FOR OFFICIAL USE ONLY · EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE PHILIPPINE NATIONAL BANK TO BE GUARANTEED BY THE REPUBLIC OF THE PHILIPPINES FOR THE PHILIPPINE INVESTMENTS

Document of

FILE COPy The World BankFOR OFFICIAL USE ONLY

Report No. P-2289-PH

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED LOAN

TO THE PHILIPPINE NATIONAL BANK TO BE GUARANTEED BY

THE REPUBLIC OF THE PHILIPPINES

FOR THE

PHILIPPINE INVESTMENTS SYSTEMS ORGANIZATION (PISO)

PROJECT

April 11, 1978

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

US$1 = P 7.50 /1P 1 = US$0.133P 1 million US$133,300

ABBREVIATIONS

ADB - Asian Development BankBOI - Board of InvestmentDBP - Development Bank of the PhilippinesIGLF - Industrial Guarantee and Loan FundNEDA - National Economic Development AuthorityPICA - Private Investment Company for Asia (PICA) S.A.PISO - Philippine Investments Systems OrganizationPDCP - Private Development Corporation of the PhilippinesPNB - Philippines National Bank

FISCAL YEAR

January 1 - December 31

/1 This is the exchange rate that prevailed at the time of apraisal inJuly/August 1977. The current exchange rate is $1 = P 7.40. As thedifference is not likely to affect significantly the project, the figureshave not been revised.

Foa oFnCL USE ONLY

PHILIPPINES

PHILIPPINE INVESTMENTS SYSTEMS ORGANIZATION (PISO) PROJECT

LOAkN AND PROJECT SUMMARY

Borrower: The Philippine National Bank (PNB)

Beneficiary: Philippine Investments Systems Organization (PISO)

Guarantor: Republic of the Philippines

Amount: $15 million equivalent

Terms: The proposed loan will bear interest at 7.50% p.a.Flexible amortization to conform substantially to theaggregate of the repayment schedules applicable to thespecific investment projects financed out of theproceeds of the proposed loan.

Relending Terms: PNB would relend the proceeds of the proposed loan toPISO at an interest rate of 7.50% plus a handling feeof 0.75% p.a., on the outstanding amount, but otherwiseon the same terms as those for the Bank loan. PISOwould onlend to sub-borrowers at an interest rate of12-14% p.a. (including all service fees) for a maximumterm of 15 years, including a grace period of 3 years.

Prolect The project is designed to assist the PhilippineDescription: Government in realizing its objective of expanding and

diversifying the institutional capacity of financialintermediaries capable of mobilizing and allocatingmedium- and long-term resources to development projectsin the industrial sector. In particular, it woulddevelop the capacity of PISO, a private financial insti-tutiLon, to initiate and expand its medium- and long-termlencling operations. The proposed loan will be used byPISO for making sub-loans to finance foreign exchangerequirements of projects mainly in manufacturing.In addition to the institutional improvements for whichthis project provides, there are a number of financialand industrial sector issues which the GovernmentwouLd need to address within the next few years. Theeffectiveness of PISO in mobilizing and allocatingfinancial (particularly local) resources will, to animportant degree, depend on the policy adjustmentswhich the Government makes in the coming years. Apartfrom these broader sectoral concerns, there are nospecial risks associated with the project.

Ths dtocument ha a restricted dstribution and may be used by recipients only in the perfofmanceof theif official dutiea Its contenu may not otherwise be disclosed without World Dank authorization.

EstimatedDisbursements: ($ million)

Bank FY 79 80 81

Annual 4.4 8.2 2.4Cummulative 4.4 12.6 15.0

Staff AppraisalReport: No. 1900-PH dated April 3, 1978.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

REPORT AND RECOMMENDATION OF THE PRESIDENTTO THE EXECUTIVE DIRECTORS

ON A PROPOSED LOAN TO THE PHILIPPINE NATIONAL BANKTO BE GUARANTEED BY THE REPUBLIC OF THE PHILIPPINES

FOR THE PHILIPPINE INVESTMENTS SYSTEMS ORGANIZATION (PISO) PROJECT

1. I submit the following report and recommendation on a proposed loan

to the Philippine NationaL Bank with the guarantee of the Republic of the

Philippines for the equivalent of $15.0 million. The loan would be at an

interest rate of 7.50% p.a. The proceeds of the loan would be relent to the

Philippine Investment Systems Organization (PISO) at an interest rate of 7.50%

plus a handling fee of 0.75% on the outstanding amount, but otherwise on the

same terms as those of the Bank loan, for onlending to specific productive

enterprises. The loan would be repaid in accordance with the composite amorti-

zation schedules of PISO's subloans which will have a maximum repayment period

of 15 years, including a maximum grace period of three years. Sub-borrowers

would assume the foreign exchange risk.

PART I - THE ECONOMY /1

2. An economic mission visited the Philippine in July/August 1977 and

its report, "The Philippines: Country Economic Memorandum" (No. 1765-PH of

October 26, 1977), was distributed to the Executive Directors under Secretary's

Memorandum PHL77-2 on October 27, 1977. A basic economic report, entitled The

Philippines: Priorities and Prospects for Development (SecM-76/366), was

previously distributed to the Executive Directors on May 18, 1976.

Macroeconomic Performance

3. During the 1960s, the Philippine economy grew in real terms at

an annual rate of about 5-1/2%. However, the rate of growth was less than

what might have been achieved if the country's considerable natural and human

resources had been utilized more effectively. The benefits of growth were

also distributed relatively unevenly, both with respect to regions and income

classes. While overall agricultural growth was reasonably satisfactory,

repeated food deficits were experienced. The growth of productive employment

opportunities failed to keep pace with the expansion of the population

and labor force. Low levels of taxation resulted in inadequate public

expenditure for necessary infrastructure and social services. Poor export

performance combined with the heavy import dependence of domestic industry

led to chronic weakness in the balance of payments.

4. The growth of the Philippine economy accelerated slightly to anannual rate of 6% in the 1970s. Fluctuations, however, have been significant.

In the period 1970-72, when the effects of a balance of payments stabilization

program initiated in 1970 were being felt, the economy grew less rapidly,

exports and imports of goods and services were roughly equal, and the shares

of public and private fixed investment in GNP were stable at still relatively

low levels. Economic growth was unusually good in 1973 as sharply higherprices for traditional export commodities stimulated demand, agricultural

production rebounded strongly from the natural disasters of the previous

/1 This section of the report is the same as that of the Rural Electrification

Project (SecM/78-63), which was approved by the Executive Directors on

April 4, 1978.

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year, and the balance of payments registered a substantial current accountsurplus. The export-led income boom of 1973 was followed by an investmentboom. The resulting high investment rate, together with favorable sugarprices, temporarily sheltered the economy from the impact of the oil priceincrease in late 1973 and the following world recession, and real GNP growthwas maintained at 6% in 1974-75. The first half of the 1970s also sawsignificant structural changes in the economy, the most important of whichwere an increase in the level of public investment, financed in large partby a greater tax effort, a recovery in export growth, a shift of the domesticterms of trade in favor of agriculture, and the slowing of the populationgrowth rate.

5. The collapse of sugar prices in late 1975, following earlierdeclines in the prices of other major export commodities, altered the externalsituation dramatically. The terms of trade dropped by 23% in 1975, and as aresult the current account deficit rose to 6% of GNP, and the overall balanceof payments deficit to $500 million. Thus, the necessity of restoring balanceto the external accounts was superimposed on the Government's longer-termobjectives of faster economic growth and a better distribution of its benefits.To maintain the momentum of growth and investment, the Government adopted apolicy of increasing capital inflows in the near term to finance the resultingexpanded current account deficits while accelerating export growth in thelonger term. In 1976-77, the economy - led by exports, public investment,agriculture and construction - has continued to grow at 6% per year. Unfor-tunately, much of the stimulus from an expansion in export volume was offsetby further deterioration in the terms of trade. However, inflation, whichreached a peak of 31% in 1974 as a result of externally generated pressure ondomestic prices, has slowed to a rate of about 7% because of the decelerationin international inflation and a conservative monetary-fiscal policy.

Development Strategy

6. The Government's development objectives and policies, which wererecently set out in a Five-Year Development Plan for the period 1978-82, callfor further acceleration of economic growth, first to 7% and then to 8%. Thedevelopment strategy focuses on an expansion of more productive employmentopportunities at a rate of 3.6% per annum, reduction of income disparities,greater selfsufficiency in food and energy, strengthening the balance ofpayments, and increased development in rural areas. In addition, the Planincludes strategies for development in each of the country's thirteen regions.In general, the Plan is an elaboration of the policy directions pursued bythe Government in recent years. It is also broadly consistent with theBank's basic economic report, although investment, manufacturing output, andexports are projected to grow more rapidly than visualized therein. Itshould be feasible to accelerate the overall growth rate to 7% as the termsof trade stabilize, but more rapid expansion of manufacturing is necessary todo so, and effort needs to focus on improving the efficiency of investment.

Agriculture

7. For a country with fairly good soils and a reasonably literaterural population, agricultural yields in the Philippines are relatively low.Possible reasons for this situation are the low quantity and quality of

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irrigation facilities and high vulnerability to weather risks; land tenurepatterns; and weak agricultural credit, extension, and other supportingservices. Agricultural production has, nevertheless, grown at an averagerate of 4-1/2% per year in the 1970s. The performance of the sector wasexceptionally strong in 1976 and 1977, as production increased by 7%, and thePhilippines has been virtually self-sufficient in rice, its main staple, forthe past three years.

8. The Government gives high priority to agriculture and ruraldevelopment. It has undertaken a number of steps to increase the availabilityof irrigation and supporting services, and has also expanded programs toimprove living conditions in rural areas, including rural electrification,health and family planning, and rural roads. However, while irrigationinvestment has been raised substantially, improvements in the quality ofsupporting services - particularly credit and extension - are necessary.

9. For historical reasons, land ownership in the Philippines isinequitably distributed. The land transfer program, which has been inoperation for five years and covers rice and corn growing areas, proceededquite rapidly when larger landholdings were the focus of concentration, butprogress has been slower recently as the focus has been on a larger numberof medium-sized holdings, which often belong to middle-class landowners. Asof June 1977, an estimated 120,000 tenants, or 30% of the total tenants underthe program, had received Certificates of Land Transfer, which establishedtheir claim to the land. Despite the difficulties in the process of implemen-tation, the transfer program remains an important part of the Government'srural development strategy.

Industry

10. During the 1960s, Philippine industrialization was promoted by hightariff protection and subsidized finance, and consequently industrial growthwas primarily in the area of import-substitution with a high capital intensity.Performance was disappointing with respect to employment, exports, and theoverall rate of growth of output. In the early 1970s the Government floatedthe exchange rate, which then depreciated significantly, and introducedpolicy changes to reduce tariffs and realign industrial incentives. Furtherefforts to reduce remaining biases in favor of import substitution andcapital intensity will still be needed, however, to accelerate the rate ofindustrial growth as projected in the Five Year Development Plan.

11. Manufacturing industry has grown at a relatively slow average rateof about 6% in the 1970s. Moreover, due to the slow increase in nationalincome and demand because! of the decline in the terms of trade in the lasttwo years, manufacturing growth has also slowed, and investment has stagnated.On the other hand, industries producing nontraditional exports have expandedrapidly from a very low base as their exports increased almost fivefold in thefour-year period 1973-76 in response to exchange rate adjustment and specialmeasures designed to alleviate existing restrictions on imports and thusreduce the bias towards production for the domestic market. As noted above,further efforts in this clirection will be needed if industrial exports are tocontinue to grow at a rapid rate. The construction industry has also grown

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rapidly as the expansion of relatively construction-intensive public investmentand large tourism investments in the Manila area raised construction expendi-ture from 6% of GNP in the early 1970s to 12% in 1976.

Employment, Incomes and Population

12. Employment increased by about 4.6% annually during 1973-76, aconsiderable improvement over the historical growth rate of 2.4%, and wasable to keep pace with the rapid growth of the labor force. Particularlynoteworthy was the growth of employment in manufacturing, which essentiallystagnated during 1970-74, but grew by 8% annually during 1975/76, resultingin part from the growth of labor-intensive production for export. However,because manufacturing's share of total employment is small, agriculture andservices continue to function as residual sources of employment and accountfor most of the growth in total employment.

13. Preliminary survey data show that the share of income received bythe poorest 40% of families, which remained constant during the 1961-71period, increased from 12% in 1971 to 15% in 1975. The income share of thetop 20% of families remained about the same as in 1971, while that of middleincome families declined correspondingly. Due to the improvement in agricul-ture' s terms of trade, the growth of agricultural production, the decline inurban real wages following the devaluation in 1970, and the stagnation ofindustrial employment until 1975, the ratio of the average rural income tothe average urban income rose from 48% in 1971 to 57% in 1975. Real percapita consumption increased by about 2% annually in 1971-75. Hence, afterallowance for price increases, real incomes in rural areas, where most of thepoor live, have probably increased somewhat, while real urban incomes haveremained about the same.

14. The population is estimated at 43.3 million in 1976 and is currentlygrowing at 2.8% as compared to a 3.0% growth rate during the 1960s. ThePhilippines has an active family planning program registering approximately650,000 new acceptors per year. Although the number of new acceptors hasreached a plateau as the program faces the increasingly difficult problem ofreaching rural areas, the estimated proportion of married women of reproductiveage practicing family planning increased from 20% in 1974 to 25% in 1977.

Investment and Savings

15. Due largely to the buoyant export performance in 1973 and thesubsequent increase in incomes, investment boomed in 1974-75. Privateinvestment rose from 14% of GNP in the early 1970s to 20% in 1975. Publicinvestment was raised from 2% to 4% of GNP with the growth in revenue frominternational trade taxes, improvements in tax administration, and improvedproject implementation capacity. Subsequently, public investment has beenraised further to an estimated level of 6-1/2% of GNP in 1977. The privateinvestment rate, on the other hand, has fallen somewhat to an estimated 18%of GNP. Although the private investment rate is well over the 14% average ofthe early 1970s, the revival of private investment is an important short-termproblem. Furthermore, the high incremental capital-output ratio, the relativelymodest growth of manufacturing output and employment, and the structuralunderutilization of capacity in some industries suggest that the efficiencyof investment also needs to be improved.

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16. Aggregate savings performance has improved during the last decadeand is comparable to that of other countries at a similar stage of economicdevelopment. In 1976-77, gross domestic savings maintained the level of 25%of GNP achieved in 1975 and financed about 80% of total investment, with thebalance coming from foreign savings. In order to increase the efficiency offinancial markets in intermediating between savers and investors, the Govern-ment has made significant improvements in financial policy. Organizedbanking institutions have been strengthened. Interest rates were realignedin 1976 and again in 1977 to encourage a greater flow of financial savingsinto time and savings deposits relative to short-term deposit substitutes, andto reduce the spread between borrowing and lending rates. Further reformsare required to increase the availability of long-term domestic currencyresources. Special credit programs have been adopted to expand lending tothe credit-short agricultural sector and rural areas and to serve the needsof medium- and small-scale industries. However, a deterioration of loanrecovery rates has been experienced by all government financial institutionsand credit programs, creating a difficult policy dilemma. On the one hand,the programs have become costly means of achieving their objectives, and thegrowth of arrears reduces the overall efficiency of resource mobilization andallocation. On the other hand, the programs do redress imbalances in theavailability of credit so that arrears have to be reduced without closingnecessary credit channels.

Government Expenditures and Revenues

17. Public expenditures and revenues have historically claimed a muchsmaller share of national resources in the Philippines than in many otherdeveloping countries. In the early 1970s, general government expenditureaveraged only 12% of GNP, public investment was strikingly low at about 2%of GNP, and tax revenues stood at 11% of GNP. Government expenditures weredominated by general administration and social services, particularlyeducation. This situation had resulted from a variety of factors includingdifficulties in raising tax revenue and weak implementation capacity in thepublic sector. Since th,e early 1970s, the Government has taken steps tocorrect the situation and raise both the overall level of expenditures andthe share going to economic services and public investment. By 1977 govern-ment expenditures had reached an estimated 18% of GNP, and public investment,which has risen very rapidly in the last two years, equaled about 6-1/2% of GNP.

18. Recognizing that a large increase in tax revenues would be requiredto finance expansion of the public investment program, the Government hasundertaken a comprehensive program of tax reform to raise the needed revenuesequitably and efficiently. In the short term, needed revenues have been raisedthrough revisions in inclirect taxes. In the long term, structural changes areto be made to raise the built-in elasticity of the tax system, to reduce distor-tions in economic incentives and dependence on cyclically volatile taxes oninternational trade, ancd to improve equity by increasing the proportion ofrevenues coming from direct taxes. The Government has increased the ratio ofdomestic taxes to GNP by an impressive 1.5 percentge points between 1975 and1977 through new tax measures and vigorous efforts to improve taxpayer compli-ance and collection performance. However, much of the success in mobilizing

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revenue from domestic sources has been offset by a sharp decline in the yieldof export taxes and import duties due to cyclical fluctuations. Total taxrevenues, which had been raised from 11% of GNP to 13.6% by 1975, rose toonly an estimated 14.1% in 1977. Greater resource mobilization by governmentfinancial institutions and government corporations, whose investment programshave grown rapidly, is also needed.

External Trade and Capital Flows

19. Largely as the result of a 23% decline in the terms of trade in 1975,the current account recorded a deficit of $900 million, or 6% of GNP. To meetthe immediate payments problem, the Government drew down its internationalreserves, obtained loans under various IMF facilities, and expanded itsborrowing program to finance necessary imports. For the longer term, astrategy was adopted of accelerating export growth both to hold the currentaccount deficit about constant, while it declined relative to GNP, andto meet the debt service payments on the higher level of external borrowing.

20. Some progress in these directions was made in the last two years.In 1976, in spite of a further 11% deterioration in the terms of trade, asubstantial increase in export volume and slow growth of import paymentsnarrowed the trade deficit and partly offset the higher net interest payments.Although somewhat larger than in 1975, the current account deficit was stabil-ized at 6% of GNP. Net capital inflows were nearly doubled to $1.1 billion.Most of the inflow was from medium- and long-term loans, two-thirds of whichwere public loans reflecting in part increased disbursements from officialsources. Estimates for 1977 show a further substantial expansion in exportvolume which, with little expected change in the terms of trade, importvolume, services or transfers, would reduce the current account deficit to 4%of GNP and eliminate the overall payments deficit. Hence, on the whole, thebalance of payments position has strengthened significantly.

21. To achieve a 7% growth rate in real GNP, as projected for theperiod 1978-82, imports will have to grow faster than they have recently anda net capital inflow of at least $1 billion per year will be required. Assum-ing continued sound debt management and the maintenance of a balanced maturitystructure of foreign borrowings, the overall level of external debt of thePhilippines is expected to remain within reasonable limits. The ratio of debtservice payments to exports and nonfactor services would average about 19%,of which 7% would be public debt service, during the plan period (1978-82).

22. In order to ensure that the long-term capital transfer is commensu-rate with the level of development expenditures which will be required during1978-82 and that debt service obligations remain within reasonable limits,the Government sought commitments of official assistance of $750-800 millionin 1978 at the meeting of the Consultative Group for the Philippines, held inTokyo on December 1 and 2, 1977. This amount is likely to be available.However, since many of the planned projects which are to be financed fromexternal sources have a low foreign exchange component, some local cost finan-cing is necessary, in appropriate cases, to meet the Philippines' externalfinancing requirements.

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PART' II - WORLD BANK OPERATIONS

23. As of March 31, 1978, the Philippines had received 51 Bank loans(of which two were on Third Window terms) amounting to $1,332.5 million andthree IDA credits amounting to $32.2 million./l At that date, IFC investmentstotalled $96.3 million. I'he share of the Bank Group in total debt disbursedand outstanding is about 11% and its share in total debt service is about 5%.These ratios are expected to increase to about 19% and 8%, respectively, bythe end of the present decade. Annex II contains a summary of IDA credits,Bank loans and IFC investmnent as of February 28,1978 as well as notes on theexecution of ongoing projects.

24. The Bank Group has financed projects in virtually all sectors ofthe economy with particular emphasis on agriculture and basic infrastructurewhich have each accounted for about one third of total Bank Group lending.In agriculture, emphasis has been given to expanding irrigation systems toincrease food production and to credit programs to support food grain produc-tion and processing, livestock and fisheries production and tree farming.Support has also been provided for integrated rural development projects inlow income areas. The Bank Group also provided large amounts of assistancein developing power and transportation because substantial improvement inbasic infrastructure has been needed to compensate for many years of pastneglect and to provide the basis for future growth of the productive sectors.In the industrial sector, the Bank's main thrust has been on strengtheningthe capacity of public and private development finance institutions withincreasing attention given to meeting the needs of small and medium industries.In the social sectors, the Bank Group has provided support for educationprograms, designed to improve the quality of primary and secondary educationand to meet trained manpower requirements in agriculture and industry. Inurban areas, assistance has been provided for water supply projects and forprograms to upgrade living conditions in low income urban areas and to developlow cost sites and services. Support has also been provided to the Philippinespopulation program through assistance for the construction of multipurposerural health units and for training of family planning staff.

25. There has been a marked improvement in the execution of Bankfinanced projects in the last five years compared with the experience in thelate 1960s, when there were serious problems caused by a shortage of pesocounterpart funds and weak administration. Almost all ongoing projects arenow being implemented reasonably well and the results of supervision andproject completion reports indicate that the economic benefits for mostprojects are likely to be in line with appraisal estimates. However, theoverall rate of disbursernent is marginally below what would be expectedgiven the generally good project implementation and the Government iscurrently reviewing disbursement performance on an agency-by-agency basisto identify possible reasons for disbursement lags and to find appropriatesolutions.

/1 Since then, a loan of $60 million for rural electrification was approvedby the Executive Directors on April 4 and an IDA credit of $28 millionfor a rural infrastructure project on April 11.

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26. As noted in Part I of this report, the Government's Five-Year Devel-opment Plan highlights a strategy which focuses on the expansion of productiveemployment in agriculture and industry, reduction in income disparities,greater self-sufficiency in food and energy and increased development inrural areas. The Bank Group's future lending program has been designed toassist the Government in achieving these objectives. Agriculture and ruraldevelopment will account for the largest part of future lending, with continuedemphasis on food production and increasing the productivity and incomes ofsmall farmers. However, the program provides for several new initiatives,including a first loan to support the strengthening of the national agricul-tural extension service and a first loan for developing multiple croppingsystems in rainfed areas, where there is substantial rural poverty. Increasedsupport will also be provided for integated rural development projects whichwill support the Government's objectives of redressing regional imbalances inincome. Substantial assistance will also continue to be given to industrywith special attention being given to expanding the development of labor-intensive, small and medium industries outside the Metropolitan Manila area.The share of lending for social sector projects is expected to continue toincrease as a result of greater emphasis on construction of urban watersupply and sewerage systems and further assistance to the lower income urbanareas through low cost sites and services projects. The Bank Group will alsocontinue to provide support for improving the quality of education and forexpanding the Government's population program in rural areas. While the BankGroup will continue to provide support for transportation and power infrastruc-ture projects needed to support the Philippine development effort, the shareof Bank lending for these sectors will decline somewhat in the years aheadprimarily because alternative sources of financing are available to finance alarge part of the power generation program.

27. As noted in Part I, the Philippines has experienced a seriousdeterioration in its international terms of trade in the last several yearswhich has necessitated substantial foreign borrowing. While the overalllevel of debt remains manageable, the Philippines will need to obtain substan-tial amounts of foreign assistance on concessional terms to support itsexpanding development program. In view of this consideration, the percapita income of the country and the generally good management of the economy,a limited amount of IDA financing will be proposed for the Philippines; thefirst IDA credit since 1974 was recently presented to the Executive Directorsand a second is scheduled for FY79.

28. This is the seventh loan to be presented to the Executive Directorsthis fiscal year and would bring total lending to the Philippines to $208 mil-lion. Loans for development finance, urban development, water supply anda multipurpose dam projects are expected to be ready for presentation withinthe next few months.

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PART III - THE ]:NDUSTRIAL SECTOR AND INDUSTRIAL FINANCE /1

29. The industrial sector (defined as manufacturing, mining and con-struction) in 1976 accounted for about one third of GDP and 15% of totalemployment. Manufacturing is by far the largest component of the industrialsector accounting for about one quarter of GDP and about 11% of employment.Food and beverages are the largest manufacturing group followed by chemicalsand textiles. Manufacturing enterprises are predominantly privately ownedand generally concentrated in large capital-intensive units.

30. Industry grew alt a rate of about 6% per annum between 1955 and 1971.Its growth rate accelerated in the early 1970s. However, as the Philippineeconomy was adversely affected by the worldwide economic slowdown and thesharp deterioration in the Philippines' terms of trade, the growth ratedeclined to 4.6% within the last three years. Capital investments for plantand equipment increased by only 5% in 1976 and are estimated to have increasedat about the same rate in 1977. However, assuming the Philippines' terms oftrade are stabilized in 1978, as expected, exports and growing governmentexpenditures should give increased stimulus to the economy and contribute toan expansion in the rate of industrial growth and investment. The longer-termprospects for industrial growth are favorable because of the good natural andhuman resources of the Philippines and its active private sector.

31. There are, however, a number of important issues confronting theindustrial sector. Historically, Philippine industrial production was gearedprimarily to the needs of the domestic market and there has been heavyreliance on protection policies applied through the tariff system and somedegree of import control.. In the late 1960s, the Government became awareof the problems implicit in this approach and through the Investment Incen-tives Act of 1967 and the Export Incentives Act of 1970 has sought to expandthe nontraditional industrial base and to expand exports and industrialemployment. In addition to the incentives provided under the Export IncentivesAct, the peso was devalued in 1970, an Export Processing Zone was establishedand an Export Council was created to make recommendations on various aspects ofexport promotion. Partly in response to some of these measures, nontraditionalmanufacturing exports grew very rapidly during the period 1973-77. However,Philippine industry still remains heavily protected and differential rates ofprotection combined with selective export incentives to various industriesare still producing less than optimal industrial and export growth. Torationalize the industrial sector and to provide the basis for future growth,it will be necessary for the Government to move toward a less restrictivetrade regime by gradually removing import restrictions and reducing tariffs.The Government, with the assistance of a Bank-financed consultant, isundertaking a major review of industrial protection and incentives and is

/1 This section is substantially the same as that of the President's Reporton the Private Development Corporation of the Philippines (PDCP) Project(SecM/R78-14), which was considered by the Executive Directors onJanuary 31, 1978.

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considering a major tariff reform. Further stimulus could be providedthrough continuing analysis and information programs on foreign marketpotential, simpler export procedures, larger credit programs and establish-ment of trading houses.

32. Philippine industry has contributed relatively little towardsalleviating the problems of unemployment and underemployment. Between 1960and 1974, manufacturing employment grew at an annual rate of about 2.5%. Therate of employment generation, however, has markedly improved during thelast two years as employment in manufacturing grew at an annual rate of 8%in 1975 and 1976, partly as a result of Government's programs designed tofoster the growth of small and medium industries which have considerableemployment potential.

33. Manufacturing enterprises remain heavily concentrated in the greaterMetro-Manila Area which accounts for about 40% of such enterprises. Theproblem of the geographic concentration of industry is receiving increasingGovernment attention. Measures already taken in this regard include provisionof incentives for projects located in less developed areas, promotionalmeasures by the Board of Investments and its practice of negotiating thelocation of the project before its approval, a ban on new plant establishmentwithin 50 km of Manila (except export-oriented projects) and a requirementthat the Industrial Guarantee and Loan Fund (IGLF) and the Development Bankof the Philippines (DBP) direct at least 60% of their small-scale lendingoutside Metro-Manila. Further decentralization of industry will be encouragedby the Government's rapidly expanding public infrastructure program (particu-larly roads and rural electrification), major regional planning and developmentefforts, and a planned program of regional industrial estates.

34. The Government's Five-Year Development Plan (1978-82) projectsthat the manufacturing sector will grow at an annual rate of 9% during thePlan period and that manufacturing investment will grow at an annual rateof 15.5% (from $1.7 billion in 1977 to nearly $3 billion in 1982). TheGovernment's plan calls for the rapid growth of labor-intensive, small andmedium industries producing both for domestic and export markets, and theestablishment of some large, resource-based projects to deepen the industrialstructure and develop further the country's natural resources. An example ofsuch a project is the planned construction of a copper smelter to processcopper concentrates that are currently exported.

Industrial Finance

35. The core of the Philippine financial system is a large commercialbanking sector, both local and foreign, that operates under the branch bankingsystem and is the main source of working capital and trading credit. Inaddition to the commercial banks, there are a number of investment houses,savings and loan associations, rural banks and regional development banks.The Government Insurance System and the Social Security System are active inreal estate and mortgage financing. Investment houses operate in the activeshort-term money market. In late 1976, the Government allowed foreign bankbranches or offices to establish Off-Shore Banking Units (OBUs) and expand theForeign Currency Deposit UJnits to undertake foreign currency credit operations.

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The Government-owned Development Bank of the Philippines (DBP) and the Private

Development Corporation of lthe Philippines (PDCP) are the only two specialized

long-term lending institutions.

36. As noted in para. 16, the aggregate savings performance in the

Philippines has improved generally during the last decade and is comparable

to that of other countries at a similar stage of economic development.

Since 1975, gross domestic savings have been at a level of 25% of GNP and

financed approximately 80% of total investment. However, in order to reach

a gross investment level of more than 31% of GNP by 1982 and reduce the

country's dependence on foreign savings, the Five-Year Development Plan

(1978-82) calls for an increase in gross domestic savings to a level of more

than 28% of GNP at the end of the Plan period. To achieve this objective,

the savings of the householid sector, which is expected to contribute approxi-

mately 40% of the total domestic savings requirement, will need to increase

by more than 17% per annum during the next five years.

37. In addition to raising the level of savings, there is also a need

to increase the maturity of financial assets. While the gross acquisition of

financial assets by the private sector rose from approximately 7% of GDP in

1965 to over 12% in 1974, the relative share of short-term assets increased

from only 17% to more than 40% during the same period. This was mainly due

to statutory limits on deposit rates of credit institutions while no ceilings

existed for money market rates. Given the needs of the investment program

for long-term finance, the present preference for financial assets with

shorter maturities represents an important issue for the Government's financial

policy. With a view to lengthening the average maturity of financial instru-

ments and to encouraging the mobilization of savings through banking institu-

tions, ceilings on bank rates on savings deposits were raised from a range of

6-6.5% to 7-7.5% and on time deposits from a range of from 8-11% to 8.5-12%.

Ceilings on interest rates for loans with maturities exceeding two years were

raised from 12-14% to 19% in January 1976. As the rate of inflation has been

about 7%, the real interest rates are all positive. In June 1977, a 35%

withholding tax on interest paid on short-term financial instruments was

introduced, while a 15% withholding tax on interest paid on savings and time

deposits was set. These measures have resulted in a 36% increase in real

terms in savings and time deposits in 1977.

38. The Philippine financial system does not yet include an effective

bond market mainly because longer-term interest rates have been statu-

torily controlled. An additional constraint is the dominance of the term

market by Government financial institutions because of the preferential treat-

ment given to their debt instruments. Only very limited capital expansion

is being financed through the stock exchange partly because private owners

are reluctant to share control over their enterprises and prefer financing

through borrowing. Recently, however, a 5% tax was introduced on closely

held corporations to encourage them to go public.

39. Financial institutions and credit programs in the Philippines have

experienced deterioration of loan recovery rates during recent years which has

seriously affected their financial performance. This is due, in part, to the

- 12 -

rapid expansion of credit programs to the productive sectors and to interna-

tional economic conditions which have had an adverse effect on some domestic

enterprises. The Government is devoting increased attention to the problem

of arrears so that loan recovery can be expected to improve.

40. It is important for the Government to adopt a systematic long-term

plan to develop the Philippine financial sector along rational lines. An

aide memoire focusing on the issues relating to the financial sector is

being prepared by Bank staff and will form the basis of a policy discussion

between the Government and the Bank within the next few months. A financial

sector mission is scheduled to visit the Philippines in the fall of 1978.

The Bank's Role

41. The Bank Group has assisted industrial development in the Philippines

by providing financial and technical assistance to financial intermediaries

to help them expand and improve their medium- and long-term lending programs

to productive enterprises. Bank Group lending for the sector so far has been

channelled through the Private Development Corporation of the Philippines

(PDCP), the Development Bank of the Philippines (DBP) and the Industrial

Guarantee and Loan Fund (IGLF), a compensatory financing and guarantee fund

which is administered by the Central Bank. Total Bank Group lending has

amounted to about $280 million, including a loan of $30 million for the Fifth

Private Development Corporation of the Philippines (PDCP) Project, which

was signed on February 9, 1978. Increasing attention has been given in

recent years to the needs of small and medium industries as $55 million of

the proceeds of Bank loans is being used for financing such enterprises.

42. Progress under the ongoing industrial projects financed by the

Bank is generally satisfactory. With the exception of the Fifth PDCP Loan,

which was approved only recently, most of the funds under previous loans

have been committed. Results of post-implementation analyses indicate that

both the financial and economic rates of return of subprojects financed are

well above the opportunity cost of capital in the Philippines.

43. In addition to the proposed loan, we hope to be able to present to

the Executive Directors within the next few months a third loan to DBP for

large, small and medium industries. A second loan to help support the IGLF

program of financing small and medium industries through privately owned

financial intermediaries is scheduled for presentation in FY79. These projects

have been designed to meet the medium- and long-term capital requirements of

industries of all sizes and to strengthen the institutional capability of

public and private lending institutions.

44. The proposed loan would be the first to the Philippine Investments

Systems Organization (PISO) and would enable it to undertake long-term

industrial lending. The project is designed to support the Philippine

Government's objective of increasing the rate of industrial growth to 9% per

annum (para. 34). In order to achieve this objective, it will be necessary to

increase substantially the long-term resources available for industrial

development and to diversify the sources of such financing, particularly in

the private sector. Long-term loans currently account for less than 20% of

- 13 -

the investment required by the industrial sector; 95% of such loans areprovided by two institutions: DBP and PDCP. The Government has thereforerequested the Bank to make a loan to PISO with a view to helping develop itscapacity for long-term lending for private sector development projects. TheGovernment selected PISO because of its relatively diverse ownership and thehigh quality of its management and staff.

PART IV - THE PROJECT

45. The proposed loan would be the first to assist PISO in developingan effective program of medium- and long-term lending to private sectorenterprises. The project was appraised in July 1977 and negotiations wereheld in Washington in Marchi 1978. The Philippine negotiating team wasled by His Excellency, Eduardo Z. Romualdez, the Philippine Ambassador to theUnited States, and Mr. Vicitor S. Barrios, Chairman and President of PISO. AStaff Appraisal Report, entitled "Staff Appraisal Report on the PhilippineInvestments Systems Organization" (No. 1900-PH), is being distributed separ-ately. Supplementary project data are provided in Annex III.

46. The proposed loan would be made to the publicly owned PhilippineNational Bank (PNB), which would relend the proceeds to PISO under the sameterms and conditions as that of the Bank loan, except that PNB is expected tocharge PISO a handling fee of 0.75% p.a. on the amount outstanding.The relending arrangement through PNB is necessary because the Philippine lawprovides that the Governmnent can only guarantee the obligations of publiclyowned institutions.

47. The proposed Bank loan and the subsidiary loan to PISO would haveflexible amortization schedules reflecting the aggregate of repayment schedulesfor subloans made by PISO which will have a maximum term of 15 years includinga grace period of up to three years. Most of PISO's subloans are expectedto have maturities of 5-12 years with an appropriate grace period. PISOplans to charge interest aLt 12-14% (including all service fees) on itssubloans. PISO's "free limit" would be established at $750,000 and which inaggregate would not exceed $5 million. Subloans falling above these limitswould require Bank approval (Section 2.03(b) of the draft Loan Agreement).

Institutional Aspects

48. PISO was incorporated on March 1, 1974 as a privately owned Invest-ment House. Its charter contains all the provisions normally associated withdevelopment financing/investment banking institutions. Its authorized sharecapital is P 100 million, and as of December 31, 1977, subscribed and paid-in sharecapital amounted to P 23.6 million (about $3.1 million). In addition, accumu-lated retained earnings as of the same date were about P 4.2 million, bringingthe total equity to about P 27.8 million ($3.6 million). The sole foreignshareholder is the Private Investment Company for Asia (PICA) S.A.,/l whichowns 33.6% of the outstanding stock. The largest domestic shareholder (theInco Mining Corporation) owns about 19.5% of PISO's outstanding stock.

/1 A Singapore-based multinational investment corporation with the objectiveof promoting privately owned productive industrial enterprises in Asia.

- 14 -

49. Given its relatively short operating life and the constraintson mobilizing long-term sources of funds, PISO's activities to date have beenzonfined mainly to short-term financing operations, money market transactionsand syndications. Short-term trading assets constitute the bulk of PISO'sportfolio and are financed by short-term borrowings and equity. As ofDecember 31, 1977, PISO's short-term investments and cash in hand and othercurrent assets totalled P 119 million ($15.9 million equivalent) and consti-tuted about 95% of PISO's total assets. PISO has not yet undertaken anysignificant amount of long-term lending operations. It has, however, managedand/or participated in 11 syndications of long-term loans and has made oneequity investment. In four of these syndications, it has approved loans fromits own resources totalling P 21.3 million of which about P 7.1 millionremained outstanding as of December 31, 1977. Of the 11 projects, 7 were newand 4 were "pioneering" ventures in product lines not previously establishedin the Philippines. PISO has also privately placed or underwritten commonstock issues of a total value of P 8.7 million for three companies and hasguaranteed part of three commercial loans for a total amount of P 7.5 million.

50. To provide the basis for an expanded long-term lending program,PISO has agreed to increase its net worth (share capital plus retained earnings)by at least F 10 million, which would increase its net worth to about P 37.8million (Section 6.01(c) of the draft Loan Agreement). Concurrently, PICA'sshareholding would be reduced to 30%. To encourage wider participation,individual domestic shareholding would be restricted to 15%. The Land Bank ofthe Philippines (LBP) is expected to subscribe to the new share issue (14.6%).LBP's participation is expected to be an interim measure to help PISO launchits expanded lending program. The Land Bank intends to divest its shareswithin the next 3-5 years and PISO's management plans to list publicly andtrade its shares as soon as practicable within the same period.

51. Project Evaluation, Procurement and Disbursement Procedures. On thebasis of a review of all of PISO's project appraisal reports and specialmarket studies, the existing project evaluation capabilities appear to be ofhigh quality. The reports reviewed, however, did not include economicevaluation of projects financed. Agreement was reached during negotiationsthat PISO would undertake economic rate of return analysis for all projectsrequiring investment of $750,000 and above (Section 2.02(b)(ii) of thedraft Project Agreement). Apart from this, all appraisal reports wouldcontain the usual partial economic indicators (i.e. value added, employmentgenerated, foreign exchange savings realized, etc.). Consideration oftechnical aspects of projects requires strengthening and PISO plans toconcentrate on improving this aspect of appraisal, using consultant serviceswhen necessary. While PISO's experience in supervision has been in the pastrelatively limited, its supervision procedures are soundly conceived andreports prepared are of good quality. PISO's procurement procedures helpensure that the right type of machinery and equipment is purchased at areasonable price. It usually requires at least three competitive quotations,and its staff carefully checks the suitability of equipment. Disbursementsare made after detailed scrutiny of supporting documents.

- 15 -

52. Management and Staff. PISO's Board of Directors comprises 11 seats,

of which 9 are presently filLed. All board members are well qualified andcomplement each other in tenns of their individual and collective experience,industrial interests, and links with financial/business groups. The Chairmanof the Board, Mr. Victor S. Barrios, who is also PISO's President and chiefexecutive officer, is a prominent member of, and a leading spokesman for, thePhilippine financial community. He has had considerable experience indevelopment banking (for several years as a senior staff member with PDCP)and his ability and commitment to development finance are respected in boththe private and public sector. He is supported by a well qualified topmanagement team.

53. PISO's total staff numbered 55 as of March 15, 1978, with profes-sional and support staff being distributed on a roughly 7:3 basis. SinceSeptember 1976, PISO has been able to slow the relatively high turnover ofstaff by periodic adjustment of salaries and the provision of more diversifiedwork assignments. PISO's staff are judged to be of high quality; its numberhas been increased by seven officers during the last six months whichwill enable PISO to deal with project evaluation/supervision workload likelyto result from the availability of the proposed Bank loan. PISO expects tostrengthen its staff further by recruiting approximately 8-10 additionalemployees by the end of FY78.

Policies and Corporate Strategy

54. Since its incorporation, PISO has gradually been developing andrefining a policy framework to guide its operations. With broad guidelinesfor corporate activity having been established at the outset by the Board, aseries of specific policies governing day-to-day operations continuesto be developed. These policies, however, are not embodied in PISO's presentPolicy Statement. PISO's management recognizes the usefulness of refiningand expanding its Statement to incorporate and expand upon existing policiesrelating to the conduct of its operations and regulation of its financialaffairs. Accordingly, PISO has revised its Policy Statement which wasadopted formally by its Board on March 29, 1978. The revised Policy Statementoutlines in specific terms PISO's operating and financial policies andprocedures. This document is supplemented by a Corporate Strategy Statementwhich outlines the directions PISO proposes to take in the next three yearsand what it hopes to achieve in this period. The main features of PISO'sstrategy are to: (a) maintain its character as an investment house but withincreasing emphasis on long-term financing; (b) increase the proportion oflong-term assets to total assets from 2% in 1976 to about 50% by 1981; (c)diversify its portfolio with respect to industrial, geographical, and regionaldistribution and to restrict its exposure in any single industry to 30% ofits outstanding long-term portfolio; (d) closely monitor security marketconditions with the intent to list publicly its shares and widen its domesticownership base; (e) diversify its long-term foreign and domestic resources;and (f) evaluate the contribution of all projects to the Philippine economyand where possible stress such particular development objectives as employmentcreation, export promotion and regional dispersal of industries.

- 16 -

Financial Position and Performance

55. As of December 31, 1977, PISO's total assets stood at aboutP 125.5 million (about $16.7 million equivalent), of which almost all assets(95%) were classified as current assets. Its term loan portfolio remainsrelatively insignificant, accounting for only 5.7% of total assets. PISO'scurrent ratio stood at 1.3:1 as of December 31, 1977, and its total debt/equityratio at 3.8:1. Net income after provisions and tax was P 3.5 million whichrepresents an increase of 49% over 1976 after a sharp reduction in 1976 of22% from 1975. Return on average assets was 2.9% in 1977 as compared with2.1% in 1976. PISO paid a 6% dividend (on par value) in both 1975 and 1976,and as of June 30, 1977, the book value of a PISO share was about 18% abovepar, after a stock dividend of 15%, reflecting PISO's retained earnings ofabout P 4.2 million. Since PISO has virtually no long-term portfolio, it hashad no significant experience in dealing with the problem of arrears. However,it has adopted a prudent stance in determining the level of provisions fordoubtful accounts and intends to increase the level of provisions annually ata rate commensurate with portfolio growth until the provisions correspond toat least 1.5% of total loan portfolio by 1981.

Projected Operations

56. PISO's projected commitments for loans are expected to grow fromP 8.8 million in 1977 to about P 42.8 million in 1978 and to P 180 million in1981, while total commitments including guarantees and syndications areexpected to grow from P 251.3 million in 1977 to P 416.3 million 1981. Theseprojected targets are considered attainable, given PISO's institutionalcapability and its plans for staff increases. PISO's share of the market forlong-term loans (from its own and borrowed funds) would gradually increasefrom 0.2% in 1978 to 1.5% in 1981.

57. On the basis of these projections, PISO's long-term loans wouldincrease from only 4.2% of its total assets in 1977 to about 52% in 1981.Both its Policy and Strategy Statements call for the support of new entre-preneurs, of small-scale enterprises and of clients who do not enjoy readyaccess to financing elsewhere. However, as a newcomer to long-term financing,PISO will inevitably start with modest targets and will have to rely to aconsiderable extent, in the initial stages, on the financing of larger establishedcompanies. PISO expects to expand gradually its assistance to small-scaleenterprises; while annual commitments to such enterprises are only expectedto average 4.6% of total loan commitments, their share in terms of number ofoperations will increase substantially. This level of small business lendingis considered reasonable at this stage of PISO's development.

- 17 -

Resource Requirements and Projected Financial Position

58. During the period 1978-1981, additional domestic resources of about

P 60 million are expected to be required and would be financed through

additional paid-in capital, net collections, internally generated funds and

refinancing from the IGLF for small enterprises financed under this facility.

Foreign resource requirements during the period 1978-1979 are expected to be

about $21 million (about P 157.5 million). The proposed $15 million Bank loan,

and $2 million from the US Eximbank would meet the bulk of PISO's foreign

currency requirements over that period.

59. PISO's total assets are expected to grow at an average annual rate

of nearly 50% between 1978, and 1981, reaching P 626.3 million ($83.5 million

equivalent) in 1981. PISO's total debt equity ratio will be below 10:1 up to

1981. According to the projections, the current ratio is not expected to fall

below 1.2:1 while the debt service cover ratio is expected to decline from 3.1

in 1978 to 2.0 in 1981. Assurances have been obtained at negotiations that

PISO would maintain a long-term debt equity limit of 4:1 and a total debt/equity

ratio of 10:1 (Section 3.03 of the draft Project Agreement). In addition,

PISO would continue to maintain debt service and interest coverage at satisfac-

tory levels and would use as a guideline a 10% margin for the current debt

service and interest coverage ratios. Net income is expected to increase

from P 3.5 million in 1977 to about P 16.6 million in 1981, reflecting a

yearly average increase of about 48%. The income contribution from the

long-term portfolio is expected to increase from 8.8% of total income in 1977

to 67% in 1981. PISO's projections show gradually increasing net returns on

average equity from about 13.3% in 1977 to about 25.7% in 1981. PISO intends

to retain at least 40% of its net average earnings to strengthen its capital

base, and its proposed dividend policy has been set accordingly.

Justifications and Risks

60. The project wouLd help provide the needed resources for industrial

development in the Philippines and would strengthen PISO's capacity for

longer-term development lending. Although most of the proceeds of the

proposed loan would be on]Lent to medium- and large-scale modern enterprises,

the project would create the institutional basis enabling PISO in the longer

run to expand its lending to more small-scale industrial projects. Apart from

the normal difficulties that may arise in project implementation, because

PISO is a relatively new entity, there are no special risks associated with

the project.

61. The effectiveness of PISO and other development finance companies

in the Philippines in mobilizing and allocating medium- and long-term finan-

cial resources for the industrial sector, will depend to an important degree

on the adequacy of measures, which the Government will need to adopt within

the next few years, to resolve the broader financial and industrial sector

issues referred to in Parit III. These sectoral concerns will form an important

part of the continued policy discussions between the Government and Bank staff

within the next year or two.

- 18 -

PART V - LEGAL INSTRUMENTS AND AUTHORITY

62. The draft Loan Agreement between the Bank and PNB, the draftGuarantee Agreement between the Republic of the Philippines and the Bank, thedraft Project Agreement between the Bank and PISO, and the Report of the

Committee provided for in Article III, Section 4 (iii) of the Articles ofAgreement of the Bank are being distributed separately to the Executive

Directors.

63. Special conditions of this loan are referred to in Section III ofAnnex III. An increase in PISO's equity by P 10 million has been made an

additional condition of effectiveness of the proposed loan (Section 6.01(c) ofthe draft Loan Agreement).

64. I am satisfied that the proposed loan would comply with the Articlesof Agreement of the Bank.

PART VI - RECOMMENDATIONS

65. I recommend that the Executive Directors approve the proposed loan.

Robert S. McNamara

by I.P.M. CargillVice President, Finance

AttachmentsApril 11, 1978

ANNEX ITABLE 3A Page 1 of 4 pages

PHILIPPINES - SOCIAL INDICATORS DATA SHEET

LAND AREA (THOU KM2) ------------------------ - --_--------------- - ------------ PHILIPPINES REFERENCE COUNTRIES (1970)

TOTAL 300.0 MOST RECENTAGRIC. 109.6 1960 1970 ESTIMATE THAILAND IURKEY KOREA SOUTH **

_ _ -------------_------ --------__ ---_ ------_ ---_ --- -----_ _-_ ---- __--

GNP PER CAPITA (USS) 140.0* 230,0* 410.0*/a 210.0 * 500.0* 280.0*

POPULATION AND VITAL STATISTICS…-_ -_ -_ _ _ _-- _- _-- _- _-- _ _

POPULATION (MID-YR, MILLION) 27.4 36.9 43.3/a 36.3 35.6 32.2

POPULATION DENSITYPER SQUARE KM. 91.0 123.0 144 a 71.0 46.0 327.0

PER sQ. KM. AGRICULTURAL LAND 328.0 375.0 395.0/a 263.0 65.0 1371.0

VITAIL STATISTICSCRUDE BIRTH RATE (/THOU, AV) 45.1 44.2 43.8 44.3 40.6 35.0

CRUDE DEATH RATE (/THOU,AV) 17.9 13.2 10.5 13.7 14.4 11.4

INFANT MORTALITY RATE (/THOU) 84.6 81.0 72.0 80.0 153.0/a

LIFE EXPECTANCY AT BIRTH (YRS) 49.4 55.6 56.5 55.5 54.4 65.0

GROSS REPRODUCTION RATE 3.5/a 3.3 3.3 3.2 2.6/b,c 2.6

POPULATION GROWTH RATE 1%)TOTAL 3.0 3.0 2.8 3.1 2.5 2.3

URBAN 4.0 4.0 3.9 4.9 4 -9

/d 6.4

URBAN POPULATION I% OF TOTAL) 25.3 27.6 29.8 15.0 38.7 41.2

AGE STRUCTURE (PERCENT)0 TO 14 YEARS 45.7 45.6 43.2 45.1 41.7 42.1

15 TO 64 YEARS 51.6 51.6 54.0 51.8 54.0 54.5

65 YEARS ANO OVER 2.7 2.8 2.8 3.1 4.3 3.4

AGE DEPENDENCY RATIO 0.9 0.9 0.9 0.6

ECONOMIC DEPENDENCY RArjo 1.3/b 1.5 1.i/b 1.1 1i1/e 1.4

FAMILY PLANNINGACCEPTORS (CUMULATIVE, THOU) .. 320.0 4065.0/a 470.0 .. 4424.7

USERS (% OF MARRIED WOMEN) . 2.0 25.0/a 10.0 6.2 42.0

EMPLOYMENT

TOTAL LABOR FORCE (THOUSAND) 10100.0 12400.0 15400.0/a 6700.0 t4soo.0/f 10200.0

LABOR FORCE IN AGRICULTURE (x) 61./C 55s.o/a 52.67i 79.0 67.0 50.4/a

IINFMlP~TCyf -1% nc LABOP -OOCS) e.? 7.5 4.C . 4.0/ 4.

iNCOMC DISTRIBUTIGN

% OF PRIVATE INCOME RECOD BY-HIGHEST 5% OF HOUSEHOLDS 28.6 .. 22.0 32.8/h 17.1

HIGHEST 20% OF HOUSEHOLDS 56.2 5.0 5. 51.1 60.6 44.5

LOWEST 20% OF HOUSEHOLDS 4.2 3 5.6 2.

LowEST 40% OF HOUSEHOLDS 11.9 11.7 14.7 14.3 9.4 /h 17.7

DISTRIBUTION OF LAND CWN7;S.,i-.

% OWNED BY TOP 10% OF OWNERS .. .. 43.0/c 5 53.0 28.0

% OWNED BY SMALLEST 10% OWNERS .. .. 2.0/c - 0.9 2.0

HEALTH AND NUTRITION

POPULATION PER PHYSICIAN .. .. 1190.0/d 7970.0 2250.0 2110.0

POPULATION PER NURSING PERSON . . . 4i0.0tM 6650.0 1770.0 /i 2170 .:/

POPULATION PER HOSPITAL BED 11B0.0 650.0 880.0 890.0 500.0 1900.0

PER CAPITA SUPPLY OF -CALORIES (% OF REQUIREMENTS) 83.0 93.0 105.7 103.0 110.0 103.0

PROTEIN (GRAMS PER DAY) 44.0 45.0 55.6 52.0 78.0 65.0

-OF WHICH ANIMAL AND PULSE is.o/d 22.0 , 17.0 /a 22.00 19.0

DIATH RAT[ (/THOU) AGES 1-4 6.0/e 6.0 7.5 14.7 /k

EDUCATION

ADUUSTED ENROLLMENT RATIOPRIMARY SCHOOL 95.0 113.0 117.0 81.0 109.0 104.0SECONDARY SCHOOL 26.0 49.0 49.0 16.0 28.0 41.0

YEARS OF SCHOOLING PROVIDED(FIRST AND SECOND LEVEL) 10.0 1o.0 10.0 12.0 11.0 12.0

VOCATIONAL ENROLLMENT(% OF SECONDARY) 14.0/f 6.o/b 9_0 14 _0 /b 14.0 16.0

ADULT LITERACY RATE (%) .. . 87.0 79.0 55.0 /1 87.0

HOUSING

PERSONS PER ROOM (URBAN) .. * - , .. 1.9 2.7

OCCUPIED DWELLINGS WITHOUTPIPED WATER (%) 60.0 76.0 . .. 64.0 80.0/c

ACCE55 TO ELECTRICITY -

(% OF ALL DWELLINGS) 17.0 23.0 31.0 . . 41.0 50.0

RURAL DWELLINGS CONNECTEDTO ELECTRICITY (I% .* 7.0 10.0 . . 18.0 30.0

CONSUMPTION

RADIO RECEIVERS (PER THOU POP) 22.0 72.0 . 78.0 89.0 126.0

PASSENGER CARS (PER THOU Pop) 3.0 8.0 8.0 5.0 4.0 2.0

ELECTRICITY (KWH/YR PER CAP) 100.0 235.0 291.0 124.0 247.0 307.0

NEWSPRINT (KG/YR PER CAP) 1.3 2.0 1.5 1.0 0.7 3.5

SEE NOTES AND DEFINITIONS ON REVERSE

ANNEX IPage 2 of 4 pages

N0TS

bless otherwISe noted, dots for 1960 refer to any year betieen 1959 and 1961, for 1970 between 1968 and 1970 and for Most Recent Estimate between

1973 and 1975.

^ GNP per copita datS ae- based on the World bank Atlas methodology (1974-76 basis).

cc gorea bac veer solrcced as an objectioe coontry on the basif of its ainilar popuiation, location and income level and, like the Philippi-es, it

is exPected cr-w tepidly it the caning years.

PLPINS 1960 h 1950-55; /b Ratio of population under 15 and 65 and over to total labor force; /t As percentage of enploynent;_PHILIPP, I 19 ! Id 1960-62; /e 1962; /f Not including vocationel short-term courses.

l97 0 , Ac porcontage of enploynent; /b Not Including private vocational schools or vocational short-tern coarses

MOST RECENT fSTIMATE; /s 1976; lb Ratio of population under 15 and 65 and over to total labor force; /c 1971;/d Registered only; believed to be ovar-entinate of ocbner actually practicing.

THAILAND S970 /a 1964-66; /b Public schools, which include technical education at the post-aerondary level.

TIIRILEY 1970 ia 1967; /b Excludes 17 eastern provinces; Ic 1965-67; /d 1965-70; /e Ratio of population under 15 sod 65and over to lab1. force 15 years and wevr; /f 15 years and over, e.cludes unemployed; jj Registered only;

/h Disposable income; /i Including assistant nurses and midwives; /I 1964-66; /k 1967-68; /I Persona

six years and over who tell the census takars that they can rad and write.

inipo REP'. OF 1970 /a An peroentaga of employmnt; /b Registered, not all practicing in the country; /c Water piped inside.

RiD, Noveeber 17, 1977

DEmnTIOau oF SOCIAL 7NDICATORS

Land urear-)thou k=2

%oul:tion er nursing prson - Population dtvided by musber of practicingTotal - Total s-rfac- areS crerpriSifg land reas nd inland waters, es a nd fel grduts norsee, "trained" or "certified" s dUri. - Moot re-et, e-timate of agricoitural ars used tmporarily or peros- anilia-y personnel with training or eaperance,.

n-ntly fo- crops, pastures., srket 6 kitchen garden or to lie fallo. Porulatim psr hoeitel bad - Population diviled by number of hospiel bedsavailabl in public and privet general and epecilised hespitel nd

GNP per capita (1S)5 - GNSP per capita eatimates t corrent market pnicaa, rehabilitation ceeter; secludes ourtieg hoas nd esutblihente forcal-claced by oSu- conar-sor- method as World Bank Atlas (1973-75 basie); cvetodial nd prventive nre.1960; 1970 aed 1975 data. Per canita sunely of calorie (7 of resuirememtal - CoPputed fros nergy

squivaleat of -t food supplies eilebl is c--otry par capita per dsy;Population and vital statstic; vailble supplies canprise d-a-tic productis, imports 1ass eporte, IndPopulation (mid-Year million) Ar of July first: if not vailable, orage changes in stock; net *pplies amclde enimal feed, seede, quantities used

of two end-year .stb.ata.; 1'60, 1970 nd 1975 data. is food proceseing and lasses in distribution; rquire nts ere estimatedby FAD based on physislegical ne-ds for normai activity ed halth conid-

Poeulation denity - per square kl - Mid-year population par square kil.ts.r srnug emviro_ntal tmperature, body eighta, ag. and ase diitributions of(100 hecteree) of total area. popuhtion, nd allowing 102 for wete at houehold level.

PoPvlhtion deneity - per sosere kI of a*ric. lend - Computed as abae far Per canite auPly of protain (gara per de) - Pratnei content of per capitaagricultural land only. et swpply of food per day; t supply of fond is defimad as above; rquire-

ments for all countris eatabliahed by USA Economic ReSeerch ServicesVital statistics provide for a miniusa a*ilmesca of 60 gr_ of totel proctin Per day, andCrude birth rats per thousand. a-arge - Aonual live hirtha per thousand of 20 gra of aime1 and pulse prontim, ef which 10 gr_ should be -1-1e

lid-year popolation; ten-year -ritheetic average ending in 1960 and 1970, protein; theae stanedrds ar Isr then those of 75 grne of total proteinand five-yes average ending in 1975 for eat recant estimate and 23 grasa of animl protain as *m average for the wsrld, propoad by FPO

Crude death rats Per thouaand, avesrse - Annual deatha per thousand of id-yar in the Third World Food Survey.population; ten-year arita tic averages ending is 1960 and 1970 and five- Per capita prsteis supaly fr animal end ,l,s - protein supply of foodyear average ending in 1975 for as.t recant estimate, derived from anals and pulee in grm per day.

Infant mortality rats (/thou) - Annual deaths of infant under on year of age Death rate (/thou) ces 1-4 - A-nual deatha per thossand in age group 1-4per thousand liv births, yrars, to children in this aga group; suggested as an indirtotr of

Life esp*ctancy at birth (yr.) - A-erege nusber of years of life raining at malnutritionbirth; usually five-year -v-r-ge- ending in 1960, 1970 and 1975 for develop-ing co,attico Education

Croae reproduction rate - verage cuber of live daughtereawaan will bear Adiu ted enrollment ratio - priery chool - Enro11_nt sf a11 ges as per-in her normal reprodop ti-e period if she amperieoces preent age-specific cantags of peimary school-age popul-tian; inclods children aged 6-11 y-eatertility rates; u-ally fine-vest averagea ending in 1960, 1970 and 1975 but adjusted for different lengths of primary adocatin; for countries ithfor developing couctrins onivereal edu-stion, enrollment may ee.sad 10v2 since * pupils are blov

Population crowd, rate (7.) - total - nCopound annual growth rates of mid-yer or above the Official school age.popultion for 1950-60, 1960-70 and 1970-75. Adjuted enrollment ratio - secondary school - Cuaputed s bove; secondary

Population grovth rate (7.) - urban - Canputod like growth rate of total education requires at least four years Of approvd priary instruction;population; different definitions of urban areas ny affect comparability of provides general, vocational or teacher training instruction for pupiladata among countrLes. of 12 to 17 years of ags; correapsedesce courses en generally ezclIded

Drhac epulation (7, of total) - Ratio of urban to total populatioq; differeot Yes of chooling e rovidf d Ifirt sod second leels) - Total yess ofdefinitios of urban areas nay aftrct comparability of data sng countries. chooling; at secondary level, voctionl instruction ay be partially or

ct0o pl-tely estluded.A,ge trctore (percent) - Children (0-14 years), working-age (15-64 years), Vocational enrollment (7. of secondary) - VOC-atiOnl institutions i-olude

and retired f65 years and aver) as percentages of mid-year papuletion technical, indtrial or other progra which operate ifd.pendently r asJyc dependency ratIo - farto of population onder 15 and 6) and over to those deparonents of secondary Institutionn.

t ages IS tbrocd b ha. Adult literacy rate (7.) - Literate dults (fbl to read and write) as pen-iconocic dependencvc ratio - Ratio of population under 1I and 65 and over to centage of total adult popul-tion aged 15 years ad over.

the labor farce in ago 9ro-p of 15-64 years.raniI plyanln _ - cceptora (co-nlative- thou) - Cusolative on-ber of acceptors Hgoing

of birth-octnrel de-ires coder sospicen of national faily planning progres Per-n- per roan (urban) - Average uoaber of parsons per rtas in occupied

sinc incaptbo conventional dwellings in urban re; dwellings eeolsde non-permanetFeils pla-nnign t (77 of married women) - Percentages of mArried woeen of structure and unoccupied parts

child-bearing age (15-44 years) who ue birth-control devio-u to a11 married Docucied dwsllins mithout pead water (%) - Occupied conventional dwelingswoee insa ne age yroup. in urban and rural areas ithout inside or outside piped water f-ctilita

sa percentage of a11 occupied dwellings.T.t.1i.brvmeet-~ A.ces to lcrct.7 faldelns Conventcima dwellings ath

folc labd orf Ioly d brhuutad -fonghoma active persona, including armed electricity in living qarters as p t of total dwellings in rban edfocei cd ompae btscuigouwie, students, etc.; definitionsrrl ns

Ic eniaacontisa are set coparable RucaI dwellings connected to elsetricity (7.) - Canputed as above for ruralLabor farce in aricuiture (7) - AgricuLtural labor force (ic faring, forestry, d1eings only.

hunting and fisabio 5 as percent-ge of total labor fsrce.UnnnPeloyd (7 of labor force) - Unemplyed are usully defined as persons vho CoosurPtion

are able and willioi to take a jab, out of a job on a gives day, rained sut Radio recivers fetr thou eon) - All types of receivers for radio broadcastof a job. and aecking work for a uperffifd ninimom period not -sceediag one to general public per thousand of papulacice; emclsdea onliceneed receiverweek; may not be comparable betweno countries due to different definitions in countrie and in yehes when registration of radio sets was in effectof unemployed and source of data, e.g., employment office statiatics, ._p,e date for r1cn t years may not bh canpara-ble aoes st courie fbolihedsarneys. compcleorv ono-ployment ins-race UIcen ing.

Passeger cars (per thou pop) - Passenger cars comprise motor cars sestingInca distribhti- - Percentage of prieste Lncome (both ic cash and kind) le than eight persons; enclodes embulenes, hearses and military

receivad by riche-t 57. richest 207., poorest 207., and poorest 407 of house- vehiclesboide. Electricity (kwh/yr pear cap) - Annual coneption of idoatrial, - imerial,

public end private electricity in kilowatt hours per capita, generallyDiacribctioo of tend nersblc-Percentages of land owned by wealthiest 107 based on production dat., ithout l1owance for losses in grids bht allow-

and poorest 107. of land owners. oig for imports and eprta of electricity.

H NNesrist 'kg/-r per cap) - Per c-pita annual conoamption in kilograHealth end Nutrition estia ted frn domestic production plus net imports of n-sprint.Population per phyrcciac - fopulotion divided by nun-er of practicing

physIicans qualified trowl a mnedical school at coivereity level.

ANNEX IPage 3 of 4 pages

ECONOMIC INDICATORS

GROSS NATIONAL PRODUCT IN 1976 ANNUAL RATE OF GROWTH (X, constant prices)

US$ million % 1966-71 1971-76 1976

GNP at Market Prices 17,631 100.0 5.1 6.6 6.4

Gross Domestic Investment 5,519 31.3 5.9 12.5 6.3

Gross National Saving 4,413 25.0 2.4 10.8 6.6

Current Account Balance -1,106 -6.3

Exports of Goods, NFS 3,115 17.7 -0.5 5.6 18.0

Imports of Goods, NFS 4,270 24.2 4.1 6.5 1.5

OUTPUT, LABOR FORCE ANDPRODUCTIVITY IN 1976

Value Added Labor Force V. A. per worker

US$ million Z Million -US$ x

Agriculture 5,156 29.0 8.1 50.0 637 58.0

Industry 6,029 33.9 2.3 14.2 2,621 238.7

Services 6,607 37.1 5.0 30.9 1,321 120.3

Unemployed . . 0.8 4.9 . _

Total/Average 17,792 100.0 16.2 100.0 1,098 100.0

GOVERNMENT FINANCEGeneral Government Central Government

(P billion) % of GDP (P billion) % of GDP

1976 1976 1971 1976 1976 1971

Current Receipts 20.9 15.8 11.3 18.3 13.8 9.2

Current Expenditure 18.2 13.7 10.1 16.1 12.2 7.6

Current Surplus 2.7 2.0 1.2 2.2 1.7 1.6

Capital Expenditures 4.9 3.8 1.6 4.5 3.4 1.3

MONEY, CREDIT AND PRICES1972 1973 1974 1975 1976 AuRust 1977

(P million outstanding end period)

Money Supply 6,500 7,300 9,000 10,300 12,100 12,800

Bank Credit to Public Sector 3,900 2,400 2,000 5,800 8,900 9,200

Bank Credit to Private Sector 12,600 16,200 24,200 28,500 23,600 34,900

(Percentage or Index Numbers)

Money as % of GDP 11.5 10.1 9.0 8.9 9.2

General Price Index (1972 = 100) 100.0 117.6 154.4 166.8 180.1

Annual percentage changes in:General Price Index 6.7 17.6 31.3 8.0 8.0

Bank Credit to Public Sector -2.1 -38.5 -16.7 190.0 53.4

Bank Credit to Private Sector 21.7 28.6 49.4 17.8 17.9

/a All conversions to dollars in this table are at the average exchange rate prevailing

during the period covered.not applicable.

ANNEX IPage 4 of 4 pages

TRADE PAYMENTS AND CAPITAL FLOWS

BALANCE OF PAYMENTS MERCHANDISE EXPORTS (AVERAGE 1974-76)1974 1975 1976 US$ million %

(US$ million)Coconut Products 539 21.4

Exports of Goods, NFS 3,431 3,076 3,330 Sugar Products 613 24.3Imports of Goods, NFS 3,784 4,116 4,383 Forest Products 298 11.8Resource Gap (deficit = -) -353 -1,040 -1,053 Mineral Products 437 17.3

Fruits & Other Agric. Products 178 7.1

Interest Payments (net) 26 -53 -185 Other Manufactures 456 18.1Other Factor Payments (net) -154 -149 -138 Total 2,521 100.0Net Transfers 276 318 269Balance on Current Account -205 -924 -1,107 EXTERNAL DEBT, DECEMBER 31, 1976 /c

US$ millionDirect Foreign Investment 28 125 144Net MLT Borrowing Public Debt, including Guaranteed 2,216Disbursements 456 677 1,407 Nonguaranteed Private Debt 1,812

Amortization 312 318 368 Total Outstanding and Disbursed 4,028Subtotal 144 359 1,039

Other Capital (net) /a 143 -80 -236 DEBT SERVICE RATIO FOR 1976 /d

Increase in Reserves (+) 110 -521 -160Public Debt, including Guaranteed 7.2

Gross Reserves Nonguaranteed Private Debt 10.5(end year) /b 1,978 2,079 2,205 Total Outstanding and Disbursed 17.7

Petroleum Imports 573 710 801

IBRD/IDA LENDING, February 28, 1978 (US$ million)

RATE OF EXCHANGE IBRD IDA

Annual Averages End Period Outstanding and Disbursed 457.7 29.01975 1976 Jan-Aug 1977 Aug 1977 Undisbursed 697.4 3.2

Outstanding, incl. Undisbursed 1,155.1 32.2US$1.00 = P 7.275 7.447 7.418 7.403P 1.00 = US$ 0.138 0.134 0.135 0.135

/a Includes SDRs, short-term private loans, Central Bank liabilities, use of IMF credit, and errorsand omissions.

/b Gross reserves of the Central Bank./c Excludes short-term debt and IMF standby credit and is on a disbursement basis.Id Ratio of Debt-Service to Exports of Goods and Nonfactor Services.

ANNEX IIPage 1 of 12 pages

THE STATUS OF BANK GROUP OPERATIONS IN THE PHILIPPINES

A. STATEMENT OF BANK LOANS AND IDA CREDITSAs of February 28, 1978

Loan orCredit Amounts ($ million)Number Year Borrower Purpose Bank IDA Undisbursed

Fifteen loans and two credits fully disbursed 218.5 19.5637-PH 1969 Republic of the

Philippines Irrigation 34.0 0.3720-PH 1971 Rice Processing

". and Storage 14.3 4.4809-PH 1972 National Power

Corporation Power 22.0 4.3349-PH 1973 Republic of the

Philippines Education II 12.7 3.2891-PH 1973 " Fisheries 11.6 1.1939-PH 1973 Ports 6.1 3.2950-PH 1973 Second Highways 68.0 14.2984-PH 1974 Aurora-Penaranda

Irrigation 9.5 5.9998-PH 1974 DFC-DBP 1 50.0 7.4

1034-PH 1974 National PowerCorporation Power 61.0 27.0

1035-PH 1974 Republic of thePhilippines Population 25.0 18.7

1048-PH 1974 " Shipping 20.0 15.11052-PH 1974 Philippine

National Bank DFC 30.0 19.61290-PH 1975 Republic of the Tarlac

Philippines Irrigation 17.0 11.41102-PH 1975 Rural

Development 25.0 22.51120-PH 1975 Small and Medium

Industries 30.0 8.01154-PH 1976 Magat

Irrigation 42.0 32.81190-PH 1976 " DFC-DBP II 75.0 56.31224-T-PH 1976 Education III 25.0 20.31225-PH 1976 Livestock II 20.5 12.41227-PH 1976 Chico Irrigation 50.0 47.71272-T-PH 1976 Manila Urban 10.0 9.01282-PH 1976 Manila Urban 22.0 19.71269-PH 1976 Second Grain

Processing 11.5 11.51270-PH 1976 " Second Fisheries 12.0 10.21353-PH 1977 Third Highways 95.0 94.51367-PH 1977 Jalaur Irrigation 15.0 15.01374-PH 1977 Fourth Education 25.0 24.51399-PH 1977 Central Bank of Fourth Rural

the Philippines Credit 36.5 34.914L4-PH 1977 Republic of the National Irriga-

Philippines tion SystemsImprovement 50.0 49.8

1415-PH 1977 Provincial CitiesWater Supply 23.0 22.7

1421-PH 1977 Second RuralDevelopment-Land Settlement 15.0 15.0

1460-PH 1977 National PowerCorporation Seventh Power 58.0 58.0

1506-PH * 197B Republic of the Smallholder TreePhilippines Farming 8.0 8.0

1514-PH * 1978 PhilippineNational Bank DEC (PDCP) 30.0 30.0

Total /a 1,265.5 32.2 738.6of which has been repaid(Bank and third parties) 110.4 -

Total now outstanding 1.155.1 32.2Amount sold 22.0

of which has been repaid(third parties) 13.1 8.9 -

Total now held by Bank and IDA(prior to exchange rateadjustments) 1,146.2 32.2

Total undisbursed 697.4 3.2 738.6

Ia A loan of $65 million fur the Second National Irrigation Systems ImprovementProject waks approved by the Executive Directors on February 28, 1978 andsigned on March 15, 1978. In addition, a loan of $2 million for anEducational Radio Technical Assistance Project was approved by theExecutive Directors on March 21, 1978, a loan of $60 million for ruralelectrification on April 4, 1978 and a credit of $28 million for a ruralinfrastructure project on April 11, 1978.

* Not yet effective.

ANNEX IIPage 2 of 12 pages

B. STATEMENT OF IFC INVESTMENTSAs of February 28, 1978

Fiscal Amounts ($ million)Year Company Loan Equity Total

1963 & 1973 Private Development Corporation of thePhilippines 15.0 4.4 19.4

1967 Manila Electric Company 8.0 - 8.0

1967 Meralco Securities Corporation - 4.0 4.0

1970 Philippine Long DistanceTelephone Company 4.5 - 4.5

1970 & 1972 Mariwasa Manufacturing, Inc. 0.8 0.4 1.2

1970 Paper Industries Corporation of thePhilippines - 2.2 2.2

1971 & 1977 Philippine Petroleum Corporation 6.2 2.1 8.3

1972 Marinduque Mining and IndustrialCorporation 15.0 - 15.0

1973 Victorias Chemical Corporation 1.9 0.3 2.2

1974 Filipinas Synthetic Fiber Corporation 1.5 - 1.5

1974 Maria Christina Chemical Industries, Inc. 1.5 0.5 2.0

1974 Republic Flour Mills Corporation 1.2 - 1.2

1975 Philippine Polyamide IndustrialCorporation 7.0 - 7.0

1976 Philagro Edible Oils, Inc. 2.6 0.2 2.8

1977 Acoje Mining Company, Inc. 2.3 1.2 3.5

1977 Sarmiento Industries, Inc. 3.5 - 3.5

Total gross commitments 71.0 15.3 86.3

Less sold, acquired by others,repaid or cancelled 24.5 12.0 36.5

Total commitments now held by IFC 46.5 3.3 49.8

Undisbursed 5.0 - 5.0

ANNEX IIPage 3 of 12 pages

C. PROJECTS IN EXECUTION /1

Agricultural Sector

Loan No. 720 Rice Processing and Storage; $14.3 Million Loan ofFebruary 4, 1971; Date of Effectiveness: May 10, 1971;Closing Date: June 30, 1979

This project provides long-term credit through the DevelopmentBank of the Philippines to finance a program for the development and modern-ization of the rice and corn processing industry. Originally the projectwas restricted to rice and to the private sector, and the emphasis was onthe construction of new integrated large capacity rice mills. Due in partto poor harvests and in part to large cost increases for rice mills, thedemand for subloans for new integrated rice mills turned out to be smalland, as explained in the President's Memorandum, dated June 8, 1972 (R72-40),the Loan Agreement was amended to shift the project emphasis to rehabilita-tion of existing rice milling facilities. The Loan Agreement was furtheramended in April 1974 to: (a) expand the scope of the project to include cornin addition to rice, (b) enable local governments and the National GrainsAuthority to borrow funds under the project, and (c) streamline procurementprocedures (President's Memorandum SecM74-244 of April 15, 1974). As aresult of these amendments, the project is now generally progressing satis-factorily, although mounting arrears are a source of concern and DBP is nowstepping up its supervision and collection efforts to deal with this. Bankloans for subloans have been fully committed; however, because of the longconstruction period of the large subprojects, full disbursement will bedelayed until mid-1978 and the Closing Date has been postponed toJune 30, 1979.

Credit No. 472 Aurora-Penaranda Irrigation; $9.5 Million Credit andLoan No. 984 $9.5 MiLlion Loan of May 14, 1974; Date of Effectiveness:

August 22, 1974; Closing Date: June 30, 1979

The project diverts water from the Aurora basin into the Pantabanganreservoir to provide year-round irrigation for 30,000 ha of rice land inCentral Luzon. Although the need for foundation and abutment area grouting onthe two diversion dams was more extensive than originally expected, progresson the transbasin diversion was excellent. Diversion of 75% of Aurora water,

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

ANNEX IIPage 4 of 12 pages

on closure of the first dam in July 1975, was an early benefit for the CentralLuzon rice growing area. The second dam was closed or April. 1, 1976, about oneyear ahead of schedule. In the service area, lack of competition and high bidsdelayed awarding of contracts, but five small local construction firms are nowat work. Urgent work is being done by government forces. Project costs haveincreased about 54% over appraisal estimates, largely as a result of rapidinflation. Although there are added benefits from early diversion resulting inadditional water for irrigation sooner than planned, and nearly 5,000 ha havebeen added to the project, the rate of return is expected to fall from 17% atappraisal to around 14%. The Credit has been fully disbursed and disbursementon the Loan has begun.

Loan No. 891 Fisheries; $11.6 Million Loan of May 21, 1973;Date of Effectiveness: December 5, 1973; ClosingDate: June 30, 1979

This project is designed to provide long-term credit to the privatesector through the Development Bank of the Philippines for marine and inlandfisheries development. The demand for subloans has been adequate, and theorganization to implement them has been properly established. The project isprogressing satisfactorily, and all funds were fully committed by July 1976and are likely to be disbursed by the Closing Date. A moderate arrearsproblem has developed, which DBP is tackling by increasing its supervisionand collection efforts.

Loan No. 1080 Tarlac Irrigation; $17.0 Million Loan of January 27,1975; Date of Effectiveness: April 27, 1975; ClosingDate: December 31, 1980

The project is assisting the Government to improve 21,000 ha ofland under three existing national irrigation systems and expand irrigationon 13,000 ha of additional land in Central Luzon. Progress on the groundwater,water management training and NISIS components of the project has been good.All major civil works contracts are now awarded and remaining work is allunder way. Also, most equipment contracts are awarded. Progress under theproject is satisfactory.

Loan No. 1102 Rural Development; $25.0 Million Loan of April 16,1975; Date of Effectiveness: July 28, 1975; ClosingDate: June 30, 1981

The project is assisting the Government to carry out a rural devel-opment project on the island of Mindoro. This includes constructing andimproving 150 km of national highways and 280 km of provincial roads, rehabil-itating and upgrading Calapan Port, improving and extending two nationalirrigation systems to serve 12,000 ha of rice land, and 3,000 ha undercommunal irrigation systems, providing an agricultural program involving seed

ANNEX IIPage 5 of 12 pages

testing laboratories and rat control, providing protection programs in fourwatersheds, schistosomiasis control, and assistance to Mangyan tribes. Pro-gress is satisfactory on irrigation and after substantial initial delays, isimproving steadily for the road component. These two components are beingimplemented by agencies having experience with Bank-funded projects, andconstruction has begun on Calapan Port. With the exception of the MangyanAssistance Program, however, there was little early progress under the otherprograms because of inadequate budgeting by the various agencies for the newprograms. More adequate budgets have now been approved and all work isexpected to proceed rapidly.

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

The project is assisting the Government to improve and expandirrigation on 35,000 ha cf land in the Cagayan Valley of Northern Luzon.Consultant's work on the engineering and economic evaluation studies isalmost completed. The water management training is under way and satis-factory progress is being made on civil works.

Loan No. 1225 Second Livestock; $20.5 Million Loan of April 8, 1976; Dateof Effectiveness: September 13, 1976; Closing Date:June 30, 1982

The project is designed to increase domestic production of livestockproducts. As of June 30, 1977, disbursements were $5.0 million, which isabout 70% above appraisal estimates. However, arrears under the FirstLivestock Project are quite high and DBP is now taking steps to improvesubloan appraisal and supervision as well as project monitoring.

Loan No. 1227 Chico River Irrigation Project; $50.0 Million Loanof April 8, 1976; Date of Effectiveness: July 19, 1976;Closing l)ate: June 30, 1981

The project is assisting the Government to improve and expandirrigation on 19,700 ha in the Cagayan Valley. Consultants for the ErosionControl Study and for input-output monitoring have been engaged. A starthas been made on civil works for rehabilitation of the Chico West and Tuga-Gobgob areas. Bids have been received for the three road links included inthe project and contracts have been awarded for two of them. Governmentevaluation of the third is still under way. After substantial initial delay,the road component of the project is now progressing more satisfactorily.

ANNEX IIPage 6 of 12 pages

Loan No. 1269 Second Grain Processing Project; $11.5 Million Loan ofJuly 2, 1976; Date of Effectiveness: November 12, 1976;Closing Date: June 30, 1981

The project provides long-term credit through the Development Bankof the Philippines to assist in modernizing and expanding the Philippinegrain processing industry. Initial progress under the project is satisfactory.

Subloan commitments are expected to begin shortly, now that Loan No. 720 isfully committed.

Loan No. 1270 Second Fisheries Project; $12.0 Million Loan ofJuly 2, 1976; Date of Effectiveness: November 12, 1976;Closing Date: June 30, 1981

The project provides long-term credit through the Development Bankof the Philippines to assist in increasing fish production for domestic con-sumption. Initial progress under the project is satisfactory.

Loan No. 1367 Jalaur Irrigation Project; $15.0 Million Loan ofFebruary 14, 1977; Date of Effectiveness: May 12, 1977;Closing Date: December 31, 1982

This Loan is assisting the Government in rehabilitating about22,000 ha of existing irrigation schemes and constructing new irrigation anddrainage facilities for about 2,900 ha of rice land on the island of Panay.Construction work on the existing main and secondary canals improvement hasnow begun.

Loan No. 1399 Fouirth Rural Credit Project; $36.5 Million Loan ofApril 11, 1977; Date of Effectiveness: June 2, 1977;Closing Date: December 31, 1980

The project provides medium- and long-term credit through partici-pating banks to finance farmers and local entrepreneurs for farm mechanization,livestock, fisheries, and cottage and agro-industries. The project becameeffective on June 2, 1977. Initial implementation was delayed because of thetime required for preparation, but commitments are expected to increase inthe coming months. The major problem is to minimize disqualification fromparticipation due to high arrearages and to encourage eligible rural banks to

participate.

Loan No. 1414 National Irrigation Systems Improvement Project; $50 MillionLoan of May 13, 1977; Date of Effectiveness: August 9, 1977;Closing Date: December 31, 1981

This project consists of rehabilitation of irrigation facilitiesserving 28,000 ha and extension of irrigation facilities to 22,000 ha

ANNEX IIPage 7 of 12 pages

of farmland in Northern Luzon and Leyte, and a schistosomiasis control

program in Leyte. The Loan became effective on August 9, 1977.

Loan No. 1421 Second Rural Development (Land Settlement) Project;

$15.0 Million Loan of June 10, 1977; Date of Effectiveness:

October 27, 1977; Closing Date: December 31, 1982

The loan became effective on October 27, 1977. A good start has

been made in setting up the administrative structure of the project implemen-

ting unit and in improving its planning capacity. Physical progress is

somewhat behind schedule as a result of procedural difficulties in obtaining

local counterpart funds. This problem, however, is being resolved and

project implementation can be expected to be completed on time.

Loan No. 1506 Smallholder Tree Farming and Forestry Project; $8.0 Million Loan

of January 23, 1978; Date of Effectiveness: Not Yet Effective;

Closing Date: December 31, 1982

This Loan was approved by the Executive Directors on December 22, 1977

and signed on January 23, 1978. It is not yet effective.

Loan No. 1526 Second National Irrigation Systems Improvement Project: $65 Million

Loan of March 15, 1978; Date of Effectiveness: Not Yet Effective

Closing Date: December 31, 1984

The project will assist the Government to improve and develop irriga-

tion systems for a total of 80,900 ha, control schistosomiasis and strengthen

the National Irrigation Administration regional offices. The Loan Agreement

was signed on March 15, 1978. It is not yet effective.

Transportation Sector

Loan No. 939 Second Ports Project; $6.1 Million Loan of October 24, 1973;

Date of Effectiveness: December 19, 1973; Closing

Date: July 15, 1979

Progress on civil works construction for both General Santos

and Cagayan de Oro has been slow, due mainly to frequent breakdowns of the

contractor's dredger in General Santos, and the slow mobilization of con-

tractor's plant in Cagayan, de Oro. These problems have been resolved and

progress on civil works construction at both plants is improving. By June

1977, work was 36% completed in General Santos, and 6% in Cagayan de Oro.

The present estimated tota[l project cost is 75% higher than the appraisal

ANNEX IIPage 8 of 12 pages

estimate due to worldwide price increases. However, foreign exchange costsare lower than appraisal estimates as the contractors are locally based.Total traffic at the project ports is in line with appraisal forecasts and areasonable financial rate of return is being earned. By June 1977 thePhilippine Port Authority had taken over 7 of the 18 national ports.

Loan No. 950 Second Highway; $68.0 Million Loan of December 12,1973; Date of Effectiveness: February 27, 1974;Closing Date: June 30, 1979

Overall progress on construction has been generally satisfactory,with about 90% of the project works completed. However, progress on one ofthe national roads is not satisfactory and this is expected to delay projectcompletion by about 12 months compared to the appraisal estimate. UNDP-financed road feasibility studies were completed in June 1975, and detailedengineering for the Third Highway Project (Loan 1353-PH) was completed inAugust 1976. Detailed engineering for the proposed Fourth Highway Project wassubstantially completed in October 1977. The total cost of the project hasrisen substantially (about 40% above appraisal estimate) because of inflationfollowing the oil price increase in late 1973. About $12 million still remainsundisbursed and hence the Closing Date has been postponed to June 30, 1979.

Loan No. 1048 Inter-island Shipping; $20 Million Loan of October 29,1974; Date of Effectiveness: January 15, 1975; ClosingDate: June 30, 1979

The Government is relending the proceeds of the Loan to theDevelopment Bank of the Philippines (DBP) for onlending to beneficiariesfor the acquisition of new and used ships and for major repairs and con-versions. Commitments were initially slow because of lack of demand from theprivate sector due to the lengthy period required for the processing ofloans, restrictive collateral requirements by DBP, and unfavorable lendingterms offered by DBP in comparison with those extended by other lendinginstitutions in the Philippines. However, these problems are now beingresolved and subloan commitments have begun to move again.

Loan No. 1353 Third Highway Project; $95.0 Million Loan ofJanuary 12, 1977; Date of Effectiveness: March 30, 1977;Closing Date: June 30, 1981

The project is assisting the Government in improving the nationaland rural road systems and their maintenance. Most construction contractshave been awarded. The major problem is delayed implementation of the roadrestoration/maintenance component of the project. However, priority attentionhas been given to this problem and, as a result, implementation of thesecomponents are expected to accelerate during the coming year.

ANNEX IIPage 9 of 12 pages

Education Sector

Credit No. 349 Second Education; $12.7 Million Credit of danuary 5,1973; Date of Effectiveness: April 11, 1973; ClosingDate: December 31, 1978

The Credit provides $12.7 million to finance improvements toexisting middle and higher level agricultural education institutions, curric-ulum development, and new technical and vocational institutions in ruralareas. Physical progress is now good under the project and disbursements havereached 75% of planned levels. All of the 32 project institutions have beencompleted and three fourths of the technical assistance program has beencompleted. Cost overruns of 13% are expected in dollar terms because ofinflation and earlier lack of cost control over civil works; the amount ofequipment purchased has been reduced to compensate for cost overruns.

Loan No. 1224 Third Education Project; $25 Million Loan of April 8,1976: Date of Effectiveness: July 29. 1976; ClosingDate: June 30. 1981

The project covers the first phase (1976-80) of the Government seight-year textbook program and provides for the development, productionand distribution of 27 million textbooks. It also provides for curriculumdevelopment, teacher training and technical assistance. Progress underthe project is satisfactory. Disbursements are more than twice the plannedlevel.

Loan No. 1374 Fourth Education Project; $25.0 Million Loan ofMarch 25 1977; Date of Effectiveness: June 9, 1977;Closing Date: December 31, 1981

This project is assisting the Government in developing agriculturaleducation and training. It includes assistance for: specialized facilitiesfor forestry, animal science, and veterinary medicine; a regional agriculturalcollege in the Visayas; and training for extension workers and farmer leaders.Implementation of all aspects of the project is on schedule.

Urban Sector

Loan No. 1272T Manila Urban Development Project; $10.0 Million andLoan No. 1282 $22.0 MiLlion Loans of June 9. 1976; Date of Effectiveness:

December 9, 1976; Closing Date: September 30, 1981

The loan is financing: (a) improvements in basic sanitary services forfamilies living in the Tondo Foreshore and Dagat Dagatan areas, and (b) improve-ments in transportation and traffic in the Greater Manila Area. Constructionon 1,500 of 2,000 serviced lots at Dagat Dagatan is nearing completion. The

ANNEX IIPage 10 of 12 pages

high school and health clinic in Tondo have been constructed and the subdivisionof lots in the Tondo priority area is also nearing completion. A paper on thestatus of this project was submitted to the Executive Directors in December 1977.

Loan No. 1415 Provincial Cities Water Supply Project; $23 Million Loan ofMay 13, 1977; Date of Effectiveness: September 9, 1977;Closing Date: March 31, 1982

This loan is financing: (a) water supply improvement and expansionin six provincial cities; (b) feasibility studies for water supply improve-ment in ten additional cities; and (c) feasibility studies for Manila sewerage.The Loan was made effective on September 9, 1977. Progress is generallysatisfactory according to the review of the preliminary engineering studiesand detailed design of the water supply construction.

Power Sector

Loan No. 809 Fifth Power; $22.0 Million Loan and $10.0 Million CreditCredit No. 296 of April 3, 1972; Date of Effectiveness: July 1, 1972;

Closing Date: June 30, 1978

The project is helping the National Power Corporation (NPC) tofinance the construction of a second thermal unit of 150 MW at Bataan andtransmission facilities in Luzon. Although there has been some minor delaydue to the late delivery of transformers, the project is proceeding satis-factorily. The erection of transmission lines has also been completed.The loan is expected to be fully disbursed before the Closing Date, which hasbeen postponed from June 30, 1976 to June 30, 1978. A tariff increase wasapproved in October 1976, but this was insufficient to enable NPC to achievethe expected rate of return of 8% on its net fixed assets in operation.Further tariff increases are currently under consideration.

Loan No. 1034 Sixth Power; $61.0 Million Loan of July 31, 1974:Date of Effectiveness: November 15, 1974; ClosingDate: December 31, 1978

The project is helping the National Power Corporation (NPC) tofinance a 100 MW hydro plant at Pantabangan and transmission lines for thefurther expansion of the Luzon grid and feasibility studies by consultantsfor a future power project. The generating plant has been commissioned.However, the transmission component of the project is behind schedule becausenecessary design work has been delayed due to NPC's heavy constructionprogram. For this reason the Closing Date may have to be extended. Costshave increased by 21%, largely due to inflation.

ANNEX IIPage 11 of 12 pages

Loan No. 1460 Seventh Power Project; $58.0 Million Loan of August 9, 1977;Date of Effectiveness: January 6, 1978;Closing Date: June 30, 1982

The project will assist the Government in expanding the transmissionsystem in Luzon, establishing the first stage of a communications system andcontrol center, and training NPC staff. The loan became effective on January 6,1978.

Industrial Sector

Loan No. 998 Industrial Investment and Smallholder Tree-Farming;$50.0 Million Loan of June 12, 1974; Date ofEffectiveness: September 9, 1974; Closing Date:December 31, 1981

The proceeds of the Loan were relent to the Development Bank ofthe Philippines (DBP). The industrial portion of the Loan ($48 million)has been used by DBP to f:Lnance direct imports for medium and relativelylarge industrial projects. DBP is using the balance ($2 million) to financeabout 1,300 smallholders in a pilot tree-farming project in Mindanao. Subloansare expected to be fully committed by mid-1978.

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

The project assists in the financing of economically desirable andfinancially viable industrial subprojects. As of November 2, 1977, commitmentsfor subloans totaling $19.1 million had been made. While subloan commitmentshave been somewhat slower than originally expected due to the generally slowpace of business activity, the implementation of the project is satisfactory.

Loan No. 1120 Small and Medium Industries Development; $30.0 MillionLoan of June 5, 1975; Date of Effectiveness: August 20,1975; Closing Date: August 31, 1979

The DBP portion of the funds has been fully disbursed. After aslow start, commitment and disbursement of funds under the Industrial GuaranteeLoan Fund are now proceeiling well. However, the Rural Industrial CooperativeProgram ($2.3 million) which is being implemented by the National Electrifica-tion Administration is, lbecause of its experimental nature, facing managementand staffing problems. Disbursements on this component have therefore beenslow. Overall progress of the project is, however, satisfactory.

ANNEX IIPage 12 of 12 pages

Loan No. 1190 Industrial Investment; $75.0 Million Loan ofJanuary 28, 1975; Date of Effectiveness: April 6, 1976;Closing Date: March 31, 1980

The proceeds of the Loan are relent by the Development Bank of thePhilippines for subloans to finance direct imports for medium and relativelylarge industrial projects. Commitments of funds, which were initially muchslower than expected due to a slowdown of investment in the industrial sectoras a whole, have recently improved. The Executive Directors approved aproposal to reallocate $25 million of the funds for small and medium industrieson February 25, 1977, and an amendment to the Loan Agreement to this effectwas signed on March 16, 1977. As of November 2, 1977, commitments for subloansamounting to $17.5 million had been made. In addition, $5.4 million had beendisbursed against the allocation for small- and medium-scale industries.

Loan No. 1514 Private Development Corporation of the Philippines; $30 MillionLoan of February 9, 1978; Date of Effectiveness: Not YetEffective; Closing Date: March 31, 1982

This Loan was signed on February 9, 1978 and is not yet effective.

Population

Loan No. 1035 Population; $25.0 Million Loan of July 31, 1974;Date of Effectiveness: November 13, 1974; ClosingDate: December 31, 1979

The project is assisting the Government in expanding rural healthinfrastructure, and in providing staff training facilities and technicalassistance for the development of a management information system and fortraining. Under the direction of the Project Management Staff in the Depart-ment of Health, overall project implementation is progressing well. Trainingactivities are ahead of schedule in all 12 regions. The civil works componentis behind schedule but is expected to be completed ahead of the appraisalreport timetable due to simplification of construction design. Progress underthe project is satisfactory.

ANNEX III

PHILIPPINES

PHILIPPINE INVESTMENTS SYSTEMS ORGANIZATION PISO) PROJECT

Supplementary Project Data Sheet

Section I - Timetable of Key Events

a. Time taken to prepare project: About three months

b. The agency that prepared theproject PISO

c. Date of the first presenta-tion to the Bank and dateof the first Bank missiento consider the project : February 1977

d. Date of departure ofappraisal mission : July 1977

e. Date of completion of nego-tiations March 1978

f. Planned date of effectiveness: On or before June 30, 1978.

Section .I - Special Bank Implementation Action

None

Section III - Special Conditions

(a) PISO's free limit would be set at $750,000 with an aggregate limitof $5 million (para. 47);

(b) PISO would increase its equity by about P 10 million, bringingits total equity to no less than P 37.8 million (para. 50, conditionof effectiveness);

(c) PISO would include economic rate of return analysis in appraisingprojects costiLng over $750,000 (para. 51); and

(d) PISO would maiLntain long-term debt/equity ratio of 4:1 and totaldebt/equity ratio of 10:1 (para. 59).