Docunent of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 8210-PH

STAFF APPRAISAL REPORT

PHILIPPINES

SMALL COCONUT FARMS DEVELOPMENT PROJECT

MAY 1, 1990

Agriculture Operations DivisionCountry Department IIAsia Regional Office

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

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CURRENCY EQUIVALENTS

(July 1, 1989)

US$1 = Philippine Peso (P 22.00)P 1 = US$0.05

FISCAL YEAR

January 1 - December 31

WEIGHT AND MEASURES

1 hectare (ha) = 2.47 acres1 metric ton (ton) = 2,205 lbs

ABBREVIATIONS AND ACRONYMS

ARDB - Agricultural Researc.n Development r anch (PCA)CARP - Comprehensive Agrarian Reform ProgramCETC - Coconut Extension Training Center (PCA)CNO - Coconut OilCOCOFED - Coconut Producers' FederationCPOU - Central Project Operations Unit (PCA)DA - Department of AgricultureERR - Economic Rate of ReturnFOB - Field Operations Branch (PCA)ICB - International Competitive BiddingIEC - International Economics Department (IBRD)LCB - Local Competitive BiddingMAWA - Hybrid PB121 - A cross between Malayan Dwarf and West African

Tall CoconutsMCDO - Municipal Coconut Development Officer (PCA)NEDA - National Economic Development AuthorityODA - Overseas Development Agency (United Kingdom)ODNRI - Overseas Development Research InstitutePCA - Philippine Coconut AuthorityPCDO - Provincial Coconut Development Officer (PCA)PKO - Palm Kernel OilRDB - Research and Development Branch (PCA)SCFO - Small Coconut Farmers' OrganizationSPD - Seed Production DepartmentUCAP - United Coconut Association of the PhilippinesUCPB - United Coconut Planters BankUNICOM - United Coconut Oil Mills Inc.

FOR OMCIAL USE ONLY

PHILIPPINES

SMALL COCONUT FARMS DEVELOPMENT PROJECT

Loan and Project Summary

Borrower: Republic of the Philippines

Beneficiaries: Coconut smallholders and thePhilippine Coconut Authority (PCA)

Loan Amount: US$121.8 million.

Terms: Repayable in 20 years, including five years ofgrace, at the Bank's standard variable interestrate.

Proiect Obiectives: These would be to: (a) launch a long-term program ofcoconut replanting and productivity improvement,supported by the necessary infrastructure andstrengthened technical and support services;(b) increase the incomes of coconut smallholders byimproving coconut yields and copra quality; and*c) boost foreign exchange earnings by ensuring anincreasing and reliable supply of higher qualitycopra for processing and export. The proposedproject would constitute the first phase of the20-year small coconut farms development program.

Proiect Description: Over a five-year period the project woulds(a) establish seedgardens, nurseries and otherinfrastructure sufficient to sustain a long-termprogram of replanting of 50,000 ha of senile palms,p.a.; (b) replant 25,000 ha and support intercrop-ping during the first three years of replanting;(c) rehabilitate 348,000 ha of middle-aged palms andsupport the development of 50,000 ha of immaturepalms; (d) support a pilot copra quality improvementprogram; and (e) provide for the institutionalstrengthening of the Philippines Coconut Authority(PCA).

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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Project Benefitsand Risks: The project would improve the productivity and

incomes of the impoverished smallholder subsector,increase exports and re-establish confidence amongend-users in the future supply of better qualitycoconut-ti'sed products from the Philippines. Themain technical risks of the project concern possiblepoor site selection, typhoon damage and inadequatecontinued use of inputs by smallholders. Veryconservative yield assumptions have therefore beenadopted and strict criteria for recipient selectionhave been devised. The long-term coconut develop-ment program depends on the willingness of GOPeventually to restore self-financing arrangements.Project benefits should improve the climate for thenecessary action, and GOP would be asked to preparea long-term financing plan by the fourth year of theproject and implement the plan before projectcompletion. Finally, there is a possibility thatpeace and order conditions may inhibit projectactivities in certain locations, but as this is anational program, sufficient flexibility exists toavoid such areas.

Estimated Costs

Local Foreign Total--------USS milliop'-------

Replanting 13.8 6.7 20.5Rehabilitation 28.3 40.0 68.3Nutrient Support 8.5 10.5 19.0Copra Quality Improvement 5.7 1.7 7.4Research 3.3 1.4 4.7Extension & Training 4.0 1.3 5.3Institutional Strengthening 2.3 5.8 8.1

Total Baseline Costs 65.9 67.4 133.3

Physical Contingencies 3.7 6.3 10.0Price Contingencies 15.9 17.4 33.3

Total Proiect Costs /a 85.5 91.1 176.6

Financing Plan

Farmers 21.9 - 21.9PCA/GOP 31.6 - 31.6ODA - 1.3 1.3Bank 32.0 89.8 121.8

Total 85.5 91.1 17C.6

/a Including duties and taxes of US$12.5 million.

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Estimated Disbursements lb

Baik FY FY91 FY92 FY93 FY94 FY95 FY96 FY97____--_-_----------(USS million) --------------

Annual 9.8 14.3 17.4 23.1 29.5 22.2 5.5Cumulative 9.8 24.1 41.5 64.6 94.1 116.3 121.8

Economic Rate of Return: 402

Mapt IBRD No. 21986R

lb Project start-up is planned for September 1990, corresponding to the firstquarter of FY91. The project would be complete on September 30, 1995, andthe Loan would close on June 30, 1996, at the end of FY96, with finaldisbursements processed in early FY97.

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PHILIPPINES

SMALL COCONUT FARMS DEVELOPMENT PROJECT

Table of Contents

Page No.

Loan and Project Summary . .............. . i

I. AGRICULTURE IN THE PHILIPPINE ECONOMY ....................... 1

Sectoral Performance . ... . ..... .... 1Policy Environment . .. ............... 2Development Issues ....... ........ 2Government Objectives and Strategy ............................ 3Bank Sector Assistance Strategy ............................... 4

II. THE COCONUT SUBSECTOR ......................................... 5

Overview . ..................................................... 5Agro-Technical Characteristics .. 5Cropping Patterns and Tenurial Arrangements ................... 7Coconut Products . ..... ............................ . 8Processing .................................... .............. 8M-arlceting ..................................................... *..... 9Coconut Sector Institutions ................................... 10Financing ...................................... 0.................... 12Future Prospects ....... .................................. . 12

III. THE PROJECT. ... ....... . . . . . .. .. 15

Project Origin and Preparation. 15Project Objectives and Summary Description. 15Detailed Features .. ....... . ...... . .17Establishment of Seedgardens and Nurseries............ 17Replanting . ........ ....... 18Intercropping.t. r ... ........... ...... . 19Rehabilitation of Low-Bearing and Immature Palms 19Copra Quality Improvement ................ 21Institutional Strengthening of P CA . .22

This report is based on the findings of an appraisal mission to thePhilippines in June/July 1989, comprising Messrs. D. Meadows (Mission Leader,Senior Tree Crops Specialist), S. Husain (Senior Economist), A. Chupak(Senior Financial Analyst) and A. Juanengo (Consultant, ProcessingSpecialist).

Page No.

IV. PROJECT COSTS AND FINANCING ............. ............... . 24

Project Costs ......... .......................... . 24Financing ....... ............................................. 25Procurement . ..... . ...... . . .... ......... . 26Disbursement ......... . ..... . . ... .............. . 27Accounts, Auditing and Reporting ............................. . 28

V. ORGANIZATION AND MANAGEMENT .. . . ......... . 30

Philippine Coconut Authority (PCA) ............................ 30Farmer Enrollment and Supervision ............ 34Monitoring and Evaluation ....... ......... ....... . 34

VI. PROJECT JUSTIFICATION AND RISKS ..................... .......... 35

Production, Market Prospects and Prices ..................... ** 35Project Benefits .......... ... .... 37Financial Analysis ............................... ......... 37Economic Anal7sis ............... ......................... 40Environment Imv4act ............................................ 41Tmpact on Women. . . ........ .................... 42Risks .... ... .......... 42

VII, AGREEMENTS AND RECOMMENDATION ................ . 44

ANNEXES

ANNEX l: Project Costs and Disbursements .................... 46

Table 1.1: Summary Accounts Costs Sunmmary .............. 46Table 1.2a: Project Components by Year

Including Contingencies ..................... 47Table 1.2bs Project Components by Year .. 48Table 1.3: Summary Accounts by Year,

Including Contingencies ..................... 49Table 1.4: Financing Plan .. ..... ....... .S 50Table 1.5: Disbursement Schedule by Categories ........... 51Table 1.6: Disbursement Schedule by FY/Quarters .......... 52

ANNEX 2: Project Yields and Production ....................... 53

Table 2.1: Copra Yield Profile . ........ 53Table 2.2: Net Incremental Production .................... 54

ANNEX 3: Economic Analysis... ................. .... ..... ... S 55

Table 3.1: Computation of Economic Farugate Prices ....... 55Table 3.2: Economic Costs and Benefits ... ......... 56

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ANNEX 4s History of Coconut Legislation and Institutions.... 57

ANNEX 5: Auditing and Reporting Requirements ....... .60

ANNEX 6: Project Implementation Schedule ............... ...... 62

ANNEX 7s Project Supervision Plan ............................ 63

ANNEX 8: Documents in the Project Plan ...................... 64

CHARTS

CHART lt Philippine Coconut Authority ................. .. ... .65

CHART 2: PCA Field Operations Branch .................... 66

MAPIBRD No. 21986R

PHILIPPINES

SHALL COCONUT FARMS DEVELOPMENT PROJECT

I. AGRICULTURE IN THE PHILIPPINE . XY

Sectoral Performance

1.1 The agricultural sector (including livestock, fisheries and forestry)continues to play a key role in the Philippine economy, generating about 271of GDP and 252 of exports in 1988, directly employing about 10.1 millionFilipinos (482 of the total employed labor force), and providing many of thenatural resources and much of the domestic demand on which the industrial andservice sectors depend. Agriculture's share of GDP has remained essentiallyunchanged since 1970. The crops subsector accounted for 602 of the grossvalue added in agriculture in 1988, followed by livestock and poultry (21Z).fisheries (17Z), and forestry (21). Over 80Z of the country's cropped area of12 million ha is occupied by rice, corn (3.5 m ha each) and coconuts (about3.3 m ha). Coconut products constitute the principal agricultural export,followed by prawns, fish, forest products, banana, pineapple and sugar.

1.2 From 1970 to the beginning of the economic recession in 1982, theagricultural sector grew by over 42 p.a. in real terms (5Z p.a. if thedeclining forestry subsector is excluded), but thereafter the ratedecelerated. Cood sectoral performance in the 1970s was facilitated byhistorically high international prices for agricultural commodities, whichencouraged expansion of total area under cultivation and the use of moderntechnology, most notably in the staple food, rice, but also in othercommodities such as bananas, pineapples, poultry and acquaculture products. Alarge irrigation investment program doubled the irrigated area. This,together with the adoption of high-yielding varieties and increased fertilizerapplication, boosted average paddy yields from 1.6 tons/ha in 1971/72 to 2.4tonslha in 1982183. These positive factors outweighed the policy biasesagainst agriculture in the 1970s, which included an overvalued exchange rate,export taxes, price controls, trading bans, monopolies in the coconut andsugar subsectors, and heavy protection for industrial goods.

1.3 Sectoral performance declined for several years after 1982, due tolow international commodity prices, severe droughts in 1983 and 1987(resulting in negative agricultural growth rates of 2Z and 12, respectively),contraction of credit to the sector, and a shortage of foreign exchange whichadversely affected the import of agricultural inputs. Beginning in 1988, thesector has begun to show strong recovery, with a 3.42 growth in 1988 and about4.3Z growth in the first half of 1989. This growth is accounted for mainly bythe performance of "other crops' (e.g., banana, mango, pineapple, coffee,root-crops and vegetables), poultry and fisheries. Rapid growth of non-traditional crops has resulted in significant agricultural diversification:although occupying only about 141 of the cultivated land, they now account forabout 45? of total gross value added in the crops subsector.

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Policy Environment

1.4 The removal of policy biases against agriculture (para. 1.2) startedas a response to the economic crisis in 1982. Measures taken included theopening up of the import trade in animal feeds and wheat; the phasing out ofprice controls on rice, poultry, eggs and pork; deregulation of interest ratesand gradual elimination of subsidies on agricultural credit. Moresignificantly, the successive devaluations of the peso from 1982 onwardshelped offset the decline in international market prices of exportcommodities. After assuming power in February 1986, the new Governmentfurther reduced distortions and institutional constraints unfavorable toagriculture, with the objective of increasing farm profitability. Importantactions included lifting of the copra export ban; abolition of export taxes;dismantling of some of the monopolistic controls over the coconut and sugarsubsectors; deregulation of the desiccated coconut and banana exportindustries; liberalization of urea and potash imports and distribution andreduced tariff protection for locally-produced fertilizers; and exemption ofmost agricultural inputs from taxes and customs duties. These measures,coupled with the earlier ones, and a gradually improving international markethave created a more favorable environment for agricultural growth.

Development Issues

1.5 Although the record of agricultural growth and diversification overthe past two decades has been generally good (paras. 1.2-1.4), massive ruralpoverty and low productivity still pose major challenges for the future.Government estimates show that the incidence of poverty in the Philippinesincreased from 49t in 1971 to 58Z in 1985s urban poverty increased from 37?to 50?; rural poverty from 56? to 62Z.11 At present, although only 58? of thepopulation is rural, about 67Z of all poor families are in rural areas, andrural incomes are only about 47? of average urban incomes.

1.6 Most poor farmers are involved in rice, corn or coconut production.The growing number of the poor and the persistence of income inequality is aresult of three strulctural factors: unequal asset ownership (particularlyland), a high population growth rate (2.41), and poor productivity growth.The situation has been aggravated by the increasing scarcity of land and thefailure of the economy as a whole to provide sufficient employmentopportunities outside of agriculture. Population pressure and limited arableland have led to a rapid growth in the numbers of the landless and increasedmigration to upland areas, where soil quality is poor and agriculturalactivities often produce severe environmental degradation. Rapid advances intechnology have occurred in commodities developed by the large commercialsector, especially bananas, pineapples, poultry and aquaculture, andsignificant yield increases have been obtained in rice cultivation, althoughthese are still low by Asian standards. However, the productivity levels ofcorn, coconuts and sugarcane continue to be disappointing, due mainly toshortages of advanced planting material, smallholders' lack of resources tobuy improved planting material and fertilizers, tenurial problems andincreasing cultivation on marginal lands.

1/ The Philippines: The Challenge of Poverty, The 'lorld Bank, ReportNo. 7144 -Ps, October 17, 1988.

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Government Obiectives and Strategy

1.7 The Government is seriously attempting to address the issues of lowagricultural productivity and pervasive rural poverty. The basic aim ofagricultural development, as defined in the Philippines Medium-TermDevelopment Plan (1988-1992), is to lay the foundation for equitable,efficient and ecologically sustainable agricultural growth. The Government'srole is seen primarily as one of creating a supportive policy andinstitutional framework and providing the necessary incentives and investmentsin such areas as infrastructure, research and technology, while encouragingthe private sector to propel the economic recovery in the countryside.

1.8 The most well-publicized initiative of the present Government toreduce rural poverty and income inequality has been the Comprehensive AgrarianReform Program (CARP), launched in 1987. The CARP covers all public andprivate agricultural lands regardless of tenurial arrangements and commoditiesproduced and is, therefore, more far-reaching than the agrarian reform programof 1972, which extended only to rice and corn lands. CARP would cover about10.3 million ha and benefit some 3.9 million farmers and farm workers, and isto be implemented in three ohases over a ten-year period. Some exemptionshave been allowed (e.g. for seed production units) and a 10-year deferment isgranted to private commercial farms devoted to livestock, poultry, swineraising, aquaculture, orchards, vegetables, cut flowers, cocoa, coffee andrubber. Through 1988, about 181,000 ha of rice and corn lands and about22,000 ha of Government land previously leased to multinational corporationshad been distributed. Although progress is being made, major issues relatedto institutional capabilities, land valuation, landowner opposition andagricultural support systems for beneficiaries will have to be overcome ifCARP is to be effectively implemented as planned.

1.9 As noted earlier (para. 1.4), the main successes to date of thepresent Government have been in the area of policy reform, which hasconsiderably improved conditions for agricultural growth, increased producerprices and reduced the costs of many inputs. Significant efforts have alsobeen initiated to reform the rural financial system, including: (a) theelimination of various special (subsidized) official credit lines and themerger of others into an effective, well-administered rediscounting facilitywhich has been successful in attracting more private cnmmercial credit to theagricultural sector; (b) partial rehabilitation of the rural banking system,which had nearly collapsed as a result of high arrearages on earlierGovernment-directed credit programs in the 1970s, compounded by the financialand economic crises of the mid-1980s; and (c) the expansion of creditguarantee facilities which are also aimed at attracting commercial credit tothe agricultural sector. Marketing assistance to farmers is being providedthrough the new Livelihood Enhancement for Agricultural Development Programlaunched in May 1988, which relies on private initiative and resources, withthe Department of Agriculture (DA) acting as a broker to facilitate farmers'access to financing, management expertise and markets. Finally, althoughstill in the early stages, the Government is also devoting increasingattention to the issues of conservation of natural resour.es and improvedenvironmental management, with particular attention to deforestation,destruction of coistal fisheries resources, and erosion and related problemsin the uplands.

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Bank Sector Assistance Strategy

1.10 The Bank attaches high priority to agricultural development, as ameans to support both economic growth and poverty alleviation in thePhilippines. Since 1964, the Bank has approved 40 loans and credits (US$1.4billion) for investments in agriculture and rural development. Approximatelyone-third of these projects were for irrigation development, and another one-third for rural credit. The remainder have been for area-based ruraldevelopment projects, rural infrastructure, processing and storage, landsettlement, extension and research, smallholder forestry, watershed managementand erosionG control, and financing of agricultural inputs ur'er one policy-based loan. Implementation of completed and ongoing Bank-financed projectshas generally been satisfactory, although some operations have experienceddelays because of local funding constraints, overly optimistic targets, designchanges after project start-up, peace and order problems, weak or poorlycoordinated multiple implementing agencies and time-consuming procurementprocedures. The proposed project would be the Bank's first direct lending forthe treecrops subsector in the Philippines. Other future Bank operationsover the next few years would continue to assist the irrigation subsector,environment and natural resource management, rural finance, and povertyalleviation through support for agrarian reform and improvement of keysectoral institutions.

II. THE COCONUT SUBSECTOR

Overview

2.1 The coconut subsector accounts for over 252 of the cultivated area inthe Philippines, and provides incomes for at least one-fourth of the ruralfamilies and a significant number of people engaged in coconut-basedindustries and trade in urban areas. Coconut-based products are the thirdlargest contributor of foreign exchange, accounting for 101 of the total valueof merchandise exports and about 401 of the value of agricultural exports ofthe Philippines in 1988. Developments within the coconut subsector,therefore, have important effects not only on the rural sector but also on theeconomy as a whole.

2.2 Low productivity and lack of any long-term replanting program are theprincipal issues facing the coconut industry in the Philippines today. Withaverage yields of 700-800 kg/ha (copra equivalent), coconuts have accountedfor only about 8-101 of gross value added in the crops subsector, althoughthey occupy over one-fourth of the cultivated area. The main factorsresponsible for low productivity are the use of planting material of lowgenetic potential and the virtual absence of fertilizer use on nutritionallydeficient coconut lands. A related problem has been the limnited progress todate with intercropping (which usually affects the palms beneficially), due tothe prevailing tenurial arrangements on some coconut lands and the lack ofmarkets for potential intercrops in many locations. Finally, improperharvesting, drying and storage practices are responsible for the poor qualityof Philippine copra, which results in low oil extraction rates and higherrefining costs. Horeover, Philippines copra meal, which is a livestock feed,is encountering increasingly stringent aflatoxin regulations in the EECmarket.

Agro-Technical Characteristics

2.3 Varieties. Coconut palms may be classified as talls, dwarfs orhybrids (usually crosses of dwarfs and talls). Prior to the introduction ofhybrids in 1976, all Philippine plantings were talls. At present, more than98X of the total coconut area is still planted to talls. Talls generallybegin bearing about 7 years after planting, achieve full yield by year 12, andsenility at about 60 years. Harvesting is done throughout the year,theoretically at intervals of about 45 days, but more commonly every 2 to 3months. The average annual yield per tree is about 30 nuts, although undergood management it can exceed 150 nuts. Typically, each nut yieldsabout 200 g of copra. A few named tall varieties (Bay Bay, Laguna, Tagnanan,San Ramon, etc.) are recognized, but the vast majority of holdings wereplanted from unselected seeds, which is a major reason for the generally lowyields. Poor management is an important contributing factor: only 1X ofcoconut parcels receive fertilizer regularly, although this can more thandouble copra yields (up to over 3 tons/ha from selected talls); plantingdensity is often suboptimal; and stands of unproductive, diseased or senilepalms are frequently not replanted. The problem of senility is particularlyserious in the traditional coconut producing Southern Tagalog region(including Quezon, Laguna and Cavite provinces), where nearly half the palmswere over 60 years old in 1979. Nationwide, about one-third of the palms are

now thought to be over 60 years old, implying that 875,000 ha are due forreplanting.

2.4 The new hybrids introduced since 1976 begin bearing at four years,and reach full development by year 10. Their productive life span has not yetbeen definitely established, but it is expected to be similar to that oftalls. Their yield potential is double that of talls, exceeding six tons/haunder good management. The most common hybrid (PB121), popularly known as theMAWA hybrid, is produced by crossing the Malayan Dwarf with the West AfricanTall. MAWA has been found suitable for planting in about 502 of the coconutareas of the Philippines, notably in Mindanao. Several other hybrids, mostlybred by the Philippine Coconut Authority's (PCA's) Breeding and GeneticsDivision, are under trial and some are better adapted than MAWA, particularlyto the drier environments of the Philippines. In addition to better drought-tolerance, some hybrids such as PCA 15-1 produce larger nuts and have bettertolerance to Phytophora disease; others appear be more resistant to typhoons.Hybrid breeding and development is a dynamic process, and suitable hybridshave now been identified for almost all agroclimatic conditions in thePhilippines coconut areas.

2.5 Hybrid seed production is a skilled horticultural activity requiringcareful management and close supervision. The seed is produced byartificially pollinating the palms selected as female parents (usuallydwarfs), which are grown in isolated seedgardens. During the 1970s, a largeseedgarden was created on the island of Bugsuk (South Palawan) with fundsderived from a levy on copra sales (para. 2.23). This seed garden was awardedmonopoly status and could potentially have supplied sufficient seed for 60,000ha/per year. Consequently, only insignificant seed production facilities weredeveloped elsewhere in the country. However, a planned hybrid replantingprogram in the early 1980s was never launched and, with the subsequent changeof Government, Bugsuk was abandoned and hybrid seed production is currentlyvery limited in the Philippines. Reactivation of the Bugsuk seed garden isimpractical at this stage, because the assets are frozen pending resolution of,legal disputes with the former owner, and because the seed garden would nowneed almost complete rehabilitation, the cost of which would not be justifiedas the palms are too old for artificial pollination.

2.6 Pests and Diseases. Talls and hybrids alike suffer from a few pests,the most important being the rhinoceros beetle, rats and slug caterpillars.Rhinoceros beetle breeds in decaying coconut wood and is the major pest in allbut two coconut regions. Biological controls are available, but the bestdefense is avoidance of breeding sites, which increases the importance of thecommercial utilization of coconut wood. Slug caterpillars can likewise bemanaged biologically. Control of rats is a matter of better farm management.Cadang-cadang is the most serious disease, caused by a viroid which kills300,000-500,000 palms per year in southeastern Luzon and parts of Samar, andfor which there is as yet no cure. This disease normally attacks palms olderthan 25-30 years, so it may be a less serious problem for hybrids whoseproductive life starts only four years after planting. Phytophora diseaseshave become increasingly important, both infecting and spoiling nuts andkilling palms (bud rot). It has become an international problem on whichresearch resources are being concentrated.

2.7 Climate and Soils. Coconuts thrive in tropical monsoonal areas withno more than 4.5 dry, months per year. Rainfall in most of the coconut areasranges from two to four meters annually, with the most even distributionoccurring in the southern and eastern regions of the country. Prolongeddroughts can seriously damage coconuts, particularly newly planted areas.Typhoons regularly damage coconut stands in the Bicol and Eastern Visayasregions, but in general, the benefit of the associated rainfall exceeds thelosses suffered by sites hit by the centers of the storms. However, the mostpowerful typhoon in 40 years did severely damage coconuts over wide areas ofBicol and the Northeastern Visayas region in 1987, where recovery ofproduction has been slow.

2.8 Coconuts perform best on well-drained soils of sandy or silty clayloam, of at least 10 cm depth and no more than 18Z slope. However, they canthrive in most soils, including sand, provided there is no stagnantwaterlogging. Coconut yiel.ds often show good response to chlorine andnitrogen, and, less frequently to potassium and magnesium. Soil nutrientdeficiencies have been mapped across the country, so that fertilizerrequirements are broadly known. PCA has a foliar analysis laboratory and canroutinely test plant samples for assessing nutrient deficiencies.

Cropping Patterns and Tenurial Arrangements

2.9 In the Philippines, coconuts are the principal crop outside of theirrigated areas, where rice predominates, although most coconut farmers alsogrow other crops for subsistence and cash. The spacing and high leaf canopyof coconuts permit intercropping, which is practiced on about 402 of allcoconut parcels. Subsistence intercrops are especially important duringreplanting. Annuals such as corn and peanuts and longer-term crops includingcacao, coffee and banana are grown under the coconut palms. Nearly one-fifthof all coconut parcels have both annuals and perennials as intercrops,illustrating the opportunity afforded by coconuts for intensification of landuse through "multistory' cropping. Intercropping coconuts increases coconutyields and can be very attractive where markets are assured.

2.10 According to the 1980 Agricultural Census, there were approximately825,000 coconut farms occupying some 3.0 million ha: about 492 of these farmswere smaller than 1 ha; 712 less than 2 ha; 912 less than 5 ha; and 98Z under20 ha. Since the agrarian reform program (para. 1.8) provides for a retentionlimit of 5 ha for the landowner and 3 ha fir each qualified child, it wouldnot affect over 902 of the farms, or about 752 of the coconut lands. Thetenurial status of coconut farms is quite complex: some 712 of farms (coveringabout 602 of land) are reported to be owner-operated; 222 of farms (covering252 of the area) are share-tenanted; and the other 72 of farms are partlyowned, lease tenanted or otherwise managed. Sharing arrangements for thecoconut crop vary widely from 50/50 to 90/10 in favor of the owners but annualintercrops belong to the tenants. In the case of owner-operated farms,caretakers are frequently hired, who live on the farms and receive a share ofthe harvest, which means that a typical farm may actually provide income forthree families (owner, resident workers or caretakers, and laborers).

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Coconut Products

2.11 Based on traditional low-input practices, coconut farming has fewbackward linkages with input suppliers. As the raw material for a host ofimportant processed products, however, coconuts have many important forwardlinkages in the economy. The major product is coconut oil (CNO), which isextracted from copra, the dried meat of the coconut. Oil may be refined andconsumed directly as cooking oil or processed further to produce chemicalssuch as fatty acids, fatty alcohols, esters, glycerine, etc., which are theraw materials for soaps, detergents, lubricants, cosmetics andpharmaceuticals. The Philippines has some 88 oil mills and two coconut oilprocessing complexes. The latter process up to 95,000 tons of crude coconutoil annually into chewicals, mainly for export. The second major coconutproduct is desiccated coconut, which is the peeled white meat cut into smallshreds and dried under rigid hygienic conditions. The Philippines is theworld's largest producer of desiccated coconut, with 13 modern factoriesmanufacturing mainly for the US market. Copra cakes and meal, derived fromthe residues cf oil extraction, are the third product. They are primarilyexported as animal feed, but are encountering difficulties in some markets dueto high aflatoxin levels. A fourth product with potential is coconut shellcharcoal, used directly for fuel in smelting and as the raw material for thelocal activated carbon industry. Five companies in the Philippines currentlyproduce activated carbon mainly for export to Japan.

2.12 Many other products have excellent but underexploited potential.These include: coconut wood (sold primarily for lumber and now beingpurchased at attractive prices by small-scale commercial saw millers inincreasing quantities; abundantly available when senile coconut palms arefelled for replanting); and coir fiber from coconut husk (which can be usedfor producing carpet underlays, mattress and bristle fiber, car seats, etc.).There is substantial scope for Government assistance in the technlcal andcommercial development of these and other non-traditional products. Finally.,there is an increasing international market for both fresh young coconuts for'drinking and ripe coconuts for eating.

Processing

2.13 In order to retain a higher proportion of the value of coconutproducts within the Philippines, the Government encouraged a rapid butuncoordinated expansion of coconut processing plants during the 1970s. Thecrushing capacity of coconut oil mills rose from 1.2 million tons in 1970 to3.4 million tons in 1982, while desiccated coconut capacity rose from 112,000tons to 156,000 tons, and activated carbon manufacture was introduced, withcapacity rising to 11,300 tons. In all three industries, overcapacity wascreated, mostly on the basis of directed credit. The disastrous financialconsequences for oil mills, as well as the perceived need for greaterbargaining strength in the world market, led to the creation of United CoconutOil Mills, Inc. (UNICOM) in September 1979. UNICOM bought mills, mothballedunnecessary ones and soon controlled directly or indirectly at least 672 ofthe country's oil milling capacity and nearly all coconut oil exports.Nonetheless, by 1982 capacity utilization was still only about 53Z for coconutoil (despite a ban on copra export at the time), 872 for desiccated coconut,

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and about 8O for activated carbon. Much of the equipment of the mothballedmills was reportedly cannibalized for replacement of poorly-maintainedequipment in operating mills, so the present extent of overcapacity isreduced, but not readily quantifiable. After the UNICOM monopoly wasabolished by the present Government, some mothballed mills have been purchasedand returned to service by private companies and a new private mill is underconstruction in General Santos City. Two coco-chemical plants now inoperation fully meet local demand, and any further investment must becarefully justified on the basic of export requirements.

2.14 The most intractable problem of the oil milling industry has beenpoor copra quality. Copra bound for oil mills commonly has a moisture contentof 10-202 (much above the optimum), is sometimes scorched, discolored,frequently rubbery, deteriorating from mold and insect attack and contaminatedwith dirt and gravel. The result is that Philippine coconut oil is of lowquality and sells at a discount of about 2Z in the world market; further, themills suffer from low oil extraction rates and high machinery operating andmaintenance costs. The persistence of these problems stems from the lack ofany price incentive to producers for supplying high-quality copra. Amoisture-based price scale does exist but is largely misapplied and, in anycase, does little more than compensate for loss of water weight during drying.No mill can offer a true quality premium unless it is assured of enough highquality copra to justify separate stock piling, milling and oil and mealstorage. As not enough farmers in a single mill catchment area have thenecessary drying facilities to produce the required quantity of high qualitycopra, the mills have no incentive to pay a premium for it. This viciouscycle costs the industry an estimated US$52 million gross annually, in termsof lower prices for oil, lower oil recovery, higher copra storage losses, andhigher mill operating and maintenance costs. The problem of quality hasrecently come to a head with the introduction by the EEC of stricter limits onthe level of aflatoxin contamination of copra meal imported as a livestockfeed. Aflatoxin is produced by a fungus, Aspergilus flavus, which develops onmoist copra and can be controlled only by rapid and adequate drying and goodstorage of copra. The importance of overcoming this problem rapidly has beenrecognized by PCA, as the closure of key international markets to Philippinescoconut meal would severely reduce farm-gate copra prices.

Marketing

2.15 World CNO prices, which are rapidly reflected at farmgate, fluctuatewith the general movement of the prices of all vegetable oils and fats (seeChapter VI). However, as a specialized lauric oil with a firm but finitedemand, CNO can command a substantial premium or suffer a modest discount inrelation to other oils, depending on the supply position. Thus, wide pricefluctuations occur, largely in response to the Philippine supply position,which from year to year is mostly controlled by the weather. Droughtdepresses production in the following year, while good rainfall, which isfrequently associated with cyclonic disturbances, enhances the next year'sproduction. The rare severe typhoon can cause sufficient damage to affecttotal output. Coconut production has shown a five-year cycle, with a two tothree year peak followed by a trough of similar duration. Maximum productionof 2.6-2.7 million tons was recorded in 1976-78 and 1986-87. Troughs areusually around 2 million tons with the lowest recently recorded output being

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1.4 million tons in 1984. The wide price and volume fluctuations affect farmincomes and the demand for consumer goods in rural areas.

2.16 Between the coconut farmer and the oil miller or exporter, coprausually goes through three or more marketing intermediaries. Most coconutfarmers maintain long-standing relationships with local merchants who act asprimary copra buyers, but also provide informal credit and sell consumer goodsto their copra suppliers. These are deep-rooted economic and socialrelationships, which have resisted attempts to supplant them by national orregional marketing agencies. Additional tiers of copra buyers exist atbarangay, town and city levels. These buyers accumulate copra into largerlots for transport, warehousing, and eventual sale to the ultimate buyers ofcopra, which are large oil mills in exit ports, small domestic oil mills, andthe port-level export warehouses. A network of copra and coconut oil brokersand agents operates throughout the industry, linking buyers and sellerslocally and with foreign markets. Competition for copra is keen among bothexporters and oil millers, and the world market for processed copra productsis also very competitive. Since more specialized down-stream products havelimited individual markets, Philippine exporters have not yet been verysuccessful in penetrating them. Under the present Government, individualmills and independent traders have been freely exporting CNO and copra. In1987 there were 15 exporters of copra and 28 exporters (mostly millers) ofCNO. Invariably the millers also export most of their production of coprameal. The traditional multitiered structure of buyers and traders receives asubstantial share of the average millgate price of copra. Export taxes andlevies have been abolished and the only fee is P 30/ton for PCA documentation.

Coconut Sector Institutions

2.17 Philippine Coconut Authority (PCA). Over the years, the Governmenthas tried several approaches to fostering a strong and viable coconutindustry. Since 1916, when a Coconut Products Board was created by Public Act2598 to encourage the improvement of coconut products, numerous laws andregulations have been enacted (Annex 4), culminating in the creation of ttiePhilippine Coconut Authority under Presidential Decree 232 in June 1973. PCAis an autonomous public corporation attached to the Department of Agriculture(DA). Its Board of Directors comprises seven members, including a Chairman,who are all appointees of the President. Day-to-day management of PCA is theresponsibility of an Administrator, supported by five Deputy Administrators,each of whom oversees a branch or major office. PCA's programs are executedby eight Regional Offices, each under a Regional Administrator. Within theRegions, Provincial Coconut Development Officers (PCDO) are assigned to eachof the 63 coconut growing provinces and manage the activities of the MunicipalCoconut Development Officers (MCDO).

2.18 A Coconut Extension Training Center (CETC) in Davao providesresidential and training accommodations for 125 students. PCA's Research andDevelopment Branch (RDB) is responsible for developing the technology on whichto base improvements in coconut production. RDB's activities are carried outby three PCA research centers in Davao (agronomy and crop protection) andZamboanga (breeding and coconut wood utilization), both in Mindanao, and Albay(cadang-cadang disease and tissue culture) in Luzon. RDB is also responsible

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for the management of a leaf analysis laboratory located in Manila, whichprovides the recommendations for the type and quantity of fertilizers to beapplied. Most industrial coconut research activities are undertaken by theIndustrial Technology Development Institute, universities and the privatesector, often under contracts with the Industrial Research and MarketDevelopment Branch (IRMDB), but RDB also executes some farm level processingresearch directly. IRDB performs principally regulatory functions, includingthe operation of a product standards laboratory for quality testing andinspection of products for export, and analyzes and prepares forecasts ofdomestic and international demand.

2.19 Although previously authorized to collect substantial levies on coprasales (para 2.23), PCA now collects only a statutory fee of P 30 per metricton of copra, which provides the bulk of its annual income of around P 85million. In addition, PCA has been spending the equivalent of about P 80 -100 million annually, which it has been drawing from its diminishing reserves.PCA has adapted to this tight financial situation by cutting back its staff,particularly those assigned to Headquarters, from 1,530 to 900, ar.d byreducing other operating expenses. Direct contributions were received fromthe national budget for the first time in 1989, and this will continue in1990. While current staff are generally well motivated and quite competent,significant increases in the number of field staff and a considerableinvestment in training, as well as some internal reorganization, would benecessary to enable the PCA to implement a major development program.

2.20 Coconut Farmers' Organizations. Most coconut farmers in thePhilippines are members of either the Coconut Producers' Federation (COCOFED)or a Small Coconut Farmers' Organization (SCFO). COCOFED is the older ofthe two. Its membership peaked in the early 1980s at over 900,000 coconutfarmers grouped in 992 municipal chapters which, in turn, elected the officersof provincial chapters and a 15-person national Board of Directors. COCOFEDwas financed largely from coconut levy funds, and supported chapter-leveldevelopment programs, scholarships and life insurance schemes for coconut,producers' families. It also set up the Coconut Marketing Corporation, which'operated some 200 buying stations. The activities of COCOFED slowed down withthe suspension of the coconut levy and both institutions further declinedafter their assets were sequestered by the Government in 1986. At that time,PCA adopted a policy to encourage a more participatory form of organizationbased at the barangay level. In contrast to COCOFED, the SCFOs, which nownumber some 896 in 63 coconut producing provinces, are reportedly lesscontrolled by larger farmers and vested interest groups. PCA's extensionservice interfaces with small farmers mainly through the accredited SCFO's.SCFOs are also encouraged to undertake comunal livelihood and other incomesupplementing activities.

2.21 United Coconut Planters Bank (UCPB). UCPB was acquired in 1975 inthe name of the coconut farmers out of the proceeds of the cocoxut levy funds,with the declared objective of setting up a credit institution which couldmeet coconut farmers' financing needs and also provide credit to theprocessing industry. UCPB's operations have grown rapidly and it is nowclassified as a universal bank, providing a wide range of banking servicesthrough some 63 branches, as well as through association with ten rural banks.UCPB's capital base has been increased and it has acquired a controlling share

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of stock in the Philippines' largest food and beverage industrial corporatton(San Miguel Corporat. on). Until recently, however, UCPB has provided verylittle production credit to small farmers. Resolution of the ownership ofUCPB, and other levy-acquired assets, is now before the Supreme Court.

2.22 Others. While PCA is responsible for the implementation of theGovernment's coconut farms development program, the DA also provides somerelated support services, particularly for intercropping. Two research anddevelopment agencies also have close complementary linkages with PCA: thePhilippine Council for Agriculture, Forestry, and Resources Research andDevelopment, a government agency under the Department of Science andTechnology; and the Philippine Coconut Research and Development Foundation, aprivate agency originally funded from the levy. Both fund some researchactivities on coconuts and other crops, professorial chairs and scholarships,and occasional in-house research. The United Coconut Association of thePhilippines (UCAP) is a federation of the main coconut industry associationsand entities, including PCA. UCAP maintains a small secretariat, a subjectlibrary and publishes comprehensive statistics, and is generally recognizedas the authoritative representative of the industry as a whole.

Financing

2.23 For most of the last two decades, much of the official support forthe coconut industry has been self-financed by way of levies on the sale ofcopra. Starting with a trivial levy of P 5.5 per ton in 1971 -- to generate aCoconut Investment Fund (administered by COCOFED) -- collections were raisedthrough the 1970s to fund coconut development (e.g., for price stabilizationin the early 1970s; the acquisition of UCPB in 1975 (para. 2.21); theestablishment of the Bugsuk hybrid seed garden, para. 2.5, etc.). Under thelatest provisions, the levy was specifically intended to support coconutreplanting. Farmers contributed an aggregate of about US$380 per ha(equivalent to about US$1,500 per average farm family, most of whom are amongthe poorest of the rural poor in the Philippines). PCA received some of thefunds collected, and its share was sufficient to enable it to expand staff;construct a number of office and research buildings, and accumulate a reservewhich permitted it to maintain operations on a reduced scale after the levywas terminated. However, the majority of the funds collected were largelymisappropriated, and individual farmers have thus far received almost noreturn from their contributions. The political passions aroused by thisscandal are still strong and, at least in the short-term, limit theGovernment's ability to fund the proposed small farmer coconut developmentprogram (paras. 2.2i 2.26, Chapter III) through new taxes or levies.

Future Prospects

2.24 The Philippines now accounts for about 45Z of total world coconutproduction and 65-70Z of total world exports of CNO and copra. World importsof CNO are projected to increase at about 0.7S through the year 2000. Becauseof its technical properties, CNO presently sells at a premium of US$40-50/tonover palm kernel oil (PKO), its nearest substitute in the world market, andthis premium is expected to continue in the foreseeable future. Domesticdemand for coconut products in the Philippines is also projected to expand atabout 2-3Z p.a. The projected world price for CNO for the year 2000 (in 1988

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constant terms) is US$516/ton, which is considerably above the estimatedaverage cost of production of US$250-300/ton in the Philippines. Although thedemand prospects are reasonably good (paras. 6.3-6.4), the supply side is atrisk and Philippines' production will likely decrease in the 1990s and laterif no Government intervention occurs, for several reasons.

(a) A significant expansion of cultivated area is not feasible becauseof the increasing scarcity of land (para 1.6).

(b) The proportion of senile coconut palms is becoming excessive:although the current age profile is not known with certainty, a1979 survey showed that about 20Z of the coconut palms were senile(over 60 years old) and very little planting has taken place sincethen. Even if farmers replanted on their own, most of this wouldbe done with the readily avaUlable low potential plantingmaterials, which would contribute to decreasing yields.

(c) Much of the coconut area close to major urban centers in Luzon hasbeen replaced over the past decade with higher-value crops, andthis trend is likely to continue where markets are good.

(d) Because of lack of fertilizer use, nutritional deficiency oncoconwut lands is becoming progressively worse, with consequentadverse effects on yields.

A recently published Strategic Study of the Philippine Coconut Industry%,produced by eminent local consultants, under a Steering Committeecomprising the Chairman of XICPB, the Secretary of Agriculture and theChairman of PCA, estimates that production will decline by 22 p.a. over thenext 20 years. This would result in the absence of an exportable surplusin the first decade of the next century -- a prospect which has begunseriously to worry end-users. The study's findings are at variance withearlier IEC projections based on internationally available statistics,which are derived from the extrapolation of old data and overstatespontaneous new planting since 1983.

2.25 Given the reasonably good forecasts of domestic and world demandfor coconut products on the one hand, and the prospect of decreasingproduction on the other, the Government has adopted a strategy torevitalize the coconut subsector and prevent it from lapsing,unnecessarily, into sunset industry status. A long-term coconutproductivity and copra quality improvement program would be initiated underthe proposed project (see Chapter III). The- program would involvereplanting of senile coconut palms with higher-quality planting materials,improving the nutritional status of lands under mature coconut throughgreater fertilizer use, encouraging intercropping on coconut lands,introducing improved drying techniques to improve copra quality and reduceaflatoxin levels, and strengthening coconut research and extension, and theoverall institutional capacity of the PCA.

2.26 While the Government recognizes that farmers throughout thecountry will continue to grow coconuts for a long time to come, publicresources for coconut productivity improvement would be increasingly

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concentrated in areas which are favorable for coconut growing and lessprone to typhoon damage. This strategy would ensure productivity growth aswell as a more stable production over the longer term. For the mosttyphoon-prone areas, the Government would encourage diversification awayfrom coconuts into more viable enterprises. For these reasons, areplanting target of 50,000 ha per year has been set, which eventuallyimplies an advanced industry of 2.5 million ha -- that is, about a 25Zreduction of the 3.3 million ha currently devoted to coconuts. Because ofthe need to develop seed production capacity and the necessary supportstaff and logistics, the annual replanting rate would be much lower in theinitial years, not reaching the desired level until about 1997. This wouldbe partially compensated by investments in rehabilitation and nutrientsupport to existing trees, which would enhance production and farm incomesuntil the full replanting program is in place.

Table 2.1: LONG TERM COCONUT DEVELOPMENT PROGRAM, 1990-2009 a/

(ha)

Annual Area Under Area UnderReplanting Rehabilitation Nutrient Support

1990 5,000 20,000 50,000

1991 3,500 80,000 50,000

1992 3,500 168,000 50,000

1993 4,000 268,000 47,000

1994 9,000 328,000 27,900

1995 24,000 288,000 -

1996 44,000 200,000

1997 50,000 100,000

1998 50,000 80,000

1999 50,000 20,000

2000 - 2009 50,000 _

a/ The proposed project would support the first phase of thelong-term program, during 1990 - 1994.

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III. THE PROJECT

Proiect Origin and Preparation

3.1 The need for a long-term development program for the Philippinescoconut sector has been recognized for many years. However, the predominantlyimpoverished smallholders who make up the backbone of the industry have beenunable to invest in yield-improving measures on their own. The very fewlarge-scale producers who have invested in new technologies now face beingsplit up under the land reform program (para. 1.8) and their total area is, inany case, relatively insignificant. Consequently, the proportion of senilepalms gradually increased and coconut production, once buoyed by extensive newplantings, is now declining to the detriment of both farmers' incomes and thecountry's balance of trade. A national coconut replanting program announcedin the 1970s was never implemented (para. 2.23). With FAO/CP assistance, PCAthen prepared a coconut development project which the Bank appraised in 1984,but the Government subsequently decided not to proceed with that operation,partly because of unwillingness to reconcile the accounts of the levyproceeds. In 1987, following the change of Government, contacts were renewedwith the Bank concerning possible support for a long-term smallholderdevelopment program, and project preparation was initiated in 1988. Theexperience gained by PCA staff and much of the documentation from the 1984exercise was utilized in preparing the proposed project. The PreparationReport for this project was compiled and edited by local consultants, PCAstaff having produced the draft text and cata, and the National EconomicDevelopment Authority (NEDA) having assisted with the technical review andeconomic analysis. The project was appraised in June/July 1989, and loannegotiations took place in April 1990.

Proiect Obiectives and Summary Description

3.2 The project would have the following objectives:

(a) to launch a long-term program of coconut development and productivityimprovement, supported by the necessary infrastructure andstrengthened technical and support services;

(b) to increase the incomes of small-scale coconut farmers by improvingcoconut yields and copra quality; and

(c) to boost foreign exchange earnings by ensuring an increasing andreliable supply of higher quality copra for processing and the exportmarket.

3.3 The project would constitute the first phase of a long-term smallcoconut farms development program which, over the next twenty years, wouldresult in the replanting of some 743,000 ha of senile coconuts and therehabilitation of about 418,000 ha of low-bearing palms (paras. 2.25-2.26).The project would develop and apply improved technologies, establish theoperating procedures, and prepare the institutional and financial bases forsuch a program. The rationale for the project, and the Bank's involvement in

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it, is the urgent need to reverse the lapse into senility and decliningproductivity of the Philippines' coconut production base, which endangers thecountry's international competitiveness, undermines end-user confidence andultimately threatens the Philippines' future share of tIe world market. Theurgency stems from the immensity of the task, and the long lead-time needed toobtain a substantial impact.

3.4 The proposed project would take advantage of a combination ofpromising opportunities: (a) the Philippines already possesses excesscapacity in oil-milling, refining and coconut desiccating (para. 2.13), whichwould allow considerable value to be added to incremental copra production atvery little additional capital cost; (b) world market prospects for copraproducts are good (para. 2.24); (c) the technical basis for achieving muchhigher yields is well established; and (d) the existing organizationalframework of PCA can easily be adapted to handle a large coconut developmentprogram, with some reorganization and institutional strengthening. From thestandpoint of poverty alleviation, hybrid coconuts, particularly whenassociated with intercrops, offer one of the few widely replicable means ofintensifying land use by smallholders. As indicated in para. 3.1, the Bankhas been interested for some time in assisting a program aimed at benefittingsmall coconut farmers, who are among the poorest in the country. Althoughother Bank-financed projects in the Philippines have served the rural poor,the proposed operation would mark the beginning of a possible pipeline ofoperations to improve the living standards of many people who have, to date,remained by and large outside the scope of most official developmentassistance.

3.5 Over a five-year period, the proposed project would comprise:

(a) Coconut farm development:

Mi) establishment of seedgardens and nurseries to produce high-yielding hybrid coconut seedlings sufficient, when fullproduction is achieved, to sustain a replanting program of about50,000 halyear;

(ii) replanting of overaged palms with high-yielding hybrid coconutseedlings on about 16,400 ha, and re:'anting of palms damaged bytyphoons and other natural disasters with selected tallseedlings on abou.tt 8,600 ha;

(iii) provision of inputs and technical assistance to support annualintercropping during the first three years of replanting;

(iv) provision of inputs to rehabilitate middle-aged palms on 348,000ha, and to support the development of young palms planted onabout 50,000 ha under previous PCA development schemes;

(b) Conra quality improvement:

(i) equipping of an existing laboratory in Manila for aflatoxinassay, and establishment of a second regional copra qualitycontrol laboratory in Cebu;

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(ii) support for a pilot effort to introduce hot-air copra dryers tosmallholders in 2-3 major mill catchment areas; and

(iii) provision of technical assistance and training;

(c) Institutional strengthening of PCA:

(i) expansion of central, regional and provincial PCA officestaff; replacement vehicles; office, communications and otherminor equipment; construction and equipping of three regionaloffices and L'novation of three existing regional offices;support fo- incremental operating expenditures; andtechnical asi:3tance, training and research studies;

(ii) completion of facilities for PCA's Coconut Extension TrainingCenter; training of staff trainers and extension workers; andsupporting materials for training and extension activities;and

(iii) upgrading of PCA's coconut research program througa agronomicconsultancy services, vehicles, equipment and materials forPCA's Research and Development Branch and three regionalresearch centers, and support for contract research oncoconut processing and end uses.

Detailed Features

3.6 Estsblishment of Seedgardens and Nurseries

(a) Seedgardens. PCA's strategy for the future of the coconutindustry calls for a sustained arntual replanting rate of 50,000 ha peryear, which should be attained as rapidly as possible. Other than inexceptional circumstances caused by typhoon damage, where lack of plantingmaterial may necessitate the use of local talls, replanting is economicallyjustified only if hybrids of proven suitability for specific locations areused. Due to the lack of hybrid production facilities (para. 2.5), itwould be necessary to establish about 1,000 ha net of hybrid seedgardens tomeet the demand. Five seedgardens of approximately 250 ha each (216 hanet) would be established to produce sufficient hybrid seednuts to sustainthe program. One of them would be established by PCA under the project andassurances were obtained during negotiations that PCA would formally obtainthe use of a suitable site for not less than 20 years, no later than March31, 1991 (para. 7.1(a)). The other four seedgardens (in Mindanao, theVisayas and Luzon) would be established and managed by private agriculturalenterprises under contracts with PCA. These enterprises would benefit from"pioneer industry" status under the Bureau of Investments' incentivesscheme and several enterprises have indicated strong interest. Assuranceswere obtained during negotiations that contracts for hybrid seed productionwould be entered into only with agricultural enterprises with adequate n

financial, technical and managerial resources, as agreed with the Bank(para. 7.1(b)). It would be a condition of effectiveness that arrangementssatisfactory to the Bank had been made for the establishment of at least

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one seedgarden. PCA would specify the type of hybrids to be produced,supply parental seed as required, and maintain technical supervision ofthese seedgarden operations. Financing for the establishment of the privateseed gardens would be raised by the agricultural corporations, and istherefore not included in the project costs. In the case of PCA's ownseedgarden, the project would finance site clearing, fencing and roadconstruction, civil works, acquisition of planting material, equipment,supplies, vehicles, and incremental operating costs on a declining basis.The first hybrid seed would become available from 36 to 40 months afterfield planting of the female parents (pollen from external sources would benecessary for the first two years production). Thereafter seed productionwould increase rapidly, effectively reaching full production by the seventhyear after planting. The first three seedgardens would be established inYear 1 and the remaining two in Year 2. On this basis they would providesufficient seed in Year 4 to replant 2,045 ha, rising in Year 5 to 6,680ha.

(b) Nurseries. Initially seedlings for planting on the farmwould be raised in temporary nurseries established by participating smallcoconut farmers' organizations (SCFOs), under the direction and control ofPCA field staff, with the project providing fencing materials, tools andsupplies. The two-stage nursery system would be followed with selectedgerminated seed being normally sown in polybags. As the replanting programgrows in magnitude, PCA would establish its own nurseries with irrigationfacilities, fences and essential civil works, as required in each provincewhere replanting is to take place. In the case of talls, seed equivalentto 200X of the required number of seedlings would be set in to seed beds toiK'llow for 45Z cullings and 102 replacements. For hybrids, 240 seeds wouldbe set for each ha to be replanted. Assurances were obtained duringnegotiations that PCA would present to the Bank annually, for approval, itsnursery development plan for the following year, with specific reference tothe need for any field nurseries and the circumstances justifying their use(para. 7.1(c)).

3.7 Replanting. Some replanting would be possible during the projectperiod, since reasonable hybrid seed could be obtained from existingsources for about 6,600 ha of replanting and the new seedgardens wouldstart to produce sufficient seed to supply 8,800 ha during the fourth andfifth years (para. 3.6(a)). It is also assumed that typhoon disaster-related replanting of about 9,600 ha of local talls would be necessaryduring the first three years (principally in Bicol (para 2.7)). Tallswould be planted at 100 palms per ha (10 m squares) and the hybrids at143/ha (9 m triangles). The phasing of coconut replanting activities underthe project is shown in Table 3.1, and the sequence under the long-termcoconut development program is shown in Table 2.1.

3.8. Existing palms would be felled and, wherever possible, the stemssold for lumber production. PCA would assist farmers to find buyers whennecessary, and any residual stems would be burned or stacked and treatedwith green muscardine fungus (Metarhizium anisopliae) to prevent rhinocerosbeetle infestation. PCA would supervise land preparation by the farmer.Intercropping with annuals would be encouraged for the first three years,after which a cover crop would be established (para. 3.9). Where

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intercropping is not feasible, cover crops would be sown immediately.Close supervision would be the responsibility of a PCA-managed task forceduring the planting year, supplemented by enhanced extension input insucceeding years. Fertilizer would be provided for the first seven years,as most of the soils under senile stands have very impoverished surfacestrata which cannot adequately sustain the rapid growth and early bearingof young hybrid palms.

Table 3.1: PHASING OF COCONUT REPLANTING(ha)

ReplantingProject year with Hybrids with Talls Total

1 1,000 4,000 5,0002 500 3,000 3,5003 900 2,600 3,5004 4,000 4,0005 9,000 9,000

Total 15,400 9,600 25,000

3.9 Intercropping. Farmers in the replanting program would be encouragedto cultivate annual intercrops for the first three years of replanting, tosupplement farm income during the immature period before the new coconut palmscome into production. Cover crops would be sown together with the intercropsin the third year to avert the risk of the weed grass lalang (Imperatacylindrica). In many instances farmers would also be able to harvest covercrop seed for sale. PCA-managed field staff would advise the farmers onsuitable crops. Farmers who are able to intercrop would receive seeds,fertilizers and other inputs to support the first crop, up to a value ofP 2,000 each, and all farmers would receive cover crop seed at the appropriatetime.

3.10 Rehabilitation of Low-Bearing and Immature Palms

(a) Low-bearing Mature Palms. The current decline in coconutproductivity over the past years is partly attributable to the increasingproportion of senile palms in the Philippines, but the poor nutrient statusof the palms of bearing age is also a asjor factor, which is caused byincreasing impoverishment of soil nutrients through continuous cropping andan almost total absence of fertilizer use. A nationwide PCA palm nutritionsurvey has identified the principal nutrient deficiencies in each area andappropriate fertilizer recommendations are available. Where these havebeen applied on a demonstration basis, yield increases on the order of 1252have been achieved over four years of application. Under the proposed

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project, appropriate fertilizers would be provided for a period of fouryears to mature palms on a total of 348,000 ha, as shown in Table 3.2:

Table 3.2: INITTL& APPLICATION OF FERTILIZER

Project Year ha

1 20,0002 60,0003 88,0004 100,0005 80,000

Total 348,000

In most cases, the application would be 1.5 kg per palm per year ofammonium sulphate and 2 kg of potassium chloride. Common salt would besubstituted for KCL in areas where potash is not deficient and where therewould be no adverse effects on intercrops or on soils. Fertilizers wouldbe applied only after qualified farmers had removed any shrubs from theirplantation and ring-weeded the palms, and this would be carried out underthe close supervision of the MCDO on a communal basis, with all recipientfarmers in an SCFO assisting each other in turn. On average, there areabout 30-35 nuts per tree, each nut yielding 0.2 kg of copra or 700 kg perha (at 100 trees per ha). It is estimated that these yields would increaseto about 1,470 kg/ha over four years, which would provide adequate fundsand incentive for farmers to continue applying fertilizers and would boostcoconut production by 267,000 tons by 1998.

(b) Nutrient Support for Immature Palms. Approximately 50,000ha, primarily hybrids, have been planted during the past 10 years undervarious small PCA sponsored schemes, most of which were short-lived as aresult of financial constraints. The premature termination of theseprograms eliminated the planned support for the young palms and, havingreceived little or no fertilizer after field planting, their growth anddevelopment have been very poor. In order to restoLe these palms tosomething close to their original potential, fertilizer would be providedunder the proposed project on the same basis as for rehabilitation of low-bearing mature palms (para. 3.10(a)). It is intended that the applicationsshould be for a maximum of four years, but would terminate for palms over12 years old. It is estimated that yield increments would range, dependingon age and planting material, from nearly 600 kg to over 2 tons of copraper ha (Annex 2, Table 2.1), implying an additional 63.000 tons per year by1996.

3.11 Taken together, the two rehabilitation programs for low-bearingand immature palms would generate a fairly rapid increase of almost 330,000tons p.a. of copra production from the 398,000 ha involved (Annex 2,Table 2.2). They would thus help to arrest the decline in total productionduring the initial years of the long-term program, as the rate ofreplanting builds to the desired level (paras. 2.25 - 2.26).

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3.12 Copra Quality Improvement. The Philippines produces a very poorquality of copra which is frequently contaminated with aflatoxin, caused bythe inadequate drying methods practiced by most smallholders (para. 2.14).This situation is estimated to cost the country about US$52 million peryear in reduced export prices and physical losses. In the future, however,there is also a risk that the Philippines may lose access to its Europeanmarkets for copra meal, as various countries are in the process oftightening standards concerning acceptable aflatoxin levels. This coulddeprive the economy of a further US$75 million p.a. However, in spite ofthe growing necessity to improve copra quality, the objective is not easilyachieved. Any piece-meal approach based on improving quality on a limitednumber of holdings would not work, as the quantity of superior materialwould be *lost' among the mass of poor copra and would, therefore, have noadditional trade value. Rather, this situation can be overcome only bychanging drying practices in sufficiently large areas so that commerciallyvaluable parcels of higher quality copra would result. This would involveconcentrating resources in the catchments of individual oil mills or coreareas, and negotiating appropriate arrangements with those mills for thepayment of quality premia.

3.13 Under the project, PCA would follow a two-staged approach toraising copra quality. Initially, supported by co-financing from theUnited Kingdom, PCA would create the necessary laboratory facilities inManila to analyze aflatoxin levels and, supported by a mycotoxicologist andan associate professional officer, would develop standard methodologies andsampling techniques. 'When these are fully developed, a second laboratorywould be established in Cebu to service the Visayas and Mindanao Regions.An oilseed processing expert would assist PCA in conducting surveys ofaflatoxin incidence and copra drying practices in several major millcatchments. The technical experts would be supported by short-termconsultants and back-stopping by the Overseas Development ResearchInstitute (ODNRI) in the U.K. Technical assistance totalling 96.5 staffmonths, together with analytical equipment and vehicles, would be coveredthrough the grant cofinancing.

3.14 In a second stage, after the research work and surveys had beencompleted, the project would support the introduction of hot air copradryers on a pilot basis in 2-3 mill catchments, based on a detailed planprepared by PCA and the technical assistance specialists. The plan wouldspecify current aflatoxin levels in each catchment. and the targets to beachieved. Selected catchments would be those in which a majority of SCFOs,representing at least 802 of the area supplying an individual mill, arewilling to participate. In addition, the mills involved would have to beprepared to pay quality premia sufficient to enable participating SCFOs torecover the cost of the driers and to reward farmers for the additionalinputs involved. Manufactured components of the driers would be providedon a reimbursable basis to the SCFOs, which would construct sheds, providenecessary local materials and assemble the driers under PCA supervision.Steering committees composed of representatives of PCA, the farmers, theoil mills and traders would be set up within each catchment to agree onproceedures, including quality price differentials, and small projectmanagerial units would be established and equipped. Presentation of a

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suitable plan would be a condition of disbursement of loan funds for thecopra quality improvement component of the project (para. 7.3).

3.15 Institutional Strengthening of PCA. The project would assist instrengthening PCA's capacity to undertake the proposed long-term coconutdevelopment program. Following suspension of the coconut levy (para.2.23). over the last few years PCA's income has declined dramatically andit has had to reduce staff and operating expenses and curtail capitalexpenditures. Moreover, although PCA's organizational structure may havebeen adequate for the kinds and level of activities for which it has thusfar been responsible, several changes in the distribution of functions andmanagement relationships are needed as the agency poises to implement amuch more comprehensive, long-term program. The project would thereforesupport: (a) a planned reorganization of PCA, with particular attention tococonut extension and research activities; (b) an increase in and upgradingof PCA staff, mainly at the provincial and municipal levels; (c) selectiverenovation/expansion of physical facilities; and (d) technical assistanceand training.

3.16 Details concerning the reorganization of PCA and the staffingrequirements of the project and the longer-term coconut development programare provided in Chapter V. With regard to physical facilities, three PCAregional office buildings would be constructed to replace unsuitable rentedbuildings and three existing offices would be renovated. New provincialoffices to be constructed would be located on sites suitable for nurseries,which would be provided with fencing, irrigation and a storage building.The PCA seedgarden would also be established with roads, fencing andoffice, residential, laboratory and storage facilities, and would be fullyequipped. Some investment in vehicles would be needed to restore mobilityto PCA field staff and others for whom transport is essential, as many ofPCA's existing vehicles are no longer serviceable. In total, 72 cars, 8light trucks and about 1,700 motorcycles would be required. The latterwould be mainly for extenslonists, who would purchase them through loans,,repayable over five years through salary deductions. The Coconut Extension'Training Center (CETC) would be renovated and equipped to allow for full-scale utilization in staff training. Communications equipment would berenewed as necessary at regional offices and research centers, and providedfor the first time at provincial offices to allow direct linkage to theregional offices. Office equipment, including support for the new projectmanagement unit at PCA Headquarters and some computer facilities, would beprovided and some of the scientific and farm equipment at the researchcenters would be replaced or rehabilitated, as most of it is now 10-14years old.

3.17 In addition to the 96.5 months of ODA-cofinanced support for copraquality improvement (para. 3.13), provision would be made for 12 monthsp.a. of internationally recruited consultant services and studies. Acomprehensive training program would be developed to upgrade the knowledgeand performance of PCA staff. To allow for wastage and promotion, about1,800 extensionists would be trained by the CETC, which would also monitorthe performance of trainees and provide regular in-service follow-uptraining for them and other PCA staff. In addition, provision would bemade for: (a) overseas training, in the form of study tours to ASEAN

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countries with effective replanting or quality control programs for a totalof 50 staff and short-term training courses for a further five; and (b) 10local MSc courses, five local Ph.D courses in Research Management, SoilScience, Entomology and Bio-Technology (2) and about 50 local short-termtraining courses.

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IV. PROJE-T COSTS AND FINANCING

Proiect Costs

4.1 Total project costs over the five-year implementation period areestimated at US$176.6 million, including a foreign exchange component ofUS$91.1 million (522). The base costs were estimated using prices obtainedduring appraisal in July 1989 and adjusted to levels expected to prevail atthe time of project start up in September 1990. Physical contingenciesequivalent to 10Z were added to the base costs for civil works, farm inputsand operating costs; and equivalent to 7? for equipment, vehicles and spareparts. Price contingencies were calculated on base costs plus physicalcontingencies and compounded annually as follow: (a) for all local costs,92 for 1989-91 and 82 for 1992-95;2/ (b) for all foreign costs 7.22 for1989, and 4.4S for 1990-95. Total contingencies are equivalent to about322 of base costs, or 252 of the total project cost in terms of US dollars.Project costs are summarized in Table 4.1 and Annex 1, and are furtherdetailed in the Working Papers. They include only incremental investmentsand operating costs, above the present level of PCA expenditures.

Table 4.1: PROJECT COST /a

Local Foreign Total Local Foreign Total X------(P million)------ ---- (US$ million)----

Replanting 303.6 147.4 451.0 13.8 6.7 20.5 15.4Rehabilitation 622.6 880.0 1,502.6 28.3 40.0 68.3 51.2Nutrient Support 187.0 231.0 418.0 8.5 10.5 19.0 14.3Copra Improvement 125.4 37.4 162.8 5.7 1.7 7.4 5.5Research 72.6 30.8 103.4 3.3 1.4 4.7 3.5Extension & Training 88.0 28.6 116.6 4.0 1.3 5.3 4.0InstitutionalStrengthening 50.6 127.6 178.2 2.3 5.8 8.1 6.1

Total Baseline Costs 1,449.2 1,483.4 2,932.6 65.9 67.4 133.3 100.0

Physical contingencies 81.2 140.0 222.2 3.7 6.3 10.0 7.5Price contingencies 584.8 639.9 1,224.7 15.9 17.4 33.3 25.0

Total Project Costs 2,115.3 2,263.2 4,378.5 85.5 91.1 176.6 132.5

la Including duties and taxes of US$12.5 million.

2/ Price contingencies, initially calculated in local terms, have beenconverted to USS using exchange rates that correct the differencebetween the expected rate of domestic inflation and the expected trend

'ld~ '

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Financing

4.2 The proposed Bank loan of US$121.8 million represents 692 of totalproject costs (74Z of total project costs excluding duties and taxes), andwould finance 99Z of the foreign exchange cost and 37Z of local costs.Bank financing of some local costs is justified by the relatively lowincome level of the Philippines and strong poverty focus of the project.The balance of US$54.8 million would be funded as follows: US$1.3 millionby a grant from the U.K. ODA (1Z of total project cost); US$31.6 million byPCA and/or the Government (18Z of tntal project cost) and US$21.9 millionby the project farmers in the form of hired labor and local materials(12.5Z). Assurances were obtained during negotiations that PCA and/or GOPwould include in their annual recurrent and capital budgets adequate fundsto finance project activities, including both incremental and non-incremental costs, and that such funds would be released for use in atimely manner (para. 7.1(d)). The proposed financing plan is outlined inTable 4.2.

Table 4.2: PROJECT FINANCING

Local Foreign Total Local Foreign Total Z-(---.P million) ------- -----(USS million)-----

Farmers la 547.0 - 547.0 21.9 - 21.9 12.4

PCAIGOP 786.2 - 786.2 31.6 - 31.6 17.9

ODA - 30.7 30.7 - 1.3 1.3 0.7

Bank 782.1 2,232.5 3,014.6 32.0 89.8 121.8 69.0,

Total 2,115.3 2,263.2 4,378.5 85.5 91.1 176.6 100.0

/a Farmers would also contribute incremental family labor valued at US$33.0million equivalent.

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Procurement

4.3 Procurement arrangements are suimmarized in Table 4.3.

Table 4.3: PROCUREMENT ARRANGEMENTS a/(USS million)

Procurement Method TotalProject Element ICB LCB Other N.A. Cost

Civil Works 2.7 0.8 0.7 - 4.2(2.5) (0.7) (0.6) - (3.8)

Equipment and 2.8 0.5 0.8 - 4.1Spare Parts (2.6) (0.3) (0.6) - (3.5)

Vehicles and 5.5 0.3 0.5 - 6.3Spare Parts (4.7) (0.2) (0.2) - (5.1)

Copra Improvement - - 5.5 - 5.5- - (4.9) - (4.9)

Research - - 0.3 - 0.3- - (0.3) - (0.3)

Extension and Training - - 5.5 - 5.5- - (5.5) - (5.5)

Technical Assistance - - 1.4 - 1.4- - (0.4) - (0.4)

Farm Inputs 96.8 - 3.1 - 99.9(87.4) - (2.5) - (89.9)

Farmers' Hired Labor - - 21.9 - 21.9

Incremental Operating - - 2.5 25.0 27.5Costs - - (1.9) (6.5) (8.4)

Total 107.8 1.6 42.2 25.0 176.6(97.2) (1.2) (16.9) (6.5) (i21.1)

a/ Figures in parenthesis represent share to be financed out of theproceeds of the Bank loan.

4.4 Whenever possible, items to be procured would be grouped intopurchases of at least US$200,000 each, likely to result in about 33 contracts(10 contracts for vehicles, 10 for equipment and 13 for fertilizers). All

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such contracts exceeding US$200,000 for vehicles, equipment and farm input andUS$1.0 million equivalent for civil works (two contracts) would be procuredthrough International Competitive Bidding (ICB) in accordance with Bankprocurement guidelines. In evaluating ICB tenders, a margin of 152 of thec.i.f. bid price or actual customs duties, whichever is less, would be allowedfor preference for domestic manufacturers.

4.5 Contracts from US$50,000 to US$1.0 million for civil works and toUS$200,000 equivalent for vehicles, equipment and farm input would be procuredthrough Local Competitive Bidding (LCB) in accordance with proceduresacceptable to the Bank, in an estimated aggregate amount of about US$1.3millio'n, representing approximately 10 to 15 contracts. Procurement oftechnical assistance services amounting to US$1.4 million would be carried outin accordance with Bank guidelines for the selection and recruitment ofconsultants. About US$1.3 million of co-financed consultants, equipment andvehicles would be procured in accordance with ODA procurement procedures.Procurement of items valued at less than US$50,000 would be through prudentshopping, based on a comparison of at least three price quotations, and wouldnot exceed: US$0.7 million for civil works; US$1.3 million for equipment,vehicles and spare parts; US$0.3 million for research and materials; US$5.5million for extension and training; US$3.1 million for fertilizer and otherfarm inputs; and US$2.5 million for incremental operating services, includingrepair and maintenance of vehicles and equipment servicing the scattered PCAoperating units. The remaining incremental operating expenses amounting toUS$25.0 million are not applicable for procurement. Farmers' contributio i.sthe form of hired labor, amounting to US$20.9 million, would be proL.r.eithrough normal commercial practices.

4.6 All bidding packages above US$200,000 for vehicles, equipment andfarm input and US$1.0 million equivalent for civil works would be subject toprior review by the Bank, representing 852 of Bank-financed items andincluding about two contracts for civil works and 33 contract packages forvehicles, equipment and fertilizers. Other Bank-financed contracts would be,subject to selective post award review. PCA would be encouraged to use theBank's sample bid documents for procurement of goods, commodities and civilworks.

Disbursement

4.7 The proposed loan of US$121.8 million would be disbursed over sevenyears, during Bank FY91-97. The disbursement schedule provided in Annex 1,Table 1.6 is shorter than the historical disbursement profile of 10 years forBank-financed agricultural projects in the Philippines. The proposed seven-year disbursement period appears realistic, however, since much of theexpenditure involves bulk procurement of vehicles, equipment and fertilizers,which is unlikely to be seriously delayed. PCA, the institution responsiblefor implementing the project, is firmly in place and has acquired experiencewith many of the individual operations to be supported under the project.Disbursement for contracts with a value over US$200,000 equivalent would befully documented. All other disbursements for eligible expenditures,including disbursements for incremental operating costs, would be made on thebasis of Statements of Expenditures (SOEs).

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Table 4.4: SUMMARY DISBURSKMENT SCHEDULE

Category Amount of theLoan Allocated I of(Expressed in Expenditures

Dollar Equivalent) to be Financed

(1) Works 3,400,000 9OZ

(2) Vehicles and 4,600,000 100I of foreign expendi-spare parts tures, 100X of local

expenditurr-s (ex-factorycost) and 802 of localexpenditures for otheritems procured locally

(3) Equipment and 3,200,000 1002 of foreign expendi-spare parts tures, 1002 of local

expenditures (ex-factorycost) and 852 of localexpenditures for otheritems procured locally

(4) Consultants' services, 5,300,000 1002training, studies andextension

(5) Research 300,000 1002

(6) Copra driers 4,400,000 902

(7) Farm inputs 80,900,000 902

(8) Incremental operatingcosts

(a) 2,000,000 602(b) 2,100,000 452(c) 1,700,000 302(d) 1,800,000 252

(9) Unallocated 12,100,000

TOTAL 121,800,000

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4.8 Special Account. Assurances were obtained at negotiations thats(a) GOP would establish a Special Account for the project into which the Bankwould make an initial deposit of US$5.0 million, equivalent to 2-3 months'average withdrawal from the loan account, to be used to prefinance goods andservices reimbursable under the loan; and (b) the Special Account would beoperated under terms and conditions satisfactory to the Bank (para 7.1(e)).The Special Account would be managed by PCA and should any disbursement madefrom this account be found to be ineligible for financing under the project,GOP would deposit the corresponding amount into the Special Account prior tosubmissiou of any further replenishment application.

Accounts, Auditing and Reporting

4.9 Assurances were obtained at negotiations that PCA would keep separateaccounts of expenditure made under the project, irrespective of the sources offunds, and that all accounts related to the project would be audited annuallyby independent auditors acceptable to the Bank (para. 7.1(f)). The auditors'report and statements of accounts would be submitted to the Bank within ninemonths of the end of each PCA fiscal year. The audit report would include,inter alia, a separate opinion that funds disbursed against SOEs had been usedfor the purpose for which they were provided. Assurances were also obtainedthat PCA would submit regularly quarterly progress reports to the Bank, andwould prepare a completion report on project implementation and achievementswithin six months of the final loan disbursement (para 7.1(g)). Details ofauditing and reporting requirements are given in Annex 5.

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V. ORGANIZATION AND MANAGEMENT

Philippine Coconut Authority (PCA)

5.1 Responsibility for project coordination and implementation would restwith PCA (paras. 2.17-2.19). While PCA's current structure is basicallysound, some reorganization and rationalization of functions and authoritywould be necessary to enable the entity to carry out its responsibilitiesunder the project. The main concerns relate to PCA's research and extensionactivities, and their linkage with field operations. In addition, owing toits tight financial position over the past few years (para. 2.23), PCA hasreduced its staff in absolute terms and been unable to provide adequatetraining programs, and renovate and replace its physical facilities andequipment. The proposed project would therefore support various institutionalstrengthening activities, to prepare PCA not only to carry out the projectitself but also to develop the necessary capability to implement the longer-term coconut development program. Specifically, the project would support:(a) a planned reorganization of PCA, with particular attention to coconutextension and research; (b) an increase in anid upgrading of PCA staff, mainlyat the provincial and municipal levels; (c) selective renovationiexpansion ofphysical facilities; and (d) technical assistance and training. Items (c) and(d) have been discussed in paras. 3.16-3.17. With regard to PCA'sreorganization and staffing (items (a) and (b)), the proposed changes havebeen thoroughly reviewed and agreed in principle during project preparationand appraisal. Assurances were obtained during negotiations that formalapproval of PCA's reorganization would be a condition of loan effectiveness(para. 7.2 (ii)), and that the new organization structure would be implementedno later than September 30, 1990 (para. 7.1 (n)). The principles underlyingthe planned reorganization, reflected in Chart 1, and the staffingimplications ure summarized below.

5.2 Extension. PCA's extension staff 0MCDOs) are insufficient in numberfor the needs of the project and would be augmented by DA field staff-Agricultural Production Technicians (ATP). ATPs would be assigned to theproject under the terms of a Memorandum of Agreement between DA and PCA, datedMarch i3, 1990, and a Supplemental Agreement thereto dated April 4, 1990,which provide that ATPs selected for assignment would successfully completetraining at CETC and would be under the operational control of PCA. Theprojects extension field staff (MCDOs and ATPs) and their PCA supervisors andmanagers would be the critical driving force of the projectlprogram,responsible for encouraging the formation of SCFOs and guiding theirdevelopment; promoting the objectives of the coconut development program;identifying qualified participants; initiating requisitions for the necessaryinputs; ensuring that farmers have undertaken the prescribed preparatoryactivities; supervising delivery of the planting materials and fertilizers andensuring that they are properly planted or applied at the designated sites;monitoring production responses; and providing advice on all aspects ofcoconut cultivation, including processing. Presently, the PCA DeputyAdministrator of the Agricultural Research and Development Branch (ARDB) isresponsible for both agricultural development (extension) and research, buthas no in-line subordinate units to supervise these two major activities, norexercises formal control over the Regional Administrators who are responsiblefor executing field development programs in the eight regions and reportdirectly to PCA's Chai . fu e, P 's Fi d (

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would take over the extension activities of the zurrent ARDB and would asstmedirect control of the Regional Offices. It would also assume responsibilityfor the Coconut Extension Training Center (CETC), to ensure that field stafftraining is fully coordlinated with the needs of the program.

5.3 Project/program implementation would pose heavy managementresponsibilities on FOB; for this reason, the Deputy Administrator would besupported by a strengthened Operations Planning and Management Department(OPD), located at the Head Office. The manager of OPD would ensure that thefield program is carried out according to approved plans; that appropriatetechnical standards are maintained; that the necessary logistical and humanresources are available so that development targets can be met; and thatadequate statistical data is recorded at each phase of field operations. OPDwould have four Divisions to meet these requirements: Field Operations,Logistic Services, Operations and Statistics, and Seedgarden/Seed Contracts.Given the importance of OPD, assurances were obtained at negotiations that theposition of Department Head would be filled at all times with an officer whosequalihications and experience are agreed with the Bank (para. 7.1 (h)). TheSeed Supply Division (SSD) would be responsible for the establishment andmanagement of the new PCA seed garden and for technical supervision of thefour private seedgardens which would supply hybrid seed to PCA. For thesepurposes, PCA would require about 25 additional regular staff and 310 skilledand unskilled workers and security guards, thse latter to be provided bycontract. In consultation with PCA's research staff, SSD would determine thenecessary crossing programs at least 18 months in advance of need, so that theseedgardens could program their pollinations accordingly and ensure that anadequate amount of suitable seed is available for each region at the requiredtime.

5.4 The Manager of the CETC would report to the Deputy Administrator ofFOB. The rapid expansion of the extension force (prra. 5.6), as well as therequirements of in-service training and pre-promotion courses, would place amajor burden on the CETC, whose staff would have to be increased by 12persons. Three of these new staff would be specialists in developmentcommunications or agricultural journelism, to assist in strengthening thetechnology packaging functions of CETC. All catering for resident studentswould be contracted out. Pre-service courses for MCDOs would last 10 weeksand those for ATPs, six weeks. There would also be in-service training forcurrent MCDOs, PCDOs and subject matter specialists. The training staffitself would be supported in the development of its skills through periods offield work with MCDOs, increased exposure to research center work, courses atlocal universities, and visits to foreign agricultural extension and coconutresearch agencies. Local universities and PCA's existing in-house expertisewould be tapped as technical resources for the training program. Anexperienced training consultant would be retained for limited periods over thelife of the project to monitor and evaluate the effectiveness of CETC'sactivities (para. 3.17).

5.5 PCA's eight Regional Offices, each under the direction of a RegionalAdministrator, are entirely responsible for all PCA activities at field level.By far their major function is the supervision of extension staff (PCDOs, ATPsand MCD0s) and their tasks at SCFO and farm level. Regulatory functions and

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copra improvement activities are generally minor components of their workprograms. Nevertheless, as indicated in para. 5.2 above, reportingrelationships hitherto bypassed the Deputy Administrator responsible foragricultural development and research, which sometimes resulted in theadoption of technically inappropriate or inadequate agriculturc'l practices atfield level. Under the project, charges would be made to ensure that theRegional Administrators report to the Deputy Administrator FOB on allagricultural matters.

5.6 The success of the project would rest largely on the quality andmotivation of the extension staff. The current staff of 595 MCDOs would needto be augmented over the five years of the project to about 1,950, as follows:

Table 5.1: NET EXTENSION STAFF REQUIREEENTS BY PROJECT YEAR

Project Year Existing Staff New Staff Total MCDOs

1 595 -- 5952 595 148 7433 743 479 1,2224 1,222 443 1,6655 1,665 285 1,953

To allow for turnover, about 1,800 extension personnel would be sought to meetthe requirement for 1,355 incremental extension staff. As the Government isreluctant to increase the already large number of agricultural extensionistsin the country, many of whom are perceived to be unde. -employed, the majorityof new extension staff for the project would be made available to PCA by meansof assignment of ATPs from the Department of Agriculture. During negotiationsthe Government furnished to the Ban2k a satisfactory plan for the assignment toPCA from DA of sufficient numbers of competent extensionists to enable PCA tocarry out its obligations under the project (para. 5.2). During negotiations,assurances were obtained that: (a) the Government would take all necessaryaction throughout the life of the project to ensure the aforementionedassignment of extensionists to PCA; (b) new extension staff, from whateversource, would be selected on the basis of having successfully completed sixweeks of field immersion experience and passing the pre-service trainingcourse at CETC; and Ic) in the event that insufficient numbers of suitableATPs were assigned to PCA, the Government would make provision for theexternal recruitment of MCDOs (para. 7.1 (i)). Besides the aforementionedextension staff, posts for additional supervising CDOs would be required, someclerical staff would be assigned to the Provincial Offices to providetechnical and clerical support, and some staff strengthening would be neededin the eight Regional Offices. These incremental staff would be contracted byPCA.

5.7 Agricultural Research. PCA's Research Management Department (RMD)would be responsible for both agricultural and farm level processing research.The Manager would ensure that all research is directed to solving pressingproblems in the coconut subsector, that research quality standards are kepthigh, and that the research program receives the necessary financial, material

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and human resources in a timely manner. Most agricultural research is locatedin the three regional Research Centers, but a number of genetic and agronomicstudies are located at other test sites. Project support for research wouldallow these efforts to be expanded and higher levels of technology to beemployed. Staffing is not seen as a constraint, and therefore no majorchanges are envisaged in the organization or staffing of the three ResearchCenters. However, training opportunities provided under the project and theavailability of technical assistance to address specific problems would serveto improve the selection of research projects and expedite the completion ofresearch tasks. Processing research would concentrate on the improvement ofcopra quality and the better utilization of coconut by-products, particularlycoconut wood and coconut shells. These tasks would entail the appointment ofsome additional technical staff to supervise research work subcontracted touniversities and institutes on specific priority issues.

5.8 Copra Quality Improvement. The technical assistance team engaged inthe analytic technique for aflatoxin determination (paras. 3.13-3.14) wouldwork in the Quality Control laboratory of the Industrial Research and MarketDevelopment Branch. The field team surveying aflatoxin incidence and studyingcurrent copra making methods would work closely with the respective regionaloffices and the FOB staff. They would assist in the selection of the pilotareas for the introduction of hot-air dryers. Special arrangements would bemade, involving collaboration between PCA, COCOFED, SCFOs, UCAP and the localoil millers, and an interagency management unit would be created in each pilotarea. The technical assistance field team would advise the management unitsfor the duration of their assignments.

5.9 Accounting and Procurement Staff. The volume of financialtransactions handled by PCA would increase dramatically under the project, andthe Financial Management and Services Department would therefore need fiveadditional accounting staff at the Head Office and one extra bookkeeper ineach regional office.

5.10 Central Project Operations Unit (CPOU). The Administrator of PCAwould serve as Project Director. A Central Project Operations Unit would beestablished in the Office of the Administrator, with a staff of four. TheUnit would have no direct implementation responsibility, which would reside inPCA's Branches and Regional Offices, but it would be responsible for projectcoordination and monitoring and would report to the Project Director on allaspects of project progress. The CPOU would also be responsible for projectprocurement and for keeping PCA's management and Board fully abreast ofproject progress and alerted to emerging problems. The head of the CPOU wouldbe responsible for inspection of field operations, and would report to PCA'sAdministrator on any problems which might not be identified through theroutine monitoring system (para. 5.13). Designation of the incumbent was madeprior to negotiatiot,3. Assurances were obtained during negotiations that, nolater than June 30 of each year, the CPOU would furnish to the Bank forcomment the proposed annual project area coverage targets and related plansand budget for the succeeding year (para. 7.1 (1)). The CPOU would also sendthe Bank quarterly summaries of project performance, and prepare a ProjectCompletion Report for submission to the Bank within six months of final loandisbursement (para. 7.1 (g)). Establishment of the Unit would be a conditionof loan effectiveness (para 7.2 (iii)), and assurances were obtained during

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negotiations that the post of the head of CPOU would be filled at all times byan incumbent with training and experience agreed with the Bank (para. 7.1 (h).

Farmer Enrollment and Supervision

5.11 At field level implementation would be in association with recognizedfarmers' organizations, whose smallholder members would be beneficiaries ofthe project, and with cooperating oil mills for the copra quality improvementcomponent. PCA has established the following selection criteria for farmersto participate as beneficiaries under the project: farmers must be:(a) Filipino citizens; (b) members of a recognized farmers' organization;(c) owning or operating less than the maximum farm sizes permitted by CARP,and in the no case more than 10 ha; (d) past contributors or heirs ofcontributors to the coconut levies; (e) willing to contribute such inputs aslabor, transport of seedlings and/or fertilizer; and (f) willing to undertakeproject related work on their farms. Assurances were obtained duringnegotiations that selection criteria would be agreeable to the Bank (para. 7.1(i)).

5.12 In the interest of equity and of benefitting the maximum number offarmers, project-supported replanting would be limited to a maximum of 1 ha,rehabilitation to 3 ha and nutrient support to 4 ha per farmer. Assurances tothis effect were obtained during negotiations (para. 7.1(k)). Extension staffwould be provided with pro forma application documents which, when completed,would clearly identify those farmers who qualify for project assistance. Theywould ensure that in all cases the necessary preparatory work is undertaken bythe farmers and that seedlings and fertilizers are put on the approved sites.To facilitate supervision by the extension staff, benefitting farmers wouldassist each other in these operations. This mutual cooperation conforms toFilipino tradition (Cbayanihan') and would further strengthen the spirit ofthe SCFOs.

Monitoring and Evaluation

5.13 Ensuring effective monitoring and evaluation would be theresponsibility of the Operations and Statistics Division of FOB, butmonitoring functions would be a routine responsibility of each operationalunit. Basic operational monitoring requirements are already being built intoFOB's implementing guidelines for the various field activities. Managers andkey staff would be trained and equipped to undertake effective monitoiing toensure successful accomplishment of their units' tasks. Their aim would beto maintain an accurate picture of not only physical progress, but also of thequality of work and the determinants of success and failure, as inputs intothe planning of successive stages of the coconut development program. On aregular basis, CPOU would aggregate this data to report to the Administrator,the Board and the Bank (para. 5.10).

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VI. PROJECT JUSTIFICATION AND RISKS

Production, Market Prospects and Prices

6.1 Production. Full incremental production from coconut palms replantedor rehabilitated under the project would be at about 405,000 tons copraequivalent per year around year 2004 (Annex 2, Table 2.2!. Limited quantitiesof annual intercrops, such as corn and mung bean, would also be produced.Felled coconut palms on about 25,000 ha of replanted area would supply about175 million board feet of sawn timber. The incremental project coconutproduction would be about 182 of the average production of 2.2 million tonscopra equivalent in the last five years. If the current average productionlevel were to continue in the future, the total production, including projectincrezrautal output, would be about 2.6 million tons copra equivalent by the year2000. However, due to decreasing yields (para. 2.24), average production fromthe non-project areas is likely to decline by at least 300,000 tons copraequivalent by the year 2000. Therefore, despite contribution from the project,the total Philippine production in the year 2000 will be less than the2.4 million tons copra equivalent assumed by the Bank's International EconomicsDepartment (IEC) for its current price projections. In the absence of theproject initiated development program, CNO exports would decrease by 452 by theyear 2,000.

6.2 International and Domestic Market Prospects. World demand for copra(oil equivalent) is projected by the IEC to increase at about 12 p.a. and worldimports at 0.7Z p.a. through the year 2000. Domestic demand for coconutproducts in the Philippines is also projected to grow at 2-32 p.a. The combinedinternational and domestic demand would justify at least a 252 increase by theyear 2000 over the last five years' average production of 2.2 million tons. Theproject incremental production, which would be much lower than the additionaldemand, is expected to be easily absorbed by the market.

6.3 Exports, which account for over 802 of the total Philippine coconutoutput, go primarily to the United States (over 402) and the Netherlands (over25Z). Coconut oil (CNO) is the principal export (about 800,000 tons worthUS$410 million in 1988). Coconut oil demand in these importing countries isabout evenly divided between edible and inedible uses, although demand foredible uses has grown relatively slowly because it is price-elastic and affectedby the supply of several lower-priced substitutes, notably soybean oil and palmoil. Nonetheless, coconut oil is used in many products, including cooking oil,simulated dairy products (coffee whiteners, whipped toppings, filled andimitation milk, non-dairy ice cream, cream fillings), candies, margarine andshortenings, cocoa butter substitutes, and spray oils. These diversified usespromise reasonable growth prospects for edible coconut oil. Non-oil demand isalso broad-based, with uses in laundry products, cosmetics, lubricants,pharmaceuticals and a myriad of industrial processes. For many of these uses,there are no good substitutes apart from PKO and petroleum-based products, andsince CNO enjoys a premium over PRO, petroleum prices are projected to increasesignificant in the longer term, and there are growing environmental concernsover the use of petroleum-based products, market prospects for CNO forindustrial uses are very good.

6.4 The principal by-product of coconut oil production is copra meal, whichis mainly exported to Europe and used as a component of animal feeds. Over 902

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of copra meal produced in the Philippines is exported (530,000 tons worthUS$63 million in 1988). This source of demand for copra is generally robust,but because meal is a lower value by-product of CNO production, it is not a veryimportant factor in overall copra demand. Recently concerns have arisen overthe levels of aflatoxin in animal feeds. Since December 1988, EEC is enforcinga maximum tolerated limit of 200 ppb and the Federal Republic of Germany, whichis the major importer, intends to impose an even more stringent limit of 50 ppbwith penalties between 30 and 50 ppb of 1/2 of price for each ppb. Analysis ofsamples shipped recently indicated that, while Philippines should be able tomeet the 200 ppb requirement, nearly half of its exports would fail the 50 ppbtest. The future prospects for copra meal exports will, therefore, dependheavily on: (i) whether restrictions below 200 ppb are actually introduced; and(ii) the ability of Philippine farmers, traders and exporters to improvepractices so as to meet the new standards. While copra meal unsuitable forexport to Europe might find altern-tive markets (either less discriminatingbuyers for livestock, or buyers intending to use it as an organic fertilizer),it would probably also command a much lower price.

6.5 Desiccated coconut, which is nearly all exported (88,000 tons worthUS$78 million in 1988), is used entirely by the food industry inconfectionaries, baking products, frozen foods, some canned foods and ready-to-cook mixes for home use. The United States accounts for about half of thePhilippines' exports, and Western Europe for nearly a third. World demand ismoderately price-elastic, but very small (under 150,000 tons) in comparison toCNO demand. It can, however, strongly influence local prices for coconuts, andthus copra production, in the catchment areas of the desiccating factories.

6.6 The price outlook for coconut wood has a significant influence onfarmer decisions on replanting. Demand for wood is strong and increasing,though the market share of coconut wood is far below its potential. Thetechniques for handling and converting coconut wood are known, as is itspotential usefulness, but this knowledge is not widely disseminated. Only sincethe start of the original planting/replanting program around 1980 has a majorsupply of coconut timber started to develop, although it has proved to beunsteady. The potential for its wider use stems from the depletion of naturalforests and the aging of the coconut palms and attendant need to replant, whichmany savmillers are now beginning to recognize. The project would supportinitiatives in coconut wood processing, primarily to improve farmer incentivesfor replanting. This would be undertaken through continued applied research atZamboanga, as well as by assisting farmers to fell palms in an orderly manner,while keeping saw mills informed of the location and scheduling of sources ofsupply.

6.7 Prices. Price projections for copra and coconut oil are notoriouslyunreliable because of unpredictable production variations in both copra andsources of substitute oils. Bank projections show a small decline in thecoconut oil price in 1988 constant terms from US$565/ton (1988) to $554/ton(1995) and $516/ton (2000). For copra, the projected changes are fromUS$398/ton (1988) to US$396/ton (1995) and US$367/ton (2000). The projectincremental production is not expected to exert any pressure on projected worldprices since, even with project output, total Philippine production and exportsof copra (oil equivalent) may barely equal the level projected by the IEC (para.6.2). For economic analysis, IEC projected prices, converted to 198B constant

- 37 -

terms on the basis of the MUV index, were used. A standard conversion factor of0.90 was used to convert local costs into border prices. Because of this,economic farmgate prices for copra, which is an exportable, would be about 2?higher than financial farmgate prices.

Project Benefits

6.8 The main project benefits would be: (a) improved productivity and farmincomes for small coconut farmers, tenants and resident workers, who are a majorpoverty group in the country; (b) increased foreign exchange earnings fromcoconut product exports; and (c) development of technical, financial andinstititional bases for the long-term coconut replanting program. Some 275,000coconut farms (about 30? of total coconut farms in the country) are expected tobenefit from the project's replanting, rehabilitation and technical supportactivities and about 180,000 fa-ms from the drying component. The precisenumber of beneficiaries is difficult to estimate since benefits could be sharedby owners, tenants and caretakers (para. 2.10). The project on-farm activitieswould generate about 12.3 million days of incremental work per year (equivalentto about 50,000 jobs) at full development. At peak incremental projectproduction in the year 2006, net foreign exchange earnings from incrementalexports of coconut products (using projected world market price of copra for theyear 2000 in 1988 constant dollars) would be about US$97 million per year. Theproject would provide the technical basis for improving planting material,cultural techniques and pest/disease control in future phases of the long-termprogram. The establishment of about 1,000 ha of seedgardens would supplysufficient material by the year 1997 for replanting the national coconut standat a rate of 50,000 ha per year, appropriate to the long run needs of theindustry. Formulation of a financing plan for replanting and institutionalstrengthening of PCA is another aspect of project significance.

6.9 The project would produce several other benefits which have not beenquantified. First, it would stimulate the use of fertilizer on coconuts by non-beneficiaries through its widespread demonstration effect, thereby increasingcopra production beyond that made possible by project-supplied inputs. Second,the project would encourage the practice of intercropping, thereby increasingthe intensity of land use. Third, a range of by-products would be madeavailable, including coconut husks for coir and fuel, and shells for fuel andfurther processing into activated carbon. Fourth, if the copra qualityimprovement scheme proves successful, its replication throughout the countrycould substantially improve farmer incomes and prevent a potential loss offoreign exchange earnings wh.ch could result from more stringent regulations onaflatoxin contamination in Philippine copra products. Fifth, the project wouldprovide the basis for the development of a competitive local hybrid seednutmarket, which may reduce costs of future phases of the program. Finally, thevarious research activities supported by the project are expected to identifybetter hybrid crosses, improved cultural methods, and optimal strategies fordeveloping the coconut processing industry.

Financial Analysis

6.10 Farm Incomes. The financial impact of the project on participatingfarm families was estimated using models of six typical kinds of participants(Table 6.1). The models analyze cash flows per ha for replanting with both

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talls and hybrids and rehabilitation. Farmers would provide for land clearing,removal of senile palms, planting, transportation of items other thanfertilizer, tools and upkeep. Fertilizer, seedlings, and seeds for cover cropsand intercrops are to be provided by the project in the development phase. Atfull development, however, project participant farmers would bear all costs ofinputs. The incremental income per ha and re<urn per man-day in with andwithout project situation summarized in Table 6.1 below is based on theassumption that farmers would pay for inputs and hired labor. The withoutproject scenario assumes 1002 family labor, while the with project situationassumes 402 hired labor, since the incremental labor requirements may not befully met by family labor.

Table 6.1: FARM INCOMES AND RETURN TO LABOR(in P)

Without proloct With troect Is Incremental returnp r day pr h p d r pr day per ha

Fortilization/Nutrient SuDPort

F-rtilizing mature local talls 280 4,870 284 6,8657 34 2,407Fertilizing local talls, 1 yr old 208 3,956 265 7,e68 67 3,784F-rtilizing hybrids, 3 yre old 134 2,146 309 12,044 176 9,898Fertilizing hybrids, 6 yr. old l78 8,783 346 14,199 168 10,466

Replenting (with covercrope andntercrops)

With hybrids 16O 2,237 364 19,316 204 17,076

With local tells 216 4,820 262 10,469 46 6,149

/a At full developent: year 12 for replanting with talls, year 11 for roplanting with hybrids, yer 5for fertilizing mature local talls, year 13 for fertilizing 1 year old tall., year 10 forfertilizing three yer old hybrids, and year 7 for fertilizing eight year old hybrids.

Incremental incomes per hectare and per day of familv labor are quite high, inparticular from replanting with hybrids. The returns per day of family laborcompare very favorably with the average rural daily wage of P 35 for unskilledworkers. These incomes would, therefore, provide sufficient incentive tosmall farmers to participate in the project. A family which is short ofworkers would have a strong incentive to hire labor rather than forego thebenefits of rehabilitation or replanting. It should be noted that incomesfrom coconuts alone would not be sufficient to raise the farmers above theofficially estimated rural poverty level of P 32,000 per family per yearunless the farm size is above 2 ha. The analysis in Table 6.1 is based on theassumption that KCL would be used for fertilization/nutrient support.However, on about 20? of farms, NaCl, which is much cheaper than KC1, would be

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used and incomes of those farmers would be much higher than the figures inTable 6.1.

6.11 Cost Recovery. Except for some international and bilateral assistancefor research, the Philippine coconut industry has largely self-financed itsofficial support and regulatory services. Apart from some official counterpartfunds, PCA collects a fee of P 30/ton on copra sales and has operated until 1989without any contribution from the Treasury (para. 2.19). A replanting programlaunched in 1974 was to be financed by a levy of P 200 per ton of copra (orequivalent) impose. at point of first sale. The objective was to replant50-60,000 ha per year, starting as soon as hytr!d seed became available (1979),and by now over half a million ha should have benefited. However, because ofdiversion of the accumulated funds to other purposes and the subsequentsuspension of the levy, little was achieved (para. 2.23). This occurred in 1983after funds, with a value of approximately US$l billion, had been collected fromthe farmers--representing about US$380 per ha or almost US$1,400 per averagefarm family. The proposed project would mainly benefit impoverished smallfarmers who coatributed to the levy. Project benefits are regarded as onlypartial returns for the contributions made and therefore do not present a costrecovery issue. The average inputs to be received by a typical project familywould be about US$196 (including contingencies of US$47), or 15Z of the amountcontributed by such families to the levy. Copra quality improvement was notforeseen as a benefit of the levy, and therefore a fee will be collected fromthose utilizing the driers.

6.12 It is expected that PCA's contribution to project costs (US$31.6million) would be financed initially from the regular budget, however it mayeventually be possible through recovery of levy funds previously contributed bythe coconut farmers (paras. 2.23 and 6.11). In order to ensure thesustainability of the development program to be set in place by the proposedproject, assurances were obtained at negotiations that GOP would submit to theBank by June 30, 1993 a financing plan for the long-term coconut replantingprogram and the associated ac:ivities and staffing of PCA. The plan would befinalized within six months of having received the Bank's comments, andimplementation would commence not later than January 1, 1995, (para. 7.1(m)).

6.13 Fiscal Impact. During the project period, PCA and/or GOP would need tocontribute an average of about US$32.7 million (P 825.0 million) annually tocover PCA non-incremental and project incremental costs. The average annualincremental cost is estimated at US$6.5 million (P 162.2 million) which would befinanced from partial recovery of the levy funds (paras. 6.11-6.12). Asrecovery of these funds may be time-consuming because it is dependent onjudicial proceedings, disbursements under the project would be phased so as topostpone higher GOP/PCA contributions (58Z of the total) to project year 4 and5: US$8.0 million (P 200.7 million) in 1993/94, and US$9.8 million (P 257.9million) in 1994/95. After project completion, the annual capital expenditurenecessary to maintain adequate services to the coconut subsector (primarily forreplacement of vehicles and equipment), exclusive of price contingencies, wouldbe about US$3.0 million (P 76.6 million). Also, GOP/PCA would have to makeprovision to finance the recurrent costs of PCA, particularly its research andextension services, at approximately US$6.0 million (P 153.2 million) p.a. Debtservice on the loan for this project would be met by GOP; the resulting fiscalimpact, and the fiscal deficit would peak at US$23 million in year 8, whenrepayment of the Bank loan would start.

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Economic Analysis

6.14 Economic Rate of Return (ERR). The ERR for the project is estimated atabout 402 (Annex 3) on the basis of the following methodology:

(a) all project incremental costs and benefits (except those forcopra quality improvement, which is treated in the manner ofapplied research) were expressed in constant 1988 border prices.Economic farmgate prices of inputs and outputs were derived fromthe Bank's price projections of June 1989, adjusted to 1988constant US dollars using the MUV index, and converted to localcurrency at the official exchange rate of P 22 = US$l. Localcosts and locally valued benefits were converted to border pricesby using the standard conversion factor of 0.9;

(b) market wage rates, which are significantly below the officialminimum wage, were used for the analysis but converted to borderprices by the standard conversion factor of 0.90;

'c) for replanting, incor foregone and sale of a proportion of thecoconut stems in the first year were tak3n into account; and

(d) rates of return for individual components are based on on-farmcosts and benefits while the ERR for the whole project includesall incremental overheads, civil works, vehicles and equipment.For rehabilitation/nutrient support, the on-farm cost is based onthe use of KC1 fertilizers.

The ERR for fertilization of mature local talls is 532; for fertilizing oneyear old talls 12Z; for fertilizing three year old hybrids 114Z; forfertilizing eight year old hybrids 93Z; for replanting with local talls(and cover crops) 14?; and replanting with hybrids (and cover crops) 26?.If the benefits of intercrops are included along with cover crops forreplanting with local talls and hybrids, returns will be much higher;however, because of positive net benefits from the sale of logs andintercrops in the initial years, the ERR is not uniquely determined inthese cases. The ERRs are relatively high for rehabilitation andfertilization components because there are no initial investments, andyields would rapidly respond to nutrient support. Since the major part ofthe project is rehabilitation/fertilization, the overall project ERR isalso relatively high.

6.15 Sensitivity Analysis. The results of a sensitivity analysis showthat the project remains viable across a raage of assumptions on costs andbenefits. The switching value test shows that costs would have to increaseby 46? or benefits decrease by 322 to lower the project's ERR from 401 to12?, the estimated opportunity cost of capital in the Philippines. Whilethe probability of such cost increases is very low, a decline in benefits,particularly if prices turn out to be lower than projected, could occur.However, a price level 32Z lower than projected, while possible in someyears (given the high price volatility of vegetable oils), appears unlikelyover the entire 20-year period of analysis. The project can also withstanda three-year delay in the benefit stream without the ERR going below 12?.

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Table 6.2: SWITCHING VALUES /a(Opportunity Cost of Capital 12Z)

Component Base ERR Benefits Costs

Rehabilitation of mature talls (KC1) 53 -38 62Nutrient support (KCl)

1 year old talls 12 - -

3 year old hybrids 114 -65 1888 year old hybrids 93 -64 181

Replanting (with cover crops andintercrops)

With hybrids -/b -52/c lo8/cWith local talls -/b -42/c 7l1c

Total Proiect 40 -32 46

/a The opportunity cost of capital is assumed to be 122.ib Because of positive net benefits from sale of logs and intercrops in the

initial years, the ERR is not uniquely determined in these cases./c The switching values are for the net present value.

Environmental Impact

6.16 Overall, the project would have a positive impact on the environment.Project activities are restricted to existing coconut areas and involve noexpansion into new land; on the contrary it is hoped that enhanced farm incomeswould help to reduce farmer incentives to exploit nearby forest lands.Similarly, project support for utilization of coconut wood should help torelieve pressure on rapidly depleting forest reserves. This would become amajor benefit in later years as the replanting program expands. A potentialenvironmental risk would be the localized large volumes of wood waste whichcould breed coconut pests if not properly disposed of. The project might alsoeventually lead to a slight reduction in the genetic variability of the coconutpopulation. Both of these considerations are relatively minor, since the pestsare biologically controllable and pose no known threat to anything other thanpalms, and PCA has a well established program for conserving coconut geneticmaterial.

6.17 Neither insecticides nor herbicides are currently used in coconuthusbandry by smallholders and their introduction is not anticipated, astechniques for biological control of the major pests have been developed.Fertilizers to be procured would be determined on the basis of actualdeficiencies determined by leaf analysis. Ammonium sulphate, potassium chlorideand common salts will be utilized as required. As the fertilizer is appliedonly around each palm, the quantity per hectare is small and application wouldbe by forking into the soil, thus virtually eliminating any run-off. The

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introduction of cover crops under the project will assist in stabilizing thesoils, improve the microclimate and provide a source of nitrogen.

Impact on Women

6.18 A small proportion of coconut farms are owned and/or operated bywomen -- most frequently widows. Harves,ing, the main activity in coconutfarming. involves climbing palms or using long bamboo poles with knivesattached; it is both arduous and hazardous and is undertaken almost exclusivelyby men. On the other hand, women may manage the property, assist in copramaking and frequently assist in the cultivation of intercrops, and women oftenparticipate in both DA and PCA extension groups and the SCFOs. With regard toPCA itself, many women are involved in the research activities of RDB, wherethey head four important and highly technical divisions. FOB alsc employs womenas MCDOs and some PCDOs and from time to time women havq also headed theextension activities and CETC. No negative impact on women can be anticipatedfrom project activities.

Risks

6.19 The crucial conditions for project success are continLed input useafter the grant period, the selection of agronomically suitable areas for therehabilitation and hybrid replanting, adequate supply of hybrid plantingmaterials through the development of private seed-gardens, and the maintenanceof a stable source of local funding to allow activities (principally replanting)started under the project to be completed. On the issue of inputs, attainmentof expected production benefits depends on farmers' continuing to use fertilizerover the full period of analysis, although fertilizer would be available throughthe project only during the first several years. Under normal conditions thedemonstrated value of fertilizer should persuade most farmers tt continue usingit. However, should increases in the fertilizer/copra price rat!. occur, or thesupply of fertilizer be interrupted by exogenous factors, then fertilizer usewould fall, and with it project benefits. By assuming average project yiel4sconsiderably below those obtained on well-run corporate coconut farms(1.5 tons/ha vs. 2.5 tons/ha for rehabilitation, 3.50 tons/ha vs. 4.0 tons/hafor hybrid replanting and 1.6 tons/ha vs. 2.8 tons/ha for tall replanting), theanalysis has taken into account part of this risk. PCA can further reduce thisrisk by augmenting its extension efforts in the outer project years. Locationof palms in agronomically suitable areas is essential to achieve estimatedhybrid yields (and those of talls to be rehabilitated). Therefore, considerablecare needs to be taken in selection of farms to receive seedlings orfertilizers. PCA would ensure that in allocating these inputs among the largenumber of potential beneficiaries, only productive efficiency criteria, basedprimarily on agronomic suitability, would be used. Concerning an adequatequantity of hybrid planting materials, private corporations have indicated astrong interest in establishing seedgardens, possibly due to the fact that theywould obtain pioneer industry incentives. If private investment does notmaterialize, PCA would have to establish the seedgardens itself and arrangepriv&te management contracts. Concerning long-term financing for the coconutsubsector, there is a strong likelihood that once the proposed project getsunderway and its benefits are evident, willingness of coconut farmers to accepta suitable financial arrangement (such as a new form of levy) will improvequickly. The assurance concerning preparation by GOP of a long-term financing

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plan by project year 4(para. 6.12) would help to ensure that official effortsare focussed on this issue well before this first phase project comes to aclose. Finally, peace and order conditions and typhoons may inhibit projectactivities in certain locations, but *s this is a national program, sufficientflexibility exists to avoid such areas.

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VII. AGREEMENTS AND RECOMMENDATION

7.1 During negotiations, assurances were obtained on the following:

(a) PCA would present to the Bank evidence that it had formally obtainedthe use of a suitable seedgarden site, for at least 20 years, by nolater than March 31, 1991 (para. 3.6(a));

(b) PCA would enter into contracts for hybrid seed production only withagricultural enterprises with adequate financial, technical andmanagerial resources, as agreed with the Bank (para. 3.6(a));

(c) PCA would present to the Bank annually, for approval, its nurserydevelopment plan for the following year, with specific reference tothe need for any field nurseries and the circumstances justifyingtheir use (para 3.6(b));

(d) PCA and/or GOP would include in their annual capital budget adequatefunds to finance project activities, including the non-incre'aentalcosts, and that such funds would be released for use in r. timelymanner (para. 4.2);

(e) GOP would establish and manage a special account to be operated underterms and conditions acceptable to the Bank (para. 4.8);

(f) PCA would (i) maintain separate project accounts; and (ii) allaccounts related to the project, including PCA's regular accounts,would be audited annually by independent auditors acceptable to theBank and the audit reports and statements of accounts would besubmitted to the Bank within nine months of the end of each financialyear. The auditors' report would include a separate opinion thatfunds disbursed against SOEs had been used for the purpose for whichthey were provided (para. 4.9);

(g) PCA would submit quarterly progress reports to the Bank and wouldcontribute to a project completion report within six months of thefinal loan disbursement (paras. 4.9 and 5.10);

(h) the posts of the Heads of PCA's CPOU and OPD would be filled at alltimes by incumbents with training and experience agreed with the Bank(para. 5.3 and 5.10);

(i) (i) GOP would take all necessary action, throughout the life of theproject, to ensure the assignment to PCA of sufficient numbers ofcompetent extensionists to enable PCA to carry out its obligationsunder the project; (ii) new extension staff, from whatever source,would be selected on the basis of having successfully completed sixweeks of field immersion experience and passing the pre-servicetraining course at CETC; and (iii) GOP would make provision for theexternal recruitment of HCDOs in the event that insufficient numbersof suitable extension staff are available for assignment to PCA(para. 5.6);

_ v~~~~~~~~~~

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(j) farmers participating in the project would be selected according tocriteria agreeable to the Bank (para. 5.11);

(k) for the duration of the project. replanting would be limited to 1 ha.rehabilitation to 3 ha and nutrient support to 4 ha per farmer (para.5.12);

(1) PCA would furnish to the Bank for comment the proposed annual projectarea coverage targets and related plans and budget for the succeedingyear, no later than June 30 of each year (para. 5.10);

(m) GOP would Ci) submit to the Bank for review by June 30, 1993 afinancing plan for the long-term coconut replanting program andassociated activities and staffing of PCA; and (ii) the plan wouldbe finalized within six months of having received the Bank's commentsand implementation would begin by January 1, 1995 (para. 6.12); and

(n) PCA would begin to implement a new organizational structure agreedwith the Bank, no later than September 30, 1990 (para. 5.1).

7.2 Conditions of loan effectiveness would be (i) that arrangementssatisfactory to the Bank have been made to establish at least oneseedgarden (para 3.6(a)); (ii) the formal approval of a new organizationalstructure for PCA (para. 5.1); and (iii) the establishment of the CPOU(para 5.10).

7.3 A condition of loan disbursement for the copra quality improvementcomponent would be the presentation of a suitable plan for theimplementation of a pilot scheme to introduce improved drying practices in2-3 major oil mill catchments (para. 3.14).

7.4 With the above assurances and conditions, the proposed projectwould be suitable for a World Bank loan to the Philippines of US$121.8million, repayable in 20 years, including five years of grace, at thestandard variable interest rate.

PILIPPINESSMALL CDI'T FARM MflVE R ECT

SLAR' Amon C2T WmA

'PeCo '0001 Ir c

2 Total * `:':S Froige Rate ' Fser. best

Local Fordin TotUl Excha?ne Costs L:ca! F^*eigt. T; taI S;:ce;aa S3.,:*2um_v%2` __zz:- 17 .*77e##7t= B.-C=.' S=eS w=-OxIrazzl MCCO IC7C.:7:= mc.... =5aw. z-

1. DHJES11E CI'T

A. CIVIL VWRKS 58944.9 14021.2 73,606.0 20 ?3 2676,6 66g.! 7.34!.' 2B. VEIC1S 33,773,5 79,74.6 113s549.1 70 4 1 43.t ?,3#.61.? . 4C. BUPNNt 17,629.5 3 SO993.4 7!.7?2.9 7 3 901.3 264C.9 3.412.2 7 .,. RE£ARCH 4.909.6 96.4 5#774.0 15 0 23.2 .!9.4 .62 ! 1' 0£. £XIEISION I TRINING 71620.9 1? 905.2 89?526.0 20 3. 3pm!55. 913.9 *t069.4 2^ 3

F. TEOWIC1A ASSISTANI - 2?7319.7 2719.' 100 1 - 1?41. !'1.i. :eo !6. CmmRA 11ER 94,600.0 5'400.0 9O9000.0 6 3 ,W945. 2'5,! 4m09.' t 7

Totwl iWE cST 271,439.2 204065.5 475,503.7 43 16 !22338.1 94275.7 216134. 43 1691SDiie Ctoitim"Is 24,466.4 2!i50.2 36t416.6 3. 1 1l112.f 543.7 1,6553 33 1Price Contin uin 90t663.3 52,065.1 142,719.4 36 5 2t5630 1-53. 4 9 102.9 83 3

Total INWJDINS COTIMElNC!ES 3860567*. 21f880.8 '54,649.7 4S 22 16,0'3.2 11,358.8 2'737'.0 41 21

11. KIRUN OTSt

A. FA IWIT

:. FERTILIZER 307e90.2 1I231P174.7 I,53e,064. 90 52 13,99.0 55,962.5 69.95?.5 9C 522. DTS ':t719.0 lt11,.3 0 63.032.0 1a 2 2,350.9 5!4.2 2#985.- 1e 2

Sui-Tot.l FAR II?flT 3"9.64002 1,"1241e.' 14602,094.9 le 55 16S34".9 U9,476.7 ?72o.9U le 5B. SALARIES 232'118.2 :18.1 232.226.3 0 8 1C0!50.4 '.4 1049!.' 0 eC. bEtTI9 W0. 2004960.5 36,711.9 "37t'12.4 ' ! , 9,134.4 !.670.5 1.90!5.1 e!t. 'AR1ERS PARTICIPAT!IW 395.101.! - 395.10.!. - 1? !'-504.6 - 17.04.6 _ !

Total RECURRENT MSTS 1.177079'.5 127.7nS .7 2p45r#13'.1 5" 54 !2.5M.4 !!1962.6 U1.698.1 In 94Phwsical CARtinswins 56,7N6.9 !27,926.' '4.693.' 69 6 2.579.? 5e114.0 R,394.? 6e IPrief Cont11eiff 404,l15.l 587,830.4 2.S2Z!5.5 54 37 1.3s76.' 15tel.0.4 20,196.! '4 22

votal INCL'DING CONTINGECIES 1°.M' 72:.4 1,.9°5114.0 3.723.62.?3 54 !1' 69,491.4 ?.?h.9 1°AD260.3. 53 1l2cfL SL ts- 3cs-.: src:sc . .s31. eC essceCfm: WC-tse- r:.mn: rntfe cis.:-i Fz|

Total BASLIIIE COSTS 1.449,217.6 1,481*423.2 ^:°932.641 S2.e'3.5 6'.42.1.3 13373O1,. 5! !00Physical Co,.tinUunei,s 21,23.2 139.E77.0 221.400.37 6z 9 3,692.0 6,350 0 10.050.0 63 IPrice Co,1'Urdfifus 554,S49.4 L7639.9.! oP24,'41. 52 42 1!,9739.1 !7.350.3 33,2P.4 52. 2!

'otal BRO.CT CDSTS 2,115,t.r.3 2.213.15.? 4#370,n492.0 52 140 9.504.6 0°136-7 1?6.641.2 52 133Apr-l. mS _m rn cw2- w:rsc CC ss ; ?C CTUC 3Cs CU?: s

Abjl 5. I9WO 13:22

PHILIPPINESSALL CICIT FA41S IWELOPIENT PROJECT

Projet CPU.efts be Year

Totals Includird Coentirtnc1 T3ltc Ircludird CO.tingmncis

(Pt." '000) (US$ '000'

1990 1991 1992 1m93 1994 TisLil 1990 151 1992 1n03 994 Total

A. RE UAN PLUITII

1. SD SAEM 67,047.9 24,23B.4 23.012.6 264380.1 28.910.2 169t489.1 2 951.4 1,031.1 944." 1,046.3 1,104.6 7,077.5

2. DIRECT OIT IN KMID 32,155.3 24.252.7 37,087.9 68,781.0 15.448.9 31941,5.6 1.415 51,031.7 1521.7 2?7,8.0 6,013.5 129710.3

3. FAIRS CINRIWUTIIOIS 13P239.2 9.938.5 11,883.5 17,295.2 40,407.0 92.763.4 582.9 '22.8 487.6 686.0 1.59M 3.728.3

Sub-Toutl REPU14TINS / FPLTDIN 112,442.4 58,429.5 71,993.9 112,456.2 2r6,066.1 581,378.1 4.949.7 2,495.5 2.953.4 A,460.2 B,667.2 23,516.0

D. REHIILITftTION / FERII.IZATLON

1. OM IN KImD 31,892.7 13,.719,8 315,314.8 543,136.4 718,053.6 10717P117.3 1,403.9 5,900.9M12937.1 21 441.7 27,529.8 694313.3

2. FAER CONTRIUUTIONS 4,798.8 21.783.2 52,650.1 97M905.8 138.919.2 316,057.1 211.2 926.6 2.160.2 3P8W3.1 5,326.1 12.507,2

9*Total RWMILITATION / FERTILIZATION 36691.5 160,503.0 3670944.9 441,042.2 856,972.8 2.063,174.4 1,615.1 6.827.M 15,097.3 25,424.9 32o855.9 81#820.6

C. MIENT SIPPOT / FERTILZATION

1. NAW IN KIND 86,980.0 94581.7 102.374.9 68,329.1 66631.0 *184896.7 3,929.8 4.023.3 4200.A. 7710.0 2,554.6 179317.1

2. FARR CaDNTRIITIIS 16,438.8 18,967.8 31,516.2 46.339.6 19.894.6 103.177.0 773.6 806.9 1,293.9 649.1 762.7 4,M5.2

-Total iURIElT SWi / FFRTILIZATION 103,41.8 113.549,5 13911,.1 84,668.7 06,575.6 522.073.7 1,552.4 4,930.2 s494.3 3388.1 3,317.3 21.552.3

D. CO UA 19.11 IIRONT

slOTM IN KIND 39,713.1 36,609.3 40.141.8 40,609.8 43,858.6 200,931.7 1,748.2 1557.3 ,647.0 1.610.7 14681.5 8244.6

2. FIElRS CONTRItTIONS 2,3.0 5.202.! 8,446.1 9,121.8 9.95145 35013.5 105.3 221.3 .46.5 361.8 377.7 1.412.6.__ - --- --- ---------- --------- _--------- -------- ---- ------- ----- ------- --------

Su*-Tot3l CO4R4 GIALITY IJRWENBT 42.105.2 41,810.4 48,587.9 49,731.6 53,710.2 2S,5.3 1,853.4 19778.5 1.993s 1.972.4 2.059.2 9,657.2

E. PCIlEANIMR 20.517.7 10,092.1 10,711.3 11,295.5 12.199.2 64.9MB.8 903.2 42R.9 139.5 4.0 467.7 2.687.2

F. PCA-RE8IUiS 113.924. 100.181.3 1164379.0 129,312.4 138.537.6 598,233.6 5,010.5 ,241.5 40774.9 5,128.7 5,3(1.5 24,487.1

G. PUA RESEARCH

1. PC H4EARC PKLN I TIROTN LAB 14,696.3 2.61.1 2.88.1 3484.7 4,m.0 28.022.2 646.9 i21.7 106.7 138.2 168.4 1,181.4

2. PA-RESEARCH FEIINO UNITS 3.3551 2,090.6 1,593.3 1,772.6 2.009,.1 1O,87.7 1177 R8.9 65.4 70.3 77.0 449.3

3. PCA-FER. TRIALS PROGRAN 528.7 .1149.8 1,244.5 1,344.1 1:451.6 5718.6 23.3 48.9 51.1 53.3 55.7 232.2

4. PCA-TILM EPERIINTS 1.357.2 2,021.9 2,273.9 2,465.4 2721.! 10.840.2 s 9.7 86.0 93.3 97.8 104.3 441.2

S. AAY 9.270.7 1,742.5 2.516.0 2,569.4 2.750.8 18,849.4 408.1 74.1 103.4 101.9 105.5 792.8

6. 1MM 10.129.7 13.243.8 4,100.6 4,202.9 4-451.7 36.i$1.7 459.1 563. 168.2 166.7 170.8 1,528.2

7. ZANAA 9,586.0 8,148.1 4,3s9.e 4,599.8 4.741.8 3l,465.5 422.0 346.6 .180.1 182.4 181.8 1,312.9- - - -- - -- -- -- -- - -- -- ----- ----------- - -- - -- - - -- - - - - - - -_-- - -- -- - -- - -- -- - -- --- -- - -- - - -_- - -- - - - - - - -- -- -- - -- ,,

Sub-Total PC* RESEAI 49s223.7 31,257.8 19.706.3 20.439.0 22r521.6 142.148.4 2.166.8 1,379.6 767,. 810.6 863.5 5.938.1 .N. EXMiSON 1 TRAINING 29.013.8 28,276.3 370748,1 39,445.2 36,241.9 1707P5.6 1m.27 t202M.8 1.5488 1.5l4.5 1,389.5 6.986 . -7

---- - - - --- - ---- - - --- - - ------ - --- ------ - --- --- - - - --- ------ -------- ----- - - -------- -- - --- ---------

Tot.l PROJECT 018S 507,237.2 544,089.9 80,991.8 .088,M3913 1,032.715.0 4#S41485.0 22,31' 3 23,144.4 33.069.2 43,167.3 564931.8 176441.2

April S 1990 13:22

WI9ALL 7 AR8S DUELOPI£N PRCO!TProject CUPonents bw Year

Peo '000)

Dse Costs .:,a

I1°O '991 1992 9°3 2994 Pa:0 !M$ p530'

A. REDWYIND / PLFATING

1. SED SAMDEN 54,645.3 185446.0 6i.552-. I80:11.4 0l17- 12 -B34.6 ?19.S2. DIRECT SwT 111 KIND 25,63.6 17P800.7 25,28.4 43,267.! 91,2t .1 2.3,2S4. 0 -24^.23. fAOlERS CURITIMWI 1.W623.0 8t024.0 t,964.0 ±1.945.0 22.840.0 66,2P6.0 3-0t3.5

Bub-Totul REPUfITII / PLANTIE 91,931.9 49270.7 50.701. 73.223.5 !35.236.6 395,414.6 17-93.4S. PENADILITATION / FtRLMIZATION

1. GMIT in KIND 25,454.0 101,516.0 213.813.6 341t01?.6 417WP5.6 1-09S-546.8 40,9?0.42. FPUlS CINRMIUJTI31S 4.213.0 17,587.0 39,272.-0 67,619,0 S8.88,0 2175,°9.0 9,87.7

SubTotal REMIIliTATION 7 FERIML17ATUII 29t667-0 119*403.0 2533#05.6 408B636.6 506M.93,A 1)317.075.8 59t67,1C. MIURIENT SUPORT / FERTILIZATIOE

1. OMIT IN KIND 69,420.0 69420.0 69,420.0 42t901.6 38.736.4 28,898.0 13177.22. FAWRNER CRIIFlTIS 14*432.0 15314.0 239523.0 1,2R35.0 12*722.5 77276.5 34512.6

- -- --- - - - --- - - -- - - - -- -- - -- -- -_--

SubWTotal IUIRIENT RWPORT / FERTIL17ATION 8,852.0 84v734.0 92,943 0 54.186.6 51,458.0 367#174.5 16.689.80- CDPIA OILITT IIfIWIET

0

* 1. MI IN KIND 32U5.659 27864.3 27.452.8 2r.633.1 25.633. 139,449.3 6378.62. FAUlS CUIIITTlii 2,000.0 4000.0 6.000.0 6,000.0 6.000.^ 24ooo0.o 1,00.0

- _ - -- --- - - ----- - - - -- - - - --- - - -- ----- - - - - _- -- - - -- - -- - -- -- -

Sub-Total COPam WALlM INPIRo T 34,65.9 31,864.1 33.452,8 31.6Z331 31633.1 63,449.3 7,429.5E. PCA-WIEXAUIR 179226.9 7?8-.8 ?7766.4 7,290.4 7,F90.4 48,0S2.9 2,184.2F. PCA-RlEGIOIS 94.242.7 76*t34.0 82.z2,4.5 4,444.5 83,551. 4J2,2,197.! 19,149.9S. PCA RESEARCN

1, PCRESEARCH PLANT NUTRITION LAB t2.078.0 .9217.0 1*853.0 2.321.3 2,714.7 21184.0 962,92. PCA-RESFARCH 9EODING tITs 20748.1 15M5.1 1 .1 3! 163.1 1,21.1 7,15.7 , 756.-3. PCA-FR. rRIALS PRIORM 451.0 902.1 902.1 902.1 °0O?. 4*059.4 IB4.54. PCA-NTILCC EXPERINIETS 1.108.6 1.514.5 WM53.4 1-579,6 1*611.7 7t390.8 3.'5.95. ALFAY 7548.0 1.297.4 1!755-8 1,659.8 1,64.8 1385.9 631.66. DMA4V 8,498.3 9#829.2 2-827.- 2,682.1 2.633 I 26469.6 1-203,27. Z8AhNOGA 7,817.7 6.44.6 3PO75.9 2.982.9 2.841.4 22*863 . 1,039.2

- - - - - - -- -- -- - -- - -- -- - --- - -- -- -- - --- -- -- -- ----- --- - - - -- - -- - - - - - 5iSub-Totl PCA RESEARCH 40*24S.7 23.480,8 13-118.4 13.200.9 13*S68.8 1030708.6 4.714,0H. EXTENSION I TRAININ1 2�3.545,7 20*924.8 25,790.3 24*°S.?7 21t2'i0.0 114.4679 5,2S4.^94

TOta AInE COSTS 4'5,581.7 409.3901. 559,02.9 697-062.8 SS0#42*.0 2,9z2,640.e 13.3401.0PbVeiCul ContinikCi 29734.6 29*889.2 42:110.2 539738.7 65*626.9 221.P00.3 :104SX.0Price Contiw4rcies 61*9'0.9 :049.80.2 204#70.2 336*689.f '5645n.1 1.221./43.0 33.28',4

- -- - - -- -- -- --- - -- ----- -_- -- -- - -- -- -- -- -- --- - -- -- --- -- -- -- ---

to%al PRDJER COSTS 507,277.2 54440"9.9 805,971.8 1.0oM391.1 1*432P7`5.0 4.178.485.0 176*641.24==otio StI=Ma .. 13n-= f22t== =1=== ==== ont-

4wri1 5* 1990 t3:22

PHILIPPIESSlL COCOf FS CW WL0Ef PROJECT

Ssw kr unts bh Tnr

Totals Includirs Contirnsin ToUls Ilcudird ConlirW nein

(Ps° '-°°) QRS 'COO)

1590 1m 1M 1993 1994 Total 199 199 9 1993 14 Totaluin ~ _ * _in _=_su us u2m3 =_ g 2= == _ --:OS'r - -

A. CNIL vIS 61,602.9 24W067.8 9,947.0 47.9 - 95.665.3 29711.7 1,023.8 408.1 1.9 - *,145.5

P. 8IICLES 68,366.4 17#504.8 24h22.2 23.959.9 16,780.5 150#633.7 3,009.5 744.6 95.6 950.3 643.4 6333.3

C. EIIUff 69,058.0 20f410.5 3o632.4 1,834.3 1,299.4 95.223.6 2,995.9 868.2 149.0 MRP 49.4 4:135.3

D. EIM 1,560.5 1,75.2 U445.2 1,590.7 1,666.9 7,698,5 48.7 62.8 59.3 61.5 63.9 316.2

E. EXENIlh 11611N3 16,190.9 23,600.2 31p510,0 32,843.3 29.747.6 133,891.9 712.7 19003.9 IiM.2 19302.6 1s140.5 5.452.6

F. TECHNICAL ASSISTAE 11.614.7 13,752.4 3,646.2 2,389.0 2,580.2 33,992.4 511.3 585.0 149.6 91.8 98.9 1 439.5

so COPm mmER 9397.2 20,436.8 33,181.1 35,935.6 39,702.5 137.55332 413.7 969.3 1,361.4 I i421.3 1J403.8 5,549.5

Total I1 1 COSTS 236,790.4 121.247,6 107,384.1 99,460.6 90*766.0 654,648.7 10.423#4 5.157.6 4,405.9 3M905.1 3,479.9 27,377.0

Wf:=~ 4 =:¢*77= r_u~u Z~2 ~ -- -- z -W--- ---- -- -.... = .. :

11. IRETA COSTS_______

'0

A. FAIN IT

1. FERILID . 138,999.4 250,031.1 442,654.5 665,998.9 905,i39.9 2,4039013.7 6,113.8 10635.9 18,161.7 26,410.6 34.717.9 9A.010.0

2. OTIERS 19M3B2.6 9,279.8 13,923.2 15,656.0 379778.0 94%618.6 853.2 352.2 554.8 620.9 1.448.4 3,929.6

Sub-Total FN IUWUT 15,2/20 258,309.8 456At77,7 681,594.8 943,317.9 2F497p639.3 6,967.1 10,980.0 19,716.6 27,031.6 36,166.3 99,99.5

go SLAIES 32,728.0 55,042,4 65t62369 79,535.1 86400.3 319,329.8 1440.7 2.341.4 2,692.5 3.154.5 3,312.5 12r941.6

C. OpeRATIU COST i2t578.0 53t598.5 72,90.2 89,178.1 103,219.3 359.863.2 1,674.3 2,.'0.0 2,9166.0 3, 97.3 3,957.3 14,574.9

D. FARM PRTICIPATION 36,868.9 55,991.6 1042515.9 1409662.4 209Of72.4 547h011.0 1.622.9 2,3'7.5 4,288.2 5,579.9 8.015.) 21,94.3

Total RECI M COSTS 2709446.8 422,842.4 6989607.7 99930.5 1.342.009S0 3,723936.3 11904.9 17,996.9 29,663.3 39.262.? 51,451.9 149.269.3

Total PRICT COSTS 507,237.2 544,089.9 905,991.8 1.089,391.1 1.432.775.0 4,378.485.0 22,328.3 23t144.6 33,069.2 C.367.3 54,931.9 1769641.2

April 5, 1990 13:22

I- ..

ANNEX 1Table 1.4

- 50 -

PHILIPPINES

SMALL COCONUT FARM DEVELOPMENT PROJECT

Financing Plan

PYI /a PY2 PY3 PY4 PY5 Total Z90/91 9'192 92/93 93/94 94/95

(P million)

Farmers 36.9 55.9 104.5 140.6 209.1 547.0 12.5PCAIGOP 81.0 97.3 149.3 200.7 257.9 786.2 18.0ODA 17.3 11.8 1.6 - - 30.7 0.7Bank 372.0 379.1 550.6 747.1 965.8 3,014.6 68.8

Total 507.2 544.1 806.0 1,088.4 1,432.8 4,378.5 100.0

(US$ million)

Farmers 1.6 2.4 4.3 5.6 8.0 21.9 12.4PCA/GOP 3.5 4.1 6.2 8.0 9.8 31.6 17.9ODA 0.8 0.5 - - - 1.3 0.7Bank 16.4 16.1 22.6 29.6 37.1 121.8 69.0

Total 22.3 23.1 33.1 43.2 54.9 176.6 100.0

/a Project start-up planned for September 1990.

- 51 -ANNEX 1Table 1.5

PHILIPPINES

SMALL COCONUT FARM DEVELOPMENT PROJECT

Disbursement Schedule by Categories and by Years(US$ million)

FY91 FY92 FY93 FY94 FY95 FY96 FY97 Total

Civil works 1.7 0.9 0.5 - - 0.4 0.3 3.8Equipment and

spare parts 1.6 1.3 0.2 - - 0.2 0.2 3.5Vehicles and

spare parts 1.7 1.0 0.6 0.3 - 0.8 0.7 5.1Research - 0.1 - 0.1 - 0.1 - 0.3Extension, training 0.4 1.0 1.3 1.1 0.9 0.8 - 5.5Technicalassistance - - 0.1 0.1 0.1 0.1 - 0.4

Copra improvement 0.4 0.6 1.0 1.1 0.9 0.7 0.2 4.9Farm inputs 2.8 7.6 12.2 19.2 26.4 17.6 4.1 89.9Incrementaloperating costs 1.2 1.8 1.5 1.2 1.2 1.5 - 8.4

Total 9.8 14.3 17.4 23.1 29.5 22.2 5.5 121.8

Cumulative 9.8 24.1 41.5 64.6 94.1 116.3 121.8

-52 - ANNEX 15 ~~~~~~~Tobgole .

PHILIPPINES

SMALL COCONUT FARM DEVELOPMENT PROJECT

Disbursument Schedule by Quarters(USS million)

Bank fiscal Cumulative Historicalyear end Cumulativ, disbursement disbureme ntquarters Disbursement disbursement as X of loan Profile /b

FY912nd 2.6 2.6 2.0 2 23rd 2.9 5.4 4.44th 4.4 9.8 8.0 4 4

FY921st 4.0 13.8 11.32nd 3.7 17.5 14.4 8 63rd 3.1 20.8 16.94th 8.6 24.1 19.8 13 8

FY93lot 3.4 27.6 22.62nd 4.6 32.1 28.43rd 4.6 38.7 30.14th 4.8 41.5 34.1 27 12

FY94Ist 4.8 48.3 38.02nd 8.2 62.6 43.1 37 143rd 6.0 68.6 48.04th 6.1 64.6 63.0 44 18

FY95

let 6.2 70.8 58.12nd 7.6 78.4 64.4 62 183rd 8.2 88.6 71.14rd 7.5 94.1 77.3 so 20

FY981st 6.9 101.0 82.92nd 6.5 106.6 87.4 68 223rd 4.6 111.1 91.24th 6.2 116.3 95.6 78 24

FY971.t 6.5 121.8 100.0 88 282ndard 96 284th

FY981st 99 302nd3rd 100 3

/ Credit effectiveness, completion and closing dates assumed to be October 1, 1990,September 30, 1996 and September 30, 1998 respectively.

/b For the Philipines agricultural projects as stated in the Standard Disbursement Profiledated April 22, 1988.

PHILIPPINES

SMALL COCONUT FARMS DEVELOPMENT PROJECT

Copra Yield Profil-(kgfha)

Replanting with Replanting with Fertilization of Nutrient support of Nutrient support of Nutrient support ofYear Hybrlds ocal talls /a mature local talls 1 year old tails 3 year old hybrids

WOP WP WOP UP WOP UP WOP UP WOP UP ' o

(1990) s5o 0 0 0 700 709 0 0 0 0 240 288(1991) 490 0 0 0 700 904 0 0 0 862 400 576(1992) 480 0 320 0 700 1,173 0 0 0 880 800 1,200(1993) 470 200 400 0 700 1,393 0 0 73 1,760 80o 1,800(1994) 460 425 400 158 700 1,467 0 0 147 2,112 800 2,400(1996) 460 1,250 400 302 700 1,467 0 289 220 2,200 600 2,840(1998) 440 1,750 400 444 700 1,467 0 400 387 2,420 60o 2,760(1997) 430 2,250 633 889 700 1,487 222 633 387 2,420 60o 2,760(1998) 420 2,750 600 1,111 700 1,487 333 933 367 2,420 600 2,760(1999) 400 3,260 688 1,333 700 1,487 444 1,222 387 2,630 600 2,760(2000) 390 3,600 723 1,666 890 1,467 568 1,444 387 2,630 60o 2,760(2001) 380 3,600 763 1,778 680 1,487 822 1,566 387 2,630 60o 2,180(2002) 370 3,600 773 1,778 670 1,487 889 1,733 387 2,530 0oo 2,780(2003) 380 3,500 793 1,778 8o0 1,487 768 1,733 387 2,530 600 2,760(2004) 340 3,500 828 1,778 850 1,487 844 1,733 387 2,530 800 2,780(2005) 330 3,500 913 1,778 640 1,487 1,022 1,733 367 2,530 800 2,780(2008) 320 3,600 893 1,778 830 1,487 1,022 1,733 387 2,580 800 2,780(2007) 300 3,600 883 1,778 820 1,467 1,022 1,733 387 2,630 800 2,760(2008) 290 3,600 873 1,778 810 1,487 1,022 1,733 387 2,630 800 2,760(2009) 280 3,600 683 1,778 600 1,487 1,022 1,733 3a7 2,530 60o 2,780

WOP = Without ProjectUP = With Project

/s In typhoon-damaged areas. In without project situation ;it Is assumed that 40% of trees will survive the typhoon and startyielding again in Year 3 while the rest 60% will be replanted with farmers' own material and start yielding in Year 8. Inwith project situation, it is assumed that the entire area will be replanted and start yielding in Year 5.

I-

- 54 -

ANNEX 2Table 2.2

PHILIPPINES

SMALL COCONUT FARMS DEVELOPMENT PROJECT

Net Incremental Production(tons: copra equivalent)

Replanting Rehabilitation Nutrient Support forwith of Talls Hybrids

Year Hybrids Talls Mature Talls 1 year 3 years 8 years Total

1990 -300 0 180 0 0 917 7971991 -215 0 4,620 0 1,056 3,362 8,8231992 468 -3,072 22,492 0 2,640 11,460 33,9881993 407 -3,840 61,092 0 5,061 22,920 85,6401994 163 -3,216 119,664 0 5,895 34,380 156,8861995 6,842 -2,164 185,964 9,063 5,940 38,964 243,6091996 17,621 -752 235,996 11,160 6,159 41,256 311,4401997 25,225 556 260,996 8,677 6,159 41,256 342,8691998 32,454 2,505 266,916 16,740 6,159 41,256 366,0301999 39,343 4,583 266,916 21,706 6,489 41,256 380,2932L'00 45,002 6,171 267,116 24,775 6,489 41,256 390,8092001 47,415 8,017 267,916 26,059 6,489 41,256 397,1522002 47,609 9,071 269,596 29,128 6,489 41,256 403,1482003 47,853 9,456 272,276 27,258 6,489 41,256 404,5882004 48,017 9,139 275,756 24,803 6,489 41,256 405,460

- 55 -

ANNEX 8Table 3.l

PHILIPPINES

COCONUT FARMS DEVELOPMENT PROJECT

Computation of Economic Farmsate Price.

PotasslumUnit Copra /a Corn /b TSP /c Chloride d Ures /

Project 1990 price In 10Mconstant dollars /f USS/MT a7s 8s 161 92 192

Ocean Freight and Insurance USS/MT 6o 6o 60 S0 so

Projected Price FOB/CIFPhilippine Ports US$/MT 815 145 221 182 262

Price In local currency(USIl = e 22) Peso/MT 8,980 3,190 4,882 4,004 6,644

Port handling costs Peso/MT 35 as 85 as as

Transport from/to Davao from/to the regione Peso/MT 440 440 440 440 440

Price at regional warehouse Peso/MT 6,455 8,68e 5,887 4,479 8,019

Local distribution costs Peso/MT na. 100 100 100 100

Copra collection costs Peso/MT 400 n.a. n.a, na. n.a.

Cost of drying to 5X moisture Peso/MT 100 na. n.a. na. n.a.

Economic Farmgate Price Peso/MT 5,966 8,765 5,487 4,579 8,119

a Philippines/Indonesian, bulk, CIF NW Europe.US, No. 2 Yollow, FOB Oulf Ports.

o Bulk, FOB US Gulf.Bulk, FOB Vancouver.

e Bagged, FOB NW Europe, Price of Ammonium Sulphate (AS) is assumed to be 21/45 of the price of urea.World Bank Price Forecasts, June 1989.

PHIzLP,Su«

9SALL C0CMJT FARS neVEOP1491T PR0JET

lO9O 199Ol 12 1993 14 9S 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 200? 2008 2009

rnerae,wnaa Costs IA

On-farm costs of fertilixingmture local tall1 38 155 355 553 712 690 680 677 720 868 868 868 867 869 871 879 678 879 882 884

On-farm costs of fertilizinglocel talls, I yr old 49 49 49 SO 41 o6 58 56 62 66 68 69 71 70 68 64 64 64 64 64

On-farm costa of fertilizinghybrid. S yra old 6 7 8 10 10 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11

On-farm costa of fertilizinghybrids. 8 yr- old 39 40 46 S6 59 69 71 71 71 71 71 71 71 71 71 71 71 71 71 71

On-frm costs of replantingXith hybrids A 13 12 32 63 147 74 77 39 48 S8 64 84 105 76 79 79 82 92 111 79

On-farm costs of-replantingwith local talls Lk 36 44 62 38 29 19 19 24 40 39 37 28 29 30 45 41 39 30 29 29

Subtotal on-form costs 181 30 21 770 09 919 9l6 878 952 1113 1.119 1.131 1154 1127 1.145 1.140 1 4 1.147 1 168 lfl 8

Civil works e 14 8 3 - - - - - - - - - - - - - - - -Equivpent and vehoc L 71 20 1S 13 ; 71 20 1S 13 9 71 20 15 13 9 71 20 1S 13 9Staff and other oprNting costa, Ls 63 90 107 118 124 114 114 114 114 114 114 114 114 114 114 114 114 114 114 114

Subtotal other coats 48 "A J2 Z 12734 123 186 134 M 127 123 18S 1I3 I21 1 123

TotaI Incremental Coat 129 425 646 901 1313 111& 1050 1.00 1070 1236 1304 1.26 1283 1.2S4 1.26 1.25 1.279 1276 1.29S 1.261

Incrmnta 1 8nef It.

Fertilizing mturo local talls 1 28 187 376 741 1,163 1.489 1,666 1.689 1.669 1.637 1,612 1,S58 1,599 1,612 1,633 1,653 1,675 1,694 1,714Fertilizing local talla, 1 yr old 0 0 0 a 0 52 71 54 101 129 145 152 170 160 145 116 116 116 116 116Fertilizing hybrids, 3 yr old 0 6 16 32 37 38 39 38 37 39 38 38 38 38 38 38 38 38 so 38Fertilizing hybrids, 8 yrs old 6 20 70 143 216 252 261 256 250 246 241 241 241 241 241 241 241 241 241 241Replanting with hybridx 15 22 28 77 199 178 97 39 57 144 164 212 2S4 305 291 311 288 298 802 322Replanting with local talIs/ 64 119 133 79 22 7 4 19 22 47 5O 71 64 67 S6 69 61 71 56 61

Total Incremental Bnefit _ 1 3.217 11;90 1 061 2 0622 24 27 L2 n6 2 3626 2. 10 2 38 2B 2 397L L2 3 2 L49 I

La Excluding taxes and duties and including physical contingencies of 10 for civil worl,s. 71 for equipment and 56 for vehicles and all other costa excluding incrmentelstaff. A set of 0.90 is applied to local costs.

/b Including intercrop- and cover crops.

LS Excluding costs of copra quality improvement and including contract research through year S.

s ii

-57 - ANNEX 4Page 1

PHILIPPINES

SMALL COCONUT FARMS DEVELOPMENT PROJECT

History of Coconut Legislation and Institutions

1. Over the years, GOP has tried several approaches to establishing andmaintaining a strong and viable coconut industry. Since 1916, when a CoconutProducts Board was created by Public Act 2598 to encourage the improvement ofcoconut products and make the farmers participants in, and beneficiaries of,the coconut industry, a long series of laws and regulations have been enacted.In 1940, Commonwealth Act No. 518 established the Nationai Coconut Corporation(NACOCO) with the following objectives: (a) to establish, keep, maintain andoperate drying plants or copra driers, or coconut centrals, wit'. a view toadjusting the coconut industry to a position independent of trade preferencesin the United States and to provide facilities for the better curing of copraproducts and the proper utilization of coconut by-products, provided that nosubsidy, direct or indirect, shall be paid to producers or processors ofcopra, coconut oil or allied products; and (b) to provide facilities forproduction loans to coconut planters and copra products.

2. In 1954, NACOCO was abolished by Republic Act (R.A.) 1145 which, inturn, created the Philippine Coconut Administratlon (PHILCOA) with thefollowing olbjectives: (a) to ensure the steady and orderly development of thecoconut industry and to stabilize and strengthen its position in the world(b) to promote the effective merchandizing of copra, coconut oil, coconutproducts, and by-products in the domestic and foreign markets so that thosewho are engaged in the coconut industry will be placed on a basis of economicsecurity; provided, however, that the PHILCOA may not engage in trading in anyform without the prior approval of the President of the Philippines, whichapproval may be given only after prior recommendation of the National EconomicCouncil; (c) to improve the tenancy relations between cocon t proprietors andtenants and the living conditions of laborers engaged in the coconut industry;and (d) to encourage the invention of useful machinery that will hasten thedevelopment of the coconut industry.

3. Towards the end of the 1950s, R.A. 2282 was enacted providing foradequate financing of coconut cooperatives and coconut producers and creatinga "Coconut Financing Fund," constituted either from the sale of bonds or fundsappropriated from the National Treasury. However, no project was implementedunder this financing program.

4. The Philippine Coconut Research Institute (PHILCORIN) was created byCongress in 1964, to be funded from budget "surpluses.' The Institute wasestablished at Bago-Ostrivo, Davao in 1967, with only meager facilities andalmost no operating funds. Nevertheless, the small staff was able to commencesome important experiments with the aid of external grant financing.PHILCORIN was under the National Science Development Board and had a Board ofDirectors in which the private sector predominated.

-58 ANNEX 4Page 2

5. With the avowed policy of accelerating the development of the coconutindustry by providing adequate medium- and long-term financing for capitalinvestment in the industry, R.A. 6260, otherwise known as the CoconutInvestment Act, created the Coconut Investment Company (CIC) in 1971. The lawprovided for the collection of a levy of P 0.55 for every first domestic saleof 100 kg of copra, until the authorized capital stock of the CIC of P 100million was fully paid. After the amount of P 100 million was finally raisedin 1981, Executive Order (EO) 825 was issued in 1982 authorizing theorganization and incorporation of the CIC with the Coconut ProducersFederation (COCOFED) Board of Directors serving as the interim board of CIC.In 1986, the CIC was placed under sequestration by the Presidential Commissionon Good Government (PCGG) and has since remained inactive.

6. In June 1973, Presidential Decree (P.D..) 232 abolished PHILCOA andPHILCORIN and created the Philippine Coconut Authority (PCA) with thefollowing purposes and objectives:

(a) to promote the accelerated development of the coconut and other palmoils industry in all its aspects.

(b) to provide general directions for the steady and orderly developmentof the industry; and

(c) to achieve vertical integration of the coconut industry so thatcoconut farmers become participants in, and beneficiaries of, thedevelopment and growth of the coconut industry.

7. In August 1973, P.D. 276 established a Coconut ConsumersStabilization Fund (CCSF) to maintain supplies of coconut-based consumer goods(cooking oil, laundry soap, etc.) at low retail price levels established byprice control. P.D. 276 authorized the PCA to formulate and implement asubsidy scheme by imposing a levy in accordance with the mechanics establishedunder R.A. 6260. The levy started at P 15.00 per 100 kg of copra and rose toa maximum of P 100 per 100 kg of copra.

8. In November 1974, P.D. 582 mandated the implementation of anationwide hybrid replanting program (National Coconut Replanting Program(NCRP)) and authorized the financing of a coconut hybrid seed garden. Fundingwas sourced from the aforementioned levy, which was increased by P 20.00 per100 kg of copra for that purpose.

9. P.D. 755 was enacted in July 1975 declaring a national policy toprovide readily available credit facilities to coconut farmers at preferentialrates through the acquisition of a commercial bank for the benefit of thecoconut farmers. Payment for the acquisition of the United Coconut PlantersBank (UCPB), were financed from collections of the CCSF. Thereafter, CCSFfunds were deposited with UCPB on sn interest free basis.

10. P.D. 961, enacted in July 1976, codified all laws dealing with thedevelopment and funding of the coconut and other palm oils industry andprescribed that these funds were to be used for the following purposes:

- 59- ANNEX 4Page 3

(a) Coconut Consumers Stabilization Fund: (i) to provide a subsidy forcoconut-based domestic consumer products; (ii) to provide for arefund for premium duty collected on copra, or its equivalent, soldprior to February 17, 1974; (iii) to finance the developmental andoperating expenses of COCOFED; and (iv) to finance the establishmentand operation of industries and commercial enterprises related to theindustry.

(b) Coconut Investment Development Fund (CIDF): (i) to finance a hybridcoconut seed garden (Bugsuk); (ii) to purchase seednuts produced bythe seedgarden; (iii) to pay the cost of implementing the nationwidereplanting program; (iv) to finance extension services, modelplantations and other activities designed to inform coconut farmerson the proper methods for replanting; and (v) the balance for otherinvestments for the benefit of the coconut farmers.

11. In May 1980, following expressions of concern by farmers andpoliticians that the levy was depressing farmgate prices and that the benefitsof vertical integration within the industry were not accruing to the farmerswho had financed it, the fixed levy was replaced by a price-related slidingscale, and later, in August 1982, was suspended on Presidential instructionsby PCA. This led to an immediate reduction in the activities of all concernedentities and to the suspension of the NCRP.

ANNEX 5- 60 - Page 1

PHILIPPINES

SMALL COCONUT FARM DEVELOPMENT PROJECT

Auditing and Reporting Requirements

1. PCA would keep financial record in accordance with sound accountingpractices to reflect its financial status. PCA would ensure that itscorporate accounts, project accounts, the Special Account and Statement ofExpenditures (SOEs) are audited annually by independent external auditorsacceptable to the Bank. The audited accounts and the auditors reportincluding a statement for each account certifying that Bank funds had beenused for their intended purpose, would be submitted to the Bank within sixmonths of the end of its fiscal year.

2. With respect to SOEs, the audit report should include the followingstatement:

.During the course of our audit of ......... for the period .we examined Statements of Expenditures submitted to the World Bank during thatperiod in support of applications for reimbursement from the Loan Account,pursuant to the Loan Agreement dated ........

our examination was made in accordance with generally acceptedauditing standards, and accordingly included such tests of the accountingrecords, verification of assets and liabilities, and such other auditingprocedures as we considered necessary in the circumstances.

In our opinion, the Statements of Expenditures submitted, and thesupporting schedules and information submitted with them, together wiLn theinternal controls and procedures involved in their preparation, can be fairlyrelied on to support the applications for reimbursement in accordance with therequirements pursuant to the Loan Agreement."

3. PCA would prepare annual project plans and work programs, for theCorporation as a whole and each participating unit, that would clearly showproposed project related activit;es. A procurement program would also beprepared to reflect pr' nosed purchases for the following year, detailing theitems, quantities, timing and sources of funding and procurement methods(whether ICB, LCB, international shopping or other). These programs would besubmitted to the Bank for information. The procurement plan would be addi-tional to any specific requirements under Bank loan. On the basis of theannual plans, work program and procurement plan, PCA would earmark funds inits budget and ensure its availability.

- 61 - ANNEX 5-~~~~~~ ~~Page 2

4. PCA would submit quarterly progress reports to the Bank containing atleast the following information: physical progress achieved (in quantitativeterms); major issues/problems encountered or likely to be arise in the subse-quent period; and objectives for the subsequent periods. The quarterlyprogress report would contain a summary of current expenditures and acumulative record.

5. After project completion, PCA would prepare a Project CompletionReport (PCR) analyzing project Implementation and achievements in relation toits objectives and would submit this report to the Bank within six months ofthe project closing date.

-62 - ANNEX 6

PHILIPPINES

COCONUT FARMS DEVELOPMENT PROJECT

Proiect Implementation Schedule

Project Activity 1990 1991 1992 1993 1994 1995

Effectiveness r

Establish 3 Seedgardens

Establish 2 Seedgardens

Replant with local talls

Replant with availablehybrids

Replant with seedgardenhybrids

Fertilize low-bearingpalms

Nutrient support

Aflatoxin Analysis/Survey

Pilot reorganization comp. x

Assignment of additionalMCDOs

Renovate and equip CTEC

ANNEX 7- 63 -

PHILIPPINES

SMALL COCONUT FARMS DEVELOPMENT PROJECT

SuDervision Plan: Bank Supervision Mission Schedule

Proj ect Approxliate Expected Staff InputYar Mission Date* Ar-as of Concentration Skill Requirements (staff-weks)

1 July/Aug Start up, loan effectiveness, Tree Crops1990 training, procurement, PCA Financial Analyst 8.0

reorgenization monitoring, MAE Specialiststaff recruitment, accounting, Trainingaudit and disbursementprocedures

1 Oct/Nov Seedgardens field progress, Tree Crops 4.01990 procurement, reorgenization, Financial Analyst

MCDO recruttment Year 2program, CPOU activities

1 Apr/May Field program, Projects A PCA Tree Crops 6.01991 accounts for 1990, MCDO Financial Analyst

training and deployment, Economistmonitoring and evaluation,copre driver program

2 Oct/Nov Seedgardens, procurement Tree Crops Agronomy 6.01901 intercropping, UCDO supply, Financial Analyst

Aflatoxin findings

2 Apr/May Field program, 1991 accounts, Tr-e Crops Financial 6.01992 Pilot drier progress Analyst Economist

Monitoring and evaluation

8 Oct/Nov Long-term financing proposals, Tree Crops, 6.01992 Field program, MCDO supply and Agronomist

training, Intercropping

a Feb/Mar Review draft Financing Plan, Tree Crops 8.01998 1992 account., general project Financial Analyst

progress, monitoring and Econom'stevaluation

4 Oct/Nov Hybrid seed supply, Tree Crops 8.01998 Procurement, MCDO supply, Financial Analyst

Training, Pilot drier progress Training SpecialistProcessing Specialist

4 Apr/May Field Progrsm, 1998 accounts, Tre Crops 8.01994 Disbursements, Procurement, Financial Analyst

Monitoring and Evaluation Economist

5 Oct/Nov Hybrid seed supp'y, nurseries, Tree Crops 4.01994 Procurement, Research Agronomist

achievements, Pilot drierprogress, Intercrops

5 Apr/May Field Program, 1994 accounts, Tree Crops 6.01996 Implementation Financial Plan, Economist

Disbursementa, Pilot drierprogress, Procurement

6 Oct/Nov Review of Project achievements, Tree Crops 6.01995 final procurement Agr2nomist

Economist

6 Apr/May 1995 accounts, Final Financial Analyst 2.01996 procurement *nd disbursement

7 Oct/Nov PCR Tre Crops 8.0Economist.

- 64 -

ANNEX 8

PHILIPPINES

SHALL COCONUT FARMS DEVELOPMENT(To be Completed)

Documents in Project File

PCA Agricultural Research & Development Consultation, April, 1984.IBRD SA. Philippines: Coconut Development Project - February 1985.PCA Coconut Farms Development Project - Preparation Report - February

1989.IBRD Miscellaneous Papers and Tables 1989:

1. Economic Analysis - Crop Budgets for Replanting,rehabilitation and nutrient support under variousscenarious and differing fertilizer.

2. Computer analysis of detailed costs - Costab Tables.

3. Economic Analysis - Costab Tables.

- 65- CHART 1

PHILIPPINES

SNALL COCONUT FARMS DEVELOPMENT PROJECT

Chart 1. PhiliDOine Coconut Authority - Organization Chart

SECRETARYDEPT. OF AGRICULTURE

CHAI RMAN OF ICEO OIOPCA GOVEINING BOARD

|CORPORATE SECRETARY | COMPTROLLER|

ICENTRAL PROJECT OPERATIONS UNIT OFfICE OF THEADMINISTRATOR

|= PUB-LI-C AAFFAIRS

MANAGEMENT SERVICES OFFICE

RESEARCH ANDI DEVELOPMENT HEAD OPERATIONS BRANCH CORPORATE SERVICES

BRAIICH BRANCH

pAGRICULTURAL RESEARtH| | BOAN6A RESEARCH| tLEAAFAR IADINISTRATIVE|| FINANCIAL |& DEVELOPMENT DEPT. CENTER DEPARTMENT SERVICES DEPT. SERVICES DEPT.

COCONUT EXTENSION OPERATIONS PLANNING IPCA SEEDGARDENTRAINING CENTER & MANAGE DEPT.-.

I INDUSTRIAL RESEARCH ANDMARKET DEVELOPMENT BRANCH

ALBAY RESEARCHI DAVAO RESEARCHCENTER CENTER

MARKET RESEARCH IMARKET DEVELOPMENT| INDUSTRIAL RESEARCHDEPARTMENT DEPARTHENT NAMANAGEMENT DEPT.

11 PCA ADINISTRATIEREGIONAL OFFICES

- 66- CHART 2

PHILIPPINES

SMALL COCONUT FARMS DEVELOPMENT PROJECT

Chart 2. Field Operations Branch - Organisation Chart

FIELD OPERATIONSBRANCH

PCA SEEDGARDEN OPERATIONS PLANNING &DIVISION MANAGEMENT DEPARTMENT

COCONUT EXTENSION | FIELD OPERATIONS.TRAINING CENTER DIVISION

LOGISTICS SERVICESDIVISIONI

TRAINING DIVISION DV

OPERATIONS STATISTICSPUBLICATION & _ DIVISIONINFORMATIONDIVISION

SEEDGARDEN ANDSEED CONTRACTS

DIVISION

REGIONAL OFFICESIRE10GIOA ADMINISTRATOR

PROVINCIAL COCONUT DEVELOPMENT OFFICERS(PCDO)

EXTENSION STAFF(MCDOs & ATPs)

MAP SECTION

IBRD 2 1986R12(? 121C~~012

1 16 1 20° 124° S

- ~~~~~~~~~~~P H I L I P P I N E S

_ 20° = SMALL COCONUT FARMS2 0°DEVELOPMENT PROJECT

Airports Non Coconut CGrowingProvinces

Roads - ApuAri * PCA Regional Offices

-- Railroads Loag * PCA Research Centers, Nationalr WCapital

International o-- PCA Region BoundariesBoundaries

San . ) \ AAGANFernando,{

8A"C §- f t- KILOMETERS 0 100 200 300

_ tZ3° q _ q / v * | |S n -| I t U°

M OLES 0 so 100 100 200

MANILA /- .",:,

0~ 0 It t EGASPI

C? ~ '- I J 7/ Ci/ -W SW

PUOftOPrincesa

KON ,AMBOANGAPORT

PHILIPPINES

VIET BRUW.JNAM

MALAYSIA

'I N D 0 F S I A C t20 t24120A 21?2o

APRIL 1990