1 Ja Government provided extension services costs aasumed to be more or less the same with and without the project. Jb See Annex 4, Tab4e 1; present maintenance assumed at 5% of construction costs. fc Term credit investments assumed to be only 1/2 operational during the year of financing. Ld See Project File; Paper No. 5; Table 1-4. fe At 0.7% sales tax and duty at 10% c.i.f. for locally manufactured and 20% for imported. Components (only for rice and corn production). Jf Based on sales tax at 0.7% for investment items; specific excise tax at P 0.55/liter for petrol; P 0.65/11iter for oil and lubricants; P 0.17/liter for diesel and P 0.07/liter for kerosene; and customs duty at 20% c.i.f. ft Based on P 3.00 per pig levied by local government; and sales tax at 5% on feed supplements; present number of animals assumed to be 3 per farmer. Jh Based on sales tax at 5% on feed supplements. J1 Includes P 5.00/head levied by the local government and sales tax on feed supplement at 5%; present number of animals assumed to be 0.5 per farmer on the average. jI Includes sales tax of investment items at 7%, and business taxes levied by the local govern- ments based on gross revenues. Jk As in footnote ft herein, plus business tax by local government based on gross revenues. ft Includes sales tax on investment items and business taxes as per above. /m Based on sales tax on investment items, local government taxes for gravel and sand at PO.25/cubic meter, and business taxes. fn Includes sales tax both for raw materials and finished products, and business taxes payable to the local governments based on gross revenues; and sales taxes on investment items. ft Includes sales tax at 7% on investment items, and business taxes payable to the local governments based on gross revenues. -67 - ANNEX 7 Table 1 PHILIIPPINES SMALL FARMERS DEVELOPMENT PROJECT LAND BANK OF THE PHILIPPINES FINANCIAL IMPACT ON LBP Income Statement Projections (Accrual Basis) (P million) Years 1 2 3 4 5 6 7 8 9 10 Income /a 2.38 9.96 23.45 26.28 10.31 10.31 5.79 2.26 0.89 0.02 Expenses Operating expenses /a 4.66 4.20 3.30 3.00 1.32 0.74 0.28 0.10 0.79 0.01 Operating net income (2.28) 5.76 20.15 23.28 8.99 5.05 1.99 0.79 0.01 - Financial IBRD Funds /a 1.24 2.29 4.16 8.57 5.73 LBP Funds lb 1.14 3.34 6.80 7.02 3.79 0.05 Net before bad debts (4.66) 0.13 9.19 7.69 (0.53) 5.00 1.66 0.79 0.01 Bad debts /c 0.97 2.53 5.09 3.24 0.31 0.06 .03 Net income (5.63) (2.40) 4.10 4.45 (0.84) 4.94 1.96 0.05 0.01 Cumulative (5.63) (8.03) (3.93) 0.52 (0.32) 4.62 6.58 6.63 6.64 6.64 Debt servicing ratio /d 1.9:1 4.3:1 5.3:1 3.1:1 1.8:1 /a See Annex 7, Table 2. /b At 7.5% of loans granted; new lending assumed to have effective cost period of 10 month/year. /c At 3% of total loans granted and expected income. /d For IBRD interest and commitment charges. - 68- ANNEX Table 2 PHILIIPPINES SMALL FARMERS DEVELOPMENT PROJECT LAND BANK OF THE PHILIPPINES FINANCIAL IMPACT ON LBP Credit Program Cash Flow Projections (Accrual Basis) (Pesos million) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Cash Inflow IBRD Loan /a Seasonal credit 3.05 7.70 17.55 Term credit 13.30 25.73 35.97 Subtotal 16.35 33.43 53.52 Field staff 1.65 1.30 1.25 Research 0.35 0.30 0.15 Total 18.35 35.23 54.92 Income: /b Seasonal credit fe 0.71 3.42 10.03 10.84 Term credit /d 1.67 6.54 13.42 15.44 10.31 5.79 2.26 0.89 0.02 0.01 Total 2.38 9.96 23.45 26.28 10.31 5.79 2.26 0.89 0.02 0.01 Subloans Repayments Seasonal credit /e - 6.10 28.10 81.57 81.57 Term credit /f - 6.60 18.37 35.99 31.81 25.15 10.95 6.07 0.04 0.02 Total - 12.70 46.47 117.56 113.38 25.15 10.95 6.07 0.04 0.02 Total Cash Inflow 20.73 57.89 124.84 143.84 123.69 30.94 13.21 6.96 0.06 0.03 Cash Outflow Sub-lending Seasonal credit Ag 6.10 28.10 81.57 81.57 Term credit /h 23.93 46.32 64.75 - Subtotal 30.03 74.42 146.32 81.57 IBRD loan offset fi 35.99 72.51 Expenditures Financial IBRD loan ft 1.24 2.29 4.16 8.57 5.73 Others Field staff fk 3.30 3.00 2.50 2.50 1.10 0.62 0.24 0.09 0.01 0.01 Research J1 0.70 0.60 0.30 - - - - - - - Overheads /m 0.66 0.60 0.50 0.50 0.22 0.12 0.04 0.01 - - Total Expenditures 5.90 6.49 7.46 11.57 6.05 0.74 0.28 0.10 0.01 0.01 Total Cash Outflow 35.93 80.95 153.78 129.13 78.56 0.74 0.28 0.10 0.01 0.01 Net cash flow (15.20) (23.02) (28.94) 14.71 45.13 30.20 12.93 6.86 0.05 0.01 Cumulative (15.20) (38.22) (67.16) (52.45) (7.32) 22.82 35.81 42.67 42.72 42.73 LBP Contribution fn 15.68 30.09 47.73 Overall Cash Positions Annual 0.48 7.07 18.79 14.71 49.86 22.88 12.93 6.86 0.05 0.01 Cumulative 0.48 7.55 28.34 41.05 90.91 113.79 126.72 133.52 133.63 133.64 La At 50% of total project costs. /b Sub-loans which rate at 12% p.a. plus service charges at 2% p.a. on outstanding balances. Te Effective income earning period assumed at 10 mouths per year. Id Effective income earning period at six months during the first year of financing at 12 months/year subsequently. fe Repayment at 100%; cash proceeds assumed available for relending during the following year with all loans repaid in full at the end of the previous year; seasonal credit terminated at the end of fourth year. If Term credit subprojects assumed to repay principal due at the end of the year available for relending during the following year; repayment schedule based on the respective debt amortization scheduling (see Project File; Paper No. 4; Tables 1-15. JA See Annex 4, Table 1; seasonal credit revalued in full up to the end of the fourth year. /b Includes contingencies, as per Annex 4, Table 1. fi Hypothetical counterbalancing of IBRD credit equivalent to the repayment of term credit from the fourth year, and seasonal and term credit repayment in the fifth year. Y4 At interest charges of 7.9% and commitment charges at 0.75 of 1%; drawings from IBRD loans assumed to be equivalent to four months/year with the balance subject to commitment charges to end of the disbursement period. fk As per Annex 4, Table 1; up to end of the fourth year; thereafter assumed to decrease in proportion to the outstanding amount of subloans. 11 As per Annex 4, Table 1. /m At 20% of the field staff cost to cover headquarters backetopping and administrative costs. In At 50% of seasonal credit, field staff and research costs, and 40% of term credit while the balance of 10% Is provided by sub-borrowers. - 69 - ANNEX 7 Table 3 PHILIIPPINES SMALL FARMERS DEVELOPMENT PROJECT LAND BANK OF THE PHILIPPINES FINANCIAL INPACT OF LBP Credit Program Cash Flow Projections (Assuming 55% Annual Repayment) /a Years 1 2 3 4 5 6 7 8 9 10 Cash inflow IBRD loan 18.35 35.33 54.92 Income Seasonal credit 0.39 2.05 6.45 8.87 3.81 1.19 Term credit 0.92 4.02 9.20 12.56 11.01 7.66 3.81 1.69 0.48 0.11 Subtotal 1.31 6.07 15.65 21.43 24.92 8.85 3.81 1.69 0.48 0.11 Subloan repayment Seasonal credit - 3.37 15.52 41.33 54.60 23.47 7.31 Term credit - 3.63 11.76 25.11 28.51 25.74 15.80 8.83 2.73 0.68 Subtotal 7.00 27.28 66.44 83.11 49.21 23.71 8.83 2.73 0.68 Total cash inflow 19.66 48.30 97.85 87.87 98.03 58.06 27.52 10.52 3.21 0.79 Cash outflow Sublending Seasonal credit 6.10 22.40 62.38 66.44 Term credit 23.93 46.32 64.75 - 30.03 68.72 127.13 66.44 IBRD loan offset 25.11 83.39 Expenditure IBRD loan 1.24 2.29 4.16 Others Total expenditure 5.90 6.49 7.46 11.57 7.93 0.75 0.37 0.17 0.04 0.01 Total cash outflow 35.93 75.21 134.59 103.12 91.32 0.75 0.37 0.17 0.04 0.01 Net cash inflow (16.27) (26.91) (36.74) (15.15) 6.71 57.31 27.15 10.35 3.17 0.78 LBP contribution 15.68 30.09 47.73 Overall cash position Annual (0.59) 3.18 10.99 (15.25) 6.71 57.31 27.15 10.35 3.17 0.78 Cumulative (0.59) 2.59 13.58 (1.67) 5.04 62.35 89.50 99.85 103.02 103.02 /a Assumes 55% annual repayment of outstanding debts for three years with the uncollected balances written-off at the beginning of the 4th year. All other assumptions as in Annex 6 Table 30.  方