Document of The World Bank FOR OFFICIAL USE ONLY Report No. 8660 PROJECT COMPLETION REPORT PHILIPPINES AGRICULTURAL SECTOR/INPUTS PROJECT (LOAN 2469-PH) MAY 23, 1990 Agriculture Operations Division Country Department II Asia Regional Office TIs docunt has a restricted distribution and may be used by recipients only in the performance of their official duties Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Name of Currency Peso (P) Appraisal Year Average (1984) US$1.00 - 9 16.70 Intervening Year Average (1985) US$1.00 1 P 18.61 Completion Year Average (1986) US$1.00 P 20.00 GOVERNMENT OF THE PHILIPPINES FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS ADB - Asian Development Bank DA - Department of Agriculture FPA - Fertilizer and Pesticide Authority GDP - Gross Domestic Product GNP - Gross National Product ICB - International Competitive Bidding IMF - International Monetary Fund MAF - Ministry of Agriculture and Food NEDA - National Economic and Development Authority NFA - National Food Authority PCA - Philipir.e Coconut Authority PHILPHOS - Philippine Phosphate Fertilizer Corporation PHILSUCOM - Philippine Sugar Commission SRA - Sugar Regulatory Administration USAID - United States Agency for International Development FOR OJTICIAL US Om TME WORLD BANK Washmgton. D.C. 20433 U-SA. 00k* Ci b,.cbv-Gowtu Oplathit EVAhtwmn May 23, 1990 MEHOPANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on PHILIPPINES Agricultural Sector/Inputs Project (Loan 2469-PH) Attached, for information, is a copy of a report entitled *Project Completion Report on Philippines - Agricultural Sector/Inputs Project (Loan 2469-PH)m prepared by the Asia Regional Office. No audit of this project has been made by the Operations Evaluation Department at this time. Attachment od n;- W Thi document has a restrctd distribution and may be wsed by recipients only in the performance FOR OMCIUL USE ON PROJECT COMPLETION REPORT PHILIPPINES AGRICULTURAL SECTORItNPUTS PROJECT (LOAN 2469-PH) TABLE OF CONTENTS Page No. Preface ..........- ..... i Basic Data Sheet .ii Evaluation Summary ..................-.-...-.- . iii PROJECT COMPLETION REPORT. 1 BACKGROUND .. 1 The Economy .. 1 The Agricultural Sector .. PROJECT DESCRIPTION.. 2 Objectives and Scope .. 2 Project Costs and Financing .. 2 Procurement and Disbursement .. 2 PROJECT IMPLEMENTATION ..3 Disbursements .. 3 Policy Refonas ..4 Institutional Reforms .. 4 Studies . Other Aspects .. 6 ROLE OF THE BANK 6..6 SUBSEQUENT POLICY AND INSTITUTIONAL REFORMS . . 6 PROJECT IMPACT.. 7 Short-Term Production Impact .. 7 Long-Term Impact .. 7 Policy Reforms .. 9 Institutional Reforms ..10 Studies ..11 ISSUES AND LESSONS LEARNED ..16 Project Scope ..16 Sustainability ..16 Procurement and Disbursement ..17 Institutional Reforms ..17 ANNEXES Annex 1: List of Important Legal Covenants/Conditions .19 Annex 2: Action Program .21 ATTACHMENTS: Attachment I: Comments from the Department of Agriculture .23 Attachment II: Comments from the Ministry of Finance . . 25 MAP: IBRD 20941 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. - i - PROJECT COMPLETION REPORT PBILIPPIES AGRICULTURAL SECTORILOUTS PROJECT (LOAN 2469-PB) PREFACE This Project Completion Report (PCR) reviews implementation of the Agricultural SectorlInputs Project, for which Loan 2469-PH in the amount of US$150 million was approved on September 4, 1984. The original loan clos- ing date of December 31, 1985 was extended to December 31, 1986, and the loan was fully disbursed on February 11, 1987. This PCR was prepared by the Department of Finance, Gbvernment of Philippines. The Basic Data Sheet, Evaluation Summary and Overview were prepared by Asia Regional staff, based on the President's Report, the Loan Agreement, Bank supervision mission reports, correspondence with the Borrower and internal memoranda in Bank files, interviews with Bank staff associated with the project, and the findings of a Bank completion mission which visited the Philippines in December 1988. This PCR was read by the Operations Evaluation Department (OED). The draft PCR was sent to the Borrower for comments and they are attached to the Report as Attachment I. OED normally audits all SECAL and SAL operations. However, because of the security situation in the Philippines, this was not done in this case. - Ut - PHILIPPINES AGRICULTURAL SECTOR/INPUTS PROJECT (LOAN 2400-PH) BASIC DATA SHEET As of 1281/88 Original Disburse Cancel led Repaid Outstanding Loan 2469-PH US81S0 1 US81SO U - - US$160 1 Original Dates Actual Dates Initiating Project Brief -- 01/19/84 Letteir of Developmnt Policy 08-- /04/84 a Negotiations 06/24-81/84 Board Approvtl - 09/04/84 Loan Agrment -- 09/26/84 Effectivenoes 12/26/84 10/22/84 Loan Closing 12/81/86 12/31/88 Final Disbursment 09/30/85 02/11/87 CUIMULATIVE LOAN OISSURSEMENT (US* M) FY85 FY8S FY87 (i) Planned 186.0 150.0 - (ii) Actual 35.5 89.0 150.0 (iii) (tt) as X of (1) 26.1 59.8 100.0 mISSIoN DATA No. of No. of Staff Date of Month/Year weeks persons wooks report Preparation 11/10-29/83 a 2 6 01/19/84 Appraisal 02/8-03/02/84 Variable 7 17.5 07/17/84 Supervision I 10/28-11/25/84 1 1 1 12/12/84 Supervision It 04/19-05/08/8S 1 8 8 07/17/85 Supervision III 11/24-12/14/85 Variable 2 4 01/02/88 /b Supervision IV 01/18-30/86 1 2 2 02/12/88 Supervision V 06/80-07/19/88 3 1 8 08/01/88 Completion 12/05-16/88 1.6 1 1.5 12/30/88 TIME RECORDED (STAFFWEEKS) FY84 FY8S FY86 FY87 FY88 FY89 LENP 24.8 LENA 89.7 LENN 4.2 1.0 SPN 21.7 22.8 6.8 PCR 0.2 4.3 FOLLOW-ON AGRICULTURE SECTOR ADJUSTMENT OPERATIONS (None) / Supplmented by follow-up letter of June 80, 1984. /b Mid-term Revise - iii - PHILIPPINES AGRICULTURAL SECTORIINPUTS PROJECT (LOAN 2469-PH) Protect Completion Rpo:rt Evaluation Summary Background The Agricultural Sectorinputs Project was the Bank's first and, to date, its only adjustment operation in the agricultural sector in the Philippines. Vhen the project was approved in September 1984, the Philippine economy was in a serious crisis, mainly due to the global recession, with low commcdity prices and high interest rates on external borrowings. To cope with the crisis the Government adopted a stabilization program supported by an IMF standby agreement. The program included, inter elia, structural reforms in key sectors of the economy, particularly in agriculture, which accounted for about 302 of GDP and 402 of export earnings. Proiect Obiectives and Descrintion The project was designed to support the Government's "Agenda for Action in Agriculture: 1984-88' bys (a) helping to maintain agricultural production through an adequate supply of inputs; (b) laying the foundation for future agricultural growth by introducing improved policies and carrying out studies that would lead to efficiency improvements, restore incentives and mobilize financial resources for sectoral.development; and (c) upgrading the institutional framework for the formulation and implementation of agricultural policies and programs. The project focussed on a Core Program outlined in a Development Policy Letter from the Government to the Bank, dated June 4, 1984. Some actions in the Core Program had been implemented before the Board approvel the loan, and others were to be implemented under the project. The latter included: (a) opening up the import and export trade in animal feeds to the private sector; (b) phasing out price controls on poultry, eggs and pork; (c) broadening the composition of the Boards of the Philippine Coconut Authority (PCA) and Philippine Sugar Commission (PHILSUCOM) through inclusion of representatives of concerned Government ministries and farmers' interests; (d) preparing six policy studies concerning the National Food Authority (NFA), coconuts, sugar, irrigation, fertilizer and agricultural credit; (e) rationalizing and consolidating the public investment plan for agricultural development (1985-88); and (f) reducing import tariffs on poultry. Progress in implementing these actions was to be reviewed in December 1984 prior to release of the second tranche of the loan. The Bank loan of US$150 million was to finance both public and private sector Imports of fertilizers, pesticides, animal feeds, veterinary products and agricultural machinery and spare parts for the 1984-85 agricultural year. In - iv-_ addition, technical assistance (US$0.6 million) was to be financed to help carry out policy-related studies and institutional strengthening. The agricultural inputs import program was also supported by the Asian Development Bank (ADB), through a US$130 million loan approved in March 1984 following close consultations with the Bank, and by bilateral sources, principally the United States and Japan. Proiect Implementation At completion, the policy actions envisaged under the project were implemented and studies undertaken, albeit at a slower pace than originally expected. Implementation of the institutional measures was partial. The mid- term review was conducted one year late in November/December 1985. Disbursements were slow and the loan closing date was extended from December 31, 1985 to December 31, 1986. The loan was fully disbursed on February 11, 1987. The slow disbursement of the loan was due mainly to the economic contraction in the country, which reduced the expected demand for agricultural inputs, and non-utilization by NFA of its share of the loan (33X) because of a delay in signing the subsidiary loar. agraement with the Government and unattractive terms and conditions of the agreement. To facilitate disbursements against private sector imports, amendments to the Loan Agreement were made relaxing procurement procedures. With these changes, the actual share of procurement subject to ICB declined to about 31Z of the loan amount, compared to 73Z envisaged at appraisal. The Bank also simplified disbursement procedures in mid-1986. Project Impact By helping to finance imports of essential agricultural inputs in a period of foreign exchange shortages, the project appears to have generated a short-term production impact. While the Philippine economy contracted and real GDP fell by 6Z in 1984 and 4.3X in 1985 (increasing marginally to 1.5Z in 1986), agriculture had positive growth rates of 2.3Z and 3.3Z respectively (3.7Z in 1986). As expected at appraisal, the medium- and long-term benefits from policy and institutional reforms under the project would be more significant than the project's apparent short-term production benefits. Though a quantitative assessment of their impact cannot be made, those reforms reduced economic distortions and increased reliance on market mechanisms. Among the significant reforms were decontrol of prices of rice, poultry, eggs and pork; opening up of the import and export trade in animal feeds, rice and corn to the private sector; reduction in poultry import tariff from 50Z to 40Z; deregulation of interest rates and phasing out of subsidies on agricultural credit; and enlargement of the role of the Ministry of Agriculture and Food (MAP) in sectoral policy formulation and cooi:dination. However, more sgn"'ficant were the reforms resulting from the policy-related studies under the project, particularly for coconut, sugar, NFA and fertilizers. For coconut and sugar, reforms were pursued under the IMF Standby Agreement and, in particular, domestic sugar trading was liberalized. The recommendations of the NFA study were mainly followed up by USAID and, inter alia, led to divestiture of NFA's non-grain activities and v transfer of wheat imports and flour distribution activities to the private sector. The liberalization of fertilizer importation and distribution resulted In a significant reduction in distributor margins with a consequent fall in end- user prices and increase in fertilizer consumption. Overall. the project was a success. A significant part of the credit for this success was due to the new Government which assumed power in February 1986 and which was more committed than its predecessor to liberalization of the economy. Sustainability While most policy reforms supported by the project have been sustained, there are some exceptions. First, under the project, the import tariff or. poultry had been reduced from 50? to 402, but since April 1988, it has been rolled back to 502. Second, the opening up of the import and export trade of rice, corn and animal feeds to the private sector has so far been only partial: the soybean meal trade has been deregulated but trade in other animal feeds such as fish meal, barley, etc. is regulated by the NFA and import and export of rice and corn continues to be handled exclusively by the NFA (though quantities involved have been small). An issue could be raised as to whether the policy and institutional reform package of the project was substantive enough, or whether the Bank could have gone furtiter in the pursuit of reforms. The project was formulated under the previous Government, when resistance to economic liberalization and dismantling of monopolies was formidable. Under the circumstances, the aim of the project was to provide a framework for continuing policy aialogue and to set in motion a process of change through some policy reforms, accompanied by studies which would lay the basis for future reforms. This aim was achieved. The lesson is that an initial adjustment operation can be used to initiate change and studies can be important vehicles for further reforms. The project also demonstrated the importance of coordination with other aid agencies and IMF. Procurement and disbursement problems delayed loan utilization. In retrospect, a negative list would have facilitated faster disbursements. The arrangements for NFA's utilization of its portion of the Bank loan should have been worked out much earlier in the project cycle. The scope and impact of institutional reforms under the project were at best limited. The technical assistance (TA) for strengthening the MAF (now Department of Agriculture (DA), and for setting up a sectoral planning, programming and budgeting mechanism, was not utilized. The planning capabilities of the DA remain weak. The organizational and financial situation of NFA, which is responsible for price support and buffer stock operations for rice and corn, continues to be a complex sectoral issue. The lesson is that a major institutional impact is unlikely to be achieved through a single adjustment operation. PHILIPPINES AGRICULTURAL SECTOR/INPUTS PROJECT (LOAN 2469-PH) Proiect Completion Report Background 1. The Economy. When the project was approved in September 1984, the Philippine economy was in serious crisis, mainly due to the global recession, with low commodity prices and high interest rates on external borrowings. Real GDP growth had fallen from an average 6.22 p.a. in the 1970s to 3.92 in 1981, 2.92 in 1982 and 0.92 in 1983. Capital flight had accelerated and a cessation of commercial credit eventually led to a debt moratorium in October 1983. To cope with the liquidity crisis and restore balance of payments and price stability, the Government adopted a stabilization program supported by an IMF standby arrangement, which included, inter alia, structural reforms in key sectors of the economy, particularly in agriculture. Success of the program hinged partly on maintaining or increasing the level of agricultural production in the face of projected input shortages. 2. The Agricultural Sector. In 1984, agriculture accounted for about 302 of GDP, hal? of the labor force and some 402 of export earnings. During the 1970s, sectoral growth had averaged about 4.52 p.a., but the rate declined to 4? in 1981, 3.1? in 1982 and became negative (-2.l1) in 1983. Although low inter2lational commodity prices and a prolonged drought in 1983 were important factors underlying declining sectoral performance, other constraints also played a role (e.g., organizational and management weaknesses, pricing policies which dampened investment incentives, and excessive government intervention in both crop marketing and input supply). 3. To arrest and reverse declining sectoral performance, the Government formulated a program entitled "Agenda for Action in Agriculture: 1984-88n (hereinafter referred to as the Agenda), which addressed the following issues: (a) government interventions that adversely affected production incentives; (b) institutional weaknesses; (c) land use policies; (d) irrigation strategy; (e) the lack of a well-defined public investment program; and (f) agricultural credit policies and programs. The Bank made major informal contributions, as well and formal inputs to the Agenda through sector studies, includingt 'Philippines Irrigation Program Review' (Report No. 3545-PH, December 1982); 'Philippines Agricultural Sector Memorandum' (May 10, 1983); *Philippines: Agricultural Credit Sector Review' (Report No. 4117-PH, May 12, 1983); and 'Philippines Agriculture: Issues in Pricing Policy' (Report No. 4845-PH, July 10, 1984). -2- Proiect Description 4. Objectives and Scope. The project was the Bank's first and, to date, its only agricultural sector adjustment operation in the Philippines. It was designed to support the Government's Agenda (para. 3) by: (a) helping to maintain agricultural production through an adequate supply of inputs; (b) laying the foundation for future agricultural growth by introducing policies and requiring studies leading to reforms that would improve efficiency, restore incentives and mobilize financial resources for sectoral development; and (c) improving the institutional framework for the formulation and implementation of agricultural policies and programs. 5. The Bank's immediate efforts *ere focussed on a Core Program outlined in a Development Policy Letter from the Government, dated June 4, 1984. Some actions in the Core Program were implemented before the Board approved the loan: (a) adoption and implementation of organizational changes to improve the coordination of policies and programs in the food and agricultural sector, including the redesignation of the Ministry of Agriculture as the Ministry of Agriculture and Food (MAF); (b) adoption of a phased program of adjustments and decontrol of prices of poultry, eggs and pork; (c) trade liberalization by allowing the private sector to export rice and corn; and (d) adoption of measures to realign rediscount rates for agricultural credit more closely with those for other sectors and to allow rediscount rates to vary in accordance with market rates. 6. A mid-term review prior to release of the second tranche of the loan was scheduled for December 1984 to assess Government performance in implementing other actions under the Agenda and the Core Program, including progress in: (a) opening up the import and export trade of animal feeds to private entities; (b) phasing out price controls on poultry, eggs and pork; (c) broadening representation on the Boards of the Philippine Coconut Authority (PCA) and Philippine Sugar Commission (PHILSUCOM) through inclusion of concerned ministries of the Government and farmers' interests; (d) preparing six policy studies concerning the National Food Authority (NFA), coconuts, sugar, irrigation, fertilizer and agricultural credit; (e) rationalizing and consolidating the public investment plan and related budget for agricultural development (1985-88); and (f) reducing import tariffs on poultry. 7. Proiect Costs and Financing. The project was part of an overall program of financial assistance, estiw.' 1d to cost about US$458 million, design6d to ensure the availability of essential ogr4cultural inputs for the 1984-85 agricultural year. The Bank loan of US$150 million (including front-end fee of US$0.4 million) was to finance both public and private sector imports of fertilizers, pesticides, animal feeds, veterinary products and agricultural machinery and spare parts. In addition, technical assistance (US$0.6 million) was to be financed to help carry out policy-related studies and institutional strengthening. The agricultural inputs import program was also supported by the Asian Development Bark (ADB), which approved in March 1984 a loar. of US$130 million folloing close consultations with the Bank, and by bilateral sources, principally the United States and Japan. 8. Procurement and Disbursement. Procurement of US$110 million (or about 73Z of Bank loan amount) was to be through ICB and the rest through other methods. The Bank loan would reimburse 1002 of the foreign exchange cost of eligible imports and 1002 of the cost of consulting services. The loan was to be disbursed over -3- a one-year period in two tranches of US$75 million each -- the first upon loan effectiveness and the second after the mid-term review (pars. 6). Proiect imnlementation 9. At completion. the policy and institutional actions envisaged under the project had been largely implemented and all studies had been undertaken, albeit at a slower pace than originally expected. The mid-term review vas conducted one year late in November/December 1985 and the second tranche was released in March 1986. The original loan closing date was December 31, 1985, but as of January 21, 1986 only US$56.9 million (38Z) of the loan had been committed and US$45.9 million disbursed. The loan closing date was, therefore, extended to December 31, 1986, and the loan was fully disbursed on February 11, 1987. 10. Disbursements. Disbursements on inputs were about the same as envisaged at appraisal, but there was a significant underutilization of funds for consul- tants' services, since the Borrower decided to use its own staff to undertake most of the studies. The f.nal disbursement position was as follows: Appraisal Actual Category estimate disbursement (US$) (US$) 1. Agricultural inputs 149,025,935 149,621,9Z5 2. Consultant's services 600,000 4,000 3. Front end fee 374,065 374,065 Total 150,000,000 150.000,000 There were several reasons for the slow disbursement of the loan. First, the economic contraction experienced by the Philippines reduced the expected demand for imported agricultural inputs. Second, the NFA did not use its allocated share of US$50.0 million (33? of the loan amount) to finance imports, both because of a delay in signing the subsidiary loan agreement (signed only on April 10, 1985, six months after the date of the Loan Agreement with the Bank) and because the terms and conditions of the agreement were not as attractive as those of alternative financing available to NFA. Third, there were some difficulties in gathering the supporting import documentation for some eligible private sector imports, and this delayed the submission of withdrawal applications to the Bank. 11. To facilitate disbursements against private sector imports, the Loan Agreement provisions regarding procurement procedures were amended. For generic pesticides, veterinary products, breeding stock and agricultural machinery and spare parts, the threshold for ICB was raised from US$300,000 to US$1,000,000; only three quotations were required for contracts between US$500,000 and US$1,000,000; and direct negotiations with suppliers was allowed for contracts below US$500,000 and for proprietary items. For fertilizers costing US$5 million or less per contract, standard commercial practices were allowed. With these changes, the actual share of procurement subject to ICB declined to about 31? of the loan amount, compared to the 73? envisaged at appraisal. The Bank also simplified disbursement procedures in mid-1986 by requiring only letters of credit -4- and proofs of payment for disbursement, with copies of bills of lading and contracts retained by the Borrower for review by supervision missions. 12. Policy Reforms. The policy reforms, envisaged at appraisal, were implemented, as summarized below (see Annexes 1 and 2 for details): (a) Rice. The export trade in rice was opened up to the private sector in mid-1984 and retail rice price ceilings were lifted on October 1, 1985. Though the Action Program matrix in the President's Report (page 15) includes stabilization of rice prices 'through buffer stock operations rather than mandatory price ceilings', the actual removal of retail rice price ceilings does not appear as a formal condition, either of Board presentation or first or second tranche release or as a covenant in the Loan Agreement. (b) Corn. The import trade in corn was opened up to the private sector in October 1984 and the export trade in September 1988. (c) Animal Feeds and Livestock. (i) The import trade in animal feeds was opened up to the private sector in October 1984; (ii) pr!cr controls on poultry, eggs and pork wire removed (Presidential Order of October 1984) two months ahead of appraisal expectations; (iii) the poultry import tariff was reduced from 502 to 402 in November 1985; and (iv) the preferential treatment of NFA over the private sector in feed grain imports was removed (tariffs and taxes equalized) in late 1986. One reason for the speedy implementation of item (i) was that actual market prices for these commodities tended to be below the controlled prices, largely because of a significant demand contraction (Z0-30S). The President, acting on recommendat.'ns of the Price Stabilization Council, removed price controls from all products except rice, because of a "market normalization". 13. Institutional Reforms. As agreed during negotiations, through the Executive Orier (E.O.) No. 965 of June 30, 1984, the Government, had implemented prior to Board presentation the recommendations of the Presidential Commission on Reorganization concerning organizational changes in the agricultural sector. According to the provisions of E.O. 965, the Ministry of Agriculture was given a larger role in policy formulation and coordination in the agricultural sector, as followsz (i) the Ministry of Agriculture was reorganized as the Ministry of Agriculture and Food (MAP); (ii) the Bureau of Fisheries and Aquatic Resources and the Philippines Fisheries Development Authority were transferred from the Ministry of Natural Resources to the MAF; (iii) prior concurrence of the MAP was required for the issuance of forest land grazing lease arrangements; (iv) the Minister/Deputy Minister of the MAF became a member of the governing Boards of various commodity boards/authorities, including PCA and PHILSUCOM; and (v) coordination of the food policy and programs functions of the NFA with the MAF was improved. With respect to the last measure, the original proposal discussed during negotiations (and confirmed in the June 4, 1984 letter from the Prime Minister to the President of the World Bank) was to transfer NFA from the Ministry of Human Settlements to the MAP as an attached corporation with a large degree of autonomy. This was not done, however, as the Government decided to implement what it considered to be a more drastic organizatibnal change, involving a transfer of NFA' s food policy and p.ograms functions to the MAF and plans to transform NFA into - 5 - primarily a food marketing corporation (letter from the Prime Minister to the President of the World Bank dated July 5, 1984). The findings of the project study were to be considered in the final reorganization of NFA. The Bank agreed to this approach. Some reorganiuation of NFA did occur as a result of the study (see paras. 15(e). 40 and 47) and NFA was eventually attached to the MAF when the new Government abolished the Ministry of Human Settlements. 14. As envisaged at appraisal, a medium-term agricultural investment plan (1985- 88) and consolidated annual budgets relating to the plan were also prepared during project implementation. However, the National Economic and Development Authority (NEDA) appears to have played the major role in this process, and there is scanty documentation in the files regarding the project's contribution in this area. Clearly, the project's role in improving the MAF's planning, programming and budgeting capabilities was minimal (see further paras. 32-33 and 47). 15. Studies. The six studies were satisfactorily completed and were of generally high quality: (a) Coconuts and Sugar. These two studies, prepared by NEDA in February 1985, were reviewed by independent consultants, hired and paid by the Bank, in March 1985. The consultants' reviews were comprehensive and raised good issues regarding the studies' recommendations and data analysis. The studies and the consultants' reviews provided the basis for an action program developed by the Bank in May 1985 (see further paras. 36-37). (b) Irrigation. This study, prepared by the National Irrigation Administration (NIA) in November 1984, made recommendations on NIA's cost recovery policies and financial requirements and provided a basis for the Bank-financed Irrigation Operations Support Project (Loan 2948- PH, signed on June 13, 1988). (c) Fertilizer. An ADB-financed consultant study prepared in May 1985 had to be revised by another team of consultants and was eventually completed in March 1986. The study made important recommendations on fertilizer production, consumption, imports/exports and marketing (see further paras. 41-42). To remove a conflict of interest situation, in April 1986 the new Government appointed separate chief executive officers for the Fertilizer and Pesticides Authority (FPA) and Philippine Phosphate Fertilizer Corporation (PHILPHOS), a large Govern- ment-owned fertilizer firm, (this measure was originally expected by November 1984). (d) Credit. The recommendations of this study, prepared by the Technical Board for Agricultural Credit in April 1985, provided a basis for the Agricultural Credit Project, financed by the Bank (Loan 2570-PH, signed on June 10, 1985) and USAID. The project supported a program to phase out credit subsidies and established an institutional framework to channel increased resources to the agricultural sector through private commercial banks. (e) NFA. The recommendations of the March 1985 ADB-financed consultant study on NFA (called NFA Organization and Systems Study, undertaken - 6 - as part of the Agro-Processing and Marketing Technical Assistance Project) were reviewed by an independent consultant hired and paid by the Bank. A meeting in March 1985 at NFA and attended by the Bank, ADB and Government officials, also reviewed the study. The study's recommendations were followed up mainly under a US Government program (PL-480 Assistance). Important reforms included the divestiture of NFA's non-grain activities and restriction of NFAA's price stabilization function to rice and corn (approved in April 1985); adjustments to NFA's organizational structure and operating procedures; and the opening up of NFA's wheat imports and flour distribution activities to the private sector in April 1985, despite strong resistance from special interest industry groups. 16. Other Aspects. As envisaged at appraisal, the Government designated a Project Coordinator in the Office of the Prime Minister to monitor all project- related activities and coordinate their timely execution. A Steering Committee was also appointed to oversee the execution of studies. Section 3.08 of the Loan Agreement stipulated that all pesticides imported under the project would comply with guidelines issued by the FPA and would be packaged, labeled, handled and stored in accordance with sound environmental practices. This aspect of project implementation was reviewed in some detail by the Bank's environmental staff, who concluded that the selection of pesticides purchased under the project was made with due consideration to human health and environmental safety (memo of October 22, 1985). The annual audited accounts for the project were expected to be sub- mitted not later than six months after the end of each fiscal year. However, the 1985 accounts were received nine months after the end of the fiscal year. Audited accounts for later years were not received. The large-scale transfer of staff after the new Government came to power, and particularly the abolition of the Prime Minister's office where the Project Coordinator had been located, appear to be the main reasons for the lack of auditing of 1986 and 1987 project accounts. Role of the Bank 17. The Bank had contributed actively to the preparation of the 'Agenda for Action in Agriculture: 1984-88" (para. 3), which was the basis for the project. During implementation, the Bank's supervision effort was adequate. In addition, the Bank took initiatives to implement some reforms in the coconut and sugar subsectors (paras. 36-37) in collaboration with the IMF. Subsequent Policy and Institutional Reforms 18. The new Government not only implemented some significant reforms envisaged under che project, but also carried the process of liberalization much further on its own initiative. Important actions included: (a) lifting of the copra export ban; (b) abolition of export taxes on all coconut products, lumber (except logs for which an export ban is in effect), veneer, abaca, pineapples and bananas; (c) abolition of the remnants of monopolies and monopolistic structures; (d) liberalization of urea and potash imports and distribution; (e) granting of tax and duty privileges on fertilizer imports; (f) attachment of the NFA, PCA and the Sugar Regulatory Administration (SRA) to the MAF; and (g) restructuring of the National Food and Agricultural Council. These measures coupled with earlier ones, including successive devaluations of the peso from 1982 onwards, and a gradually - 7 - improving international market have helped to create a favorable environment for agricultural growth. Proiect Impact 19. At appraisal, the project was expected to generate both short-term production benefits, and medium- and longer-term benefits based on policy reforms and improved planning and institutional arrangements. None of these was quantified, but all were considered vital to the process of economic recovery and development. 20. Short-Term Production Impact. The loan was expected to raise produc- tion by making imported inputs available to farmers during a period of severe foreign exchange shortages, and thus to assist the Government's short-term economic stabilization program. The Bank loan was intended to finance about one-third of the agricultural input imports in 1984/85. The stabilization program and the program of assistance to the agricultural sector were relatively successful in meeting these short-term objectives. Under the stabilization program, inflation (as measured by the consumer price index) was reduced from 50? in 1984 to 232 in 1985 and to about 12 in 1986, while the current account deficit declined from 8? of GNP in 1983 to 42 in 1984, 0.12 in 1985 and 3Z in 1986. However, the economy contracted and real GDP fell by 6? in 1984 and 4.3? in 1985, increasing only marginally by 1.5Z in 1986. Despite this severe economic contraction and a sharp drop in sugar production, due mainly to unfavorable external market conditions, agriculture had positive growth rates (2.3Z, 3.3Z and 3.7Z in 1984, 1985 and 1986 respectively). It is likely that the inputs financed by the Bank and other official donors helped to achieve this performance, although it is extremely difficult to demonstrate this in quantitative terms. 21. Long-Term Impact. More significant and lasting benefits were expected from the policy and institutional reform package, designed to improve production incentives and the efficiency of resource allocation by increasing reliance on market mechanisms and reducing Government intervention. The project-financed studies were intended to lay the basis for policy initiatives which could be implemented under future Bank projects. As for institutional reforms, two kinds of benefits were expected. First, there would be an improvement in intrasectoral planning, policy formulation and coordination, as a result of the integration of several sectoral agencies under one Ministry and the institution-building program for MAF. The second expected benefit was an improvement in public investment planning, programming and budgeting through better program design and allocation of scarce investment funds in accordance with sectoral priorities. 22. While the intended policy reforms, studies and institutional changes were largely implemented, their precise long-term impact on agricultural sector growth and efficiency, producer and consumer prices and agricultural incomes is almost impossible to determine, given the difficulty of isolating project impact from that of the world market, weather and other changes in the domestic economy. The task is made more difficult because no mechanism for impact monitoring was established under the project. The National Economic and Development Authority (NEDA) was to conduct, in consultation with the Bank, periodic evaluations of the effects of policy and institutional reforms associated with the project (President's Report, para 75). The first evaluation was to be conducted at the conclusion of the project, two further evaluations at six-month intervals, and a final evaluation one-year thereafter. The evaluations were to establisn an analytical framework for future Bank/Government dialogue on agricultural policy. None of these evaluations was undertaken prior to the work on the project completion report in late 1988. The large-scale personnel changes after the new Government came to power in early 1986 appear to be the main reasor. for this lack of follow-up. 23. In the absence of any precise data on the quantitative changes which could be ascribed solely to the project, the impact assessment has to be largely qualitative. Even in this respect, there are some complications because of the change in Government midway through the project. The second tranche of the loan was released in March 1986 under the new Government, although conditions for its release had been met by the previous Government. The new Government clearly had a much greater commitment than its predecessor did to economic liberalization, and it therefore implemented many policy and institutional reforms (para. 18) which had not been ircluded in the project. It is not possible to judge whether the previous Government, had it survived, would have implemented and sustained all the reforms contemplated under the project itself or the subsequent related reforms undertaken by the new Government. 24. Another point that has to be emphasized is that the project's impact cannot be assessed in isolation from the impact of the ADB-financed Agricultural Inputs Loan and U.S. and other bilateral programs, which were proceeding concurrently and were complementary. In particular, the ADB and USAID played a significant role in the process of reforming the fertilizer sector and in NFA reorganization. 25. With the above caveats in mind, a judgement that can be made with some confidence is that the project provided significant support to a sectoral reform process that has continued to this day, and that these reforms, which eimed essentially at removing economic distortions and increasing reliance on market mechanisms, have made a positive long-term contribution to the economy. 26. While the project impact is considered to be positive, it is difficult to argue that it was major. Indeed, as the first (and only) agricultural sector adjustment operation in the Philippines, originally expected to span one year and eventually extending to two, by itself this project could not have realistically been expected to bring about major changes (see further para. 44), and no such expectations are evident in the President's Report. Prior to Board presentation, in response to a query from the Executive Directors whether there was sufficient conditionality attached to the loan, the staff stated that effective policy and institutional reforms could only be carried out gradually and in a time frame beyond the scope of any single operation (memo to Files of August 6, 1984 on Questions from the Executive Directors). The staff viewed the proposed loan as a means to establish a framework for longer-term reforms, some of which would be pursued in the context of other lending operations which were then in the pipeline (e.g. coconut rehabilitation, sugar rehabilitation, irrigation maintenance, agricultural loan fund, etc.), and most of which have materialized into projects supported by the Bank. 27. It is clear that compromises were made in the process of finalizing the project's agenda and, for some important agricultural subsectors, studies were resorted to rather than well-defined adjustment measures. For example, in the -9- Initiating Project Brief of January 19, 1984, liberalization of wheat trade was recommended. But evidently after opposition from NFA, which earned a profit from wheat imports and distribution, and thus covered losses on its other operations, this conditionality was dropped. In its telex of March 21, 1984 to the Government, the Bank stated that it was prepared to accept NFA retaining responsibility for wheat imports, provided the Bank and the Government could agree on timing of issuance of guidelines for rice exports, liberalization of animal feed imports and decontrol of pork and poultry prices. In part, these compromises reflected the staff's assessment of the Bank's leverage with the Government in promoting some sector reforms and the strategy of keeping certain important issues alive through inclusion of studies, in cases where immediate action was not possible In other cases staff did not feel that sectoral knowledge was sufficiently comprehensive to support specific reform recommendations. In particular, for the coconut and sugar subsectors, where distortions appeared to be the greatest (see para. 35), there did not seem to be enough information or consensus about the policy actions to be implemented, and these subsectors, along with complex issues related to NFA operations and fertilizer subsector, therefore became subjects of project studies. 28. In retrospect, the most important long-term contributions of the project were in the coconut and sugar subsectors, fertilizer marketing and distribution, NFA reorganization, and reduction in agricultural credit subsidies through realignment of the Central Bank rediscount rate. Except for the last item, all of these emerged from project studies. On the other hand, the adjustment and institutional reform measures included under the project probably made a smaller contribution, as discussed below. 29. Policy Reforms. The policy reforms envisaged under the project (Annex. 2) were the following: (a) reduction in the interest rate subsidy on Government- sponsored agricultural credit; (b) opening up of the foodgrain and animal feed import and export trade to the private sector; (c) stabilization of rice prices through buffer stock operations rather than mandatory price ceilings; (d) removal of price controls on poultry, eggs and pork; and (e) reduction in import tariffs on poultry. Of the above five measures, (b) and (e) were only partially implemented. Import and export of rice and corn, although theoretically open to the private sector, continue to be handled by the NFA and the import tariff on poultry, which had been reduced from 50? to 40S in 1985, was rolled back to 5OZ in April 1988 (para. 45). The opening up of rice exports to the private sector had been emphasized on the assumption that exportable surpluses would become significant, but this has not happened so far. The opening up of rice imports to the private sector was not discussed in the President's Report, evidently o.i the assumption that the Philippines would remain self-sufficient in rice. 30. The remaining three adjustment measures were implemented as envisaged, the one relating to interest rate subsidies having been implemented before Board approval. Whether the removal of retail rice price ceilings and of price controls on poultry, eggs and pork had a significant favorable impact on producer prices and investment in the rice and livestock subsectors has not been documented. It should be noted that removal of retail rice price ceilings was not included in the Core Program (page 21 of the President's Report), appearing only in the Action Program matrix (para. 12 (b) above). In contrast, the removal of price controls on poultry, eggs and pork was considered critical, as it was included in the Core Program. The sector study "Philippines Agriculture: Issues in Pricing Policy" (Report No. 4845-PH, July 10, 1984) had noted that enforcement of ceiling prices - 10 - for poultry, eggs and some pork cuts was 'uneven", and the operation of NFA's KADIWA stores (retail stores located in low-income neighborhoods in the major cities of the country selling food staples at regulated prices) was "too small to affect the upward pressure on prices exerted by the tariff policy" (tariffs on poultry and eggs were 50X and on beef and pork 5Z). The sector study also noted that the country was almost self-sufficient in meat production and some pork had actually been exported from time to time by the private sector. In these circumstances, tariff policy reform rather than removal of price controls would appear to be more important. Reduction in import tariffs on poultry was indeed a condition of second tranche release. However, as noted in para. 29, only a relatively small reduction from 50% to 40X was implemented, with a one-year delay, and then rolled back to 40Z. Thus, the impact of adjustment measures (c) and (d) in para. 29 cannot be called significant although, in all probability, it was positive since the reforms removed some market distortions. 31. It would appear that the most significant adjustment measure under the project was the closer alignment of Central Bank rediscount rates for agriculture with those for other sectors and a change from a fixed to a floating rediscount rate based on prevailing market rates (implemented under Central Bank Circular No. 994 of March 9, 1984). The underpinning for this and subsequent reforms had been provided by the Bank's sector study on agricultural credit in 1983. The Government's policy of providing interest subsidies through rediscounted Central Bank funds had led many rural banks to depend on these funds rather than on locally-mobilized savings and improved debt collection efforts. The rural banking system nearly collapsed as a result of high arrearages on earlier official directed credit programs in the 1970s, compounded by the financial and economic crisis of the mid-1980s. Removal of interest subsidies on agricultural credit was a significant first step towards improving the rural financial market undertaken during project processing. Agricultural credit reforms were then carried forward and deepened under the Agricultural Credit Project (Loan 2570-PH. signed on June 10, 1985). 32. Institutional Reforms. The institutional measures envisaged under the project (Annex 2) were the following: (a) adoption of the proposal of the Presidential Commission on Reorganization concerning institutional changes in the agricultural sector and issuance of appropriate implementing documentation to make the proposal operational; (b) initiation of a long-term institution-building program to make the new structure fully operational; (c) adoption of measures to broaden the representation on the governing boards of PCA and PHILSUCOM; (d) appointment of separate chief executives for PHILPHOS and FPA; (e) preparation of a prioritized development plan and corresponding financing plan for the agricultural sector; and (f) establisliment of procedures and systems for updating the plan on a regular basis. In addition, any institutional recommendations emerging out of the six project studies were expected to be implemented. Potentially the most significant institutional measure was (b), that is, initiation of a long-term institution-building program, principally for the MAF. However, this was not implemented and the technical assistance included under the project for this purpose was not utilized (para. 47). The other institutional measures were implemented but, although they were steps in the right direction, it is difficult to characterize their impact as significant. 33. Other potentially important institutional measures were (e) and (f), that is, improvement in investment planning. One of the main objectives of the - 11 - Agenda for Action in Agriculture was to channel an adequate level of resources for agricultural development purposes in accordance with well-defined investment priorities (President's Report, p. 20). Consistent with this objective, the Agenda provided for the formulation of a medium-term agricultural development plan (1985- 88), and a corresponding consolidated budget for 1986. The project included technical assistance to prepare this plan and budget and to upgrade sectoral planning and budgeting. The technical assistance was not utilized and this project component does not appear to have had any impact on the capabilities of the MAF, although NEDA did prepare a medium-term plan. The Bank also undertook a Public Investment Review for the agricultural sector in November 1984, independently of the project, and the review recommendations were later discussed with NEDA and MAF. Public investment in agriculture (including irrigation, rural roads, forestry, and agrarian refoni) actually declined in real terms (1972 prices) from P 1,325 million in 1983 to about P 800 million in 1984-86 (increasing again beginning in 1987). While all public expenditures were cut back during the crisis years in the mid-1980s, the decline in agriculture-related expenditures was sharper than the overall decline. The share of agriculture in total Government expenditures fell from 9.6Z in 1983 to only 5.4% in 1986 - the lowest share in a decade ("Philippines: Agricultural Sector Strategy Review". Report No. 6819-PH, October 21, 1987). As a result, the overall allocations to agriculture were inadequate to finance new development, O&M and an efficient level of services. Therefore, one of the main objectives of the "Agenda for Action in Agriculture", that is, to channel an adequate level of resources to the sector, was not met during the project implementatios period. 34. Studies. Compared to the policy and institutional measures included under the project, the studies led to more significant sectoral developments. In many ways the delay in loan disbursements was fortuitous in that it provided ample time for the Bank to pursue the recommendations of the studies, albeit with support from the IMF, ADB and USAID. The most important resulting action programs were for coconuts, sugar, and NFA. In addition, significant actions in the fertilizer subsector resulted partly from the studies. 35. At the time of project preparation and appraisal, Government intervention in the coconut and sugar subsectors was pervasive, and perhaps, more significant than in other areas. Both the coconut and sugar subsectors were extremely important for the economy, accounting for about 20% and 8% respectively of merchandise exports. Coconuts accounted for over 25% of the cultivated area and provided incomes for at least one-fourth of the rural families. Government intervention in the coconut subsector had taken various forms, including export taxes on coconut oil, an export ban on copra, an abortive coconut replanting scheme, coconut levies (abolished in 1982), and vertical integration of the processing industry. The latter was undertaken under private auspices, through the United Coconut Oil Mills (UNICOM), the largest buyer of copra in the country (about two-thirds of production) and virtually the only exporter of coconut oil. While PCA was intended to be the Government's vehicle for regulating and promoting the coconut industry, its Board consisted mainly of large-scale producers and millers; hence there was a possible conflict of interest between PCA's regulatory functions and its Directors' private trading/manufacturing interests. In the sugar subsector, the National Sugar Trading Corporatior. (NASUTRA) acted as the sole buyer of sugar from the mills and the sole exporter since 1977. The policy-making and regulatory body was PHILSUCOM, which allocated sugar production for export and domestic consumption, and fixed the raw sugar buying price. PHILSUCOM had also - 12 - acquired several subsidiaries. As in the case of coconuts, there was a conflict between the regulatory interests of PHILSUCOM and the trading interests of NASUTRA: their Boards comprised largely the same individuals. PCA and PHILSUCOM also reported directly to the Office of the President and were thus independent of the relevant sectoral ministries. 36. There had been continuing public criticism of the situation prevailing in the coconut and sugar subsectors, including the conflict of interest situation in the PCA and PHILSUCOM Boards, the interlocking directorates, the lack of public disclosure of accounts and financial accountability, the misuse of coconut levy funds, the inadequate arrangements for the coconut replanting scheme, sharing of sugar export proceeds with planters and millers, financial management, cost of operations of NASUTRA, mechanics of price fixation, and the highly restrictive trading practices. Given this background, it would seem surprising that the project included only studies of the two subsectors and broadening representation on the governing Boards of PCA and PHILSUCOM. This compromise was apparently as much as the Bank could achieve at the time, given the strong opposition from the vested interests in the two subsectors. However, the studies did make some significant recommendations, on the basis of which the Bank prepared an action program in May 1985. Just prior to this action program, Presidential Decree (PD) 1960 of January 1985 introduced some significant changes for the coconut subsector and PD 1971 of February 1985 introduced changes for the sugar subsector. It is probable that the sugar and coconut studies, drafts of which had been reviewed within the Government in December 1984 - January 1985. provided the basis for the PDs. Inter alia, PD 1960 led to dismantling of UNICOM and the reopening of the export of coconut oil to any millers or refiners who agreed to assume a share of UNICOM's obligations. PD 1971 ordered the replacement of NASUTRA by another agency named Philippine Sugar Marketing Corporation (PHILSUMA) by the end of 1985, although PHILSUMA was also to be the sole buyer and seller of sugar. 37. The action program developed by the Bank went beyond the changes provided for in PDs 1960 and 1971. After intense debates within the Bank and IMF, and with some modifications, the broader action program was included as part of the IMF Standby Agreement in 1985-86. Under this Agreement, the Government's "Letter of Development Policies for the Coconut and Sugar Subsectors", dated November 13, 1985, indicated that, inter alia, the composition of the Boards of PHILSUCOM and PCA had been restructured to ensure majority Government representation; Government agreed to adopt measures to improve competition in the domestic market for copra; PHILSUCOM was to be divested of subsidiaries; NASUTRA and PHILSUCOM financial statements for the crop year ending August 31, 1985 were to be audited and published; and domestic sugar marketing was liberalized but PHILSUMA was to be responsible for sugar export and price stabilization in the domestic market. Before full implementation of these reforms, in February 1986 the Government changed. The new Government went much further and abolished PHILSUCOM, PHILSUMA and monopolistic structures in the coconut subsector, along with other reforms (para. 18). 38. It is difficult to assess the impact of the coconut and sugar reforms on subsectoral production, investment, consumer prices, and producer prices and incomes. In particular, coconut production and prices have exhibited extreme fluctuations. Copra production dropped to 1.4 million tons in 1984, the lowest level in the 1980s, but rose to 2.6 - 2.7 million tons in 1986 and 1987. Clearly, the weather was the most important factor in this fluctuation. As the Philippines, - 13 - accounts for about 652 of world coconut product exports, such production changes cause extreme fluctuations, both in international and in domestic producer and consumer prices. The liberalization of coconut oil and copra exports by the previous and present Governments can be said to have removed a significant barrier to investments in the subsector. A rehabilitation and long-term coconut replanting program will finally begin implementation in 1990 under a project for which a Bank loan will be negotiated shortly. 39. The impact of reforms in the sugar subsector has been somewhat different. The domestic and export marketing of sugar were liberalized and prices were allowed to be determined by the market, but the SRA retains the power to set marketing quotas, that is, the allocation of sugar production for domestic consumption, exports to the U.S. and world market, and reserves. These powers, coupled with the sugar import ban, have had a very significant influence on domestic producer and consumer prices during the last few years. The Philippines exported about 60X of its total raw sugar production in the 1970s and early 1980s. Beginning in 1984, world sugar prices dropped sharply and the Philippines' lucrative long-term export sugar contracts expired at the end of that year. At the same time, the country also faced a liquidity crisis and interest rates peaked at 45-50Z, leading to a drastic decline in sugar production. Compared to the 5- year average (1979180 - 1983/84) raw sugar production of 2.4 million tons, production declined to 1.7 m tons in 1984/85, 1.5 m tons in 1985/86 and 1.3 m tons in 1986/87. Unemployment and underemployment in sugar areas became very serious. However, even the reduced sugar production was in excess of the effective market (domestic and US sugar quota) of about 1.2 m tons, ex-mill prices of raw sugar therefore dropped to 6.5-7.0 US cents/lb in 1986. a level which was below the cost of production of even the most efficient producers. With the economic recovery in the Philippines which began in 1987, domestic sugar demand has picked up, although there has not been a corresponding increase in production. Since the import ban is still in effect, domestic consumer and producer prices for sugar have risen sharply. At about 18-20 US cents/lb in 1988, consumers were paying approximately double the world market price, and thus heavily, subsidizing producers. A related sectoral issue has been the continued arrearages of loans by producers to financial intermediaries (despite the recent high prices) and arrearages to the Central Bank of the major financial intermediary for sugar, the Republic Planters' Bank, which needs rehabilitation and restructuring. Liberalization of domestic and export marketing of sugar appears to have had a beneficial impact in helping to strengthern private expertise in export marketing and in promoting product diversification, such as production of blanco directo (white) sugar by some sugar mills. However, the outstanding agenda for essential policy reform in the sugar subsector is clearly still large. 40. The NFA study led to some important institutional changes (para. 15(e), although much remains to be done. At project formulation and appraisal, the Bank considered the policy and institutional reforms within the NFA to be *among the most important elements in its overall package" (telex of March 26. 1984 to the Government). NFA was perhaps the most important Government agricultural institution: it implemented the support pricing and procurement system for rice and corn; had the sole right to import and export rice, corn, wheat, and animal feeds; undertook processing and storage of grains; operated KADIWA retail stores throughout the country; and had numerous subsidiaries involved in a wide range of other activities (see para. 47). Significant budgetary subsidies were channelled to NFA, which had regulatory powers while also being a player in the market. The - 14 _ NFA study was taken seriously by both the Bank and the ADB, with important decisions reached in a review meeting held at NFA on March 19, 1985. Interestingly, at the meeting NFA authorities emphasized that "the NFA could not and would not at this time relinquish its role as exclusive importer of wheat and rice" (Minutes of Inter-Agency Meeting on T.A. No. 493-PHI - Special Review of NFA Organization and Systems, March 19, 1985). However, a month later, the Government approved the opening up of wheat imports to the private sector. Another important decision related to divestiture of subsidiaries (see para. 47). While these measures clearly enlarged the role of the private sector in Philippine agriculture, their impact on NFIA's institutional efficiency is difficult to assess. The stated objective of NFA's reorganization was to develop and adopt a more effective system of ensuring price stability for producers and consumers through market intervention rather than retail price ceilings. Procurement by NFA of a sufficient volume of rice and corn to maintain adequate buffer stocks was to be the key factor in ensuring price stability and sustained production increases (President's Report, p. 72). Of the three objectives of NFA viz., maintenance of sufficient stocks for food security, stabilization of consumer prices, and stabilization of producer prices, the last was least served by NFA actions. NFA has been under tight budget constraints and has orocured less than 5Z of the national rice and corn crops, thus benefitting only a select groip of farmers. Although this has probably been sufficient to influence prices in the four rice- producing and one corn-producing provinces where NFA's procurement is normally concentrated, the average farmgate price has rarely been as high as the support price, even in these regions. Measures implemented under the project would appear to have been a good first step towards rationalizing NFA's activities, but the effectiveness and equity of NFA's policies and programs are still open to question ('Philippines: Toward Sustaining the Economic Recovery" Country Economic Memorandum, Report No. 7438-PH, January 30, 1989, pp. 73-74.) 41. The study on fertilizers and the related policy actions which were undertaken made a significant contribution to the agricultural sector, which does lend itself to some quantitative assessment. At the time of project preparation and appraisal, a sector study estimated that the domestic fertilizer industry was receiving a total subsidy equivalent to about 50Z of the border price per unit of domestically produced fertilizer, and that most of the burden of these subsidies fell on the farmers who, under the system of price fixation by FPA, had paid a premium averaging approximately 1OZ over the border price from 1973 to 1981 ("Philippines Agriculture: Issues in Pricing Policy", Report No. 4845-PH, July 10, 1984). The same study estimated that in 1982, the domestic price of urea was 16Z above the equivalent world price, of ammonium sulphate 27Z above, and of muriate of potash (used on sugarcane and other export crops) 86Z above. The study concluded that "without quotas, tariffs, and price controls, fertilizer prices would fall to world levels, agricultural production would be stimulated, and the domestic fertilizer industry would become more efficient or possibly shrink in size". Another problem was the Government's arrears to the fertilizer industry. The arrears stemmed from an arrangement under which the Government was to reimburse the fertilizer producers/distributors whenever the prices (fixed by FPA) at which they sold fertilizers to farmers were lower than the actual cost. For various reasons, those payments were not made in full by the Government and substantial claims accumulated. To assist producers to defray interest charges resulting from these outstanding payments, the Government allowed producers/distributors to add a financing charge to fertilizer prices. - 15 - 42. As part of agreements under an ADB loan (para. 7), the Government cleared the arrears to fertilizer companies by October 1985, which resulted in somewhat lower prices to farmers. A much more significant reduction of fertilizer prices occurred as a result of liberalization of fertilizer imports and marketing and the abolition of price fixing. While a cartel of only four firms had earlier been allowed to produce, import and distribute fertilizers, the privilege was extended in August 1984 (Letter of Instruction No. 1419) to other companies. However, total importable volumes and respective import allocations to companies were still determined by FPA, which also handled tenders on behalf of the private sector. The new Government further deregulated the fertilizer sector. In May 1986, FPA relinquished its control over procurement and prices and became responsible only for quality control and environmental monitoring. There were 24 active fertilizer importers in 1987 and the increase in competition and decreasing gross margin at all levels of the distribution chain were instrumental in reducing in end-user prices substantially, although decreasing world fertilizer prices after 1984 were also a factor. For urea, which accounted for about 57? of total Philippine fertilizer imports over 1980-87, the gross margin (shared among importers, wholesale distributors and dealer retail outlets to cover all their expenses and mark-ups) declined sharply from 42Z of the farmers' price in 1984 to 19? in June 1987, due to these liberslization measures ("Philippine Fertilizer Sector Study", Chemonics International Consulting Division, Washington, D.C., March 1988 (Report prepared for USAID, Manila, Philippines). The differential in the c.i.f (P 3,600/ton) and retail price of urea (P 5,600/ton) in the first quarter of 1985 was P 2,000/ton; by the last quarter of 1986, the differential was down to P 600/ton (c.i.f price of P 1,900/ton, against the retail price of P 2,500/ton). By the last quarter of 1987, the differential was still P 600/ton (c.i.f price of P 2,500/ton against the retail price of P 3,100/ton) ("Trends in Fertilizer Supply, Use and Prices, 1980-88", Bureau of Agricultural Statistics, Department of Agriculture, Republic of the Philippines, November 1988.) The consequent improvement in the relationship between grain and fertilizer prices has increased the incentives for input use in the last three to four years ("Philippines: Toward Sustainiig the Economic Recovery", Report No. 7438-PH, January 30, 1989, p. 66.) Consumption of fertilizers which had declined in 1984 and 1985 to 660,000 and 710,000 tons respectively from 879,000 tons in 1983, shot up to about 1.2 million tons in 1987 and 1988, an increase of about 37? over the 1983 level. It should be notee though that the weighted average nominal rate of protection on all fertilizers consumed by the Philippine farmers is still about 5?. 43. In summary, the project, which was the Bank's first and, to date, its only policy-based aoricultural operation in the Philippines, was an overall success as the main policy actions, studies and institutional reforms envisaged were implemented and the foreign exchange was used for the import of essential agricultural inputs. The main thrust of the project, which was "toward greater liberalization of domestic and foreign trade in agricultural products" (President's Report, p. 13) was achieved. The project's major contribution was that it provided a framework for continuing policy dialogue and the recommendations of project studies led to further policy reforms. The project-related reforms were largely sustained and extended by the new Government. Although the project made a good beginning, the agenda for future development of the agricultural sector remains lengthy and complex, and other adjustment operations and specific investment projects could be considered to address the principal development issues. - 16 - Issues and Lessons Learned 44. Proiect Scope. A familiar question raised with regard to adjustment operations is whether the policy and institutional reform package was substantive enough in the light of the project's long-term objectives. Policy actions under this project centered on price and tariff reforms for the livestock and poultry subsectors, which in 1983 accounted for only about ISZ of agricultural gross value added (GVA). For rice and corn. which together accounted for about 201 of agricultural GVA in 1983, policy actions related only to opening up of the import and export trade to the private sector. Some other major sectoral issues, particularly the monopolistic and monopsonistic structures in the coconut and sugar subsectors, were to be reviewed under the project studies. Whether this constituted an adequate agenda for an adjustment operation or whether the Bank could have gone farther in the pursuit of reforms is a difficult question to answer (see paras. 26-27). The rroject was formulated under the previous Government, when resistance to economic liberalization and dismantling of monopolies was formidable. The Bank made a significant contribution to the preparation of the "Agenda for Action in Agriculture: 1984-88', which provided a blue-print for liberalization in the sector, and some policy and institutional reforms under the Agenda had already been implemented during project preparation and appraisal (para. 5). Loan 2469-PH took up implementation of another chunk of the Agenda during the project period, with the rest of the Agenda to be taken up under subsequent operations. The aim of the project thus was to set in motion a process of change through some policy reforms and studies, which would lay the basis for further reforms. The studies did provide a guide for additional reforms, particularly in coconut and sugar subsectors, some of which were pursued under the IMF Standby Agreement (para. 37); the fertilizer subsector (paras. 41-42); and the NFA (paras. 15(e) and 40). The project was thus an important instrument for continued agricultural sector policy dialogue and reform in the Philippines. A significant part of this success was due to actions of the new Government. A lesson which emerges from the project experience is that an initial adjustment operation can start a process of change and studies can be important vehicles for further reforms. The project also demonstrated the importance of close collaboration with the IMF and other multilateral and bilateral aid agencies in resolving complex policy and institutional issues. 45. Sustainability. While most of the project-related policy reforms have been sustained, largely because of the new Government's commitment to a more market-oriented agricultural sector, two areas deserve mention. Under the project, the import tariff on poultry had been reduced from 50S to 40S, but since April 1988 (Republic Act 6647) it has been rolled back to 50. Second, the opening up of the import and export trade in rice, corn and animal feeds to the private sector has been only partial: the soybean meal trade was deregulated and is now mostly undertaken by the private sector, but trade in other animal feeds, such as fish meal, barley, etc. is regulated by the NFA. The import and export of rice and corn, although theoretically open to the private sector, also continues to be handled exclusively by NFA (quantities involved have been small). Guidelines on the export of corn grains by the private sector have been in effect since September 1, 1988. They stipulate that the NFA Council, in consultation with the Department of Agriculture (DA) and the Inter-Agency Technical Working Group on Cereals and Feedgrains (headed by DA), shall determine and declare the exportable quantity of corn surplus for the guidance of the private sector and that applicant-exporters would be duly licensed by the NFA, would obtain permits from the NFA for every - 17 - transaction of corn exportation and would furnish to the NFA a copy of the contract entered into with the importer. The same applies to rice exports, which have so far been made in small quantities by NtA to repay an Indonesian loan. In view of these restrictions and the small quantities involved, trade liberalization implemented under the project for rice and corn has not yet been significant. The equalization of tariffs and taxes applicable to NFA and the private sector for feedgrain imports has also been without real significance, since only NFA has been allowed to import corn. 46. Procurement and Disbursement. Loan utilization was delayed due to procurement problems (para. 10). In retrospect, three aspects deserve attention. First, the loan was to be disbursed against a positive list, principally fertilizers, but fertilizer demand had been over-estimated at appraisal because of inadequate forecasting of the effects of the general economic decline. A negative list would have facilitated faster disbursements (an understanding could still have been reached with the Government to provide adequate foreign exchange for agricultural inputs). Second, given the liberalization of fertilizer and animal feeds imports, procurement procedures, which earlier envisaged a high proportion of ICB (73Z) for public sector importers, were too restrictive and had to be relaxed. Third, NFA was expected to utilize 33Z of the loan ut its subsidiary loan agreement with the Government was delayed considerably and the terms were not attractive to NFA (para. 10). This last problem should ha- been resolved much earlier in the project cycle. 47. Institutional Reforms. The scope and impact of institutional reforms under the project were at best limited (paras. 32-33). The project included technical assistance for strengthening the MAF and setting up a sectoral planning, programming and budgeting mechanism, but this assistance was not utilized. The capability of the MAF (now Department of Agriculture, DA) to undertake sectoral planning, programming and budgeting remains weak. The new Government continued the institutional reform process, including "attachment" of the three major institutions in the agricultural sector, viz., NFA, PCA and SRA, to DA. However, the extent to which DA exercises effectivs authority over these institutions is debatable. The DA itself has recently undergone a reorganization (Executive Order No. 116 of January 1987); planning has been given greater emphasis under the new structure, but staff skills and coordination still need improvement. Another important part of the project was action relating to the NFA after completion of the study (paras. 15(e) and 40). This was significant and resulted in NFA's divesting itself of its non-grain activities and concentrating on price stabilization of rice and corn. NFA was also to divest itself of its numerous subsidiaries, including Food Terminal Inc. (FTI), KADIWA retail stores, Southern Philippines Grains Complex, Northern Philippines Grains Complex, Iloilo Rice Husk Fuel Power Station, Grains Insurance Corporation, Tabangao Bulk Storage and Ship Unloading Complex, and National Post Harvest Institute for Research and Extension (NAPHIRE) and production programs under General Order (G.O.) 47. However, as of December 1988, only KADIWA stores had been divested, production programs under G.O. 47 discontinued and NAPHIRE transferred to DA. The rest were still awaiting divestiture. Although the first step towards improving NFL's effectiveness was taken under the project, the organizational and financial situation of NFA continues to present complex sectoral issues. The lesson learned from the project experience is that a significant institutional impact is unlikely to be achieved through a single adjustment operation of short duration. - 19 - ANNEX 1 Page 1 PHILIPPINES AGRICULYURAL SECTOR/INPUTS PROJECT (LOAN 2469-PH) List of Imporwtant Legpl Covenants/Conditions La Covenante/Conditlons Ost. Remarks I. Contltons of Board Present_aton Lb t. Official adoption by the Government and Before Board Complied with (letter from beginning of implementation of the program of presentation, the Prime Minister to the policy and Institutional reform outlined in the President of the World Bank, "Agenda for Action In Agriculture: 1984-98t. dated June 4, 1984). ii. *.4ptlon by the Government of the proposal of - Do - Compiled with (Executive the Presidential Commission on Reorgenzantion Order No. 965 of June 30, concerning organizational change In the 1994). agricultural sector. Ill. Initiation of the studies on NFA, coconut, - Do - Coconut and sugar studies sugar, Irrigation, fertilizer, and agricultural started; arrangements for eredit, as well as the sectoral Investment starting other studies program. substantially completed before Board presentation. iv. Removal by the Government of existing price - Do - Condition modified: a three- controls on poultry products and adoption of a phased program of price program of phased reduction of the Import adjustments and decontrol tariff on poultry products, and of price adopted before Board controls on pork. presentation, of which the first phase, that Is, adjustments in the prices of poultry, eggs and pork to reflect recent increases In input costs, implemented on May 28, 1984. v. Appropriate mesures by NFA to turn over ill - Do - Guidelines prepared by NFA foodgrain and antmal feed Import and/or export before Board presentation. trade to the private sector, with Importation handled either directly by the letter, or through pooled buying arrangements under the coordination of NFA. IT. Condition of Loan Effectiveness 1. Opening by the Government of a Special Account Before first Opened In October 1984. in the Central Bank of the Philippines, In tranche rolease. which the Bank would make advance payments and replenishment . III. Conditions of Second Tranche Releas 1. Adequate progress by NFA In opening up to Before second Import and export trade of private entities the Import and export trade of tranche release, animal feeds opened up to the animal feeds. private sector in October 1984, except for export of corn, which was opened up on September 1, 1989. II. Adequate progress in phasing out price - Do - Price controls phased out In controls on poultry, eggs nd pork. October 1984. - 20 - ANNEX 1 Page 2 Covenants/Conditions Date Remarks I11. Adequate progress ln reforms of PCA and - Do - Representation broadened and PHILSkUCOM to broaden representation on their Government majority obtainod Boards to Include concerned ministries of the In November 1986. Borrower and farmers' Interests. tv. Satisfactory progross In preparing tho six - Do - All studles completed by policy-related studies. March 1986. v. Satisfactory progress in rationalizing *nd - Do - Public Investment plan for consoitdatIng the public invostment plan for agriculture and consolidated agricultural devolopment (1986-88) and the budget prepared In 1986. consolidated budget. vi, Adequacy of progreso In reducing import tariffs - Do - Import tariffs on poultry an poultry. redscld from 650 to 40% In November 1985. IV. Other Covenants t. Use of the peo proceeds from the sale of Not applicable. Not done due to IMF foreign exch*nge provided under the Bank loan restrictions. to finance expenditures for development program, lncluding NFA's buffer stock operations. II. Appointment by the Governmnt of a Steering No date given. Compiled with. Colittes to overse the execution of studies. Ill. Designation by the Government of a Project No date given. Complied with. Coordinator within the Office of the Prime Minister to monitor all projct-r lated activities and coordinate their timely execution. Iv. Importation o pesticide under the project to Not applicable. Complied with. comply with guidelines issued by the FPA and to b packaged, labeled, handled and stored In accordance with sound environmental practices. v. Periodic evaluation by the Government, In First evaluation Not complied with, xcoept for consultation with the Bank, of the effects of t project the Project Completion policy and Institutional roforms associated completion; two Report, which was prepared with the project. further evalu- two years after completion. Wtions at six- month Intervals; and a final evaluation one year thereafter. vi. Submission to the Bank of annual sudited Not later than Delayed submission of 198 accounts for the project. six months after accounts; accounts for later the end of each yrer not received. flscal year. la Includes formal conditions starting from the negotlations stg.. An lmportant policy reform Implemented much before negotiations related to agricultural credit. A Central Bank Circular (No. 994 of Marbch 9, 1984) provided for cloasr alignment of Central Bank rediscount rates for agriculture with those for other sectors and a change from a fixed to a floating redlcount rate based on prevailing market rate. lb As listed In the Bank's telex to the Government of May 16, 1984. - 21 - AN 2 AOUA p L SrnnPIS PROJECT (LOAN 2-489-PHI Policy Area "edivu-Torm Objectives Action Proposed under the Project Timetable Actual Implementation National Food Improve efficiency of (u) Commitato open up within a raseonable period Dec 1984 Oct. 1984 Authority NFA operations of time alliport and ezport trade in rice. corn and other ani I foeds to the private sector. (b) Lhdortako to stabilize rice prices through DeC 19$4 Retol rice price buffer etock operatioe rather then coiling removed in c) mndatory price ceilings October 1985 (c)Sub-tantiilay camIeIto study of WfA Oet 1984 mar 1908 eiewandbegi mlomonttlon of the Dec 1 r 19S5 rocoemondt io Usf h etAsdy. CoGonut Efficiency and *qu ty (a) Substantially conplet study of the coconut Nov 1984 Feb 198 in Production subector. arketinv and (bj Adopt measures to broaden the ropreentation Jul 1984 Nov S985 consumption on tho governing board o' PCA. (c) Review and beoin Implementation of the Doc 1984 Way 198E6 recomendstione of the study. Sugar Efficiency and equity (a) Subettnntiilly complete study of the auger NOV 198 Feb 1945 in production eubsector, iarkotini and (b) Adopt moesure. to b-oden the representation Jul 198 Nov 1985 coneumption on the governing board of PHILSUCI4. c) Review and begin implementation of the Dec 19l4 Nay 1985t/ recomndatione of tMe study. Livestock Efficiency and equity Cna Remove price controls on poultry products. Dec 1984 Oct 1984 in production, (b) Adopt phaosd reduction of the import tariff Dec 1984 Nov 1985 marktintP and for poultry product, taking into ceount consumption th- competitiveness of the dooetic industry. (c) Reaove price controls on pork. Dec 1984 Oct 1984 Ferttilizer Efficiecay and euity (a) Appoint *parate chief operating executives Nov 1984 Apr 1986 In production, for Phiipho. and FPA. mrketin9 and (b) Adopt specific seesures and a timetable to Nov 19s84 ct 1988 consumption retire Governent's arrearte to fertilizer firma. Cc) Complete a review of this and other related Nov 1984 Nay 1998& isues in a study to be undertaken in the context of the A08 Agricultural Inputs Program loan. Irrigation Achlive suffitcint (s) Complet the *tudy of NIA's coet recovery Nov 1984 Nov 1984 ceot recovery pol iciem and resource requirements. divereify irrfgatod (b) Review and begin impleamntetion of the Dec 1984 Iv86,/ croppIng rcommendations af tho above study. Agricultural Improve efficiency of (a) Begin a phased program of reducing the Jun 1984 Jun 1984 credit crodit allocation and interest rate subsidy on Oovernment collection :pon ored aoricultural credit programs in wocordance with a timetable acceptable to the Bank. (b) Co ste th* study of agricultural credit Oct 1984 Apr 1988 (c) Review and begin implementation of the Dec 1984 1985krc recomAendatione of the study. Governmaet Improve planing, (a) Issue appropriate implemnting documentation Jun 1984 Jun 198 institutions progressng and to make operational the proposal of the coordination Presidential Commission on Reorganization on Institutional changee in the agricultural sector. (b) Initiat e long-term Inetitution-but Iding Nov 1984 Not implemented program to make tho new structure fully operational. Sectoral Establilt system for (C) Prnope a prioritized developent plan and Nov 1984 1985k investment sectorl linvestmnt corresponding financing plan for the planning planning agricultural sector. ub) Ent imh procedures and systems for Nov 1984 1"S9i updating the plan on a regular basis. These dates are approximate since some revits took place earlier and mplementation of the study ' recommendastions w spread over ties. See text for a detailed discus" ion of the review and implamntation procee. A First draft. Thie ws revseed by aother tea of conaultonts end the study wa- completed in March 1986. Lg Procime dats cannot be specified se th, proces me spread over tim. _ 23 - COMMENTS FROM THE BORROWER Attachment I REPUBLIC OF THE PHILIPINES b £ DEPARTMENT OF AGRICULTURE FERIIIUZ AND PEST DE AUTH I 6TH FLOOR, RAHA SULAYMAN BUILDING BENAVIOEZ ST., MAKATI. METRO MANILA 1. 30 March 1990 The World Bank 1818 H Street N.W. Washington D.C. Fax No. 001-202-477-7658 Attn.: Mr. Graham Donaldson Chief, Agriculture, Infrastructure & Human Resources Division Operations Evaluation Dept. Re: PCR (Ln. 2469-PH) - Our only comment is on para 18-e) which should be amended as follows: a continuation of the granting of indirect subsidy in the form of tax and duty privileges on fertilizer imports." This is the case since the * tax privilege is not an outright exemption. Very truly yours, _ L L. JR. Kxee,,bve Director III I cc: Mr. Rolando Arrivillaga Resident Representative Rin. 200. CH - Multi Storey Central Bank of the Phil. TELW.: 60550.01 TO 03 P. O. BOX 1049 TELEX NO 23176 FPA PH - 25 - OOMMENTS FROM THE BORROWER Attachment II RIPUBIC OF THE PHILIIE8 MINISTRY OF FINANCE BUREAU OF THE TREASURY 9JED ~PALACQODELGOBERNAW&UlnVAMUROSKANRnA 3 April 1990 Mr. Graham Donaldson Chief Agricultural Infrastructure and Human Resources Division Operations Evaluation Department Re : Agricultural Sector/Inputs Project (Loan No. 2469) Project Completion Report Dear Mr. Donaldson : This has reference to your letter dated 6 February 1990 requesting comments on the above-captioned subject. We would like to express our appreciation for being one the recipients of the draft report and one of those requested to comment on its contents. However, may we inform you of our regret of not being able to render authoritative and accurate comments as our participation in the project consisted only of the submission of Application for Withdrawal and recording of loan proceeds. We believe that the comments/observations coming from the National Economic and Development Authority, Department of Agriculture, National Food Authority and the Fertilizer Pesticide Authority, who were involved in the policy formulation and project implementation of the above-captioned loan, would be more beneficial in your evaluation of the project. Very truly yours, Asst. National Treasurer-PDMS EDMD/CCC/GRF/pml* CC: The World Bank M a n i 1 a I MAP SECTION i IBRD 20M1 116 CLASSIFICATOI OF PROVNCES 1W 1 BY GEOORAPCAL REGIONS I iLoCOS VI WESTERN VISAYAS I Roe" Norb 39 cAkle PHILIPPINES 2 Abe. Co9 Is 100O SW AN B 20 20' A umo.,n* 11*40t V CENTRAL VISAYAS - Roads p,sgs,z *4 CON 1I CAGAYAN VALLEY .S NCeo" o.B* RX I _ s 48 ,m Railroa 9 4' S4*x--- Pits, Sowapias K aWnga-Ap8 l EASTEV N VISAYAS Isabela o moftnI saw maReol ' l*ga* 49 09 BwiafO IINomo V.4* la 4 E'"n S , 1 in,_noREJ Soudrlar .4 0,,noo " Ley 1-9te IIINCENTRAL LUZON 52 Sounem Levu - 55 ""e"o 9"a IXB WESTERN MINOANAO Di - If Te&t z 2*omi,g N"ei s0 2 \ z8 P_ IXA WEzSTERNM AO S \ - 9 8uc .TLbIeaft°i 5l Y 8n Bl 915 _I'@00 IVA NATIONAL CAPITAL 5' r; 1 m2 - REGION hornfld6cs I6 I IV SOUTHERN TAGALOG X NORThER M ANAG 4 X t 0 2 "'a&,o de, _______________________ 23 Raw 6414 A5odel MM IO 22 25 L,gWA mnsa n, ,rcd&51 2 M&..Ou4W 2$ k6.m0g O'W3lh 64 AO~* del & A0Il 78 - 29 M.1dooQ 0cc*1enal Xi EASTEN MINOANAO 17 32 Rn. S3pi g ar o ! 22 V ' Paiam-A Dam. do SW 3 32 Cammina.3,,M*A* 69 sa Jbm at6 64 So*8~ Cotab1ol 1' C'r'' Sul XII CENTRAL MINDANAO 33 34 C..S*La"fl40 53 NOW *4*63 - 34 3. . - - 1g IXB de.l Xl 36 SoMWO. t oto*2 . ' /3_9 Z ' 7 X x t AV _ 5Zn,2es'~~~~~~I 2 _ N va440 ss , . .~~~~~~~~~~~3 3 .12 12? o Puoito 31 14881~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~~~~4 WfUNB 57 CHN NOO XiI _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ 1?0 14lt _ MAY 1988