Document of The World Bank FOR OFFICIAL USE ONLY Report No. 15233 PROJECT COMPLETION REPORT PHILIPPINES RURAL FINANCE PROJECT (LOAN 3356-PH) JANUARY 31, 1996 Agriculture and Environment Operations Division Country Department I East Asia and Pacific Regional Office This document has a restricted distribution and may be used by recipients only in the perfornance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENT Name of Currency: Peso P Rate of Exchange (average Peso Per US Dollar) Appraisal Year 1991 = 27.479 1992 = 25.512 1993 = 27.120 Completion 1994 = 26.443 (estimate) Land Bank of Philippines Fiscal Year January 1 to December 31 ACRONYMS ACPC Agricultural Credit Policy Council ALF Agricultural Loan Fund ARF Agrarian Reform Fund BSP Bangko Sentral ng Pilipinas (the Central Bank) CARP Comprehensive Agrarian Reform Program CFI Countryside Financial Institution CLF Countryside Loan Fund DA Department of Agriculture DENR Department of Environment and Natural Resources DOF Department of Finance EMB Environmental Management Bureau GFI Government Financial Institution GOP Government of the Philippines LBP Land Bank of the Philippines NEDA National Economic & Development Authority PCIC Philippine Crop Insurance Corporation PCR Project Completion Report PDIC Philippine Deposit Insurance Corporation PFIs Participating Financial Institutions QGFB Quedan Guarantee Fund Board QUEDANCOR Quedan and Rural Guarantee Corporation RBs Rural Banks SRTF Special Revolving Trust Fund WAIR Weighted Average Interest Rate FOR OFFICIAL USE ONLY The World Bank Washington, D.C. 20433 U.S A. Office of the Director-General Operations Evaluation January 31, 1996 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THIE PRESIDENT SUBJECT: Project Completion Report on the Philippines Rural Finance Project (Loan 3356-PH) Attached is the Project Completion Report (PCR) on the Philippines Rural Finance project (Loan 3356-PH, approved in FY91), prepared by the East Asia & Pacific Regional Office. The Borrower prepared Part II, which agrees with and adds to Part 1. The principal objectives of the project were: (i) to expand the volume of commercial credit for rural development, particularly medium- and long-term credit; and (ii) to improve the policy and institutional framework of the rural financial sector. The Bank's loan, for US$150 million, was committed in its entirety to the Countryside Loan Fund (CLF) administered in an apex capacity by the parastatal Land Bank of the Philippines (LBP). Government and LBP were committed to policy, institutional and regulatory reforms. The Bank's loan was fully disbursed in three years, half the projected period. Real lending rates to the participating retail banks and rural sub-borrowers were positive and market determined, and recovery rates have been excellent. The project helped consolidate the new market-oriented rural credit policy established by an earlier project. Government passed the agreed regulatory measures. However, many of the expected institutional reforms were not achieved during the shortened implementation period. The outreach of the CLF was modest. The number of sub-loans was 30 percent of the target, because the average sub-loan was three times bigger than under the preceding project. The Rural and Thrift Banks which serve the smaller commercial farmers did not significantly increase their participation in the program. There is also a possibility that a significant amount of the project funds onlent by the LBP substituted for shorter tern funds previously provided to traditional clients by the commercial banks. The issue of additionality was mentioned in the cofinancier's (USAID) impact study of the preceding project, OED's audit report of that project, and the Staff Appraisal Report for this project, but the PCR does not raise it. The PCR provides a good description of the project from the perspective of the CLF. Its treatment of additionality and incremental impact of the sub-loans on farms and enterprises is, however, inadequate. Project outcome is rated as satisfactory. The consolidation of rural credit policy in a market framework is a notable achievement, as is the good performance of the portfolio. The failure to expand coverage, and the possibility that some project funds were substituted for traditional lending, are worrisome features that call for further study. Institutional development during the shortened implementation period is rated as modest, in recognition of the improved competence of LBP to manage the lending line, reasonable progress with strengthening the finances of many Rural Banks and training of their staff, offset by the slow growth in the participation of Rural and Thrift Banks in the program and lack of progress with two guarantee funds. Sustainability of the medium- and long-term lending lines through official and private sources is guaranteed during the operational period of a follow-on loan and is rated as likely. The performance of the Bank in implementing the CLF was satisfactory. An audit is planned. Attachment This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. I FOR OFmCLAL USE ONLY PROJECT COMPLETION REPORT PHILIPPINES RURAL FINANCE PROJECT (LOAN 3356-PH) Table of Contents Page No. Preface Evaluation Summary PART I PROJECT REVIEW FROM BANK'S PERSPECTIVE . . . . . . . . . . . 1 A. Project Identity . . . . . . . . . . . . . . . . . . . . . 1 B. Background . . . . . . . . . . . . . . . . . . . . . . . . 1 C. Project Objectives and Description . . . . . . . . . . . . 1 D. Project Design and Organization . . . . . . . . . . . . . 2 E. Project Implementation . . . . . . . . . . . . . . . . . . 3 F. Project Results . . . . . . . . . . . . . . . . . . . . . 5 G. Project Sustainability . . . . . . . . . . . . . . . . . 9 H. Bank Performance . . . . . . . . . . . . . . . . . . . . . 10 I. Borrower Performance . . . . . . . . . . . . . . . . . . . 10 J. Project Relationship . . . . . . . . . . . . . . . . . . . 10 K. Documentation and Data . . . . . . . . . . . . . . . . . . 11 PART II PROJECT REVIEW FROM BORROWER'S PERSPECTIVE . . . . . . . . . 12 A. Background . . . . . . . . . . . . . . . . . . . . . . . . 12 B. Project Implementation . . . . . . . . . . . . . . . . . . 13 C. Project Results . . . . . . . . . . . . . . . . . . . . . 15 D. Analysis of the Project . . . . . . . . . . . . . . . . . 22 PART III STATISTICAL INFORMATION . . . . . . . . . . . . . . . . . . . 25 1. Related Bank Loans . . . . . . . . . . . . . . . . . . . . 25 2. Project Timetable . . . . . . . . . . . . . . . . . . . . 26 3. Project Cost & Financing . . . . . . . . . . . . . . . . . 26 4. Disbursements . . . . . . . . . . . . . . . . . . . . . . 27 A. Disbursements by Category . . . . . . . . . . . . . . . 27 B. Estimated and Actual Disbursements over Time . . . . . 27 5. Project Implementation . . . . . . . . . . . . . . . . . . 28 6. CLF: Interest Rates, Inflation and Onlending . . . . . . . 29 7. CLF Balance Sheets & Profit & Loss Accounts . . . . . . . 30 8. Status of Covenants . . . . . . . . . . . . . . . . . . . 31 9. Use of Bank Resources . . . . . . . . . . . . . . . . . . 34 A. Staff Inputs . . . . . . . . . . . . . . . . . . . . . 34 B. Missions . . . . . . . . . . . . . . . . . . . . . . . 34 MAP: IBRD 27553 This document has a restricted distribution and may be used by recipients only in the performance of their oficial duties. Its contents may not otherwise be disclosed without World Bank authorization. i PROJECT COMPLETION REPORT PHILIPPINES RURAL FINANCE PROJECT (LOAN 3356-PH) Preface This is the Project Completion Report (PCR) for the Rural Finance Project in the Philippines for which Loan 3356-PH in the amount of US$150 million was approved on June 21, 1991. The loan was fully disbursed on June 8, 1994, substantially ahead of the original closing date of March 31, 1997. Parts I and III of the PCR were prepared by the Country Department I, East Asia and Pacific Region, and Part II by the Borrower. The PCR is based inter alia on a Completion Report from Land Bank of the Philippines (LBP) dated August 26, 1994; the Staff Appraisal Report (No. 9563-PH) dated May 30, 1991; the Loan and Guarantee Agreements dated July 11, 1991; Bank Supervision reports; correspondence between the Bank and the Borrower; internal Bank memoranda; and field work by a Bank mission in May 1994. The Bank wishes to thank the management and staff of the Land Bank of the Philippines for their cooperation and assistance in preparing this PCR. Hii PROJECT COMPLETION REPORT PHILIPPINES RURAL FINANCE PROJECT (LOAN 3356-PH) Evaluation Summary Obiectives 1. The project's main objectives were to expand the volume of commercial credit, particularly medium- and long-term credit, for rural development in the Philippines and to improve the policy and institutional framework of the rural financial sector. The Bank loan provided funds totalling US$150 million over a two and one half year period for short-, medium- and long-term credit through the Land Bank of the Philippines (LBP) Countryside Loan Fund (CLF). In parallel a number of steps and measures were taken to institutionally and financially strengthen the rural banking system; to strengthen agencies supporting rural finance, particularly the Philippine Crop Insurance Corporation (PCIC) and the Quedan Guarantee Fund Board (QGFB), as well as LBP itself; to undertake policy studies on rural finance; and to provide training for staff of LBP, Participating Financial Institutions (PFIs) and Co-operatives. Implementation Experience 2. The loan was fully disbursed more than two years ahead of schedule despite a delay in loan effectiveness brought about by slow fulfillment of conditions concerning branch liberalization and approval of the Rural Banks (RBs') capitalization program both of which were under the responsibility of the Monetary Board. LBP, the borrower, performed well under the project. The monitoring of individual sub-loans and associated investments was, however, weak and this aspect of the CLF Unit needs strengthening. Relationships between LBP and PFIs were generally good, but relationships between LBP and Agricultural Credit Policy Council (ACPC) were poor, and as a result the studies which were to have been undertaken under the project were only partially completed. The implementation of PCIC's development program was inhibited by a Government imposed freeze on insurance premiums payable by farmers in parallel with a cap being placed on the sum paid to cover premium subsidies. This has resulted in PCIC being able to collect only a part of the total preimums due. Results 3. Overall the project succeeded in meeting its principal objectives. It provided much needed medium- and long-term credit for rural investment which is chronically under-funded in the Philippines from formal sources. Investments supported by the project were greater than envisaged at appraisal due to higher contributions by both PFIs and sub-borrowers. In total, 687 borrowers benefitted from project funded investments. Altogether, 411 of CLF loan amounts went to agro-processing, 31% to agriculture and aquaculture, 15% to manufacturing and 13% to services. The project was reasonably diversified geographically but still iv concentrated on the more developed rural areas. Commercial Banks handled 72% of total loan funds; Thrift Banks 17%; Government Banks 4%; and both Non-Bank Financial Institutions (NBFIs) and Rural Banks (RBs) 3% each. Sub-loans averaged P7.1 million (about US$270,000) and 85% of sub-loans were for expansion of existing enterprises rather than new businesses. Less than 10% of total funds were lent short-term, about two thirds of investments were in fixed assets, and one third working capital. Loan recoveries under the CLF program have been very good with past dues to LBP amounting to only 0.02% of their outstanding loan portfolio. Rates charged under the project to sub-borrowers were positive in real terms and rates charged by LBP to PFIs were market oriented. 4. Sub-borrowers, PFIs and LBP have all benefitted financially from the project. Average FRRs on sub-project investments were estimated ex ante at about 30% and average ERRs at 35% compared with the average real cost of funds of about 10%. The lending spreads which were 3* for NBFIs, 3.7% for Commercial Banks, 4.4% for thrift banks and 8% for rural banks were sufficient to make the use of CLF funds attractive to them. LBP benefitted both directly through its operating spread (it earned an incremental US$2.7 million net in 1993 as a result of CLF) and from the assistance which the loan covenants gave it in establishing itself as a viable self-supporting institution. Depending on long-term movements in exchange rates between the World Bank's pool of currencies and the peso, the foreign exchange guarantee fees collected by the Government may not be sufficient to cover the foreign exchange risk. As of 31st August 1994, the "unrealized open loss" to Government for the project, after adjusting for the value of re-invested guarantee and foreign exchange fees, was about US$5 million. SustainabilitY 5. The CLF program will continue to be sustainable provided LBP is successful with continued resource mobilization (both internal and external). But as markets develop, the interest rate setting mechanism needs to become more sophisticated, in particular, the system of setting fixed rate loans, which are considered by the PFIs as a very important feature of the CLF program. Strengthening of the RBs should help to increase the amount of funds (which are still small) channelled through them to the rural areas. Findings and Lessons Learned 6. The project has made a significant positive contribution towards developing the rural credit sector in the Philippines. In particular, there has been substantial institutional development in the RBs and in LBP itself. The rural financial sector is now much more market oriented and has lower intermediation costs than in 1991. The following are the main lessons to be drawn from the experience of implementing this project: (i) the level of investment lending in the rural area was substantially higher than envisaged at appraisal. This was mainly due to the use of market determined interest rates and the private banking system which resulted in additional resource mobilization both from PFIs and sub-borrowers. (ii) the mechanism for dealing with interest rate adjustments needs to be more sophisticated and rates changed more readily in line with v market requirements. A market-related mechanism for setting fixed interest rates also needs to be introduced. As interest rates become more finely tuned, more active marketing of CLF would be required including LBP's adjusting its own spread to reflect commercial conditions and the risks associated with specific PFIs; (iii) those project components which were not directly financed by the Bank were, in general, not successfully implemented. If actions are to be included within projects, it is important to have financial leverage and to provide the necessary resources for their implementation; (iv) the system whereby Government is bearing the foreign exchange risk for a fee still exposes Government to potential risks. Mechanisms whereby foreign exchange risks should be borne by the financing institutions or borrowers rather than the Government need to become part of future projects once the macro-economic environment allows it; and (iv) it may have been better to concentrate institution building under the project more directly on LBP rather than to try to support several other agencies. Particular areas where this could have taken place would have been firstly, in strengthening the capacity of the CLF Unit with respect to individual sub-loan monitoring; and secondly, in supporting the mobilization by LBP of medium- and long- term resources. Although the project did mobilize some medium- and long-term funds, these came entirely from the sub-borrowers and PFIs and not from LBP. -. PROJECT COMPLETION REPORT PHILIPPINES RURAL FINANCE PROJECT (LOAN 3356-PH) PART I: PROJECT REVIEW FROM BANK'S PERSPECTIVE A. Proiect Identity Name Rural Finance Project Loan Number 3356-PH RVP Unit : East Asia and Pacific Regional Office Country Philippines Sector Agriculture and Natural Resources Sub-sector : Credit B. Background 1.01 Commercial Banks which concentrate on fully collateralized short-term lending have traditionally dominated the Philippines financial sector. Lending to the rural sector had been particularly limited due to perceptions that risks were high; rural real estate collateral was generally considered unacceptable by banks; resources for medium- and long-term investments were severely limited; and in general the Rural Banks (RBs) were in weak condition. Private institutions were further discouraged from rural lending by unfair competition from subsidized credit under Government funded schemes. Consequently, participation of the banking system in long-term rural financing has been limited. Furthermore, as a result of the financial crisis in the Philippines in the late 1980s there was a real contraction in bank lending between 1984 and 1989. 1.02 From the standpoint of the real economy, however, there is a clear need for medium- and long-term credit in the rural sector - at the time of appraisal (1990), this was estimated to be at least US$1 billion per year annually of new funding. The satisfaction of this latent demand was seen to require improved market based incentives to induce financial institutions to better serve rural needs. In addition, measures to enhance the access of rural borrowers to formal credit also needed to be developed. The Bank had already started to address these problems through its Agricultural Credit Project (Loan 2570-PH) under which it had established an Agricultural Loan Fund (ALF) of over US$100 million for re- discounting commercial loans to the rural sector. The primary aim of this project was to carry forward the achievements of the Agricultural Credit Project, building on the institutional changes which had been initiated under it. C. Project Obiectives and Description 1.03 The main objective of the project was to expand the volume of commercial credit for agriculture and rural development in the Philippines and to enhance the policy and institutional framework of the rural financial sector by: -2- (a) supporting the development of the ALF re-discounting facility which was by then administered by LBP, with an additional US$150 million Countryside Loan Fund (CLF), thereby providing additional (mainly medium- and long-term) resources to finance increased private investment in the agricultural and rural sectors; and (b) institutionally and financially strengthening the rural banking system, the Philippine Crop Insurance Corporation (PCIC), the Quedan Guarantee Fund Board (QGFB) and LBP in order to facilitate better access to formal credit and banking services in rural areas. 1.04 Funds were originally intended to have been provided over a period of up to five years for: (a) Credit to finance private investments in agriculture and other viable rural operations. This credit which was to be provided through the banking system at commercial rates was intended to be non-directed and was to include a small pilot scheme (US$1 million equivalent) to be channelled through selected co-operatives which would act as financial intermediaries to support long-term investments by their members; (b) Policy and Institutional Development including: (i) Further liberalization of banking policies including more rural branching and the implementation of programs to encourage re-capitalization of rural banks; and (ii) Strengthening of existing insurance/guarantee funds with the intention that their services would be available at market prices; and (c) Studies and Training including: (i) Policy related studies on both formal aħ 'rmal rural sector credit restraints, particularly te Lending and resource mobilization; and (ii) Training for staff of LBP, Participating Financial Institutions (PFIs), and co-operative members and management to enhance their ability to handle credit operations. D. Proiect Design and Organization 1.05 The project was designed to provide continuing support for GOP's move away from direct subsidized credit and towards a more sustainable rural financial sector. Initial project design work, which was started while the previous Agricultural Finance Project (Loan 2570-PH) was still under Central Bank of the Philippines' (CBP) control, was undertaken by CBP's ALF staff. It was specifically intended that new re-discounting funds would complement existing ALF funds and so ensure continuous availability of long-term re-discounting funds for the rural sector. However, largely as a result of the delays in moving responsibility for the management of ALF from CBP to LBP, preparation of this -3- project was a drawn out process. However, once the new ALF administrative arrangements became clear in mid 1990, detailed design for the credit element of the project was finalized by LBP with assistance from Bank preparation missions. The financial thrust of the project was to expand the ALF re-discounting resources by the introduction of the CLF. Both of these funds were to be managed by a specialist unit set up in LBP. The new CLF resources were to re-discount individual sub-loans by accredited PFIs covering up to 75% of project costs - at least 15% being provided by beneficiaries and 10t by PFIs. 1.06 The policy and institutional development aspects of the project were designed by Philippine Government agencies with assistance from the Bank. Specifically implementation of changes in banking policy came under the control of CBP (now Bangko Sentral ng Pilipinas (BSP)), while the Philippine Deposit Insurance Corporation (PDIC) was the agency responsible for developing the rural bank strengthening program, known as The Countryside Financial Institution Enhancement Program (CFIEP). Proposals for the strengthening of both PCIC and QGFB were developed by the agencies themselves, with some support from the Bank. Policy studies under the project were to have been undertaken by the Agricultural Credit Policy Council (ACPC) while training for CLF and PFI project staff was designed to be implemented by LBP. Overall, the main project implementing agency was LBP who was the borrower and through its President had the responsibility for assuming overall project coordination. Linkage between LBP and other project implementing agencies was through the CLF project steering committee which included not only the President of LBP but also the Under Secretaries of the Department of Finance (DOF), Department of Agriculture (DA), Deputy Governor of the Central Bank, the Executive Director of ACPC, the Director of Agricultural Staff of the National Economic Development Authority (NEDA) and representatives of the PFIs. E. Prolect Implementation 1.07 Loan Effectiveness and Project Start-up. Loan 3356-PH was signed on 11th July 1991. Effectiveness was declared in November 1991 and the first drawn down under the project, the transfer of US$10 million into a special account was applied for on 30th December 1991. Implementation commenced on 2nd January 1992. The main reason for the gap of nearly six months between the loan agreement and the start of implementation was the delay in project effectiveness which resulted from slow fulfillment of loan conditions concerning the further liberalization of banking policies including: (i) liberalization of branching regulations in rural areas; and (ii) approval of the RBs' capitalization program. Fulfillment of both these conditions were within the province of the Monetary Board, but the direct cost of the delay, reflected through commitment fees was borne by LBP. The third condition of effectiveness concerning the approval of and putting into effect the revised policy manual by LBP was met in a timely fashion. 1.08 Implementation Schedule. The project was initially scheduled to start 1st October 1991 and be completed by 30th September 1996 with an expected closing date of 31st March 1997. Although it started three months late, it was completed substantially ahead of time with the final draw down on 8th June 1994 being -4- reimbursement for sub-loans rediscounted by LBP prior to 31st March 1994. The proposed co-operative sub-project component, however, under which US$1 million equivalent were to have been channelled through selected co-operatives was not implemented. Funds due to have been used by this sub-component were absorbed by the main CLF. The main reason for this sub-component not being implemented was that during the project period, the interest rates offered to co-operatives under CLF were higher than the fixed rates directly offered by LBP to farmer co- operatives under its "normal" co-operative lending program, which has access to ARF and other below market resources. 1.09 The implementation program for the loan set out in the loan agreement which required (i) no retailing of ALF or CLF funds by LBP; (ii) the recycling of initial short-term credits into medium- and long-term sub-loans; (iii) the operation of CLF on a commercial basis with profits being retained within CLF; and (iv) the issuance of a policy manual as agreed by the Bank to be changed only with prior concurrence of the Bank, had been adhered to. However, with respect to (iii) above, the profit retained within CLF according to its financial statements does not include the imputed income earned as a result of the project which by June 1994 amounted to P142 million or about US$5.5 million. 1.10 Procurement. As this was a credit project, most procurement was done by prudent local shopping overseen by the PFIs. CLF conducted verification surveys of the purposes for which funds were used on a sample basis. No significant procurement problems were encountered under the project, and LBP end use surveys confirmed that funds were generally used for their intended purposes. 1.11 Project Investment (Cost) and Financing. At appraisal, an estimate of investment to be supported by the project was made on the basis of the first use of the funds, that is, within the credit component the US$150 million of proposed World Bank financing was leveraged up by contributions from PFIs and sub- borrowers. No account was taken of the fact that returned funds would also be re-lent. In addition to this, an estimate was made of the cost of training and studies to be provided under the project using LBP and ACPC funds. Calculated on this basis, total project costs came to an estimated US$203.5 million (sub- projects US$200 million, studies etc. US$3.5 million). 1.12 The actual investment in (cost of) sub-projects funded under the project up to the end of March 1993 amounted to US$269.5 million (Table 3 Part III), however this was based on total contributions of IBRD funds (both initial and re- cycled use) of US$155.5 million. If this figure is scaled back to the US$150 million of new capital provided, so as to give a direct comparison with the appraisal estimate, total project supported investment (costs) for the credit component were US$260 million. This indicates that the Bank Loan supported 301 more investment than envisaged at appraisal. The main cause of the difference between the actual achievement and the appraisal estimates was that the contributions both by the sub-borrowers and PFIs to project investments (costs) were considerably greater than envisaged. Sub-borrowers contributed 1621 more than the projected amount and PFIs 57% more. As to type of credit, 12% was for short-term and 88% for medium- and long-term compared with appraisal assumptions of 33% and 67% respectively. 1.13 Disbursement. Disbursements of the loan 3356-PH are given in Table 4 Part III. The total loan was disbursed in substantially less than three years compared with an appraisal estimate of six years. Although disbursements started slightly slower than planned due to a delay in effectiveness, the rate of disbursement was substantially faster than envisaged. By the end of the first semester of FY93, 49% of project funds had been disbursed compared with an appraisal estimate of 33% and a standard distribution profile figure of 14%. By the end of FY94, the 100% actual disbursement figure compared with 60% estimated at appraisal and 50% using a standard profile. At appraisal, allocation of loan funds included US$50 million for short-term loans (Category 1) and US$100 million for medium- and long-term loans (Category 2). Actual disbursements for short- term loans amounted to only US$13.9 million. This resulted in the need for a reallocation of loan funds and a total of US$36.1 million was switched from Category 1 to Category 2 on November 24, 1993 and March 3, 1994. F. Proiect Results 1.14 Overall the project was successful in meeting its objectives which were to: (a) assist in financing such productive facilities and resources in the Philippines as will contribute to the economic and social development of the country; and (b) to enhance the policy framework governing the rural financial sector. 1.15 Credit. The flow of long-term funds for development in the rural areas which resulted from the project added significantly to the scarce long-term resources available for investment. By 31st March 1994, 687 sub-loans had been supported under CLF giving rise to investments of P7,006 billion (US$269 million) 1'. 1.16 Funds onlent by LBP to PFIs were initially adjusted quarterly, based on the weighted average interest rate (WAIR) of 61-90 day certificates of time deposits issued by the ten major commercial banks two weeks prior to the start of each quarter. Subsequently, as a result of a drastic drop in interest rates on time deposits, the formula was changed (from the third quarter of 1993) and the variable rate was based on the WAIR on 91 days Treasury Bills prevailing during the second month of the previous quarter. Borrowers were allowed to switch to fixed interest rates at a pre-determined premium above the variable rate depending on maturity of the loan. The levels of these premia were also raised from the third quarter of 1993 from l%-2% to 2%-3.5%. The difference between the nominal FX borrowing interest rate from the World Bank and the peso onlending rate from LBP to PFIs composed a 2% LBP administration fee, a 1% guarantee fee to Government, LBP's gross receipts tax payable to Government, and a variable balance which was absorbed by Government as the foreign exchange risk cover fee. Over the period January 1992 to March 1994 the lending structure of variable loans has been approximately as follows: rate to sub-borrowers, 17.5%; LBP's pass on rate to PFIs, 13.5%; net cost to LBP, 11.5%; gross receipts tax, 0.5%; guarantee fee, 1%; foreign exchange fee (variable), 2.2%; cost of World Bank funds, 7.8%. 1/ At an average rate of P26 = US$1. -6- 1.17 Despite relatively high real interest rates, averaging almost 10% to sub- borrowers, project funds were drawn down rapidly. Clearly, because CLF's rates were set quarterly, but the market was constantly readjusting, the CLF interest rate was sometimes higher, and sometimes lower than the T-Bill rate. The volumes of lending confirmed the market's sensitivity to this. In the three quarters when the CLF rate was above the T-Bill rate, volume averaged P200 million at P5 million per loan while in the six periods when the CLF rate was below the T-Bill rate, an average of P573 million at P6 million per loan were disbursed. 1.18 Average maturity of loans under the project was about four years and average sub-loan size P7.1 million (US$ 270,000), or more than three times larger than the average loan under the previous ALF program. The average PFI interest rate spread was 4.0%. The rural banks had the smallest average loan size, borrowing an average of P483,000 (US$19,000) per CLF loan from LBP, but the largest interest rate spread, averaging 8.0% on a volume weighted basis. Average borrowings from LBP and spreads for other institutions were: commercial banks, P15.1 million (US$580,000) and 3.7%; thrift banks P3.2 million (US$120,000), and 4.4%, Government banks P5.2 million (US$200,000) and 4.4%; and NBFIs P28 million (US$1.1 million) and 3.0%. 1.19 As of March 1994, 97 PFIs were accredited for CLF funding. Of these, 20 commercial banks, 1 government bank, 12 thrifts, 16 rural banks and 2 non-bank financial institutions (NBFIs) were making use of the program at that date. Among the PFIs, the commercial banks had made most use of CLF (72% of total LBP loans), followed by the thrift banks (17%), government banks (4%) and both NBFIs and rural banks (3% each). Compared with ALF, the share of thrifts fell, but that of all other institutional types increased. 1.20 Much of the finance under the project was for expansion of existing businesses, although the proportion of new projects (19% by number, and 15% by value) was greater than under ALF (13% by number, 5% by value) . Of the 687 project loans, 568, or 83% were for small-sized businesses projects with assets that totalled less than P20.0 million before financing. These businesses accounted for a significant proportion (22%) of CLF financing. Nevertheless, the bulk of the funds went to larger scale businesses - 30% to 96 projects for businesses with assets between P20 and 200 million (US$ 0.8 and 7.6 million) and 48% to 23 firms with assets of P200 million and above (US$ 7.6 million and over). 1.21 Food and agro-processing absorbed the largest share (41%) of total CLF loan amounts; followed by agriculture and aquaculture with 31t, manufacturing 15% and services, 13%. Among the processing loans, grain millers and associated businesses were major borrowers, with beer, alcohol and sugar also important. The main types of investment in primary production were for livestock, particularly poultry and pigs and sugar. Manufacturing covered a wide range of products, from aluminum foil to textiles and construction materials, while 80% - 7 - of services projects in were transportation. Overall, about two thirds of the total sub-loans were for fixed assets and one third for working capital. 1.22 Lending under the project, which was determined by market demand, mainly focussed on the more developed rural areas. Region IV (Southern Tagalog) had both the greatest number of sub-loans (40%) and amount disbursed (28%). This was followed by Region III (Central Luzon) - 201 of loans and 13% of amount disbursed, Region VII (12% and 14%) and Region VI (8% and 18%). Very little investment was made in Regions I (Ilocos), V (Bicol), VIII (Eastern Visayas), XII (Central Mindinao) and Cordillera (in total, 9% of loans, and 5% of amounts). 1.23 Because the project is only two and a half years old, there has been no ex post evaluation of sub project profitability. As a guide however, ex ante financial rates of return have been reviewed on a sample2l of those loans for which FRR calculations were made. These indicated expected rates of return averaging around 30% in real terms - well above the cost of money to them, which has averaged about 10% in real terms. Economic analysis was only undertaken by banks for projects to which sub-loans exceeded US$1 million. Reported ex ante ERRs averaged 35% on the projects in the sample reviewed (in total, loans to these projects amounted to about 45% of total loans). Analysis of the sample also indicated that the sub-loans were projected to support total investment per job averaging P2.5 million (US$95,000) for rediscounting amounts of over P50 million; P850,000 (US$33,000) for rediscounting amounts P5-50 Million; and P340,000 (US$13,000) for rediscounting amounts below P5 million. Overall, an estimated 9,000 new jobs are now anticipated to result directly from CLF funded projects. This number excludes both (i) the jobs created as part of the investment process, e.g. in the construction industry; and (ii) indirect employment, e.g in industries supplying project investments, such as feed milling in the case of livestock investments. This estimate of job creation is below the appraisal estimate of 25,000 new jobs. The main reason appears to be that the larger borrowers, which absorbed most of the funds have tended to invest in capital intensive projects, including some investments, for example in the textiles sub-sector which were aimed specifically at labor saving. 1.24 The project involved a substantial number of PFIs and was not highly concentrated. Consequently, CLF's impact on most individual PFIs was relatively modest. A review undertaken by LBP indicated that the CLF had a positive impact on the profitability of all eleven PFIs reviewed; it accounted for less than 1% of net income in the case of commercial banks, 2-8% with thrift banks, 3% for the NBFI reviewed, but considerably more for rural banks. The average spread of 4% which PFIs have been able to make on CLF loans has been attractive to them provided they are able to use CLF to expand their loan portfolios. 1.25 The financial impact of CLF on LBP can be deduced from Table 5. In the full financial year 1993, LBP earned P76 million from CLF, after taking account of imputed income before allowing for incremental staff costs. The latter are thought to be about P4 million giving a net contribution to LBP profit of just over P70 million. This is quite significant and is equivalent to about 8% of 2/ The sample comprised all sub-loans of over P50 million (US$1.9 million), and 33% of sub-loans P5-50 million (US$0.2-1.9 million). For sub-loans below P5 million (US$0.2 million), from which a 10% sample was taken FRRs were not estimated during sub-loan processing. - 8 - LBP's 1993 net profit. Figures for the first six months of 1994 indicate a likely greater profit contribution with net benefits for the last year amounting to over I80 million. Collection of CLF supported loans by LBP has been excellent. Of particular significance is the very low level of past due loans. These represent only 0.02% of the outstanding LBP CLF portfolio. The covenants under the project limiting Government's outstanding payables to LBP, and the agreement with the Bank seeking redefinition of LBP's relationship with agrarian reform land ownership, bonds and mortgages have helped LBP become a more self- sustainable institution and have assisted in protecting it from political interference. The one negative effect of CLF on LBP has been LBP's exclusion from retailing CLF resources. This has resulted in some client loss, as businesses which had been LBP's clients, but which wished to borrow long term for rural investments have accessed CLF resources through LBP's competitors. This has tended to curtail development of LBP's commercial rural lending. It is intended to address this problem through establishment of a separate Retail Co-financing Fund which will be available for LBP to lend to its own customers under the proposed second rural credit project. 1.26 The potential cost to Government of the Agricultural Credit Project is the foreign exchange risk. It will not be clear whether or not the guarantee fees and the foreign exchange risk fees which it levies will be sufficient until the loan is fully repaid, in 2012. By 30th June 1994, Government had earned P102 million (US$3.9 million) in foreign exchange risk fees and P53 million (US$2.0 million) in guarantee fees or a total of US$6 million. However, at that date, the peso had devalued to P27.00 = US$1 compared with an average when the loan was drawn down of P25.83 = US$1. The effective potential cost to government as a result of devaluation of the peso against the dollar by 30th June 1994 was therefore about US$6.5 million. In addition, up that date there had also been a potential loss on cross currency risk of US$9.7 million, resulting in an 'unrealized open loss', net of fees collected of about US$10.2 million2l. To date the open loss has not involved any cash outflow - indeed, from a cash flow standpoint, GOP has benefitted from the project directly by the US$6 million of fees collected. Furthermore, the 'open loss' is a volatile figure and by August 31, a hardening of the peso against the dollar4l together with the collection of fees during July and August had reduced the "unrealized open loss" net of fees collected to about US$5.7 million21. Besides the direct impact of guaranteeing foreign exchange on GOP's cash flow, the project has considerable indirect benefits to GOP's cash flow. These include: (i) the gross receipts tax collected on interest both from LBP and the PFIs totalling perhaps US$1.5 million annually; (ii) the incremental income tax on the incremental profits of the financial institutions wholesaling project funds; and (iii) the incremental tax on the economic activity generated as a result of the project. 1.27 Policy Impact. Enhancement of the policy framework governing the rural financial sector has been brought about by the liberalization of branching and strengthening of rural banks through additional capitalization and debt reduction. Overall, the financial position of the rural banks was substantially 3/ These figures do not take account of the benefit to Government of income resulting from the investment of fees collected which by these dates would have been worth less than US$1 million to them. 4/ Exchange rate on September 2nd 1994 was US$1 = P26.34. -9- stronger in March 1993 than in September 1991. In September 1991, of 773 rural Banks, 32% were classified as unsatisfactory, 35% as needing improvement and 33% as good performing Banks, by 1993, the relative proportions had improved to 19%, 45% and 36%. Over the same eighteen month period, Total Capital had increased by 40% from P2.352 million to P3.273 million. The impact of the project on PCIC and QGFB has been minor. Although it is managed by professional and competent staff, and there has been a significant improvement in administrative efficiency between 1989 and 1993, (average premium collected per staffer rose from P270,000 to over P600,000) PCIC remains a weak institution. This is largely because of continued non payment of GOP's share of crop insurance premia and a Government imposed freeze on premium rates. Together these government interventions have prevented PCIC from implementing its policy of becoming financially self supporting and have resulted in a serious deterioration of its prudent insurance capacity. The former QGFB was converted to a corporation, QUEDANCOR in April, 1992. However, it has not yet raised its guarantee fee rates to levels which would be self sustaining, nor has it established a grain trading center as envisaged during project preparation. Overall, no major enhancements to the rural finance sector have stemmed from these institutions during the project period. 1.28 Under the project, training was to be carried out by LBP to include: (i) training of project related staff within the borrower and participating financial institutions; and (ii) training of selected co-operative staff and management. A specific area of concentration was concerned with environmental aspects of sub- projects. Six environmental seminars/workshops which were attended by LBP staff, government agencies and local and foreign consultants were organized under the project and involved some 322. Training specifically on the CLF program guideline policies and procedures was given to PFIs loan officers and to LBP's own employees. A total of 263 participants attended nine seminars both in Metro Manila and the regions. LBP has also developed a two year management development program for training of RBs in the key areas of credit process, internal control and operations management. This two year program which started in July 1993 aims to enhance the internal capability of 216 RBs. As of 30th June 1994, 100 LBP assisted RBs were trained involving 398 participants nationwide. Considerable resources have also been put into co-operative training by LBP over the project period. A series of five training modules have been developed and 103 local training teams established nationwide in co-ordination with LBP's field offices and partner NGOs. Training was given to 3,886 co-operatives in 1992, and 3,259 in 1993. However, despite the heavy training input to co-operatives, the quality of LBP's co-operative loan portfolio has deteriorated over the past three years. 1.29 It was envisaged at appraisal that ACPC would carry out policy studies. After some delay, it was agreed that studies (i) to look at the informal sector for rural finance; and (ii) focussed on the demand for term credit in the rural sector, would be prepared. These were not adequately undertaken during the project period, largely as a result of lack of financing. The original agreement had been for ACPC to provide the professional manpower but for LBP to underwrite the other costs of the studies. The two agencies failed to come to a sound working agreement on this. G. Project Sustainability 1.30 The CLF model of re-discounting of loans to the rural sector is certainly - 10 - a sustainable activity. The project has been operated at real interest rates with excellent credit recovery. LBP has developed a sound wholesale lending operation which is capable of being substantially expanded. To achieve expansion, or even to stay at the present real level, however, will require mobilization of additional medium- and long-term funds. These are envisaged both through a further bank follow-on project and mobilization of domestic resources through the bond market or sale of loans. The policy of setting interest rates substantially in advance and having fixed spreads between variable and fixed interest rates is a poor approximation to market conditions. As the Philippine financial markets develop, it will be important to set variable rates more often and more closely in line with movements in the market place and to set fixed rates based on market conditions rather than pre-determined formulae. The potential, but unrealized, net subsidy to be provided by GOP through covering foreign exchange risk for a fee has resulted mainly from the recent devaluation of the dollar against the Banks' currency pool. Only after the loan is fully repaid will it become clear whether GOP actually has provided a cash subsidy to the project. H. Bank Performance 1.31 Bank performance under the project was satisfactory. Timely and adequate supervision missions were conducted to ensure the program objectives were achieved and response/approval of loans beyond LBP's free limit were handled expeditiously. Some minor problems were experienced at the end of the loan draw down period when deductions were made from draw down requests to cover initial funds in the special account, but the reason for which was not adequately explained to the borrowers' staff. I. Borrower Performance 1.32 LBP, the borrower, performed well under the project with the only minor criticism concerning lack of effective co-ordination with ACPC over the studies which were to have been funded by them. The continued comparatively high concentration of loans in the more developed rural areas may partly result from under-funding of the CLF unit within LBP and difficulties in retaining skilled personnel because of the restriction on LBP salaries. With the single exception of one small Rural Bank which had been previously accredited under the CB-ALF program LBP's monitoring and review of PFIs, which constitute their direct clients, and therefore risk, was extremely thorough. However they could usefully have concentrated more resources, had they been available, on the monitoring of individual sub-loans. The important issue of strengthening CLF through increasing staff numbers and professional skills and expanding its budget is currently being addressed within LBP as part of the preparation of the Second Rural Credit Project. J. Project Relationship 1.33 With respect to the Credit Component, the project relationship between LBP and PFIs was generally good. However, the change in interest rate policy during implementation of the project was properly viewed by the PFIs as undesirable in that their clients, who had signed up for loans assuming that interest rates - 11 - would be linked to one indicator, found that the indicator had changed adversely as far as they were concerned. Despite this, however, most PFIs continued to remain involved with CLF loans. The lack of effective financial linkages between either the Bank or the borrower and other intended project participants, PCIC and QUEDANCOR may have caused less than satisfactory performance in the strengthening of these two agencies. The LBP, ACPC relationship was less than satisfactory under the project, but a new agreement has been drawn up between them to provide for better co-ordination in future. K. Documentation and Data 1.34 The loan agreement was adequate. The staff appraisal report provided a useful framework for both the Bank and LBP to follow, and LBP prepared a comprehensive Part II of this report in a timely fashion. Quarterly reports from LBP to the Bank were generally on time and contained sound data on lending and training operations. The main area in which project data was less than satisfactory, concerned the financial and economic performance of sub-projects. This is largely a result of the rapid disbursement of funds under the project and therefore most of the results of project investments not yet being clear. The recommendation made in the PCR of the preceding Agricultural Credit Project (Loan 2570-PH) that in future economic analysis needs to be based on continuous in depth monitoring of a sample of project sub-loans was not taken up by the CLF implementation unit. However, within the proposed Second Rural Finance Project this issue is being addressed with additional economists and financial analysts being allocated to the CLF unit. - 12 - PART II: PROJECT REVIEW FROM BORROWER'S PERSPECTIVE1 BACKGROUND 1. The Rural Finance Project I (Loan 3356-PH) was intended to expand the volume of commercial credit for agriculture and rural development, and to enhance the policy and institutional framework of the rural financial sector in the Philippines. The project was to: (a) channel funds through LBP to finance private investments and seasonal production credit in agricultural and other viable projects in the rural areas through qualified retail PFIs; (b) induce financial institutions to attend to the credit needs of the rural areas more efficiently, and to facilitate better access to private banks in rural areas; and (c) enhance the access of rural borrowers to formal credit sources. The project facilitated a wider participation in rural lending of financial intermediaries which included commercial, thrift, rural banks (RBs), specialized government bank, as well as selected non-banks performing quasi-banking functions (NBQBs). 2. The project, originally intended to be implemented over a period of five years, was composed of the following components: (a) Credit to finance seasonal production and for investments in fixed assets and incremental working capital. Credit would be provided through the banking system for a broad spectrum of agri/aquaculture, food and agro-processing, manufacturing and service-oriented rural investments. Under this components, US$1.0 million would be made available to selected cooperatives under an Experimental Pilot Plan to support the long term investments of their members. LBP would be the implementing agency of the credit component; (b) Policy and Institutional Development which included: (i) further liberalization of banking policies concerning the opening of new branches in rural areas, merging of banks in rural areas, ceiling on the maximum shareholding of a single investor (to be implemented by BSP) and other inducements to banks in good standing to recapitalize rural banks with equity deficiencies (to be implemented by PDIC); and (ii) strengthening of existing insurance/guarantee funds, so they will be in a sound position to provide farmers and banks with adequate insurance and guarantee facilities at market prices (to be undertaken by PCIC and QGFB); and (c) Studies and Training which included: (i) policy related studies on (formal and informal) rural credit constraints, with special emphasis on term lending and resource mobilization (to be implemented by ACPC); and (ii) training for CLF and PFIs project staff and for cooperative members and management to enhance their ability to handle credit operations (to be implemented by LBP). 3. Apart from the basic loan covenants, the Loan Agreement and the Guarantee Agreement provided for a number of special covenants relating to: short-term credit; institutional strengthening programs (LBP, PCIC, QGFB, and RBs) policy studies to be undertaken; staff training; accounts and audit; sub- loan approval; the CLF Policy Manual; interest rates; PFIs accreditation 1/ This is a summary of the Project Completion Report dated August 26, 1994 prepared Jby the Program Lending Department of LBP. The full document (about 45 pages long), which provides a comprehensive historical account of the project, is available in the Project File at the Bank's Asia Information Center. - 1 3 - criteria; monitoring and evaluation; and the Special Account. By and large the performance criteria were complied with satisfactorily, except for one study which was not undertaken mainly due to lack of financing. IMPLEMENTATION The Credit Component 4. CLF Operating Policies and Procedures. CLF operations were strictly carried out on the basis of policies and procedures established in a Policy Manual of Operations, which were previously approved by the Bank and LBP's Board of Directors. Policy revisions during program implementation were made whenever necessary to respond more effectively to significant developments which would affect the successful implementation of the program. All major policy changes were duly approved by LBP and the Bank, and reported to the CLF Steering Committee. 5. Eligibility Criteria. CLF provided funding to seasonal production sub-loans of up to one year (up to 18 months for sugar) ; and medium or long term investment financing for the establishment of new enterprises or expansion of existing ones for incremental capacity to be generated. Projects in agri/aquaculture, food or agro-processing, manufacturing and service-oriented economic ventures were qualified for CLF financing provided they were located in and were directly beneficial to rural areas. 6. Interest rates. Two interest rate options were made available to the sub-borrowers and the PFIs, i.e., variable and fixed rate. All short term loan availments with tenures of one year or less, had interest rates on variable basis only. for medium to long term loans, the PFIs and the sub-borrowers were given a choice to select one of the two interest rate options and a one time chance to convert from variable to fixed, but not vice versa. Initially, the pass-on rate to the PFI for the variable rate option was defined as the Weighted Average Interest Rate (WAIR) on 61-90 day Certificate of Time Deposit (CTD) of 10 major commercial banks (prevailing during the week, two weeks prior to the start of each quarter) as published by the BSP. For the fixed rate option, the pass-on rate was the WAIR prevailing on loan booking date or the conversion date from variable to fixed, plus a premium determined as follows: Term Premium Over 1 year to 5 years +1.0% Over 5 years to 8 years +1.5% Over 8 years +2.0% 7. However, a subsequent review and amendment of the pricing structure was necessary with the drastic drop in interest rates of time deposits. A continued usage of the CTD WAIR as basis for pricing would mean that LBP would be operating at a loss since the applicable WAIR would not be enough to cover the basic cost of borrowing. Effective the third quarter of 1993, the variable rate was based ont he WAIR on 91-day Treasury Bills prevailing during the second month of the preceding quarter. Premia for the fixed rate option were likewise revised as follows: - 14 - Term Premium Over 1 year to 3 years +2.0% Over 3 years to 5 years +2.5% Over 5 years to 8 years +3.0% Over 8 years +3.5% 8. The pass-on rates to the sub-borrowers were negotiated between the PFIs and the sub-borrowers. The spreads retained by PFIs on CLF-assisted sub- loans were not regulated so as to allow flexibility in providing an acceptable return commensurate to the credit risks taken by these financial intermediaries. 9. Foreign Exchange Risk. LBP onlent the loan proceeds exclusively in pesos and the entire foreign exchange and cross currency risks were assumed by the Government against a market-based variable fee paid by LBP. The FXRC fee was computed as the difference between the pass-on variable rate and premium to PFIs and the sum of the Bank's lending rate, 2% LBP administration fee, 1% guarantee fee payable to the Government, and applicable Gross Receipts Tax. 10. PFI Accreditation Criteria. The accreditation of financial institutions under the CLF was undertaken by LBP's Financial Institutions Department for the commercial banks, specialized government bank, non-bank financial institutions and Metro Manila based thrift banks. LBP's Countryside Financial Institutions Group, on the other hand, handled the accreditation of rural banks and thrift banks with head office based in the provinces. The PFIs solvency, profitability, reputation of owners and competence of management, and quality of assets particularly their loan portfolio were the main areas of consideration in the accreditation process. Compliance with various regulations of the BSP in the case of banks and of the Securities and Exchange Commission for non-banks were also taken into account in the evaluation. 11. At the start of the program, land Bank initially accredited 67 PFIs. As of March 31, 1994, a total o 97 PFIs were already accredited - 25 commercial banks, 16 thrift banks, 5 non-bank financial institutions, 49 rural banks and 2 government banks. 12. Financing Mix. The CLF could finance up to 75% of the subproject cost. For each subproject, the PFI would finance at least 10% of the financing package from its own funds and the sub-borrower would provide at least 15% of total project cost. The sub-borrowers provided more than the required 15% equity participation with P2,117 million or 30% of the total project cost. The PFIs also exceeded the minimum 10% financial contribution by providing P845 million which is 12% of the total project cost. Thus, the CLF/IBRD funding contribution was significantly reduced to 58%- of the total project cost. Moreover, the actual investment, under the project (total project cost) , substantially increased from the projected P5,213 million (US$200.5 million at an average exchange rate of US$1:P 26) to P7,006 million, or an excess of P1,793 million or 34%. 13. Environmental Protection. Sub-borrowers were required to comply with existing environmental rules and regulations. Proof of application for Environmental Exemption Certificate (EEC) or Environmental Compliance Certificate (ECC) with the Environmental Management Bureau (EMB) of the Department of Environment and Natural Resources or copies of EEC/ECC if already issued were required prior to any CLF loan release. - 15 - 14. . Disbursement. A Special Account with Citibank, New York was established and an initial deposit of US$10 million was made by the Bank into the Special Account. Each withdrawal from the Special Account was fully accounted for by sub-loan disbursements eligible under the project. Withdrawals from the Loan Account were made on the basis of Statement of Expenditures. 15. Procurement. Procurement of goods, works and services financed with loan funds were strictly on the basis of procedures customary for development finance operations. However, as there were no applicable purchases or contract above US$5 million for any subproject, procurement by International Competitive Bidding was not exercised during the project implementation. 16. Monitoring, Reporting and Audit. Based on agreed formats, LBP regularly submitted to the Bank quarterly progress reports on project implementation. Also, the Financial Statements of the CLF, the Special Account and Statement of Expenditures were audited annually ny the Commission on Audit and the Bank was furnished with a copy of the audit reports. 17. LBP Supervision of PFIs. PFIs were continuously monitored to keep tab of developments on their operations and their performance was gauged against the industry standards. Risk monitoring for PFIs included the semestral analysis of financial performance in which key financial indicators based on interim/published financial statements were analyzed. PFIs were likewise asked to submit Aging of Loan Arrearages to assess quality of their loan portfolio. The CLF credit lines of PFIs were reviewed and renewed annually as part of CLF credit administration and supervision of PFIs. Indicators based on latest financial statements plus all risk monitoring activities were periodically evaluated and depending on the outcome of the annual review, the CLF line was either maintained, increased, reduced or at worst, terminated/cancelled. PROJECT RESULTS A. The Credit Component 18. LBP was able to fully disburse the fund in record two and a half years ahead of schedule. This could be attributed to the aggressive marketing efforts of the CLF Unit Staff who capitalized on the attractive features of the program such as the wide coverage of eligible projects, the simplified loan documentation and processing requirements, the availability of medium/long term repayment and fixed pricing option. Moreover, the program ran parallel, if not surpassed, the features of the other wholesale lending programs in the market. 20. Socio-Economic Impact. The program addressed the financing requirements of 687 projects with loan amount aggregating P4,043 million. The CLF promoted the development of small and medium enterprises. Most of the subprojects financed by CLF (568 accounts or 83%) belonged to small-asset size sub-borrowers with assets before financing amounting to P20 million or less. Data further showed that there were 583 sub-loans each amount to less than P5 million while there were only 10 sub-loans amounting to more than 50 million each. The program also successfully encouraged medium and long term investments that expanded productive capacity in the agricultural and rural sectors. Seventy six percent of the Fund (P3,074 million) went to 536 medium term projects with loan tenor of over 1 year to 5 years while 15% (P599 million) financed long term projects with maturity of over 5 years. Only 9% (P370 million) went to short term loans with maturity of - 16 - one year or less. As to purpose of loan, 55% or P2,204 million went to fixed asset acquisition, 18% or P741 million went to a combination of fixed asset acquisition and working capital. The remaining 27% (P1,098 million) went to incremental working capital. 21. CLF improves the access of agricultural and rural borrowers to formal credit sources. The program also promoted financial institutions active participation in providing a wide range of banking services in the rural areas, including credit and resource mobilization. The rural banks and the thrift banks were very instrumental in channeling the CLF funds to the countryside. of the total subprojects financed, 242 were coursed through the RBs, followed by thrift banks with 214 accounts. However, based on the amount released, P2,922 million or 72% were disbursed through commercial banks. This reflected that loans to large companies with bigger financing requirements were packaged by commercial banks who have the financial resources and technical capabilities to service the financing needs of large sub-project. 22. CLF data also showed that most PFIs preferred to lend to companies with established track record of profitable operations. Of the 687 projects financed, 556 expanded their existing capacities while only 131 were newly established or start-up business ventures. Based on total loan amounts, P574 million or only 14% went to start-up projects while P3,469 million financed expansion projects of existing business establishments. also, it was noted that generally, new projects started with relatively small resources, mostly with an asset size of less than P20 million. 23. There was no pre-determined allocation of the fund according to industry nor geographical location of subprojects. Results, however, showed that CLF financed more accounts belonging to the agriculture and aquaculture industry with 53% of the total accounts, followed by food/agro-processing (20%), Services (18%0 and manufacturing (9%). But based on the total amount released, food and agro industries captured the biggest share of P1,646 million (41%). 24. All the twelve regions and the Cordillera Autonomous Region were benefitted by the Program. Region IV (Southern Tagalog) captured the highest in terms of number (273 sub-projects) and amount of loan (P1,119 million). This could be attributed to the comparative advantage of lodating the production site near the main market, which was Metro Manila and the progressive status of economic activities in said area. The next region was Region 6 (Western Visayas) - P713 million (18%), followed by Region 7 (Central Visayas) - P581 million (14%) and Region 3 (Central Luzon) - P517 million (13%). 25. A sample of 100 sub-borrowers2, representing 15% of the accounts financed and 54% of the total loan granted, was surveyed to form the basis for reporting the socio-economic impact of the project. The samples were distributed as follows: 60 sub-borrowers with CLF loan upto P5 million, 30 sub-borrowers with CLF loan of more than P5 million up to P50 million and 10 sub-borrowers with CLF loan of more than P50 million. The sample was composed of 41 agri/aqua, 20 food/agri-processing, 13 manufacturing and 26 service oriented subprojects. From this sample alone, 2,648 new jobs were indicated to have been created, dispersed 2/ The socio-economic impact of the subproiects were not captured in the existing CLF I database. We are currently collating our data to increase the sample of the subproiects financed. - 17 - all over the different regions of the country. The relatively low increment could be explained by the facts that (i) most of the subprojects financed involved expansion of existing operations with minimum requirement for additional labor inputs; (ii) most of the new projects were not labor intensive (e.g. transportation facilities, piggery, ricemilling). Nevertheless, the new jobs indicated referred only to direct employment. Thousands of jobs indirectly related to the project were also created during the various phases of construction/installation of fixed assets financed by the program thereby contributing to the poverty alleviation program of the government. Based on the same sample, additional government revenues amounting to P1,350 million per annum were expected to have been generated from the projects financed by CLF. The amount may be quite substantial as available data included revenue generation attributable to other factors (e.g., increase in projected sales and improved production efficiency of existing capacities). 26. CLF Financial Performance. In a record time of two years, CLF resources expanded over seven fold. From P532 million in February 1992 (start of CLF I loan releases), total resources grew to as much as P4,113 million as of March 31, 1994 (full disbursement of US$150 million equivalent) largely due to the expansion of the CLF loan portfolio and the full utilization of the US$150 million CLF loan from IBRD. From February 1992 to December 31, 1992, loan portfolio grew by as much as 3273%. This was further sustained in 1993 whereby loan portfolio increased by almost 100%. The tremendous growth could be largely associated with the fast rate of CLF utilization by the PFIs given the attractive features of the program and the aggressive marketing efforts of the CLF Unit. Correspondingly, total liabilities increased with the additional drawdowns to finance relending, i.e., from P540 million as of February 1992 to P4,106 million as of March 31, 1994. For the year 1992, CLF's income barely coped with the program's expenses as there was substantial payment for commitment fee on the undrawn loan balance. Income dramatically improved in 1993 to as much as P76 million as the loan portfolio doubled form the previous year and the commitment fee payable to the World Bank decreased by more than 50%. 27. Financial Impact on LBP. The CLF Program provided LBP with more loanable funds to finance projects consistent with its social mandate of countryside development. Borrowings from IBRD as of December 31, 1992 and December 31, 1993 amounted to P1,860 million and P3,340 million, respectively which represented 3.75% and 3.73% of LBP's total resources. As to loan portfolio, outstanding CLF loan balances as of December 31, 1992 and December 31, 1993 amounting to P1,648 million and P3,168 million represented 8.8% and 10% of LBP's total loan portfolio, respectively. 28. Financial Impact on PFIs. The financial impact of CLF on the profitability of 11 PFIs, most of which were leading availers, was assessed from 1992 to 1993. The samples included 6 RBs, 2 Commercial Banks (KBs), 2 Thrift Banks and 1 Non Bank Financial Institution (NBFI). In general, all 11 PFIs benefitted from the program but the incremental effect on the net income was greater for smaller sized PFIs. The percentage of CLF income vis-a-vis net income is less than 1% for KBs, 2t to 8% for thrift banks, about 3% for NBFI and 2% to 65% for RBs. Likewise, contribution of CLF loans to total loan portfolio was higher for smaller sized PFIs such as RBs (3% to 14*), NBFI (more than 10%) thrift banks (2% to 5%) than KBs (about l*). 29. Cooperative Sub-Component. Under the Cooperative Sub- component/Experimental Pilot Plan, US$1.0 million equivalent would be channeled - 18 - through selected cooperatives as financial intermediaries to support the long term investment of their members. This sub-component, however, was not implemented in view of the following: (a) small farmers could hardly appreciate variable pricing vis-a-vis fixed pricing; (b)The interest rates offered by CLF were higher than the fixed rate (e.g. 12% p.a. + 2* supervision fee) directly offered by LBP to farmer cooperatives. B. Policy and Institutional Strengthening Component 30. Policy Actions. Further liberalization of banking policies in the rural areas as outlined under the project were carried out satisfactorily by the central bank. These include the following policy issues: (i)the liberalization of bank branching policies under BSP Circular No. 1390 dated May 19, 1993 virtually eliminated the bank categorization by service area by focussing on the unimpaired paid-in capital position of the institution as basis for bank branching; (ii) the merger of rural banks as a means of strengthening countryside financial institutions was being encouraged through the grant of incentives such as counterpart capital infusion and other financial assistance. However, there was a precondition for such incentives, i.e., the merger or consolidation should involve at least one undercapitalized bank. In the case of thrift banks, it was necessary that the main operations of the merging banks should be in the countryside; and (iii) on the limits on the maximum shareholdings of a single investor in a distressed RB, no ceiling was imposed on the amount that may be infused in such a bank. 31. Rural Bank Strengthening Program. The countryside Financial Institution Enhancement Program (CFIEP) was formulated to help improve credit delivery in the rural sector through a capital build-up program for banks in the countryside. Under the Program, RBs were granted incentives by the three implementing institutions, BSP, LBP and PDIC under three modules: (i) under Module I, BSP provided an effective 50% discount on eligible debts redeemed. The Two-For-One Module of the CFI Enhance Program attracted a total of 144 complete applications of which 86% or 124 was approved by BSP resulting in debt reduction in the rural banking sector of at least P237 million plus cash collection by BSP in accrued interest of P31 million. RB debt redemption was expected to slightly increase with some of those with recently approved and pending application s(20 of them) likely to take advantage of the automatic 90-day extension from receipt of BSP approval to apply for additional incentive to fully redeem their eligible debts with BSP; (ii) under Module II, LBP provided an equity investment matching the amount infused under the Program. This module was quiet popular, particularly among the more successful RBs. This provided incentives to RBs to increase capital including those which have no eligible past due loans with the BSP. LBP approved 141 applications under the program involving P214 million in fresh private capital. Assuming approval of the 29 pending applications said amount is expected to exceed P300 million as LBP's P300 million appropriation for the program has been almost fully allocated. RBs which availed of Module I but did not apply under Module II were either not comfortable with having an LBP representative in their Board of Directors and/or not in need of additional loanable funds; and (iii) Module III provided through PDIC a loan facility for merger or consolidation of RBs. Out of the ten (10) applications received under the Mergers and Consolidation Module, only one, the Davao merger (Network Rural Bank of Southern Philippines or Network Bank) involving 6 RBs secured all the necessary approval s from BSP, LBP, PDIC and SEC. Said merger fully retired their collective arrearages with BSP amounting to P16 million. LBP equally - 19 - matched the irdeemed amount through investment in preferred shares. On top of this, the merged bank infused an additional P3 million. Of those with pending merger applications, only three (3) consisting of seven (7) RBs ere deemed likely to materialize, entailing an aggregate financial assistance of approximately P50 million, excluding that for Network Bank. PDIC felt that rural bankers are not inclined to diluting their ownership as evidenced by the low turnout of applicants for Module II and the very slow compliance with application requirements. PDIC reported that they have yet to agree with BSP on the terms, particularly the interest rate, of the relending fund in order to effect the initial release of P114 million out of the Special Fund for the Mindanao Network Bank. 32. The program gained general acceptance among rural bankers. However, based on the PDIC report, a substantial number opted to pass off the incentives under CFIEP as they were looking forward to the debt-to-equity conversion provision under the Rural Banking Act of 1992 (RA No. 7353) as a "cheaper alternative" to increasing capital. The Rural Banking Act of 1992 provided RBs a 5-year tax exemption, an expanded coverage of allied undertaking, and, to those qualified, the authority to offer demand deposit and to accept local government deposits. Said law also provided for the conversion of RB past due loans with BSP into equity of a GFI to be matched by private capital through staggered infusion over a 15-year period, beginning on the fourth year. 33. Quedan and Rural Credit Guarantee Corporation (OUEDANCOR) formerly Quedan Guarantee Fund Board (QGFB). Two of the five basic elements constituted the QGFB strengthening program were fully implemented. These are: (i) modification of its legal status to that of a stock corporation with the ability to mobilize private equity for the expansion of its operations and to provide credit guarantee facilities for a wider range of economic activities (including production inputs, farm equipment, post harvest facilities, working capital and inventory). This was fully completed with RA 7393, approved on April 13, 1992; and (ii) the implementation of a satellite warehouse pilot project and the expansion of its support to small farmers through additional use of National Food Authority (NFA) storage facilities and other leasing arrangements. This has been carried out through a satellite warehouse project which is being implemented under the program called Carp-Barangay Marketing Center. The other three elements of the program have not been implemented for various reasons. These are as follows: (i) Quedan support "for small farmers through additional use of NFA storage facilities" was covered by a new NFA program called Grains Inventory Financing Technique (GIFT) whereby NFA receives farmers' palay deposit, issues a warehouse receipt (quedan) to serve as collateral for a 6-month marketing loan with LBP; (ii) the reason for not increasing QUEDANCOR guarantee fees to fully cover, by 1994, its operating costs and expected losses is that QUEDANCOR would be out of the market if its charge more than the newly created guarantee programs (new NFA GIFT program and DAR-GFSME guarantee program for CARP Landlords); and (iii) the proposed Grains Trading Center was disapproved by the previous Department of Agriculture Secretary. The concept might be implemented through the Cooperative Trading Center (CTC) being spearheaded by the Federation of Free Farmers, Inc. QUEDANCOR is encouraging its client s(farmer coops and rice retailers) to link up with CTC. 34. Philippine Crop Insurance Corporation (PCIC). Three factor constituted the PCIC strengthening program, as outlined in the following paragraphs. - 20 - 35. Modification of its premium structure by adopting a variable rates by regions, reflecting empirically determined variable risks, and gradually increase in its premium level toward full cost recovery by farmers and the respective lending institutions and elimination of all subsidies by end of 1995. The premium restructuring was approved by the President of the Philippines on July 25, 1990 for implementation over five years starting 1991 until 1995. Under the five-year (1991-1995) phasing out program for government premium subsidy for rice and corn, the share of government in the premium is being gradually shifted to participating farmers until such share is completely phased out by end of 1995. This means that by 1996, there shall be no more government premium subsidy and that the entire premium in the range of 8.2%-16.5% of amount of cover for rice and 8.5%-22.1 for corn shall be shouldered by the farmers (and lending institutions in the case of borrowing farmers) . However, as early as 1992, there was already a strong clamor from concerned sectors for the rollback of the premium share of farmers to the 1990 level (i.e. prior to the implementation of the phasing-out program) or at the very least freezing said share of farmers at 1992 level to keep crop insurance premium affordable to them. Based on this, PCIC requested Malacanang for the freezing of the regional rates for rice and corn at 1992 level. Said request to freeze the regional rates at 1992 level was approved by the President of the Philippines effective until 1994 along with the directive to provide avenues for reducing the cost of insurance to affordable levels by small farmers with only a minimum amount of government premium subsidy. 36. The introduction of insurance options to cover both uncontrollable (typhoons, floods, and droughts) and controllable (pests and diseases) risks, the latter at higher premium levels. A proposal to repackage the existing multi-risk cover for rice and corn crops to a standard cover against natural calamities only and an extended cover against limited pests and diseases of epidemic proportion, was submitted to the office of the President in 1993. The idea was to give insuring farmers options to purchase only protection for risks that are not manageable and thus, provide them means for insurance cost reduction. Under the repackaged cover, the total premium rates for the standard cover (ranging from 4t-7t of amount of cover for rice and 6%-11% for corn) and the extended cover against pests and diseases (ranging from 0.5%-1t of amount of cover for rice and 0.56-2.25% for corn) are lower than the would-be phased-out rates when the premium freeze shall have expired. Nonetheless, some form of premium subsidy is still necessary to keep the crop insurance within the reach of target clientele. Conservative estimates put the amount at P50 million per annum. Said figure may be viewed as a trade-off between the cost to the government of providing crop insurance program to the economy in terms of increased productivity, particularly as regards staple crops (rice and corn) which are the main sectors serviced by the program. PCIC's crop insurance cover for plantation-type high value crops was envisioned to generate surplus reserve to cross-subsidize the small-farmers portfolio over the long term. This will obviate the need for indefinite subsidy under the program. In the meantime, however, PCIC reportedly needs additional capacity (higher capitalization) to write risks under the commercial portfolio. According to PCIC, the Department of Finance has given word that it is endorsing the proposed repackaged cover subject to resolution of certain issues revolving around the amount of government premium subsidy under the new scheme. 37. Maintain a prudent ratio of total risks to liquidity assets. PCIC would obtain from LBP P250 million in preferred shares and from the Government of the Philippines about P220 million of overdue contributions to crop insurance. The latter would be provided by the conversion of Special Revolving Trust Fund (SRTF) earnings into Governments equity investment. PCIC has an authorized - 21 - capital stock of P750 million divided into P500 million common stocks and P250 million preferred stocks. From a paid-up capital of P250 million in 1991, capitalization increased to P500 million in 1992 with the conversion of the SRTF into equity and further to P600 million in 1993 with the infusion of an additional P100 million in preferred shares by LBP. The increase in capitalization favorably brought down leverage from 7.8 in 1990 to 3.6 in 1993. C. Policy Studies and Training Component 38. This component includes two sub-components: the studies to be carried out by ACPC and the training program under the responsibility of LBP . 39. The Studies Sub-component. Out of the two planned studies only one was completed and the other one would be expanded and carried out during 1995. A study on the agricultural term lending was completed. The findings and policy implications of the study included the following: (i) rural term lending remained weak. Macroeconomic environment was not conducive enough to develop term lending in the Philippines. Recommended policy reforms included reduction of intermediation costs and enhancing the attractiveness of agricultural lending as an investment option for banks; (ii) specialized government banks and private development banks participated in term lending only to satisfy their social mandate, while RBs support it due to available seed fund facilities. Private commercial banks utilized more of their funds for short term credit and tied up funds from special financing programs for longer term projects; (iii) seed fund facilities could serve as "stimulus" in pushing the development of term lending in the country but should be treated only as a stop-gap measure which can temporarily address the immediate requirements of the sector; and a follow-up study on agricultural term lending market should be undertaken focussing on improving the estimation of supply and demand for term lending and on the profitability of medium and long term lending of banks vis-a-vis short term agricultural loans and other investment options. To the extent possible, a macro level analysis should be done to estimate the magnitude of medium and long term agricultural financing and its various patterns. The comprehensive study to generate formal basic data to determine the relative role that the informal financial sector is playing in terms of credit supply and resource mobilization in rural areas has not been carried out. ACPC stated that a proposal entitled "Policy Related Studies for the Rural Finance Sector" was submitted to LBP for possible funding of some portions of the study but no agreement was reached between LBP and ACPC on the matter. On the informal credit sector, a study on "The Efficiency of NGOs as Financial Intermediaries" was started with the construction and pre-testing of survey questionnaires. however, the conduct of the survey and writing of report has not yet been implemented. Recently, LBP indicated to ACPC that the funds for the Policy studies are now available. In this regard, a Memorandum of Agreement between LBP and ACPC is currently being finalized. Also, the terms of reference for the Policy Studies is being revised to account for what has not been earlier accomplished and for more recent concerns in rural finance. The revised Policy Studies will consist of the following components: (i) profitability analysis of the medium and long term agricultural loans; (ii) extent and efficiency of informal credit market system and linkages; (iii) extent of agricultural lending activities of NGOs and cooperatives; and (iv) evaluation of LBP's agrarian lending. - 22 - The Training Sub-component 40. This sub-component was satisfactorily implemented by LBP. Various training in the form of lectures and/or seminars were conducted to address skill gaps of project-related staff in LBP and the PFIs. Annex M lists the environmental seminars/workshops participated by LBP-CLF officers and staff as well as representatives of the PFIs. These seminars provided the necessary technical know-how on environmental management and environmental impact assessment of sub-projects. Aside from briefing the participants on the CLF program, guidelines, policies and procedures, the PFI account officers were likewise clarified on the preparation of cashflow, financial projections and ERR and FRR computations. In addition to formal lectures, the CLF Unit, as part of its intensive market efforts, conducted periodic calls to PFIs wherein major policies and requirements were explained during one-on-one discussions with PFI account officers. The CLF Unit also actively attended various conventions/ confederation meetings of RBs and promoted the active utilization of the program. 41. For the training of RBs, a two-year Management Development Program has been developed by the LBP Countryside Development Foundation Inc. The training program aimed to systematize and strengthen the operational processes of RBs to enable them to function as viable conduits of countryside credit. It also aimed to strengthen the RBs' overall internal capability and improve their solvency, profitability and liquidity positions through establishment of required and appropriate systems in the areas of credit process, internal control and operations management. The monitoring and evaluation component gauged the effectiveness of the technology transfer through monitoring of the operation of the different systems and procedures. This two-year program, which started in July 1993, aimed to enhance the internal capability of 216 RBs. As of June 30, 1994, 100 LBP assisted RBs were trained involving 398 participants from various regions nationwide. 42. LBP Assisted Cooperatives (BACs) Training Program was conducted to provide capability building intervention schemes and help strengthen cooperatives nationwide with which LBP has various loan exposures. In 1992, five (5) training modules were developed and packaged, namely: Basic Coop Bookkeeping Course, Basic Coop Operations Management Course, Advanced Coop Bookkeeping Course, Advanced Coop Operations Management Course and Orientation Course for Board of Directors. To carry out the needed training programs on all the target BACs, LPB-Cooperative Development Assistance Group (CDAG) recruited, established and trained 103 local trainers teams nationwide in coordination with LBP Field Offices and NGOs. The teams provided training to 3,886 BACs in 1992. BAC training was not confined to the formal classroom type. Officers and employees of selected primaries and federations were exposed, through exchange programs and study tours, to actual operations of successful cooperatives to acquire hands-on knowledge and skills in projects that were deemed suitable in their respective areas. LBP-CDAG facilitated and implemented in 1992, coop exchange programs benefitting 155 primaries and 15 federations. In 1993, 3,259 BACs were trained in various modules earlier mentioned. Ten (10) coop congresses were facilitated involving 257 BACs and eight (8) exchange programs were conducted involving 93 BACs. ANALYSIS OF THE PROJECT 43. Bank's Performance and Lessons Learned. The Bank's overall performance was very satisfactory. Timely and adequate supervision missions were conducted to ensure that program objectives would be achieved. Queries and 23 - clarification on various aspects of program implementation were promptly acted upon by Bank's program manager. Moreover, response/approval of loans beyond LBP's free limit were made within a very reasonable time frame. 44. There were, however, minor problems encountered concerning loan drawdowns. In some cases wherein there were heavy releases on CLF loan,s internal funds temporarily financed CLF loan releases as reimbursements were made in pesos which was subject to documentary stamp tax payment, an expense which could be avoided should the Bank have a shorter processing time on applications for replenishment. Also, during recovery of the seed fund, LBP was not fully reimbursed based on the expected rate of recovery of submitted expenditures. LBP would have highly appreciated to be informed on the reasons for any reduction in the requested reimbursement of fund. Borrower's Own Performance and Lessons Learned. 45. Aside from the attractive features of the program, the full disbursement of the Fund three years ahead of the original schedule could also be attributed to the intensive marketing efforts of the CLF Unit. Documentary requirements, evaluation and approval procedures were streamlined so as not to replicate the credit evaluation conducted by the PFIs as the credit risks were already addressed by LBP's strict accreditation process. 46. Despite the successful implementation of CLFI, there are some areas of improvement for better implementation of a similar program identified from the experiences from CLF I, namely: a. There were significant policy changes announced midstream of the project implementation which slowed down fund disbursement. These included policy changes such as (i) limitation to working capital financing; (ii) suspension of relending to large asset-size sub-borrowers; and (iii) revision of pricing formula. These policy changes adversely affected the marketing efforts and loan packages of the PFIs as some projects suddenly became ineligible for funding despite the no pre-determined market allocation policy of the Program. These should not have happened if certain parameters had already been set at the program start to address CLF's financing limitations. Also, specific safeguards should be incorporated in the pricing formula (e.g. floor price) to ensure the viability of the Program. b. The CLF Unit operated on a very lean staffing. As the promotion of the active utilization of the CLF lines, processing of loan applications and disbursements were prioritized, some operational requirements were set aside. Manpower limitations constrained the coverage of more project end-use verifications/inspections. Even the training of CLF Unit staff were very limited as the continuous operations of the Program had to be ensured. c. The Management Information System (MIS) of the CLF needs to be strengthened and improved. Experience showed that most of the data/information necessary for the preparation of CLF reports to IBRD were sourced from various departments within LBP. -24 - Likewise, data requirements of PFIs and other government agencies were coursed through the other departments concerned since the data was not yet readily available within the CLF Unit. Also, CLF data/information was not updated since reports were done on a weekly/monthly basis. Thus, an improved/upgraded MIS is necessary to provide accurate system of sourcing information in various forms as a tool of management in forming critical decisions. d. LBP and the PFIs are generally committed to comply with environmental requirements. however, there was an apparent lack of technical expertise both from LBP and the PFIs on this field. Thus, even simple matters regarding environmental requirements had to be referred to the Environmental Management Bureau of the Department of Environment and Natural Resources. Such actions delayed project implementation and fund disbursement as well. A training program should be conducted for LBP unit personnel who shall implement certain technical aspects such as environmental screening of subprojects applying for CLF financing. 47. Effectiveness of Relationship Between IBRD and LBP. The working relationship between IBRD and LBP was very satisfactory. The smooth relationship with the Bank definitely contributed to the successful implementation of the project. - 25 - Part III. STATISTICAL INFORMATION 1. Related Bank Loans PROJECT PURPOSE ORIGINAL YEAR OF STATUS/COMMENTS AMOUNT APPROVAL (USSS M) FY RuraL Credit I Medium- and long-term credit to improve farm machinery and 5.0 1966 Completed Loan was (Ln. 432-PH) to develop smaLl private irrigation systems. fully disbursed. PCR data not available. Rural Credit II Mediun- and long-term loans for modernization of farm 12.5 1969 Completed Loan was (Ln. 607-PH) machinery and irrigation equipment, including fisheries fully disbursed. PCR equipment and small boats. data not available. Rice Processing Development and modernization of the rice and corn 14.3 1971 Loan was fully (Ln. 720-PH) processing industry through Long-term credit. disbursed. PCR issued 10/19/82. Livestock Livestock development program through agricuLtural credit 7.5 1972 Loan was fulLy (Ln. 823-PH) administered by DBP. disbursed. PCR issued 09/29/77. Fisheries Credit Improve national fish production through improvement of 11.6 1973 Loan was fully (Ln. 891-PH) capture and culture fisheries. disbursed. PCR issued 07/22/80. Industrial Finance direct imports for medium and relatively large 50.0 1974 Loan was fully Investment and industrial projects in manufacturing, agro-industrial. disbursed. PCR SmaLIhoLder Tree- issued 03/27/84. Farmers Project (Ln. 998-PH) Rural Credit Ill Continuation and expansion of Ln. 607-PH, including 22.0 1974 Loan was fully (Ln. 1010-PH) development of fisheries, livestock, cottage and agro- disbursed. PCR industries. issued 01/23/78. Livestock It Increase domestic production of livestock products. 20.5 1976 Loan was fully (Ln. 1225-PH) disbursed. PCR issued 02/17/83. Grain Processing II To assist in modernizing and expanding Philippine grain 11.5 1976 Loan was fully (Ln. 1269-PH) processing industry through providing long-term credit. disbursed. PCR 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 Medium- and Long-term credit through participating banks 36.5 1977 US$3,500 was (Ln. 1399-PH) to finance farmers and local entrepreneurs for farm cancelled. PCR mechanization, livestock, fisheries, and cottage and agro- issued 12/19/85. industries. SmaiLholder Tree Continuation of LN. 998-PH with additional components in 8.0 1978 USS3.8 M was Farming large-scale plantation, forestry research and planning. cancelled. PCR (Ln. 1506-PH) issued 04/28/87. Small Farmer To increase agricultural productivity and expand rural 16.5 1979 US$0.78 M was Development employment opportunities among small-scale farmers. canceLled. PCR (Ln. 1646-PH) issued ?????? Third Livestock/ Same as in Loans 891-PH, 1270-PH and increase in meat 45.0 1981 US$21.48 M was Fisheries production. canceLLed. PCR (Ln. 1894-PH) issued 08/26/88. Agricultural Credit To assist in enhancing the ruraL financial sector and 100.0 1985 Loan fully disbursed. (Ln. 2570-PH) provide funds for term credit to agriculture through the PCR issued. banking system. - 26 - 2. Proiect Timetable ITEM DATE PLANNED DATE ACTUAL Identification 11/89 11/06/89 Preparation 02/90 02/18/90 Preappraisal 09/90 10/22/90 Appraisal 01/91 02/24/91 Loan Negotiations 05/91 02/24/92 Board Approval 07/91 06/21/91 Loan Signature 07/11/91 07/11/91 Loan Effectiveness 10/01/91 11/07/91 Loan Closing 03/31/97 06/08/94 Project Completion 09/30/96 06/08/941 1/ Loan was fully disbursed with the last disbursement made on 8th June 1994. 3. Project Cost & Financing (US$ million) Actual Ea.uivalent 1/ Variance SAR Est to Mar 94 no RecyclinQ C from A A B C Project Cost Short Term Credit 66.7 31.5 30.4 -54% Medium & Long Term Credit 133.3 238.0 229.6 72% Total Credit 200.0 269.5 260.0 30% Training & Studies 3.5 3.5 3.5 0% TOTAL 203.5 273.0 263.5 29% Financing IBRD 150.0 150.0 150.0 0% Recycled Funds (net) 5.5 Sub-Borrowers 30.0 81.5 78.6 162% PFIs 20.0 32.5 31.4 57% LBP 3.4 3.4 3.4 0% ACPC 0.1 0.1 0.1 0% TOTAL 203.5 273.0 263.5 29% I/ As Project cost at appraisal was estimated on 'first use of funds' only, project investment over the period to March 31, 1994 is scaled down proportionally so as to leave out loans supported by net recycled funds. 4. Disbursements (US$ million) A. Disbursements by Category Loan Actual Agreement Estimate Part A(M) - Short-term loans 50.0 13.7 Part A(2) - medium- and 100.0 136.3 long-term loans TOTAL 150.0 150.0 B. Estimated and Actual Disbursements over Time Cumulative Z of Cumulative standard Bank Fiscal Cumulative Disbursement as Disburs Bent Year/Semester Disbursement Disbursement % of the loan Profile-' SAR Est Actual SAR Actual SAR Actual Est Est FT92 First 16.0 10.0 16.0 10.0 10.7 6.7 0 Second 20.0 18.3 36.0 28.3 24.0 18.9 6 FY93 First 13.0 45.2 49.0 73.5 32.7 49.0 14 Second 14.0 39.0 63.0 112.5 42.0 75.0 22 FM9 First 14.0 17.4 77.0 129.9 51.3 86.6 34 Second 13.0 20.1 90.0 150.0 60.0 100.0 50 Fms First 13.0 103.0 68.7 62 Second 14.0 117.0 78.0 78 FY96 First 9.0 126.0 84.0 82 Second 9.0 135.0 90.0 94 F197 First 7.5 142.5 95.0 100 Second 7.5 150.0 100.0 3/ At appraisal, loan effectiveness and closing dates assumed to be October 1, 1991 and March 31, 1997; actual date of loan effectiveness was November 7, 1991 and closing For all regions agricultural credit projects as of April 1990. - 28 - 5. Project Implementation Indicators Appraisal Estimate PCR Estimate to June during Drawdown 1994 Period 1. Outstanding Loans to PFIs at P4.1 billion P3.35 billion end of Disbursement Period Equiv US$115 million Equiv US$124 million 2. Cumulative Provision for Bad R10.25 million P0.01 million Debts at end of Disbursement Period 3. % CLF held as cash or other 15% 15% liquid investments at end of (US$20.3 million) (US$20.4 million)1/ Disbursement Period 4. Number of sub-loans made (to end March 1994) - Total Not estimated 687 - Short-term Not estimated 111 - Medium-term Not estimated 536 - Long-term Not estimated 40 5. Annual Impact of CLF on LBP P40-P50 million P69 million in 199.3 profitability 6. FRRs to Sub Borrowers?1 - Proportion less than 20% FRR Not estimated 19% - Proportion 20-30% FRR Not estimated 43% - Proportion 30-40% FRR Not estimated 14% - Proportion over 40% FRR Not estimated 24% - Average Not estimated 30% 7. Average ERRs to Sub Borrowers2l Not estimated 35% 8. No. of jobs created directly-/ 25,000 9,000 1/ Net current assets i.e. total cash, less net current liabilities. 2/ Ex ante data taken from analysis of a sample of subloans including 100% of subloans over P50 million, 33% of subloans P5-P50 million and 10% of subloans below R5 million. - 29 - 6. CLF: Interest Rates, Inflation and OnlendinQ 1992 1992 1992 1992 1993 1993 1993 1993 j.194 Overall G1 Q2 03 04 Q1 a2 Q3 04 Qi Interest Rate 17.6% 15.4% 13.7% 13.8% 12.9% 10.7% 11.0% 11.2X 15.5% 13.5% (Pass on to PFIs a/) T-Bill Rate 18.6% 15.1% 15.6% 14.8% 13.3X 10.9X 10.9% 14.7% 15.1% 14.3% Variance (CLF:T-Bill) -5.5% 2.2% -12.2% -6.5% -3.2% -1.6% 0.9% -23.8% 2.8% -5.5% QuarterLy Inflation 7.9% 12.0X 9.1% 3.9% 5.4% 9.2% 1.3% 7.9% 9.3% 7.3% Real Interest Rate 9.0% 3.0% 4.2% 9.5% 7.1% 1.4% 9.6% 3.1% 5.7% 5.8% (Pass on to PFIs a/) Volume (million peso) 477 44 603 838 404 575 340 543 219 4,043 Number of Loans 216 31 90 65 51 64 49 81 40 687 Average Subsidiary Loan 2.2 1.4 6.7 12.9 7.9 9.0 6.9 6.7 5.5 5.9 Size b/ (million peso) a/ Rate to PFI. Rate to sub-borrower averages 4% higher b/ Amount lent by LBP to PFI. Amount lent by PFI to sub-borrower averages 15% higher - 30 - 7. CLF Balance Sheets & Profit & Loss Accounts (million pesos) CLF Balance Sheets Dec '92 Dec '93 Jun '94 CLF Rediscounted Loans Short-Term 55.86 87.25 16.89 Medium-Term 1,130.86 2,433.76 2,670.21 Long-Term 457.13 646.95 659.07 Overdue 4.84 1.08 0.72 Total Portfolio 1.648.6 3169.03 3.346.89 Cash 235.14 485.19 1,072.14 Other Current Assets 53.01 77.54 67.39 Current Assets 288.14 562.73 1,139.53 - less current Liabilities (119.37) (404.89) (586.90) Net Current Assets 168.78 157.84 552.63 Total Assets less Current Liabilities 1,817.47 3,326.87 3,899.52 Due to World Bank 1,860.77 3,343.78 3,875.01 Fund Equity/Deficit -43.30 -16.91 24.51 Equity Adjusted for Imputed Income 1.14 77.35 166.41 CLF Profit & Loss Accounts Year to Year to 6 Mths to Dec '92 Dec '93 Jun '94 Loan Interest 60.90 299.72 219.72 Other Interest 0.90 2.28 -0.01 MiscelLaneous Income 1.40 4.02 1.27 Total Income 63.21 306.02 220.98 Interest to WB 62.13 214.72 118.09 Commitment Fee 1/ 11.22 3.06 0.22 FX Risk Cover 25.53 34.24 42.66 Guarantee Fee 8.20 27.35 17.70 Misc Expenses 0.06 0.26 0.88 Provisions for Losses 0.01 Total Costs 107.15 279.62 179.56 Net Income -43.94 26.40 41.42 Imputed Income 2/ 44.44 49.81 47.64 Net Income After Imputation 0.50 76.21 89.06 Estimated cost of CLF Unit 3/ 5.32 6.94 4.00 IncrementaL Impact on LBP Profit (4.82) 69.27 85.06 1/ Includes committment fees for Sept - Dec 1991 of P 3.76 MilLion. 2/ Average daiLy cash balance multiplied by short term rate on Government Securities (Less 20% Withholding Tax). 3/ Based on CLF utilizing equivalent of 20 full time staff and all LBP's operating costs being pro rata to staff members. - 31 - 8. Status of Covenants Section Covenant Status of Compliance LA 2.02(b) The borrower shall for the purpose In full compliance - of the project open and maintain in accourt opened December 18, dollars a special account on terms 1991. and conditions satisfactory to the Bank. LA 3.01(a) The borrower shall carry out the In full compliance. project in conformity with appropriate practices. LA 3.02 The borrower shall exclude itself In full compliance. from retailing the CLF and relend the proceeds of the loan to PFIs. LA 4.01 Maintenance of accounts and In full compliance. furnishing them to the Bank. LA 4.04 The Borrower shall maintain the Generally complied with. following ratios: (i) risk assets toIn 1993 liquid assets to net equity of not more than 7 to 1; short term deposits was and (ii) liquid assets to short termreduced to 110% as a result deposits of not less than 125%. of huge increase in GOP short term deposit. LA 4.05 ARF arrears to the Borrowers shall Complied with. not exceed 20% of the Borrowers equity or Peso 1 billion whichever is lower. LA Sch.5 The Borrower shall finance sub-loansGenerally complied with, (1)(a) on the basis of arrangements more resources should have satisfactory to the Bank. been provided for monitoring of individual sub-loans. LA Sch.5 The Borrower shall exercise its Generally complied with (1)(b) rights in relation to each PFI so although some investments that they follow the Policy Manual, funded under the project do conduct their affairs in accordance not appear to have been with sound business practices and analyzed fully along the maintain adequate record. lines of the Policy Manual. LA Sch.5(2) Eligibility of PFIs, maintenance andln full compliance. furnishing to the Bank of records with evidence of eligibility of each PFI. LA Sch.5(3) Principal terms and conditions of In full compliance. subsidiary and sub-loans. - 32 - LA Sch.5(4) Procurement of goods and works Difficult to ascertain required for the project shall be whether fully complied with carried out in accordance with Sch particularly with 5(4). investment by sub- borrowers, but appears acceptable overall. GA 2.01 The Guarantor declares his Complied with. commitment to the objective of the project. FA 3.01(a) The Guarantor shall cause PCIC to Complied with upto 1993. carry out its development program In 1993 a freeze on further satisfactory to the Bank. premium adjustment was imposed on PCIC by the guarantor. Also the Guarantor failed to transfer to PCIC its insurance premium share. GA 3.01(b) The Guarantor shall cause QGFB to Partially complied with. carry out its development program QGFB has become a satisfactory to the Bank. corporation with legal entity, its scope of activities has been expanded, and partial privatization was allowed but not materialized, equity increase and business expansion has not taken place. GA 3.01(c) The Guarantor shall cause ACPC to Partially complied with. carry out the two studies as agreed Out of the two studies with the Bank. agreed with the Bank only one was completed. GA 3.01(d) The Guarantor shall cause the Complied with. Central Bank to implement satisfactory criteria and regulations concerning: (i) the opening of new branches; (ii) the establishment of new banks servicing the rural areas; (iii) mergers of banks in rural areas; and (iv) single ownership restrictions. GA 3.02 The Guarantor shall take all Partially complied with. necessary actions to ensure the The process of issuing the financial viability of the Borrower agrarian reform bonds by in a manner satisfactory to the GOP instead of the Borrower Bank. has been started but not yet completed. - 3 3 - GA 3.03 The Guarantor shall assume the Complied with. foreign exchange risk in respect of the Loan and charge the Borrower a fee therefore based on arrangements acceptable to the Bank. - 34 - 9. Use of Bank Resources A. Staff Inputs (Staffweeks) Stage of Prolect Cycle Planned Total Actual Through Appraisal 181.0 175.2 Appraisal through Board approval 61.0 15.8 Supervision 33.0 47.4 Completion 8.0 4.0 Total Staff Inputs 283.0 242.4 Total FY89 FY90 FY91 FY92 FY93 FY94 Ident./preparation 175.2 35.3 81.6 58.3 Appraisal 9.7 9.7 Negotiations/Board 6.1 6.1 Supervision 47.4 1.1 22.6 17.5 6.2 Completion 4.0 4.0 Total 242.4 35.3 81.6 75.2 22.6 17.5 10.2 B. Mission Data Staff Month/ Number of Days in Performance Type of Year Persons Field Specialty Rating Problem Identification 11/89 5 85 B,C,A,D,E Preparation 2/90 4 80 B,C,A,E,D Pre-appraisal 06/90 4 80 B,G,E,C Pre-appraisal 10/90 5 100 B,E,A,D,G Appraisal 02/91 3 30 B,E,G Supervision 9/12/91 1 15 B,F 1 n.a. 2/24/92 1 21 B,F 1 n.a. 9/4/92 1 10 B 1 n.a. 1/6/93 1 6 B 1 n.a. 6/15/93 1 6 B 1 n.a. 2/24/92 1 21 B 9/4/92 1 10 B 1/6/93 1 6 B 6/15/93 1 6 B Specialty: A: Agricultural Economist B: Financial Analyst C: Agricultural Credit Specialist D: Financial Management Specialist E: Economist F: Environmental Specialist G: Legal Counsel IBRD 27553 115- 120-~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 212- 1 28- CLASSIFICATION OF PROVINCES BY ADMINISTRATIVE REGIONS I ILOCOS VI WESTERN VISAYAS B.- PHILIPPINES 20- Il=cos Norte Akon 20- loos Sur Capia Lo Union Antique BATANES Pangasinan lloilo b3 NATIONAL CAPITAL CORDILLERA ADMINISTRATIVE Negros Occidental REGION (CAR) Guimnors PROVINCE BOUNDARIES Abra VIi CENTRAL VISAYAS Kalinga-Apoyao Cebu REGION BOUNDARIES Mountain Province Negros Oriental Hfugeo Bohol Bengae SiqBoho) INTERNATIONAL BOUNDARIES 11 CAGAYANVALLEY Vill EASTERNVISAYAS Boin- Northern Samar oNOTE The nUmber of Rogion- ond Provines shown on this m-p Cegeyon Weskrn Somor f-, tore [e rhon the odool tminI How-v-r damn on those boundoty Isabela Eastern Samar CAR chonges/odditont woo un--voloble ot the time of prinig. Nueno Vizcay Leyte Quirino Southern Leyte 11 III CENTRAL LUZON BiiranI Noena Ecijo IX WESTERN MINDANAO T[rIac Zerboanga del Node Zambalare- Zamboanga del Sur Porpango B1sin(J1 Eulocrn X NORTHERN MINDANAO KILOMETERS 0 100 200 300 Bataan Sorigao del Nodte __ _ _ _ __6__ __ _ _ _ __ _ _ _ _ - NATIONAL CAPITAL Carigo MIE 0 50 / iS 2 REGION (NCR) CI-gU;,, MILES D 50 100 150 200 IV SOUTHERN TAGALOG Aguson del Node Aurr Misointrs Oriental Qu-oun M-isai Occidental III L CUZ N Rioai Bokidcno-n Cooite Ag-son del Sur Xi SOUTHERN MINDANAO Laguna ~~~~~Surigao del Sur Maoagaun D-aao Orientoal C Marindoque 1I Da-aa del Norte M;~c- Ooic..t.I Danao del Sur V M:ndoro Occidental Sovot CotabatoL Romboon Saa ngani /b