Report No. 6819-PH

PhilippinesAgricultural Sector Strategy Review(In Two Volumes) Volumne II: Annexes 1 13October 21, 1987

Asia Region

FOR OFFICIAL USE ONLY

Document of the World Bank

This report lies a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may not otherwisebe disclosed without World Bank authorization.

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ABBRSVIATIO-NS AND ACRONYMS

ADB - Asian Development BankAFT - Agricultural and Food TechnicianALRP - Accelerated Land Reform ProgramAPST - Agricultural Policy and Strategy Team, authors of the Agenda

for Action for the Philippine Rural SectorAR(' - Agricultural Research OfficeASSP - Agricultural Support Services ProjectATI - Agricultural Training InstituteBACOD - Bureau of Agricultural Cooperatives DevelopmentBAEcon - Bureau of Agricultural EconomicsBAR - Bureau of Agricultural ResearchBFD - Bureau of Forest DevelopmentBPI - Bureau of Plant IndustryBPP - Barangau Pilot ProductionBS - Bureau of SoilsBSW - Bureau of Soils and Water ManagementCALF - Consolidated Agricultural Loan FundCB - Central BankCEDP - Community Employment Development ProgramCIS - Communal Irrigation SystemCLSU - Central Luzon State UniveraityCGIAR - Consultative Group on International Agricultural ResearchDA - Department of AgricultureDAR - Department of Agrarian ReformDBM - Department of Budget and ManagementDBP - Development Bank of the PhilippinesDENR - Department of Environmental and Natural ResourcesDOST - Department of Science and TechnologyDPWH - Depertment of Public Works and HighwaysDTI - Department of Trade and IndustryEC - European CommissionEDS - Extension Delivery SystemFAO - Food and Agriculture OrganizationFNRI - Food and Nutrition Research InstituteFPA - Fertilizer and Pesticide AuthorityFRG - Federal Republic of GermanyFSDC - Farm Systems Development CorporationFSSRI - Farm Systems and Soil Resources InstituteFY - Fiscal YearGDP - Gross Domestic ProductCIA - Grant-in-aidGNP - Gross National ProductGVA - Gross Value AddedHYV - High-Yielding VarietiesIA - Irrigation AssociationIADP - Integrated Area Development ProjectIFPRI - International Food Policy Research InstituteIOSP - Irrigation Operation Support ProjectIRR - Internal Rate of ReturnIRRI - International Rice Research Institute

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

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ISF - Irrigation Service FeeISNAR - International Services for National Agricultiral ResearchLBP - Land Bank of the PhilippinesMAO - Municipal Agricultural OfficerWACIAD - National Council on Integrated Area DevelopmentNAFC - National Agricultural and Fisheries CouncilNAPHIRE - NationLal Post Harvest Institute for Research and ExtensionNASUTRA - National Sugar Trading ComamissionNCIP - National Coconut Intercropping ProgramNDC - National Development CompanyNEDA - National and Economic Development AuthorityNEP - National Extension ProjectNFA - National Food AuthorityNGO - Non-Governmental OrganizationNIA - National Irrigation AuthorityNIS - National Irrigation SystemNPC - National Power CorporationNRDP - National Research ari- Development ProgramNRO - NEDA Regional OfficeNSTA - National Science and Technology AuthorityOLT - Operation Land TransferO&M - Operations and MaintenanceOP - Open-PollinatedPAO - Provincial Agricultural OfficerPAID - Private Agricultural Investment for DevelopmentPCA - Philippine Coconut AuthorityPCAMRD - Philippine Council for Aquatic and Marine Research and

Development (established March 1987)PCARRD - Philippine Council for Agriculture, Forestry and Natural

Resources Research and Deve'Lopment (previously PhilippineCouncil on Agriculture and Resources Research andDevelopment)

PCGG - Presidential Commission on Good GovernmentPD - Presidential DecreePDB - Private Development BankPHILPHOS - Philippine Pho3phatic Fertilizer CorporationPHILSUCOM - Philippine Sugar CommissionPHILSUMA - Philippine Sugar Marketing AuthorityPIP - Public Investment ProgramPIS - Pump Irrigation SystemsPNB - Philippine National BankPNOC - Philippine National Oil CompanyPTA - Philippine Tobacco AuthorityPVTA - Philippine Virginia Tobacco AuthorityPTVT - Provincial Technology Verification TeamRB - Rural BankRBRRC - Rural Banking Rehabilitation Review CommitteeRDC - Regional Development CouncilR&D - Research and DevelopmentR&E - Research and ExtensionRIARS - Regional Integrated Agricultural Research StationsSCU - State Colleges and UJniversities

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SMS - Subject Matter SpecialistSRA - Sugar Regulatory AdministrationTA - Technical AssistanceTBAC - Technical Board for Agricultural CreditTG - Technology GenerationTOR - Terms of ReferenceT&V - Training and Visit system of extensionTV - Technical VerificationUCPB - United Coconut Planters BankUMDP - United Nations Development ProgramUNICOM - United Coconut Oil MillsUPLB - University of the Philippines at Los BanosUS - United StatesUSAID - United States Agency for International DevelopmentUSM - University of Southern MindanaoVISCA - Viscaya's State College of Agriculture

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PHILIPPINES

AGRICULTURAL SECTOR STRATEGY REVIEW

VOLUME 2: ANNEXES

T&ble of Contents

Page No,

ANNEX 1 Trends in Agricultural Employment, Incomes and Poverty... 1

ANNEX 2 Non-Bank Evaluations of the Sector......................o 12

ANNEX 3 Coconuts ................ 22

ANNEX 4 Sugar...................... . .0

ANNEX 5 Grains Pricing Policy Including a Suggested NewApproach to Protection.,... 0o,....o.................. 34

ANNEX 6 Irrigation..... ...................................... 49

ANNEX 7 Rural Credit ................ 77

ANNEX 8 Fertilizer ........................................ ..... 86

ANNEX 9 Research and Extension... . ........... ... .so 90

ANNEX 10 Sector Institutions... ..... ... .. 115

ANNEX 11 Public Expenditures in Agriculture...................... 120

ANNEX 12 Policy Changes 1984-87 ......... 0....,. .@*@00*0*@00@ 140

ANNEX 13 Statistical Tables ..... .. *,O ***....... 143

ANNEX 1Page 1

PHILIPPINES

AGRICULTURAL SECTOR STRATEGY REVIEW

TRENDS IN AGRICULTURAL EMPLOYMENT, INCOMES AND POVERTY

Employment and Incomes

1. Between 1970 and 1986 the Philippine population grew from 37 millionpeople to 56 million, an average increase of 2.5% p.a. During the same peri-od, total employment grew from just under 11 million to just over 20 million,an average increase of 4.4% p.a. Total agricultural employment increased from5.6 million to 10.1 million, an 80% rise that works )ut to an annual growth of4% p.a. In 1970, total agricultural employment (i.e. including fisheries andforestry) provided just over 50% of national employment; by 1985 agriculture'sshare of total employment had fallen to a little less than 50% of the total.What these figures imply is that agriculture was providing nearly half of allnew employment in the economy--approximately eight times as many jobs asmanufacturing and two and half as many as either commerce or "other services",the three next-largest sectors.

2. In a vigorously growing economy one would not expect agriculturalemployment to be growing nearly 50% faster than population and nearly as fastas total emplcyment. Non-agricultural growth wouid be draining off peoplefrom agriculture. The fact that this has not happened over the past decadeand a half reflects the general weakness in the economy, forcing more peopleto remain in agriculture than would have done so had employment expanded vigo-rously in other sectors. With the value of total sector output groting at3.9% over this period (1970-86), simple arithmetic (employment growing fasterthan income) tells us that average agricultural incomes had to fall. Figureson poverty trends and on real agricultural wages confirm the picture offalling average incomes. Government figures show a fall in the real wages ofdaily laborers of 11% in sugarcane, 15% in palay, and 19% in corn between1970-82; only in coconuts was there a marginal increase (1%). Since 1982, thedownward trend of wages has, if anything, accelerated. The implication ofthese income trends for rural poverty is explored in the paragraphs thatfollow.

Rural Poverty

3. The measurement of poverty in the ?hilippines, the identification ofpoverty groups, and the foundation of policies and programs to alleviate po-verty are all handicapped by data problems. Measures of absolute and relativepoverty in the Philippines are based on household surveys that are thought to

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Page 2

be not wholly reliable or comparable over time. A more serious problem isthat there is no agreed definition of poverty nor of the methodology for mea-suring it. Thus estimates of the extent of poverty vary considerably,depending upon the analyst's concept. For example, estimates of the povertyline in 1971 vary from a low of P 360 per capita to as much as P 1l102. Eventhe two Bank reports on the subject use different methodologies.-

4. For the purposes of this report, we use the definition of thepoverty line used by the 1985 Bank report. It set the poverty line at P 7,363for the average rural family and P 10,584 for the average urban family.According to this definition, these amounts of purchasing power were justenough to provide the needed food and nonfood items. The threshold of extremepoverty was defined as the income level which provides necessary caloriesonly, equal to 16 kg of rice per head per month.

5. Despite deficiencies in data, there is broad agreement on thefollowing basic conclusions:

(a) poverty in rural areas is a problem that needs to be addressedurgently;

(b) the uncertain prospects for the Philippine economy in general andfor agriculture in particular will further blunt the impact of agrowth-oriented strategy for poverty alleviation;

(c) many specific poverty-oriented programs have been largelyineffective, either because of faulty design or lack of politicalcommitment; and

(d) there is therefore a need for a much more systematic and determinedstrategy for attacking poverty.

1/ The first Bank report on Poverty, Aspects of Poverty in thePhilippines: A Review and Assessment was prepared at the request of theConsultative Group and issued in December, 1980. It was the firstsystematic attempt by the Bank in the Philippines to measure the extentof poverty, to assess trends in poverty and income distribution and toanialyze the causes of poverty. It also analyzes the policy issues facingthe government in trying to alleviate poverty. The second report, ThePhilippines: Recent Trends in Poverty, Employment and Wages, issued inJune, 1985, was muchi narrower in scope. It analyzed the trends inpoverty, income distribution, employment, and wages, critically reviewedthe data on which the estimates were based, and offered detailed recom-mendations for improving the data base. Unlike the 1980 report, however,it did not analyze either the causes of poverty or the strategic optionsopen to the Government in reducing poverty or income inequality in thefuture.

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6. This Annex draws on available studies to briefly indicate the mag-nitude of the problem, identify the poor, and assess the causes of poverty.It then reviews past poverty programs and some of the current proposals forfuture action. In so doing, it suggests a possible conceptual framework forformulating a strategy for alleviating rural poverty.

Scale of the Problem

7. While data problems seem to preclude accurate measurement, thegeneral dimensions of the poverty problem are fairly clear:

(a) The incidence of poverty in the Philippines is relatively high for amiddle income country. Using the 1985 Bank report's definition ofpoverty, some 40% of families in the country felt below the pove:tyline in 1983, of which about a fifth were in extreme poverty.

(b) The distribution of income is highly inequitable. In 1983, thebottom 20% of families received 3% of total income and the bottom40% less than 10%. The top 20% received over 58% of total income.

(c) Poverty is heavily concentrated in rural areas and in agriculture.According to the 1985 Bank report, the incidercc of poverty in ruralareas was 45% in 1983 (compared with 26% in urban areas), of whichone third was extreme poverty. Over 80% of the poorest (lowest 30%)Philippine families were in agriculture, where a high incidence (50-60%) of poverty occurs among families primarily dependent on corn,coconut and sugar cane, among small-scale fishermen, and among agri-cultural laborers (see paras. 10-12 below).

(d) The incidence of poverty varies significantly across regions. In1983 the highest rates (about 50%) were found in Western and CentralVisayas where over half of the nation's sugar industry is concen-trated. Extensive poverty was also often found in inaccessible,resource-poor areas. Relatively high rates of poverty incidence(around 40%) were also observed in Ilocos, Cagayan Valley, Bicol,Western and Northern Mindanao. The most favored areas, CentralLuzon, Southern Tagalog, Southern Mindanao and Central Mindanao, hadrates around 20%.

8. The extent of poverty in the Philippines is also reflected in thenutritional level of the people. The Second Nationwide Nutrition Surveyundertaken in 1982 showed that about one third of Filipino households hadinadequate energy intake levels (less than 80% of recommended daily levels).Adequacy levels were closely correlated with household incomes and theeducational level of the meal planner, and negatively correlated with size ofhousehold. Nutritional deficiencies showed up particilarly among high-risk,pre-school children: about 10% of children aged 0-6 years were found to besuffering from either chronic or acute miialnutrition. The 1982 survey resultsshowed significant gains over the first survey undertaken in 1978. Never-theless, it is clear that major nutritional problems remain.

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9. In certain important respects, the poverty and income distributionsituation seems to be getting worse, rather than better:

(a) the total number of poor families increased during the period 1971-83, despite an 80% real increase in GDP;

(b) the incidence of poverty, after falling for many years, has probablyrisen again since the economic crisis of 1984 and 1985, when averageper capita income fell by about 15% in real terms;

(c) income distribution has become more inequitable since 1971; theshare of income going to the lowest 40% of families fll from 12% in1971 to less than 10% in 1983, while the share going to the top 20Xincreased from 53% to 59%;

(d) average family incomes have increased more than twice as fast inurban areas than in rural areas since 1975, resulting in a furtherwidening of rural/urban income differentials;

(e) agricultural incomes have fallen further behind incomes in othersectors, primarily due to poorer terms of trade for agriculture; and

(f) while no data are readily available, it is probable that malnutri-tion has increased since 1978, particularly since per capita incomefell.

Who are the Poor?

10. This report is concerned with the rural poor only. In 1983 therewere estimated to be some 2.8 million rural families living in poverty. Mostcf them depended on agriculture for their primary source of income:

Farming 31%Farm labor 16%Fishing/livestock/forestry 11%

58%

But a surprising proportion of the rural poor were dependent mainly on non-agricultural sources of income:

"Dividends, rents, pensions" 20%Non-agricultural labor 14%Wholesale/retail trade 3%Other 5%

42%

Thus it is clear that (i) the problem _f rural poverty is not confined toagriculture and (ii) that agriculture alone cannot be expected to solve ruralpoverty (let alone national poverty).

ANNEX 1Page 5

11. A systematic classification of the major poverty groups might be auseful first step towards identifying more specific poverty prigrams. The1980 Bank report identified six particular groups of poor families inagriculture:

(a) Rice/corn farmers, estimated to be the largest single group in theagricultural sector.

(b) Rice/corn farm laborers, who were t;.ought to be the poorest singlegroup.

(c) Small coconut farmers and laborers (over 50Z of whom are poor).

(d) Small sug&r farmers and laborers (poverty rate high, especiallyamong the landless labor).

(e) Farmers in upland/remote/marginal areas (estimated at about 1 mil-lion farm families).

(f) Coastal ("municipal") fishermen and their laborers.

12. This chapter continues to use this typology for convenience . How-ever, a more detailed breakdown of poverty groups would be required as a firststep in formulating a systematic poverty alleviation strategy. In particular,it would seem desirable to recognize that:

(a) There are important differences within the majot poverty groups.(For example, within the rice/corn farm group, it would be useful todistinguish betrfeen irrigated farms, rainfed farms in lowland areas,and upland areas).

(b) Many poor families will fall into more than one category (forexample, a rice/corn farmer may also grow coconuts or be employed asa parttime laborer.) It would be useful to know more about therange of economic activities available to poor families.

(c) It would be desirable to identify other distinct farm labor categor-ies (not just rice/corn labozers), since their problems and needsare different. In particular, it would be desirable to distinguishbetween landless laborers and laborers who also farm (i.e. small-holders or tenants with off-farm labor income).

(d) More information is needed about families in upland areas; thesewould appear to be both the largest poverty group (estimates go ashigh as 3 million families) and the most vulnerable.

Why Are They Poor?

13. A strategy for poverty alleviation needs to attack the basic causesof poverty. For those families who depend upon agriculture for their mainincome, there seem to be five main determinants of poverty:

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(a) Limited Access to Resources. The most important resource is land.The primary reason agricultural households are poor is because theyoperate very small farms, or have no land at all. Accori,ing to the1980 Agricultural Census, 50% of farms were less than 2 ha in size,and 23% were less than 1 ha. The gross inequality in access to landis shown by the fact that the 50% smallest farmers cultivated only16% of the land. At the other end of the scale, the 3% of farmerswith holdings in excess of 10 ha cultivated 26% of the land. Someexamples of the proble. of small size within major poverty groupsinclude:

(i) 50% of rice/corn farmers have holdings of 1-3 ha and 15% haveless than 1 ha. Depending upon their access to irrigationand technology, many of these farms would be too small toprovide an acceptable income level;

tii) 50% of coconut holdings are less than 1 ha; and

(iii) 60% of sugar holdings are less than 5 ha, and account foronly 12% of total area.

However, the poor also typically have poor access to the otherresources that might intensify their land use (such as credit orextension) or that might impr.ve their quality of life (such ashealth and other public services).

(b) Low Productivity. High-Yielding Varieties (HYVi technology has donemuch to increase incomes on many farms, mainly in irrigated rice-growing but also in bette:-endowed rainfed areas. Nevertheless,yields of all major crops are still low, compared with othercountries, and (in the case of rice, coconuts and sugar) comparedwith technology available in the Philippines. Poverty is doublylikely when low productivity is combined with sub-marginal landholdings.

(c) Depressed Prices. During the 1975-82 period, the internal terms oftrade for agriculture declined by sume 30%, offsetting much of thegain from the adoption of improved technology. This was largely dueto a set of prize controls, tariffs and taxes that discriminatedagainst agriculture in favor of manufacturing (and the consumer).Externally, net terms of trade fell by nearly 60% between 1974 and1985.

(d) Lack of Employment Opportunities. Non-agricultural employmentexpanded faster than agriculture in the period 1970-85 mainly due tothe growth of the service sector. Nevertheless, agriculture stillaccounted for some 60% of new employment during this time, manybeing absorbed as unpaid family workers, Nationally, the number ofunemployed increased more than threefold between 1970 and the cnd of1985.

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(e) Catastrophic weather and/or pest attacks. The poor family is likelyto be particularly vulnerable to periodic catastrophies--to theextent of possibly losing their land or jobs and being pushedfurther into poverty.

Past Poverty Programs

14. Overall Assessment. In its 1985 review of government policiesaffecting low-income families in agriculture, the National and EconomicDevelopment Authority (NEDA) differentiated betwee. (i) the indirect impact ofmacroeconomic policies/programs on the poor, (ii) specific agricultural/ruraldevelopment programs, and (iii) policies and programs specifically targeted atthe poor. There is general consensus (Bank, NEDA, APST Report) that the pastmacroeconomic policy framework, far from helping to alleviate poverty, had agenerally negative impact on the rural poor.

15. In reviewing specific agricultural/rural development programs, theAPST report identifies three types of programs:

(a) The old community development approach of the 1950s and 1960s, nowgenerally discredited.

(b) The single-commodity approach which, being primarily production-oriented, was not well focussed on poverty target groups (and inNEDA's judgment excessively "top-down" in approach).

(c) Integrated area development programs which, while located in poorareas, did not qualify as poverty programs since they did not"deliberately target the poor communities as program beneficiaries."

16. One of the best reviews of past programs for alleviating poverty isby Rahman Sobhan, Chairman of the Bangladesh Institute of Development Studies,who was retained by the Food and Agriculture Organization (FAO) to reviewrural poverty in the Philippines.21 He concludes that, despite declaredobjectives of combining growth with equity, the emphasis of previousgovernment development plans has been on promoting economic growth throughindustrialization, exports, and agricultural development. Successive plansall declared war on poverty. But while they identified specific targets forincreasing esmloyment, incomes and services, "there was no clear conceptual orprogrammic linkage between the goals of attacking mass poverty and theinvestments and programs" within the plans.

17. According to Sobhan, there was an "implicit assumption that targetgroupa of the poor can be reached through the development process withouthaving to redistribute wealth or access to resources." The main thrust of the1983-87 Plan, for example, was to "equate poverty alleviation with theincrease in employment opportunities and to in turn relate this to the accele-

2/ Rural Poverty and Agrarian Reform in the Philippines, FAO (undated, circa1983).

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ration of development expenditure." There was an implicit assumption thatincreased production would absorb labor and that iypropriate technologies andincentives would be available for this to happen.-.

18. More precise attempts to target the poor were made through invest-ment programs in backward areas, targeted at marginal groups in fishing,forestry or upland agriculture. Again, it was assumed that such programswould stimulate employment and incomes for the poor, although there was nomechanism to ensuire that they would reach their target beneficiaries. Sobhanconcludes that such broad spectrum programs (including social services) failedto reduce poverty because they had no built-in components to identify andreach the poorest groups and to ensure that resources were allocated in favorof the poor (and not the privileged groups).

19. Agrarian Reform. The agrarian reform programs, particularly since1972, were among the more precisely targeted poverty programs. While it isnot certain how reliable the data are, the programs seem to have been modera-tely successful, in terms of their original (limited) objectives. There is nodoubt that these agrarian reform programs, in spite of the delays in theirexecution, have increased the incomes of a substantial group of poorfamilies. They are also probably the most successful and visible program fortackling social inequity in the Philippines. Yet as anti-poverty programs theagrarian reforms have some major defects:

(a) First is the limited scope of past programs. Rice/corn tenant farmsaccount for only about 40% of farmers or 15% of the total agricul-tural labor force. The program did nothing for other major povertygroups, such as the landless or tenants in crops other than rice orcorn. Nor did it recognize the needs of the subtenants who wereexcluded from the program.

(b) Second, the program redistributed but did not necessarily increaserural incomes. In principle, if not always in practice, the lease-hold program, for example, reduces the landlord's share by half anddistributes it to the tenant. Although it may be too early tojudge, there seems to be no evidence so far that total production,income or employment has increased in areas where land reform hasbeen in process. (On the contrary, there is some evidence that, atleast in the short term, production may suffer when the new owner iscut off from the services previously supplied by the landlord thatpublic sector institutions cannot immediately make up for.)

(c) Third, it appears that the ongoing agrarian reform program cannot byitself overcome the poverty of even those tenant farms it reaches,never mind the majority of rural poor it cannot reach. It issuggested that limited access to land, rather than land tenure, isthe primary cause of poverty (see para. 13 above). But the major

3/ But it did not materialize because of capital-intensive investments anddistorted incentives.

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land reform programs of the past have not given more land to thepoor; most of the farmers are still dependent on very smallholdings. Nor have the programs tackled another major cause ofpoverty--low productivity* Yet without such programs, many holdingsare too small to be viable, whatever the legal status of thecultivator.

20. The Government has proposed a program to accelerate theimplementation of the existing agrarian reform program and to extend it to amuch larger area of land. This ambitious program seeks to address most of thecriticism of the previous programs cited above. In particular, it proposesto:

(a) greatly accelerate the rate of implementation in rice/corn areas;

(b) extend the land reform programs to other areas, most notably thoseunder sugar and coconut;

(c) make available various categories of land that are expropriatableunder existing law;

(d) legitimize the de facto occupation of large areas of public land;and

(es provide follow-up services, particularly extension and credit, tonew owners or settlers to help them make good use of their land.

21. This program has been reviewed by a recent Bank mission, which madeimportant recommendations for accelerating and improving the program and forreducing its cost.-' Many details of the program have still to be worked out,and it is not yet clear what the impact on rural poverty will be. In theshort-term, there will be an immediate increase in production and incomes tothe extent that presently unused land is brought back under cultivation. Onthe other hand, where land already under cultivatiorn is being transferred totenant or labor ownership, there may well be a fall in production. In thecase of large scale commercial operations, there could be a significantdisruption, and in Volume I it is suggested that this risk be carefullystudied (see Appendix 1 to Volume 1). In the long run, we expect the programto have a very dynamic effect in increasing production and income and inbringing about a more equitable distribution of incomes.

22. However, as the recent Bank report pointed out, even an acceleratedland reform program will not by itself solve rural poverty. It is to be hopedthat the strong political appeal and large financial cost of the program willnot therefore obscure the need for a wider and more integrated approach torural poverty alleviation.

4/ See Agrarian Reform Issues in the Philippines: an Assessment of theProposal for an Accelerated Land Reform Program, Report No. 6776-PH,May 12, 1987.

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Page 10

What Can Be Done?

23. The limited progress made in the past in eradicating poverty is atleast partly explained by the poor policies and doubtful commitment to reformof previous political regimes. The new administration has given a high prior-ity to poverty alleviation in its official statements, and has already shownitself willing to take forceful actions--as for instance in correcting pricedistortions and liberalizing fertilizer importation and distribution. How-ever, while the new administration has been quick to point out the deficien-cies of previous policies and programs, it has still to formulate a coherentstrategW,for eradicating poverty or to determine how to proceed on landreform.-

24. There is clearly uto single, simple solution to poverty in thePhilippines. Since poverty is heavily concentrated in agriculture, a largeburden of responsibility falls on agricultural development strategy, policiesand programs to seek out and help the poor. Much of the general strategy foraccelerated agricultural growth outlined in Volume I, while aimed at the wholesector, also contains key elements of any anti-poverty strategy. Theseprograms include most major agriculture services, such as research, extension,credit, irrigation and rural infrastructure, including those specificallytargeted at agrarian reform areas.

25. But a sharper focus on poverty will be required in the future, sinceit cannot be assumed that a general growth-oriented strategy will necessarilyreach the poor. There are two additional approaches that might be followed:

(a) Volume I suggests that if development programs are to have a greaterimpact on the poor, then poverty impact should be a major, andperhaps paramount, criterion of program design. If this principlewere applied to agriculture, it would mean that every developmentprogram should be reviewed for its poverty impact and, wherenecessary, redesigned to more effectively reach and benefit thepoor. Some of the more obvious questions that might be asked are:

5/ The new Government's Draft Development Plan, 1987-92, makes poverty-reduction a major objective, with rural poverty to be reduced from 64% ofall rural families today to 47% by 1992 (56% fell below the poverty linein 1971). The main instrument for combatting poverty, apart from landreform, appears to be vigurous growth of the agriculture sector. Overallgrowth of GDP is targeted at 6.3%, with agriculture to grow at 5.0%,industry at 7.0%, and services at 6.4%. Apart from questions about theeffectiveness of a high-growth 3trategy for attacking poverty, thereseems a basic inconsistency in the plan's 5.0% growth target foragriculture since none of the major subsectors is targeted to grow fasterthan 3.9% (crop production 3.9%, livestock and poultry 1.9%, and fishproduction 3.4%).

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(i) In research: Is there sufficient emphasis on croppingsystems to improve poor families' incomes, health andnutrition? Can poor farmers afford recommended inputs, andif not, is there enough work being done to develop low-costtechnology? Does the scientific community have an appro-priate technology for each identified poverty target groupor is working to develop one? Do recommended practices giveenough emphasis to labor-intensive technology?

(ii) In Extension: Are the extension services reaching the poorand disadvantaged families, including those in remote areas,sub-marginal holdings, women? Is the advice being offeredrelevant to the poor? How can the extension service betterreach the poor (particularly when the extension workers lacktransport)?

(iii) In Irrigation: The provision of (subsidized) water hasgreat potential for raisiTtg farm incomes; is this being usedto narrow income differentials, or do the better-off farmersbenefit most? Can the irrigation design/water managementsystem be skewed to give a large share of available water tosmall farmers? Are irrigation service fees appropriate froma poverty point of view? What is the potential for low-costindividual water systems to increase productivity on smallholdings (see Appendix 1 to Volume 1).

(iv) In Inputs and Credit: Do poor farmers have ready access tothe modern inputs they need to increase productivity andincomes? If not, why not, and what needs to be done toensure they do? (see Appendix 1 to Volume 1).

(b) In addition, agricultural policy makers could draw up comprehensiveprograms for reaching specific poverty target groups such assmallholders in coconut areas (primarily through extension ofintercropping), upland farmers in specific locations, or municipalfisherman.

26. It must be recognized, however, that neither agrarian reform noragricultural programs, by themselves, can overcome rural poverty. A majortheme of this report is therefore the need for development in ocher sectors ofthe economy to take up the slack, and in particular to draw off a largeproportion of the expanding labor force from the land. This subject isdiscussed at some length in Volume I.

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PHILIPPINES

AGRICULTURAL SECTOR STRATEGY REVIEW

Non-Bank Evaluations of the Sector

1. People interested in the sector have an unusually large number ofrecent studies on which to draw in addition to the Bank's own work. Thosedone by the Bank are not summarized but are listed in Annex 9; this annexsummarizes five non-Bank studies completed in 1985-87. The studies coveredare the following:

(a) Afenda for Action for the Philippine Rural Sector, prepared by a 20-member Agricultural Policy and Strategy Team drawn from theUniversity of the Philippines at Los Banos and the PhilippineInstitute for Development Studies. Six chapters (volumes) plus fourannexes (October 1986).

(b) Price and Investment Policies for Food Crop Sector Growth in thePhilippines, by M. Rosegrant, L. Gonzales, H. Bouis, and J. Sison ofthe International Food Policy Research Institute of Washington, D.C.(one volume, January 1987).

(c) Agricultural Cooperation with the Philippines, by Joseph Ertl, UweOtzen, and Richard Peters (Federal Republic of Germany). One volume(September 1986).

(d) Private Sector Opportunity Assessment (Agricultural Sector): AnOverview of the Philippines and Its Agricultural Sector, AYCConsultants, Inc. (three volumes, November/December 1985).

(e) Crop Diversification in Rice-Based Agricultural Economies:Conceptual and Policy Issues, by Prof. C. Peter Timmer (draft,December 1, 1986, 65 pp.).

The Agricultural Policy and Strategy Team (APST) Report

2. This Agenda for Action is probably the best single document for acomprehensive introduction to the sector. It was prepared at Governmentrequest by a 20-member team lead by Dr. Cristina David and composed of 16professors mainly from the University of the Philippines at Los Banos (UPLB)plus four other experts. The study is impressive not only for its analysesand specific policy recommendations but equally for the richness of thehistorical, institutional, and statistical information which it provides.Each chapter also includes a bibliography.

3. The report's six chapters are entitled "An Agenda for PolicyReform", "Addressing Rural Poverty", "Traditional Food Sectors", "AgriculturalExports", "Rural Credit, Agricultural Inputs and Services", and "Research,Extension and the Delivery of Government Services to Agriculture." The four

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(relatively short) annexes deal with (i) the National Agricultural InvestmentCompany and the Agricultural Incentives Act of 1986, (ii) the case for removalof export taxes on agricultural products, (iii) rural organizations (mainlynon-governmental organizations, NGOs), and (iv) alternative procurement andrelease prices for rice and their impact on the operations of the NationalFood Authority (NFA).

4. The rural poverty chapter assembles much good data, although thedata-bases for both poverty-mapping and land reform appear relatively weak.The prescriptive advice on how the Government should pursue anti-poverty goalssuggests that much further work remains to be done before good intentions areconverted into implementable programs. Similarly, the land reform objectivesare not spelled out very clearly. The chapter on traditional food sectorscovers rice, corn, livestock and animal feeds, fisheries, and upland agricul-ture (including forestry). The coverage of rice, fisheries, and uplandagriculture is particularly good (despite weakness in the recommendations for.,le). The coverage of corn is better on white corn (used for human consump-

thp, on yellow corn (used for animal feed). The livestock/feedstuffsK iai weak. Not surprisingly, the chapter is stronger at problem-idet ifil. lon than on policy advice and program recommendations (this is incont ~st to the IFPRI study summarized below). The chapter on agriculturalexpor4s focuses on coconuts, sugar, and nontraditional exports (conventionallydefined as individual exports totalling less than US$5 million in 1968). Thegeneral view of coconuts and sugar is that they are not "sunset industries"but can be brought back to viability with suitable reforms. The difficult butcrucial problem of the market outlook for coconut products is not handled withmuch depth; supply-side reforms are given more attention. Sugar will have tobecome smaller, be exposed to world markets, and undergo land reform. Thereport's coverage of nontraditional exports reflects a strong bias againsttransnational corporations and large-scale plantations and a belief that smallprivate farms and small-scale traders can provide the healthiest institutionalbasis for growth, with Government concentrating on the prcvision of infra-structure and information. Chapter V on credit, inputs, and services coverscredit, irrigation, pesticides, fertilizer, and postproduction systems forgrains and perishables. The latter section is particularly effective inhighlighting nontechnical factors that might improve quality and reduce waste(considerable emphasis is put on the development of quality premiums in theprice structure). The final chapter, on research, extension, and governmentservices, is especially usieful on institutional material; the section on theDepartment of Agriculture (DA) organization is less clear and convincing (themain thrust is to shift from the Ministry's present commodity organization toa functional organization).

5. The report's policy advice is divided into six longer-tei-m"principal thrusts" and a dozen "immediate steps" that the Government shouldtake. The longer-term policy imperatives are to:

(a) adopt an anti-poverty focus in rural areas;

(b) implement comprehensive land reform;

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(c) eliminate the bias against agriculture to induce growth andefficiency in the rural economy;

(d) strengthen support services to increase productivity, improve marketefficiency, and expand market size. (The key services are irriga-tion and infrastructure, credit, -iiput supplies, research, exten-sion, training, and post-harvest technology);

(e) protect lo:2g-term agricultural potential by strengtheningconservation policies; and

(f) increase the effectiveness of government agricultural institutionsand promote the participation of NGOs.

The "immediate steps' recommended are:

(a) launch a massiz'c rural infrastructure program;

(b) implement land reform immediately in the poorest areas;

(c) restore the availability of production credit by using monetarypolicy to bring interest rates down generally (but not selectivelyin favor of agriculture);

(d) continue the dismantling of government-supported monopolies;

(e) maintain the domestic prices of rice, corn, and sugar "close tolong-run world price levels;"

(f) abolish export taxes on all products except logs;

(g) remove the P 10 surcharge on fertilizer;

(h) relax the ban on interprovincial transport of carabaos and theslaughter of male carabaos;

ti) mobilize research and extension systems, with greater roles forregional state colleges and universities, NGOs, and farmers'organizations;

(j) reduce constraints on seed supplies, particularly for open-pollinated corn; and

(k) abolish the Agricultural Incentives Priorities Plan (which benefitsonly large agribusiness and promotes capital-intensive production).

6. In general, the APST report is strongly in favor of free enterpriseand market guided decision-making. The main exception is the need to maintainminimum prices (but close to estimated long-run world prices levels) for rice,corn, and sugar (at the time of report writing, world prices of thesecommodilies were 30-50% below their long-run trend levels).

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The 1987 IFPRI (International Food Policy Research Institute) Study

7. This simulation study investigates what changes would have to bemade in government price and investment policies and in national croppingpatterns, if the recent rate of agricultural growth (3.2%) is to rise to the4% level judged necessary for agriculture to play a lead role in economicrecovery and growth. It is an impressive study, not least because of theclarity with which its methodology and policy recommeniations are explained.The work was commissioned by ADB as part of a 15-country study; althoughprimarily a modelling exercise, the study draws heavily on empirical work donein a Phase I study which IFPRI did jointly with IRRI in 1983/84.

8. The study uses estimates of domestic resource costs (DRCs) of 29crops to establish whether or not the Philippines has a comparative advantagein each crop. Excluded from the study are coconuts and sugar. The country isfound to have enough of a comparative advantage in rice, corn, soybeans, andcottof so that it can compete iith imports at modera17 levels of protection,even at the low world prices of 1985 and early 1986.- But costs are not lowenough to permit competition in export markets for any of these crops. Of the19 other crops examined, only four showed good export potential: tobacco,garlic, onions, and abaca (all are current exports, although their volume issmall). Six additional crops show high farm-gate profitability at worldprices but lack export potential (string beans, sweet peas, tomatoes, water-melon, turnips, and pineapple). Achieving the target 4% growth rate willdepend on what happens in rice, corn, and livestock production, since thecombined weight of all other crops (including coconuts and sugar) is rela-tively small compared to the staple grains and livestock (which consists ofpork, poultry, and eggs--cattle are relatively unimportant). Consequently thestudy's main attention is on pricing and investment policy as they affect thethree key subsectors (rice, corn, and irrigation).

9. The following four quotations contain the study's majorrecommendations (Bank views are not fully in agreement with them):

(a) On irrigation: "The current irrigation program by the NationalIrrigation Authority (NIA) is inadequate to meet growth in domesticdemand. Substantial increases toward the level in the 1983 NIA planwould be appropriate. Increase in levels of investment should beconcentrated on new system construction, which in general providemore production for a given level of investment compared torehabilitation. Finally, results are supportive of an increasedemphasis on investment in low productivity regions. The resultsindicate that investments in these regions can improve regionalequity without reducing the impact on production growth."

1/ Because of a further drop in world market prices for corn and rice in thesecond half of 1986, high tariff protection wps required to maintaincompetitiveness with imports.

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(b) On protection: "The basic strategy for growth is to maintainmoderate protection of rice and corn in the short term, sharplyincrease investment in technology-enhancing projects and programs,and reduce price protection on a phased basis as productivityincreases. Reduced prices in turn boost domestic demand and realincomes, generating further incentives for agriculturalproduction. The key elements of the strategy are price policy,technology development policy, and irrigation investment policy."

(c) On technology priorities: "Rapid technological change is the key togenerating agricultural growth sufficient to induce price declinesadequate to boost consumption, while maintaining producer incentiveswith lowered cost per unit of output. A major effort must be madeto maintain long-run growth rates in rice yields, and to sharplyincrease the growth rate in corn yields."

(d) On corn productivitiy: "Generating increased productivity for cornis likely to be more difficult than for rice. The research,extension, and seed production and distribution systems for corn aremuch less developed than for rice. Improved varieties of corn coveronly about 10% of total corn area, compared to nearly 90% for modernvarieties of rice... Based on the results of the policy impactmodel, in order to reath about 4% annual growth in production, thearea devoted to improved varieties would need to reach 40-60% oftotal corn area harvested by 2000, depending on the balance betweenhybrids and improved yellow open-pollinated (OP) varieties. Thiseffort would require sharp increases in funding for research,extension, and seed production and distribution for corn. Researchon corn has been too low, with the percentage of total agriculturalresearch funds devoted to corn only about half the percentage ofcorn in gross agricultural value added. Funding of seed productionand distribution programs is even more inadequate. The current cornseed production and distribution system can meet only about 10% ofpotential demand for improved seed."

1986 Federal Republic of Germany (FRG) Study ofGerman/Philippine Agricultural Cooperation

10. This summary report provides an excellent overview of the sector'sproblems and potential. Despite favorable natural conditions and a well-developed research network, the sector is found to have three serious struc-tural weaknesses (skewed land distribution, a weak marketing system, and weakagricuitural services) plus a recent policy environment that has resulted in"skimming off" surpluses for the benefit of the industrial and urban sectors(this was done through marketing monopolies, product-specific levies, thetaxation of agricultural exports, price controls, export quotas, and an over-valued exchange rate). Yields are relatively low, the credit system has"virtually collapsed", and agricultural incomes have fallen since 1980 whilerural malnutrition has increased. But the sector does have the potential ofachieving a 4% growth rate, and can regain its function of being the No. 1employment-generator, if reforms are made in nine specific areas. The overallkey to reform is "liberalization" (greater reliance on market forces); the

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Aquino Government has already taken, or is preparing, a number of steps inthis direction (e.g., liberalization of agricultural imports, abolition oftaxes on agricultural exports except logs, and abolition of foreign trademonopolies in coconuts, sugar, maize, soya flour, wheat and rice).

11. The nine key areas where reforms are believed needed are thefollowing:

(a) Centralization of sector planning. There is a history of ill-defined, conflicting responsibilities among the multiple agenciesinvolved in decentralized sector planning.

(b) Agricultural pricing policy: The Central Bank's liberalization ofalmost all agricultural imports has met with resistance in thie MAPwhich wants to maintain protection and price supports for rice andcorn. Fertilizer prices are being forced down by removal of importrestrictions.

(c) Agrarian reform. The Marcos Government did not accomplish more thanhalf its first-phase 1972 program of distributing holdings of over25 ha. of rice and corn lands to tenants; very slow progress wasmade in the second-phase program of giving tenants on smallerproperties secure tenure arrangements. Nor was any seriousconsideration given to redistributing large holdings of land undersugar, coconuts, pineapple, or bananas.

(d) Agricultural credit. The virtual collapse of the formal creditsystem for agriculture has led to a rapid expansion of private orinformal money-lending (which now accounts for 60Z of outstandingcredit, with concentration among smallholders).

(e) Food processing and marketing. Raw material shortages have led tounderutilization of capacity. Poor storage capacity is partly toblame. Government favors expansion of contract farmingarrangements. Expansion of the presently weak co-ops could help.

(f) Training, Extension and Applied Research. Although the appliedresearch institutions are quite good, the tradition of product-specific extension workers is unsound. The pay and morale of the12,900 field agents are low, and their number too high. Governmentplans to shrink their nuw er through attrition and to raise theirpay from P 1,600 to about P 3,000 per month.

(f) Protection of Agricultural and Fisheries Resources. Timberresources have been rapidly depleted as the result of predatorypractices; "drastic legiolattion" is needed to end these. There isan obvious need for widespread reforestation. There has also beenmuch destructive fishing (e.g. the dynamiting of coral reefs).

(g) Sugar: structural reorganization. The distress in the sectorfollowing the price collapse of 1981/82 has led to reorganizationproposals from the World Bank (most are embodied in the Sugar

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Rehabilitation and Diversification Project, soon to be appraised),as well as a series of private and local-government proposals forNegros, the most seriously affected island. But those localproposals need the support of a national land reform program.

(h) Coconut reorganization. Over one-quarter of the country's croppedarea is under coconuts, which have typically contributed 17-20% oftotal export earnings. Until recently, coconut export earningscovered 80-90% of the country's debt service requirements. Thepresent depressed state of the industry, plus the change inGovernment, has stimulated proposals for recovery. Increasingproductivity and much wider adoption of intercropping appearessential. But there is a question about how large a replantingprogram would be wise.

12. The last third of the report assesses the prospects for German/Philippine cooperation in the sector, with emphasis on the market prospectsfor Philippine exports to the FRG and the European Community (EC). Theoutlook for sugar and coconut oil/cake/meal is unfavorable; the only hope (nota significant one) lies in the development of processed products. Tropicalfruits look more promising but the long distance to Europe makes dried fruits,and fruit juices, better prospects. Cashew nuts hold promise. Coffee,already fairly well established and with the export quota recently doubled,has good prospects, particularly if it can find a place in FRG imports.Cocoa, a fairly recent introduction, will have difficulty competing withlonger-established suppliers but may find a modest market in importsubstitution. With good growing conditions, the country's large net importsof pepper suggest an import-substitution opportunity; ginger might grow wellalso. Ramie, the textile fiber that does well in cotton and synthetic blends,can probably expand moderately. Tobacco can probably hold its present exportmarkets but cannot look forward to much expansion in world consumption.Carrageenane, an algae extract used as a jellying agent, will continue to dowell as a Philippine company is the market leader in Asia, the center of worlddemand. Timber and its products are likely to diminish in export volumebecause of falling supplies. The dairy industry deserves exploration as asubstitute for the present large dairy imports, but there will need to be muchattention to technical factors to establish economic feasibility. Meat andits delicatessen products deserve study, with special attention todecentralized abattoirs specializing in finished products. Feedstuffs "couldplay an increasingly important role, possibly even advancing to the exportstage..." Finally, fish and marine products are a subsector that has notsuffered much from the depression. The municipal (inshore) sector serves thedomestic market; the commercial (offshore) sector is already well organized--it is almost exclusively a tuna industry; the biggest potential probably liesin aquaculture for raising shrimp, prawns, mussels, and oysters. A big needis cheap fishfood (a potential product of the animal feed industry).

13. According to the study the most promising area for increasedFRG/Philippine cooperation may be FRG help in reviving agriculturalcooperatives. Only about 7,200 of the 17,179 registered co-ops are active andthere is a big need for the functions they could perform. "Entry points" fordirect private German investment are noted--"primarily in the processing and

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packaging of agricultural produce for export, refrigeration (refrigerationchain), the domestic and ex;ort marketing of marine products, and theproduction of feedstuffs (basic products and protein concentrates."Additional possibilities exist in ti,nber, meat processing, and the siloindustry.

The 1985 USAID-Sponsored Study by AYC Consultants, Inc.

14. This three-volume report is part of a larger multi-sector assessmentof investment opportunities in the private sector. The core of the report isa detailed assessment of the performance of 72 crops in each of the country's12 regions. "Performance" was assessed in terms of (i) past profitability,yields, and regional specialization, (ii) past and potential markets, bothdomestic and foreign, and (iii) linkage potential. The result is a weightedranking of the 72 crops with respect to future promise, both nationally and ineach region. The four existing major crops (rice, coconuts, sugar, and corn)did well, mainly because of their present size and consequent ability toaffect rural development. Of the remaining crops, 36 showed "strongpotential" in different regions; three of these are examined in some depth(corn, coffee, and cacao).

15, Establishment of a new Philippine company is proposed forchannelling US aid (and other funds) to the private agricultural sector. Thenew program/institution (PAID--Private Agricultural Investment for Develop-ment) might lend to entrepreneurs, take equity positions, or make directinvestments on its own account for eventual resale to private investors.Similar institutions are said to have been established in Jamaica, theDominican Republic, and Costa Rica.

16. The regional data assembled for the 72 crops are useful (especiallythose on corn) and the results of the rankings are su}gestive. But themethodology appears somewhat simplistic (especially the market analyses andagronomic assessments) and the results therefore unconvincing.

Prof. Timmer on: Low Commodity Prices and Diversification

17. The decline in what appear to be long-term prices of agriculturalcommodities has strengthened Bank interest in crop diversification. To helpit assess the possibilities and instruments for achieving greater diversi-fication, the Bank's Agriculture Department has commissioned a number ofconsultant studies. One that focuses specifically on Southeast Asia is apaper by Prof. C. Peter Timmer of Harvard, "Crop Diversification in Rice-BasedAgricultural Economies: Conceptual and Policy Issues" (draft, December 1,1986). The paper reviews experience with rice price policy in the leadingrice-growing countries of the region, including Japan. Timmer's general viewis that regional governments have acted sensibly in using rice price stabili-zation schemes to insulate farmers and consumers from the swings of worldprices, made volatile by the thinness of the international market. Thispolicy has succeeded in expanding domestic production of the staple cerealgrain, decreasing or eliminating the need for rice imports and releasingforeign exchange for other imports of higher development priority. Diversifi-cation was not much of an issue while countries were still net importers; the

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diversification issue has arisen only since self-sufficiency has been attainedand surpluses (actual or potential) have emerged.

18. Faced with this new situation, Timmer's advice is to continue withprice stabilization programs but to avoid 'i) setting floor prices too muchabove world prices or (ii) continuing such support too long. If support is"too high" or "too long" the strain on the budget will become intolerable.Thus price stabilization should be viewed as a short-run policy. For the longrun, diversification must be encouraged. Successful diversification is notlikely to result from government attempts to "pick winners" among possiblealternative crops, however. No one can know enough to pick winners. A muchsurer route to successful diversification is to think of the process as agradualistic adjustment to market forces. This means trial-and-error changesin cropping patterns by farmers kept under pressure by rice stabilizationprograms that provide only a minimal "safety net." The most effective helpgovernments can provide is to allow market signals to function and to providecost-reducing infrastructure improvements that will expand farmers' access tonew market opportunities. Timmer puts great emphasis on infrastructureimprovements (especially roads) and on strengthening research and extension,areas which are of special importance for the Philippir.es.

19. Prof. Timmer's analysis makes several points that are relevant toBank appraisal methodology and policy advice. Among the more important ofthese points are the following:

(a) It is impossible to forecast the future world price of rice with anyconfidence. Neither econometric models nor attempts to read trendsfrom past price data provide good enough guides to future prices tojustify using their results for project justification or policy-setting. The best one can do, he writes, is to use current marketprices.

(b) Tie expansion of off-farm income opportunities is the surest way tocompensate for low rice prices, He says little about how tostimulate such opportunities; the expansion of rural infrastructureprograms would certainly seem one way--perhaps the fastest, surestway.

(c) The concept of "comparative advantage is not a very useful conceptfor discussinig crop diversification." Timmer defines comparativeadvantage only "as it is traditionally used by economists"--aqualification that excludes some economists, who overwhelmingly usethe term as a synonym for competitive advantage.

(d) Although market forces are the surest guide to successfuldiversification, markets do not always work efficiently or fairly.Policy-makers need to understand more about how markets work and theroles and needs of private actors, including "disfranchisedelements" such as small farmers, the rural landless, and the urbanpoor. After warning against policies that reflect a "cozyrelationship between large corporations and a handful of governmentofficials", Timmer also suggests that much of the nationalistic

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rhetoric against multinational companies is unhelpful, since thosefirms can sometimes offer the easiest access to external markets.And without markets, he notes, there can be no diversification.

(e) As noted, Timmer gives his blessing to price stabilization pr^grams(at least for rice; he is silent on how many additional crops, ifany, he would also protect). He relies on pragmatism, not formaleconomic principles, to determine the level of support. The dominantconsideration is bound to be the potential drain on the budget. Toencourage diversificaiton, support prices should not deviate "toomuch from border prices for too long a time, where 'too much' and'too long' cain be determined only relative to budgetary flexibilityand the seriousness of any spillovers from zice price stabilizationto other commodities or other countries."

(f) Japanese experience carries lessons for other Asian countries.Until 1960. Japan's rice farmers were competitive with imports,which were permitted. After that date, the government decided tolink returns from rice farming to industrial wages; this was done bytanning imports and guaranteeing farmers a support price. Theformula used included the cost of land--a "mistake" that spilledover into the whole sector as higher rice prices made land morevaluable, which further pushed u? rice prices, etc. As riceproduction and prices both rose, consumers began to eat less riceand a rice surplus emerged. The surplus stocks could be exportedonly by subsidizing them; this was costly to the budget and toJapan's relations with other rice exporters. So the governmentturned to diversification from rice. Pork and poultry expandedsuccessfully, and without protection, so long as feed grains wereavailable at international prices (those quasi-industrial productsneed cheap feed more than they need land). But attempts to moveinto other products (e.g. wheat, soybeans, barley, hay) requiredlarge subsidies since these are land-based crops and land (builtinto the rice price formula) had become very expensive. While therice surplus fell, the budgetary burden from alternative cropsremained. To ease that burden the government promoted beef andoranges, using high protection to make consumers, not the budget,pay the high costs. Thus "the secondary effects of rice pricepolicy continued to haunt the cost structure of nearly all ofJapanese agriculture. Protecting rice farmers from foreigncompetition causes extensive spillovers into the competitiveness ofother crops." "Poorer countries", he warns, "cannot afford thebudget costs or the resource misallocations of the Japanesemodel." Timmer then cites, much more briefly, Thailand's successwith diversification, a market-produced result that has receivedrelatively little explicit policy support from the government,

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PHILIPPINES

AGRICULTURAL SECTOR STRATEGY REVIEW

Coconuts

1. With some 3.27 million ha of coconuts in 1985 21 (about a third ofthe total farm land area), the country is the world's largest producer andexporter of coconut products. Although this accounts for over two-thirds ofcombined world exports of copra and coconut oil, it amounts to less than 5% ofthe world's fats and oil market. Because of the lower production costs inother countries of competing vegetable oils such as palm, soy bean andrapr.seed oil, the outlook for Se coconut sector is not promising. There isthus a distinct need for increat.lng the productivity of standing trees and forimproving crop area productivity through diversification and intensificationby intercropping with annuals and perennials.

2. Area and Yield.!' Between 1950 and 1970 the total coconut areadoubled from 905,000 to 1,884,000 ha, then increased to 2,200,000 ha in 1975and 3,126,000 ha in 1980, with little growth in the 1980-85 period. About 1/3of the trees were planted since 1975. It therefore appears that the oftenquoted area of senile trees (a third) may be overestimated. Production(yield) statistics are for a mix of copra, dessicated coconut, and fresh nutsand are therefore difficult to interpret. Based on these statistics there wasa significant yield increase between 1965 and 1980 from 956 kg/ha tol,462 kg/ha, but a decline to about 905 kg/ha in 1985. In the Landell Mills'Oils and Oilseeds report of March 1987, the 1985 copra yield was shown as 570kg/ha, indicating that about 60% of the yield will be in the form of copra.Declining yields in the last few years are due to low prices which induced adeteriorating crop management (almost no input use in even the most favorableyears) and indicate that substantial production increase is possible if itbecomes worthwhile for farmers.

3. Regional growth has been strongest in Mindanao, while the Luzoncoconut area has declined quite sharply since the late seventies as indicatedin Table 1l

1/ Area and yield statistics are from the 1986 Philippine StatisticalYearbook, issued by NEDA. The total-area of coconuts in that document isshown to be larger than that obtained by the Philippine Coconut Authority(PCA) from aerial photography, which indicates that the total area maynot exceed 2.8 million ha.

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Table 1: REGIONAL COCONUT AREA ('000 ha)

Region 1960 1978 1983

Luzon 589 747 298Visayas 398 407 527Mindanao 495 918 1,661

Source: Philippines Statistical Yearbook, various issues.

There are also regional differences in production per tree. In 1982 Mindanaopalms averaged 47 nuts/tree, while the rest of the country averaged only 34nuts/tree/year. Coconuts are a major crop in 64 of the country's 72 prov-inces, with greatest concentration in coastal areas. The number of holdingsand holding size distribution is provided in Table 2 for a total area of 2.8million ha.

Table 2: NUMBER AND SIZE DISTRIBUTION OF COCONUT FARMS

Under 5 ha 5-20 ha Over 20 ha Total

No. of holdings 653,380 (91%) 50,300 (7%) 14,300 (2%) 718,000Total area (ha) 915,600 (33%) 628,300 (22%) 1,256,100 (45%) 2,800,000

Source: Philippines Statistical Yearbook, various issues.

Over 90% of the holdings are thus below 5 ha and occupy a third of the coconutarea. Some 45% of the coconut area is held by 2% or 14,300 large owners, withan average of 87.8 ha/holding. The average farm size of 3.9 ha disguises askewed holding size distribution where farmers in the category under 5 haaverage only 1.4 ha/holding, in the 5-20 ha category the average is 12.5 ha,and the over 20 ha category averages a large 87.8 ha/holding.

4. It has been estimated that each farm provides, on average, incomefor about two families, divided between owners, resident workers/sharecroppers, and laborers. Most of the larger coconut farm owners havesubstantial off-farm incomes and do not live on the property. The corporatefarm area has been increasing and with it the number of hired laborers. Thetenurial status of the coconut subsector is complex as indicated in Table 3(from a comprehensive 1978/79 NEDA survey):

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Table 3: COCONUT FARM TENURE STATUS, 1978

AverageFarms Area area/farm(x) (Z) (ha)

Owned and operated 71.0 60.0 3.3Share tenanted (operator sharescrop with owner) 22.3 25.0 4.5

Partly owned (operator cultivatesboth owned and tenanted parcels) 4.2 5.0 4.4

Lease tenanted (operator pays fixedrent to the owner) 0.3 1.0 8.3

Managed (usually plantationssupervised by person other than owner) 0.8 6.0 29.0

Others 1.4 3.0 8.2

All farms 100.0 100.0 3.9

For many owners, coconut farming involves no more than arranging forharvesting by contract laborers, drying the copra and selling it. They employ"caretakers" who protect the crop from pilferage and may share in theharvest. Caretakers sometimes sharecrop non-coconut areas of a farm andannual crops interplanted between rows of coconut palms. It is probable thatthe percentage of share tenants and area under tenancy is higher thanindicated because both partly-owned and managed farms often have part of theirland under tenancy arrangements, and because many landowners, fearing thepossibility of land reform, refuse to recognize a tenancy relationship betweenthemselves and their workers. Thus the actual share of tenanted farms variesfrom 50:50 to 90:10 (in favor of the landlord). In some of the more isolatedareas a de facto land reform is in progress with the New People's Armyextorting "taxes" from tenants, although the owners, mostly living in thecities or overseas, retain official title.

5. The annual income of a coconut farm was P 7,640 (US$546) in 1983.Divided among two families this income was below the 1983 rural povertyline. Since 1983 copra prices have declined to a very low level in 1986, buthave somewhat increased since then. Early (1983) data indicated that some 57Zof coconut farming families fell below the poverty line, and this situationhas continued or even worsened. It is therefore extremely important toincrease the productivity and incomes in coconut areas. This is possible by(a) improving the nutritional standard of the trees by nitrogen and chlorideapplication as indicated by foliar analysis; (b) intercropping annuals,biennials (e.g. pineapple) or perennials (coffee, cocoa, black pepper, etc.);and (c) under grazing with sheep or goats. Farmers or share croppers usuallyare reluctant to fertilize their trees although there is experimental evidencethat it is possible to increase production and income. Therefore increasedproductivity and incomes can most likely be generated from intercropping which

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is possible due to the general wide spacing and a high leaf canopy for treesolder than 20 years. Presently nearly 20% of all coconut farms have bothannuals and perennials as intercrops, which indicates the possibility forexpanding the area of intercropping or "multistorey" cropping. Recentlyplanted hybrid semi-dwarf palm stands are generally not suitable forintercropping once shading becomes excessive.

6. The Governmer.t is already actively promoting intercropping andgrazing under coconuts which also leads to coconut yield increases (from soilaeration and fertilizer application). At present, there are two small creditschemes available:

(a) PCA's National Coconut Intercropping Program (NCIP) which reachedonly some 2,035 farmers (owners or tenant farmers with a writtenconsent of the landlord) in 1985. The loan amount is based onactual costs for establishing the intercrop (P 2,100 for mung bean,P 5,400 for hybrid corn, P 15,100 for black pepper and P 16,800 forcacao (over a 4-year period for perennials)). For 1986 some 7,000participants averaging about one ha per intercropped area wereanticipated (funds from PCA are available).

(b) The Countryside Economic Development Program, piloted in 1987 fororganized groups of farmers, with the participation of a trader andthe Coconut Development Officer. This program is jointly sponsoredby the United Coconut Planters Bank (UCPB) and PCA. Eligibility,range of crops, and loan amounts are similar to that under the PCAprogram.

7. Commercial plantations in Mindanao have introduced intercroppingalready on a significant scale, in particular cocoa and coffee. Attracted byhigh raw fiber prices in 1986, a large number of smaller farmers, in the mostevenly distributed rainfall areas of Mindanao, have recently introduced ramie,a good quality fiber intercrop (which may compete with palms, much the same asgrasses do, for nutrient uptake). There are substantial smallholder coconutareas in Cavite province (south of Manila) where successful intercropping andmultistorey cropping can be observed. This indicates that there is muchpotential for these practices if the market is available. DA's croppingsystem research on farms, and Farm Systems and Soil Resources Institute's(FSSRI's) work, together with research by other SCUs, has provided a base formaking crop and methodology recommendations with a considerable degree ofconfidence. Despite these ongoing efforts there remains a very large area ofunderutilized coconuts, where productivity and incomes could be greatlyincreased. However, one of the most potent reasons that this is not beingexploited is the tenancy problem. Large areas of coconut lands are owned byabsentee landlords and it is difficult to arrange formal cropping or sharearrangements. Moreover, due to the isolation of many coconut areas, it may bedifficult to arrange for substarlLial areas of intercropping there unless thepeace and order situation improves.

- 26 -ANNEX 3Page 5

8. Based on presently available credit schemes (para. 6) forintercropping (or under grazing), costs (excluding labor costs for cropmaintenance and harvests) and benefits are estimated as follows:

Table 4: INnICATIVE INTERCROP PRODUCTION COSTS AND BENEFITS

Available Annualcredit amount returnsfor crop es- Intercrop Producer before labortablishment yield price Annual costs forand immature at full early production crop mainte-maintenance production 1987 cost /a nance & harvest

(p) (kg/ha) (P/.g) (P/ha) (P/ha)

Cocoa 169800 750 25 6,000 12,750Coffee 11,800 600 30 4,500 13,500Black pepper 15,100 1,000 50 4,000 46,000Ramie 23,000/b 1,600 30 27,500/c 13,500Grazing 4,300 250/d 20 2,000 3,000Upland rice 2,600 1,400 3 2,860 1,340Mung bean 2,100 50 12 2,310 3,690

/a Inclusive of credit repayments.7i No credit scheme--actual establishment cost in Mindanao in 1986/87.Th Four harvests per year of 400 kg/ha brushed fiber.73 Live weight gain per year. Grazing goats is preferred in coconut areas.

In addition to the benefits from the intercrop, copra yields would alsoincrease from intercropping by about 100 kg/ha/year, resulting in anadditional income of about P 2,700/ha/year (before additiotzal labor costs).

9. From Table 4 it is clear that intercropping perennials can result insignificantly increased income if markets are available. Before substantial.investments are made in intercrops with a long immature period a carefulmarket analysis should be uone. Olt hilly terrain preference should be givento perennials to avoid soil erosion losses. Annuals are less profitable andrequire new plantings each season, and should therefore be mostly consideredin food deficit areas. With average coconut yields of some 800 kg/ha atP 2.70/kg, providing a gross benefit of P 2,160/ha, all intercrops exceptupland rice would out-perform the base crop coconuts.

10. The following possibilities for increasing the area of intercroppingcoconuts with long-term crops should be urgently pursued:

(a) Evaluate PCA's ongoing NCIP and, if found viable and in need ofadditional funding, support the program. Evaluate the potentialimpact of UCPB and PCA's Countryside Economic Development Program

- 27 -

ANNEX 3Page 6

and determine if there are technical, organizational and financingconstraints. The above efforts support both individual andorganized groups of coconut farmers; and

(b) Review private proposals for financing Nucleus Estate type opera-tions for producing high quality coffee and cocoa and possibly othercrops such as spices, ramie, etc. by farmer cooperatives withparticipation of a so-called anchor-firm. The latter would beestablished jointly by private investors and the cooperative, whichwould set up clonal nurseries, provide technical assistance, arrangefor credit, establish post-harvest processing facilities (wet-processing and drying of coffee and fermentation/drying of cocoa,ramie decortication and degumming, etc.) and contract to purchasefrom participating growers all produce for final processing andsale. A proposal for intercropping coffee in the Calinan-BaguioDistrict in the Davao City area appears to be a model for review andpossible adoption.

11. The Nucleus Estate type of development appears particularly appro-priate and attractive since it organizes farmers to produce and process a highquality product while sharing in the full benefits on an agreed basis.However, it is not clear how areas with various ownership-tenancy arrangementscan participate, and this should be a clear target for furtherinvestigation. One of the attractions of a Nucleus Estate type of developmentis that it will also increase coconut production (as a side effect offertilizing and tending the intercrop) and it should increase copra qualitythrough using the central drying facility.

12. If another 20% of farmers/property owners on farms larger than 5 hawould participate in intercropping perennial crops over a 10-year period, anadditional area of about 380,000 ha could be covered. With a distribution of40% cacao, 30% coffee, 10% ramie, 10% spices (black pepper and others), and10% miscellaneous crops and grazing, incremental production at full productionwould amount to some 142,000 mt cocoa, 68,000 mt coffee, 60,000 mt ramiefiber, 19,000 mt of spices (pepper equivalent) and some 6,000 mt of meat. Atearly 1987 prices this could then amount to an incremental annual benefit ofP 8.5 billion at full production.

Recommendation

13. The Government should arrange for a review of present and proposedcoconut intercropping operations, and possible new initiatives, within thenext six months by a team comprising an agro-economist, a land-tenancy expert,and a tree crop/processing expert. In particular the tenancy problems shouldbe addressed, and an indication should be given of the area of coconut landthat could become available in reasonable homogeneous blocks for intercroppingon a nucleus estate or cooperative farming basis within the next 5-10 years.This review may then lead to the preparation of either a coconut developmentproject or a subsector loan based on an agreed development/on-lendingproposal.

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ANNEX 3Appendix 1Page 1

Cocodiesel

1. The possibility of long-run increases in world petroleum prices andlong-run decreases in the world price of coconut oil are a double source ofconcern for the Philippines, or should be. If, however, coconut oil canbecome a substitute for some petroleum products, the country may be able toconvert adversity into an advantage. Work on this possibility began about1981, when the petroleum price was still above US$30/bbl.; the fall of coconutoil prices from their 1981 historic peak, with ensuing domestic gluts, inten-sified Philippine interest in finding new outlets for coconut oil. But whenworld oil prices also fell, and copra prices improved somewhat, interest inpromoting cocodiesel weakened. Today, only a weak effort remains (mainly as aminor program in the Philippine National Oil Company's (PNOC's) Nonconven-tional Energy Center).

2. The possibility of substituting coconut oil for petroleum (eitherdiesel, bunker C, or industrial fuel oil) depends on relative prices and onsolving certain technical problems. These problems are linked. The maintechnical problem has been the development of fungal bacterial growth whencrude coconut oil is mixed directly with diesel. The fungal contaminationinterferes with proper performance of the cocodiesel mixture, contributing toclogging of the injection jets, degradation of the engine's lubricating oil,and injury to motor gaskets. If an economic biocide can be found that willkill the bacteria, these problems will either disappear or be open to muchsimpler solution (i.e. not all the technical problems arise from fungalcontamination). An alternative, more expensive solution is to refine crudecoconut oil into an esther, which does not suffer from fungal contamination.Partial estherification (refining the crude into "kuchin" oil) adds roughly50% to the crude price; complete refining adds another 10-15%. In early 1987,the pump price of motor diesel (including all taxes) was P 4.76/ltr; crudecoconut oil was P 3.97, but fully-refined coconut oil was P 6.29 (kuchin oilfell somewhere between the P 4.76 and 6.29 figures). These are financial ormarket prices, which may not measure the true value of imported petroleum orcoconut oil to the Philippine economy ("economic" prices).

3. The Government's earlier interest in promoting a cocodiesel programresulted in the launching of a national program in the fall of 1982. A pilotproject the year before had proved the feasibility (if not the popularity) ofusing a 30% coconut oil 70% diesel blend. The program was seen primarily as away of helping the coconut oil milling industry rather than as an energydevelopment program. A Presidential Decree issued on 1 September 1982 madethe cocodiesel program part of the rationalization program of the coconutindustry. The production of intermittent exporters of coconut products andthe excess production of those primarily producing for the domestic market wassupposed to be channeled to the cocodiesel program. To implement thedirective, PCA promulga-t d rules and regulations and indentified the oil millsand desiccators that should participate in the program. The program did notsucceed, however, and was virtually shelved four months after it began. Themain reason appears to have been resistance to cocodiesel by its intendedusers (whether their objections stemmed from problems associated with fungalcontamination is unknown). One other program appears to have been much more

- 29 -ANNEX 3Appendix 1Page 2

successful; this was the use of crude coconut oil (preheated but reportedlyused without mixing) in power generation by the National Power Corporation.There appeared to be far fewer technical problems in using crude coconut oilas a boiler fuel than as an automotive fuel. But even at the low coconut oilprices that ruled during that (brief) period, the product had to be subsidizedto make NPC willing to use it.

4. There has been one evaluation of the cocodiesel program (by Aramasand Clyde, in September, 1984); they concluded that "the volume of expectedforeign exchange foregone due to the use of coconut oil in the cocodieselprogram seems large enough to question the economic wisdom of the project."That judgment and the analysis on which it is based appear questionable,however, as the authors worked entirely with market prices in a fairly narrowrange. What seems needed is a more broad-based analysis of various options ofa program whose costs are low but whose potential benefits could be sizeableif and when petroleum product prices experience sizable increases.

- 30 -ANNEX 4Page 1

PHILIPPINES

AGRICULTURAL SECTOR STRATEGY REVIEW

Sugar

1. The sugar subsector has long played a significant role in thePhilippine economy. During 1973-82, sugar exports averaged some 1.4 milliontonnes p.a. and accounted for an average 12% of the total value of merchandiseexports. This declined to 5% in 1983 and 1984 and to 4% in 1985. Until 1984the sugar industry employed about 500,000 worker3 annually in sugarcaneproduction (90%) and processing (10%). Given an average family size of sixmembers, approximately three million people out of the estimated 1985population of 55 million have thus depended on the sugar industry.

2. Beginning in 1984, world sugar prices dropped sharply. At about thesame time, the country's acute financial problems emerged. The Philippines'lucrative long-term export contracts for sugar also expired in late 1984. Allthese problems led to a drasti: decline in sugarcane area and production inthe country. Compared to the five-year average (1979/80-1983/84) sugarcanearea of 442,000 ha (harvested) and raw sugar production of 2.4 million tonnes,the area and production in 1984-85 declined to 384,000 ha and 1.7 milliontonnes respectively and to 321,000 ha and 1.5 million tonnes, respectively, in1985-86. The projection for 1986-87 is 310,000 ha and 1.4 million tonnesre3pectively, a decline of 30% in area and 42% in production over the five-year average through 1983-84.

3. There are some 30,000 sugarcane growers in the country, of which 77%operate small farms (below 10 ha), 18% operate medium-sized farms of 10 to50 ha and 5% operate large farms (above 50 ha). However, small farms accountfor only about 22% of the sugarcane area while medium and large farms accountfor 35% and 43%, respectively. Land distribution is thus highly skewed.Currently 38 sugar mills are operating with a total annual milling capacity ofabout three million tonnes of raw sugar. The five-year average (1979/80-1983/84) capacity utilization was 70%, declining to about 50% by 1985/86 and aprojected 47% in 1986/87.

4. The Philippines, which was exporting about 60% of its total rawsugar production in the 1970s and early 1980s, cannot profitably export sugar(except under thI US quota of about 160,000 tonnes) at current world prices of6-7 US cents/lb.- The adjustment in sugarcane area and production (para. 15)is thus in the right direction. However, several problems have emerged in theadjustment process, some of which entail high economic and social costs. Someof the problems are:

2/ The average cost of production of raw sugar in the Philippines isestimated at 14-15 US cents/lb.; however, some efficient mill districtscan profitably export at 9-10 US cents/lb.

- 31 -ANNEX 4Page 2

(a) A serious unemployment/underemployment problem has emerged,involving about 100,000 sugarcane workers who were already part of amajor poverty group;

(b) Some sugarcane land is lying idle;

(c) Sugar mills are operating at low capacity; and

(d) Crop loan arrears have increased.

5. In the period 1977-1986, the Philippine Sugar Commission (PHILSUCOM)had been responsible for policy-making and regulation in the sector. Duringmost of 1977-85, the National Sugar Trading Corporation (NASUTRA) had been thesole agency involved in domestic trading and export of sugar. In late 1985the Government established the Philippine Sugar Marketing Corporation(PHILSUMA) as the single buying and selling agency to replace NASUTRA. Also,the Government, agreed under the IMF standby program to implement severalimportant institutional changes that would have contributed to the sector'sstreamlining and adjustment. Specifically, it committed itself to undertakeaudits of NASUTRA and PHILSUCOM, prepare a p; of divestiture of PHILSUCOM'ssubsidiaries, issue operating guidelines for ".ILSUCOM, and issue mandatoryguidelines to PHILSUCOM and PHILSUMA on public disclosure requirements.However, no significant progress was made on any of these commitments underthe old administration.

6. Since early 1986 the new Government has introduced a number ofinstitutional and policy changes. The new Government abolished the exportmonopoly of PHILSUMA and consequently export marketing has been liberalized,except for allocation of the US export quota by the Sugar RegulatoryAdministration (SRA). The new Government also dissolved PHILSUCOM,established SRA as the regulatory agency, and attached it to DA. The SRAcom?rises three members (including a Chairman), two representing planters andone representing millers. The Government is considering what SRA's functionsshould be, particularly whether it should handle research and extension, asPHILSUCOM did; its staffing, funding and organizational structure; and whatshould be done about the retrenchment/redeployment of PHILSUCOM staff.

7. The institutional and policy changes made so far are clearly in theright direction. They have resulted in reduced regulatory control and alesser degree of Government intervention. However, further changes arerequired to support longer-term productivity and income growth in the subsec-tor. These have been discussed with Government in connection with a Banksector report "Philippines Sugarlands Diversification Study" (Report No. 6042-PH, May 30, 1986) and a proposed policy-based lending operation.

8. The proposed Bank loan (appraisal scheduled for August 1987) wouldaddress various adjustment problems in the subsector. It specifically wouldsupport policies and plans to: (a) rationalize sugarcane production and pro-cessing; (b) resolve the problem of sugar loan arrearages; (c) initiate sugar-lands agrarian reform; (d) facilitate crop substitution/diversification;(e) improve efficiency through measures including introduction of a directcane purchase syste; and (f) restructure institutional arrangements for thesugar subsector, including research and extension.

- 32 -

ANNEX 4Appendix 1Page 1

Ethanol

1. Before the energy crisis of 1973-74 the Philippines was highlydependent on foreign energy sources (over 95%). The crisis created an impetusto start diversifying its energy sources and developing indigenous supplies.The second round of world oil price increases of 1979-80 encouraged thosedevelopments further. The energy program of 1982-87 published in April 1982stated that among the renewable energy sources, ethanol offers the highestpotential contribution. An alcogas program was launched in 1982 but it wassoon frozen at existing levels as petroleum prices started falling.

2. In 1985, the Government began to re-examine the potential forethanol and envisaged the eventual production of 600 million liters of alcoholper annum (equivalent to about 800,000 tonnes of raw sugar); of this, 300million liters were to be exported. The primary reason for the re-considera-tion was the depressed price for sugar; attempting to diversify energy sourcesis currently a secondary reason. A new Alcohol Corporation (with equity fromthe Government and foreign partners) was to be established to oversee theprogram and, if necessary, to own, manage and operate alcohol distilleriesthroughout the country. A detailed feasibility study of the ethanol programwas undertaken, supervised by the Department of Trade and Industry (DTI). Thefeasibility study team was composed of members from both the public andprivate sectors. The public sector was represented by the Board ofInvestments, Philippine National Alcohol Commission, PHILSUCOM and NationalDevelopment Company. The private sector was represented by MarubeniCorporation of Japan and Pilipinas Shell.

3. Based on the findings of the ethanol program feasibility study,there is no scope at present for major exports of anhydrous ethanol as anoctane enhancer to Japan. Export possibilities to other countries are alsolimited, given competition from Brazil. The feasibility study team,therefore, recommended that the Philippines initially concentrate on thedomestic market with a gradual replacement of lead additives. The three-year(1987-89) program envisages a countrywide 10% blend of ethanol with gasolineas an octane enhancer. However, the economic viability of the program is indoubt and MTI and NEDA are presently re-evaluating the economics of ethanol.

4. If, for health reasons, the lead level in gasoline is to be reduced,a least cost analysis, which takes into account the economic cosL ofsubstitutes other than ethanol (such as MTBE, Toluene, etc.), is the properapproach. In connection with the preparation of the Sugar DiversificationProject, Bank staff are following this approach in their evaluation of theethanol program. The study will be finalized shortly.

- 33 -ANNEX 4Appendix 1Page 2

(a) A serious unemployment/underemployment problem has emerged,involving about 100,000 sugarcane workers who were already part of amajor poverty group;

(b) Some augarcane land is lying idle;

(c) Sugar mills are operating at low capacity; and

(d) Crop loan arrears have increased.

5. In the period 1977-1986, the Philippine Sugar Commission (PHILSUCOM)had been responsible for policy-making and regulation in the sector. Duringmost of 1977-85, the National Sugar Trading Corporation (NASUTRA) had been thesole agency involved in domestic trading and export of sugar. In late 1985the Government established the Philippine Sugar Marketing Corporation(PHILSUMA) as the single buying and selling agency to replace NASUTRA. Also,the Government, agreed under the IMF standby program to implement severalimportant institutional changes that would have contributed to the sector'sstreamlining and adjustment. Specifically, it committed itself to undertakeaudits of NASUTRA and PHILSUCOM, prepare a plan of divestiture of PHILSUCOM'ssubsidiaries, issue operating guidelines for PHILSUCOM, and issue mandatoryguidelines to PHILSUCOM and PHILSUMA on public disclosure requirements.However, no significant progress was made on any of these commitments underthe old administration.

6. Since early 1986 the new 1overnment has introduced a number ofinstitutional and policy changes. The new Government abolished the exportmonopoly of PHILSUMA and consequently export marketing has been liberalized,except for allocation of the US export quota by the Sugar RegulatoryAdministration (SRA). The new Government also dissolved PHILSUCOM,established SRA as the regulatory agency, and attached it to DA. The SRAcomprises three members (including a Chairman), two representing planters andone representing millers. The Government is considering what SRA's functionsshould be, particularly whether it should handle research and extension, asPHILSUCOM did; its staffing, funding and organizational structure; and whatshould be done about the retrenchment/redeployment of PHILSUCOM staff.

7. The institutional and policy changes made so far are clearly in theright direction. They have resulted in reduced regulatory control and alesser degree of Government intervention. However, further changes arerequired to support longer-term productivity and income growth in the subsec-tor. These have been discussed with Government in connection with a Banksector rrport "Philippines Sugarlands Diversification Study" (Report No. 6042-PH, May 30, 1986) and a proposed policy-based lending operation.

8. The proposed Bank loan (appraisal scheduled for August 1987) wouldaddress various adjustment problems in the subsector. It specifically wouldsupport policies and plans to: (a) rationalize sugarcane production and pro-cessing; (b) resolve the problem of sugar loan arrearages; (c) initiate sugar-lands agrarian reform; (d) facilitate crop substitution/diversification;(e) improve efficiency through measures including introduction of a directcane purchase system; and (f) restructure institutional arrangements for thesugar subsector, including research and extension.

- 34 -ANNEX 5Page 1

PHILIPPINES

AGRICULTURAL STRATEGY SECTOR REVIEW

Grains Pricing Policy Including a SuggestedNew Approach to Protection

Background

1. Yields of both rice and corn have increased in recent years,although they remain low by South-east Asian standards (average palay yield isaround 2.5 tons/ha vs. 3.3 tons for Asia; average corn yields are slightlybelow 1.0 tons/ha vs. around 1.5 tons for Asia).

2. Rice is the most important food commodity in the Philippines, withper capita consumption just under 100 kg in 1980. Between 1970 and 1985production expanded at a rate of about 3% p1i., from 5.2 million tons ofunmilled rice ("palay" in the Philippines) - to 8.2 million tons, slightlyfaster that the population growth rate (2.5% p.a.). The rapid increase inproduction after the early 1970s was partly due to a government riceproduction program called "Masagana 99" which promoted new high-yieldingvarieties and increased fertilizer usage and made subsidized credit availableto farmers. Initially, this helped in the adoption of new technology, butbecause of debt collection problems, it undermined the solvency of themajority of the rural banks.

3. The increase in production during the 1970s permitted the country tobecome self-sufficient. Imports decreased from over 600,000 mt in 1972 to24,000 mt in 1977, and from 1978 to 1982 the country was able to export smallquantities. Because of drought conditions in 1982, some imports, undertakenby NFA, were required. The main harvest in the fall of 1985 was large, andwith normal weather conditions experienced in 1986, no imports were necessaryin 1986.

4. The "Maisagana" program for corn was the Government's counterpartprogram to "Masagana 99," the rice program. It started in 1982 and was alsoencouraged by the extension service and with subsidized production credits.Even before the program started production expanded with the use of improvedvarieties and production technology. Total production expanded from 2.5million mt in 1975 to 3.3 million mt in 1984; i.e., on average the expansionwas about 3% p.a.--about the same as that for rice. Because of the sharpincreases in the use of yellow corn as a feed input, yellow corn imports haveincreased from about 1,000 mt in 1970 to a high of 528,000 m in 1983 in spiteof the increase in production. However, imports for 1985 were down to250,000 mt and were largely undertaken during the first half of the year. Anexcellent main harvest from July 1985 to December 1985 eliminated the need forimports during that time and for 1986.

1/ One ton of palay corresponds to about 0.6 tons of milled rice.

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ANNEX 5Page 2

5, The January, 1987, IFPRI report 2/ concluded that rice and cornproduction should be protected with a moderate tariff of about 20% for effi-cient domestic producers to remain competitive with 3 imports and to keepdomestic prices in line with long-term world prices- . Their competitiveadvantage analysis indicated that at those levels Philippine -ice and cornwere competitive with imports uling border prices of the first half of 1986.The border prj,re for rice in the first half of 1986 was about US$235, for cornabout US$115 pe Adding the 20% tariff would result in import prices of US$282and US$138 for rice and corn, respectively. The authors of the IFPRI reportfurther state that protection below what was advocated would result insubstantial shifts out of rice and corn production and in large-scaleimportation. On the other hand, if protection was above 20%, production wouldbe stimulated, domestic demand would be reduced, and surpluses would arisethat could be disposed of only through (subsidized) exports.

6. Since the IFPRI aralysis was done, corn prices have dropped to evenlower levels, not expected at the time. Since August 1986 cif prices havehovered around US$65 to 70 per ton, a price that undoubtedly reflects"dumping". Under these circumstances a fixed tariff of 20%, as proposed,would not protect domestic producers adequately. On the other hand, a ban onimports, which is currently in place, can be costly to the consumers and thefeed milling industry when there is a shortfall in production. A compromiseproposal--the introduction of a reference price connected with a variabletariff--which grants some protection to both producers and consumers, isoutlined below.

Government's Overall Policy with Regards to Pricing and Marketing

7. Prices for agricultural commodities and inputs (except rice andcorn) are determined by the free interplay of supply and demand. All pricecontrols have been abolished. For traded commodities the Government'strade/tariff policy determines the relationship between world and domesticprices. A wide variety of policies exists from zero tariff cases (where worldprices determine the level and variability of domestic prices) to the cases ofexplicit bans which result in complete segmentation of the domestic from theworld market.

2/ M.W. Rosegrant, L.A. Gonzales, H.E. Bouis, and J.F. Sison: "Price andInvestment Policies for Food Crop Sector Growth in the Philippines",IFPRI, Washington, D.C., January 20, 1987.

3/ According to the latest Bank projections in Report No. 814/86 (October1986), rice prices (fob) in constant 1985 dollars are projected to varywithin a range of $206 per ton to $233 per ton between 1988 and 2000.Corn prices (fob) are projected to be $104 in 1988 and to slowly decreaseto $94 by the year 2000.

41 The present low price of rice reflects in part the success of severalcountries in expanding rice production as well as protection and exportsubsidies in some industrial countries.

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ANNEX 5Page 3

8. Government's overall policy is that marketing is the task of theprivate sector. The private sector is indirectly being supported by infra-structure development and the provision of various services. An exception tothe overall policy that makes marketing the exclusive domain of the privatesector has been made for rice and corro, where a price stabilization policy hasinvolved government in a residual role in domestic marketing and a monopoly orlicensing role in imports and exports.

Rice and Corn: The Exception to the Overall Marketing Policy

9. There has been government intervention in the marketing for rice andcorn since the establishment of the National Grains Authority (which laterbecame NFA) some decades ago. The general objectives are:

(a) Objective 1: To provide remunerative prices for producers;

(b) Objective 2: To provide a secure supply of the two main staplefoods at reasonable prices for consumers;

(c) Objective 3: To limit "exploitation" by traders; and

(d) Objective 4: To hold reserve stocks for food security purposes.

To carry out its functions, NFA has three main policy instruments:

(a) Policy Announcements/Dissemination of Information. Policyannouncements concerning the support price for the next crop couldhave an effect on production decisions. However, in the Philippinecontext, they are of little relevance since the record of achievingthe support price is poor (see below). Announcements of importationdecisions on the other hand result in an immediate market reaction;

(b) Purchases, Storage and Sales of Grains. The main limitations ofthis instrument arise from financial constraints of NFA; and

(c) Decisions Concerning Imports. Judging by its past record, a matterof fact, NFA has been biasci in favor of consumers and has thereforetended to overimport. But tven assuming the absence of any biasesand a specific domestic price target, it is not possible for thebest of bureaucrats to accurately predict supply and demand and thedeficit which needs to be covered by imports. Imports willinevitably be either too high or too low.

Effectiveness of NFA in Achieving its Objectives

10. It is not easy to determine NFA's overall effectiveness in achievingits goals partly because the two main objectives are conflicting. Farmers areinterested in high prices and consumers low prices. A third group--thetraders--are interested in wide price bands and limited and predictableintervention by NFA.

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ANNEX 5Page 4

11. Effectiveness of Maintaining Floor Prices (Objective 1). To analyzethist one needs to distinguish between two main situations:

(a) surplus situation; and

(b) deficit situation.

When a surplus situation exists, purchases by NFA have a limited effect onmarket prices unless NFA can export some quantities (at a loss). Exporting ata loss is constrained by NFA (and/or Government) financial capabilities. In adeficit situation the quantity and terms of imports are more crucial to domes-tic price formation than NFA purchases. Since past Government and NFA poli-cies were more concerned with ensuring low rice and corn prices for consumers/feedmillers than with ensuring the achievement of the support price for pro-ducers, NFA tended to overimport and thereby undercut its own attempts (asineffective as they have been) to achieve the support price for farmers. As aresult actual farmgate prices for rice have often been below the supportprice.

12. With regard to NFA's ability to maintain a floor price certainmisconceptions exist. It is often stated that "if NFA had enough financialresources it could buy more which in turn would raise market prices." Whattends to be overlooked is the fact that in a closed economy framework, with noexport subsidization, whether NFA buys 5% or 15% of production, the impact onthe average national market price is marginal. It simply changes theproportion of stocks held by the private and public sectors, and it benefitssome more (favored) farmers in the provinces where NFA is buying at theexpense of a higher budget deficit.

13. Ftphle Supply and Low Prices for Consumers (Objective 2). Theobjective of a stable supply and reasonable prices has been achieved. Theretail price ceilings over the years were assured by NFA selling (at a loss,because of small margins between tne purchasing and selling price) and/or byimportations. The absolutely lowest prices for consumers would, of course,have been achieved by a free importation policy which, however, would haveseriously threatened the production sector and which therefore would not havebeen acceptable.

14. Limit "Exploitation" by Traders (Objectives 3). The frequent stat-ing of this objective (generally by officials of the previous Government)reflected a particular attitude toward the private sector rather than a realeconomic problem. If Government sets the overall policies (which have consis-tency) and if the trading sector is competitive (with large numbers of marketparticipants and no restrictions to entry) private traders, by attempting tomaximize their own profit, will together achieve a competitive situation thatis optimal for the economy as a whole. If there was a problem in this area inthe past it was (a) the uncertainty created by ad-hoc NFA interventions/decisions; and (b) by the licensing of traders, which may have been somewhatrestrictive.

15. In the past NFA price bands (between purchase and selling price)have probably been too narrow. The margins were probably smaller than real

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ANNEX 5Page 5

NFA costs (which, however, one may not be able to easily determine because ofNFA's accounting system that does not permit costing on an activities'basis). To ttie extent that NFA was effective in enforcing its priceband itsqueezed out some private sector firms and created uncertainties.

16. Holding Reserve Stocks (Objective 4). This objective has generallybeen over-achieved, at a high cost. NFA stocks te..led to be too high. (It isquestionable whether a largely self-sufficient country should hold reservestocks over and above normal working stocks particularly when world prices are-lower than domestic prices and when prices are projected to remain low.)

Some Basic Trade Policy Options

17. Since Government purchases to support and/or stabilize prices havebeen of limited effectiveness and were costly, one must recognize the relativeimportance of the trade and tariff policy. Some basic options are outlinedbelow.

18. Import Ban. For commodities where an import ban has been imposed,domestic supply and demand determine domestic prices; and the latter bear norelationship to world prices (to the extent that the ban is effective; i.e.,that no smuggling is taking place). An import ban is currently in effect forrice and corn. Such a ban benefits producers whereas consumers incur welfarelosses.

19. Quantitative Restrictions. Under such a system NFA grants importlicenses to private sector firms for specific amounts or imports on its ownaccount. Amongst other problems, such a policy tends to lack consistency asad hoc decisions have to be made.

20. Free Trade Policy. Under a free trade policy domestic prices wouldvary with world prices. Given the low current and projected prices, producerswould incur serious welfare losses whereas the consumers would gain.

21. Fixed Tariff Policy. With a fixed import tariff domestic priceswould be higher than the world prices but they would fluctuate with worldmarket prices.

22. Variable Tariff Policy. Variable import levies are used in manycountries or trading blocks, such as the EC. A domestic reference price isfirst determined and then an import tax is assessed which makes up thedifference between the imports at world prices and the reference price. Thepolicy protects producers from low and fluctuating prices. Consumers incursome welfare losses compared to a free trade policy, but in case there is ashortfall in domestic production consumers are protected because imports willprevent prices from rising above the domestic reference price.

The Cu:rent Policy

23. Import bans for rice and corn are currently in effect in thePhilippines. The bans are not absolute, i.e., when domestic prices startrising, political pressures for making exemptions start building, and it is up

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ANNEX 5Page 6

to the Government to determine if and when imports of a certain size arepermitted. As stated earlier, NFA's past policies were biased in favor ofconsumers. The current import ban policy can be seen as a reaction to thosepolicies in order to benefit producers. Past biases should no doubt becorrected, but one should avoid over-correction that does not assure a certainceiling price to consumers, at which, e.g., imports would be permitted.

24. Benefits of the import ban policy cre:

(a) administratively it does not require anything (except enforcementagainst smuggling); and

(b) it benefits the farm sector, particularly in years of productionshortfalls.

Drawbacks of the import ban are:

(a) if there is a shortfall in domestic production, consumers andtraders do not know at which price level the rising prices willstop; and

(b) when prices rise, political pressures for ad-hoc importationdecisions building up. Two options exist:

(i) Government grants an import exemption. Based on limitedinformation the size of the imported amounts must bedetermined, which is a discretionary decision whose preciseimpact on prices is not known. Also, by the time importsactually arrive, the situation may have changed. Even underthis option some smuggling may be induced if the differencebetween the world price and the domestic price becomessufficiently large.

(ii) Government holds -n to the ban without making exceptions. Ina shortfall situation this means that prices will rise towhere demand and supply intersect. This benefits producers atthe expense of consumers. Again, as the differenct betweenthe domestic prices and world prices becomes large, smugglingis likely to be induced. When smuggling takes place, thegovernment does not get any revenues, whereas under a tariffscheme it would.

A Proposed Reference Price/Variable Tariff Scheme

25. The advantages of a variable tariff scheme would be that it would:

(a) protect domestic producers from imports belcw the reference price;provide greater reliability of pre-planting price forecasts;

(b) assure consumers that domestic prices will not rise beyond thereference price (plus marketing margins) in case of a shortage;

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ANNEX 5Page 7

(c) result in a lower overall price variability than the import ban or afixed tariff policy; and

(d) results in tariff revenues for Government when imports areundertaken.

26. The reference price should be determined based on the long runaverage world price plus a protection margin. The long run average worldprice could be determined by a trend line or (perhaps more objectively) by amulti-year moving aBerage price., At the cif level the five-year movingaverage world price is called, for our purposes, the "world reference price"for the year in question. To this price one should add a protection margin;61this is determined, like any other tariffs, by a number of considerations,including the production costs of efficient domestic producers, extent ofexport subsidization by industrial countries, etc. The "protection margin" isnot what importers would pay as tariff (see para. 61).

27. Three options of how 7eference prices could be determined are shownin Tables 1, 2 and 3 for corn. All of them assume a protection margin of20%. Table 1 shows a 5-year moving average, Table 2 a 3-year moving averageand Table 3 a 3-year moving average where the most recent years have a higherweight. (A fourth option, not shown in a Table, would be a moving averagethat includes projected prices. The Bank's latest estimate for 1)87 is US$72per mt and the projection for both 1988 and 1989 is US$123.1. At the ciflevel, a 5-year moving average 1984-88 would be US$116.8 and a 5-year movingaverage 1985-89 would be US$114.0.)

28. If option one (from Table 1) was used the world reference price forcorn for 1987 at the cif.devel would be the average for 1982 to 1986 which is$127.8 per mt. Adding a 20% margin would result in $153.4 per mt. At anexchange rate of P 20.4/$ this would equal P 3.13/kg (at the port of entry).No ad hoc bureaucratic decisions would be required during the year aboutwhether to import or how much. It should be noted that, had a referenceprice/variable tariff scheme as proposed above been in effect in 1986, the

5/ The purpose of this is to even out price fluctuations and thereby toreduce domestic adjustment cost.

6/ According to Government policy all imports are to be taxed by a tariff of10% to 50%. Instead of using a fixed tariff of say 20% we are suggestingthat a variable tariff, which averages out at 20% over the years, issuperior.

7/ One could of course determine a reference price each year simply on thebasis of political considerations. But following an explicit method,such as the one proposed here, would be preferable because it would makethe process more transparent and objective. Nevertheless, a referenceprice determined politically once a year would still be preferable to aban or to quantitative restrictions being determined on an ad hocbasis.

Table 1: A PROPOSED REFERENCE PRICE/VARIABLE TARIFF SCHEME FOR CORNWITH A 20% PROTECT;ON MARGIN AND A 5-YEAR MOVING AVERAGE

World refer- Domestic referenceFOB price ence price price at CIF level Domestic Implicit variable tariff

Yellow =(1)x1.1O = 5-year including 20% Exchange referen-e (annual averagesNo. 2 CIF moving aver- protection margin rate price $/ton %

Gulf price age of (2) = (3) x 1.20 (P/$) (P/kg) -(4)-(2) =(7):(2)

(1) (2) (3) (4) (5) (6) (7) (8)

1970 58.4 64.21971 58.4 64.21972 56.0 61.61973 98.0 107.81974 132.0 145.21975 119.6 131.5 88.6 106.3 7.2 0.76 0.0 0.0

1976 112.4 123.6 102.1 122.5 7.4 0.91 0.0 0.0

1977 95.3 104.8 113.9 136.7 7.4 1.01 31.9 30.4

1978 100.7 110.8 122.6 147.1 7.4 1.09 36.3 32.8

1979 115.5 127.0 123.2 147.8 7.4 1.09 20.8 16.4

1980 125.3 137.8 119.5 143.4 7.4 1.08 5.6 4.1

1981 130.8 143.9 120.8 145.0 7.9 1.15 1.1 0.8

1982 109.3 120.2 124.9 149.9 8.5 1.27 29.7 24.7

1983 136.0 149.6 127.9 153.5 11.1 1.70 3.9 2.6

1984 135.9 149.5 135.7 162.8 16.7 2.72 13.3 8.9

1985 113.2 123.4 140.2 168.2 18.6 3.13 44.8 36.3

1986 87.6 96.4 137.3 164.8 20.4 3.36 68.4 71.0

1987 72.0/a 79.2 127.8 153.4 (20.4) 3.13 74.2 93.7

/a Estimate.

Iin

Table 2: A PROPOSED REFERENCE PRICE/VARIABLE TARIFF SCHEME FOR CORNWITH A 20% PROTECTION MARGIN AND A 3-YEAR MOVING AVERAGAE

World refer- Domestic referenceFOB price ence price price at CIF level Domestic Implicit variable tariffYellow =(1)x1.10 = 3-year including 20% Exchange reference (annual average)No. 2 CIF moving aver- protection margin rate price $/ton %Gulf price age of (2) (3) x 1.20 (P/$) (P/kg) =(4)-(2) =(7):(2)(1) (2) (3) (4) (5) (6) (7) (8)

1970 58.4 64.21971 58.4 64.21972 56.0 61.61973 98.0 107.8 63.3 76.0 7.2 0.55 0.0 0.01974 132.0 145.2 77.9 93.5 7.2 0.67 0.0 0.01975 119.6 131.5 104.9 125.9 7.2 0.91 0.0 0.u1976 112.4 123.6 128.2 153.8 7.4 1.14 30.2 24.41977 95.3 104.8 134.4 161.3 7.4 1.19 56.5 53.91978 100.7 110.8 120.0 144.0 7.4 1.07 33.2 30.01979 115.5 127.0 113.1 135.7 7.4 1.00 8.7 6.91980 125.3 137.8 114.2 137.0 7.4 1.01 0.0 0.01981 130.8 143.9 125.2 150.2 7.9 1.19 6.3 4.41982 109.3 120.2 136.2 163.4 8.5 1.39 43.2 35.91983 136.0 149.6 134.0 160.8 11.1 1.78 11.2 7.51984 135.9 149.5 137.9 165.5 16.7 2.76 16.0 10.71985 113.2 123.4 139.8 167.8 18.6 3.12 44.4 36.01986 87.6 96.4 140.8 169.0 20.4 3.45 72.6 75.31987 72.0/a 79.2 123.1 147.7 (20.4) 3.01 68.5 86.5

/a Estimate.

Table 3: A PROPOSED REFERENCE PRICE/VARIABLE TARIFF SCHEME FOR CORNWITH A 20% PROTECTION MARGIN AND A WEIGHTED 3-YEAR MOVING A'JERAGAE

World refer- Domesticence price reference price

FOB price weighted* at CIF level Domestic Impltcit variable tariffYellow =(l)x1.10 3-year including 20% Exchange reference (annual average)No. 2 CIF moving aver- protection margin rate price $/ton 7Gulf price age of (2) = (3) x 1.20 (P/$) (P/kg) =(4)-(2) =(7):(2)(1) (2) (3) (4) (5) (6) (7) (8)

1970 58.4 64.21971 58.4 64.21972 56.0 61.61973 98.0 107.8 62.9 75.5 7.2 0.54 0.0 0.01974 132.0 145.2 85.1 102.1 7.2 0.74 0.0 0.0 I1975 119.6 131.5 119.5 143.4 7.2 1.03 11.9 9.01976 112.4 123.6 132.2 159.2 7.4 1.18 35.6 28.81977 95.3 104.8 129.6 155.5 7.4 1.15 50.7 48.41978 100.7 110.8 115.4 138.5 7.4 1.02 27.7 25.01979 115.5 127.0 110.6 132.7 7.4 0.98 5.7 4.51980 125.3 137.8 118.0 141.6 7.4 1.05 3.8 2.81981 130.8 143.9 129.9 155.9 7.9 1.23 12.0 8.31982 109.3 120.2 139.2 167.0 8.5 1.42 46.8 38.91983 136.0 149.6 131.2 157.4 11.1 1.75 7.8 5.21984 135.9 149.5 138.5 166.2 16.7 2.78 16.7 11.11985 113.2 123.4 .45.1 174.1 18.6 3.24 50.7 41.11986 87.6 96.4 136.4 163.7 20.4 3.34 67.3 69.81987 72.0/a 79.2 113.8 136.6 (2G.4) 2.79 57.4 72.5

/a Estimate.

* The following weights were used: 50% for most recent year;35% for second most recent year; and15% for third most recent vear.

Ln

- 44 -

ANNEX 5Page 11

implicit variable tariff would on average have been 71% for a 20% protectionlevel over the base price. This is because of the unusual, sudden drop inworld prices to levels not experienced for over a decade.

29. Using a 5-year moving average for rice the reference price for 1987would result in a price of US$323.5 per ton (Table 4). Whatever theprotection margin would be for rice, it should be somewhat higher for wheatand even higher for flour, preferably the max Tum of 50%t in order to limitthe degree of substitution of wheat for rice.-

30. If domestic prices stayed below the domestic reference price noimports would be undertaken since imports coming in at the reference price(actual cif price and variable tariff) would not be competitive. If domesticprices start moving above the reference price, the private sector would startbringing in imports and domestic prices would remain around the reference-:ce (plus marketing margins). Import licensing by NFA would not be

necessary and should be abolished. Instead, any importer would be required toprovide documentation (copy of contract, bill of lading, proof of payment) toCustoms. The amount of variable tariff to be assessed for each shipment wouldbe the difference between the reference price and the actudl cif price of theshipment (this amount, divided by the year's world reference price, would givethe tariff in percentage terms). Imports would be undertaken only duringshortage periods, and the number of shipments would not be large.Administratively it should not be a problem for Customs to be able to collectthe variable duty. With a fixed tariff of say 20% the Customs officialcollects a duty of 0.2 times the cif price; in the case of a variable tariffhe imposes whatever tariff is needed to bring the cif price up to that year'sdomestic reference price. To avoid over-invoicing, Gc ernment way want torequire customs to provide the import documentation to NFA for a check wL.whether the prices paid are realistic in the sense of whether the' are in linewith spot prices on the day of purchase.

Graphical Conceptualization and Summary of Major Options

31. Three supply scenarios are presented by S , S2, and S3 (Figure 1).D is the domestic demand schedule. Pw is the actual world price, which may beabove or below the five-year moving average price. P ef is the referenceprice. P2 is the market clearing price in situation e , when an import ban isin effect. With the same production schedule and a reference price/variabletariff scheme, imports amounting to GF would enter the country, therebyreducing the domestic price to Pref* If domestic production is S2 the marketclearing price would be P1. Buying by NFA at market prices in a one-periodmodel would not raise prices unless some exports were undertaken on a

8/ It should be noted in this connection that wheat-based products aremainly consumed by higher income groups.

Table 4: A PROPOSED REFERENCE PRICE/VARIABLE TARIFF SCHEME FOR RICEWITH A 20% PROTECTION MARGIN

Domestic DomesticWorld reference reference price reference Implicit

FOB price = 5-year at CIF level price at cif variable tariffprice CIF moving average including 20% Exchange level in pesos (annual average)thin 5% price of (2) protection margin rate (4)x(5) S/ton %broken (2)-(1)xl.08 $/mt (3) x 1.20 (P/$) (P/kg) (4)-(2) (7):(2)(1) (2) (3) (4) (5) (6) (7) (8)

1970 144.0 155.51971 129.0 139.31972 147.0 158.7 11973 350.0 378.01974 542.0 585.4 Le

1975 363.1 392.1 283.4 340.1 7.2 2.45 0.0 0.01976 254.5 274.9 330.7 396.8 7.4 2.94 121.9 44.31977 272.2 293.9 357.8 429.5 7.4 3.18 135*6 46.11978 367.5 396.9 384.9 461.9 7.4 3.42 65.0 16.41979 334.2 360.9 388.6 466.3 7.4 3.45 105.4 29.21980 433.9 468.6 343.7 412.4 7.5 3.09 0.0 0.01981 482.8 521.4 359.0 430.8 7.9 3.40 0.0 0.01982 292.9 316.3 408.9 489.6 8.5 4.16 173.3 54.81983 276.9 299.1 412.8 495.5 11.1 5.50 196.4 65.71984 252.1 272.3 393.3 4711. 16.7 7.88 199.6 73.31985 215.9 233.2 375.5 450.6 18.6 8.38 217.4 93.21986 210.5 227.3 382.5 394.2 20.4 8.04 166.8 73.41987 210.0/a 231.0 269.6 323.5 (20.4) 6.60 92.5 40.0

/a Estimate. rn

-46- ANNEX5Page 13

FIGURE 1: Three Production Scenarios and MajorPolicy Options

P

PrefP1c t-- - - -- - - - _7___I E

A 3 K L C D

D

o

- 47 -

ANNEX 5Page 14

subsidized basis.9/ To raise the price to Pref a quantity of IE would have tobe exported with a subsidy of KLEI. The export subsidy of KLEI results inwelfare losses for consumers of (P1EFPre ) and the welfare gains for producersof (PlENPr f). Considering consumers and producers together there would benet gain 01 ENF which is smaller than the export subsidy. Therefore, usin),equal welfare weights for producers and consumers, the export subsidy resultsin a (small) net social loss. Nevertheless, if it could be established thatcorn and/or rice producers have a higher incidence of poverty than the averageconsumer, and if therefore Government assigned slightly higher welfare weightsto the producers, the export subsidy could be justified on (net) welfaregrounds. S3 implies a surplus situation where domestic prices fall to theworld market price level. In that situation no kind of tariff policy iseffective and neither is any NFA buying. The private sector would exportquantity CD. Again, the only policy that would keep domestic prices above theworld market floor would be an export subsidization policy.

Implications for the Role of NFA

32. The three main points made above have significant implications forNFA's future role:

(a) The recognition that increased buying by NFA, when there is asurplus of rice or corn, does only marginally increase the averagedomestic price. It increases NFA stocks and decreases privatelyheld stocks. It benefits a few additional favored farmers in theprovinces where NFA is buying and increases the NFA operating costsand deficits. Point(a) does not imply any critisicm of NFA, whichis an effective agency with a highly dedicated staff; it simplyrecognizes the limits of public price intervention in a closedeconomy framework;

(b) A reference price/variable tariff scheme as proposed above reducesprice fluctuations (by eliminating price peaks); it protectsproducers from import competition below the reference price andguarantees that consumers/feedmillers etc. will get their commodi-ties at prices no higher than the reference price if there is ashortfall in production; and

(c) There is little justification for a country to hold reserve stocks--particularly large ones--when the country is basically self-sufficient, when world market prices are lower than domestic prices,and when world prices are expected to remain at low levels (thepresent situation).

9/ Buying at prices higher than the market rate would marginally increaseaverage prices.

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ANNEX 5Page 15

33. If these threy0yoints are accepted they would suggest a smaller rolefor NFA for the future. Even if the import ban was not replaced by avariable tariff scheme as proposed above, the implications for NFA wouldremain the same (because of the limited effectiveness of Governmentintervention in a closed economy framework when the trading is fullycompetitive). Retrenchment is always difficult for any organization, but NFAhas shown that a retrenchment can be made without undue turmoil for theorganization and hardship for individuals. In the fill of 1986, permanent NFAstaff was reduced from about 7,000 to about 5,500," Good severance paypackages were offered to induce staff to leave voluntarily and according toreports most of those who left have adjusted well to their career changes.

34. If Government agrees with the thrust of the arguments above andtheir implications for NFA's future role, Government may want to create a taskforce to precisely define NFA's role and to make operational proposals of howthe restructuring/retrenchment could be undertaken in the most efficient, fairand least disruptive way.

10/ This coincides with the view expressed in the APST report where it wasstated that "NFA must be slimmed down" (p. 11).

11/ As a result of divestiture of non-grain activities.

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ANNEX 6Page 1

PHILIPPINES

AGRICULTURAL SECTOR STRATEGY REVIEW

Irrigation

1. The development of irrigation infrastructure in the last two decadeshas been impressive. Irrigated area expanded from 702,000 ha to 1.4 millionha since 1968. This contributed significantly to the expansion of palay pro-duction by 3.0 million MT during the past 18 years and enabled the Philippinesto achieve self-sufficiency in rice. Despite this impressive progress, thesubsector faces today several issues and problems which have significant im-plications for the productivity and efficiency of the systems as well as fortheir financial viability. This section addresses two of the major issues.The first issue addressed is the proposed shift in the investment prioritiestoward increased emphasis on rehabilitation of existing systems and the empha-sis on smaller scale systems. The economic viability of the various optionsand the implications in terms of the appropriateness of the investment programin irrigation and the rice supply situation are analyzed. A second importantissue is the financing and pricing policy in irrigation. As a result of theeconomic crisis and the cutbacks in the Government's budget there was adrastic fall in Operation and Maintenance (O&M) expenditures in irrigation.Because of that, .requently less than two-thirds of the planned service areaare effectively irrigated, resulting in low cropping intensity. The problemis related directly to the sources of finance of irrigation and the costrecovery of irrigation water. This issue is also examined here.

Review of Irrigation Development

2. Irrigation in the Philippines ia gentgezlly categorized into threetypes of systems: national systems (NIS), communal irrigation systems (CIS),and pump irrigation system (PIS). The National Systems are either reservoiror run-of-river gravity systems. They are built, operated and maintained bythe National Irrigation Administration (NIA). In terms of command areas, theyrange in size from about 100 ha to over 100,000 ha. Currently there are 127NISs covering nearly 600,000 ha. Communal Systems are small gravity, mostlyrun-of-river type, owned and operated by the farmers themselves. The roughly6,300 CISs (as of December 1986) account for about 50% of total irrigated areaand about 40% of irrigated rice production. CISs vary in size froni a fewhectares to as large as 4,000 ha, but over 70% of systems are smaller than 100ha. The CISs are constructed under NIA supervision with farmers contributinglabor and locally available materials. The systems, after completion, areturned over to the farmers, through their respective farmer associations, whoassume full responsibility for the operation and maintenance of the system.Pump systems may be government or privately owned. The large surface pumpshave a service area of more than 100 ha and are generally installed, operatedand maintained by NIA. The medium pumps cover a service area of 20-100 ha andare operated and maintained by either NIA or the Farm Systems DevelopmentCorporation (FSDC). Small pump units are privately owned by individualfarmers, and have a command area of less than 20 ha.

- 50 -ANNEX 6Page 2

3, The implementation of the program to generate new areas for irriga-tion was vigorously pursued over the past 10-15 years. This raiszd the ser-vice area of operating irrigation systems from about 742,000 ha in 1972 toabout 1.45 million ha in 1986, or about 47% of total potential irrigable area.The irrigation investment activities had their peak during the period between1973 and 1980, when service area increased on average by 58,940 ha per annum.That expansion slowed down in the period 1983-85 due to the financial crisis.The growth in service area by system between 1972 and 1986 is presented inTable 1. Total irrigated area during that period increased at a rate of 4.6%per year. The rate of increase was greatest for CIS (6.1%) and lowest for NIS(3.0%). By location, 67.2% of the irrigated area is in Luzon, 12.6% in theVisayas and 20.2% in Mindanao (see Appendix Table 1).

Table 1: SERVICE AREA BY SYSTEM 1972-1986

Annualincrease

Type of 1972 1981 1986 1972-86System (ha) (%) (ha) (%) (ha) (%) (X p.a.)

National 379,200 51.1 482,200 39.2 595,259 40.8 3.0Communal 293,800 39.6 599,000 48.6 710,009 48.7 6.1Pump 69,400 9.3 150,000 12.2 152,128 10.4 5.4

Total 742,400 100.0 1,231,000 100.0 1,457,396 100.0 4.6

Source: NIA

Table 2: SERVICE AND IRRIGATED AREA, 1986(ha)

IrrigatedCropping

Irrigated Area, Rice Total Other Intensity /aService Area Wet Season Dry Season Rice Crops (x)

Storage (NIS) 103,280 81,450 78,220 159,670 8,070 162Diversion (NIS) 491,979 367,030 247,510 614,540 31,540 131Communal and Pump 862,137 N/A N/A 1,062,913 32,873 127

Total 1,457,396 1,837,123 729483 131

/a (Total irrigated rice and other crops) * Total service area.

Source: NIA

- 51 -ANNEX 6Page 3

4. Total irrigated areas in the NIS in 1986 reached 789,807 ha, consis-ting of 777,195 for rice and the rest for other crops (Table 2). Communal andpump systems combined account for a total irrigated area of 1,095,787 ha. Interms of irrigated cropping intensity the storage systems exhibited thehighest value. On average storage systems had in 1986 cropping intensity of162% compared to 131% for diversion systems and 127% for Communal and Pump.Overall, the cropping intensity values are low, reflecting, among others,inadequate and highly variable water supply, particularly in the dry season;poor system maintenance; and the incompatibility of system design and loca-tion-specific conditions. The low cropping intensity in communal systems ispartly attributed to the overdesign of systems relative to availability ofwater supply. This is also reflected in rice yields. These are shown inTable 3 where the NIS system, particularly the storage ones reveal their leadover the communals.

Table 3: YIELDS BY SYSTEM, 1984(MT/ha)

Wet Season Dry Season

Storage 3.7 4.0

NIS (Diversion) 3.7 3.7

CIS 2.9 2.8

PIS 3.8 4.1

Lowland rainfed 1.9

Source: NIA, IFPRI

Investment, Rehabilitation and Operation and Maintenance

5. There are several important questions facing Philippine plannerswhen it comes to the investment program in irrigation. What should be theemphasis: rehabilitation or new investment? What share of resources shouldbe devoted for O&M? If new projects are required should large scale or smallscale systems be constructed? Several studies in recent years have concludedthat the Philippines should place greater emphasis on rehabilitation invest-ment and on investment in small scale, less capital intensive communalirrigation schemes. The Bank's 1982 Irrigation Review recommended greateremphasis on rehabilitation and less in extending the irrigated area than theGovermnent had in mind. The Bank report, Philippines: Public InvestmentProgram (5677-PH, August 1985), cites a study of ten projects financed by theAsian Development Bank (ADB) indicating that converting from rainfed to

- 52 -ANNEX 6Page 4

irrigation costs 50-80% more per incremental ton of paddy than rehabilitationof existing systems. Thus, the report recommends, future activities in thesector need to focus on rehabilitation investment, increasing O&Mexpenditures, and the completion of on-going projects. Starting new largeprojects should receive low priority. An ADB study completed in May 1984,1recommends reallocation of investment from large storage systems to communalsystems or national diversion systems. The new report by IFPRI (January1987), however, recommended that more new investment is required andrelatively tess emphasis be put on rehabilitation.

6. This section reviews these questions. The economic viability of thevarious investment options is assessed in the context of present and projectedlow world rice prices, the fact that the Philippines is at or around riceself-sufficiency, and the limited prospects of rice exports from thePhilippines, given world rice market conditions and the low quality ofPhilippine rice.

7. Returns to New Investment and Rehabilitation by System. Theestimates of returns to new investment are based on existing systemperformanc. and projected performance of six representative systems. Twolarge scale systems, two medium scaJ7 systems, and two small scale systemswere used as sources of basic data.- Data from three representative systemswas used to assess the rates of return to rehabilitation. These systems varyin size (2,500 ha, 8,170 ha and 15,000) and in their geographical location.

8. The estimates for economic rates of returns derived here should betreated only as indicative results. Because of various limitations, such asaggregation across different systems and data availability, the resultsreported here represent general orders of magnitudes only. Nevertheless,these estimates provide a relatively clear picture as to the potentialviability of the various investment options in Philippine irrigation.

9. All costs used are constant 1985 prices; all farm inputs and outputsare estimated at present and projected 1995 farm-gate prices expressed in 1985constant prices. The prices for rice and fertilizers are based on the Bank'scommodity price forecast of January 1987. The price structure assumed forrice is provided in Appendix Table 2. For the next 15 to 20 years (given theplanned investment program in irrigation), the Philippines would fluctuatearound rice self-sufficiency with a surplus in the early years turning into Edeficit toward the second part of the period (see section on rice supply anddemand). As a result, the economic viability of irrigation is assessed undertwo trade regimes: import substitution regime (import parity) and ricesurplus regime (export parity). The average economic farmgate pricr used in

1/ "Assessment of Food Demand/Supply Prospects and Related Strategies forDeveloping Member Countries of ADB" IFPRI-ADB, May 31, 1984.

2/ The systems are Apayao-Abulog (15,000 ha), Baco-Bucayao (8,170 ha),Sta. Cruz (3,725 ha), Libmanan-Cabusao (3,427 ha), Padada (2,500 ha) andInarihan (1,305 ha).

- 53 -ANNEX 6Page 5

the import substitution case is P 2.3/kg and in the surplus case the priceused is P 1.9/kg.

10. In the case of new projects, it is assumed that the area "withoutproject" is utilized for rainfed rice. With the project, cropping intensityincreases gradually to 80-90 in the wet season and to about 60Q in the dryseason. These intensities depend, of course, on many factors: adequatesystem design, sufficient water supply and adequate operations and maintenanceof the system, among other things. Rainfed paddy yields are 1.7 MT per haincreasing in the future to 2.5 MT/ha. With irrigation, yields are assumed toreach 4 MT/ha in the wet season and 4.2 MT/ha in the dry season. Inputs,services and labor costs are adjusted according to cropping intensity,cropping activity (i.e., rainfed, irrigated dry season, irrigated wet season),and by system location. Benefits from irrigation increase gradually ascropping intensity increases, and are assumed to reach full development levelson the fourth year after the completion of the system. Benefits derived fromnonrice crops during the dry season are excluded from irrigation netbenefits.

11. Construction costs of irrigation systems were estimated based ondata from various ongoing and recently completed projects. These weredifferentiated by size: large-scale (7,000 ha +), medium-scale (2,500-7,000ha), and small-scale (up to 2,500 ha). Construction costs vary by size andtype of system from about P 29,000 per ha for smaller scale, mostly locallyfunded pSqjects, to over P 48,000 per ha for the larger scale systems (1985prices). In addition, assuming adequate O&M expenditures, these systemswere assumed to require only minor restsration work every 11-12 years. Theappropriate levels of O&M expenditures are assumed to be provided throughoutthe systems life. This level varies by system but averages about P 400 per ha(1985 prices). Recurrent costs also include the purchase of O&M equipmentduring the systems' life.

12. In the case of rehabilitation, the cost of rehabilitation ofexisting systems was estimated at P 13,115 per ha (1985 prices). The requiredlevel of O&M expenditures is provided under both the "with" and "without"project. Benefits from rehabilitation are assumed to come only from improve-ments in cropping intensity. As a result of rehabilitation, cropping

3/ Very large variations from system to system (in the same size category)make estimation of construction costs of a "typical" system quitedifficult (also the differentiation by size is arbitrary). For example,costs of large scale projects vary from US$1,900 per ha to about US$5,000per ha. Furthermore, the experience in the Philippines has been thatlarge and medium scale projects are more expensive (per unit area) thansmaller scale ones. This is not only because of different technology butalso because systems covering large development areas encounter anassortment of problems arising from varied topography such as floodproblems, major drainage problems, varied soil characteristics, etc.Also, larger scale projects typically include training, studies andhealth components, which make them more expensive.

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intensity gradually increases from an average of 50% to 80-90% in the wetseason and from 30% to about 60% in the dry season. This of course dependscritically on adequate supply of water and appropriate O&M levels. Noincrease in yields as a result of rehabilitation is assumed; and, croppingintensity in the "without project" case does not decrease over time (this canbe justified by the provision of appropriate O&M expenditures). These arequite conservative assumptions but are made here to illustrate the economicviability of rehabilitation.

13. The estimated levels of the economic rates of return by system aresummarized in Table 4. The results clearly show that O&M improvements andrehabilitation are economically viable under both import substitution and ricesurplus regimes. New investments in irrigation are viable for small scalerun-of-river systems and for communal irrigation systems. This is the casefor both trade regimes. Investments in large- and medium-scale run-of-riverand storage systems, on the other hand, are not economically viable accordingto these estimates.

Table b : ESTIMATED ECONOMIC INTERNAL RATE OF RETURN - BY SYSTEM TYPEAT 1985 PRICES (x)

Rice regimeImport

substitution /a Surplus /b

Rehabilitation (3)/c 15.8 12.7

O&M improvement /d 25-35 18-25

New InvestmentRun-of-River SystemsLarge (2) 9.9 7.0Medium (2) 10.5 7.3Small (2) 17.3 13.3

Communal systems 18-21/e 15-16

Storage systems 3.7/e 2.7

/a Economic farmgate price of P 2.3/kg based on CIF Manila of US$216/MT (with20% discount for quality). See Table 2 in Appendix.

/b Economic farmgate price of P 1.9/kg based on FOB Manila of US$173/MT (with20% discount for quality).

/c Figures in parenthesis are number of systems from which weighted averagesof internal rates of return (IRR) were derived.

/d IOSP preparation estimates.Te IFPRI report.

Source: Staff estimates except where noted.

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14. Communal systems exhibited the highest returns (18-21%), mostlybecause of the substantially lower capital investment requirement per ha ofbenefitted area. Small scale systems exhibited relatively high rates ofreturn (17.3%) even for the export regime (13.3%) due to lower cost and higherbenefits per ha. Large- and medium-scale run-of-river and storage systemexhibited low returns reflecting the impact of the very high per ha capitalinvestment costs. Storage systems have been estimated to yield returns as lowas 3%.

15. Rehabilitation of existing systems and O&M improvements are econo-mically viable. Rates of return to rehabilitation for the three systemsanalyzed vary between 14.3% and 16.5% in the import substitution case andbetween 10.4% and 13.4% in the export regime. This despite the very conserva-tive assumptions on the net benefits from rehabilitation. Improvement of O&Mactivities also prove to be viable with rates of return ranging between25-35%.

Table 5: RATES OF RETURN - SENSITIVITY ANALYSIS(Import substitution regime, %)

10% 10% decline10% yield construction 10% decline in ricedecline cost increase in areas price

Rehabilitation 14.3 14.6 13.0 14.2

Run-of-River SystemsLarge 8.2 9.0 8.4 8.5Medium 8.1 9.6 9.1 9.1Small 14.6 16.0 15.8 15.9

16. The rates of return to rehabilitations are very sensitive todeclines in the cropping intetnsity (Table 5). A 10% decline in the wet anddry season irrigated area reduce the IRR to 13.0% (import substitution) and10% (export parity). These declines are smaller in the case of yield andprice declines. New construction of all system sizes, on the other hand, ismost sensitive to declines in yields and in rice prices. However, under theimport substitution regime small scale systems are still viable under allscenarios. Under the export regime, declines in yield and rice price makesmall scale systems marginally viable (10-12%).

17. These results give a strong indication that the Philippines shoulddevote increasing resources to the improvement of O&M activities in irrigationas this will provide the highest returns. The economic rates of returnestimates also show that rehabilitation of existing systems should receivepreference in the investment program, subject to careful choice of the systems

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with respect to water availability and system design. On the other hand, thesatisfactory performance of small run-of-river national systems and communalschemes, confirm that those are the more viable alternative schemes to followwhen considering new area expansion. The next section reviews in some detailthe O&M issue. The review of the proposed investment program in irrigation(para. 21) will evaluate its appropriateness and particularly its composition,in relation to the results obtained above.

18. Operation and Maintenance. The present level of O&M expenditures isinadequate. O&M expenditures, on the system level, were P 187/ha in 1985 andP 226/ha in 1986 (constant 1984 prices) compared to the required level ofP 340/ha (Table 6). The levels of O&M expenditures adversely affect theperformance of the systems and reduce the benefits derived from past irriga-tion investment. For example, recent experiences in system rehabilitationshow that rehabilitation investment, in some cases, did not improve systemperformance. One of the factors cited was the inadequate level of O&M afterthe rehabilitation. In order to achieve the full benefits from rehabilitationthe proper level of O&M expenditures must be provided. Another example is thecropping intensity in the NISs. For the period 1980-85, NIA reports that thearea in NISs actually irrigated during the wet and dry season averaged 73% and58% respectively, of total service area, for an aggregate cropping intensityof 1.31. This is due to deterioration of canals and structures, defectivediversion work, and inadequate drainage. For the most part these problems areattributed to the low level of O&M. If continued, this low level of expendi-ture will cause continuous reduction in system efficiency resulting in adecrease in cropping intensity and service area.

Table 6: NIS-O&M COSTS AND ISF COLLECTION(P Million)

Year O&M expenditures ISF collection O&M per ha /a(pesos)

1979 66.15 46.78 2351980 85.75 51.67 2591981 103.45 58.57 2801982 108.14 58.43 2541983 100.99 72.56 2311984 132.34 100.80 1881985 171.10 150.64 187

/a Actual, inadequate levels of O&M expenditures. Constant 1984 prices.

Source: NIA.

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19. O&M of national irrigation systems has always suffered from shortageof funds. As can be seen in Table 6, nominal O&M releases have been increas-ing except for 1983. Ir real terms, however, the funds available for O&M havedeclined from P 280/b n 1981 to P 187/ha in 1985 (in 1984 constant prices).Actual O&M per ha in real terms was consistently below the optimal level ofP 340 per ha. A combination of inadequate revenue from ISF, a sharp declinein Government equity contribution, and the requirement that NIA meet its debt-service obligations from 1982 onwards, resulted in a drastic reduction inNIA's operating expenditures. As a result, the divergence between actual andrequired O&M levels per ha has increased steadily since 1982-83.

20. The decline in Government budgetary support to NIA forces NIA to em-phasize cost recovery through Irrigation Service Fees. This is having aninteresting effect on the level and quality of O&Me NIA in its efforts toimprove cost recovery has deputized almost all of its field staff ascollectors. In addition, special financial incentives are provided to thecollectors. Since effective collection can be done only immediately afterharvest, and this is also the time to maintain the systems, NIA fieldpersonnel are busy collecting the irrigation service fee (ISF) at the expenseof maintenance work. While cost recovery of ISF is important, it is clearthat this activity cannot come at the expense of the actual operation andmaintenance of the system. The first problem seems to be the deputation ofthe technical staff as collectors. A related problem seems to be the systemof incentives which encourages collection work over maintenance work. NIAmust ensure that after harvest time, when the systems should be tended to,sufficient effort be devoted to their maintenance.

Irrigation in the Philippine Development Plan, 1987-92

21. A medium term development plan 1987-1992 was issued in December1986. The irrigation component of the plan seeks to support the objectives ofself-sufficiency in rice in line with population growth, reduce regional im-balances in rice supply and demand, and extend irrigation to crops other thanrice. To achieve these objectives the plan targets the coverage of an addi-tional irrigated area of about 206,200 ha, thus increasing the area covered byirrigation facilities to 1.66 million ha or about 53% of total irrigable area.The plan also targets the rehabilitation of some 723,100 ha (more than halfthe area now covered by national and communal systems). The physical targetsand estimated expenditures are given in Table 7. A total investment ofP 19,008 million (US$ 927 million) over the 6-year period is needed, accordingto the plan.

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Table 7: IRRIGATION DEVELOPMENT PROGRAM-PHYSICAL TARGETS AND FINANCIALREQUIREMENTS, 1987-92

('000 ha)

Total1987 1988 1989 1990 1991 1992 1987-92

New Areas 55.9 46.2 29.1 25.8 22.2 27.0 206.2National 41.3 29.6 11.2 10.3 6.5 10.5 109.4Communal 14.6 16.6 17.9 15.5 15.7 16.5 96.8

RehabilitationImprovement 167.2 174.3 173.9 66.2 75.9 65.6 723.1National /a 124.5 130.2 127.9 16.1 20.9 7.2 426.8CommunaL 42.7 44.1 46.0 50.1 55.0 58.4 296.3

Projected Expenditures(Million P, current 2,474 2p927 3,166 3,437 3,657 3,347 19,008prices(Million Pp constant 2,474 2,318 2,729 2,801 2t689 2,214 15,2251987 prices)

/a Includes for 1987-1989 the area expected to be covered by the IOSP whichis an O&M improvement project.

Sources: Medium Term Philippine Development Plan, 1987-92, December 1986.

22. The plan recommends a shift in emphasis, compared to the 1970s, fromnew irrigation projects to the rehabilitation of existing facilities. There-tore, about 60% of total investment will be used to support rehabilitation,with the remaining 40% allotted to new irrigated areas under the national andcommunal syster. Specifically, the order of priorities for the coming yearsis as follows.-

- Completion of ongoing projects: The completion of ongoing projectswill take precedence over any project.

- Development of small scale irrigation =wojects: The development ofsmall scale irrigation projects, particularly communal irrigationprojects will be continued.

- Strengthening of Operation and Maintenance (O&M): Increase O&Mexpenditures to a sufficient level to stem further deterioration ofirrigation infrastructure.

4/ Source: Philippine Development Plan 1987-2000: NIA submission.

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Rehabilitation of existing irrigation systems: To minimize invest-ment losses and maintain efficient irrigation service, rehabilita-tion and improvement will be pursued.

- Implementation of limited high-priority multipurpose projects:Multipurpose projects will be implemented sequentially to enhanceirrigation, power, flood control, and other purposes.

23. On the basis of the above order of priorities and the physicaltargets specified in the Development Plan, a marked decrease in the annualgeneration of new service area is noted. For the period 1987-92, new areageneration sill average only 26,100 ha per year, and for the period 1993-96,the average will go down further to about 14,300 ha per year. These targetsare lower than the average of 39,900 ha per year experienced in the last twodecades. On the other hand, the plan calls for the rehabilitation on averageof 120,000 ha per year (compared to 429500 ha per year during 1980-86).However, two clarifications are required regarding these rehabilitationfigures. One, these figures include the areas to be covered by the IrrigationOperation Support Project (IOSP) proposed for Bank financing. While someminor rehabilitation will take place under the IOSP, the project is actuallyan O&M Improvement Project. Thus, the rehabilitation figure in Table 7 shouldbe lower. Second, as the IOSP, if approved, would start in 1988, the schedulefor rehabilitation presented in Table 7 should move back one year.

24. About 96,800 ha of the 206,200 ha of new areas to be generatedduring 1987-92 will be from communal irrigation projects. The increasedemphasis on communal systems is also reflected in the 1987 budget as thebudget allocates P 400 million for communal projects, compared to P 75 millionin the appropriations bill. Also, the new service areas generated in 1987-92will come mostly from ongoing projects. Only about 31,000 ha will begenerated from projects yet to be started, and these are mostly communalsystems.

25. Four new projects are included in the new irrigation investment pro-gram (Table 8), with a total cost estimated at P 6.7 billion (constant1986). This compares to P 9.1 billion expected expenditure for the completionof on-going projects. The IOSP aims to arrest the decline in, and graduallyincrease, O&M expenditures in the NISs. Under the plan, O&M expenditures perha would increase to P 460 ha (constant 1986 prices), systems will undergominor rehabilitation and Irrigation Associations (WAs) will be developed toencourage the participation of farmers in the operation and maintenance of thesystems. Another component of the project would be to develop a new policyand strategies to improve cost recovery in irrigation.

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Table 8: IRRIGATION INVESTMENT PROGRAM(P million, 1986 constant prices)

Total1986 1987 1988 1989 1990 1991 1992 1987-92

Ongoing 1,931 1,971 2,042 1,723 1,354 1,124 930 9,143

Total of newprojects 0 385 603 998 1,460 1,729 1,556 6,721

Balog-Balog 0 27 295 466 806 917 727 3,238IOSP 0 328 278 305 346 345 201 1,812Pampanga Delta 0 20 20 227 230 311 315 1,123Second Irrigation 0 0 0 0 78 156 314 548

Total 1,931 2,346 2,644 2,721 2,814 2,853 2,487 15,865

26. While the IOSP is an O&M project, the other three involve the con-struction of new service areas and some rehabilitation of existing systems.The proposed Balog-Balog project is a multi-purpose storage system meant toprovide irrigation in the Tarlac and Pampanga area. A feasibility studyundertaken in 1981 estimated a rate of return of 13.5%. The other major irri-gation project is the Pampanga Delta Development Project. The project, pro-posed to start in 1989, is to generate 11,000 ha of irrigated area also in theTarlac and Pampanga areas. The internal rate of return for the project wasestimated at 9.9%. The fourth new project is the Second Irrigation SectorProject planned for Mindanao. It involves the construction of 23,000 ha ofnew areas and the rehabilitation of 4,000 ha., as a continuation of the ADB'sFirst Irrigation project.

27. The thrust of Governm'ent strategy in the irrigation sector isappropriate. In particular, as demonstrated by the economic rates of returnderived earlier, the order of priorities which puts first, improving O&M;second, rehabilitation; and only third, new construction, is the right one.Also justified, when expanding irrigated areas, is the emphasis on communalirrigation systems and small scale national systems. There are doubts,however, whether the composition of the new investment program presented inTable 8 is the appropriate one.

28. There is no doubt that even with emphasis on rehabilitation and O&M,some new investment in irrigation areas should take place. However, there aresome questions as to the specific projects in the new investment program.Particularly questionable are the Balog-Balog and the Pampanga Deltaprojects. The feasibility studies completed in the early 1980s show thatthese projects exhibited only marginal internal rates of return (13.5% forBalog-Balog and only 9.9% for Pampanga). Since construction cost increasedsharply and the world price of rice declined dramatically since the completion

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of the studies, there is no doubt that these projects are economicallyquestionable at best. Furthermore, the regional distribution of theirrigation program--both projects are in the Tarlac and Pampanga regions--raises some questions as to the choice, particularly when compared to theGovernment goal of regional equity. Finally, both projects are large scale insize (Balog-Balog is even a storage system) going against the declaredemphasis on smaller scale systems. The issues of size and regional equitycombined with questionable economic viability imply thaty at the least, a veryclose look by Government into these projects is warranted. Discussions withNEDA revealed that it is well aware of the questions raised by these twoprojects. It was understood that all the irrigation projects from 1988 onwardwould be reviewed to determine their viability. These reviews would be in-house reviews conducted by the Department of Public Works and Highways (DPWH)and by NIA.

29. The Second Irrigation Sector Project raiAes different types ofquestions, This project is due to start in 1990 as the second phase of anongoing ADB project. However, the First Irrigation Project is only nowstarting after long implementation delays.

30. Finally, it was shown earlier that rehabilitation is economicallyviable, subject to: (a) careful choice of systems to be rehabilitated; and(b) provision of adequate O&M after rehabilitation. However, it should bepointed out that out of 127 NISs only 18 systems were not rehabilitatedrecently. Most of the systems underwent rehabilitation in the last 5-6years. Therefore, there is no urgent need to embark on a massive rehabilita-tion effort in the next 4-5 years. In the early part of the 1990s anotherround of rehabilitation would most likely have to commence. However, again,if the required levels of O&M would be provided from the present onward, therehabilitation required in the future would be in the nature of relativelyinexpensive minor restoration works.

Rice Supply and Demand: 1985-2005

31. The investment program in irrigation described in Table 8 has, ofcourse, important implications on the rice supply/demand situation to the endof the century. The Philippines attached in the past much significance to theattainment of rice self-sufficiency. Now that that has been achieved theemphasis is on maintaining this. This section provides some rough indicativeestimates of the link between the irrigation investment program and the riceself-sufficiency target.

32. Demand Projections. The future growth of domestic rice consumptionhas been estimated on the basis of the expected population growth, nationalincome growth and income elasticity of demand for rice. Total rice consump-tion in the base case for the period 1985-2005 is given in Table 9. Thespecific assumptions used in estimating future dEmand foi rice in the basecase are as follows: (a) population growth rate is projected to decline from2.9% to about 2% p.a. for the period 2000-2005; (o) average national incomegrowth to 1990 is assumed to be 5.1% p.a. increasing to 5.5% p.a. from 1990onwards. With population growth declining, the per capita income growth rateis assumed to rise from an average of 2.5% to 3.5% between 1990 and 2005; (c)

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the income elasticity of demand for rice has been assumed at a constant 0.1x;and (d) in the base case relative rice prices are assumed constant.

Table 9: RICE DEMAND PROJECTIONS 1985-2000 - (BASE CASE)

1986 1990 1995 2000

Population Growth /a 2.9 2.6 2.4 2.2

Population (millions) 56.1 62.2 70.0 78.0

National Income Growth a - 5.1 5.5 5.5

Per Capita Income Growth /a -- 2.5 3.1 3.3

Income Elasticity of Demand 0.1 0.1 0.1 0.1

Per Capita Rice Consumption -- 0.25 0.31 0.33Growth (% p.a.)

Per Capita Rice Consumption (kg) 94 95 97 98

Total Rice Consumption 5,273 59917 6,766 7,669('000 MT)

/a % p.a. over the past five years.

33. The annual increase in per capita rice consumption is expected torise from 0.25% to 0.35% over the next two decades. Per capig rice consump-tion will rise accordingly from 94 kg to about 98 kg in 2000._ Based onthese estimates total rice consumption is expected to increase from 5.1 mil-lion MT in 1985 to an average of 7.7 million MT for the period 1995-2000, a50% rise in the next 15-20 years.

34. Supply Projections. The growth of rice production has been calcu-lated on the basis of expected changes in area irrigated as a result of thenew irrigation investment program and the yields of irrigated, rainfed lowlandand upland palay. Table 10 summarizes the results of the base case. Theirrigated areas in the wet and dry season are based on the projected increasein irrigated areas included in the Medium Term Investment Plan 1987-92. Theincrease in irrigated area is assumed to come from rainfed lowland areas. Theannual decrease in rainfed lowland areas in a given year is taken as the pro-duct of the increase in service area in all types of systems and the irrigatedcropping intensity for the wet season in that year. In the upland, NIA's

5/ This is quite low compared to Thailand (207 kg) and Indonesia (170 kg).

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estimate of 156,000 ha was adopted. The projection is, therefore, that byyear 2000 total irrigated area in the wet season would be 1.66 million ha andin the dry season 1.12 million ha. Thus total irrigated area is expected toincrease by 46% between 1986 and 2000. Yield levels have been differentiatedaccording to the season (wet and dry) and by area of production (irrigated,lowland rainfed, upland rainfed) based on Bank's projections (IOSP prepara-tion). Irrigated yield represent weighted averages of national, communal andpump system yields. The disappearance rates of seed, feed and waste areassumed to remain constant at 10.5% (IFPRI estimate), but milling recoveryrates have been marginally raised from 0.66 to 0.67 (1.5%) to reflect expectedimprovements in milling plants.

Table 8: RICE SUPPLY PROJECTIONS 1986-2000 (BASE CASE)

1986 1990 1995 2000

Area ('000 ha)Irrigated WS 1,141 1,335 1,596 1,665

DS 772 895 1,050 1,123Lowland Rainfed /a 1,264 1,070 850 740Upland Rainfed 156 156 156 156

Yield (MT/ha)Irrigated WS 3.3 3.5 3.7 3.9

DS 3.4 3.6 3.8 4.0Lowland Rainfed 1.9 2.0 2.1 2.1Upland Rainfed 3.0 1.1 1.1 1.2

Production ('000 MT) 9,139 10,230 11,764 12,720

Less:Seed, Feed, Waste 959 1,074 1,235 1,336(10.5%)

Palay available forConsumption 8,180 9,156 10,529 11,385

Milling Recovery Ratio 0.66 0.66 0.66 0.67

Total Rice Supply 5,399 6,043 6,949 7,628

Total Rice Demand(from Table 4) 5,273 5,917 6,766 7,669

Surplus/Deficit ('000 MT) 126 126 183 -41

/a Does not take into account possible improvements in rainfed croppingintensity.

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35. Based on the demand and supply projections presented in Table 9 and10, it appears that the Philippines will be virtually self-sufficient in riceto the end of the century, it will maintain a rice surplus ranging from126,000 MT to 183,000 MT a year during the period 1986-1995. Towards the endof the century, as the generation of new irrigated area slows down in the1990, a very small deficit of 41,000 MT is projected to develop.

36. These results are highly sensitive to the assumptions on croppingintensities and yield growth of irrig#led rice on the supply side, and to theincome elasticity on the demand side." Table 11 illustrates the results ofsensitivity analyses with respect to these variables. A lower growth in yieldin irrigated rice would eliminate the surplus and produce a small deficit inthe 1990s and a much larger one in the year 2000. A 10% decline in thecropping intensity also brings about a situation of deficit. An increase irthe income elasticity of demand for rice will reduce the surplus in the 1990sbut not eliminate them.

Table 11: SENSITIVITY ANALYSIS OF RICE SUPPLY AND DEMAND PROJECTIONS('000 MT)

Surplus/Deficit1990 1995 2000

Base Case 126 183 -41Lower cropping intensity -64 -47 -311Lower yield in irrigatedarea -6 -68 -543

Increased elasticity ofdemand 87 85 -216

Sources: Annex Tables 2-3.

37. The last Bank estimates of rice supply and demand were presented inThe Philippines: Irrigation Program Review (2425-PH, December 15, 1982).That report projected surpluses of between 600,000-800,000 MT between 1985-1990 and of about 300,000 MT in the year 2000. Those projections now appearoptimistic. In 1985-86 the country is just about self-sufficient and willprobably remain so for the rest of the decade. The reason for the lower pro-duction than projected stem from lower growth in both yields and area irri-gated. First, the drought of 1982-83 interrupted the growth of both yields

6/ Since these are only indicative estimates and for the sake of simplicity,sensitivity with respect to own or substitute crop prices was notundertaken.

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and area irrigated. Second, the slowdown in project implementation during thecrisis years (1983-85) adversely affected the growth of service areas.

Cost Recovery and Financing of Irrigation

38. NIA's ability to implement the ongoing investment program and toprovide adequate O&M are severely curtailed by its financial situation.Financially, NIA is on the verge of bankruptcy. Its difficulties, caused byan imbalance between expenditures and income flows, stem from: (a) existingirrigation pricing policies; (b) absence of an effective mechanism to enforceISF collection; and (c) recent government measures to deal with the country'sfiscal problems, including a sharp reduction in government equity contribu-tions to NIA and the requirement that NIA meet its foreign debt-serviceobligations fromi 1982 onwards from its own resources. NIA's financial diffi-culties have direct implications for its ability to implement its irrigationinvestment program as well as to rehabilitate and maintain existing NISs. In1986 NIA was able to implement its program by utilizing its cash reserves (nowexhausted). However, NIA will require increasing contributions from theGovernment from 1987 onward ur.less there are fundamental changes in irrigationpricing and collection. NIA's difficulties have already brought about a slow-down in implementation of ongoing projects, a real decline in the level of O&Mexpenditures (see para. 5), and, as a result of cost-saving measures, adecline in its physical and technical capacity to implement future irrigationprojects.

39. Irrigation Financing. The principal financing mechanism for obtain-.ing resources from beneficiaries of irrigation has been irrigation servicefees (ISF). NIA earns secondary income from equipment rental, from intereston construction funds held on deposit, and from management fees which itcharges to supervise construction of foreign-funded projects. The distribu-tion of income from various sources is provided in Table 12. Total irrigationfees collected in 1986 amounted to P 215 million accounting for 51.5% of NIA'sincome. This represents a drastic increase from 1983 *hen ISF accounted foronly 22%. Total indirect income, particularly from interest (37.1%) andmanagement fees (25%) greatly exceeded the revenues derived from ISF. Thisincome more than offset the shortfalls in ISF collections and NIA, therefore,was able to support its operating budget from its various sources of income.However, as a result of the financial crisis and the decline in interestincome and management fees, NIA was forced to improve cost recovery of ISF inorder to support its activities. The investment program in irrigation, on theother haiid, has been financed with Government equity contributions. Thesehave ranged from P 1.4 billion in 1980 to P 1.7 billion in 1982, withGovernment shouldering the servicing of all foreign loans for irrigation.

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Table 12: NIA SOURCES OF INCOME, 1983 AND 1986

1983 1986Income Z of Income x of(P mln) total (P mln) total

Irrigation service fee 72.7 22.2 215.1 51.5Equipment rental and pump amortization 29.8 9.1 48.0 11.5Interest income 121.8 37.1 69.7 16.7Management fee 81.2 24.7 57.6 13.8Other 22.4 6.8 26.9 6.4

Total 327.9 100.0 417.3 100.0

Source: NIA.

40. The economic crisis in 1983-84 and subsequent measures and policiesinstituted by the Government had a significant adverse impact on the financialsituation of NIA, affecting both its investment program and its operatingbudget. The last three years saw a sharp decline in equity support of theGovernment to NIA. From a peak level of P 1.7 billion in 1982, equityreleases went down to P 205 million in 1984. In 1985, the Government releasedonly P 149 million of P 330 million equity programmed. For 1986, NIA receivedonly P 140 million (out of P 590 milijon in local counterpart funds requiredto continue the irrigation program).- Foreign exchange availability wentdown from $112 million in 1981 to $64 million iA 1984. Furthermore, since1982 NIA has been required to shoulder the debt-servicing of all loanscontracted from 1982 onwards. To date, NIA has to service loans totalling$250 million for 10 foreign-assisted projects. These amounts will increasesharply beginning in 1988 reaching a peak of P 592 million in 1990 (assumingan exchange rate of $1 = P 20.50).

41. The sharp decline in equity contributions and the need to serviceforeign loans out of its operating budget forced NIA to cut down drasticallyon its operating expenditures. Annual operating expenditures declined fromP 244.73 million in 1981 to P 182.41 million in 1983 (current pesos)--a 38%decline in real terms. Thus, the level of O&M, which was already inadequatebecause of poor collection and low fees, was reduced even further. On theinvestment side, delays and cutbacks in local fund releases have sharplyreduced NIA's income from management fees, slowed down implementation ofongoing projects, forced cutbacks in NIA's staff and reduced NIA's capacity toimplement new irrigation projects.

7/ With declining levels of equity contribution, the level of managementfees also falls, reducing further the income NIA generates outsideirrigation fees.

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Page 19

42. Outlook. Without a change in government policy regarding irrigationfee levels, and without a marked improvement in ISF collection efficiency, NIAcannot be financially viable in the long run (even if the Government willassume the servicing of NIA's foreign debt). Unless current ISF levels areincreased, NIA will be able to finance its deficit from its cash reserves in1986 gly. In 1987, the deficit is likely to be in the order of P 197 mil-lion.t- This would leave NIA with a negative cash balance of P 170 million,i.e., the agency will have exhausted its cash assets, liquidated all itsshort-term investments, and will have no working capital to continue opera-tions unless it can borrow from banks. In the medium term, assuming modestimprovements in government support price for palay (in nominal terms) and inirrigation fee collection, NIA would require additional funds in the order ofP 600-700 million a year to be able to support the planned investmentprogram. These deficits could not be overcome by improvements in irrigationfee collections and other sources of operating income of NIA only.Effectively, therefore, NIA will not be able to undertake new investments. Itwill not be able to open new irrigated areas nor provide for rehabilitationand proper O&M of existing systems. Since most of NIA's administrativeoverheads are met from management fees, declining levels of government equitywould force NIA to reduce further its staffing which has already been cutconsiderably during the last few years.

43. ISF. According to the national irrigation policy adopted in 1978,NIA is authorized to charge ISF on NIS land to cover the cost of O&M andinsurance, and to recover initial investment costs (without interest) in nomore than 50 yeav, provided that such charges are within the beneficiaries'capacity to pay., Current ISF rates for rice are given in Table 13. Since1975, the irrigation fees paid by farmers have been di-nominated in terms ofpaddy. This has provided a degree of indexation against inflation. Thefarmers may either pay in kind or the equivalent amount in cash, based on theGovernment support price of paddy. The ISF rates vary according to type ofsystem and by wet and dry season.

8/ These calculations assume government equity of P 150 million in 1986, andP 400 million in 1987.

9/ Farmers in communal irrigation system are expected to pay a fee to covercapital costs, excluding the costs of roads and NIA's engineering andoverhead costs. Most IAs collect fees in kind based on area irrigated.Fees range from 0.5 to 4.5 cavans of palay per ha per year.

- 68 -ANNEX 6Page 20

Table 13: CURRENT IRRIGATION SERVICE FEES /a(Cavans per hectare)

Rice and other Short Season Crop /bSystem Wet Dry Third crop

GravityReservoir 2.5 3.5 3.5

All other national systems 2 3 3

PumpsBonga Pump 1 to 2 8 12 12Solana-Tuguegarao 9 12 12Angat-Maasim 3 5

/a 1 cavan = 50 kg of paddy7b ISF rates for diversified crops, other than annual crops, are 60% of

thoue for rice.

44. Current ISF rates, established in 1975, prior to adoption of thenational irrigation policy, are insufficient to recover full investment andO&M costs even assuming 100% collection efficiency. In spite of the automaticindexation, the ISF rates have declined by about 25% in real terms between1979 and 1984. However, as a result of the sharp increase in palay supportprice in 1985, the ISF level in real terms has increased substantially but itis still below 1979 levels. Using Table 13 as a benchmark, Table 14 permits acomparison between current ISF and other pricing options based on 100% collec-tion efficiency (for discussion of collection problems, see para. 48). Thediscussion differentiates between storage systems which involve very highinvestment costs, and run-of-river diversion systems which have relativelysmall investment costs. Tt .ee options for setting rates are presented (a) torecover required O& 5nly; (b) to recover required C&M plus directconstruction costs;-0° and (c) to recover total investment costs rid O&M. Allrates assume a 25 year recovery period with Government subsidizing the fullinterest costs.

45. Present ISF rates are on average sufficient to recover the O&M costsof both run-of-river and reservoir systems (again, assuming 100% collectionefficiency). These rates are not sufficient to recover the full cost ofcapital and O&M or even only the direct cost of capital and O&M. The inade-

10/ Direct capital cost excludes the cost of roads, supporting infrastruc-ture, institutional development, engineering and supervision. Directcapital costs represent about 30% of total cost for run-of-the-riversystems and 70% for reservoir systems.

- 69 - ANNEX 6

Page 21

quacy of the current rates is particularly apparent in the reservoir systemswhere, because of high construction costs, pres M rates are about 50% of thelevel required to recover direct costs and O&M.1 However, it should bepointed out that there are two elements of subsidy explicit in the.efigures. First, the computation assumes no interest cost--to be consistentwith national policy on ISF. The interest cost is borne by Government.Second, the calculations assume that NIA receives P 3.50/kg for the rice itcollects as ISF. This is never the case. In 1986 NFA bought almost no ricefrom NIA and NIA was forced to sell the rice in the open market. Therefore,the actual value of the rice to NIA is much less than the P 3.50/kg. If anestimate of P 3.00/kg is used, the ISF level in Table 14 would have toincrease by 17%.

Table 14: ISF RATES--THREE SCENARIOS(Cavans/ha) /a

Run-of-river Reservoir

ISF to recover

O&M onlyWet season 1.5 1.5Dry season 2.3 2.3

O&M plus direct capital costWet season 2.2 5.0Dry season 3.2 5.6

O&M plus full capital costWet season 3.6 6.7Dry season 5.3 7.4

/a Rates are for equivalent irrigated areas.

Assumetions1. 25-year, no interest cost.l2/2. Cropping intensity 140% (90% in WS, 50% in DS).3. Government support price of P 3.5/kg of palay.

Source: Staff estimates.

11/ Based on the discussion in the paper: Reional Study on IrrigationService Fees, ADB, 1986.

12/ With 8% interest rate and 25 years recovery period, the wet season rateis 5.9 cavans/ha and dry seaaon rate is 10.6 cavans/ha to recover O&Mplus full capital costs in run-of-river schemes.

- 70 -ANNEX 6Page 22

46. Land Tax. A tax which might serve as a vehicle for recovery ofirrigation cost is the real property tax. However# a review of land taxexperience in thie country suggests that this is not a promising contributionto irrigation cost recovery. Data for 1980 (most recent year for which dataare available) show that market values of irrigated rice lands vary from aslow as P 2,870 per ha to as high as P 18,000/ha. Applying the maximum rate oftax to these figures implies taxes ranging from 6 to 36 peso per ha. Taxes ofthis magnitude would have little effect on cost recovery. Furthermore, datafrom three regions indicate that the average land tax actually paid was lessthan one peso per ha. This would indicate that either assessments areconsiderably below market values, or there is considerable nonpayment oftaxes.

47. Compared with many other indirect financing methods, the land taxhas the advantage of creating less distortions in the economy, since it is atax on a relatively fixed production input with few alternative uses. Thedifficulties of assessing property values, the poor collection performance andthe absence of direct relation between amounts collected and the performanceof irrigation systems would tend to diminish the value of a land tax as asolution to the cost recovery problems in the Philippines.

48. Collection Efficiency. While NIA has been effective in constructingirrigation projects, the O&M of completed systems has been inadequate--mainlybecause collection of ISF has been insufficient to meet these costs (seeFigure 6.1). Since 1979 ISF W3 ,lection consistently lagged behind O&Mreleases. Current collection - as a percentage of amounts due averaged only43% between 1980 and 1984. Collection efficiency has improved to 50% in 1984and to about 60% in 1985. This is partly the result of increased effort byNIA, encouraged by its difficult finan' al situation. Estimates for 1986 showa decline of collection efficiency to about 50%. This is explained by thedecline in rice market prices and by the belief by many farmers that with thenew government ISF rates will be abolished.

49. Low levels of collection are a result of, inter alia, the following:(a) dissatisfaction of farmers with irrigation services; (b) lack of effectivelegal process for enforcing ISF collection; and (c) limited capacity to pay.In a recent study, 31% of nonpaying farmers cited dissatisfaction with NIA'sservices as the reason for nonpayment. Clearly with the decline in real O&Mexpenditures, farmers may have a legitimate claim. Providing an adequatelevel of O&M for irrigation systems is, therefore, essential for improving ISFcollections. Another major problem is the difficulty of enforcing the paymentof ISF through penalties. Physically, it is very difficult to implement a "nopay--no water" policy because of the design of irrigation facilities. NIAalso lacks the legal capacity to enforce fee collection and punish delinquentfarmers. Presently NIA has to resort to civil suits to collect ISF fromdelinquent farmers, a cumbersome and costly process. Another approach hasbeen the provision of discounts to encourage payments*

131 Dues for the current year.

-71 - ANNEX 6Page 23

Figure 6. 1

170

140 71.30 . ,.

110

1 co3 *

A20 / 1 - .

70 1* / 1

40~~~~~~~~~~ -, /

30 -~ ~~)

I 0 /- &

\e / 14 I:I

-72- ANNEX 6

Page 24

50. As part of the preparation of IOSP, NIA is developing a strategy toimprove further its collection performance. The plan calls for (a) Bank loansupport tc provide adequate financial and other facilities support for O&M;(b) development of Irrigation Associations; (c) development and implementationof a standard monitoring system for the operation of various levels of the O&Mpersonnel; (d) rationalization of existing incentive policies; (e) updating ofirrigation fee registers and parcelling maps--and the reduction of unbilledareas; and (f) intensification of information campaign.

- 73 - ANNEX 6AppendixTable 1

PHILIPPINES

AGRICULTURAL SECTOR STRATEGY REVIEW

Status of Irrigation Development, 1986

Potential %irrigable Irrigation

Region area (ha) National Communal Pumps Total development

1 309,810 46,082 130,149 5,520 181,751 58.67

2 539,710 142,939 82,134 36,593 261,666 48.48

3 482,220 173,181 87,017 22,946 283,144 58.72

4 263,590 52,568 63,506 27,948 144,022 54.64

5 239,650 16,209 76,195 16,943 109,065 45.51

6 197,250 53,461 29,309 21,677 104,447 52.95

7 50,740 - 16,660 2,481 19,141 37.72

8 84,380 16,860 41,232 2,176 60,268 71.42

9 76,500 12,449 19,999 2,804 35,252 46.08

10 230,150 20,108 44,426 2,045 66,579 28.93

11 290,250 34,711 57,950 6,872 99,533 34.29

12 362,080 26,691 61,432 4,123 92,246 25.48

Total 3,126,330 595,259 710,009 152,128 1,457,396 46.62

Preliminary figures.

- 74 - ANNEX 6AppendixTable 2

PHILIPPINES

AGRICULTURAL SECTOR STRATEGY REVIEW

Rice Price Structure(In 1985 prices)

1985 1990 1995 2000

In US$ per Metric Ton

Export price, 5% broken, FOBBangkok 216 207 212 216

Grade differential (less 20%) (43) (41) (42) (43)

Ocean freight and insurance 35 35 35 35

CIF Price, Manila 208 201 205 208

In Pesos per Metric Ton

CIF price, Manila 3,869 3,739 3,813 3,869

Economic farm-gate price /a 2,237/2,427 2,153/2,343 2,201/2,391 2,237/2,427

Financial farm-gate price 2,560/3,500 3,500 3,500 3,500

In Surplus Situation (FOB Manila)(US$/MT) 173 166 170 173

Economic (export parity)farm-gate price (P/MT) 1,814/2,004 - - 1,814/2004

/a Range for seven representative systems.

Source: Basic data from IOSP preparation; EPD projections, January 1987.

ANNEX 6AppendixTable 3

PHILIPPINES

AGRICULTURAL SECTOR STRATEGY REVIEW

Rice Supply Projections, 1985-2000(Low cropping intensity)

1986 1990 1991 2000

Area ('000 ha)Irrigated: Wet season 1,141 1,335 1,596 1,665

Dry season 695 806 945 1,011

Lowland rainfed 1,264 1,070 850 740Upland rainfed 156 156 156 156

Yield (MT/ha)Irrigated: Wet season 3.4 3.5 3.7 3.9

Dry season 3.5 3.6 3.7 4.0

Lowland rainfed 1.9 2.0 2.1 2.1Upland rainfed 1.0 1.1 1.1 1.2

Production ('000 MT) ,869 9,908 11,375 12,271

Less: Seed, feed, waste (10.5%) 931 1,040 1,194 1,288Palay available for consumption 7,937 8,868 10,181 10,983Milling recovery ratio 0.66 0.66 0.66 0.67

Total Rice Supply 55,238 5,853 62719 7s358

Total Rice Demand 5s,273 5,917 6,766 79669(from Table 5)

Surplus/Deficit ('000 MT) -34 -64 -47 -311

- 76 -ANNEX 6AppendixTable 4

PHILIPPINES

AGRICULTURAL SECTOR STRATEGY REVIEW

Rice Supply Projections 1985-2000(Low yields)

1986 1990 1991 2000

Area ('000 ha)Irrigated: Wet season 1,141 1,335 1,596 1,665

Dry season 772 895 1,050 1,123

Lowland rainfed 1,264 1,070 850 740Upland rainfed 156 156 156 156

Yield (MT/ha)Irrigated: Wet season 3.3 3.4 3.5 3.6

Dry season 3.4 3.5 3.6 3.7

Lowland rainfed 1.9 2.0 2.1 2.1Upland rainfed 1.0 1.1 1.1 1.2

Production ('000 MT) 8,959 10,007 11,340 11,884

Less: Seed, feed, waste (10.5X) 941 1,051 1,191 1,248Palay available for consumption 8,018 8,957 10,149 10,636Milling recovery ratio 0.66 0.66 0.66 0.67

Total Rice Supply 5,'92 5,911 6,698 7,126

Total Rice Demand 5,273 5,917 6,766 7,669(from Table 5)

Surplus/Deficit ('000 MT) 19 -6 -68 -543

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PHILIPPINES

AGRICULTURAL SECTOR STRATEGY REVIEW

Rural Credit

Introduction

1. The decade of the seventies saw rapid growth of a formal ruralbanking system which partially substituted for the informal smallholder creditprovided by the traditional network of non-institutional lenders. While thestructure of the new institutional systems was reasonably good, unsoundoperation and weak supervision--partly reflecting political pressures on thekey institutions--led to imprudent banking practices which caused seriousarrearage problems and made many banks unable to weather the economic crisisof 1983-85. As a result, many institutions are in such serious trouble thatthey are no longer able to provide credit to the sector. Informal sourcesagain increased in importance and have largely taken up the slack.

2. Institutional credit for agriculture is offered by a variety ofgovernment- and privately-owned entities whose lending operations often haverather well defined emphasis in terms of loan amount (large vs. small loans),duration (long vs. short-term), recipients (commercial operations, agrarianreform beneficiaries, etc.) commodities (sugar, coconut, etc.) and activity(production, marketing, or processing). Noninstitutional credit is offered byprivate moneylenders, traders, relatives, friends and landlords. It tends tobe short-term, often requiring no collateral but at interest rates which arehigher than those for institutional credit.

Institutional Credit Channels

3. The structure of formal rural credit institutions which expanded sorapidly in the seventies consisted of four sets of banks: (i) a relativelysmall number of regular commercial banks with rural branches; (ii) threeSpecialized Government Banks (the Development Bank of the Philippines (DBP),the Philippine National Bank (PNB), and the Land Bank of the Philippines(LBP)); (iii) about 45 private development banks; and (iv) over 1,000 small,local, family-owned rur.1 banks. Of these, the rural banks serve medium andlarge farmers (with collateral); the other three types either serve only largefarmers or agro-industries. For example, DBP's 20 largest loans accounted for50X of its total loan portfolio, while PNB's 100 largest customers accountedfor 801 of its portfolio. A very high proportion of these large loans became"non-performing", i.e. the borrowers were unable to make the loan paymentsdue. Both those institutions became insolvent and recently went through majorrestructurings. A brief summary of the roles played by the four types ofrural credit institutions and of the difficulties which have spread throughthe system, will help explain the reforms that are needed in the institutionalcredit system.

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4. The Commercial Banks. The country's commercial banks are highlyconcentrated in Metro Manila and the country's leading trading centers. Onlya few have developed even limited branch networks in the rural areas; thesebranches exist primarily as sources of low-cost deposits, not to make ruralloans. Loan portfolios of these branches are typically much smaller thantheir deposit liabilities. Despite the limited role in agricultural lendingplayed by the small number of the commercial bank's rural branches, thecommercial banks have provided more than half the agricultural credit extendedby the whole banking system. A large proportion of such loans are belie-ved tohave been made by the banks' urban offices to large farmers and agro-industries. A study of rural finance currently being conducted by the CentralBank (CB) under the World Bank's 1985 agricultural apex loan is expected togenerate much more information on the rural and agricultural lending of thecommercial banks and how it compares with that of the rural banks. The study,scheduled for completion during 1987, is also expected to make several newpolicy and regulatory recommendations.

5. Government Banks. As in most developing countries, the Philippinegovernment has established a number of government banks to provide serviceswhich the private sector was reluctant or unable to provide. As noted, thethree of concern here are PNB, DBP, and LBP.

(a) PNB: Although criginally established to take over a defunctAgriculture (Sugar) Bank, to engage in agricultural and rurallending, and to handle government transactions, PNB had become thecountry's largest commercial bank (before the restructuring).Despite a charter which specifically required it to serviceagriculture and the rural areas, PNB's portfolio had been heavilyconcentrated in trade and industry: at the end of 1985 only 7% ofits portfolio was in agriculture, a proportion lower than that forthe commercial banks as a whole. Within agriculture, PNB had beenheavily involved in the sugar industry: the latter's liquiditycrisis has severely hurt PNB. The very high concentration of PNB'sportfolio in a few very large accounts was noted earlier. With therecent restructuring and transfer of non-performing assets toGovernment, PNB has been directed to re-target its clientele toserve small and medium scale enterprises and agriculture.

(b) DBP: DBP was incorporated to provide medium- and long-term creditfor agricultural and industrial investment and to promote the growthof smaller private development banks. In 1985, DBP was the coun-try's second-largest bank, after PNB. It had grown, however, byfinanc;ng projects that private banks would not support (becausethey were small or risky). Too often DBP had found itself underpolitical pressure to finance very large unviable projects with poorprospects for collection. Agriculture accounted for only 9% of itsend-'85 portfolio, a figure below the average of private commercialbanks. Because of its many large non-performing loans, DBP founditself in liquidity difficulties well before the onset of thecountry's economic crisis in 1983. DBP effectively stopped alllending and rediscounting operations in 1981. Like PNJB, DBP wasrecently restructured and DBP is expected to resume lendingoperations in the near future.

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(c) LBP: Although LBP was founded to finance the land reform programand to assist agrarian reform beneficiaries and ex-landowners, ithas operated primarily as a commercial bank. LBP has fulfilled itsland-reform objectives largely by allocating profits from itscommercial operations. The government has supported LBP with bothequity and deposits (from 1980 to 1984 government deposits averaged80% of total deposit liabilities). Although its originalagricultural purposes have not dominated its operations, LBP hasbeen run as a conservative commercial bank; it has successfullyresisted political pressures, and has maintained a sound liquidityposition. Nevertheless, the bank's easy access to governmentdeposits seems likely to end under new regulations to be introducedunder the Bank's Economic Recovery Loan and the IMF StandbyAgreement. The bank therefore appears to face a major restructuringof its sources of funds and perhaps of its operations.

6. Private Development Banks (PDBs). Some 45 PDBs, with 222 offices,were in operation at the end of 1985. These are private institutions,although they have relied on DBP and LBP for about a fourth of their equity.As their name suggests, these banks have specialized in medium and longer-term'oans; but only about 10% of their loans were in agriculture and accounted foronly 6% of total agricultural credit. Their clientele was primarily amonglarger farmers--the average size of their loans was 20 times that of the ruralbanks. Since most of these banks have close ties to DBP and discounted manyof their loans with that institution, they have sharply reduced their lendingas a result of DBP's insolvency.

7. The Rural Banks. The 1,024 rural banks constitute the mostimportant component of the rural financial market. Like most of the (urban)private commercial banks, most rural banks started as closely held familyundertakings to service their own financial needs and business activities.Many served to incorporate and legitimize the previously informal money-lending activities of their owners. Despite these private objectives, therural benks have played an important role in monetizing the rural sector,mohili. -g savings, and in bringing under the influence of the centralmonetary authority a large segment of the rural economy. The rural banks arethe only ones to cater to smaller farmers: in 1985 their average loan sizewas P 7,500 (under US$400). Eighty-five percent of their portfolio is inagriculture, although (because of their small loan size) they account for onlya third of total agricultural credit. Most of their loans are short-termproduction loans, and most are rediscounted with the CB.

8. Today, a majority of the rural banks are experiencing financialdifficulties, with the survival of many in doubt. At the end of 1985, only904 of the 1,024 licensed banks were operating while 120 were underreceivership, liquidation, or dissolution. At mid-1986 some 676 (73% of thebanks still operating) had overdue accounts of one year or more with theCentral Bank. Not all the rural banks are in trouble, however. One hundredand eighty-four weathered the 1980-85 crisis well. A 1985 CB analysis of thesystem indicated that 132 of the banks were highly viable, having a soundfinancial structure and management; at the other end, some 253 were threatened

- 80 -ANNEX 7Page 4

with insolvency because of deficient or negative capital accounts. Inbetween, 549 banks were experiencing liquidity problems brought on by theeconomic crisis and non-performing loans.

9. The Legacy of Subsidized Credit. During the seventies thegovernment tried to help farmers with subsidized programs of supervised credit(i.e. packages of credit based on production plans drawn up with the help ofextension agents). While these programs (e.g. the Masagana 99 and Maisaganaprograms for rice and corn, respectively) were helpful in achieving productionobjectives, they were counterproductive to development of sound lendinginstitutions. The government programs used the rural banks as primarychannels for credit delivery. But the low interest, regulated spreads, andlax rules and procedures for making and collecting loans tended to underminethe incentives and disciplines of the banks, leading to weak loan evaluation,low collections, mounting arrearages, and growing disqualifications for CBrediscounting, despite excessively liberal rediscounting standards. In 1983,for example, rural banks were allowed to borrow up to five times their networth and twice their deposits when the commercial and thrift banks were heldto a much more prudent standard. Twice, when a large number of rural bankswere found to be illiquid/insolvent and were disqualified from further CBborrowing, political pressures prevailed on the CB to requalify them in returnfor restructuring schemes that stretched out past repayment schedules andattempted (unsuccessfully) to build up equity. But the new qualificationswere not adhered to and the restructured obligations themselves soon becameoverdue.

Noninstitutional Credit Arrangements

10. Informal financial arrangements are especially important to theagricultural sector. Most farmers are small farmers; for them, the informalfinancial system must be seen as the natural provider of financial servicessince few have access to formal credit. The informal financial sources seemto serve them effectively. Estimates indicated that in 1978 the informalsector provided between 64% and 78% of the total credit received by theagricultural sector (Table 15). It is expected that the numbers haveincreased since then. Tolentino recently stated: "The evidence that iscurrently available on the informal sector of the Philippine financial systemis very fragmentary. There are currently no estimates of the spe anddirections of the financial flows through the informal system".- There istherefore a need for sector work on informal credit. Much of what is known isbased on studies by Technical Board for Agricultural Credit (TBAC) which weredone several yeare ago.

1/ V. Bruce J. Tolentino: "Current Imperatives and Development inPhilippine Agricultural Credit Policy", Economics and SociologyOccasional Paper No. 1324, Ohio State University, March 1987.

- 81 -ANNEX 7Page 5

Table 15: COMPOSITION OF INSTITUTIONAL AND NONINSTITUTIONALCREDIT TO AGRICULTURE /a

(In percent)

Source 1950s Mid-1970s Late 1970s

Institutional 20-25 64-67 22-36Noninstitutional 75-80 31-33 64-78

Ia TBAC, "A Study of Informal Rural Financial Markets in Three SelectedProvinces in the Philippines, 1978."

11. A survey made by TBAC found that the informal sector issups creditprincipally on the basis of the good credit standing of the borrower and averbal promise to pay. Only 35% of the loans surveyed were secured by awritten promissory note and a verbal agreement to sell farmer produce, andonly 2.8% were secured with land title. Private lenders, particularly thoseengaged in palay trading, require their borrowers to pay in kind. In cases ofdefault, private lenders impose strict measures. Any additional loans aresecured by land title or chattel mortgage, and have interest rates doublethose of the defaulted loan. Repayment rates on informal loans are, however,higher than in the formal sector. The overall interest rates charged byprivate moneylenders include a risk premium and are designed to leave anadequate profit margin, explicit or hidden in commodity transactions.

12. A selective study of informal rural financial markets in thePhilippines carried out by the TBAC in 1978 provides glimpses of vitality,competitiveness and flexibility which are quite at variance with thetraditional view of informal lenders as monopolistic and exploitive.- Somemoneylenders, for instance, were found to charge interest rates below those ofcommercial banks while others charged higher rates. Moreover, high ratesprove somewhat illusory in terms of returns to lenders because of defaultrisks and repayment experience.

13. The Changing Structure of Rural Moneylending. Competitive behaviorin moneylending is seen in the eme-gence of a new class of lenders during the1960s and 1970s, consisting of farmer moneylenders and input dealers. Theinput dealers included in the TBAC sample accounted for two thirds of theloans made by sample moneylenders, which is indicative of their prominence.The survey results indicate that the new class of moneylenders has to a largeextent displaced landlords as the traditional source of funds for share

2/ TBAC, "A Study of Informal Rural Financial Markets in Three SelectedProvinces in the Philippines, 1978". The study surveyed 163 privatemoneylenders and 912 fatmer borrowers in tke provinces of Bulacan,Camarinws Sur and Isabela.

- 82 -ANNEX 7Page 6

tenants and small operators, although landlords still constitute about 15% ofthe sample.

14. According to the TBAC study, the new class of lenders arose inresponse to the profitable opportunities in product and credit markets createdby the revolution in seeds, fertilizer and related technologies as well as theexpansion of irrigation and the infusion of low-cost official credit into therural economy. These developments may have particularly favored increasedlending by input dealers in that their administrative expenses per peso loanedare lower than those of any other type of informal lender included in thesample. This suggests that the change in market structure reflects theeffects of cost-reducing financial innovation in the provision of service toclients. Input dealers entering moneylending were in many cases also newentrants into farm input supply. Half of the sample had been moneylenders forless than six years, suggesting increased competition in the market. Anotherindication of competition is the survey finding that moneylenders who werebuyers of rice were reported by half the farmers to offer higher prices forrice than other buyers.

15. The presence and effect of competition within the informal sectoralso were indicated in a survey carried o-ut by TBAC and the University of thePhilippines Business Research Foundation. The survey found tLat the averageannual interest rates (in 1978) on all fully paid informal loans were 33%,51%, and 83% p.a. in the three provinces surveyed. Interest rates were lowerin two of the provinces where input dealers, who are generally sources of low-cost informal credit, tended to predominate and compete with one another. Inone of the provinces surveyed, input dealers contributed around 90% of thetotal volume of loans issued to all borrowers by sample private lenders.

16. Loan Size. The average loan amount obtained from informal lendersin the TBAC survey was smaller than that from formal sources. This isindicated by the fact that informal lenders provided two thirds of the volumeof funds borrowed by sample borrowers, but about 83% of the number of loans.As is generally observed, formal lenders avoid small-scale lending in aneffort to economize on administrative costs.

17. Lending Rates. Average annual informal lending rates in the TBACsample ranged between 25% and 96%. The highest average annual rate reportedwas 163% on 2% of the total loan volume, while 26% of all informal loanssurveyed carried no contractual rate of interest. Interest rates on informalloans tend to be lower in areas where official credit and other formal lendingis relatively widespread. The extent to which this reflects the impact offormal credit on the overall supply of credit, or is simply the result offormal lenders' preference for low risk areas, has not been ascertained.Presumably, both effects apply.

18. The Justification for Informal Credit. The TBAC study finds aneconomic justification for the activities of small-scale private moneylendersin their comparative advantage arising from economies of scale. Theseeconomies ate realized through their integration of product and credit marketsbased on face-to-face arrangements. The study concluded that the method ofoperation of informal lenders tended to result in repayment ratea which were

- 83 -ANNEX 7Page 7

superior to those which can be achieved by formal institutions. Portfoliodiversification and risk minimization were also possible because privatelenders can better differentiate their lending terms and interest rates tosuit specific borrowers and transactions, while rural be.nks and other lenderstend to have fixed interest rates. Administrative expenses are alsorelatively low, averaging 5.7% of amounts lent by sample moneylenders.

Interaction Between Informal and Formal Credit Markets

19. Interaction between formal and informal financial markets is bothcompetiiive and complementary.

20. An interesting aspect of the interaction between formal and informalcredit is the extent to which informal credit appears to have replaced formalcredit as a source of funds for farmers who defaulted on government-backedloans and thus became ineligible for further official credit. This is wellexemplified by the use of credit by .ice farmers under the Masagana 99 program(M-99) introduced in 1972. At its peak approximately 800,000 small farmersused M-99 credit for seasonal inputs. This number has fallen to fewer than100,000 because borrowers failed to repay the loans as specified and weresubsequently denied further access to M-99 credit. Remarkably, in spite ofthe decreased use of formal credit rice production continued to expand. Itmust be presumed that the gap trom institutional credit was filled by acombination of infoumal credit and self-financing.

Recent Developments

21. As one of the important recent developments, Government hasconsolidated all government-run loan funds into a single fund (CALF orConsolidated Agricultural Loan Fund) (February 1987). It does not make directloans but it will guarantee loans made through the commercial banking system.Also, in April 1987, the Monetary Board approved a rural bank rehabilitationpackage that had been recommended by the Rural Banking Rehabilitation andReview Committee (RBRRC). Under the package, rural banks with rediscountarrearages can convert the arrearages to government equity in exchange forowners' equity infusions. The rehabilitation is an important step forward butadditional steps are needed to effect a more complete rehabilitation of therural credit system (paras. 74 and 75 below).

Summary of Main Facts and Recommendations

22. On informal credit the main points are:

(a) only a small percentage (around 20%) of smallholders depend oncredit; the others are self-financed. Those who want to borrow butcannot offer collateral depend exclusively on the infornial creditsystem; and even of those with collateral a large percentage borrowfrom non-institutional sources;

(b) to the extent that markets for inputs and outputs are competitive,the interest rates charged by the informal lenders are alsocompetitive. Even when markets are fully competitive, the nominal

- 84- ANNEX 7

Page 8

interest rates charged by informal lenders may still be relativelyhigh, but this can be explained by small loan size and higher risks;

(c) direct provision of credit to smallholders through Governmentchannels has in general not been iuccessful and it should thereforenot be encouraged; and

(d) knowledge of informal credit markets is sketchy and/or dated; newsurveys should be undertaken.

To improve the workings of the informal credit markets, Government policyshould aim at:

(a) ensuring competitiveness of input and output markets (increasedprovision of rural infrastructure and communications is an importantaspect of this);

(b) strengthening the formal credit system to provide more competition;and

(c) giving informal lenders access to the formal credit system toincrease their liquidity.

On formal credit the main points are:

(a) Currently only about 10-15% of agricultural production credit toagriculture is being provided through the formal credit system;

(b) such credit generally goes to agro-industrial enterprises and thecreditworthy owners of large farms or some smaller farms withcollateral; and therefore

(c) rehabilitating the rural banking system will only indirectly benefitsmallholders without collateral.

Nevertheless, the formal rural credit system should be rehabilitated for thefollowing reasons:

(a) it provides competition with informal lenders and provides liquidityto creditworthy traders who are informal lenders;

(b) it assists in savings mobilization; these savings are generally re-invested in rural areas, whereas larger commercial banks operatingin rural areas transfer savings out of the area to the urbancenter(s); and

(c) a rehabilitation of rural banks would be expected to contribute tothe growth (but not the equity) objective.

What Needs to be Done:

(a) The arrearages issue needs to be addressed by:

- 85 -ANNEX 7Page 9

(i) recognizing and partially writing off the arrears;(ii) increasing the capitalization of rural banks through equity

contributions; and(iii) closing down of unviable banks which cannot survive or deliver.

(b) entry to rural banking must be liberalized by:

(i) abolishing restrictions for opening rural banks and rural bankbranches; and

(ii) reduce restrictions on commercial banks and private developmentbanks to make it easier to open branches in rural areas.

1. Among the additional reforms needed, and which current studiesshould help -erify, are the follcwing:

(a) Reduction of the rediscounting ceiling of rural banks (now 500% ofnet worth and 300% of deposits). Implicit in the present ceilingsare loan-to-deposit and loan-to-net worth ratios which exceed thosefor any prudent banking operation. Most rural banks are well underthese ceilings today; the CB could probably impose limits of 100% ofnet worth and 50% of deposits immed&.ately with minimum embarrass-ment; banks over these limits c2uld be given three years in which tocome into compliance.

(b) CB supervision of rural banks must be strengthened--in particular,its technical assistance and supervision functions should beseparated.

(c) Closer analysis of proposed consolidations and acquisitions shouldbe conducted before CB approval. Rural bank acquisitions bycommercial banks should be suspended pending receipt and evaluationof the rural banking study.

(d) To promote infusions of equity into rural banks, the law should berelaxed to allow one-family/one-party holdings in excess of 20% incases of capital increase. The ceiling should be retained, however,when holdings are X sreased through purchase of existing shares fromother owners.

(e) Using results of the rural financial study, the CB should developfinancial ratios and capital-strusture models that can serve asguidelines for rural bank operations and for supervision.

(f) Although a suggestion has been made for the establishment of a newagricultural apex bank, to take over the wholesaling/rediscounting/regulatory roles now played by the CB, this does not seem to be thehighest priority. It seems more important to accelerate theprocessing of rehabilitation decisions by the CB. The combinationof rehabilitated rural banks, more rural branches of commercialbanks, and the continuing spread of informal credit should meet thecredit needs of small and medium farmers.

- 86 -ANNEX 8Page 1

PHILIPPINES

AGRICULTURAL SECTOR STRATEGY REVIEW

Fertilizer

1. Background. In addition to high yield varieties (HYV) andirrigation investment, fertilizer has had a critical influence on productivitygrowth in Philippine agriculture, especially in rice. Following theintroduction of HYVs, Philippine rice production grew at 4.2% a year (1965-82)with fertilizer use accounting for approximately one-third of the yieldincrease. Fertilizer use in the Philippines has been growing at an annualrate of about 61 from 454,000 mt in 1970 to 870,000 mt in 1983. Largelybecause of price increases and credit constraints, a substantial contraction(to 665,000 mt) occurred in 1984. Demand increased again in 1985 to733,000 mt, still 137,000 mt below the 1983 level. Much of the difference isprobably accounted for by reduced demand in the sugar subsector. There aresome eight types of fertilizer used in the country. Urea, used mostly onrice, is predominant, constituting about 40% of total consumption; it isfollowed by NPK mixed-fertilizer (20%), ammonium phosphates (16%), ammoniumsulphate/ chloride (16%), and muriate of potash (8%).

2. Of the total fertilizer consumed in the country, food cropsaccounted for 64% and commercial crops 36% in 1982. The major food cropsusing fertilizer included rice (44%) and corn (5%). The sugar sector used37%, pineapple and banana 6%. The rate of fertilizer use for rice is closelyrelated to the availability of irrigation and adoption of &igh-yielding varie-ties: for irrigated rice it is 62 kg of nutrient per ha 1 whereas forrainfed rice it is 26 kg per ha. Compared to other Asian countries theestimated average fertilizer consumption in the Philippines is low.

3. A major factor affecting the pattern of fertilizer consumption isthe relative price of fertilizer to the price of the output (e.g., the priceof palay). Fertilizer/crop price ratios in the Philippines for rice and cornare among the highest in Asia, (the N/paddy price ratio is higher only inThailand), and as a result the use of N per ha in the Philippines is thesecond lowest in the region (38.5 kg N per ha). When the price ratio has beenfalling (1970-73 and 1984-85), fertilizer use has picked up. While thefertilizer/tobacco price ratio has been relatively stable over the years, theprice ratio of sugar has fluctuated widely and the price ratio of corn hasbeen increasing continuously since 1970. Finally, credit availability and itsprice are also major factors affecting the use of fertilizers. The decline incommercial credit and the sharp rise in its cost have been factors in the dropin fertilizer use during 1983-84.

4. Marketing and Pricing Policies. Government's approach to fertilizerpricing policy in the past has been to achieve a balance between the conflict-

1/ Actual nutrient content.

- 87 -ANNEX 8Page 2

ing objectives of providing low fertilizer prices to farmers and givingadequate incentives to domestic fertilizer producers at acceptable budgetcosts. However, that policy, initiated mainly to protect domestic food pro-duction, evolved into one of protecting the domestic fertilizer industry.Agricultural output suffered as farmers, burdened with most of the cost ofsupporting a high-cost domestic fertilizer industry, used less than what theyotherwise would have. Urea-using rice and corn farmers paid only a slightpremium (about 10% over the border price) between 1973-80. Farmers usingother types paid much higher penalties: ammonium sulphate was 27% higher thanthe world price and muriate of potash (used in sugar and other export crops)averaged 86% above world prices.

5. Until 1978 four domestic companies were involved in the productionof fertilizer. But because of technical problems and high production coststwo firms ceased production in 1978; by 1984 the other two had also shut downtheir operations. In 1984, however, the Philippine Phosphatic FertilizerCompany (PHILPHOS), a large government-owned corporation started producingphosphatic fertilizers both for domestic consumption and export. Up to 1984only four firms were permitted to produce, import or distribute fertilizer.Controlled prices were set such that these firms obtained guaranteed netprofits of 2% on their sales. Distribution costs were high because of a lackof competitive pressures. In August 1934 limited steps toward liberalizationwere taken, although a full liberalization had been announced. Several inter-ventions remained. First, any importer who imported one ton of fertilizer wasrequired to purchase 0.6 tons of fertilizer from PHILPHOS. (The importedfertilizers are urea and potash; PHILPHOS is producing various phosphaticfertilizers.) Second, a pooled buying system was being followed under whichthe Fertilizer and Pesticide Authority (FPA) estimated future import needs andcalled for bids from international fertilizer traders. The quantities werethen distributed by FPA to the domestic distributors. Preference was given tothe large firms. Third, provincial price ceilings remained in effect in allprovinces, differing according to distance from warehouses. (Before 1984 theprice ceilings did not prevent extensive overpricing by the four firms.)Fourth, beginning in May 1985 a P 10 tax per 50-kg bag of fertilizer wasassessed on all domestically produced or imported fertilizer in order toestablish a fund for the rehabilitation of Planters Products Inc. (PPI), oneof the original four producers/distributors. The firm is heavily indebted toforeign banki and was unable to meet its obligations in 1985. Even though thedebt was not guaranteed by the Government, the creditors pressured the Govern-ment to assume responsibility for the rehabilitation of PPI. The taxconflicts with a strategy which expects agriculture to play a key role in therecovery process. Fifth, an ins-itutional conflict of interest situationexisted since the Administrator of FPA was also Chief Executive Officer ofPHILPHOS.

6. Recent Developments. First, the conflict of interest situation wasremoved in March 1986 with the appointment of separate chief executive offi-cers for FPA and PHILPHOS. Second, in May 1986 an effective liberalizationpolicy was implemented for urea and potash resulting, within a two-monthperiod, in a doubling of firms impot:ing and distributing fertilizer. Ureaconsumption has increased markedly as prices and marketing margins have beenreduced. Pooled buying by FPA was discontinued, i.e. importers placed their

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Page 3

own orders. Third, importers and distributors have discontinued paying theP 10 tax and the Government is not enforcing its collection.

7. Recommendations of the Agricultural Policy and Strategy Team(APST). These are:

(a) Fertilizer imports should ccntinue to be allowed duty free;

(b) Import licensing should be liberalized, price controls removed, andthe P 10 surcharge formally abolished;

(c) FPA's function should be to support the private sector's activitiesand not be to regulate prices except in extreme cases of widelyfluctuating world prices;

(d) PHILPHOS and Planter's Products should not be protected at theexpense of the farmers;

(e) There is a need for more research and development to improve theefficiency of fertilizer use;

(f) A shift from low analysis to high analysis fertilizer should bepromoted; and

(g) The establishment of high speed unloading and bagging facilities forbulk imports should be studied.

8. We agree with these recommendations. According to the tariff codethe import duty on fertilizer is 20%, but with the use of certain accountingprocedures and with FPA involvement, importers of urea and potash are exemptedfrom paying the tax. Except possibly for the Ministry of Finance, thisrecommendation is probably acceptable to all parties involved as far as ureaand potash are concerned. But PHILPHOS has argued for protection for the(phosphatic) fertilizers which it is producing and a 20Z import tariff hasbeen retained. In the Bank's view the interests of farmers outweigh those ofPHILPHOS and preferably no tariff should be imposed. PHILPHOS should produceas long as it makes an operating profit; and Government should absorb the non-operating losses. (It is expected that issues related to PHILPHOS will bestudied by an incernational consulting firm under a USAID contract.)

9. Import licensing is currently not handled in a restrictive manner;nevertheless, it should be abolished as should also provincial priceceilings. These are no longer necessary; well-functioning competition in themarket is a better guarantor of reasonable prices for farmers than pricecontrols. We agree that the P 10 sycharge should be abolished; the Planter'sdebt was private and nonguaranteed -, at the time it was incurred; theGovernment is under no obligation to lenders to assume ex-post guaranteesand/or have to force farmers to pay for the rescue effort.

2/ As compared to the debt of PHILPHOS which was guaranteed by Government.

- 89 -ANNEX 8Page 4

10. FPA's role for the future should mainly include quality-controlmonitoring of fertilizer, standard-setting, and information-gathering/dissemination.

-. 90 -ANNEX 9Page 1

PHILIPPINES

AGRICULTURAL SFCTOR STRATEGY REVIEW

Agricultural Research and Extension

1. Introduction: Agricultural research in the Philippines is conductedby many universities, departments, agencies and private enterprise.Agricultural extension is similarly emanating from a number of departments andagencies. There exists a well functioning coordinating system foragricultural research, but this mechanism is sadly lacking for extension.

Research Coordination

2. All agricultural, forestry and fishery research was until early 1987coordinated by the Philippine Council for Agricultural and Resources Researchand Development (PCARRD) for a total of 2916 projects in early 1987. With therecent reorganization of the National Science and Technology Authority intothe Department of Science and Technology (DOST), PCARRD was abolished and re-placed by two councils, one for agriculture, forestry and natural resources(which is still referred to by the acronym PCARRD) and one for aquatic andmarine fishery (PCAMRD). PCARRD has a good track record in research planning,coordination and evaluation through annual regional workshops and meetings.It organized a system of consortia for regional research coordination by thevarious agencies executing research, to ensure that the respective researchefforts were mutually supportive and not duplicative, while meeting regionalrequirements. It was also fully supportive of research verification on-station and on-farms within the various agro-ecological zones to ensure thatresearch results would be of benefit to local farmers. Furthermore PCARRD isdoing an excellent job in attracting funds (both local and foreign, m.ainlyfrom USAID, the World Bank, UNDP and some bilateral donors) for expanding andequipping facilities at the major national and regional research centers; forimproving conditions of staff employment; and in disseminating research re-sults through its series of scienti.ic and more popular publications andthrough the media. Its annual report, and in particular the 1986 issue--Highlights from the Philippine Agriculture and Resources Research and De-elop-ment Network 1986--is of an excellent standard. However, there have beencriticisms about PCARRD's operations and overstaffing. A self-examination maybe useful to achieve further efficiency in operations. Under DOST the twoCouncils can continue to coordinate independently all research efforts in thesector. The Department of Agriculture (DA) must now, however, deal with tworesearch overview organizations.

3. Technology generation (TG) is mainly the domain of the StateColleges and Universities (SCUs) and the single crop research centers forrice, sugarcane, coconut, tobacco, cotton and forestry. Technologyverification (TV) on stations or on farms is mainly the responsibility of DA,but several other centers do also some TV work. For 1987, budget appropria-tions for R&D through the PCARRD monitored system amount to P 354.5 million,85% of which come from the Philippine Government and 15% from loans andgrants. The breakdown of funds from the former is as follows: DA 29%, the

- 91 -ANNEX 9Page 2

SCU's 34%, single crop research centers :0%, and the remaining funds (12%) goto other departmenLs (DENR, DOST, etc.) The percentage of direct cost andoverhead cost to total 1987 budget is 75% and 25% respectively. Within theSCU R&D system composed of 29 colleges/universities, almost 70% of totalbudget is alloted to four major universities: UPLB, ViSCA, CLSU and USM.Appendix 1 provides an overview of institutions included in the National R&Dnetwork, with their respective responsibilities. It also lists the regionalR&D centers/consortia established by PCARRD since 1978 which provide themechanism for planning, programming, monitoring and evaluation of R&D projectsand sharing of res3urces at the regional level.

4. Technology verification (TV) has now been accepted as extremelyimportant in tailoring research results to the needs of the farming commu-nity. This is expressed in the substantially increased funding for DAresearch in most recent years (see Table 2).

5. It is DA's aim to provide farmers with farming technology which willnot only increase their productivity, but also increase their incomes andimprove the nutritional status of their families. Under the RegionalIntegrated Agriculture Research Station (RIARS) system there is a change fromthe commodity approach of the past to the whole farm enterprise approach. Thenew research system is thus aimed at developing location-specific and cost-effective farming technologies for the various agro-climatic zones, soil typesand socio-economic conditions of the farmers nationwide. DA conducts itsverification work both on RIARS and sub-stations (mainly component technologytesting) and on farms. Test sites are selected in the most important agro-ecological zone in each province, and also for their good potential forimprovement on the basis of rapid mini surveys by the RIARS core team ofmultidisciplinary researchers and the Provincial Technology lerification Teams(PTVT), consisting of extension personnel specifically assigned for thiswork. The work is aimed at making the farmers profitable since all results oftrials are subjected to economic evaluations and farmer acceptability isgauged. Cropping patterns and integrated crop-livestock farming system trialsare farmer managed. It was recently estimated that about 75% of the trialsare promising for test factors such as fertilizer management, variety, pestcontrol and the addition of an extra crop. Although improved fertilizer useand management is most promising in terms of yield increases, returns oninvestment are generally low. Changing to improved crop varieties was gener-ally found most profitable. There is a very important message in this find-ing. Researchers must identify low cost technology which results in a highmarginal benefit cost ratio. TG research must not merely strive to achievehigh yields: these must be achieved at lowest cost and risk.

6. Although there has been good progress with TV work, the number ofsites per province needs to be further increased to cover more agro-economiczones. This may become possible with increased funding from a recent US-AIDloan and continued funding under the Agriculture Support Services Project.There remains, however, a great need to improve staff motivation and mobilitythrough improved salaries and incentives to increase effectiveness andoutput. Systematic data analysis with the International Maize and WheatImprovement Center (CIMMYT) and UPLB assistance is improving, but requiresfurther work.

- 92 -ANNEX 9Page 3

7. Once the appropriate technology has been verified to be suitable foran area, it is exposed to the farming community through a Barangay PilotProduction (BPP) program. All rarmers in the pilot area use the new andsuperior technology so that they can decide if it is worthwhile for adoptionin the future. In 1986 there were 41 BPPs and it is expected that this numberwill increase quite rapidly in the future. However, many technologiesconsidered suitable often required too much capital input or too much skill.

Research Funding

8. It is difficult to obtain a clear picture of research funding. NEDAdata show substantially larger allocations than data provided by PCARRD. Itis known, however, that the latter data do not include funding made availablethrough crop production tax levies, such as for sugar industry research. Inaddition to public sector research, private industry has substantial researchoperations for plantation crops and for seeds, herbicides, pesticide, agricul-tural machinery, livestock, etc. Furthermore, direct funding for researchthrough PCARRD does not include development and overhead funding which makesdata interpretation difficult.

9. Research and Development (R&D) funding is from four sources: directallocations by the Department of Budget and Management (DBM) to the variousdepartments, universities and colleges and the single crop research centers;grants-in-aid (CIA) through PCARRD, which may also include local and foreigngrant and loan funds for the various agencies; part of commodity tax levies(e.g., tobacco and sugar); and private industries. Budget appropriations for1986 and 1987 and a budget request for 1988 for the PCARRD-administeredNational Research and Development Program (NRDP) are presented in Table 1:

Table 1: NRDP BUDGET REQUIREMENT /a(P '000)

1986 1987 1988Source (appropriation) (appropriation) (request)

Direct to agencies from DBM 253,743 296,370 320,603

PCARRD - grants in aid 36,442 58,120 128,530from DBM (4,909) (4,573) (53,000)grants (foreign and local) (27,923) (44,364) (68,311)loans (foreign and local) (3,610) (9,183) (10,219)

Total 290,185 354,490 499,133

/a Includes overhead, research and development for fisheries and mining, butexcludes funds raised through levees (e.g. sugar).

-~ 93 -ANNEX 9Page 4

10. NEDA's estimate for Gross Value Added (GVA) in agriculture, fisheryand forestry for 1986 was P 163,934 million (current prices). R&D expendi-tures monitored by PCARRD thus represented less than 0.2% of GVA. This issignificantly below R&D expenditure in neighboring Asian countries, where itranges from 0.26% to 0.48% of GVA. It was estimated by APST that private re-search in 1985 could have contributed an additional P 85 million. If this wassustained in 1986 then total R&D expenditures (inclusive of funds earmarkedfrom tax levies) could have approached 0.3% of GVA, which remains well belowthe desired level of about 1% of GVA in agriculture.

11. As noted PCARRD recommends research funding to DBM for allocation tothe various departments, including the SCUs and the single crop research cen-ters. Recent allocations of PCARRD-reviewed funds are summarized by agency inTable 2:

Table 2: RESEARCH AND DEVELOPMENT BUDGET FOR AGRICULTUREAND NATURAL RESOURCES /a

(p '000)

1986 1987(appro- (appro- 1988

1985 priation) priation) (proposed)

Department of Agriculture 27,002 77,190 68,164 105,875Department of NationalResources 14,842 26,035 21,015 49,995

Department of Education,Culture and Sports andState Colleges andUniversities 64,677 55,200 81,200 116,018

Department of Science &Technology 10,042 12,454 14,937 59,319

Department of AgrarianReform 40 22 22 -

Research Centers(Single Commodity) 24,418 31,272 35,497 26,191

Grants 15,528 27,923 44,364 68,311Loans 15,866 3,610 9,183 10,219

Subtotal 172,415 2339706 274,382 435,988

Overhead 62,580 56,479 80,108 63,145

Grand Total 234,995 290,185 354,490 499,133

/a Excludes levy-funded and private research.

- 94 -ANNEX 9Page 5

12. Total expenditures for R&D were to increase by 23.5% and 22.2%respectively above the previous year in 1986 and 1987. However, due to budgetconstraints or for other reasons, not all appropriations carried through to"releases". Actual expenditures for 1986 are not available. AlthoughPCARRD's proposals were in line with NEDA guidelines for increased R&Dexpenditures for 1988-92, there was a directive from DST freezing R&D budgetsat 1987 levels for the next three years. PCARRD is attempting, and hasalready been successful in obtaining additional grant funds from multi andbilateral donors in order to boost total available R&D funds. It is thus notclear whether or not there will be any increase for R&D over the next fiveyears. PCARRD considers that it would be possible to absorb a four to five-fold increase over a 5-7 year period because of the very substantial under-funding in last few years. From Table 2 it is clear that there has been asignificant shift in R&D allocations through the PCARRD system away from theSCUs and towards DA. In 1985 SCUs were allotted 1.5 times the amount DA wasgiven; 1987 appropriations for SCUs increased by 26% but those for DA by 63%(over 1985 levels) which left DA research funding only 16% below that forSCUs. This indicates a much greater emphasis on TV research. Within DA theR&D allocations for 1988 are about 44% for the 12 regions, 27% for DA head-quarters and the Bureaus, 14% for the National Post Harvest Institute forResearch and Extension (NAPHIRE), 12% for the Philippine Tobacco Authority(?TA) and the rest for some smaller agencies.

13. The ratio of research funds to values of selected commodities in1985 and 1986 is presented in Table 18, together with the PCARRD monitoredresearch expenditure appropriations. This does not include, however, theresearch expenditures for overhead, from tax levies, and private research.R&D expenditures are also made for a combination of crops/commodities underthe heading soil and water resources, agricultural engineering, farming sys-tems and commodity combinations and these are also not specifically allocatedby crop/commodity. It is therefore extremely difficult to draw conclusionsfrom the data. It is known, for example, that 1986 research appropriationsfor sugarcane were about P 30.0 million while PCARRD monitored expendituresindicate only P 195,000. Banana and poultry research is substantially by theprivate sector and therefore the total and percentage of research expendituresfor these important commodities are grossly under estimated. Expenditures forpalay (rice) are also substantially lower than actual, since the InternationalRice Research Institute (IRRI) located at Los Banos has also many trials inthe regions from which the Philippines has already greatly benefitted and morework is being done in various agro-climatic zones.

14. From Tables 3 and 4 and from other data available it is clear thatthere remain unbalanced fund allocations. Corn, fruit (mango and citrus),coffee and fishery research appear to be substantially underfunded. Cropswhich used to benefit greatly from production tax levies, such as sugarcaneand tobacco, received very high allocations compared to other commodities.Some specific minor crops such as pulses, abaca and medicinal crops receivedgreater allocations than their contribution to the economy may warrant.Cotton and wheat research allocations are also generous but these are forimport substitution crops and may thus be warranted.

ANNEX 9Page 6

Table 18: RESEARCH FUND ALLOCATTON IN RELATION TO CROP IMPORTANCE

Research Indicative /bArea Production Value budget allocation research bud-

1985 1986 1985 1986 1985 1986 1986 1987 get to crop-- (1)00 ha) - ('000 tonnes) (d million) ---- (P'000) ----- value ratio

Palay 3,222 3,403 8,200 9,097 24,969 27,983 11,006 8,229 0.36

Corn 3,315 3,545 3,439 3,922 9,543 9,842 1,833 2,595 0.22

Coconut 3,275 3,261 2,964 3,162 12,629 4,496 8,611 14,305 1.33

Root crops 422 423 2,453 2,668 3,430 3,916 11,456 13,216 3.35

Sugarcane 407 356 2,748 2,135 9,278 7,663 195 3,193 0.19

Banana 328 330 3,698 3,820 4,235 4,885 582 42 0.06

Abaca 169 162 84 83 680 441 3,317 992 3.84

Coffee 145 148 133 137 3,590 3,882 540 826 0.18

Vegetables 134 137 760 790 3,397 3,695 4,442 4,780 1.30

Rubber 72 75 146 154 786 499 283 671 0.71

Pineapple 54 60 1,449 1,601 2,182 3,424 99 104 0.03

Tobacco 51 57 47 55 714 763 2,921 16,323 13.02

Beans and peas 51 50 41 38 421 407 8,145/a 7,917/a }} 9.77

Groundnuts 50 50 45 44 384 431 - - }

Mango 45 49 384 296 3,109 2,995 764 308 0.17

'itrus 25 26 123 132 548 619 - - -

Cacao 13 15 5 6 162 189 398 264 1.88

Cotton 5 4 6 4 38 28 609 1,961 3.89

/a Includes vegetable legumes and groundnuts.7T; Simple averages of 1986 and 1987 research budget allocation (Pd000) to Average Crop Values

(f million).

Source: PCARRD, April 1987.

- 96 - ANNEX 9Page 7

Table 19: BUDGET PROVISIONS BY SECTOR/COMMODITY FORRESEARCH AND DEVELOPMENT, 1986-88 /a

(POO0)

1986 1987 1988/b

Cro soco.ut and oil palm 9,053 14,305 23,253Corn and sorghum 3,541 3,672 13,584Fiber crops 4,792 3,420 6,791Legumes 8,547 7,917 2,611Plantation crops 1,645 2,723 5,437Root crops 11,456 13,216 25,419Vegetable crops 4,442 4,780 6,404Fruit crops 4,443 6,624 11,249Sugarcane 195 3,193 4,977Rice and other cereal grains 14,691 8,698 46,986Tobacco 2,840 16,323 20,785Ornamentals and medicinal plants 762 1,323 4,082

Total 66,407 86,194 171A578

Farm Resources and Syste~r¶Somi resources 3,500 4,845 11,878Water resources 807 224 3,798Agriculrural engineering 637 691 1,604Farming systems 2,537 3,357 10,545Commodity combination - - 3,949

Total 7,481 9,1l7 31,774

FisheriesMarine 6,211 7,064 16,138Aquaculture 4,639 4,494 12,230Inland waters 1,721 1,264 4,091

Total 12,571 12,822 32,459

ForestryAgroforestry and forest plantation 4,366 8,529 10,747Mangrove and beach-type forest 515 4,498 3,820Dipterocarp and lesser-used species 1,898 3,284 12,160Pines and other soft-wood species 534 421 4,077Molave-type forest 407 207 3,572Bamboo, rattan, forest vines and

medicinal plants 808 3,036 12,855Parks, wildlife and forest range 624 2,277 3,022Commodity combination - 187 11,592

Total 9,152 22,439 61,845

LivestockPoultry 544 598 980Pork 673 808 620Carabeef 5,928 5,455 7,687Beef chevon 2,104 2,826 1,996Forage, pasture and grasslands 708 1,100 3,429Dairy 1,749 182 402Commodity combination - 505 12,394

Total 11,706 11,474 27,508

SocioeconomicsMacroeconomics 14,842 12,100 21,226Applied rural sociology 1,643 1,656 16,886

Total 16,485 13,756 38,112

GRAND TOTAL 123,802 155,802 363,276

/a Direct research appropriations without development and overhead.7_ Budget proposal.

Source: PCARRD, April 1987.

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Research Direction

15. The systeir of establishing research priorities requires review, tak-ing account of all research efforts for the various crops or cropping farmingsystems. This review can be handled by PCARRD with possibly some outside as-sisLance. It should ensure that research priorities are established in accordwith the present and the anticipated future importance of the crop, commodityor system to the economy. Emphasis must be given to high productivity, butthis should be at the lowest possible cost to allow for high farmer profita-bility. Both basic and applied research should therefore focus on aspectssuch as the following:

(a) Biological nitrogen fixation in association with bacteria bymonocotyledons;

(b) Production and use of low cost organic fertilizers;

(c) Crop breeding for drought resistance/avoidance and pest and diseaseresistance/tolerance;

(d) Low cost mechanization, drying and storage; and

(e) Food technology for preparation of high value, acceptable productsfrom relatively low value crops (root crops, mungbean, sorghum,etc.).

Adaptive- and on-farm research should specifically focus on:

(a) Crop/livestock/fishery adaptability testing under adverse conditions(poor soils, poor rainfall distribution, etc.);

(b) Improved returns on investments for crops, livestock and fisheries;and

(c) Low cost mechanization, drying, storage and marketing of produce.

Agricultural extension

16. Extension services are now mainly provided by DA through its fullyregionalized services. Each of the twelve Regional Offices has an AssistantDirector for Operations, who is responsible for the provincial extensionoperations through the Provincial Agricultural Offices (PAO) and the MunicipalAgricultural Officer (MAO). It has recently been decided that the lowestlevel extension officer or the Agriculture and Food Technologist (AFT) willbecome a generalist extension worker. The present home economics and ruralyouth workers as well as livestock inspectors and also cooperative officerswill also be retrained as generalist AFTs. According to the latest statis-tics, DA has a total staff complement of 23,617, of which 3,163 are at head-quarters in Manila. There are some 9,070 technical staff under the old Bureauof Agricultural Extension in the regions. Additionally there are some 2,830technical staff under the old Bureau of Animal Tndustry and 500 under theBureau of Cooperatives Development. Assuming that about 80% of the regional

- 98 -ANNEX 9Page 9

technical staff in these old line bureaus do extension works there are a totalof about 10,00(k extension agents in 1,564 municipalities (about 6 per muni-cipality, with some 3.4 million farm families in about 40,000 villages (beran-gays). The extension ratio under DA therefore is about one technician:340farm families. This ratio is significantly higher than that found or aimed atin neighboring countries (Thailand and Malaysia 1:800; Indonesia 1:1,300, withJava/Bali 1:1,600, and transmigration areas and outlying islands 1:500-700).

17. In addition to the DA many local government and other organizationscovering irrigation, agrarian reform, sugar, tobacco, coconut, etc. also pro-vide extension services to the farming community,. and it is not unusual that afarmer can be visited by agents of five or six organizations all providingagriculture-related advice. One of the most urgent needs is to consider theconsolidation of agriculture-related extension services under the DA.Extension personnel, and in part'cular AFT level staff, are the lowest paidgraduate level public servants and are paid less than rural teachers. Theirallowances for travel do not permit them to be adequately mobile and to adhereto a regular schedule of visits to farming communities under the T&V system ofe'xtension. There is an urgent need for an in-depth review of rural extensionservices, which should lead to recommendations for a sustainable and afford-able service with motivated, well remunerated and well trained staff. Theremay be a need for separate btaff for regulatory work under DA and/or otheragencies working in rural areas. The review may lead to staff redundanciesfor which adequate provisions should be made. Conservatively estimated theremay be a total of at least 25,000 extension workers by the various agenciesand it is unlikely that the country can support such a large unified agricul-tural extension service (an extension agent for about 140 farm families) onceattractive salaries and benefits are provided. The problem is well recognizedby the Government, but it is unlikely that a solution can be found in the nearfuture due to political and funding constraints.

18. Recent Studies. The Netherlands-based International Service forNational Agriculture Research (ISNAR), a center of the Consultative Group forInternational Agricultural Research (CGIAR) reviewed DA research following aninternal review by a local team with the assistance of an Indonesian cinsult-ant. The January 1986 report made a number of valuable recommendations forimprovements of research under DA. Following the change of Gov2rnment inearly 1986, the Agricultural Policy and Strategy Team (APST) also reviewedagricultural research and extension and made a number of recommendations intheir Agenda for Action for the Philippine Rural Sector. This was furtherfollowed by an August 1986 set of Recommendations for Agricultural Researchand Extension in the Philippines (Policies and Guidelines) prepared by a fewmembers of the APST. The March 1987 reorganization of the Ministry adoptedsome of these recommendations but others were rejected for a number ofreasons.

19. New Organization. Through Executive Order No. 116 of March 10,1987, the old Ministry of Agriculture and Food was reorganized as theDepartment of Agriculture under the Secretary of Agriculture, assisted byseven undersecretaries and seven assistant secretaries. The Undersecretaryfor Staff Operations is to provide staff, administrative and financial supportservices for research, training and extension. The Undersecretary for

- 99 -

ANNEX 9Page 10

Regional Operations will oversee the implementation of agricultural plans,policies, programs and projects in regional and field offices, as well as theProduction Group (see para. 21). In each of the regions there will be threeAssistant Regional Officers (previously 2) assigned to Operations (whichincludes extension), Research, and Support Services. It is significant thatone new position of Assistant Regional Director will now become directlyresponsible for regional research, which indicates that the Government willcontinue to support the regional research efforts which are now supported byASSP and also US-AID and other donors. Extension services at regional levelhave not been changed either with regard to line of command or administra-tion. The lowest level extension workers will now alt be retained asmultidisciplinary generalists, supported by Subject Matter Specialists (SMS)at provincial and regional level, with some continuiag specialization atmunicipality level. It remains the aim of Government to introduce a modifiedT&V system of extension which would provide frequent regular visits to farmingcommunities by well trained, motivated and mobile extension workers.

20. At DA headquarters in Manila the changes are significant. AnAssistant Secretary is assigned to the Research, Training and Extension Group,who will be responsible for conducting research, training and cooperativedevelopment through the new staff agencies: the Bureau of AgriculturalResearch (BAR) which will absorb the old Agricultural Research Office (ARO)established under ASSP and the Field Trials Division of BPI; the AgriculturalTraining Institute (ATI) which will include the Bureau of AgriculturalExtension, the Philippine Agriculttiral Training Council and the PhilippineTraining Center for Rural Development in Los Banos; and the Bureau ofAgricultural Cooperatives Development (BACOD). Agricultural research in DAhas thus been significantly upgraded to the Bureau level with a director incharge. ATI will now only be responsible for staff training and presumablywill continue to be involved in extension policy formulation and analysis,although this is not clear from E.O. 116. One of the major tasks of ATI willbe to train all staff in farm. management economics which will be morenecessary than ever before, now that DA has adopted farmer profitability asits major goal.

21. The old Bureaus of Plant Industry (BPI) and Soils (now merged intothe Bureau of Soils and Water Management) now fall under the new ProductionGroup, together with the Bureau of Animal Industry (BAI) and the Bureau ofFisheries and Aquatic Resources (see para. 19). Although the bureaus havetheoretically retained only staff functions, such as policy lanning andregulatory activities, they continue to perform some line functions. Forexample, BPI will continue to be responsible for several reseach farms and forcoordinating regional variety trials (which evaluate new varieties before theyare released to the farming community). It is also proposed that each bureauwill continue to undertake its own research activities, with BAR as thecoordinat3r under the overall umbrella of an Agricultural Research Councilwithin DA (Chaired by the Secretary). In summary, the reorganization hassignificantly enhanced the status of agricultural research in DA. However,many organizational questions remain to be resolved, and the mode ofcoordination with PCARRD and its consortia in the regions mast also beclarified.

- 100 -ANNEX 9Page 11

22. The Philippine Coconut Authority (PCA), the Sugar RegulatoryAuthority (SRA), and the tobacco and cotton agencies are now also attached toDA. Each of these agencies have their own research and extension activities.Staff are generally significantly better paid (often more than double) and havebetter allowances than DA personnel with equivalent qualifications andresponsibility. It is not certain how far the activities of these agencieswill be integrated with DA research and extension. It is, however, obviousthat a decision must be made and if there is a full integration of extensionserv.ces, then adequate arrangements must be made to ret4in experienced andqualified staff. Many of the crop specialist extension/development staff couldbecome SMSs in a consolidated extension service under DA. Another decision isrequired with regard to intercropping under coconuts. At present PCA considersitself to be responsible for all crops in coconut areas, although FSSRI andother SCUs also conduct research in intercropping/livestock grazing undercoconuts. It would, however, be possible to integrate PCA's on-farm researchwith that of the RIARS network. How regulatory functions for these agenciescan be integrated with those of DA should also be determined, and this mayresult in surplus staff in the combined agencies. In the meantime, PCAproposes to double its extension staff.

23. Research and Extension Linkages. At the provincial level there arealready excellent linkages through the RIARS core team specialists, who workclosely with provincial, and where applicable, municipal SMSs. Furthermore,the PTVTs are selected from extension AFTs and are in almost daily contact withthe extension workers in the barangays and municipalities. At the regionallevel the two Assistant Regional Directors responsible for extension andresearch should be able to liaise closely. It is PCARRD's aim to have oneresearch Consortium in each Region for planning and coordination of research bythe various agencies. Extension has so far not been included in consortiameetings. It is suggested that the Assistant Regional Director responsible forextension services and one or two key SMSs be invited to these meetings, toprovide feedback from the extension experience and to learn of new promisingtechnology which requires verification and/or dissemination. At the nationallevel there is now a Director of BAR with staff responsible for supervising andplanning research in DA. The Director of ATI will be responsible for formu-lating extension policies and for staff training. There are frequent occasionswhere senior national and regional research and extension personnel can gettogether, for example at the twice yearly liaison meetings at IRRI, at specifictraining sessions or at seminars organized by BAR (previously ARO) or PCARRD.Evidently the present DA management desires to have a close relationship withthe farming community and wishes as much input from farmers and lower levelstaff as possible in future planning of services (bottom-up planning). This isbeing implemented through the municipal, provincial, regional and national Foodand Agricultural Councils.

24. Staff Remuneration and Training. The various studies conducted in1986 and early 1987 all have one theme in common: extension staff are insuf-ficiently rewarded and DA research personnel are significantly disadvantagedcompared with SCU researchers. PCARRD has 'forked hard to achieve better termsand conditions for SCU personnel. However, there remain significant diffe-rences in range; e.g., a PhD researcher at UPLB has a range from P 2,964-6,000per month, while a VISCA PhD's range is P 2,553-4,637. In contrast a PhD

- 101 - ANNEX 9

Page 12

researcher in DA has a range of only P 1,972-2,999/month. Similarly BS agri-cultural researchers in UPLB, VISCA and DA earn P 1,401-2,199, P 1,335-1,715and P 504-1,802 per month respectively (before the March 1987 general 20%increase in remuneration). Under the PCARRD national research program thestudy leaders, project leaders I & II and program leaders I & II recei-eadditional honoraria of P 700; 1,000, 1,500; 2,000 and 2,500 per monthrespectively. To ensure that adequate weight is given to verification type ofresearch that is of extreme importance to the adoption of new technology bythe farming community, the Government should seriously and urgently considerbringing DA researchers under the salary scale of the DOST Scientific CareerService. Furthermore, if salaries are uniformly upgraded, and staff placed inthe appropriate grade in accord with their qualifications, experience andresponsibility, then ;he honoraria system should be phased out. To encourageexcellence in research and development the annual award system (Pantas andTanglaw of PCARRD) should be extende4 to DA researchers. In particular,awards which honor achieving increases in productivity and/or profitabilityfrom the introduction of new technology, should be adequately rewarded.

25. Agricultural research and extension services have a very large staffcomplement which is generally well trained and speaks English as well as oneor more local languages. In particular the SCU system has a large number ofstaff possessing higher degrees. At UPLB institutions in Los Banos alone,there are 135 PhD, 78 MS and 34 BS level staff engaged in agriculturalresearch. DA has only a few PhD and MS level staff when compared with the SCUsystem. At all 12 RIARSs there are only 2 PhD, 42 MS and'154 BS level staff,V.-ile PTVT staff consist of 119 BS and 22 MS. There remains therefore a needto focus on more post-graduate staff training in DA, in particular for staffworking in the RIARS system. Their training focus should be farming/croppingsystems, farm-mangement economics and of course agronomy, animal husbandry,and inland/brackish water fishery. Local and some overseas scholarshipsshould be made available. With all extension workers now becoming generaliststhere is an enormous re-training program necessary. All home-economics andrural youth technicians and livestock inspectors at least should become fullyfamiliar with general and improved agricultural/Livestock and fishery prac-tices in their region. At present there are one national, four regional andsix provincial training centers under ATI. A detailed review of trainingneeds should be done, to ensure that staff and facilities are, or will be madeavailable, not only for retraining staff but also for continued upgrading ofstaff knowlEtdge and skills. It may be necessary to have one training facilityfor farmers in each of the provinces, one facility for extension staff andother lower level DA provincial and regional staff in each region, and maybefour centers for senior staff supervisors and subject matter specialists (twoin Luzon, one in the Visayas and one in Mindanao). It is likely that adequatefacilities are available at colleges and universities, and most lecturingstaff may be available part-time. Some full-time staff would, however, berequired to ensure good management and relevant course structure andscheduling. It may also be worthwhile to consider providing grants for MS andPhD thesis work in socio-economic subjects in the regions/provinces to ensurethat sufficient staff, trained in these subjects, will become available in thefuture.

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ANEX 9Page 13

26. As stated earlier, extensiorn personnel are poorly remunerated.Lowest level extensior workers at the AFT 'evel received (befcre the 20%salary increase) a total of P 1,096/month with a range to P 1,211/month, thelatter being equivalent to that of a lowest level Municipal AgriculturalOfficer. Supervisors and SMSs at all levels are also inadequately paid. Areview of conditions of employment and salary levels is urgentl) required if atrue professional service is to be provided. The review should include theallowances necessary fo. adequate staff mobility and for living in hardshipareas. Several of the recommendations to the new Government have provided forincreasing the extension workers' minium salaries to those of rural schoolteachers, which would mean a salary increase of about 50%.

27. Another often debated question is that of extension responsi-bility. There is a school of thought that would like to make provincialextension workers responsible to the provincial governments. There certainlyappears to be a real need to make extension workers more responsive to farmerrequirements. How this best can be done should be studied in detail. Itappears, however, important that extension staff work without political inter-ference and therefore independently from the whims of local governments. Itmay be possible to obtain farming community input in extension programsthrough the provincial and municipal Agricultural Councils. There are furtherpossibilities of local financing or supplementing Government salaries forextension workers; this is also an issue that should be reviewed in detailwith regard to practicality and viability in the long term.

Recommendations for Action

(a) Research investments should be doubled from about 0.3% of GVA inagriculture to about 0.6% within the next five years with a long-term goal of at least 1.0%. Investments should not primarilyprovide for new facilities, but should improve the research environ-ment in the key existing SCUs and RIARS (improving facilities--e.g.,air conditioning where required, procurement of essential vehicles,equipment, glassware, chemicals, etc.) and providing for adequatestaff remuneration, housing, training and mobility. Private sectorresearch should be further encouraged. Verification type ofresearch should be assigned at least 40% of the national researchbudget.

(b) The number of PTVTs should be expanded so that the major agro-ecological zones in each provice are covered and technology veri-fication/adaptability work is aimed at farmer profitability withoutenvironmental deterioration. In particular the integration of long-term crops, livestock and fisheries should receive further attentionas should post-h^rvest technology verification. RIARS core staffshould be assigned full-time to the provincial farming/croppingsystem work and not burdened 'ith other assignments.

(c) Technology Generation research should be focused on achieving highcrop, livestock, fishery production at least cost and risk. Highyields achieved under optimal conditions are often not acceptable tofarmers.

103 -ANNEX 9Page 14

(d) Salary scales of research workers in DA and SCUs should be upgradedor adjusted by adopting the DOST career compensation scheme forscientists or another appropriate scale. In particular, agricul-tural research in DA must become a desirable career service toattract and retain qualified and experienced researchers. A rewardsystem based on achievements which contribute significantly togrowth in GVA for agriculture and in farmer profitability should beconsidered. An effective system for promotion and reward ofdeserving staff should be established.

(e) Linkages between research organizations and institutions are welldeveloped through PCARRD's National Research and Development Programand its system of consortia. Research within DA should now beeffectively planned and coordinated by BAR. However the research-extension linkage at. national and regional level should be furtherimproved by inviting extension policy makers and senior practi-tioners to national research planning and review workshops and toregional consortia meetings to achieve the required two-way flow ofinformation. Proposals have been made for d large expansion inBAR's staff. It would be better if BAR were to remain a small buteffective planning/coordination unit to avoid an excessivebureaucracy and unnecessary duplication with PCARRD.

(f) An early study on the effectiveness of present extension servicesprovided by a significant number of institutions with very largenumbers of staff and with different levels of remuneration should beconducted. Various extension methodologies used, the need for themany non-advisory activities as well as their cost effectiveness andfarmer acceptability should be reviewed. On the basis of this in-depth review, actions and needs for establishing an affordable,sustainable and effective consolidated, multidisciplinary andprofessional service under DA should be recommended. Recommenda-tions should also be made on the organization and management, aswell as on staff requirements and staff salaries and allowances forall levels (managers, technical disciplines, supervisors and directfarmer contact staff), taking also account of requirements under theland reform programs. The need for and the agency attachment ofregulatory staff with total requirements should be indicated. Clearjob descriptions should be provided. Funding needs and farmerinvolvement/participation (including financial) in planning andexecuting the service should be made. As it is likely that excessstaff will be indicated, proposals for acceptable severance shouldbe made.

(g) A study on staff training needs for both extension and researchpersonnel should be conducted after the extension study and whenland reform requirements are more precisely known. The 1987reorganization requires higher levels of management and a differentskill mix which in turn requires the re-training of a large numberof managers, subject matter specialists, extension supervisors andfarmer-contact staff. Requirements for facilities (preferably using

- 104 -ANNEX 9Page 15

existing ceiters at national, regional and provincial levels), full-time and part-time personnel, and training needs should beestablished. Scholarship requirements and their source of fundingshould be indicated.

(h) Research and extension programs proposed under the various develop-ment projefts should be incorporated under the existing or plannednational and regional systems to avoid duplication of efforts andthe need for excessive number of contract staff and honorariapayments. A review of regional agricultural research scoff, on aregion by region basis, may be warranted since in some areas thereare many organizations and programs providing research efforts, andin these cases rationalization is called for.

(i) The need for continuing some of the original line functions of theBureaus under central agency(ies), such as quarantine, seed andplant production/certification, soil strveys, national varietytesting, breed performance testing and artificial inseminationprograms, etc. has been recognized, and may require further review(see also Volume 1, para. 4.21).

Bank Support to Research and Extension

28. Under the National Extension Project (NEP, Ln. 1626-PH, FY79) acomplete reorganization of existing extension services was introduced in1980. The service, and with it the Department of Agriculture (DA), wasregionalized under 12 Regional Directors. Services to the farming communityare now mostly delivered by gexieralist Agriculture and Food Technicians (AFT)who are technically supported by provincial and sometimes municipal SubjectMatter Specialists (SMS) and supervised by Municipal and ProvincialAgricultural Officers. Originally a 4-year project linked to pilot districtsin each province, the project was extended to 6½ years in hopes it couldovercome the organizational and budgetary constraints, which had slowedprogress in achieving its coverage targets. At the end of 1985, only threeregions had been fully covered with a modified Training and Visit (T&V) systemof extension, while other regions continued to operate with either pilotdistricts or with one or more provinces. After six years some 52% of allrural villages, as estimated by the Bureau of Agricultural Extension (BAEx),were covered by an Extension Delivery System (EDS). Some of the problemsencountered by the project were: difficulties in selecting and maintainingcontact leaders without compensation; insufficient mature technologies whichcould reduce production costs and increase gross margins; insufficient stockto disperse to the farming community as perceived by farmers; separate workarea coverage for farm management, home economics and rural youth agents; aiddifficulties in adhering to visiting schedules by staff on low remunerationand travel allowances.

29. Under the Agricultural Support Service Project (Ln 2040-PH, FY81)the capacity of various institutions to generate farm technolo6y is beingenhanced. Through the establishment and upgrading of the twelve RIARS,appropriate small-farm technology is adapted or verified on the basis of on-farm technical and socio-economic evaluation prior to general dissemination by

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ANNEX 9Page 16

the extension service. The project further strengthens the staff Bureausresponsible for regulatory matters affecting crops and livestock; itstrengthens the DA central office by improving project planning, preparation,implementation, managemernt and monitoring capability; and it provides fundsfor national nutrition surveys which are conducted by the Food and NutritionResearch Institute (FNRI). Although considerable delays are being experiencedin physical implementation due t3 local budget constraints, results in theprovinces are qui.e impressive, and adequate viable technologies have been orare being verified from available research results With the termination ofthe incomplete NEP in 1985 it was agreed that major outstanding works wouldcontinue to be implemented under ASSP (completion of communication network andextension centers, provision of training materials and expansion of a modifiedT&V-type extension service in the provinces.)

-- 106 -ANNEX 9Appendix 1Page 1

A. National Multi-Commodity Research Centers

Commodity ResponsibilityCenter National Regional

University of the Phili- Legumes Coconutppines at Los Banos Ornamental and medi- Corn and sorghum(UPLB), Los Banos, cinal crops Fiber crops (Abaca)Laguna Rice and other cereals Fruit crops

Vegetable crops Plantation cropsBeef/goat Root crops(small-farm operation) SugarcaneCarabeef (small-farm Tobaccooperation) Bamboo, Rattan,Dairy Forest vines andForage, pasture and medicinal plantsgrasslands Dipterocarp andSwine Lesser-used speciesPoultry Forest plantation andAgricultural engineering Agro-forestryFarming systems Pines and other soft-Soil Resources wood speciesWater resourcesApplied Rural SociologyMacroeconomics

Central Luzon State Carabeef (ranch Fiber crops (cotton,University (CLSU), operation) sericulture)Munoz, Nueva Ecija Chevron (large-scale Vegetable crops

operation) Plantation crops(sunflower)

Aquaculture (fresh- Dairy (water buffalo,water pond culture) goat)

PoultryAgricultural EngineeringFarming systemsSoil resourcesWater resourcesApplied Rural SociologyMacroeconomics

Visayas State College Fiber crops (abaca) Coconutof Agriculture (VISCA), Root crops Corn and sorghumBaybay, Leyte Vegetable crops

beef/goat (small-farm operation)Forage, pasture andgrasslands (small-farmoperation)

-107 - ANNEX 9

Appendix 1Page 2

Commodity ResponsibilityCenter National Regional

PoultryAgricultural EngineeringFarming systemsSoil resourcesWater resourcesApplied Rural SociologyMacroeconomics

University of Southern Corn and sorghum LegumesMindanao (USM), Fiber crops (kenaf, jute, Rice and other cerealsKabacan, North Cotabato ramie) Root crops

Fruit crops SugarcanePlantation crops Beef/goat(rubber, coffee, cacao) Carabeef (small-farm

operation)SwinePoultryFarming systemsSoil resourcesWater resourcesApplied Rural SociologyMacroeconomics

- 108 -ANNEX 9Appendix IPage 3

B. National Single Commodity Research Centers

Commodity ResponsibilityCenter National Regional

Cotton Research and CottonDevelopment Institute(CRDI), MMSU Campus,Batac, Ilocos Norte

Philippine Tobacco TobaccoResearch and Train-ing Center (PTRTC),MMSU Campus, Batac,Ilocos Norte

Forest Products Research Forest utilizationand Development Insti- Research on:tute (FPRD), College, Bamboo, rattan, forestLos Banos, Laguna vines and medicinal

plantsDipterocarps and lesser-used speciesPines and other softwoodspecies

Forest Research Institute Forest production(FOR), College, Los Research on:Banos, Laguna Bamboo, rattan, forest

vines and medicinalplantsDipterocarps andlesser-used speciesForest plantation andagro-forestryParks, wildlife andforest rangePines and other soft-wood species

Sugar Regulatory Author- Sugarcane Agricultural engineeringity (SRA), La Granja,La Carlota City

University of the Aquaculture (brackish-Philippines. In land water pond culture)College of Fisheries, Marine fisheriesMiag-ao and Leganes,Iloilo

- 109 -ANNEX 9Appendix 1Page 4

Coumodity ResponsibilityCenter National Regional

Philippine Root Crops RootcropsResearch and TrainingCenter (PRCRTC), Bay-bay, Leyte

Philippine Coconut CoconutAuthority (PCA), BagoOshiro, Davao city

Philippine Rice Research RiceInstitute (Philrice)(location uncertain)

- 110 -ANNEX 9Appendix 1Page 5

C. Regional Research Centers

Commodity ResponsibilityCenter National Regional

Mariano Marcos State Fiber crops (cotton,University (MMSU), sericulture)Batac, Ilocos Norte Legumes

Rice and other cerealsTobacco (Virginia,Burley and Turkish)Vegetable cropsBeef/goat (small-farmoperation)Farming systemsSoil resourcesWater resourcesApplied Rural SociologyMacroeconomics

Mountain State Agricul- Fruit crops (strawberry,tural College (MSAC), apple)La Trinidad, Benguet Root crops (white

potato, gabi)Ornament and medicinalcropsPlantation crops(coffee)Vegetable cropsSwineForest plantation andagro-forestryFarming systemsSoil resourcesApplied Rural SociologyMacroeconomics

Isabela State University Fiber crops (cotton)(ISU), Echague Campus, Root cropsEchague, Isabela Vegetable crops

SwinePoultryWater resourcesApplied Rural SociologyMacroeconomics

Cabagan Campus, Cabagan, LegumesIsabela Tobacco (cigar filler)

Beef/goat(ranch operation)

- Lii ANNEX 9

Appendix 1Page 6

Commodity ResponsibilityCenter National Regional

Dipterocarp and lesser-used speciesForest Plantation andAgro-forestryParks, Wildlife andForest RangeForage, Pasture andGrass lands

Palawan National Agri- Coconutcultural College (PNAC), Fruit Crops (cashew)4borlan, Palawan Legumes

Root CropsVegetable CropsBeef/goat (small-farmoperation)CarabeefSwinePoultryFarming SystemsSoil ResourcesApplied Rural SociologyMacroeconomics

Camarines Sur State Root CropsAgricultural College Vegetable Crops(CSSAC), San Jose, Beef/goat (small-farmPili, Camarines Sur operation)

SwinePoultryApplied Rural SociologyMacroeconomics

Bureau of Plant Industry Corn and Sorghum(BPI), La Granja LegumesExperiment Station Vegetable CropsLa Granja, Agricultural EngineeringLa Cartota City Farming Systems

Central Mindanao Univ. Beef (ranch operation) Corn and Sorghum(CMU), Musuan, Forage, Pasture and LegumesBukidnon Grasslands (ranch Plantation Crops (cacao,

operation) coffee and rubber)Rice and Other CerealsCarabeef (ranchoperation)

- 112 -ANNEX 9APRedl'i 1Page 7

Comodity ResponsibilityCenter National Regional

Goat (ranch operation)DairyAgricultural EngineeringApplied Rural Sociology

MacroeconomicsBureau of Plant Industry Corn and Sorghum(BPI), Davao Experiment Fiber Crops (abaca,Station, Bago-Oshiro, kenaf, ramie, jute)Davao City Fruit Crops

LegumesOrnamental andMedicinal CropsPlantation Crops (coffeeand cacao)Vegetable CropsFarming Systems

Centers/Consortia

PCARRD's existing 12 centers/consortia with their respective leadagencies are:

Bicol Agriculture and Resources Research and Development Center (BARRC) -Camarines Sur State Agricultural College (CSSAC)

Cagayan Valley Integrated Agricultural Research System (CVIARS) - IsabelaState University (ISU)

Central Luzon Agricultural Research Center (CLARC) - Central Luzon StateUniversity (CLSU)

Central Visayas Consortium of Integrated Regional Research andDevelopment (CVCIRDD)

Highland Agriculture and Resources Research Center (HARRC) - BenguetState University (BSU)

Ilocos Agriculture and Resources Research Center (ILARRC) - MarianoMarcos State University (MMSU)

La Graiaja Agriculture Research Center (LGARC) - Sugar RegulatoryAuthority (SRA)

- 113 -ANNE 9Appendix 1Page 8

Northern and Central Mindanao Coordintted Agriculture and ResourcesResearch Program (NOCEMCARRP) - Central Mindanao University (CMU)

Palawan Agricultural Research Center (PARC) - Palawan NationalAgricultural College (PNAC)

South Eastern Mindanao Agriculture and Resources Research and DevelopmentConsortium (SFMARRDC) - Department of Agriculture Region XI - (DA -Region XI)

Visayas Coordinated Agricultural Research Program (VICARP) - VisayasState College of Agriculture (VISCA)

Western Mindanao Coordinated Agriculture and Resources Research andDevelopment Program (WECARRDP) - Department of Agriculture Region IX (DA- Region IX)

- 114 -ANNEX 10Page 1

PHILIPPINES

AGRICULTURAL SECTOR STRATEGY REVIEW

Sector Institutions

1. In the past, responsibility for the agricultural sector was dividedamong several ministries and a variety of institutions and agencies which werenot necessarily under the control of the principal sector ministries. Signi-ficant reforms were recently undertaken by Government to address this issue.For example, three important agencies (NFA, PCA and SRA), formerly attached tothe Office c. the President, were placed under the Department of Agriculture,although the transfer of the PCA is not yet effective, In addition, someagencies were abolished, and some merged with others. This increases theleadership role of the Department of Agriculture. Two other Departments, DENKand DAR, as well as the provincial and municipal governments, have importantresponsibilities in the sector.

2. Department of Agriculture (DA). According to E.O. 116 issued onJanuary 30, 1987, DA is to support development by "providing the policyframework, ptlblic investment, and support services needed for domestic andexport-oriented business enterprises." It affirms that the primary functionof the DA is to "improve farm income and generate work opportunities forfarmers/fishermen and other rural workers." It requires the DA, inter alia,"to provide integrated services to farmers/fishermen," to be responsible forthe planning, policy formulation, regulation, execution and monitoring ofagriculture programs, and to coordinate with other public and private agenciesin matters affecting its plans, policies and programs.

3. The new organizational structure of DA is shown in attached Chart1. Under this structure, the Secretary of Agriculture is assisted by sevenUnder Secretaries who are responsible for: Special Concerns, StaffOperations, Policy and Planning, Regional Operations, Attached Agencies, PCA,and NFA. The Undersecretary for Staff Operations has two AssistantSecretaries: one for Research, Training and Extension and one for SupportServices. The Undersecretar-i for Policy and Plmnning has three AssistantSecretaries: one for Agri-business, one for Planning and Monitoring, and onefor Foreign-Assisted Projects. The Undersecretary for Regional Operations isresponsile for the Production Group (comprising four key bureaus) as well asfor regional operations.

4. The reorganization has also introduced a few changes at the regionallevel. For example, each Regional Director is now assisted by three AssistantRegional Directors responsible for Operations, Research, and Support Services,respectively.

5. A total of 24,092 staff are employed by the Department proper. Ofthese 3,435 are stationed at the central office and 20,641 are working in theregional offices. The largest bureaus are: Agricultural Extension: 9,852staff; Plant Industry: 5,679; Animal Industry: 4,395; Soils and WaterManagement: 1,777; and Agricultural Statistics: 1,308.

PHIUPPINESDEPARTMENT OF AGRICULTUREORGANIZAJIONAL STRUCTURE

(As of August 1987)

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L ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~&Aacvn,snl& Fltler*nn1se Ffl

,~~~~~~~~~~~~~~ao~t B lSPUM C or-t FO &stGbSbC5 AQu4. FrJO andutw |

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Pemlom~~~~~~~~~~~~~~~~~~~~~~Ajlat

&mm of~~~~~~~~~~~~~~~~~~~~Ic

C,o,,,c,r ~ ~ ~ ~ ~ ~ ~~Wrt o,kaOA

- 116 -

ANNEX 10Page 3

6. Of the five councils, the National Agricultural and FisheriesCouncil (NAFC) is the most important one. The main objectives of NAFC are:(a) to provide a forum for coordinating and integrating all operations andprograms of the various departments/agencies operating in the sector, and(b) to establish and inititutionalize a consultative and feedback mechanismbetween the government and the farming communities. The means of achievingthis is through councils at the provincial, regional and national level. TheCabinet level Committee is chaired by the Secretary of Agriculture; itincludes nine other Cabinet Secretaries and the Governor of the CentralBank. The councils at the provincial and regional level includerepresentatives of the private sector and NGOs.

7. Department of Environment and Natural Resources (DENR). DENR,recently reorganized under E.O. 192, issued June 10, 1987, is responsible forthe conservation, management, development and use of forest and grazing lands,mineral resources, and other lands in the public domain. As with DA, the linefunctions of the Department. and its bureaus will be decentralized and combinedin the Regional Environment and Natural Resources Offices, located in regionalcapitals and managed b. Regional Executive Directors. The DENR Secretarywould be assisted by five undersecretaries responsible for policy andplanning, attached agencies, bureaus, legal and administrative support, andoperations. There also would be seven assistant secretaries responsible forpolicy and planning studies, foreign-assisted and special projects, fieldoperations in Luzon, in Visayas, and in Mindanao, legal affairs, andmanagement services.

8. The DENR will have six bureaus: (a) Forest Management Bureau,absorbing the former Bureau of Forest Development and Wood IndustryDevelopment Authority; (b) Land Management Bureau, the functions of whichinclude executive control over survey, classification, disposition, andmanagement of public lands; (c) Mines and Ceo-Sciences Bureau; (d)Environmental Management Bureau, absorbing the former National EnvironmentalProtection Council, Pollution Control Commission, and Environmental Center ofthe Philippines; (e) Ecosystems Research and Development Bureau, absorbing theformer Forest Research Institute and National Mangrove Committee; and (f) theProtected Areas and Wildlife Bureau, taking over management of all nationalparks and wildlife sanctuaries, including those previously belonging to otherministries and bureaus. The Pollution Adjudication Board, replacing theNational Pollution Control Commissior., reports to the Secretary.

9. In addition, several agencies or corporations are to be attached tothe department: the National Mapping and Resource Information Authority(NAMRIA) becomes the central mapping and natural resource information agency,steered by an interdepartmental committee. It absorbs the Natural ResourcesManagement Center (NRMC), National Cartography Authority (NCA), Bureau ofCoast and Geodetic Survey (BCGS), and land classification teams of the formerBureau of Forest Development. The Natural Resources Development Corporationwill be involved in developing, financing, and otherwise assisting a stumpagesales system, industrial tree plantations, agro-forestry ventures, etc. inboth the public and private sectors. The National ElectrificationAdministration will deal with aspects of energy policies, programs and planswhich cannot be carried out by the private sector.

- 117 -

ANNEX 10Page 4

10. Department of Agrarian Reform (DAR). Its main function has been theimplementation of the land reform program under Presidential Decree (PD) 27issued in 1972. Under the proposed reorganization (see Chart 3) the Secretarywould be assisted by three Undersecretaries: one for Field Operations, onefor Services, and one for Staff Bureaus. Seven Assistant Ministers would beappointed, with respective responsibilities for the Research and PlanningService, the Finance and Physical Assets Management Service, the Administrative,Personnel and Management Service, the Legal and Public Assistance Service, andthe Area Offices of Luzon, Visayas, and Mindanao. There would be fivebureaus: Land Acquisition and Distribution, Land Development, Agrariar LegalAssistance, Agrarian Reform Information and Education, and Agrarian ReformBeneficiaries Development.

11. In anticipation of the Accelerated Land Reform Program (ALRP), theGovernment is considering ways to strengthen DAR, in order to enable it tohandle the major increase in workload. The proposed reorganization of DARinvolves some realignment of the key staff functions in the central office,but the more important changes are slated to affect the administrative andinstitutional set-up at the provincial and field levels. These changesinvolve greater decentralization and strengthening of the staff at the locallevels, particularly through increases in the number of field "team offices"at the municipal level. The objectives of decentralization are (i) toincrease the participation of local people in decision-making, (ii) to adaptthe program to local conditions, based on the felt needs of the beneficiaries,and (iii) to increase the responsibility of local community leaders and DARemployees, thus relieving the administrative burden on officials who are moreremoved from rural communities. Local DAR teams are expected to become veryfamiliar with the murncipalities they cover and serve as a bridge between theNGOs and the bureaucracy in matters concerning beneficiaries.

12. National Irrigation Administration (NIA). NIA was an operatingdivision of the then Bureau of Public Works until 1963 when it was establishedas a separate government corporation. The Minister of Public Works andHighways now acts as the ex officio Chairman of NIA's Board of Directors withthe Administrator as Vice Chairman; NEDA, DA and NPC are also represented onthe Board. NIA is responsible for the planning, construction, development,and operation and maintenance of all national irrigation systems. It also hasthe authority to supervise and/or administer temporarily all communal irriga-tion systems constructed, improved and/or repaired wholly or partially withgovernment funds. It has a total staff of 21,000 with about 9,000 employeeson a monthly and 12,000 on a daily payment basis. Further details on NIA'soperations are in Annex 6.

13. Some other important sector institutions such as the PCA, SRA andNFA are discussed in Annexes 3, 4, and 5, respectively.

- 118 -

CHART 2 ANNEX 10

P A SePHILIPPINES

DEPARTMENT OF AGRARIAN REFORMOrganIzational Stucture

COMMISION SECRETARY f Tt ON AuDn _ SCEAY_ PIIPFE

[jj -fARM PHIL _ J UNDERSECRETARIES

PESEA9CH & STWATEGC t-A RB INANCE &PI-MCAL ADIITM 1NPLANNINC SERVICf A$1STANCE ASSET VPC U SERVICE

- -i _~~~~~~SrAC

Research & Controcts EBudget Medical &_ Mantorng _ Review _ Management DentalUnit

_ Pfrog &; Projects _ bPblobc Acounts PwwrsnnelPlanning Assistance Mana nt Manogement

Prog & Protects AssistancelonclEvaluatAnn inatrnagetent |

Cases

Statistical ~~~~~~~~~~~~~Physical aagmnDaStatKhcd | 2 Amets Managgmentm

1 Doto l 1 ~~~~~~~Managernnt l 1 Ssen

BURAUOE AU OAUBJRAOJOFBUJREAUJ OF BUREAUJ OFLAND IENURE LAND REFORM IFMTO E

w 1 r I } I r ~~~~ENEICIR NFRAIO _ LEA

DEVELOPMENT DEVELIENT DEVL N B IEN EDUCRATION ASSISTANCE

LaInd Acquisition Land Estate J ARMe Education Claims && Valuation SUrve I Development & Training Conflct

Land Land Institutional Public LegalDistnbution |oConsoadatin |Deveopment | n ton Inonrmation

I cProjectARCornmunit and I I** L

Documentation En 3 e mund

DevelopmentLand Use &

Land Class cation LegolT'ansortion J Research

Capability

PARA alega

| Of FICE Of THE [ REGIONAL DIRECTOR

OFFICE Of THEPROVINCIAL EXECUTVE

OFRCER

Wod Bmng-40474-1

ANNEX 1 1- 119 - Page I

PHILIPPINES

AGRICULTURAL SECTOR STRATEGY REVIEW

Public Sector Expenditures in Agriculture

11 This chapter deals with sector-level issues of the size, pattern andeffectiveness of public resource allocation in agriculture and their possibleimpact on sectoral performance. While most agriculture related expendituresare undertaken by the private sector, Covernment's contribution to the sectorin terms of resource allocation (as well as in the formulation of the policyframework) has been a major one. Government expenditures in the sector havebeen particularly significant in areas sucn as infrastructure development(e.g., rural roads, irrigation, and land development), research and extension,provision of credit, and price and income stabilization. However, at thisstage of acelerated efforts to bring about economic recovery, the size andcomposition of the expenditure program in agriculture are particularlyimportant. This importance stems from the high priority Government has givento the agricultural sector in the economic recovery plan. According to theGovernment, the economic recovery depends critically "on the revival anddevelopment of ... agriculture" (Budget Message of the President, 1987). Thatprimacy of agriculture in the overall development strategy is reflected in theincreased allocation for agricultural activities in the 1987 budget, and theincreased allocation (absolute and relative) for the sector in the 1987-92Medium Term Development Plan and the Public Investment Program.

2. "Public Expenditures" in agriculture inctule direct expenditures inthe sector (current and capital) plus iviirect ones such as expenditures inrural infrastructure. Within Goverament, responsibility for agriculture isdivided among a large number of different ministries and agencies. Governmentaccounts pertaining to agriculture show allocations and expenditures of threeministries (now called departments)--Department of Agriculture (DA),Department of Natural Resources (MNR), and Department of Agrarian Reform(DAR)--and several semi-autonomous agencies active in the sector, the largestof which is the National Irrigation Administration'(NIA). Allocations formajor types of infrastructure are also given, but these are not usually brokendown by rural and non-rural expenditures. Because of the large number ofagencies and the way the budgetary allocations are presented in the officialaccounts, it is a difficult task to determine the level of Governmentexpenditures which actually benefit the sector, directly or indirectly. It iseven more difficult to determine the subsectoral (or program) allocations.The figures provided here represent, therefore, only rough estimates of theexpenditures in the sector and their subsectoral distribution, relying onreported figures for direct expenditures in agriculture and somewhat partialfigures on supporting expenditures in rural infrastructure.

-120 - ANNEX 11Page 2

Trends in Public expenditures

3. 1970-1982. With the rapid growth of the Philippine economy duringthe 19709 there was a simultaneous increase in the size and scope of publicexpenditures. This is evidenced by the increase in national governmentexpenditures from P 5 billion in 1970 to over P 14 billion in 1982 (constant1972 prices) and by the increase in public investment levels from 1.5% o/ GNPin 1970 to about 8Z of a much larger GNP during the 1978-82 plan period._/Much of the increase in expenditures was in the form of massive investment ininfrastructure facilities e.g., roads, irrigation and power generation. Forexample, during 1976-82 infrastructure allocation accounted for 70t of thetotal; the productive sector received 16% and the social sector 7%. Thessctoral allocations given i- rable 1 show that energy and transportation werethe priority sectors for public investment--together accounting for an averageof 4.5% of GNP between 1978 and 1982. Public investment in agriculture(including irrigation but excluding other rural infrastructure) during thatperiod averaged about 1.5% (nearly one-fifth of total public investment) andsocial services (housing, education and health) about 0.5% of GNP.

Table 1: PUBLIC INVESTMENT BY SECTOR, 1978-1986(Z OF GNP)

AverageSectors 1978-82 1983 1984 1985 1986

Economic Services 6.6 6.3 3.7 2.9 4.2Agriculture 77 U7.Industry 0.5 0.3 0.1 0.1 0.04Energy 2.9 2.5 1.6 1.4 1.6Transportation 1.6 1.7 0.9 0.4 1.1Water supply 0.3 0.7 0.4 0.3 0.6Other infrastructure 0.7 0.4 0.2 0.4 0.4

Social Services 0.5 0.6 0.4 0.3 0.4(fiousingl education/health)

Other 0.5 0.5 0.4 0.4 0.4

Total 7.7 7.4 4.5 3.6 5.0

Source: NEDA. 1986 estimates are based on budget figures and corporationplans.

1/ See Appendix Table 1.

- 121 - ANNEX 11Page 3

4. Real public sector expendit Ares in agriculture increased signifi-cantly in the second half of the 1970s. Between 1976 and 1982 agriculturalexpenditures increased by 3.2% p.a. in real terms, reaching a peak in 1979 ata level of 12.7% of total government expenditures (Table 2). The bulk of thatincrease was in irrigation, rural roads and research. However, following thatperiod of relatively rapid growth, real agricultural expenditures declined, asthe massive investment in irrigation slowed down, and by 1982 the share ofagriculture in total Government expenditures declined to 10.6%.

Table 2: TRENDS IN PUBLIC SECTOR EXPENDITURES IN AGRICULTURE 1976-87

Public Expend. on Agriculture as Z ofPublic Sector Expend. Gross Value Added Total Government

on Agriculture in Agriculture Expenditures(P million, 1972 prices) (Z) (%)

1976 1,209 6.1 10.01977 1,312 6.4 11.61978 1,300 6.0 10.01979 1,703 7.5 12.71980 1,501 6.3 11.41981 1,636 6.6 10.81982 1,504 5.9 10.61983 1,325 5.3 9.61984 810 3.2 7.31985 747 2.8 6.21986 848 3.1 5.41987 /a 1,238 4.4 7.4

AverageGrowth Rate(p.a., Z)1976-86 -3.2 -6.0 -5.51976-82 3.2 -0.5 0.81983-86 -10.6 -12.5 -13.3

/a Appropriation basisSource: NEDA and staff estimates

5. The stabilization years: 1983-1986. The severe financial crisisthat developed in late 1983 forced the Government to reduce its budgetdeficits and its borrowing from private capital markets. As a result, budgetfunds to support development projects and recurrent expenditures have beenseverely restricted for the past three and one-half years. Many foreignassisted projects have not received adequate domestic funding, reducing theGovernment's ability to make use of official foreign lending. Governmentexpenditures declined from a level of P 15 billion in 1981 to P 11 billion in1984 (constant 1972 prices) and their share of GDP declined during the same

- 122 - ANNEX 11Page 4

period from 15.7% to 11.8%, reflecting sharp cuts in economic services andsocial services (Table 1).

6. Agricultural expenditures suffered the same fate during the crisisyears as total expenditures. Expenditure levels in the sector, which actuallystarted to decline slowly beginning in 1982 (Table 2), dropped precipitouslyby 1985 to about 50% of pre-crisis levels. However, it should be noted thatthe decline in agriculture-related expenditures was sharper than the overalldecline in public expenditures. The share of agriculture in totalexpenditures declined from 9.6% in 1983 to only 5.4% in 1986--the lowest pointin a decade (see Figure 1). Thus the sector, which had already suffered frompolicy biases, was also discriminated against in the allocation of publicresources during that period. The level of expenditures in agriculture in1985 actually represents a drop in real terms to the levels of 1972-73.Overall, from 1976 to 1986 real a;'-i-cltural expenditures declined in realterms (-3.2% p.a.) with the declines during 1983-86 dcominating the trend.

7. Consistent with the renewed emphasis on agriculture by the newGovernment, the 1987 appropriations represent an increase in totalagricultural expenditures. However, the 1987 appropriations level is stillless in real terms than the level of 1983 (by 7%) and much less than the peakyear of 1979 (by 37%). In terms of its share in total national expenditures,agriculture's share is expected to increase to 7.4% but, again, it is stillwell below the levels achieved between 1979 and 1982. Implementation capacityand planning issues notwithstanding, these figures indicate that while the1987 budget represents a step in the right direction, it clearly does notrepresent a complete return to the pre-crisis situation (assuming, of course,that the appropriation levels are indeed implemented). These levels also haveramifications in the context of the Government's recovery program whichemphasizes agricultural/rural development. To tacilitate the acceleration ofgrowth in the sector, Government needs, in our opinion, to bring the levels ofcurrent operating expenditures and capital outlays at least to theirhistorical, pre-crisis, real levels. Preference should be given, as thefollowing section indicates, to increased rehabilitation and capitalinvestment in rural infrastructure (rural roads), and improved operation andmaintenance of existing infrastructure (e.g. irrigation).

Disaggregation of Agricultural Expenditures 1981-86

8. In the following section we disaggregate the agriculture-relatedexpenditures. Tthis is done on two levels: (a) by Department/Agency--lookingseparately at the trends of current operating expenditures and capital outlaysin recent years; and (b) by subsector/programs--allocating the overall expen-ditures to the various programs, thus providing a basis for inferring priori-ties within the sector adopted by the Government in recent years. As waspointed out earlier, while the Uirect expenditures by Department/Agency wereless difficult to obtain, the breakdown on a subsectoral level has beendifficult. The severe data limitations are in terms of availability (e.g.,the actual amounts spent by NFA for price support for rice and corn are quitedifficult to obtain), and in the way the data is presented in the budgetaccounts (e.g., extension expenditures in the Department of Agriculture arespr3ad over virtually all budget categories--including general services

- 123 - AtNEX IIPage 5

Fig. 1: Agricultural Expenditures (%)1 S76-8615 1976-86 -I-- ~~~~~~~~~Agtic Exp/Agtic GVA

-B-- Aqr Exp/Not'l Exp

10

ND w~~~~~

Fig. 2: Current ond Capital ExpenditureAgriculture Sector, 1981-86

i 1 ot n -~~~~~~~~~~~~I - Current Expe:nd,

B Capital Expend.

LO\c700 -

f(L 1500 -

(constant 1972 p6rces)

ANNEX 11-124 - Page 6

category). This enables us to provide only rough and somewhat partialestimates of the distribution of expenditures by subsectors.

9. Current and Capital Expenditures. The first half of the 1980s wascharacterized by falling levels of expenditure across all agriculturalagencies and ministries (Table 3). The decline, of course, was particularlysharp during the crisis years but that trend started already in 1980-81. Bothcapital and current operating expenditures fell during that period; capitaloutlays declined by 14.9X p.a. (1981-86) and current expenditures by 4.4% p.a(see Figure 2). The decline in capital expenditure was particularly sharpbetween 1983 and 1985 (-22.3% p.a.) mainly as a result of a very sharp drop inthe activities of NIA in undertaking new irrigation investment and in theactivities of the Department of Public Works and Highways (DPWH) inimplementing rural roads projects. Capital expenditures of Department ofAgriculture, Department of Natural Resources, and Department of AgrarianReform have also declined but to a lesser extent and from a lower base. As aresult, the share of capital outlays in total expenditures fell from 64% in1981 to only 46% in 1986.

10. The budget stringencies resulted in large cuts in current operatingexpenditures and particularly in maintenance expenditures. The Government'sO&M expenditures declined by 10.5% p.a. between 1983 and 1985. As a result,the quality and amount of resources provided by the major ministries havedeclined seriously in recent years. The cuts affec.ed personnel level onlymarginally but the operating expenditures and equipment purchases veryheavily. The number of extension staff, for example, has been largelyunchanged but they lack fuel, vehicles or spare parts and other essentials toperform their duties in an adequate manner. Particularly costly in thisregard have been the declining levels of maintenance of irrigation systems byNIA. O&M expenditures per hectare irrigated declined in real terms from P 280in 1981 to P 187 in 1985 (see Annex 6). The O&M cutbacks have also hadserious implications for rural roads.

11. The decline in capital and current operating expenditures in thesector was reversed in the second half of 1986 when, as part of the efforts tostimulate the economy, naticnal Government expenditure levels again began toincrease. As a result, capital outlays increased in 1986 by 0.9% (real terms)and operating expenditures by 12.6%. Although operating expenditures haverecovered in 1986, they are still below the pre-crisis levels of 1981 or eventhe 1983 level. Furthermore, despite a substantial increase in the amountsallocated to the maintenance of rural roads and some increase in theallocation for irrigation maintenance, the 1987 budget still falls short ofthe required levels. The decline in capital outlays was so sharp that evenwith the increase of 31% over 1986, the planned levels for 1987 are still onlyabout two-thirds of the 1981-82 level.

12. Subsectoral Allocations. The changes in the subsectoral distribu-tion and growth rates reveal some of the priorities of Government during theperiod. They may also provide some indication as to the required emphasis inthe future. The list of subsectors/programs which fall under the broaddefinition of agriculture includes: extension, research, irrigation, priceand income stabilization, agrarian reform, forest development and management,

- 125 -ANNEX 11Page 7

Table 3: AGRICULTURE SECTOR EXPENDITURES BY DEPARTMENT/AGENCY AND BY TYPE(P million, constant 1972 prices)

Allot- Approp- Growth ratesActual obligations ments riations (% p.a.)

1981 1982 1983 1984 1985 1986 1987 1981-86 1986-87

Current operating expenditures 595 581 498 325 359 454 559 -4.4 10.9

Dept. of Agrarian Reform 52 50 48 33 34 40 46 -4.4 7.7Dept. of Agriculture & Food 204 191 171 124 151 197 258 -0.6 14.5Dept. of Natural Resources 128 138 114 79 74 98 115 -4.4 8.4NIA 67 74 66 44 47 57 66 -2.7 8.1DPWH (rural roads) 46 54 39 24 20 32 47 -6.2 22.2Other /a 97 74 61 21 33 32 26 -17.1 -8.9

Capital outlays 1,042 923 827 483 388 395 679 -14.9 31.0

Dept. of Agrarian Reform 15 15 28 6 17 10 11 -6.4 5.7Dept. of Agriculture & Food 51 33 78 87 62 52 96 0.4 36.2Dept of Natural Resources 9 1 8 2 3 6 6 -5.1 -2.6NIA 705 594 476 242 193 229 301 -17.1 14.8DPWH (rural roads) 125 147 106 57 55 59 88 -11.8 22.0Other /a 137 132 132 89 58 39 176 -18.8 111.9

Grand Total 1,637 1,504 1,325 808 747 850 1,238 -10.3 20.7

Capital outlays/grand total 0.64 0.61 0.62 0.60 0,52 0.46 0.55

/a Including Corporate Equity Investment Fund and subsidy to Government Corporations andGovernment supported entities such as PCA, PVA, PVTA, etc.

Source: DBM and Staff Estimates.

- 126 - ANNEX 11Appendix 1Table 1

Table 1: NATIONAL GOVERNMENT EXPENDITURES, 1976-87

National Government Expenditures/Expenditures GDP

(P million, 1972 constant prices) x

1976 12,040 16.51977 119330 14.51978 12,956 15.61979 13,441 15.21980 13,115 14.51981 15,138 15.71982 14,201 14.31983 13,844 13.81984 11,097 11.81985 12,084 13.31986 15,675 17.31987 16,738 17.5

Period Average70-75 7,847 13.176-82 13,175 15.276-79 12,442 15.580-83 14,074 14.583-86 13t175 14.0

/a 1976-1985: obligation basis1986 : Allotments1987 : Appropriations basis

Source: NEDA, OBM

- 127 -ANNEX 11Appendis 1Table 2

Table 2: AGRICULTURAL EXPENDITURES BY SUBSECTORconstant 1972 prices

(P million)

1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986

Rural roads 92 199 122 119 153 171 202 145 81 75 90Irrigation 479 503 484 883 783 774 669 542 286 240 285Research 64 78 101 98 134 148 158 172 63 76 78Extension 167 170 244 198 157 205 197 179 96 101 112Price and IncomeStabilization 180 168 144 184 63 129 58 69 41 62 66

Forest Dev. andMgmt. 117 93 117 135 132 118 116 104 68 64 86

Agrarian Reform 111 102 88 85 80 67 65 75 39 51 50Other NA NA NA NA NA 23 40 38 126 77 81

Total 1,209 1,312 1,300 1,703 1,501 1,636 1,504 1,325 810 747 848

Source: Staff estimates; basic data from NEDA and OBM.

- 128- ANNEX-l

Appendix 1Table 3

Table 3: AGRICULTURE INVESThENT PROGRAM 1987-92(P million, constant 1986 prices)

TotalProjects 1986 1987 1988 1989 1990 1991 1992 1987-92

On-going, Total 19397 1,448 859 654 751 647 571 4,931

New Projects Total 0 629 732 957 801 710 166 3,995

Accelerated agr. 88 122 157 119 59 0 545Highland agr. dev. 76 180 195 189 179 0 819Nationwide ice plants 24 0 233 0 0 0 257Industrial tree plantation 39 51 60 72 80 0 302Integrated agro forestry 7 11 16 20 25 39 118Aurora integ. area dev. 64 51 38 42 0 0 195Mindanao integ. area dev. 192 91 100 113 125 - 622Abra integ. area dev. 27 24 36 66 110 0 263Sorsogon integ. area dev. 107 194 111 103 106 99 720Fishing ports and other 11 27 30 99 55 63 285

Total (excl. irrig.) 1,397 2,078 1,591 1,611 1,552 1,357 737 8,926

Total 3,328 42424 4,235 4,324 4,367 4,210 3,224 24,783

- 129 - ANNEX 11Page 8

and rural roads. Clearly there are other categories which could be includedin a list of public sector expenditures which benefit directly or indirectlythe agricultural sector. However, the overwhelming majority of expenditvresare captured by the above classifications.

13. When the period 1976 to 1986 is considered, all subsectors exhibitednegative growth rates except agricultural research. While research grew at1.8% p.a., expenditures in irrigation (-4.61 p.a.), extension (-3.5% p.a.),price and income stabilization (-3.5% p.a.) agrarian reform (-7.0% p.a.),forest development (-2.8% p.a.), and rural roads (-0.1% p.a.) have alldeclined in real terms during th2t period (Table 4).

Table 4: AGRICULTURAL EXPENDITURES BY SUBSECTOR /a(growth rates, x p.a.)

76-82 83-86 76-86

Extension 2.4 -11.1 -3.5Research 13.8 -17.9 1.8Irrigation 4.9 -14.8 -4.6Price and Income Stab. 2.4 -11.1 -3.5Agrarian Reform -7.4 -9.8 -7.0Forest Dev. and Mgmt. -0.2 -4.6 -2.8Rural Roads 11.9 -11.1 -0.1

/a Real expenditures.

Source: Staff Estimates. See Appendix Table 2.

14. Breaking this period down into the pre-crisis period (1976-82) andthe crisis years (1983-86) provides additional insights into the patterns ofexpenditure. It seems that agricultural research grew at an impressive ratebetween 1976 and 1982 (13.8% p.a.). However, this growth rate was from a verylow base, as research expenditures in 1976 amounted to only P 64 million(constant 1972 prices), i.e. only 5.3% of total agricultural expenditures.Despite the seemingly impressive growth, research expenditures in thePhilippines are very inadequate. International comparisons of agriculturalresearch expenditures as a percentage of agricul Pral CVA show that thePhilippine level was amongst the lowest in Asia._ As a result of its fastgrowth, research increased its share in total expenditures from an average of6.2% during 1976-79 to 10.4% between 1980 and 1983 (Table 5). During the

2/ See Ponciano S. InLal, Jr. "The Macroeconomic Policy Environment ofPhilippines Agricultural Performance", Journal of PhilippinesDevelopment, Vol XII, No. 2, 1985.

ANNEX 11- 130 - Page 9

crisis years this trend reversed dramatically. Research expenditures sufferedthe most from the budgetary cutbacks and registered a negative growth rate ofalmost 18% p.a., resulting in a decline of its share in total agriculturalexpenditures. Recent increases have begun to make up for this deficit, butthere is still a long way to go. There is a need now to return at the leastto the pre-crisis expenditure levels if technologies that will increase farmproductivity and profitability are to be developed. Specifically, increasesin funding are required for research on non-traditional crops, croppingsystems for marginal rainfed zones, post-harvest technology and in theremuneration levels of DA researchers.

Table 5: EXPENDITURE DISTRIBUTION BY SUBSECTOR(Average, %)

1976-79 1980-83 1984-86

Extension 14.3 12.4 12.9Research 6.2 10.4 9.0Irrigation 41.7 46.2 33.7Price and Income Stabilization 12.4 5.3 7.0Agrarian Reform 7.2 4.9 5.9Forest Dev. and llgmt. 8.4 7.9 9.1Rural Roads 9.8 11.2 10.6Other - 1.7 11.8

Source: Staff Estimates. See Appendix Table 2.

15. The biggest declines were suffered by the irrigation subsector. Theshare of irrigation expenditures in total agricultural expenditures declinedfrom an average of 42% (1976-79) to about 34% (1984-86). The reasons for thisare the slow down in implementation of some of the large and expensive irri-gation projects, as well as the virtual attainment of rice self-sufficiency.Extension expenditures also declined (-3.5% p.a. between 1976 and 1986). Thebulk of the decline occurred, of course, during the crisis years (-11.1%p.a.), although its share of total expenditure rose during that period becausethe rate of decline in extension expenditures was not as sharp as in others(for a detailed discussion of extension issues see Annex 5). Three othersubsectors that have actually increased their share in the total despitenegative growth rates are expenditures for price and income stabilization,agararian reform and forest development and management. Although allocationsfor agrarian reform declined in recent years, if Government's intentions toaccelerate land reform will materialize, allocations for this category willincrease dramatically.

16. Finally, as rural roads are not treated in detail elsewhere in thisreport, a few words on the subject are in order. The decline in expenditures inthe last three years has hit rural infrastructure especially hard, in particular

ANNEX 11131 - Page 10

the road network. The Philippines has an extensive road network of some 157,139km (1984), of which 25,100 km are national, 28,800 km provincial, 15,900 cityand municipal, and 85,200 barangay roads. This network suffers from manydeficiencies. £he most urgent problem in virtually all segments of rural roadsis inadequate maintenance, a problem worsened but certainly not created by therecent budget cutbacks. The reasons for the lack of attention to roadmaintenance range from inadequate organizational setup to shortages of funds andequipment. Years of neglected road maintenance have thus resulted in thedeterioration of a large part of the network to a point where it cannot bemaintained by normal methods; rehabilitation is needed to restore these roads toa maintainable condition. The stock of transportation equipment has alsodeteriorated drastically in recent years (partly because of road conditions),making transportation and distribution of produce and inputs unreliable, timeconsuming and expensive. Table 5 makes clear the relatively low levels ofinvestment in rural roads (particularly compared to irrigation). We believe thatimprovement of the rural road network is an extremely high priority foragriculture. The new Government has already shifted investment priorities inthis direction, for example through the CEDP, but allocations need to increaseeven further (see para. 21).

Investment Program in Agriculture 1987-92: Review and Evaluation

17, Recognizing the need to arrest and reverse the declines in expendituresin the sector, Government plans to increase the sector's share in total expendi-tures and to sharply increase total investment in the sector. The Government'sInvestment Program for 1987-92 is outlined in the "Medium Term PhilippineDevelopment Plan 1987-92" issued in December 1986, and in the Public InvestmentProgrem (November 1986). The plan calls for a total investment during the periodof P 335 billion (about US$16 billion). It implies a public investment rateduring the period of about 5.4% of GNP, compared to 3.6% of a depressed GNP in1985. Reflecting the shift in Government priorities, the share of publicinvestment in agriculture is planned to increased from 9.3% (1981-85) to 12.7% ofthe total. Transport and energy, which for many years have received the largestallocations, will continue to do so, but with a somewhat smaller proportion ofthe total (Table 6).

18. The total planned investment in the agricultural sector is aboutP 25 billion (constant 1986 prices). The breakdown of investment by subsector isprovided in Table 7. The bulk of the investment program is allocated toirrigation (about 50% of total), rural roads (23%) and Integrated Are 1Development Projects (13%) (including both ongoing and new projects).-Allocations for general support program, agrarian reform, fisheries and forestry

3/ Nine new major projects in agriculture (excluding irrigation and ruralroads) are expected to start in 1987--see Appendix Table 3. Fordescription and a more detailed evaluation of these projects see "PublicResource Management Study" 1987.

- 132 - ANNEXilPage 11

are much4 maller. The following is a brief review of the main items in theprogram.-

Table 6: PUBLIC SECTOR INVESTMENT(X distribution)

1981-85 1987-92

Agriculture/irrigation 9.3 12.7Transport/communication 26.7 22.0Industry 5.1 1.0Energy 31.8 27.1Water supply/flood control 8.3 12.6Education/health/urban 6.9 8.5Others 11.8 16.2

Total 100.0 100.0

Z of GNP 6.2 5.4

Table 7: SUBSECTOR INVESTMENT AS % OF TOTAL AGRICULTURE INVESTMENT, 1987-92

Average1987 1988 1989 1990 1991 1992 1987-92

General Programs 3.7 6.5 7.0 7.0 4.5 0.3 4.8Fisheries 3.1 1.7 5.8 1.0 0.1 0.0 1.9Irrigation 43.9 50.0 51.0 49.5 50.3 51.4 49.3Livestock 2.3 0.5 0.0 0.0 0.0 0.G 0.5Agrarian reform /a 0.8 2.6 4.7 5.0 5.3 6.2 4.1Forestry 3.1 4.2 3.9 3.8 3.5 0.6 3.2IADPs 26.0 14.5 8.9 10.5 10.6 8.1 13.1Rural roads 17.2 20.0 18.6 23.3 25.8 33.4 23.0

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0

/a Will probably increase drastically if the planned land reform program isimplemented.

4/ The investment program in irrigation is reviewed in Volume 2 Annex V.

ANNEX 11- 133 - Page 12

19. The Government's plan for a short-term recovery of the rural sectoris focused on a massive rural infrastructure program under the CEDP. Thiswill be focused on projects with a quick pay-off, with priority to the poorestregions. The components of the program are:

Roads. Focus on maintenance, rehabilitation, and restoration of provin-cial and barangay roads.

Ports. Improve efficiency of port operation, invest in equipment anddredging, and reduce port charges.

Irrigation. Focus on rehabilitation of existing systems, development ofindividual and small communal systems, and improving efficiency ofoperation and maintenance.

Flood Control and Drainage. Focus on repair and rehabilitation ofselected flood control and drainage facilities in areas witii the highestrisk and with productive bottom lands.

A second program is a local government road-building program to provide allweather, graveled farm-to-market roads.

20. The national infrastructure program gives greater attention to lessdeveloped and depressed areas of the country in order to reduce regionaldisparities. Greater emphasis is placed on the construction of rural projectssuch as feeder roads, water supply sysitems, feeder ports, school buildings,health facilities, communal irrigation, as.d rural electrification. Thephysical and financial breakdown of the rural infrastructure program for 1987-92 is provided in Table 8. About 53,000 km of feeder roads and some 325feeder, secondary and major ports will be rehabilitated or constructed. Some238,600 ha of irrigated areas will be added through the communal irrigationprojects.

21. The overall objectives and order of priorities of the ruralinfrastructure program are in line with Government's development strategy andrepresent an important improvement in the resource allocation in this area.However, more and better roads are judged to be one of the most impoltantcontributions the Government could make to accelerate rural growth. Thepresent scale of the program seems inadequate, particularly at a time when theGovernment wants to generate rural employment opportunities. Given pastserious underfunding of rural roads' construction and maintenance, expansionand acceleration of the rural roads program seem highly desireable. It shouldbe noted that even after the substantial increase in allocations for ruralroads in the 1987-1992 investment program, total investment in this categoryis still less than one-half of that for irrigation. While irrigationinvestment will continue to dominate the investment program we feel that theroads/irrigation expenditure ratio should be reduced. Two issues that need tobe resolved, however, are the level of financing available and theimplementation capacity of the respective agencies. The concern is thatsubstantial funds may be spent without corresponding physical assets beingcreated due to capacity constraints in selecting, evaluating, designing andimplementing the large number of small projects. While external assistance

Table 8: COMMUNITY-BASED RURAL ROADS AND PUBLIC WORKS UNDER THE MEDIUM-TERMPUBLIC INVESTMENT PROGRAM, CY 1987-1992

A. Fhysical Targets

Category 1987 1988 1989 1990 1991 1992 Total

1. Roads, km 7,248 8,141 8,997 10,006 11,191 12,230 57,813

(a) Feeder/secondary (6,674) (7,490) (8,252) (9,200) (10,328) (11,269) (53,213)

(b) Main (574) (651) (745) (806) (863) (961) (4,600)

2. Ports, no. of Drojects 172 104 33 34 38 42 325

3. Flood control and drainage,no. of projects ',184 1,213 ^1,249 1,300 1,331 1,377 7,654

4. Rural rater supply, no. of wells 10,827 9,631 12,390 11,932 8,922 12,468 66,170

5. Elementary school buildings,no. of classrooms 14,799 20,768 18,014 19,563 20,219 20,591 113,954

6. Communal irrigation projects, ha 31,800 33,000 36,700 41,300 45,600 60,100 238,500

B. Investment Requirements e

(P million)

Category 1987 1988 1989 1990 1991 1992 Total x

1. Roads 4,333 4,913 5,499 6,041 6,606 7,279 34,671 65

(a) Feeder/secondary (1,774) (2,007) (2,176) (2,449) (2,756) (2,993) (14,155) (27)

(b) Main (2,559) (2,906) (3,323) (3,592) (3,850) (4,286) (20,516) (39)

2. Ports 366 309 445 478 542 593 2,733 5

3. Flood control and drainage 190 723 804 869 954 1,025 4,565 9

4. Rural water supply 483 516 546 653 728 808 3,734 7

5. Elementary school buildings 579 717 843 880 954 1,114 5,087 10

6. Communal irrigation projects 300 320 355 400 442 486 2,303 4

Total 6,251 7,498 8,492 9,321 10,226 11,305 53,093 100

0

ANNEX 11135 - Page 14

could alleviate the financing constraint, there is an urgent need to assessand strengthen the capacity of both local government and DPWH to undertake anexpanded road construction/maintenance program.

22. The next two large items in the program are for IADPs (13%) andSettlement and Consolidation projects under the Department of Agrarian Reform(4.1Z). The overall objectives of these large projects are praiseworthy, butBank experience in several countries (including the Philippines) leads us toquestion the IADP approach. We doubt that the '"integrated" approach bringssignificant incremental net benefits, as compared with the approach wherebyeach agency provides its own services, subject to whatever coordination theregional planners and executive can provide. We have somewhat similarjudgment about the type of land settlement and land consolidation projectsthat have been tried to date. The cost per beneficiary has been high, and thesettlement authorities have retained responsibility for normal services (e.g.,education, health, roads) instead of handing them over to the regulardepartments. A rethinking to find 1oss costly and more successful methodsseems needed. Some comments on other projects in the program are given inAppendix 1,

Concluding Remarks

23. The overall allocation of resources by the public sector toagriculture has been inadequate in recent years to finance new developments,operation and maintenance, and an efficient level of services. As we haveshown earlier, the decline in agriculture-related expenditures during thecrisis years (1983-1985) was sharper than the decline in overallexpenditures. In real terms, the 1985 expenditure levels in the sector wereback at the 1972-1973 levels. Although capital expenditures also fellsharply, the decline in recurrent expenditures, particularly in maintenanceexpenditures, threatens the viability of the existing infrastructure.Particularly costly in this regard have been the declining levels ofmaintenance of irrigation systems. Furthermore, the allocation of resourceswithin the sector raises some questions. Some important programs--e.g.,research and rural infrastructure--have been underfunded. On the other hand,other programs, with more doubtful benefits, have perhaps been allocated adisproportionate share of resources. Such programs include IADPs, sectlementschemes and some of the less well focused uses of government subsidies.

24. Despite the increased allocations to the sector in the 1987 budgetand in the PIP, these levels are still well below the pre-crisis levels. Morespecifically, despite a substantial increase in the amounts allocated to themaintenance of rural roads and some increases in the allocations forirrigation maintenance, the 1987 budget falls short of the required levels.We would like to see increased allocations for rural roads and otherinfrastructural development (e.g., communication). Also, the share ofresearch expenditures should in our opinion increase relative to extension,whose proportion should probably decline somewhat if the various extensionservices could be consolidated and inflated staff levels are reduced.

25. Finally, a few words on the planning capacity and the programmingand budgeting process are in order. Strategic, operational and financial

ANNEX 11

- 136 - Page 15

planning in tha sector is quite weak. The Department of Agriculture isparticularly weak in this respect as it does not have a planning andprogramming unit that analyses, outlines and follows development issues in thesector. A case in point is the investment program in agriculture. For multi-year projections of this nature some aggregative estimates of the recurrentcost implications of the investment program must be made. These should bedone in terms of categories which can be translated into budgetaryclassifications. However, no unit in DA (or NEDA) analyses and projects therecurrent cost implications of the investment program in the sector. There isno adequate process through which the resource allocation decisions areplanr,ed and taken in the sector; there is no unit in DA which identifies, inspecific terms, the areas where funds for recurrent expenditures are seriouslyinadequate causing underutilization or deterioration of capacity, and/orestimates the needs in terms of budgetary categories. The difficulties wehave encountered in obtaining the data for public expenditures in agriculturehave highllghted the absence of a strategic planning unit for the sector.With the large number of departments, agencies and units involved in thesector and with the budgeting practices employed, planners and decisionmakerswould have a difficult time finding out how much resource flows into specificcategories. Total public resources that flow into extension activities,research or price support for rice and corn are not readily available. Thislack of information is a serious impediment to effective strategic planning.The deficiencies in the Philippines budget process are outside the scope ofthe report but clearly the process as it relates to agriculture needs to bereviewed. Reforms seem to be required to enable closer monitoring ofexpenditures on the subsectoral level (e.g., how much is spent on agriculturalextension); and to enable monitoring of and control over recurrentexpenditures vs. capital outlays.

26. Another example of the deficient planning and programming capacityin the sector is the sectoral investment program itself. In many respects thefive-year projections comprising the investment program in agriculture includeelements of hope and expectations as well as realistic planning. Furthermore,the composition of the investment program is a function of the strength of theplanning capacity of the submitting agency. Therefore, as DPWH and inparticular NIA, are able to provide reasonable feasibility studies, and areable to present to NEDA (relatively) well thought out projects, the list inthe Public Investment Program (PIP) is biased towards such institutions.Agencies/Departments which are weak in terms of their planning capacity sufferas their projects, while possibly worthwhile, are not presented in a way thatconvinces NEDA to include their projects in the PIP.

- 137 -ANNEX 11Appendix 1Page 1

PHILIPPINES

Additional Comments on the Medium Term Public Investment Program

1. The Government's Medium Term Public Investment Program 1987-92includes about 40 ongoing and proposed agricultural projects, amounting to atotal cost of some P 25 billion. It was not possible for the mission toreview this large program in any depth, although the report has commented onsome of the largest programs, including irrigation, rural roads, IADPs andsettlement schemes. This note offers some additional comments on three otherprojects/programs where decisions are still pending.

Industrial Tree Plantation Project

2. A feasibility study for this project was prepared by a foreignconsultant team and f nanced by ADB in 1984e Total project costs areestimated at P 1,583 million and a foreign exch4nge requirement of $39.4 mil-lion. The project would involve the formation of joint venture companiesbetween NDC and timber license agreement (TLA) holders on a 40:60 equity ratiowhich would establish industrial tree plantations. The proposed project wouldinvolve the establishment and management of selected tree species in denudedforest concession :ands with the initial target area of 100,000 hectares,mostly located in Mindanao. (The program would be just the initial phase indeveloping a total area of 200,000 hectares of proposed ITP joint ventures.)The plantation development would involve the collection of certified seeds,nursery work, clearing and site preparation, planting of seedlings,maintenance weeding, commercial thinning, disease control, fire prevention,construction and improvement of road network, timber cruising of trees, andestablishing a permanent record system.

3. The project, while supporting a production and environmentalobjective, does not provide for smallholder agro-forestry development whichshould not be omitted in this kind of project. A recent report on a forestryproject in Mindanao ("Forest-Based Regional Industrial Development Plan inEastern Mindanao") prepared by the Paper Industries Corporation of thePhilippines (PICOP) appears more balanced in the sense that it p:ovides forboth industrial plantations and snvmllholder development. An issue ofprinciple for Government is whether it wants to be involved in a project ofthis kind or whether these activities should be left to the private sector.If Government decides that it wants to be involved, the PICOP project deservesconsideratioa by Government for inclusion in the PIP instead of the IndustrialTree Plantat._on Project.

Nationwide Ice Plant and Cold Storage Network System (IPCS)

4. The project is in an advanced planning stage, and the PhilippineFisheries Development Authority (PFDA) is currently negotiating with Japaneseconsultants (funded by OECF) to conduct feasibility studies and detailedengineering design. Construction is estimated to begin in 1989. The IPCScurrently under preparation includes only four (4) zones and no prototypes

- 138 -ANNEX 11Appendix 1Page 2

(compared to the original Master Plan which proposed a network of 4 zones and49 prototypes)o PFDA's latest construction cost estimate for the four zonesis about P 300 million, as is reflected in NEDA's current in.-stmentprogram. The four zones, considertd priority areas, are Bulacan (150 tons/dayice making capacity), Zamboanga del Sur, Camarines Norte, and Stanzia inPanay. According to PFDA, each zone would have a minimum of 50 tons/day icemaking capacity and 5 satellite ice storage facilities linked to the centralice plant.

5. Initially, Government's program was a failure. In 1983, when 35 iceplants were handed over from the Bureau of Fisheries and Aquatic Resources toPFDA, none was operating. Some of them were rehabilitated by DANIDAassistance and PFDA budget allocations. To date, 10 are being operated byPFDA; another five have been leased out and are being operated by privateparties. Three more are expected to become operative in 1987, and 7 have goodprospects for leasing. Because of inappropriate location and/or lack of wateror power, the remaining 10 would remain closed, but movable parts would beremoved to construct 2 new ice plants. In 1986, for the first time, PFDAregistered a small profit inclusive of lease rentals, from its ice plantoperations.

6. However, an important issue, not discussed in the Master Plan,concerns the relative roles of privata and public investment in meeting theneeds of the users. As noted in the Master Plan, most ice plants are privateand are operating well. It is the public sector ice plants which havesuffered from shortage of power, water and/or demand, illustrating pastineffective planning and optimistic demand projections. It is thereforeimportant to decide whether and to what extent Government should becomeinvolved in construction and operation of ice plants. (For example, oneoption would be for Government to construct ice storage facilities in variousfish landing areas, and lease ice plant investment to the private sector.) IfGovernment is to be involved, it is also important to try to ensure that pastmistakes are not repeated.

Various Locally-Funded Projects

7. The investment program includes well over P billion for variouslocally funded projects. These tend to be small projects, implemented byagencies such as NFA, the Laguna Lake Development Authority (LLDA), the FarmSystems Development Corporation (FSDC) and the Southern Philippines Develop-ment Authority (SPDA). Project preparation and evaluation appears to be weak,particularly in SPDA, an agency that used to be attached to the Ministry ofHuman Settlement. Up to now these projects have been included in theinvestment program with little review or evaluation by NEDA. Given themagnitude of resources going into this category of projects, a more vigorousproject selection and appraisal process would seem to be urgently required.

- 139 -ANNEX 12Page 1

PHILIPPINES

AGRICULTUAL SECTOR STRATEGY REVIEW

Policy Changes 1984-87

1. Past Policies. Macro and sector specific policies and institutionalconstraints of the past have discriminated heavily against the agriculturalsector. These included heavy import protection for industrial goods, an over-valued exchange rate, export taxes, price controls, trading bans and marketingmonopolies for key agricultural commodities. Some policies in the sector wereintended to offset, at least partially, the bias against agriculture. Theseincluded credit at subsidized rates and implicit subsidization of irrigation,but both were insignificant in altering the unfavorable incentive structure.Some subsidies were also given, to fertilizer firms, but these were notsufficient to offset the biases created by other policies in the fertilizersubsector. The combined set of all economic incentives facing the sectorclearly reduced the profitability of agriculture. (However, as discussed inChapter 1, because of the comparative advantage and resilience of theagricultural sector, the growth performance was quite good despite theunfavorable incentive system).

2. Because of the partial failure of the industrialization strategy,which favored capital-intensive investment behind high protective barriers,and with the onset of the economic crisis of 1983-85, some re-thinking tookplace and Government undertook some reforms in the sector. Some of them wereoutlined in the Agenda for Action in Agriculture 1984-87. The measuresincluded: opening up of import trade in animal feeds and wheat; phasing outof price controls on rice, poultry, eggs and pork; and deregulation ofinterest rates and phasing out of subsidies for agricultural credit. Also,tariff reforms in the industrial sector since 1980 reduced the implicit biasagainst agriculture to some extent. (The positive impact of these and otherreforms were limited partly because they came at a time when the internal andexternal economic environment was generally unfavorable). Reform measureswere also announced for the coconut and sugar subsectors; these were containedin a number of Presidential Decrees and memoranda of understanding (seelisting below). Many of these, however, were more cosmetic than substantivein nature and/or were not implemented.

3. Recent Policy Changes. The new Government, after assuming power inFebruary 1986, moved quickly to reduce distortions against agriculture and toremove institutional constraints in the sector. Major actions included:

(a) lifting of the copra export ban;

(b) abolition of monopolies and monopolistic structures;

(c) liberalization of urea and potash imports and distribution; and

(d) abolition of all export taxes.

- 140 -

ANNEX 12Page 2

These actions represent important steps toward creating a better incentivestructure; nevertheless, much work remains to be done. The "unfinishedagenda" is discussed in Chapters 3 and 4 of the main report. Below is alisting of major policy changes/decisions during 1984-87.

List of Policy Changes/Decisions During 1984-87

4. Adoption by the Cabinet of the "Agenda for Action in Agriculture:1984-88," May 1984. The Agenda formed the basis for the Agricultural Sector/Inputs Project and other reforms in the sector. It outlined general policydirections as well as some specific policy and institutional reforms. Studiesrather than actions were proposed for some key areas: coconuts, sugar, NFA,fertilizer, credit, and irrigation.

5. Executive Order 965, dated June 30, 1984. Under this order theBureau of Fisheries was transferred from MNR to MA, and the Minister ofAgriculture became a member of the Boards of PCA and PHILSUCOM. Responsi-bility for food policies was transferred from NFA to MA, and the latter wasrenamed the Ministry of Agriculture and Food (MAF).

6. Letter of Instruction No. 1319 on fertilizer, issued August 1984.Under it, certain aspects of fertilizer policies were liberalized.

7. Presidential Decree 1960, issued in January 1985. Inter alia, itopened the export of coconut oil to any millers or refiners who agreed toassume a pro rata share of the obligations of United Coconut Oil Mills(UNICOM); encouraged the formation of associations or cooperatives to prevent"ruinous competition" for copra; and permitted new milling capacity to becreated only with the approval of MTI, MAF and PCA, with preference given toexisting millers. The formal dissolution of UNICOM followed, but it wasreplaced by ten new trading firms all owned or controlled by the same group ofinvestors, which continued operating as a cartel.

8. Presidential Decree 1971, issued in February 1985. It changed thecomposition of the PHILSUCOM Board and ordered the replacement of NASUTRA byPHILSUMA at the end of 1985.

9. Presidential Decree 1972, issued in April 1985. Its principal fea-tures were to: (a) make permanent the export duties on coconut products thenin effect; (b) assign to PCA the responsibility for servicing the replantingrequirements of small coconut farmers (with no more than 24 ha); and(c) exempt from export duties exporters who form associations of at least tenmillers/refiners or coconut product exporters, at least one whom must be aformer UNICOM mill, who together must export at least 200,000 tons of coconutproducts annually (in copra terms).

10. Executive Order 1016, issued April 1985. Under it, exportprocedures were simplified by reducing commodity clearances.

11. Executive Order 1028, issued May 1985. Under this order, NFA openedup wheat imports to the private sector. The ending of retail price controlsfor rice was announced for October 1, 1986. Fertilizer policies were to be

- 141 -ANNEX 12Page 3

"fully liberalized." NFA's foreign trade monopoly for rice was retained,however.

12. Signing of the Agricultural Incentive Act, February 1986. The billwas signed a day before President Marcos left office; its provisions have notbeen implemented.

13. Creation of Presidential Commission on Good Government (PCGG), March1986; decision to audit, investiga-e and, if necessary, sequester assetsobtained through diversion of public funds.

14. Copra export ban lifted, March 1986.

15. Speech on Policy Directions in Agriculture by President Aquino,May 30, 19z3C. The policy goals outlined were:

(a) To free the economy from unnecessary and costly government interven-tion;

(b) to improve the farmer's access to land, technology, credit, infra-structure and market information, and to provide landless wageearners greater employment opportunities; and

(c) to increase the effectiveness of government agencies serving theagriculture/rural sector mainly by decentralizing operations toensure that farmers participate fully in decision-making.

Specific measures mentioned in the speech included:

(a) land reform in the poorest areas;

(b) infrastructure projects with the quickest pay-off, particularlyroads, ports, irrigation and drainage;

(c) removal of the constraints that impede the flci of credit to agri-culture;

(d) abolition or reduction of export taxes, sales taxes and importduties on agricultural products; and

(e) dismantling of monopolies and government interventions that distortthe market and dampen producer incentives.

16. "Short-Term Recovery Plan for the Rural Sector," May 1986, issued bythe Ministry of Agriculture which provided additional details to thePresident's speech.

17. Draft of the "Agenda for Action for the Philippine Rural Sector" bythe Agricultural Policy and Strategy Team (led by Dr. Cristina David) issued,June 1986. This report was reprinted by Government in October 1986 but thedegree of concurrence by Government is not fully known.

- 142 -ANNEX 12Page 4

18. Abolition of all export taxes on agricultural products, July 1986.

19. "Agenda for People-Powered Development", July 1986. This documentoutlines the overall economic strategy. It was approved by the Cabinet.

20. "Draft Medium-Term, Development Plan 1987-92", October 1986.

21. "Medium-Term (1987-92) Public Investment Program", November 1986.

22. Attachment of NFA, PCA and SRA to Ministry of Agriculture,January 1987.

23. Abolition of monopolies and monopolistic structures, various actionsand dates.

, . ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.

- 143 -ANNEX 12Page 4

18. Abolition of all export taxes on agricultural products, July 1986.

19. "Agenda for People-Powered Development", July 1986. This documentoutlines the overall economic strategy. It was approved by the Cabinet.

20. "Draft Medium-Term, Development Plan 1987-92", October 1986.

21. "Medium-Term (1987-92) Public Investment Program", November 1986.

22. Attachment of NFA, PCA and SRA to Ministry of Agriculture,January 1987.

23. Abolition of monopolies and monopolistic structures, various actionsand dates.

- 144 -

PHILIPPINES

AGRICULTURAL SECTOR STRATEGY REVIEW

ANNEX 13

Statistical Tables

-145- AIM 13Table 1

PHILIPPINES

AGRICULTURAL SECTOR STRATEGY REVIEW

Land Use by Major Crops, 1950-85

Area harvested ('000 ha) Percentage of total1950 1960 1970 1980 1986/a 1950 1960 1970 1980 1986/a

Crops

Rice 2,214 3,306 3,113 3,637 3,403 43.6 43.5 34.8 30.0 27.8Rainfed (1,816)/b (2,526) (1,767) 2,031 1,511 (35.8) (33.2) (19.8) 16.7 12.3Irrigated (398)7F (780) (1,346) 1,606 1,892 (7.8) (10.3) (15.0) 13.3 15.5

Corn 909 1,846 2,420 3,201 3,545 17.9 24.3 27.0 26.4 29.0

Total 3.123 5,152 5,533 6,838 6,948 61.5 67.8 61.8 56.4 56.8

Tree Crops (Exclud-ing Fruits)

Coconut 985 1,059 1,884 3,126 3,261 19.4 13.9 21.0 25.7 26.6

Coffee 10 30 54 102 148 0.2 0.4 0.6 1.0 1.2

Rubber 3 5 22 54 75 0.1 0.1 0.2 0.4 0.6

Cacao 4 7 8 5 15 0.1 0.1 0.1 0.0 0.1

Total 1,002 1.101 1,968 3,287 3,499 19.7 14.5 22.0 27.1 28.6

Major Fruits andVegetables

Banana 98 161 235 318 330 1.9 2.1 2.6 2.6 2.7

Pineapple 15 - 23 29 63 60 0.3 0.3 0.3 0.5 0.5

Mango 33 52 46 39 49 0.7 0.7 0.5 0.3 0.4

Citrus 17 23 21 25 26 0.3 0.3 0.2 0.2 0.2

Major vegetables 20 81 63 69 62 0.4 1.1 0.7 0.6 0.5

Total 183 340 395 514 527 4.6 5.6 5.2 4.8 4.3

Root Crops 186 289 262 486 423 3.7 3.8 2.8 4.0 3.5

Sugarcane 130 242 366 424 356 2.6 3.2 4.1 3.5 2.9

Other Crops 452 472 422 584 484 8.9 6.2 4.9 4.8 4.0

GRAND TOTAL 5,076 7,596 8,946 12,133 12,237 100.0 100.0 100.0 100.0 100.0

a Preliminary.7k 1948.

Sources: Statistical Yearbook, 1986. Data on irrigated rice are from various sources; the rainfed area isderived as a residual.

ANNEX 1 3rable 2

PHILIPPINES

AGRICULTURAL SECTOR STRATEGY REVIEW

Coconuts: Area, Production, Yield and Disposition('000 1etric tons)

Copra Yield of Exports Domestic usersCalendar Area pro- harvested Coconut Desiccated Coconut Food-

year Planted Harvested duction area Copra oil coconut Total oil nuts Total--- (000 ha) ---- ('000 mt) (mt/ha) ------------ ('000 mt in copra equivalents)/a -----

1972 2,126 1,791 2,174 1.21 968 757 95 1,820 313 40 3531973 2,133 1,633 1,871 1.15 728 691 95 1,514 320 38 3581974 2,206 1,750 1,424 0.81 309 699 77 1,085 296 43 3391975 2,280 1,890 2,199 1.16 833 954 80 1,867 288 44 3321976 2,521 1,985 2,742 1.38 867 1,373 98 2,338 349 55 4041977 2,728 2,091 2,440 1.17 560 1,276 119 1,%55 436 49 4851978 2,890 2,168 2,517 1.16 380 1,596 110 2,086 380 50 4301979 3,064 2,172 1,912 0.88 145 1,282 100 1,536/b 326 50 3761980 3,126 2,290 2,076 0.91 123 1,451 136 1,718/b 307 50 3571981 3,105 2,211 2,316 1.05 106 1,661 136 1,913/b 353 50 4031982 3,162 2,301 2,192 0.95 192 1,506 138 1,871/b 271 50 321 11983 3,188 2,265 2,264 0.95 12 1,619 131 1,813/b 400 51 451 _1964 3,217 2,310 1,435 0.62 /d 936 106 1,128/b 257 50 3071985 3,275 n.a. 1,800/c n.a. /d 655 61 1,1487Wb 252 50 302 £

1986 3,262 n.a. n.a. n.a. n.a. n.a. n.a. n.a. ni.a. n.a. n.a.

/a The conversion factors used in Philippines are as follows: coconut oil, 52% of copra equivalents;desiccated coconut 83%. From 1980 onwards, conversion factor used is coconut oil 63%; and desiccatedcoconut 64.68%.

/b Including the copra equivalent of coconut oil processed for fatty chemicals mainly for exports./c Including the copra equivalent of coconut producers held as stocks at year-end.fd No exports due to the copra export ban which was imposed September 1982.

Source: United Coconut Association of the Philippinest.

- 147 -ANNEX 13Table 3

PHILIPPINES

AGRICULTURAL SECTOR STRATEGY REVIEW

Sugar: Area, Yield, Recovery Ratio, Production and Exports

Crop Area Yield Recovery Sugaryear /a planted Cane Sugar ratio /b production Exports /c

('000 ha) -- (mt/ha) -- (%) -- ('000 metric tons) --

1972 441 44.2 4.1 10.6 1,011 1,2621973 422 53.8 5.3 9.9 2,246 1,4551974 463 56.2 5.3 10.6 2,446 1,6361975 473 52.0 5.0 10.1 2,396 1,0061976 540 53.0 5.2 10.1 2,880 1,5151977 514 53.0 5.2 10.0 2,685 2,5751978 451 49.9 5.2 9.5 2,335 1,1421979 4$3 42.3 4.3 9.7 2,289 1,1571980 442 47.2 4.8 9.8 2,267 1,7931981 382 53.8 5.5 9.6 2,315 2,2781982 496 50.1 4.9 10.1 2,447 1,3011983 464 50.2 5.1 9.5 2,465 9991984 427 56.1 5.5 11.2 2,335 8771985 383 48.1 :4.6 10.6 1,742 5721986 321 48.8 4.7 9.6 1,500 300/d19871d 310 45.5 4.3 9.4 1,330 200

Ia September to August.

/b Ratio of sugar to sugarcane.

Ic Metric tons commercial weight (MTCW) as of August 1985.

/d Estimate.

Sources: Philippine Sugar Commission (for data through 1985), and Sugar Regu-latory Administration.

- 148- ANNEX 13

Table 4

PHILIPPINES

AGRICULTURAL SECTOR STRATEGY REVIEW

Rice: Area, Yield, Supply and Use

Rice supply and useTotal Beginning Avail- Ending Domes-

Crop Harvested Mean yield pro- inventory Net able stocK ticyear area of palay /a duction as of 07/01 imports /b supply 06/30 use /c

('000 ha) (tons/hai) ---------- ('000 metric tons) ----------------…-

1971/72 3,332.3 1.598 3,248 632 633 4,513 698 3,8151972/73 3,194.2 1.443 2,834 698 238 3,770 445 3,3251973/74 3,527.8 1.656 3,621 445 311 4,377 837 3,5401974/75 3,632.5 1.627 3,693 837 238 4,768 929 3,8391975/76 3,674.0 1.751 4,032 929 71 5,052 777 4,2751976/77 3,641.4 1.851 4,280 777 24 5,081 841 4,2401977/78 3,601.7 1.977 4,607 841 -39 5,109 1,212 4,1971978/79 3,560.7 2.110 4,847 1,212 -38 6,021 1,540 4,4811979/80 3,636.8 2.154 5,093 1,540 -236 6,397 1,575 4,8221980/81 3,459.1 2.233 5,020 3,575 -175 6,420 1,330 5,0891981/82 3,442.8 2.359 5,279 1,331 -10 6,600 1,520 5,0801982/83 3,239.6 2.386 5,040 1,520 -11 6,549 1,478 5,0711983/84 3,140.7 2.497 5,841 1,478 -30 6,576 990 5,5861984/85 3,221.8 2.540 5,363 990 389 6,742 999 5,7431985/86 3,402.6

/a Paddy with about 67% rice content.

/b Negative figure indicates net exports.

/c Refers to all uses including feed, losses and seed.

Note: Data for harvested area and production have been revised for 1971/72-1979/80.

Source: Statistics Division, Bureau of Agricultural Economics.

- 19ANNEX 13YTable 5

PHILIPPINES

AGRICULTURAL SECTOR STRATEGY REVIEW

Corn: Area. Production, Supply and Disappearance

Corn supply and useTotal Beginning Avail- Ending

Crop Harvested Average pro- stock as Net able stock Domes-year area yield /a duction of 07/01 imports supply 06/30 tic use

('000 ha) (tons/hi) ------------------- (000 metric tons) ------------------

1971/72 2,454.3 0.825 2,024 148 193 2,365 241 2,1241972/73 2,350.6 0.781 1,843 241 90 2,174 96 2,0781973/74 2,726.4 0,828 2,258 96 94 2,448 257 2,1911974/75 3,009.9 0.835 2,514 257 159 2,930 243 2,6871975/76 3,193.2 0.851 2,717 243 54 3,014 153 2,8611976/77 3,242.5 0.856 2,775 153 160 3,088 154 2,9341977/78 3,158.1 0.885 2,796 154 131 3,084 153 2,9311978/79 3,252.4 0.930 3,090 153 56 3,299 264 3,0351979/80 3,201.1 0.976 3,123 264 93 3,480 148 3,3321980/81 3,238.7 0.96 3,110 148 351 3,609 175 3,4341981/82 3,360.7 0.979 3,290 175 275 3,740 172 3,5681982/83 3,157.5 0.99 3,126 172 406 3,704 104 3,6001983/84 3,270.2 1.023 3,346 104 321 3,771 181 3,5901984/85 3,314.6 1.037 3,439 181 342 3,962 252 3,7811985/86 3,544.7 3,922

Source: Statistics Division, Bureau of Agricultural Economics.

-150 - ANNEX 13Table 6

PHILIPPINES

AGRICULTURAL SECTOR STRATEGY REVIEW

Other Crops: Harvested Area, Production and Yield

Crop year /a 1972 1976 1980 1984 1985 1986/b

Area Harvested ( 000 ha)

Abaca 145 244 236 171 169Bananas 244 298 318 318 328Coffee 55 77 101 140 145Cotton - 0.4 4 6 5Mango 41 36 39 43 45Pineapple 30 35 63 63 54Rootcrops /c 258 401 486 419 422Toba-co 78 86 61 67 51Vegetable /d 52 51 53 48 50

Production ('000 mt)

Abaca 110 139 157 89 84Bananas 980 2,271 3,977 3,819 3,698 3,820Coffee 52 81 125 117 133Cotton - 0.1 5 8 6Mango 143 293 377 378 384Pineapple 282 420 1,281 1,719 1,449Rootcrops /c 1,218 2,143 3,470 2,216 2,453Tobacco 56 59 42 66 47Vegetable /d 240 359 385 352 342

Yield (mt/ha)

Abaca 0.76 0.57 0.67 0.52 0.49Bananas 4.02 7.62 12.51 12.02 16.27Coffee 0.95 1.05 1.21 023 0.92Cotton - 0.25 1.25 1.33 1.14Mango 3.49 8.14 9.67 8.83 8.47Pineapple 9.40 12.00 20.33 27.29 26.77Rootcrops /c 4.72 5.34 7.14 5.45 5.81Tobacco 0.72 0.69 0.69 0.99 0.92Vegetable /d 4.62 6.65 7.26 7.42 6.85

/a July-June/b Preliminary/c Includes camote, cassava, gabi, paogaliang, tugui and ubi./d Includes cabbage, eggplant, garlic, pechay, radish and tomato.

Source: Bureau of Agricultural Economics.

- 151 - ANNEX 13Table 7

PRILIPPINES

AGRICULTURAL SECTOR STRATEGY REVIEW

Gross Value Added in Agriculture, Fishery and Forestryby Subsector in Current Prices

(Billion pesos)

1972 1976 1980 1981 1982 1983 1984 1985 1986

Agriculture 9.0 23.6 37.6 40.3 44.0 47.8 83.5 97.7

Paddy 2.7 6.3 9.0 10.9 11.9 12.2 21.4 29.4

Corn 1.0 2.3 3.3 4.0 4.6 4.3 7.8 10.9

Coconut, includ-ing copra 1.2 3.1 3.1 3.1 3.0 5.2 11.2 8.1

Sugarcane 1.1 2.5 2.7 3.2 4.0 3.3 5.4 3.4

Banana 0.6 2.2 4.8 5.1 5.2 7.3 11.4 12.7

Other crops 2.4 1.1 14.0 14.0 15.3 15.5 26.4 32,8

Livestock 1.8 2.9 3.9 4.2 4.6 5.3 9.4 10.0

Poultry 0.7 1.5 3.6 4.8 5.8 7.1 11.4 14.8

Fishery 2.6 6.3 11.2 13.8 15.3 16.8 23.1 28.0

Forestry 2.0 3.3 6.7 6.2 7.4 7.5 12.0 10.9

Total 16.1 37.6 63.0 69.3 77.1 84,5 139.5 161.4

Source: National Accounts Staff, NEDA.

- 152 - ANNEX 13Table 8

PHILIPPINES

AGRICULTURAL SECTOR STRATEGY REVIEW

Gross Value Added in Agriculture, Fishery and Forestryby Subsector at 1972 Constant Prices

(Billion pesos)

1972 1976 1980 1981 1982 1983 1984 1985 1986

Agriculture 8.9 12.1 15.2 15.3 15.7 15,0 15.6 16.2

Paddy 2.7 3.4 4.1 4.3 4.5 3.9 4.2 4.7

Corn 1.0 1.2 1.4 1.5 1.5 1.4 1.5 1.7

Coconut, includ-ing copra 1.2 1.4 1,3 1.4 14 1.3 1.0 1.3

Sugarcane 1.1 1.6 1.3 1.3 1.4 1.2 1.4 0.8

Banana 0,6 1.4 2.4 2.3 2.3 2.4 2.4 2.4

Other crops 2.4 3.1 4.7 4.5 4.7 4.8 5.0 5.4

Livestock 1.8 1.7 1.9 1.9 2.0 2.2 2.2 2.1

Poultry 0.7 1.0 1.6 1.9 2.2 2.5 2.6 2.6

Fishery 2.6 3.3 3.9 4.1 4.3 4.4 4.3 4.4

Forestry 2.0 1.6 1.1 1.2 0.9 0.8 0.8 0.7

Total 16.0 19.7 23.7 24.4 25.1 24.9 25.4 26.0

Note: Totals may not add up to rounding.

Source: National Accounts Staff, NEDA,

- 153 - ANNEX 13Table 9

PHILIPPINES

AGRICULTURAL SECTOR STRATEGY REVIEW

Population of Livestock and Poultry on Farm, by Kind: 1950-86('000 head)

Livestock PoultryCarabao Cattle Goat Hog Chicken Duck

1950 1,903 698 355 3,899 25,235 7091955 3,279 806 459 5,289 44,584 1,6961960 3,696 1,110 617 6,573 52,335 2,2311965 3,346 1,560 606 6,938 56,929 1,4781970 4,432 1,679 772 6,456 56,999 2,1321971 4,556 1,795 924 7,050 56,512 2,3521972 4,711 1,933 1,083 7,742 50,103 2,6001973 4,937 2,099 1,248 8,627 49,965 2,9061976 2,725 1,737 - 6,489 45,671 4,1041977 2,897 1,723 1,104 5,696 45,289 4,2281978 2,959 1,820 1,290 6,910 58,892 5,3651979 2,803 1,833 - 7,445 49,320 5,3381980 2,870 1,883 - 7,934 52,761 4,7251981 2,850 1,940 1,696 7,758 57,724 4,7831982 2,908 1,942 1,783 7,795 59,710 4,9051983 2,946 1,938 1,859 7,980 62,255 5,4191984 3,022 1,849 2,362 7,613 59,285 5,7641985/a 2,980 1,785 2,191 7,158 52,098 5,29319867W 2,984 1,814 2,177 7,275 53,005 5,208

/a Estimates.

/b Preliminary estimates.

Note: The reference date of the population is March 1 for 1955, 1960 and 1965and January 1 for 1950 and 1970 to 1986. Data for 1974 and 1975 arenot available.

Source: Bureau of Agricultural Economics.

- 154 - ANNEX 13Table 10

PHILIPPINES

AGRICULTURAL SECTOR STRATEGY REVIEW

Number of Animals Slaughtered by Kind: 1955-86('000 head)

Carabao Cattle Hog Horse Goat Chicken /a

1955 37 340 3,740 - 134 24,2631960 103 247 4,808 - 155 26,7791965 117 319 6,700 - 174 28,8821970 118 366 5,489 - 293 30,3291971 154 381 4,818 - 325 31,3181972 173 291 '1,871 - 112 _1973 272 342 2,665 11 75 11,7581974 310 312 2,717 12 78 20,3151975 212 300 3,062 9 60 10,5891976 200 258 2,525 4 145 16,5131977 175 181 1,919 7 115 12,9281978 161 200 2,036 6 68 9,9821979 148 198 1,564 4 68 18,0491980 133 205 2,449 3 51 8,0211981 66 160 3,036 4 56 10,3131982 90 312 3,696 7 82 13,1281983 84 361 3,198 5 96 54,1551984 129 280 4,258 2 82 47,77919851986

/a Data from Bureau of Animal Industry and include only Metro Manila report.

Note: Data from 1973 to 1982 include only animals slaughtered in slaughterhouses and inspected by the National Meat Inspection Commission.

Sources: Bureau of Agricultural Economics and Bureau of Animal Industry from1955 to 1972; Bureau of Animal Industry from 1973 to 1982; Bureau ofAgricultural Economics, 1983, except chicken.

- 155- ANNEX 13

Table 11

PHILIPPINES

AGRICULTURAL SECTOR STRATEGY REVIEW

Average Annual Prices of Coconut Products, 1972-86

Average Average export Average AverageAverage export price for export export

Domestic export price coconut oil price for price forFarm-gate wholesale price for for coco- in copra copra desiccatedprice /a price copra nut oil equivalent /b meal cake coconuts

1972 0.45 0.65 0.80 1.21 0.74 0.33 1.541973 1.12 1.69 1.51 2.43 1.55 0.61 2.911974 2.07 2.71 3.63 6.25 3.94 0.68 3.061975 0.80 1.07 1.70 2.68 1.67 0.80 3.121976 0,89 1.28 1.46 2.60 1.64 0.82 3.201977 1.32 189 2.55 3.77 2.37 0.96 6.141978 1.65 2.32 2.75 4,50 2.80 0.96 6.631979 2.50 3.29 4.55 7.75 4.87 1.13 9.151980 1.20 1.70 2.92 5.33 3,38 1.11 9.911981 1.13 1o78 2.45 4.50 2.84 1.03/c 9.311982 1.07 1.76 2.34 4.10 2.56 1m047- 6.511983 2.32 3.51 3.12 5.76 3.63 1.45 10.961984 6.13 9.1619851986

/a The farm-gate price for chopped copra is higher by about 8-15% than for regular copra.

/b Based on the conversion factor of 1.587 from coconut oil to copra equivalent.

/c Philippine Coconut Authority (PCA) placed a "ban" on copra exports in 1981.

Sources: (1) Bureau of Agricultural Economics, Prices Received and Paid by Farmers,1981/82.

(2) Philippine Council for Agriculture and Resources Research: Data Series onCoconut Statistics In the Philipines, 1980.

(3) UCAP Coconut Statistics for average export price for copra.

- 156 - ANNEX 13

Table 12

PHILIPPINES

AGRICULTURAL SECTOR STRATEGY REVIEW

Average Annual Prices of Sugarcane and Raw Sugar) 1972-87(Pesos/mt)

Pricereceived by farmers Sugar price

Sugar- Domestic Export Composite WorldSugar /a cane /b price price price price

1972/73 561 53 490 961 880 1,0741973/74 570 58 490 1,068 895 1,4011974/75 928 88 808 1,804 1,456 4,5001975/76 1,102 109 1,123 2,016 1,729 3,2811976/77 1,095 108 949 1,976 1,719 1,8981977/78 802 80 949 1,423 1,259 1,4191978/79 907 95 1,423 1,423 1,423 1,2701979/80 976 101 1,660 1,423 1,532 1,5671980/81 1,244 127 1,739 2,134 1,953 4,8081981/82 1,460 152 1,739 2,727 2,292 2,9501982/83 1,458 144 1,739 2,656 2,289 1,5881983/84 1,680 177 2,609 2,656 2,637 2,1011984/85 2,323 207 3,162 3,969 3,646 2,460/c1985/861986/87

/a Based on the following sharing of proceeds from sugar: planters' share63.71%; mill share 35.55% and association dues 0.74%. The preceding fig-ures are the national average for September 1982. However, because oflack of information on the sharing for other years, the same sharing dis-tribution was assumed for the entire period.

/b Price calculation is based on the quality ratio corresponding to annualvalue (see Table 1.2 in AGRICULT file).

/c As of June 1984.

Source: PHILSUCOM.

-157 -ANNEX 13Table 13

PHILIPPINES

AGRICULTURAL SECTOR STRATEGY REVIEW

Average Annual Farm-Gate Price by Commodity, 1981-86(Pesos)

Commodity Unit 1981 1982 1983 1984 1985 1986

Soybeans (dry beans) kg 3.35 3.51 n.a. 4.93 7.30Onion (red) kg 4.54 3,87 10.58 8.91 nea.Mongo (green) kg 6.30 5.50 6.36 10.73 11.98Cassava Kerosene 7.08 7.46 8.82 13.59 15.85Coffee, roastedArabica kg 10.15 12.82 15.95 29.86 26.02Robusta kg 9.14 16.75 18.02 29.74 25.03Excelsa/Barako kg 9,78 11.17 15.64 28.14 22.80

Virginia tobacco kg n.a. n.a. n.a. 11.66 n.a.Native tobacco kg 3.85 5.02 n.a. 16.56 n.a,Cacao kg 12.99 11.89 16.00 26.23 26.91Garlic kg 37.41 19.12 21.33 46.63 46.59White corn, shelled kg 1.18 1.25 1.35 2.34 2.80Yellow corn, shelled kg 1.29 1.34 1.39 2.36 2.90Tomato kg 2.47 2.29 2.87 4.41 4.10Sweet potato Kerosene 9.10 9.74 11.44 17.45 21,12Copra (Corrente) kg 1.13 1.07 2.32 6.18 5.40Coconut (matured) nut 0.48 0.47 0.66 1.89 1.40Abaca fiber (K class) kg 2.60 2.85 4.06 8.89 6.24Sugarcane (milling) nut 97.60 129.71 n.a. 176.53 n.a.Coconut oil liter 4.36 4.36 n.a. 15.65 12.24Castor beans kg 1.98 1.87 n.a. 5.34 3.74Rubber, coagulated latex kg 3.23 2.41 3.86 5.47 4.56Ginger, Hawaiian kg 1.60 2.94 8.70 7.86 n.a.

Native kg 1.85 2.60 6.71 8.01 5.72Ramie, fiber kg n.a. n.a. n.a. 15.91 n.a.Cotton, gloss kg n.a. n.a. n.a. 5.39 n.a.Cashew kg n.a. noa. n.a. 4.15 n.a.

Source: Bureau of Agricultural Economics, MAF.

- 158 - ANNEX 13

Table 14

PHILIPPINES

AGRICULTURAL SECTOR STRATEGY REVIEW

Average Annual Wholesale Price by Commodity 1981-86(Pesos/kg)

Commodity 1981 1982 1983 1984 1985 1986

Soybeans 4.90 4e45 n.a. 7.67 10.19

Onion (red) 5.09 4.93 10.97 7.42 6.86(native) 4.59 4.08 7.63 7.41 8.66

Mongo (green) 6.55 5.90 7.13 11.27 13.67

Cassava (white) 0.90 0.91 1.33 1.27 n.a.

Coffee, roasted (Arabica) 30.00 32.91 40.46 n.a. n.a.(Robusta) 17.26 17.88 28.78 n.a. 60.92(Excelsa) 15.39 16.16 30.15 n.a. n.a.

Virginia tobacco (FC) 8.19 9.41 n.a. n.a. n.a.(AD) n.a. n.a. n.a. n.a. n.a.

Native tobacco (FC) 20.38 n.a. n.a. n.a. n.a.(AD) 11.44 15.08 15.90 n.a. n.a.

Cacao (dried beans) n.a. n.a. 20.47 n.a. n.a.

Garlic 34.78 22.34 22.82 52.79 54.63

White corn, milled 1.89 2.01 2.12 3.78 5.01

Yellow corn, milled 1.94 2.06 2.15 3.60 4.75

Tomatoes 3.32 2.86 3.79 5.14 4.90

Cassava (yellow) 0.82 0.70 1.02 2.61 2.03

Sweet potatoes 1.17 1.15 1.40 2.02 2.31

White corn grain 1.37 1.44 1.57 2.67 3.28

Yellow corn grain 1.59 1.59 1.78 2.92 3.57

Mongo (yellow) 7.42 7.20 7.72 11.38 13.95

Source: Bureau of Agricultural Economics, MAF.

- 159 - ANNEX 13Table 15

PHILIPPINES

AGRICULTURAL SECTOR STRATEGY REVIEW

Average Annual Retail Price by Commodity, 1981-86(Pesos/kg)

Commodity 1981 1982 1983 1984 1985 1986

Soybeans 6.19 6.17 6.86 8.94 12.71

Onion (red) 6.28 6.27 12.86 9.08 13.88(native) 7.18 7.84 10.57 10.26 11.98

MoSlgo (green) 8.43 7.64 8.94 13.92 16.07

Cassava (white) 1.27 1.39 1.55 2,41 2.49

Coffee, roasted (Arabica) 33.00 34e11 33.37 n.a. 59.70(Robusta) 34.50 32.67 36.28 n.a. 64.96(Excelsa) 32.25 30.28 32.91 n.a. 62.42

Virginia tobacco (FC) 7.37 23.33 n.a. n.a. n.a..(AD) 45.38 51.78 70.12 n.a. n.a.

Native tobacco (FC) 35.25 22.02 n.a. n.a. n.a.(AD) 28.82 34.33 36.28 n.a. n.a.

Cacao (dried beans) n.a. n.a. 30.17 n.a. n.a.

Garlic 43.95 28.80 27.03 60.91 64.53

White corn, milled 2.11 2.25 2.35 4.05 5.37

Yellow corn, milled 2.20 2.34 2.44 3.96 5.51

Tomatoes 4.36 4.14 5.20 7.47 7.19

Cassava (yellow) 1.60 1.59 1.88 2.13 2.53

Sweet potatoes 1.73 1.75 2.31 3.04 3.40

White corn grain 1.98 2.13 1.24 3.61 4.52

Yellow corn grain 2.10 2.25 !.34 3,71 5.11

Mongo (yellow) 9.23 8.59 9.94 15.10 17.77

Source: Bureau of Agricultural Economics, MAF.

- 160 - ANNEX 13Table 16

PHILIPPINES

AGRICULTURAL SECTOJ STRATEGY REVIEW

Fertilizer: Supply and Use (All Grades)('000 metric tons)

Production Imports Total supply Total use

1977 288.0 448.1 1,102.6 685.6

1978 289.7 549,9 1,234.3 791.6

1979 233.7 734.6 1,403.5 849.3

1980 230.0 745.3 1,529.5 819.6

1981 265.3 426.9 1,402.1 785.4

1982 125.8 765.4 1,507.9 845.9

1983 164.2 643.3 1,469.5 679.5

1984 95.8 596.7 1,282.5 642.0

1985

1986/a

/a Preliminary.

Source: FPA.

- 161 ANNEX 13

Table 17

PHILIPPINES

AGRICULTURAL SECTOR STRATEGY REVIEW

Fertilizer Consumption, 1972-86

1972 1976 1980 1981 1982 1983 1984 1985 1986

M.T ('000) 492.5 643.9 760.3 732.1 784.6 817.1 626.9 679.3 925.8

Urea 132.7 174.8 329.2 307.3 342.2 371.5 256.3 301.7 490.3

Ammosul 134.6 185.4 119.7 106.9 112.5 111.4 103.3 119.8 159.4

NP & P 89.2 116.0 108.4 101.5 119.6 122.1 109,9 104.6 111.7

NPK 88.6 108.0 150.2 158.8 157.7 144.9 128.2 129.7 123.5

Potash 47.4 59.7 52.7 57.6 52.6 67.2 29.2 23.5 40.9

Nutrient MT ('000) 216.0 245.8 334.0 321.7 346.6 363.7

N 132.8 152.4 224.8 209.9 232.8 244.3

P 35.0 38.3 53.4 51.2 56.4 54.8

K 48.2 55.1 55.8 60.6 57.4 64.6

- 162 -ANNEX 13Table 18

PHILIPPINES

AGRICULTURAL SECTOR STRATEGY REVIEW

Average Import Price of Selected Fertilizers, 1973-86(US$/mt C&F)

Grade: Urea 21-0-0 18-46-0 14-14-14

1973 105.53 57.87 153.60 147.30

1974 277.98 168.03 149.22 282.38

1975 371.37 219.34 - -

1976 122.36 67.87

1977 130.14 90.02 - -

1978 158.18 103.41 172.60 170.50

1979 175.22 111.57 203.75 176.75

1980 250.53 136.83 317.48 263.19

1981 275.08 153.14 300.50 235.97

1982 195.07 99.76 258.98 179.42

1983 146.67 88.73 222.94 169.16

1984 202.23 98.50 290.30 188.96

1985 166.76 97.00 n.ao 171.20

1986 111.27 65.63 n.a. 170.41

Source: Fertilizer and Pesticide Authority.

- 163- ANNEX 13Table 19

PHILIPPINES

AGRICULTURAL SECTOR STRATEGY REVIEW

Philippines: Poverty Lines and Poverty Incidence, 1971-86

Poverty incidence(percentage of

Poverty lines (per families below Survey to/a family) (P/annum) poverty lines) national

Year Rural Urban Rural Urban income ratio

1971 2,341 2,989 57.4 35.1 0.68

1975 4,570 5,514 63.8 53.2 0.53

1980 5,537 7,758 46.7 28.5 0.55

1981 6,384 8,965 47.8 28X4 0.58

1982 6,892 9,790 42.2 24.6 0.67

1983 7,363 10,584 45.4/b 26.0/b 0.60

1984

1985

1986

/a 1980-83 third-quarter data.

/b Based on the distribution of families by per capita income class, theincidence were 43% for rural and 20% for urban.

Source: National Census and Statistics Office.

- 164 - ANNEX 13Table 20

PHILIPPINES

AGRICULTURAL SECTOR STRATEGY REVIEW

Average Normal Minimum and Maximum Temperature,by Month and Principal Island: 1984

(Degrees Centigrade)

Philippines Luzon Visayas MindanaoMinimum Maximum Minimum Maximum Minimum Maximum Minimum Maximum

January 21.8 29.2 31.5 28.0 23.0 29.4 22.1 30.4

February 21.7 29.9 21.3 29.9 22.7 29.7 21.6 30.6

March 23.0 31.4 23.2 31.5 23.1 31.0 21.8 31.6

April 23.6 32.8 23.6 33.0 23.9 32.5 23.2 32.7

May 23.7 32.7 23.7 32.6 23.7 33.2 22.7 32.3

June 23.5 31.8 23.7 31.6 23.6 32.5 22.4 31.1

July 23.2 31.9 23.4 31.8 23.4 32.5 22.3 31.7

August 23.4 31.1 23.5 30.4 23.8 32.7 22.5 32.3

September 23.0 31.7 23.2 31.6 22.9 32.1 22.2 31.3

October 23.0 30.9 23.0 30.4 23.2 32.0 22.5 31.2

November 22.7 30.9 22.7 30.5 22.7 31.1 22.2 31.7

December 21.8 30.0 21.3 29.6 23.4 30.1 22.2 31.2

Source: Philippine Atmospheric, Geophysical and Astronomical Service Administra-tion (PAGASA).

-165 - ANNEX 13Table 21

PHILIPPINES

AGRICULTURAL SECTOR STRATEGY REVIEW

Normal Rainfall and Number of Rainy Days,by Month and by Principal Island: 1984

Philippines Luzon Visayas MindanaoRain- Number of Rain- Number of Rain- Number of Rain- Number offall rainy days fall rainy days fall rainy days fall rainy days(mm) (mm) (mm) (mm)

January 154.8 13 124.0 10 219.3 20 171.9 17

February 150.3 11 41,6 7 276.6 18 302.9 17

March 102.0 9 68.5 7 160.1 15 133.6 10

April 103.5 9 97.0 8 3.3 11 138.5 13

May 154.4 16 170.1 16 132.6 14 133.3 18

June 305.8 18 368.4 19 211.5 16 209.1 17

July 171.9 14 188.3 14 144.1 13 153.3 14

August 387.8 18 482.5 22 141.9 13 116.6 11

September 215.8 17 203.3 17 254.6 18 194.7 15

October 379.8 19 493.9 20 246.1 19 200.8 16

November 269.0 14 187.6 13 362.5 19 152.0 13

December 244.6 13 120.5 10 367.4 22 241.9 16

Source: Philippine Atmospheric, Geophysical and Astronomical Service Administration(PAGASA).

- 166 -ANNEX 13Table 22

PHILIPPINES

AGRICULTURaL SECTOR STRATEGY REVIEW

Monthly and Annual Frequencies of Tropical Cyclonesin the PhiliEpines, 1950-86

Total Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

1950 13 0 0 0 0 0 2 3 1 3 2 1 11955 15 1 1 0 1 0 0 2 3 1 4 1 11960 19 1 0 0 1 1 2 2 6 1 3 0 21965 21 2 1 1 0 1 3 4 4 3 1 1 01970 21 0 1 0 0 0 1 3 4 5 3 3 1

1971 27 1 0 1 2 4 2 5 2 4 4 2 01972 17 2 0 0 0 0 2 4 2 4 1 1 11973 12 0 0 0 0 0 1 2 3 2 3 1 01974 23 1 0 0 0 0 2 5 4 2 4 3 21975 12 1 0 0 0 0 0 0 3 3 1 3 1

1976 22 1 1 0 1 1 3 3 3 4 0 2 31977 19 1 0 0 0 1 1 4 1 5 2 2 21978 24 0 0 0 0 0 3 1 7 6 4 2 11979 22 0 0 1 1 2 1 3 3 3 4 2 21980 23 0 1 1 1 3 2 4 3 2 2 3 1

1981 23 0 1 0 0 0 3 5 4 3 2 3 21982 18 0 0 2 0 1 0 5 4 4 2 0 01983 23 0 0 0 0 0 0 3 3 4 6 4 3198419851986

Note: Tropical cyclones are classified according to the maximum winds blowingabout their centers. They may fall under any of the following catego-ries:

(a) tropical depression--up to 63 km/hr,(b) tropical storm--from 64 to 118 km/hr, and(c) typhoon--above 118 km/hr.

Source: Philippine Atmospheric, Geophysical and Astronomical Service Adminis-tration (PAGASA).