Documet of

The World Bank

FOR OFFICLAL USE ONLY

Report No. 9937

PROJECT COMPLETION REPORT

PHILIPPINES

AGRICULTURAL CREDIT PROJECT(LOAN 2570-PH)

SEPTEMBER 30, 1991

Agriculture Operations DivisionCountry Department IIAsia Regional Office

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

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CURRENCY EQUIVALENTS

Name of Currency: Peso P

Rate of Exchange (Average)

Appraisal September 1984 US$ 1..00 - P20.001985 - P18.611986 - P20.391987 - P20.571988 - P21.0951989 - P21.737

ACRONYMS

ACPC Agricultural Credit Policy CouncilADB Asian Development BankALF Agricultural Loan FundALFPAG Agricultural Loan Fund Project Advisc-y GroupALFU Agricultural Loan Fund UnitAMDAC Agricultural Machinery Manufacturers/Distributors

Accreditation CommitteeAMTEC Agricultural Machinery Testing and Evaluation CenterARF Agrarian Reform FundCALF Comprehensive Agricultural Loan FundCBI Central Bank InstituteCBP Central Bank of the PhilippinesDA Department of AgricultureDBP Development Bank of the PhilippinesCFSME Guarantee Fund for Small and Medium EnterprisesGOP Government of PhilippinesIGLF Industrial Guarantee and Loan FundLBP Land Bank of the PhilippinesNBQB Non-Banks Performing Quasi-Banking FunctionsNEDA National Economic Development AuthorityPCA Philippine Coconut AuthorityPCIC Philippine Crop Insurance CorporationPCR Project Completion ReportPFI Participating Financial InstitutionQGFB Quedan Guarantee Fund BoardRFSP Rural Financial Services ProjectSES Supervision and ExaminationSTD Special Time DepositUSAID United States Agency for International DevelopmentWAIR Weighted Average of Interest Rates

FISCAL YEAR

January 1 to December 31

WEIGHTS AND MEASURES

ha hectare (2.47 acres)mt metric tons (2204 pounds)

FOR OFICIAL USE ONLYTHE WORLD BANK

Washington DC 20433USA

04f. c Df irecioq.Ceo,alO°patms Evaluat'nn

September 30, 1991

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Project Completion Report on PHILIPPINESA ricultural Credit Proiect (Ln.2570-PH)

Attached, for information, is a copy of a report entitled"Project Completion Report on the Philippines: Agricultural CreditProject (Loan 2570-PH)" prepared by the Asia Regional Office withPart II of the report contributed by the Borrower. No audit of thisproject has been made by the Operations Evaluation Department atthis time.

Attachment

This document has a restricted distribution and mav be r ed by r-"inD c iv in ti- r fnrwr r -

FOR OFFICIAL USE ONLY

PROJECT COMPLETION REPORT

PHILLIPINES

AGRICULTURAL CREDIT PROJECT(LOAN 2570-PH)

Table of Contents

Pare No.

Preface . . . . . . . . . . . . . . . . . . . . . . . . . . .Evaluation Summary . . . . . . . . . . . . . . . . . . . . ... . .

PART I PROJECT REVIEW FROM BANK'S PERSPECTIVE . . . . . . . . .A. Project identity . . . . . . . . . . . . . . . . . .B. Background . . . . . . . . . . . . . . . . . . . . .C. Project Objectives and Description . . . . . . . . .D. Project Design and Organization . . . . . . . . . . . 2E. Project Implementation . . . . . . . . . . . . . . . 2F. Project Results . . . . . . . . . . . . . . . . . . . 4G. Project Sustainability . . . . . . . . . . . . . . . 6H. Bank Performance . . . . . . . . . . . . . . . . . . 6I. Borrower Performance . . . . . . . . . . . . . . . . 6J. Project Relationship . . . . . . . . . . . . . . . . 7K. Consulting Services . . . . . . . . . . . . . . . . . 7L. Project Documentation and Data . . . . . . . . . . . 8M. Cofinancier's Comments on the Project . . . . . . . . 8

PART II PROJECT REVIEW FROM BORROWER'S PERSPECTIVE . . . . . . . 9A. Background .9B. Implementation .10C. Project Results . . . . . . . . . . . . . . . . . . . 17

PART III STATISTICAL INFORMATION . . . . . . . . . . . . . . . . . 221. Related Bank Loans and/or Credits . . . . . . . . . . 222. Project Timetable . . . . . . . . . . . . . . . . . . 233. Loan Disbursements .. 244. Project Implementation . . . . . . . . . . . . . . . 275. Project Costs and Financing . . . . . . . . . . . . . 28

A. Project Costs . . . . . . . . . . . . . . . . . . 28B. Project Financing . . . . . . . . . . . . . . . . 29

6. Project Results .... . . . . . . . . . . . . . . . 30A. Direct Benefits . . . . . . . . . . . . . . . . . 30B. Economic Impact . . . . . . . . . . . . . . . . . 31C. Financial Impact .32D. Studies .33

7. Status of Covenants . . . . . . . . . . . . . . . . . 358. Use of Bank Resources . . . . . . . . . . . . . . . . 38

A. Staff Inputs . . . . . . . . . . . . . . . . . . 38B. Missions . . . . . . . . . . . . . . . . . . . . 39

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

LIST OF APPENDICES

1. Revalued ALF Balance Sheet as at February 28, 19912. Currency Devaluation, Inflation and Interest Rates under ALF3. Characteristic., of ALF Loan Availments

Map IBRD 22431

PROJECT COMPLETION REPORT

PHILLIPINES

AGRICULTURAL CREDIT PROJECT(LOAN 2570-PH).

Preface

This is the Project Completion F.eport (PCR) for the Agricultural CreditProject in the Philippines, for which Loan 2570-PH in the amount of US$100.0million was approved on June 6, 1985. The loan was fully disbursed on October10, 1989, 14 months ahead of schedule, and was formally closed on October 31,1989.

Parts I and III of the PCR were prepared by the Asia Regional Office,and Part II by the Borrower. The PCR is based, inter alia, on a completionreport from the Central Bank of the Philippines in July 1990; the Staff AppraisalReport; the Loan and Guarantee Agreements; supervision reports; correspondencebetween the Banc and he Borrower; internal Bank memoranda; and field work by aBank completion mission in February-March 1991. In March 1991, the United StatesAgency for International Development (USAID) undertook an Impact Evaluation Studyof its Rural Financial Services Project, through which parallel cofinancing wasprovided for Loan 2570-PH, and the findings were discussed with USAID and takeninto account in preparing this PCR.

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PROJECT COMPLETION REPORT

PHILLIPINES

AGRICULTURAL CREDIT PROJECT(LOAN 2570-PH)

Evaluation Sumsmary

Objectives

1. The Agricultural Credit Project's main objectives were to help fostereconorumc recovery through provision of agricultural credit, and to introducepolicy and institutional reforms necessary for self-sustaining financialintermediationi in the rural sector. The Bank loan provided funds totallingUS$100 million over a four-year period for seasonal, medium and long-term creditthrough a newly established rediscounting facility, the Agricultural Loan Fund(ALF); studies in support of policy and institutional reforms and preparation ofa future project; and training of project-related staff and technical assistanceto the Central Bank of the Philippines (CBP). The United States Agency forInternational Development (USAID) provided parallel cofinancing through a grantof US$20 million.

Implementation Experience

2. The loan was fully disbursed 14 months ahead of schedule. Four studieswere completed within the project period, although behind schedule because ofcontracting delays, and two other studies were not undertaken. As a result ofthe World Bank's 1988 Financial Sector Review, the Government agreed to move theALF from the CBP to the Land Bank of the Philippines (LBP); the transfer tookabout two years to finalize.

3. Generally the Borrower performed well under the project, until late1989 when staffing of the ALF Unit (ALFU) at CBP was reduced in anticipation ofthe transfer to LBP. The Loan Agreement was adequate a;.d the Staff AppraisalReport provided a useful framework for both the Bank and CBP to follow. Reportsfrom the ALFU to the Bank were generally on time and contained all necessarydata. The CBP prepared a comprehensive completion report in a timely fashion.Relationships among t.he CBP, the Bank and USAID were generally good. The USAIDundertook an Impact Evaluation Study of a parallel project in March 1991, and thefindings were taken into account in preparing this PCR.

Results

4. Overall, the project succeeded in meeting its principal objectives.It provided much needed medium- and long-term credit for agricultural investment,which was chronically under-funded from formal sources. Lending and investment

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under the project were greater than envisaged at appraisal, at over P5 billion(about US$250 million) during 1985-89. Over 2,00') borrowers benefited from themain investments, which were in agro-processing (36%), poultry and livestock(20%), fisheries (15%), seasonal crops (25%) and plantation crops (4%). Theproject was reasonably dive asified geographically. Commercial banks handled 72%of funds, thrift bankE 25%, and government and rural banks the rest. Sub-loansaveraged P2.65 million (about US$123,000), and 95% of sub-loans were forexpansion of existix:g enterprises rather than new businesses.

5. For smaller scale borrowers, particularly in the rural areas, theavailability of ALF funding encouraged in--estments which would probably nototherwise have been made. For larger commercial borrowers, ALF was an attractivesource, although it is less clear how much direct incrementality was involved.Indirectly, however, there was probably considerable additionality, as the influxof project funds would have encouraged increased investment in the entire sector.

6. Loan recoveries under the ALF program have been very good and, as ALFsub-loans were fully collateralized, most minor arrears should be collected.This represents a positive change from the results of earlier Bank agriculturalcredit projects in the Philippines.

7. CBP has withdrawn from subsidized rediscounting to agritulture.Rediscounting rates charged under the project were positive in real terms andmore market-oriented than previous CBP rediscount rates. While they exceeded theaverage cost of money to banks at the wholesale level, they were below effectivemarginal wholesale rates. Both the PFIs and sub-borrowers ber sited financiallyfrom the project. Financial results to the CBP were less attractive, however,because its interes rates, calculated on the estimated break-even cost of funds,both under-estimated Peso devaluations and did not take account of dollardevaluation against the basket of currencies borrowed from the World Bank.

8. The four studies undertaken were generally useful, although many oftheir recommendations did not fall within CBP's jurisdiction and therefore couldnot be implemented under the project. Nevertheless, they provided a frameworkfor the ongoing rural bank rehabilitation program and expansion of rural credit,and they formed the basis for policies to raise crop insurance premia andeliminate subsidies. Staff training was generally satisfactory.

9. The delay in moving the ALF to LBP caused a hiatus in ALF financing anderosion of ALFU staff. Review of loan applications became less thorough, anddelays in processing ALF loans increased, amounting by March 1991 to about 10months. However, this problem should be resolved shortly, with the assistanceof a recently negotiated follow-up Bank loan to LBP.

Sustainability

10. The ALF program is sustainable, in principle, provided LBP issuccessful with continued resource mobilization (both internal and external).The fact that the CBP withdrew its funds when ALF was transferred to LBP, without

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any immediate action by the Government to replace the resources, temporarilythreatened the continuity of the ALF.

Findings and Lessons '.earned

11. The project has made a substantial positive contribution to theinstitutional development of the rural credit sector in the Philippines, byhelping to support necessary changes in refinancing arrangements and providingmuch needed funding for medium- and long-term credit. Ths3 following are the mainlessons to be drawn from the experience of implementing this project.

(a) A market determined financial environment, especially with respect toallocation of funds and interest rate movements, led inter alia, to agreater volume of lending and investments under the project than hadbeen envisaged at appraisal.

(b) Loan repayment rates under the project were, and continue to be, verygood (100% for CBP and over 95% for the PFIs), mainly because: (i)the sub-loan credit risk rests with the PFIs; (ii) the PFIs have beenfree to select their sub-borrowers without Government intervention;and (iii) the quality of staff and management in the CBP and the PFIswas satisfactory.

(c) While the decision to transfer the ALF rediscounting facility out ofCBP may have been an appropriate step from the standpoint of overallfinancial sector development and rationalization of central bankingfunctions, both the Government and the Bank should have paid closerattention to planning the details of such major institutional changesto avoid possible adverse operational effects and disruption ofservices.

PRCiECT COMPLETION REPORT

PHILLIPINES

AGRICULTURAL CREDIT PROJECT(LOAN 2570-PH)

PART I: PROJECT REVIEW FROM BAMK'S PERSPECTIVE

A. Project Identity

Name : Agricultural Credit ProjectLoan Number : 2570-PHRVP Unit : Asia Regional OfficeCountry : PhilippinesSector : AgricultureSub-sector : Credit

B. Background

1.01 The Philippines financial sector has traditionally been dominated bycommercial banks, which concentrated on fully collateralized short-te-m lending.In the late 1970s, most financing for small farmers was in the torm of subsidizeddirected credit, which was rediscounted by the government. The loan collectionexperience -nder these programs was poor, with the result that the rural bank4ngsystem came under increasing stress from about 1975 onwards. In 1982 the WorldBank undertook an agricultural credit study in the Philippines, which focusedon the limited supply of medium- and long-term agricultural credit, institutionalweaknesses, and deficiencies in government credit policies. Particular attentionwas drawn to the wide use of credit-cum-extension programs with subsidizedinterest rates, which placed heavy demands on the financial and managerialcapabilities of participating banks. Following this sector study, the Governmentof Philippines (GOP) and the Central Bank of the Philippines (CBP) agreed toimplement a package of policy and institutional reforms generally aimed at the~elimination of regulated interest rates for agriculture, phasing out ofgovernment subsidies on agricultural credit, expansion of banking services inrural areas, and initial measures to address the problems of sub-loan arrearages.However, actual implementation of these decisions was delayed for a few years bythe fact that the Philippines went through a serious financial crisis during1983-85, which substantially reduced the real value of private savings andsharply decreased the liquidity of the banking system, putting a further squeezeon the already limited availability of medium- and long-term funds fcragriculture.

C. Proiect Obiectives and Description

1.02 Against the background of the agricultural credit study and thefinancial crisis (para. 2.1), the project's main objecti es were to help fostereconomic recovery through provision of seasonal and investment credit to theagricultural sector; establish an appropriate institutional policy framework andsystems to support the development of a financially sound rural credit system;

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and increase the capacity of rural credit institutions to mobilize rural savingsand improve the efficiency of their farm credit operations through interest ratereforms, reforms in CBP rediscounting policies, and strategies for expansion ofbanking services in rural areas. The Agricultural Credit Project provided fundsover a four-year period for:

(a) seasonal, medium- and long-term credit for tLle agricultural sector;

(b) studies in support of policy and institutional reforms and preparationof a future project; and

(c) training of project-related staff and technical assistance to CBP.

1.03 The Project was complemented by parallel co-financing of US$20 millionfrom the USAID through its Rural Financial Services Projec- (USAID RFSP No. 492-0394). The USAID financing was i.aitiall- approved as a loan, but was convertedto a grant in 1987.

D. Project DesiRn and Organization

1.04 The Agricultural Credit Project supported GOP's move away from directsubsidized credit and towards; a more sustainable rur.- financial sector. ItsmaIn financial thrust was to establish the Agricultural Loan Fund (ALF), whichwas a facility managed by C. P to provide a rediscounting window for agriculturalcredit through sound financial intermediaries. The project was prepared by CBPin collaboration with other GOP agencies and the trade organizations ofcommercial, thrift and rural banks, with the assistance of World Bank staff. Theintent was both to make ALF operational and concurrently to introduce policy andinstitutional reforms essential for viable financial i'atermediation in the ruralsector. ALF would rediscount individual sub-loans by accredited ParticipatingFinancial Institutions (PFIs) for up to about 80% of project cost. Sub-loanrepayments would be returned to ALF to permit additional rediscountingoperations. In the initial phase, ALF resource- were built up by drawdown of theWorld Bank loan (US$100 million) and part of the USAID grant ''1S$17.4 million).A further US$13.4 million was provided by CBP. In addition, six specific studieswere to be undertaken and a training program carried out for both CBP and PFIstaff within the Central Bank Institute (CBI). The project as a whole wasoverseen by the Agricultural Loan Fund Project Advisory Group (ALFPAG) whichcomprised CBP Deputy Governors with groups of advisors from other participatingGOP agencies. The day-to-day operations of ALF were undertaken by anAgricultural Loan Fund Unit (ALFU) specifically set up within CBP, and act'ng asa secretariat for ALFPAG.

E. Proiect Implementation

1.05 Loan Effectiveness and Prolect Start-up. Loan 2570-PH was signed onJune 10, 1985. No undue delays occurred and effectiveness was declared on August16, 1985. The first drawdown under the project, a transfer of US$10 million intoa special account, was applied for on October 17, 1985.

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1.06 ImpLementation Schedule. The project was expected to be completed byDecember 31, 1989, with a Closing Date of December 31, 1990. It was actuallycompleted ahead of time, with the final drawdown in October 1989. Four studiesunder the project, covering (a) rediscounting policy and arrearages, (b)government assistance to low income groups, (c) crop/ sub-loan insurance, and (d)strategies for expansion of banking services in the rural areas, were allcompleted in 1987, which was within the project period but behind the originaltarget dates envisaged at negotiations. Neither the updating of a manual on term

lending nor the preparation of a future agricultural credit project wereundertaken during the project period, although these activities did take pla,.esubsequently iTn preparation for a follow-up Bank project. It had been agreedduring supervision in July 1986 that updating of the manual would be handled by

the USAID general contractor which was also uXidertaking a r.amber of parallelstudies. Subsequently the priorities of USAID and its general contractor changedand this work was not done. Preparation of a follow-up project was notundertagen at the time mainly because, as a result of a World Bank FinancialSector Review in 1988, GOP agreed that ALF would be moved from CBP, butfinalizing arrangements for the eventual transfer to the Land Bank of thePhilippines (LBP) took about two years. Once it had become clear that CBP wouldnot continue to administer the ALF, the staff in the ALFU became depleted and CBPdemonstrated less interest in a follow-on project. On the other hand, LBP wasnot in a position to work on preparation of a subsequent project until such timeas it h--d actually assumed responsibility for ALF. The take-over was notfinalized antil July 1990 (after the Agricultural Credit Project had closed), atwhich time LBP actually began to prepare the follow-up Rural Finance Project.

1.07 Procurement. As this was a credit project, most procurement was byprudent local shopping, overseen to a limited extent by the PFIs. Verificationof the purpose for which. funds were used was -undertaken by ALFU on a sample

basis. Funds were generally shown to have been used for their intended purposes.With the exception of one of the studies which was awarded to a local consultantfollowing procurement procedures approved by the Bank, the other studies and

training were undertaken by GOP agencies. Overall procurement under the projectappears to have been satisfactory, although there was a three-month delay on therforementioned consultancy procurement, due to the need to readvertise the

contract specifying that it was open to both Filipino and internationalconsultants.

1.08 Project cost. At appra4sal an estimate of project cost was made byadding the total amount of seasonal inputs against w.iich credit was lilely to be

given for one year to estimates of medium- and long-term investment items to befunded by the project over a four-year period. On this basis, the total projectcost was estimated at US$183 million, including US$0.5 million for studies andtraining. Defined in this way, the ex-post project cost is difficult toestimate. While the contributions made by World Bank, USALD, CBP and PFIs areknown or can be estimated fairly closely, there is no sure means of estimating

the sub-botrowers' own contributions. On the basis of the average reported"owner equity" contribution to projects by sub-borrowers (42%), as measured byCBP on a sample of projects in its terminal report, total "project cost"

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including the USAID project, was about US$300 million'!. Of this, US$87 millionwere investments supported by short-term loans (the 1989 level of disbursements),US$209 million were medium- and long-term investments supported by creditdisbursed between 1986-89, and US$3.1 million were studies and training. Thereason for the ex-post estimate of project cost being higher than that projectedat appraisal was largely due to a substantially greater investment in medium- andlong-term credit than initially projected and a higher estimate of "owner equity"(42% compared with 18%), which allowed the limited resource of borrowed funds tobe spread over a wider investment. Since a significant part of this "ownerequity" actually represents existing assets, the project cost defined in this wayis probably not all truly new investment.

1.09 At the end of 1989, ALF assets were just over P3 billion, includingF2.3 billion in the form of loans to local banks9 F0.2 billion as aninternational revaluation reserve, and p0.5 billion in cas:. and otherinvestmeo'ts. Because the Peso depreciated less against the dollar between 1986and !989 than implicitly projected at appraisal!', the total Peso value of theALF at end-1989 was about the same as the appraisal estimate, despite the factthat US$17.4 million, which had not been taken into account at appraisal, wascontributed by USAID in addition to the World Bank's US$100 million.

1.10 Disbursements. The estimated disbursements of Ln. 2570-PH are givenin Part III, Table 3. Although they started more slowly than planned,disbursements accelerated and were completed in October 1989, compared with theappraisal estimate of December 1990. The Loan Agreement provided forUS$0.5 million of disbursements under Category 3, (consultants' services andtraining), but undisbursed funds from this category were reallocated to Category1 or 2, because of GOP's preference to use the USAID grant rather than loan fundsfor technical assistance and studies.

F. Prolect Results

1.11 Overall the project was successful in meeting its principal objectivesof stimulating private agricultural sector investment and encouraging CBP towithdraw from subsidized rediscounting to agriculture. Numerous earlier directcredit lines were merged to establish a Comprehensive Agricultural Loan Fund(CALF), which has been used to support several guarantee programs, to helpenhance the creditworthiness of borrowers and reduce the arrearages of banks'lending to this sector. Sections 2.04 (a) and (b) of the Guarantee Agreementwere not fully complied with in that some eubsidized credit to agriculture stillexists, although about 93% of all rural credit is now extended at marketdetermined rates, which is a vast improvement over the pre-project situation.The policy studies on arrearages and rtral credit development provided aframework for the ongoing rural bank rehabilitation project and the expansion of

1/ If owner equity were estimated at 20% of investment, project cost would be US$217 million.

21 Appraisal projection was P25 = US$1 for end 1989 compared with an actual figure of P22.5Us$1.

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viable retail rural credit outlets; the studies on insurance formed the basis forpolicies of the Philippine Crop Insurance Corporation (PCIC) to raise premia andeliminate subsidies.

1.12 The flow of lending and investment under the project was higher thanenvisaged at appraisal, with over P5 billion being lent between 1985 and 1989.Over this period, 2,013 borrowers benefited from the project, with the maininvestments being for agro-processing (36%), poultry and livestock (20%),fisheries (15%), and seasonal crops, mainly sugar and banana (25%). The projectwas reasonably diversified geographically, although 32% of sub-loan amounts weremade in Region III (Central Luzon). Some 72% of funds were handled by commercialbanks, with 25% going to thrift banks, 2% to government banks and 1% only torural banks. Sub-loan sizes averaged F2.65 million (US$123,000) and 95% of sub-loans were for expansion of existing enterprises rather than new businesses. 3/

1.13 Rediscounting rates under the project were positive in real terms andwere more market-oriented than previous CBP rediscount rates. Furthermore, theyexceeded the average cost of money to banks at the wholesale level. They were,however, below effective marginal wholesale rates (i.e. the cost of time depositsplus cost of mobilization). As a result, both the PFIs and sub-borrowersbenefited financially from the project,±I at the expense of the CBP. Projectinterest rates were set on the basis of the estimated break-even cost of funds,taking account of the estimated average devaluation of the Peso against the USdollar and the nominal World Bank interest rate. In the event, the Pesodevaluation was underestimated and the devaluation of the dollar against thebasket of currencies borrowed (18.15% as at January 15, 199:) was not taken intoaccount.

1.14 Loan recoveries under the ALF program were very good, both by the CBP(100%) and at the retail level by PFIs (e.g. during 1989 amounts collected byPFIs are estimated to hive been over 95% of sums due and collectable, while asa percentage of principal, arrears to PFIs were reported at 1.4%). As ALF sub-loans were fully collateralized, it is anticipated that most of the arrears willbe collected. This represents a very welcome and positive change from theresults of earlier Bank agricultural credit projects in the Philippines.

1.15 At the direct level of the individual commercial borrower ALF was anattractive funding source, raising the possibility that it may have been accessedfor eligible investments that would have been made anyway, although this is notcertain given the extreme shortage of medium- and long-term financing at thetime. Because the ALF operating manual allowed permanent working capital loansto be rediscounted, without clearly defining that the working capital should beincremental, ALF became particularly attractive to agri-businesses during 1989and 1990, when the ALF rediscount rate was below the cost of alternative

3 Characteristics of the ALF Loans are detailed in Appendix 3.

For details of interest rates, inflation and benefits to sub-borrowers and PFIs see Part III,Appendix 2.

6

financing sources. For borrowers from rural and thrift banks, however,particularly in the rural areas, the availability of ALF funding definitelyencouraged investments to be made which would not otherwise have taken place.Indirectly, there was also probably considerable additionality from the program.Total capital needs in the agricultural sector are very high compared with formalcredit availability, so that the addition of about US$130 million of new moneyprovided under the project was easily absorbed and would have encouragedincreased total investment in the sector, whether or nor in those projectsdirectly funded by the ALF.

G. Prolect Sustainability

1.16 The ALF program is sustainable in that it can continue to functionusefully, although substantial additional financial resources will be required.To remain sustainable, interest rates charged need to be periodically adjustedto market rate indicators which better reflect changes in the Peso value vis-a-vis foreign currencies. These changes are being implemented under the follow-upproject.

H. Bank Performance

1.17 Through the Agricultural Credit Project, the Bank made a substantialpositive contribution to the institutional development of the rural credit sectorin the Philippines. It helped to support a necessary change in refinancingsystems and provided much needed funding for medium- and long-term credit. Themain weaknesses of the Bank's performance have been in the following areas:

(a) In retrospect, to reflect true costs and minimize the foreign exchangerisk, a better indicator of market rates should have been used todetermine the formula for setting the interest rates to the PFIs.Eventually, after prodding by the Bank, CBP adopted this methodologyand LBP will implement it under the follow-up project.

(b) Because of the Bank's recommendation to move the ALF out of CBP,followed by indecisiveness and delays in determining the institutionto which ALF should be transferred and the operational arrangements,a hiatus occurred, leading by March 1991 to a backlog of demand for ALFloans of about 10 months Again, this problem will be resolved throughthe follow-up project.

I. Borrower Performance

1.18 Generally the Borrower performed well under the project, until late1989 when the decision was made to transfer ALF out of CBP. Staff of the ALFUwere depleted, making it impossible to review loan applications with the samethoroughness as previously. This meant that several large sub-loans to agro-industries were approved without full compliance with the requirements of the

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operating manual.5' Most of the findings of the project studies, which wentwell beyond the remit of CBP, were not implemented within the framework of theproject, although some have been taken up subsequently. With the benefit ofhindsight, a narrower definition of the terms of reference of the consultingstudies would have been more appropriate. Better coordination between the legaldepartment of CBP, which understood that the World Bank loan was repayable in arange of currencies, and the ALFU which was responsible for the calculation ofthe break-even interest rate, might have resulted in an earlier revision of theinterest rate formula and therefore in a lower potential cost of this project toCBP. The withdrawal of CBP funds from the ALF, before negotiation of thereplacement of these by LBEF, exacerbated the present problem of queuing for ALFfunds.

J. Project Relationship

1.19 Tue relationships among the World Bank, CBP and USAID on the projecthave been generally good.

K. Consulting Services

1.20 The policy study on rediscounting and arrearages was undertakeninternally by CBP; the broadly based study on rural credit development was doneby a local consulting firm, SGV/C. Virata & Co.; the study on financial supportfor the very poor was carried out by the National Ecoromic Development Authority(NEDA); and the studv on systems for safeguarding rural financial institutionsby the PCIC. In all cases, there was a lengthy period before terms of referencewere finalized and the work program agreed, which led to delays inimplementation. The overall impression left is that these studies were generallyuseful and all were approved by ALFPAG. However, while some of therecommendations have been acted upon by CBP, many of them were of a broaderranging nature and so did not fall under CBP's jurisdiction.

1.21 Training for more than 1,000 PFI and CBP staff was provided through CBIcourses under the project. Generally the training provided under the project wascarried out satisfactorily, although the recent SGV/C. Virata/USAID ImpactEvaluation Study suggests there were gaps in the subject matter covered and thatthe institutional benefits to CBI itself (e.g. manuals, materials and developmentof their own staff) were limited.

5/ The policy manual required financial analysis to be undertaken on sub-loans over Fl million,economic analysis to be undertaken on sub-loans over P5 million, and prior approval of the CBP andthe World Bank to be obtained for sub-loans in excess of PIO and P20 million respectively. Afterthe World Bank loan had been fully disbursed, the Bank's prior approval was no longer required andex-post review of a sample of sub-loans in excess of P20 million disbursed during this periodindicated that adequate financial and economic analysis, as prescribed by the manual, had not beenundertaken on those sub-loans.

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L. Project Documentation and Data

1.22 The Loan Agreement was adequate; the Staff Appraisal Report provideda useful framework for both the Bank and CBP to follow; and CBP prepared acomprehens4ve terminal report (a precis of which comprises Part II of thisreport) in a timely fashion. Reports from the ALFU to the Bank were generallyon time and contained all necessary data. The main area in which project datawas less than satisfactory concerned the financial and economic performance ofsub-projects. Analysis on this performance was carried out by CBP at the end ofthe project period, br., it was unable to compare adequately the "with project"and "without project" scenarios which would have been necessary to make acomprehensive ex-post economic evaluation of the project. In future, this kindof analysis needs to be based on continuous in-depth monitoring of a sample ofproject sub-loans.

M. Cofinancier's Comments on the Project

1.23 USAID's Impact Evaluation Study dated March 1991, commissioned fromSGV/C. Virata, concluded that its Rural Financial Services Project was a successwith respect to its goal and purpose, in that foreign exchange was transferredto the Philippines, while facilitating implementation of market-oriented reformsin the rural financial sector. The project led to policy reforms eitherdirectly, as part of the loan covenants, or indirectly, as recommendations of theRFSP-assisted policy studies, it has also identified areas for additionalreforms.

PART II: PROJECT REVIEW FROM BORROWER'S PRSPECTIVE~'

A. Background

2.01 The Agricultural Cred't Project (Loan No. 2570-PH) and the USAID grantagreement were intended to support the GOP's thrusts for economic stabilization,recovery and growth as well as to introduce policy and institutional reformsessential for self-sustaining financial intermediation in the rural sector. Theproject was to channel funds through the CBP to finance the seasonal productionand investment credit needs of a wide range of agricultural and agro-processingactivities through qualified retail PFIs. The project differed from earlierIBRD-assisted rural credit operations which were generally commodity- andinstitution-specific. This arrangement facilitated a wider participation inagricultural lending of financial intermediaries which included commercial,thrift, rural banks (RBs) and specialized government banks (SGBs) as well asselected non-banks performing quasi-banking functions (NBQBs). Moreover, itintroduced flexibility in the use of project funds and increased the leverage bywhich the CBP introduced policy and institutional reforms.

2.02 The project was formulated by the CBP with the assistance of World BankStaff and in-house task forces which worked in collaboration with other GOPagencies and trade organizations of commercial, thrift and rural banks. Therewere two major components: (a) a credit component to support seasonal productioncredit and investment in agriculture-based loans extended by retail lendinginstitutions to the rural sector; and (b) an institutional development componentto assist the GOP identify and implement policy changes and institutionalreforms. The credit component was to be onlent by the CBP to qualified PFIs atmarket-oriented interest rates consistent with the criteria agreed upon with theIBRD and the USAID. The foreign exchange risk had to be reflected in the CBP'srediscount rates. The retail PFIs had to onlend the CBP funds blended with theirown funds at market-based interest rates. In this respect, the project was adeparture from previous credit programs which generally had subsidized interestrates.

2.03 Apart from the basic loan covenants, the Loan Agreement provided fora number of special covenants relating to seasonal production credit; policystudies to be undertaken; staff training and technical assistance; machinery andequipment; civil works; employment of consultants; accounts and audit; sub-loanapproval; the ALF Policy Manual; interest rates; the PFIs; monitoring andevaluation; the Special Account; and the elimination of subsidies. By and largethe performance criteria were complied with satisfactorily, except for twostudies which were not undertaken, the first because of the imminent transfer of

6 This is a precis of the Project Completion Report dated June 30, 1990 prepared by the ALFU,Department of Loans and Credit, CBP. The full document, which provides a comprehensive historicalaccount of the project is held in the World Bank's Implementation File.

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the ALF from the CB? to the LBP; and the second because the USAID generalcontractor's work priorities were changed and the work was deferred.

B. Implementation

2.04 Conditions for Loan Effectiveness and Start-up. The loan became

effective on August 16, 1985 and all other actions relating to legal opinions,

authorized signatories and establishment and designation of staff of the ALFU and

members of the ALFPAG were completed and conveyed to the IBRD between October

1985 and January 1986. In a supplementary letter to the World Bank, the CBP

expressed its commitment that the ALF operation financed with the loan would

receive priority in the CBP's overall credit program.

2.05 Organizational Arrangements. The CBP's Department of Loans & Credit

took charge of the ALF program. Project funds were channelled to eligible banks

and NBQBs. Project appraisal and supervision were performed by the PFIs. The

ALFU became operational on July 2 1985 when the initial 16 members of the core

staff assuLmed duties. By December 31, 1985, 24 personnel were serving in the

ALFU with five vacancies that were never filled. As at December 31, 1989 staff

had declined to 13 after 11 resigned or transferred to other CBP units or other

GOP agencies following announcement of the projected transfer of the ALF to

another government agency. The ALFPAG was created in February 1985 comprising

three CBP Deputy Governors. Following a joint World Bank/USAID Supervision! mission in November 1985, the ALFPAG was reorganized to include an expanded

membership of Ad Hoc Advisory Groups incorporating representatives from selected

government agencies, bankers' associations and commodity boards/tradeorganizations. The ALFPAG reviewed agricultural credit policies, programs and

institutions affecting the implementation of the ALF.

2.06 The CBP's training entity, the CBI, was primarily responsible for

project related training in coordination with the CBP's Department of Loans andCredits. Funds came from the institutional development component of US$2.6

million of the USAID grant. Training was in two categories: (a) trainers beingtrained to help develop the institutional training capacity of banking

associations or federations participating in the ALF; and (b) technical,

managerial and staff development for ALF and rural financial institutions taking

part in ALF-financed lending activity. In close coordination with the General

Contractor under the USAID Project, additional training was given to key CBI

staff members as trainers in developing or formulating expanded training

curricula. Between 1985 and 1988, the CBI conducted seven different types of

training courses (case writing; ALF teachers' course; institutional appraisal;

ALF familiarization; ALF rural lending; basic computer; and project monitoring& evaluation) for 849 participants.

2.07 In accordance with Schedule 5, Part B(4) of the Loan Agreement, the

Agricultural Machinery Manufacturers/Distributors Accreditation Committee (AMDAC)

was reorganized on July 13, 1985 to include as new members the Agricultural

Machinery Manufacturers and Distributors Association (AMMDA) and the Agricultural

Machinery Testing and Evaluation Center (AMTEC). The existing members were the

CBP, DBP, LBP and DA. The DBP and LBP were not allowed to participate in the ALF

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Program during its initial stage because they were then undergoing financialrestructuring and strengthening. They remained members of the AMDAC because theywere also engaged in other lending programs that involved financing of farmmachinery and equipment. Moreover, their long experience and expertise in theappraisal and evaluation of applications for company as well as product and priceaccreditation were invaluable to the operation of the Committee. As suggestedby the World Bank Supervision Mission, the CBP had assumed the permanentChairmanship of the Committee so as to provide the necessary direction informulating and implementing policies on farm machinery accreditation,distribution and financing under the ALF. Unlike in the previous four CB-IBRDRural Credit Projects where an average of 30 machinery dealers or suppliers tookpart, the lUDAC was not active under the ALF project because of the depressedmarket for agricultural machinery. The ALF posted an annual notice in majorinternational publications on the estimated volume and composition ofagricultural machinery requirements for the Philippines and invited manufacturersand suppliers to seek accreditation with the AMDAC. A total of 37 foreign andlocal manufacturers and suppliers responded to the advertisement.

2.08 Retail banks and NBQBs that complied with the ALF qualifying criteriaprescribed by the CBP with the World Bank's concurrence had access to ALF funds.The CBP Supervision and Examination (SES) departments continuously evaluated thequalifications and performance of the banks and NBQBs. The eligibility criteriafor participation in the ALF and IGLF were realigned un the suggestion of theWorld Bank Supervision Mission to correct the situation in which a financialinstitution was eligible for ALF but not IGLF participation and vice versa.Initially 142 banks (23 commercial banks, 41 thrift banks and 78 rural banks)were recommended by the SES in August 1985 to participate in the ALF Program.The list of qualified financial institutions was updated whenever the ALFUreceived the results of SES evaluation of PFIs. As of December 31, 1989 thenumber of qualified financial institutions had declined significantly to 89 (21commercial banks, 20 thrift banks, 46 rural banks, 1 NBQB and 1 specializedgovernment bank). The 37% reduction was principally due to arrearage problemsthat affected the overall loan portfolios of these institutions.

2.09 A Special Account amounting to US$10 million was set up with the CBPon October 17, 1985 in compliance with Schedule 6 of the Loan Agreement. Aninitial drawdown of US$400,000 from the credit line was released on November 6,1985. The Special Account was denominated in dollars and conversion to localcurrency was done at the time of actual expenditure.

2.10 At the beginning of the project the project feasibility formats anddocumentation required in the ALF Policy Manual evoked some adverse reactionsfrom the commercial banking sector which considered the documents voluminous andcomplicated. The feasibility study and documentation requirements weresimplified and revised and other aspects of the Policy Manual were revised, withthe concurrence of the World Bank, to make them more responsive to the purposesof the program.

2.11 To promote awareness of the ALF Program, a primer on the programimplementation was prepared and circulated in 1985, the ALFU participated in

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fairs, workshops and seminars in 1987 and 1988 and briefings were conducted, anda country-wide information drive was undertaken in 1986 through five major dailynewspapers and 35 radio broadcasting stations.

2.12 Lending Terms and Conditions. The interest rates on ALF loans to PFIswere market-oriented and determined or the basis of the higher of:

(a) cost of borrowing to the ALF, related administrative costs, and anelement of foreign exchange risk (Break-Even Cost or BEC); or

(b) the weighted average cost of the banking system's demand, savings andtime deposits (WSTDR).

The rate which was reviewed quarterly was announced before the end of eachquarter and applied to all outstanding loans.

2.13 Credit implementation started when the Philippine economy was in aliquidity squeeze and ALF loans to PFIs initially carried a relatively highinterest rate of 16.7%, without deposit mobilization cost. The rate wascalculated by the CBP's Department of Economic Research and concurred with by theBank. As the economy improved, however, the rate came down and stabilized in1987 and 1988 at 10%. From December 1985 the rates took into account the costof deposit mobilization as suggested by the Bank's Supervision Mission. Anintermediation cost factor, which is a function of, and varies with, the requiredlevel of reserves as well as with a series of other legislative and regulatoryrequirements, was included in the ALF interest rate computation. This factor wasestimated for three ranges of interest rates as follows:

TABLE 1: INTERMEDIATION COST FACTOR

ALF Base Rate Intermediation CostFactor

10% and below 1.0%Between 10% and 15% 1.5%Over 15% 2.0%

2.14 The years between 1986 and 1989 marked significant changes in thepolitical, financial and economic environments in the Philippines. There was aturnlng point for investment in 1986 when, with the change in politicalleadership, the GOP decided to withdraw from active competition with the privatesector. In the next three years (1987-1989) there was unprecedented growth inbusiness activity creating a strong demand for credit from the private sector andby the end of 1988 nominal interest rates rose in response to monetary restraint

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measures implemented to stem liquidity growth, the rising inflation rate and theavailability of alternative high-yieldlng financial investments like T-Bills.

2.15 The spreads retained by PFIs on ALF-assisted sub-loans were notregulated so as to allow these intermediaries a profitable return on lending, andto enable them to market their savings instruments with interest rates attractiveenough for savers to earn a rate of return on their deposits commensurate withthe risks in the financial system. The table below shows the range of sprea.'sand lending rates by loan term and type of institution.

TABLE 2: PFIs' LENDING SPREADS BY LOAN TERM AND TYPE OF INSTITUTION

Spread (%) Lending RateI ____________ _ _ _____ _______ ________ _ _______ _ (%)_ ________

LOAN TERM Minimumr Maximum Average Minimum | Maximum Average

Short Term 1.50 19.30 5.08 11.50 30.00 15.95

Medium Term 1.90 12.69 5.52 12.03 24.70 16.48

Long Term 6.00 12.20 8.19 15.50 24.00 20.21

PFIs

CommerciaL Bank 1.50 11.80 5.17 11.50 24.00 16.25

Thrift Bank 2.02 19.30 5.40 12.03 30.00 16.07

Rural Bank 5.20 12.0C 7.86 16.00 25.00 18.76

NBOB 5.50 7.50 6.00 15.50 17.50 16.00

SGB 4.30 12.30 5.84 15.00 23.00 16.63

Overatl 1.50 19.30 5.29 11.50 30.00 16.28

2.16 Elimination of Subsidies. Under the IBRD Loan and the USAID GrantAgreements, the interest rates on agricultural credit had to be market-based.Accordingly, a program to phase out subsidies was adopted on three creditcategories, as follows:

(1) Subsidies related to funds from the CBP's own resources were eliminatedin November 1985 when rediscount rates on eligible papers were realignedto reflect market rates and loans generated from Special Time Deposits(STDs) became no longer eligible for rediscounting.

(2) There were 27 special funds or programs channelled through andadministered by the CBP which were funded from domestic and foreignsources. In December 1986 the many fragmented, separate funds foragricultural lending were integrated into a single fund, the CALF whichwas transferred from the CBP to the Agricultural Credit Policy Council(ACPC) of the DA. The amount intended for lending was administered by theLBP and the interest rates were aligned with ALF interest rates. The CALF

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portion allccated for guarantee operations was channelled through theGuarantee Fund for Small and Medium Enterprises (GFSME), Quedan GuaranteeFund Board (QGFB) and the PCIC, in all of which the subsidy aspect wasautomatically eliminated. Interest rates on other CBP-administered creditprograms fulnded by the USAID were aligned with market rates.

(3) Other funds included funds administered by the GOP outside the bankingsystem. As the implementing inctitutior.s were not within the jurisdictionof the CEP and the programs were covered by specific agreements withinternational or foreign organizations, it was difficult for the ALF toeliminate subsidies effectively in these programs.

2.17 Policy Seudies. Four of the policy studies identified under Schedule 2Part B (1) of the Loan Agreement were carried out by the ALF and the recommendationstherein were confirmei bv ':he CBP Monetary Board as indicated in the table below.

Study Action on Recommendations JAssistance to Low-income Groups with Recommendations referred by the CBP Governor and theInadequate Access to Institutionat Monetary Board to the GOP Departments or AgenciesCredit concerned for them to impLement or incorporate them in

their owr action programs.

Crop Insurance and S,Jpport to Banks PCIC started to implement its own proposals by increasingwith Operations affected by Natural the insurance coverage for cattle, carabao, swine andDisasters poultry projects.

CBP Rediscounting Policies and Some of the recommendations were adopted in the Rural BankRetail Bank Arrearages Problems Rehabilitation Program.

Strategies for the Expansion of Recommendations were co firmed by the CBP Monetary BoardBanking Services in Rural Areas in January 1988 and referred to implementing agencies. An

Intra-CBP Task Force determined which of the acceptablerecomnendatiors to strengthen the rural financial systemcould be irnediately adopted by the CBP, and which wouldrequire legislative action.

2.18 Procedures and Standards. The appraisal and approval of s--b-loans up tothe P1O million free limit were the responsibility of the PFIs. The ALF took directpart in the appraisal and approval of sub-loans over P10 million and up to P20million. Sub-loans over P20 million were made after World Bank approval. The ALFmoved away from individual sub-loan analysis, especially those within the Plomillion free limit, and, assisted by the SES Departments, made more rigorousanalyses of the PFIs by continuously monitoring their financial soundness andeligibility to participate in the ALF. The PFIs were evaluated, inter alia, on thebasis of the quality of their loan portfolios and their ability to appraiseagricultural loans and the ALF kept an up-to-date listing of eligible financialinstitutions. The table below shows the distribution of sub-loans by size.

1_ -

TABLE 3: DISTUIBUTION OF ALF's SUR-LOANS

Size of Sub-toan i ° of Totat ALF Approvals by % of Total ALF Approvats byAmount N urber

Up to P10 million 48 T6Over PRO mittion and up to P20smillion 15 7

Over P20 million 37 7

2.19 Most of the commercial banks engaged the services of independent appraisalcompanies for collateral appraisal while the rest of the PFIs appraised thecollateral themselves. The PFIs' key officers and staff who handled ALF operationsunderwent a one-month training on project or loan ap?raisal, including project orloan supervision and monitoring before actually participating in the ALF. Thisformal training was supplemented by in-house briefings. Supervision of sub-loansand monitoring of individual sub-loan performance was the responsibility of thePFIs. The ALF made periodic end-use surveys tc confirm existence of projectsfinanced, proper utilization of loan proceeds, compliance with conditions of the ALFloan and satisfactory operations in accordance with projections submitted to the ALFat application time. Between 1986 and 1989 the ALF inspected 211 projects whichrepresented 10% of total ALF-assisted projects. The amount of STDs released tothese projects aggregated about P256 million, or 6% of the total STDs availed of byths PFIs.

2.20 The ALF's post-audit surveys showed, inter alia, that:

(a) the majority of PFIs did not have any established definitive system ofsupervision and account monitoring in their ALF lending;

(b) insufficient records were kept to monitor systematically the status andperformance of ALF-assisted accounts;

(c) ALF end-borrowers were not submitting periodic financial statements whenrequired;

(d) ALF projects surveyed were found to be leg-itimate and operatingsuccessfully except for two subsidiary loans totalling P1.26 million whichwere recalled because the projects were non-existent.

The ALF survey staff discussed with each PFI their findings and recommendations inend-use verification surveys. The reports on findings, deficiencies andrecommendations were also sent to the institutions concerned. The P?Is had tosubmit reports to ALF on action taken to rectify errors or remedy deficiencies andon any recommended measures implemented.

2.21 Loan Allocation and Disbursements. Together with the sum of US$500,000for consultants' services and training which was reallocated for credit operations

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with the World Bank's approval, the procoods of the loan were disbursed inaccordance with Schedule 1 of the Loan Agreement. The rate of utilization of theUS$117.4 million equivalent credit component (US$100 million from the IBRD andUS$17.4 million from USAID) was very satisfactory. Full drawdownm was completed onOctober 10, 1989, well ahead of the original project completion date of December 31,1989 and the loan closing date of December 31, 1990. The USAID component was fullydrawn by August 26, 1988 because of the elimination of the US$5,000 (or P100,000equivalent) limitation on sub-loans to be funded. TL:us it became possible formedium- and long-term sub-loans in addition to short-term sub-loans, to be eligiblefor funding under the project. As at December 31, 1989, the undisbursed USAID fundfor training, studies and technical assistance stood at US$970,000.

2.22 The ALF succeeded in promoting term lending among the PFIs. As ofDecember 31, 1989, the overall actual percentage of ALF term loans (49%) was only5% short of the appraisal estimate (54%). In terms of outstanding loans, however,long-term credits (69%) exceeded the short-term (31%) by 38 percent. ALF releasesfor short-term credits were considered incremental in line with Schedule 1 of theLoan Agreement in that CBP regular rediscounting for agriculture remainedsubztantially above the P1.0 billion benchmark agreed with the World Bank. The ALFperformance in relation to the overall financing plan was also very satisfactory.Actual disbursements on projects amounting to P10.771 million exceeded the estimatedproject cost of P4.06 million by 65% as indicated below 1:

TABLE 4: SUB-PROJECT FINANCING

Entities ~Estifnated Financing Percent 1ActuaL Finanig Percent_________ ________P mitLion j _ _ _ _ _ _JP milLion_ _ _ _ _ _ _

IBRD/USAID 2,400.00 59 2,923.785 27

CBP 274.00 7 1 220.260 11

PFIs 732.00 18 1,194.139 11

Borrowers 656.00 16 5,432.758 51

TOTAL 4,062.00 100 10,770.942 100

2.23 The fast rate of ALF utilization could have been the result of one or moreof the following factors:

(a) investors' growing confidence in the country's business envirornment;

(b) effectiveness of the ALF information dissemination;

(c) competitiveness of the ALF interest rate vis-a-vis the rediscountingrates and those of similar financing programs;

7/ The comparison between the two sets of figures is somewhat misleading because the total figurefor "Actual Financing" sums the seasonal credit requirements (including owner's equity) for each yearwhile the "Estimated Financing" figure at appraisal included only incremental seasonal requirements(including owner's equity), i.e. the total figure required in the final year of disbursement.

(d) increase in the number of PFls; and

(e) non-allocation of Loani 2570--PH to specific crops or types of investmentor borrowers.

2.24 The available data indicate that the bankers preferred to extend F'inancialassistance to established projects with proven records of profitable operations.95% of total sub-loans were for the expansion of existing projects and generally thesub-borrowers had long-standing relationships with the PFIs. Only 5% of sub-loanswere for start-up projects and these were mostly for prawn production and poultrymeat production. Small- and medium-sized projects with assets that totalled P5.0million before financing represented 92% of the total number of projects financedand received 56% of the ALF financing. ALF loans were extended to a broad range ofagricultural investments, the main purposes of which were agro-processing and post-harvest facilities (32% by amount), seasonal crop production (25%) and fisheriesdevelopment (15%), particularly prawn production for export. A very insignificantamount went to farm mechanization. The ALF loans were utilized mainly for workingcapital (40%), some of which was granted for medium-term; for production credit(31%) which included also term lending; and for a combination of working capital andacquisition of fixed assets (29%). The average loan size under the ALF programincreased progressively from P1.08 million in 1985 to P3.063 million in 1989. Ruralbanks had the smallest average loan size at PO.114 million and the commercial banksthe largest at P3.605 million per borrower. The commercial banks had the highestavailment at 72%, followed by the thrift banks at 25%. The remaining balance of 3%was shared by the rural banks, NBQBs and the specialized government banks. Regionsoutside the National Capital Region received 72% of total ALF grants by amount and97% by number. Regions with the highest availments were Region III (Central Luzon),Region XI (Western Visayas) and Region IV (Southern Tagalog) with 32%, 20% and 19%of releases respectively. Region VIII or Eastern Visayas, a depressed area,received minimal assistance because the PFIs were reluctant to invest theirresources in the region.

2.25 Short-term loans were normally repayable in 12 months, except for sugarand banana production which could be allowed a six-month roll-over for a total of18 months. There was a preponderance of short-term credits, being 52% of totalreleases. Medium- and long-term loans had maturity periods up to 15 years,including a grace period of not more than 7 years. The rural banks and some thriftbanks made use of the maximum terms allowable for the different sub-projects but thecommercial banks were more conservative in extending longer-term credits. Thethrift banks, especially the development banks, were instrumental in influencinggreatly the term lending transformation in ALF operations. The average maturity ofALF medium- and long-term loans was 4.5 years.

C. Project Results

2.26 Review of Sample Proiects. A representative sample of 84 projectsrepresenting 5% of total sub-loans released were surveyed to form the basis forevaluating the utilization of the project loans. The operr-ional results and

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financial and economic performance of these sub-projects are detailed in Annexes 11-13 of the Borrower's PCR.Y' In summary:

(i) Cost estimates made by the PFIs proved to be realistic with 22 of the sub-projects surveyed experiencing cost overruns of between 5% and 290%, mainlybecause of understated loan budgets, changes in project size or design, andinflation. Overall on the surveyed sub-projects the average cost overrunwas less than 7%. Only one sub-project was not completed within itstimetable.

(ii) Average actual sales for the first two years of operation for the sub-projects were about 39% above the appraisal estimates. Average actualprofits over the same period were 23% more than the appraisal estimatesalthough these may have been understated because the projects had beenoperating for only one or two years after their initial or expandedoperations. Only four of the sub-projects surveyed incurred losses.Increases in oil prices, rising inflation, and the deteriorating businessclimate due to several coup attempts made the implementation period of theALF program quite difficult.

(iii) About 12,080 new jobs were estimated to have been created under the ALFprogram. This relatively low number is explained by the facts that: (a) themajority of ALF-projects involved expansion of operations with nocorresponding expansion in labor requirements; and (b) most of the newprojects financed were not labor-intensive. Average cost per job wasestimated at about P181,000 while the total incremental annual salesgenerated by the project were estimated at P6.141 billion. Actual exportsales represented only 2% of total sales because the majority of projectsfinanced were not export-oriented during a recessionary period when exportdemand was low. The overall performance may still be consideredsatisfactory, particularly when viewed against the economic and socio-political climate in which the ALF operated.

2.27 Status of Sub-loans. The status of STDs covering ALF loan releases to PFIsby institution as at December 31, 1989 is contained in Annex 14 of the Borrower'sPCR. The summary position is shown in the table below.

8/ There appear to be some inconsistencies in theae data and the fit :es should be viewed with somecaution. Because (i) the computer files through which the data had been analyzed had been virus-infected and (ii) the CBP officer responsible had left ALFU and was no longer stationed in Manila,it was not possible to re-analyze the data or to have a clear understanding as to how the figureswere arrived at.

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TABLE 5: SUMMARY OF ALF RELEASES

ALF Releases to PFIs Loans to End-Borrowers

Amount % of Amount % ofP mittion TotaL I mitlion Total

Total ReLeases 4,144.045 100 5,338.184 100

Amount Fully Paid as at 1,831.622 44 2,352.869 4431/12/8S _ ___ .__ _

Outstanding Balance as at 2,312.423 56 2,985.315 5631/12/89 I 1

2.28 There were no arrears from PFIs to the ALF. Arrearages of end-borrowersto PFIs on the amortization payments amounted to P42.282 million (principal &interest) or 1.42% of total outstanding loans (arrears for less than 3 months, 4-6months and over 6 months were 45%, 29% & 26% respectively). This is slightly higherthan the average past due ratio of 1.02% of the 84 sample projects surveyed. Onlyabout 13% of arrearages, involving 46 end-borrowers, were restructured by threePFIs. The table below shows arrearages by type of sub-project.

TABLE 6: STATUS OF SUB-LOANS AS OF DECEMBER 31. 1989(P million)

Total Sub-Loans Amount Arrears Arrears as % ofOutstanding Amount Outstanding

Seasonat Crops 1,260.345 716.179 0.078 0.01

Fisheries Devetopment 801.261 447.797 31.754 7.09

Poultry & Livestock 1,150.378 626.916 5.727 0.91

Plantation CropDevelopment 421.182 238.825 1.671 0.70

Agro-Processing & Post-Harvest Facilities 1,704.482 955.300 3.087 0.32

Farm Mechanization 0.536 0.298 .

TOTAL 5,338.184 2.985.315 42.292 1.42

2.29 PFIs' reports to the ALF cited as the major causes for arrearages:(a) recessionary trends or weak market demand especially for prawn and ramie;

(b) natural calamities which adversely affected the level of production ofthe farmers;

(c) non-operation of project financed; and

(d) cost overruns and delays in the execution of projects financed.

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2.30 Reporting. Reporting. The ALF kept the World Bank informed of majordevelopments in its organization and management as well as operatior-l and financialperformance by submitting the following reports: (a) Quarterly Progress Report onSub-loan Disbursements; (b) Quarterly Review of ALF Interest Rate; (c) Semi-AnnualReport on ALF Operations; and (d) Annual Audited Financial Statements of the ALF.

2.31 Procurement. Suppliers of machinery and equipment were chosen on thebasis of several factors such as suitability of machinery and equipment,availability of spare parts, efficiency of service, reliability of suppliers,compatibility with present equipment, and price. Most of the articles for theprojects financed were procured locally and only an insignificant portion wasimported directly under proprietary contracts such as grandparent lines for swineand poultry breeding projects and selected machinery not normally available locally.Procurement of civil works through competitive bidding was strongly opposed by thePFIs and end-borrowers who claimed that the bidding is not only expensive butprocurement problems occur in the bidding process causir.g delays.

2.32 Financial Performance of ALF. The ALF's Comparative Balance Sheets andComparative Statements of Income and Expenses covering the period 1985 to 1989 showthat ALF resources expanded over threefold from P709.282 million in 1985 toP2,311.825 million in 1989, largely due to the expansion of its loan portfoliofunded out of Loan No. 2570-PH, USAID RFSP No. 492-0394 and the availability of theCBP's counterpart funds.

2.33 During the first three years of program implementation, the ALF's networth actually decreased by 14% from P263.473 million in 1985 to P225.973 millionin 1987 when income earned failed to keep abreast with expenses. During this periodthe loan portfolio remained relatively stable at an average of only P25?.14 million.Authority to invest temporarily idle funds was approved by the CBP Monetary Boardonly in May 1987 so that, prior to then, substantial potential earnings wereforegone. Within the remaining two years, from 1988 to 1989, the loan portfolio!/increased markedly to an average level of P1,596.540 million. The ALF's debt-to-equity ratio fluctuated significantly from a low of 63:37 in 1985 to a high of 83:17in 1987 but dropped to 76:24 in 1989. Similarly, the ALF liauidity position-'/ waserratic, moving from a high of 75:1 in 1985 to a low of 15:1 in 1989. The ALF'sliquidity position manifested an inverse relationship with its term lendingactivity.

2.34 According to its audited accounts, the ALF started to show a profit in1988 and 1989 with realized net earnings of P43.527 million and P86.176 millionrespectively. The ALF's return on assets was negative from 1985 to 1987 butincreased to 2.7% in 1988 and 3.5% in 1989. Its return on equity followed the samepattern: negative for the first three years, then 6.8% in 1988 and 12.0% in 1989.Financial expenses exceeded gross income from 1985 to 1987 but the significantincrease in interest income from loans in the next two years changed this scenario

9/ Loans which are classified as long-term assets only, i.e. total loans less current maturities.

10/ Ratio of Current Assets to Current Liabilities.

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and expenses as a percentage of gross income amounted to 72% in 1988 and 63% in1989. The liquidity position of the ALF could have been entirely different if theforeign exchange risk could have been booked as such by the ALF. The foreignexchange risk adjustments are carried in the ALF books in a special frozen accountnamed Revaluation of International Reserve, in accordance with the Central BankCharter. If the ALF had been required to cover its foreign exchange losses ofP202.371 million from 1985 through 1989, the income statement would have shown anegative bottomline.

2.35 The ALF was audited annually by the Commission on Audit and the CBP wasfurnished with a copy of the audit report including comments and findings oE theauditor.

2.36 Evaluation of Selected Participating Financial Institutions. In the finalChapter of the Borrower's PCR the management capability and competence of nineselected PFIsl'l as well as their financial operations and performance under theALF program are reviewed. The PFIs include four commercial banks, two of thelargest private development banks in the country, two rural banks and one savingsand loan association. Two of the commercial banks and one of the development banksreviewed were among the main users of the ALF. Key financial data for each of thePFIs is contained in Annex 19 of the Borrower's PCR. In each of the PFIs reviewedthere had been increasing profitability over the period of the ALF program,expansion of loan portfolios and, particularly in the case of the smaller PFIs,expansion of the deposit base. Most of the PFIs had improved their performance overthe period in terms of the loans past due as a percentage of total loansoutstanding, and in the case of one of the rural banks this ratio had improved from24.6% in 1985 to 7.9% in 1989. Management was found to be satisfactory in all casesand loan portfolios were judged to be sound or at least satisfactory. Cashcollection on the ALF sub-loans at the end of 1989 was over 99% for six of the PFIs,while for the other three it ranged between 87.6% and 98%.

J*/ The institutions reviewed were: International Corporate Bank; Citytrust Banking Corporation;Far East Bank and Trust Company; Philipptne Commercial International Bank; BPI AgriculturalDevelopment Bank; Planters Development Bark; Pagsanjan Rural Bank, Inc.; Malarayat Rural Bank,Inc.; and Lipa Public Savings and Loan Association.

- 22 -

PART III. STATISTICAL INFORMATION

1. ReLated Bank Loans

ORIGINAL YEAR OFPROJECT TITLE AMOUNT APPROVALL/C NUMBER PURPOSE (USS M) FY STATUS/COMMENTS

Rural Credit I Medium- and long-term credit to improve 5.0 1966 Completed Loan was(Ln. 432-PH) farm machinery and to develop small private fuLly disbursed.

irrigation systems. PCR data notavaitable.

Rural Credit II Medium- and long-term loans for 12.5 1969 Completed Loan was(Ln. 607-PH) modernization of farm machinery and fully disbursed.

irrigation equipment, including fisheries PCR data notequipment and small boats. available.

1971 Loan was fultyRice Processing Development and modernization of the rice 14.3 disbursed. PCR(Ln. 720-PH) and corn processing industry through long- issued 10/19/82.

term credit.

Livestock Livestock development program through 7.5 1972 Loan was fuLly(Ln. 823-PH) agricultural credit administered by DBP. disbursed. PCR

issued 09/29/77.

Fisheries Credit Inprove national fish production through 11.6 1973 Loan was fully(Ln. 891-PH) improvement of capture and culture disbursed. PCR

fisheries. issued 07/22/80

I n d u s t r i a l Finance direct imports for mediuti and 50.0 1974 Loan was fullyInvestment and relatively large industrial projects in disbursed. PCRSmaltholder Tree- manufacturing, agro-.ndustrial, mining, issued 03/27/84.Farmers Project ocean shipping, hotel projects. Financing(Ln. 998-PH) of about 1,300 participating smaliholders

in a pilot tree-farming project.

Rural Credit III Continuation and expansion of Ln. 607-PH, 22.0 1974 Loan was fully(Ln. 1010-PH) including development of fisheries, disbursed. PCR

livestock, cottage and agro-industries. issued 01/23/78.

Livestock II Increase domestic production of livestock 20.5 1976 Loan was fully(Ln. 1225-PH) products. disbursed. PCR

issued 02/17/83.

Grain Processing II To assist in modernizing and expanding 11.5 1976 Loan was fully(Ln. 1269-P;') Philippine grain processing industry disbursed. PCR

through providing Long-term credit. issued 01/14/85.

Fisheries II Same as Fisheries I above. 12.0 1976 Loan was fully(Ln. 1270-PH) disbursed. PCR

issued 10/12/85.

Rural Credit IV Mediun- and long-term credit through 36.5 1977 USS3,500 was(Ln. 1399-PH) participating banks to finance farmers and cancelled. PCR

local entrepreneurs for farm mechanization. issued 12/19/85.livestock, fisheries, adn cottage and agro-industries.

Smaliholder Tree Continuation of Ln. 998-PH with additional 8.0 1978 US$3.8 M wasFarming coffponents in large-scale plantation, cancelled. PCR(Ln.1506-PH) forestry research and planning, issued 04/28/87.

Small Farmer To increase agricultural productivity and 16.5 1979 US$0.78 N wasDevelopment expand rural employment opportunities among cancelled. PCR is(Ln. 1646-PH) small-scaln farmers being prepared.

Third Livestock/ Same as in Loans 891-PH, 1270-PH and 45.0 1981 ULS21.48 N wasFisheries increase in meat production. cancelled. PCR(Ln. 1894-PH) issued 08/26/88.

- 23 -

2. Project Timetable

ITEM DATE PLANNED DATE ACTUAL

02/8 1/Identification

Preparation 1983

Preappraisal 05/84

Project Brief (Final) 06/27/84

Appraisal 10/84

Loan Negotiations 04/24/85

Board Approval 05/28/85 06/06/85

Loan Signature 06/10/85

Loan Effectiveness 09/09/85 08/16/85

Loan Closing 12/31/90 10/31/89 2/

Project Completion 12/31/89 10/31/89 2/

.2X/ The Bank's Agricultural Credit Sector Review in 1982 effectively identifiedthe need for this project and a Project Brief on the "DBP Consolidated Lineof Credit" was issued on 02/02/82.

2/ Loan was fully disbursed with the last disbursement made on 10/10/89.

- 24 -

3. LOAN DISBURSEMENTS

A. LOAN ALLOCATION AND DISBURSEMENTS BY CATEGORY

ORIGINAL LOAN REVISED LOAN TOTALALLOCATION ALLOCATION * DISBURSEMENT

CATEGORY (US$) (US$) ACTUAL (US$)

(1-A) Sub-loans 45,500,000 30,000,000.00under PartA (1) ofthe Project

(1-B) Sub-loans 26,000,000.00under PartA (1) ofthe Project

(2) Sub-loans under 44,000,000 44,007,136.13Part A (2) of theProject

(3) Consultants' 500,000 **services andtraining

(4) Unallocated 10,000,000

FUND Special Accountfor allCategories *** -7.136,13

100,000,000 100,000,000.00

Note: Figures are based on the Bank's official disbursement data.

* No formal reallocation of loan proceeds was made.** No disbursements were made against Category (3).*** Amount represents the exchange rate fluctuations from transactions made

under the S/A.

- 25 -

B. ESTIMATED AND ACTUAL DISBURSEMENTS(Cumulative in US$ Million)

FY86 FY87 FY88 FY89 FY90 FY90 FY9010/31 12/31 06/30

Appraisal Estimate 46.00 66.00 80.00 96.00 - 100.00 ----

Revised Estimate *---- 50.00 73.00 88.00 ----- 96.00 100.00

Actual 22.92 31.43 50.62 90.29 100.00 -----

Actual as %% of 50 63 69 103 ----- ----- ----

APR/Revised Estimate

Date of Final Disbursement: October 10, 1989

* Revised in June, 1986.

C. ACTUAL DISBURSEMENTS BY CATEGORY AND FISCAL YEAR(Cumulative in US$ Million)

APRCATEGORY TOTAL FY86 FY87 FY88 FY89 FY90

(1-A) Sub-loans underPart A (1) of 45.50 12.95 14.29 30.00 30.00 30.00the Project

(1-B) Sub-loans underPart A (1) of 0.00 0.00 3.47 23.21 26.00the Project

(2) Sub-loans underPart A (2) of 44.00 0.00 7.17 7.18 32.09 44.00the Project

(3) Consultants' servicesand training * 0.50 0.00 0.00 0.00 0.00 0.00

(4) Unallocated 10.00

Special Account forall categories 9.97 9.97 9.97 4 99 **

TOTAL: 100.00 22.92 31,43 50.62 90.29 100.00

* No disbursements were made against Category (3).

** -7,136.13 recorded against Special Account in FY90, which amount represents the exchange

rate fluctuations from transactions made under this Account.

- 26 -

D. Disbursements by Purpose

IBRD Disbursementsfiscalyear & Seasonal Medium- & long- Cumulative Actual assemester production term credit & Amount % of

credit technical % Estimatedassistancell

US$ million US$ million

Est. ActualY Est. ActualV Est. ActualV

1986

1st 8.0 - 3.0 - 11 - OX

2nd 30.0 12.6 5.0 - 46 12.6 27%

1987

1st 5.0 - 6.0 - 57 12.6 22%

2nd 2.5 19.1 6.5 7.0 66 38.8 59%

1988

lst - 2.3 7.0 5.3 73 46.4 64%

2nd - - 7.0 - 80 46.4 58%

1989

1st - 19.4 8.0 19.2 88 85.1 97%

2nd - 2.8 8.0 12.1 96 100.0 104%

1990

1st - - 4.0 - 100 100.0 100%

2nd

/ No disbursements were made under the project against technical assistance.

2 Based on data from ALFU i.e. drawings by ALF from CBP special account, not disbursementsby World Bank to CBP.

- 27 -

4. Prolect Implementation

Indicators Appraisal PCR EstimateEstimate to End 1989

During Drawdown Period

1. Outstanding Loans to P2.59 billion P2.32 billionPFIs at end of Equiv US$103.6 million Equiv US$103.3 millionDisbursement Period (end1989)

2. Cumulative Provision P103.6 million P0.0 millionfor Bad Debts at end ofDisbursement Period (end1989)

3. Z ALF 1 held as cash 13% 16%or other liquid (US$14.8 million) (US$20.4 million)investments at end ofDisbursement Period (end1989)

4. Total ALF P19.1 million P15.0 millionadministrative costsuntil end ofdisbursement period (end1989)

5. Number of sub-loansmade- Total Not estimated 2,013- Short-term Not estimated 1,114- Medium-/Long-term Not estimated 899

6. Number of Policy 5 4Studies Completed

I/ Excluding Foreign Exchange adjustment account.

- 28 -

5. Prolect Costs and Financing

A. Project Costs(US$ Million)

APPRAISAL ESTIMATE ACTUAL

Local Foreign Total Local Foreign TotalCosts Exchange Costs Costs Exchange Costs

Costs Costs -

Seasonal Credit. 50.0 33.4 83.4 60.8 26.0 86.8

Medium/Long Term 69.2 29.9 99.1 146.2 62.6 208.8Credit 3/

Studies and 0.3 0.2 0.5 1.7 1.4 3.1Training 4/

TOTAL 5 119.5 63.5 183.0 208.7 90.0 298.7

I/ Estimated investment for which seasonal credit was extended in the peak year i.e. 1989.

21 Estimated at 30% on costs funded both by seasonal credit and medium- and long-term credit.

ii Estimated medium- and long-term investments for which loans were given 1986-1989inclusive. It should be noted that part of the investment was not always new investmentbut sometimes redefinition of existing assets belonging to sub-borrowers which wereincluded within project costs.

i/ US$2.6 million of USAID funds plus the counterpart contribution of US$0.4 million werehandled under the parallel Rural Financial Studies Project and did not pass through theALF account but have been counted as part of project cost.

5. Total cost estimate includes total investments against which loans were made andincorporates the sub-borrowers contribution estimated at 42% of investment as determinedby the CBP survey. Given the tendency of investors to over report their own contribution,this probably over-estimates total investment. If a more conservative estimate of ownerscontribution of 20% of sub-project cost is used, tocal project costs would beUS$217.4 million.

Increase in Total Costs compared with the figure at appraisal has been caused by (i) therebeing adequate demand for ALF funds; (ii) the boosting of the size of the ALF pool byUS$17.4 million from USAID which had not been taken into account at appraisal; and (iii)greater proportional contributions to investments made by individual sub-borrowers and to alesser extent by PFIs.

- 29 -

B. Prolject Financing

Appraisal PCR Estimate 1/ PCR Estimate 2Estimate (Alternative)

US$m. % US$n. X US$m. X

Investments Supportedby Credit

IBRD 99.5 54 100.0 33 100.0 46

USAID - - 17.4 6 17.4 8

CBP 13.7 7 13.7 5 13.7 6

Net Recycled Long-term - - 0.6 - 0.6 -Funds

Participating 36.5 20 39.7 13 39.7 19Financial Institutions

Sub-borrowers 32,8 18 124.2 42 42.9 20

Sub Total 182.5 100 295.6 99 214.3 99

Studies & Training

IBRD 0.5 - - - - -

USAID - - 2.6 1 2.6 1

CBP/GOP 0.5 - 0.5 -

Sub Total 0.5 3,I 1 3.1 1

TOTAL 183.0 100 298.7 100 217.4 100

i/ Based on CBP study showing 42% owner contribution.

/ Conservative estimate showing 20% owner contribution.

- 30 -

6. Project Results

A. Diret Benefits

Indicators Appraisal Estimate at Estimated at FullEstimate Closi-ig Date Development

Number of loans n.a. 732 n.a.made/year (in 1989)

Number of loans made 10,000+1/ 2.013 n.a.(Cumulative)

Total Volume of Loans n.a. US$252 million n.a.by PFIs extended byclosing date

Participating Financial n.a. but 175 89 accredited c.300 assuming RBInstitutions supported qualified institutions rehabilitation goes

institutions at 31/12/89 of ahead.identified which 42 had

actually madeloans

LJ Appraisal estimate was for the number of sub-projects plus the hectarage of cropland plusthe amount of seasonal credit by value as follows: livestock (2,090 projects), fisheries(410 projects), agro-industry (700 projects), farm mechanization (5,370 pieces ofequipment), plantation crops (46,570 ha), seasonal credit (P1.7 billion).

- 31 -

B, Economic Impact

Appraisal EstimatedEstimate Actual

Economic No estimate made. Detailed ex-post estimates haveRate of Indicative models showed not been made. ,/ However, dueReturn Benefit:Cost ratios for to changes in relative prices

short-term crops being between inputs and agriculturalsupported by credit of outputs between 1984 and 19891.8:1 for rice and 8:1 for the ercimated Benefit: Cost 1corn. Economic rates of ratios on rico and corn wouldreturn between 37% and 84% have been. as follows:were estimated for typicallonger-term sub-projects. 1985 1989 Long Term

Rice 2.2 4.8 2.6Corn 5.3 5.8 3.9

i.e. production of these crops,which only received limitedfunding under the project, wasgenerally profitable. Ex-postestimates of the economic rateof return on longer-term proiectinvestments are in the range 15-30%

I,.! Most of the sub-projects financed under ALF had juststarted at the time this PCR was being written,calculation of a meaningful ex-post rate of return was notfeasible.

2/ Using the same technical parameters as at appraisal.However, import parity rather than export parity was usedin estimating the economic price of rice.

- 32 -

C. Financial Impact

Appraisal ActualEstimate Estimate

Financial Rate No single estimate for the Estimated Benefit:Costof Return project was made. However, ratios on rice and corn

Benefit:Cost ratios for are:rice, corn and sugar canewere estimated at 2.3 1, 1985 1989 Long Term6.5:1, and 1.1:1 while Rice 2.9 3.5 3.5financial rates of return Corn 4.8 5.2 3.7on medium- and longer-termprojects were estimated at For sugar, which was thebetween 25-46%. main crop borrowed for,

results would have beenbetter than the appraisalestimates as domesticprices at the farmgatelevel increasedsubstantially faster thanimport costs i.e. the 1989index for sugar (using theappraisal year, 1985 as abase) was 183, comparedwith a general price indexof 126, a farm labour indexof about 150 and afertilizer index of 79.The estimated financialrate of return for longer-term investments wastypically 15-30% net ofinflation.

- 33 -

D. Studies (Sheet I of 2)

Title cf Study Purpose as Defined at Status Impact of Study and CommentAppraisal

Rediscounting Policy This study was The study which was The main recommendations ofand Arrearages intended to review carried out by CB3P the study which were adopted

CBP's rediscounting unrder the direction were (i) the proposal topolicy and problems of two deput,! merge individual loan fundsassociated with governors was and create a Conprehensivearrearages completed and Agricultural Loan Fund (CALF)particularly to rurat submitted by ALFPAG which indirectly providesbanks and to make to the Monetary Board credit guarantees andpolicy for approval on 5 insurance through existingrecommendations for August 1987. guarantee organizations, andalleviating these (ii) the proposal toproblems and introduce a rehabilitationenhancing the program for Rural Banks whichavailability of rural is still ongoing.credit.

Strategies for The general objective Contracted for by a This wide ranging study madeExpansion of Banking of the study was to consortium of a nuiber of broadServices in the develop appropriate consultants made up recoammendations on theRural Areas and responsive of C. Virata & improvemeit ' farm

strategies in the Associates, SGV & Co. viability, tengthening ofmonetary, regulatory and Estanislav, Lavin the rural 'inancial systemand bank branching & Associates. The and development of macro-policies to expand final report was economic policies for ruraland strengthen subnitted to CBP on development. Most of thebanking services in 13 November 1987. recommendations made by thethe rural areas. study fell outside the direct

control of CBP and have notbeen specifically adopted.

Government To assess mechanisms Carried out by NEDA and aAssistance to Low for government final report was submitted toIncome Groups assistance to low CBP on 16 September 1987.This

income groups that was a wide ranging study withlack access to a number of broad policyinstitutional credit. recommendations. One major

recommendation to come out ofthe study which has beenadopted by GOP was forabolition of all export taxeson agricultural products.The study also made proposalson the consolidation ofagricultural credit programs,increased crop insurancecoverage, speeding up theland reform program,expansion of price support,development of cooperativesand increased participationof small upland farmers insocial forestry.

Studies on Crop To identify ways and The study which was The major recommendation ofInsurance means of reducing undertaken by an the study which has been

lender and borrower inter-agency task adopted was the proposedrisks in agricultural force was submitted expansion of the guaranteeproduction. by PCIC to CBP on 6 coverage to include ALF

April 1987. seasonal production creditsand also to provide insuranceprotection to livestockraisers. The study also madea number of proposals on PCICrate structure and managementwhich are to be inmlementedunder the proposed ARFproject.

- 34 -

D. Studies (Sheet 2 of 2)

Purpose as Defined atTitle of Study Appraisat Status Impact of Study and Corrent

Preparation of To update CBP's term The term tending Nit - study not done.Technical Guidelines lending policy manual which wasfor Project Lending manual. originally meant to

be updated by theUSAID GeneralContraccor as part ofhis work under hiscontract with USAIDfor RFSP was notcompleted due to achange in priorities.

Preparation of a Preparation of a Not undertaken during The reason for non-Future Agricultural future agricultural the project period. preparation was that theCredit Project credit project to responsibility for ALF was

continue progress shifted from COP to LBP.made under ALF. Thus CBP/ALFU staff no Longer

had the mandate for futureborrowing in this area. Workon this was subsequentlyundertaken by L8P in 1990.

- 35 -

7. Status of Covenants

Section Covenant status of Compliance - Comment

LA 2.02(b) The Borrower shall for the purposes of In full compliance. Account opened Octoberthe project open and maintain in dottars 1985.a special account on terms and conditionssatisfactory to the Bank.

LA 3.01(a) The Borrower shall carry out the project In fu l comptiance.in conformity with appropriate practices.

LA 3.02 Procurement of goods, works, consultants Difficult to ascertain with certaintyservices required for the project shalt whether fully compLied with particularlybe according to Schedule 4. with investments by sub-borrowers but

appears acceptaote overall.

LA 4.01 Maintenance of accounts and furnishing Complied with although agreed accountingthem to the Bank. system was not set up until March 1987 which

delayed the first audit.

LA Sch 5 The Borrower shall finance sub-loans in GeneraLly coffplied with although someA(1) a-c appropriate categories and exercise its investments funded under the project do not

rights over PFIs so that they fottow the appear to have been analyzed fully along thepolicy manual, conduct their affairs in lines of the policy manual.accordance with sound business practicesand maintain adequate records.

LA Sch 5 Eligibility of participating financial Complied with - PFIs participating wereA(2) a-c institutions and supervision of lists eligible and updated Lists were submitted to

semi-annually. the Bank semi-annually as required.

LA Sch 5 Selection of beneficiaries, terms of loan In full compliance until the Loan was fullyA(3) a-c and reference to WB of loans above disbursed, thereafter sub-loans have not

P20 million. been submitted to the World Bank.

LA Sch 5 Interest rates on subsidiary loans shatl This covenant was complied with to theA(3) d be market oriented and determined on the extent that agreement was reached with the

basis of a reference rate to be agreed Bank. However, the general level offrom time to time between the Borrower interest rates were below market rates butand the Bank. were positive in real terms.

LA Sch 5 The Borrower shall review interest rates In compliance - interest rates were reviewedA(3) e and make adjustments satisfactory to the initially six monthly then quarterly.

Bank.

LA Sch 5 Repayments of subsidiary loan principal Complied with until ALF was handed over toAM3) f shall be deposited in ALF to provide LBP (after Project Completion) at which time

agricultural credit in accordance with CBP placed its own ALF funds in governmentarrangements satisfactory to the Bank. securities rather than passing them on to

LBP for relending to farmers.

LA Sch 5 Borrower shall retain in ALF aLl profits. In compliance until ALF was handed over toA(3) g LBP - see above.

LA Sch 5 Elimination of subsidies by December CBP eliminated direct interest rateA(4) a - b 1986. subsidies in compLiance with this covenant.

LA Sch 5 The Borrower shall issue by 31 December Not complied with - there was minimal demandB(1) a 1985 guidelines for appraisal of farm for farm mechanization loans under the

mechanization investments. project.

LA Sch 5 Coordination with relevant Ministries and Complied with.B(1) b Agencies on Farm Mechanization.

- 36 -

Section Covenant Status of Compliance - Cofmment

LA Sch 5 The Borrower shall maintain ALFPAG with Complied with.B(2) a composition, power, resources and staff

satisfactory to the Bank.

LA Sch 5 The Borrower shall appoint full time Complied with - the secretariat for ALFPAGB(2) b staff to ALFPAG. was the full time staff of ALFU.

LA Sch 5 The Borrower shall appoint and have in Complied with. However, when the handoverB(3) place futl time ALFU staff in numbers and from CBP to LBP became irminent the staffing

witn qvalifications, experience and of ALFU fell below optimum level.responsibilities satisfactory to theBank.

LA Sch 5 ihe Borrower shatl by 30 September 1985 Complied with.B(4) reconstitute AMDAC.

LA Sch 5 Technical assistance to be extended to Generally complied with but not clearB(5) a PFIs and plans for 5 PFIs to be submitted whether deadline was met.

to WB by 31 December 1985.

LA Sch 5 The Borrower shall make the technical Complied with.B(5) b assistance staff available upon request

to PFIs.

LA Sch 5 Studies under part 8 of the project Complied with in the case of four out of theC(1) a should be carried out in accordance with five studies although the time schedules of

terms of reference and time schedules all studies had to be extended compared withsatisfactory to the Bank. intentions at negotiations.

LA Sch 5 Studies to be sent to the Bank for review Complied with - all completed studies wereC(1) b and recommendation. sent to the Bank.

LA Sch 5 Based on recommendations Borrower shall Not clear whether mutually agreed plans wereC(1) c implement plans of action mutually agreed ever established.

on by the Borrower and the Bank.

LA Sch 5 The Borrower shall prepare programs Conplied with - in that agreement was(2) a satisfactory to the Bank for the reached with Bank, but financial and

monitoring and evaluation of activities economic monitoring of the impact of sub-under the project. projects was less than satisfactory.

LA Sch 5 The Borrower shalt by 31 December 1985 Complied with in 1985 - subsequent programs(2) b and each 31 December thereafter furnish need checking.

to the Bank the program for the foltowing12 month period's training.

LA Sch 5 Training. The Borrower shall by 30 Not known if this was fully complied with.C(3) September 1985 and thereafter by 31 March

of each year furnish to the Bank aprogram for staff training.

GA 2.01 The Guarantor declares his conmitment to Complied with.the objectives of the project.

GA 2.02 The Guarantor undertakes to make Complied with.arrangements satisfactory to the Bankpromptly to provide the Borrower or causethe Borrower to be provided with suchfunds as are needed to meet necessaryexpenditures.

37 -

Section Covenant Status of Conpliance - Comment

GA 2.03 The Guarantor shall make technicat and Degree of couiptiance not known.extension staff avaitable upon request toPFIs.

GA 2.04 a The Guarantor shalt complete elimination Not conmplied with unLess the Bank has agreedof subsidies on agricultural credit in to exceptions for IRF, PCA, ARF etc.accordance with a program and timetablesatisfactory to the Bank.

GA 2.04 b The Guarantor shaLl not introduce new Not complied with - see above.agricultural credit subsidies involvinginterest or capital subsidies.

- 38 -

8. USE OF BANK RESOURCES

A. STAFF INPUTS (STAFFWEEKS)

STAGE OF TOTALPROJECT CYCLE PLANNED * A-TUAL

Through Appraisal 62.7

Appraisal through 66.3Board Approval

Supervision 39.9

Completion 15.0

TOTAL STAFF INPUTS: 183.9

TOTAL FY83 FY84 FY85 FY86 FY87 FY88 FY89 FY90 FY91

Ident./Preparation 62.7 0.6 50.2 11.9

Appraisal 64.5 64.5

Negotiations/Board 1.8 1.8

Supervision 39.9 0.6 10.4 14.7 10.1 2.5 1.6

Completion 1l.0 15.0

TOTAL: 183.9 0.6 50.2 78.8 10.4 14.7 10.1 2.5 1.6 15.0

* Planned data not available.

- 39 -

B. MISSIONS

NUMBER DAYS PERFORMANCESTAGE OF T-O-R OF IN RATING TYPE OF

PROJECT CYCLE DATE MO/YR PERSONS FIELD SPECIALTY STATUS PROBLEMS

Through Appraisal1) Ident./

Preparation 02/83 3 21 A/B2) Ident./

Preparation 05/16/83 06/83 1 7 A3) Preparation 08/24/83 09/83 1 10 A4) Preparation 01/06/84 01/84 3 25 A/B/C5) Preappraisal 04/23/84 05/84 6 115 A/B/C/D/E

Appraisal 09/24/84 10/84 4 100 A/B/C/D

Supervision 1 06/12/85 06/85 1 15 B 1 n.a.Supervision 2 10/23/85 10/85 1 10 B 1 n.a.Supervision 3 06/13/86 06/86 1 7 B 1 n.a.Supervision 4 02/02/87 02/87 1 12 B 2 n.a.Supervision 5 01/13/88 01/88 1 8 B 1 n.a.

Completion 01/10/91 03/91 1 40 F n.a.

SPECIALTY: A: Agricultural EconomistB: Financial AnalystC: Agricultural Credit SpecialistD: Financial Management SpecialistE: Rural Development SpecialistF: Management SpecialistG: Forestry Specialist

- 40 -

Appendix 1

Revalued ALF 1" Balance Sheet as at February 28. 1991

Exchange Rates:

US$ : Peso Exchange Rate 28.125 2Borrowed "$" : US$ Exchange Rate 1.1815 3JBorrowed "$" : Peso Exchange Rate 33.23

Million Pesos USS Million

Assets

ALF Loan Rediscounting by CBP 2,041.6 72.6Due from LBP 347.6 12.3Accrued Interest Recoverable 123.4 4.4Investment in Government Securities 210.1 7.5Due from CBP 7.4 0.3Due from Foreign Banks 74.5 2.6

Total Tangible Assets 4 1 2t804,6 99.7

Liabilities

WB Loan 96.66 million Borrowed "$" 3,212.0 114.2Accrued WB Interest 29.8 1.0Taxes Due 8.7 0.3Advance from CBP 4.9 0.2Total Liabilities 3,255.4 115.7

Net Worth -450.8 -16.0

Represented by:CBP Counterpart Finance 266.4 9.5USAID Donation 364.9 13.0Cumulative Losses to date -1,082.1 -38.5

-450.8 -16.0

1/ Position from CBP standpoint including investments in GovernmentSecurities and Foreign Banks not managed by LBP.

.2.1 CBP rate for February 28, 1991 used in their ALF balance sheet for thatdate.

2./ The Borrowed "$" is the equivalent currency borrowed by CBP from theWorld Bank under this Loarn. The exchange rate between the borrowed "$"

and the US$ is that used by the World Bank for capital repaid on January15, 1991.

4/ Excludes "Valuation Reserve" which CBP presents as an asset in its ownbalance sheets for ALF.

- 41 -

Appendix 2

CURRENCY DEVALUATION. INFLATION AND INTEREST RATES UNDER ALF

|| 1986 1987 J 1988 1989 1990 5-Year_ . I I I I I ~~~~~~~~~Av'erage 1

Peso vs USS Exchaige Rate

Start Year 19.03 20.53 20.80 21.34 22.45

End Year 20.53 20.80 21.34 22.45 28.00

A. Devaluation Rate of Pesos vs USS 7.9% 1.3% 2.6% 5.2% 24.7% 8.0%

US Dollar vs SOR

Start Year 1.12 1.25 1.40 1.33 1.30

End Year 1.25 1.40 1.33 1.30 1.43

S. International Devaluation Rate 11.6% 12.0% -5.0% -2.3% 10.0% 5.0%

C. Total Devaluation Effect (A*B) 20.4X 13.51 -2.5X 2.81 37.21 13.4X

Philippine Inflation

Between Year 0.8% 3.8% 8.8% 10.6% 14.2% |

D. Within Year (Calculated) 2.3% 6.3% 9.7% 12.4% 14.2% 8.9%

E. Average Cost of Borrowed SfA' to CBP 1/ 8.4% 7.8% 7.7% 7.7% 7.4% 7.8%

F. Passed on Rate by CBP 12.6% 10.4% 10.2% 11.4% 13.1% 11.5%

G. Estimated End. User Cost 17.9% 16.6% 16.5% 17.0% 19.0% 17.4%

H. Estimated CBP Margin (F-E-C) | -16.12 -11.0X 5.11 0.9X -31.5X -9.7X

1. Time Deposit Rate | 14.4% 10.0% 13.5% ! 16.3% 21.1% 15.1%

J. Benefit to PFI (I-F) 2/ 1.81 J -0.42 J 3.3X J 4.9Z 8.0X 3.52

K. Lending Rate (Secured Loans) | 17.9% 15.5% 16.2% 19.8% 24.4X 18.7%

L. Benefit to Sub-borrowers (K-G) 3/ 0.0_J -1.1X -0.3X 2.8X | 5.4X | S.3X

M. Real Interest Rate at CBP Lending Level (F-D) j 10.1% 3.81 1 0.4X -0.9I -1.0X j 2.41

N. Real Interest Rate at PFI Lending Level (G-D) 15.3X J 9.6X J 6.21 J 4.1X 4.21 j 7.81

1/ The Borrowed "S" is the equivalent currency borrowed by CBP from the World Bank under this Loan. The exchangerate between the borrowed "S" and the USS is that used by the World Bank for capital repaid on 15 January 1991.

2/ Underestimates total benefit compared with time deposits because (i) there is no reserve requirement for ALF,but there is for time deposits; and (ii) less mobilisation costs are incurred. Together, these two items wouldhave averaged about 3%.

3/ True benefit is probably higher as agricultural investments are often rated as riskier than average, and so ALFborrowers would not on average have been able to access funds at the reported lending rate for secured loans.

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CLASSIFICATION OF PROVINCESBY (;FOGRAPHICAL RE(,Ii "IS

PHILIPPINESI 1(11 1)5 viblIES viossisil lon, loIn' Nt, AkIAn

klo'n Sn' CaP.;Ia UJn.oe Aniiq' iRA IAN l.SP41Bs--an sI I.ilAI u

CORDIHiiRA Al)\MINI'iRAIIVI Negro, tOi'lalRbGIO\ (tAR; (,'nlalmal I

411)sl,ill e(apila11.1l

R N610', I(AR1 I I,l',I A'

iKl.oIgl..Alpis A (obuiontol.la Peotnre N*gNti Oona ( Uipi ilug.man lohol -

i-pneuel IIqIl-I-r ./ l'rovinc e lBntl(I.l< leNI (AilAGAAN AIIFb R ; ASIIRAs vOSS /

Ialldns o-lheon Sama, Regioni BoLundariesagaabn ikislero SarrIi "(I"\

IsIhel Fa plln Sasag laI,uei,aIa I nternaittioiial 13(Buoo idaries

Qailifl.o as Soul hern Ine ze v,g"fl. AlalmuI|

III CENTRAl [UZON lilkean tinno, 11gP Nueva Fci1 a WFSIERN MINOINSOTarlac Zamboanga del NonerZamnbalares ZamIboanga del bar S an FeKIahl -, 5110uII iRS I) loll 21)1 11)11Pamnpanga Basihan - (aba' .ll..u . . . . .i.L. ngBala an SJIlU 1 I I 1S 1) j.1 11)0 I .) 2101OA ulCAPIA Ta-tlaw, Liogane- I

NATIlCAP NORTHERN MINDOANAO - )REGIO)N INCR- Surlgao del aorle ". § Cyal

;\' SOUTHERN TAGALOC Caoilw,nAurora Agusan del None 1.da . t z z 7 1.QuReon MIs-,is Ornental SaZ CRIral bilsamis O-cldenlal beeoanclCagnle Bukldnon Olons a pr' .

Laguna Agusan del Sur MANILABatangas SOUl HFR MINDANAO Ialangav * -I'As5gMaeinduque Sur.gan de: bur leore V.

05t.C'u,

Mlndoro 0eidnlal Davao Orlenlal il z a-IM,odoeo OccIdenlal Dasao del None / 'RombPon Davao del Sue / Lucena .CATAN D JAN ESPalavan Soulh Colabato P raanga P.O

,- BIOtL A I CFNTRAl MIINDANAO / A,CaLarmes None Lanao del None . cCa,marmes Sur Lanao del Sbr Npambura.-n ..g.p.CAolallduanes Nooh CotaialotAlkas Magumldanao I ' I I

Sosobone Sullan Kudaral MINIDORO

1 2 / Nil.ba-eK SAMAR \ I

I -t.llI,2~~-tl-ngI -/ .Jal'b$o sda Un7ralogan

/ Rosan

/ PIANAY Iaclob1

Indi E Jor lan/|

PALAWAN VISAYAS -Ebo 0)44

'Pueelou Pr,n.esa I NEGROS \ laglfr-n

rflmauel g .Sj. lamnlo^ala I lancladF

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