36693 Rural Growth and Development Revisited POLICY ISSUES by Ching dela Peña 1 Rural Growth and Development Revisited Policy Issues TABLE OF CONTENTS Page List of Acronyms Objectives and Scope 1 Review of Policies and Regulations 2 Protection 2 Regulations 8 Support Services 11 Program Planning and Implementation Issues 20 Summary 21 Recommended Agenda and Action Plan 22 Adopting sector neutral incentive and protection systems 22 Reducing competition-dampening government participation in or regulation of the market 23 Institutionalizing firm-neutral, transparent, and streamlined regulatory systems 24 Enhancing access to international markets 25 Generating and disseminating critical knowledge and information 26 Improving access to land and credit 27 Improving LGUs' capacity to undertake development programs 28 Facilitating private joint undertaking, contracting and economic organization 28 Action Plan Matrix 28 References 2 Rural Growth and Development Revisited Policy Issues LIST OF ACRONYMS ADB Asian Development Bank AFIS Agriculture and Fisheries Information Service AFMA Agriculture and Fisheries Modernization Act AFMIS Agriculture and Fisheries Market Information System AMAS Agriculture Marketing Assistance Service AO Administrative Order ASEAN Association of South East Asian Nations ATI Agriculture Training Institute BAI Bureau of Animal Industry BAR Bureau of Agriculture Research BFAD Bureau of Food and Drugs BFAR Bureau of Fisheries and Aquatic Resources BPI Bureau of Plant Industry BPS Bureau of Product Standards BSP Bangko Sentral ng Pilipinas CAC CODEX Alimentarius Comission CARP Comprehensive Agrarian Reform Program CDA Cooperative Development Authority DA Department of Agriculture DBM Department of Budget Management DENR Department of Environment and Natural Resources DFIMDP Diversified Farm Income and Market Development Project DILG Department of Interior and Local Government DOH Department of Health DSL Direct Satellite Link DSWD Department of Social Welfare and Development DTI Department of Trade and Industry DUS Distinctness, Uniformity and Stability FAPS Foreign Assisted Projects FDC Food Development Center FIDA Fiber Industry Development Administration GM Genetically Modified GMA Ginintuang Masaganang Ani HVCC High Value Commercial Crops ICT Information and Communications Technology IFMA Industrial Forest Management Agreement IPR Intellectual Property Rights IRA Internal Revenue Allotment IRR Implementing Rules and Regulations LBP Land Bank of the Philippines LGC Local Government Code LGU Local Government Unit MAV Minimum Access Volume 3 Rural Growth and Development Revisited Policy Issues MO Memorandum Order MOU Memorandum of Understanding MTPDP Medium Term Philippine Development Plan NAFC National Agriculture and Fisheries Council NCC National Credit Council NFA National Food Authority NG National Government NIA National Irrigation Administration NIN National Information Network NMIC National Meat Inspection Commission OIE World Organization for Animal Health OP Office of the President PCA Philippine Coconut Authority PVP Plant Variety Protection QR Quantitative Restrictions RA Republic Act R&D Research and Development SAFDZ Strategic Agricultural and Fisheries Development Zone SMS Short Message Service SO Special Order SONA State of the Nation Address SPS Sanitary and Phytosanitary SPSIS Sanitary and Phytosanitary Information System SRA Sugar Regulatory Administration WB World Bank WTO World Trade Organization 4 Rural Growth and Development Revisited Policy Issues MAIN REPORT Objectives and Scope 1. The goal of this exercise is to recommend a roadmap for institutionalizing strategies that support the following objectives: - growth in agriculture/agribusiness productivity; - greater diversification in the sectors; - increased agriculture competitiveness, more exports, more efficient import substitution; and - more employment 2. This particular paper will focus on the agriculture-specific policy and regulatory elements that have bearing on achieving the above goals. 3. It must be stated at the outset that the program to address the growth objectives should consider the following constraints for said program to be effective and implementable: - Government's fiscal position is severely constrained. - Agriculture players are numerous, scattered and poorly or rarely organized ­ most are small, producing one product, and selling in the local market; a few are big agribusiness concerns, vertically integrated, and diversified, product- and market-wise. - Rural communities are diverse with respect to resource endowments, distance to markets, and other factors that affect agricultural productivity and competitiveness. - The agriculture bureaucracy is big and currently fragmented, organized largely along commodity lines, and some restructuring is imperative and hopefully forthcoming - The Local Government Units (LGUs), given the responsibility for agriculture extension and support services by the Local Government Code (LGC) of 1991, are mostly ill-equipped -- institutionally, financially and technically -- to seriously provide these services. 4. With the above constraints and following expressed general policies, the strategic thrusts of national government (NG) intervention in the sector should be as follows: - Creating a hospitable environment for the private sector and rural communities to pursue market-driven increases in productivity and diversification, including: o Promoting policy stability and consistency o Adopting sector-neutral incentive and protection systems o Institutionalizing firm-neutral and streamlined regulatory systems 5 Rural Growth and Development Revisited Policy Issues o Ensuring well-defined and secure property rights (including Intellectual Property Rights) o Generating, and enhancing access to, critical knowledge and information o Facilitating private joint undertaking, contracting, and economic organization - Capacitating LGUs to lead in planning and implementing catalytic development projects that support productivity growth. o Institutionalizing the technical support roles of the NAs o Enhancing LGU's access to resources and knowledge o Promoting networking, coordination, and convergence of initiatives among LGUs and National Agencies (NAs) 6. The following sections will review the state of important protection policies, trade regulations and mandated agriculture services implemented by the DA and its attached agencies with a view to identifying areas that conflict with or do not support the above strategic thrusts. Review of Policies and Regulations Protection 7. Substantial trade policy reforms, to correct price distortions and increase the efficiency and competitiveness of Philippine industries, had been undertaken since 1985. Average tariff rates have been significantly and progressively reduced; almost all import quantitative restrictions (QRs) on agriculture have been abolished or converted to tariffs; export taxes were eliminated; and trading monopolies and monopsonies were dismantled. But some sectors continue to be subject to huge price distortions due to remaining government interventions and high levels of trade protection. 8. Rice. Rice is a sector where huge price distortions persist, as shown in the following table, because of pervasive government participation in the market. Given the importance of rice in the Philippines as a major cereal and major crop of small farmers, the National Food Authority (NFA) was created as a government corporation with the mandate to stabilize rice supplies and maintain prices at levels profitable to producers and affordable to consumers. The NFA directly participates in the market by maintaining a network of warehouses, controlling imports under a QR regime, trading using a "buy high ­ sell low" approach, and maintaining rice buffer and emergency reserves. 6 Rural Growth and Development Revisited Policy Issues RICE PRICES P/MT Calendar Year 04 03 02 Domestic Wholesale RMR 17,280.00 16,510.00 16,530.00 WMR 19,110.00 18,300.00 18,210.00 World* 25% brokens 13,207.01 9,929.85 9,136.95 15% brokens 13,733.50 10,418.21 9,498.30 Dom/World RMR/25% broken 1.31 1.66 1.81 WMR/15% broken 1.39 1.76 1.92 * Thailand FOB Sources of basic data:BAS and NFA 9. Rice was exempted from the commitment to tariffy all agriculture import QRs under the WTO accord of 1995. The exemption, granted for 10 years, expired as of end of 2004. As of this date, the country is still negotiating with WTO partners on an extension of said exemption. 10. The NFA buys palay at a support price during the peak harvest seasons to influence the level of farmgate prices. But its palay buying participation has been low and ranged from 1.3 % to 2.2 % of total palay production in the last 3 years. The NFA also releases rice into the market through selected retail outlets, which sell these at NFA-specified prices, i.e. P1.00 per kilo higher than the NFA release price, or substantially lower than prevailing in the market. Imports boost NFA participation in the rice consumer market to a share ranging from 11% to 12%. The following table shows the NFA's support and release prices relative to market. NFA Support and Release Prices (P/kg) Calendar Year 04 03 02 Palay Farmgate 9.7 8.84 8.82 NFA Support Price 9 - 10 9 9 Rice Wholesale 19.11 18.3 18.21 NFA Release Price 15 15 15 Source:NFA 11. The yearly import QR is largely determined using the estimated gap between domestic supply and demand for rice, with supply based on domestic production and beginning stocks and demand based on a daily requirement of 27 thousand MT. The President approves the import volume based on recommendations of the 7 Rural Growth and Development Revisited Policy Issues Department of Agriculture (DA) Secretary using analysis done by an interagency technical committee on the rice situation. The technical committee, using estimated production from Jan to July and year-end stocks, makes the recommendation by February so that the imports will arrive within June and August. 12. The NFA undertakes the importation of the big part of the rice import QR and usually gets to do this duty free. Beginning in 2003, the NFA allowed qualified palay farmer groups to import minimal volumes provided the 50% tariff is paid. This was in accord with the President's pronouncement in the 2003 State of the Nation Address SONA that the NFA monopoly on rice imports shall be waived and farmers groups shall be allowed to import subject to the QR and tariffs. But because of increasing international grains prices as well as lack of financial resources and experience in importing, farmers groups were not able to bring in most of their import allocations. 13. Outside of the import volume recommended by the DA Secretary based on the interagency recommendation, the NFA has been known to request Presidential clearance for additional imports, on the basis of its year round rice stock monitoring. The NFA maintains two types of reserves: an operational reserve good for at least 30 days national requirements on July 1, the beginning of the rice lean season, and an emergency reserve good for 15 days all the time. The operational reserve ensures that the NFA holds a third of requirements from July to September, rice lean months when there is greater pressure for prices to increase. 14. The NFA also regulates rice trading by way of licensing grains businessmen and implementing standards in grains milling, handling and packaging. It implements projects to support rice production and marketing improvements such as encouraging the organization of farmers, providing post-harvest facilities such as warehouses, and implementing input (seed and fertilizer) subsidy schemes, etc. The NFA likewise regulates and participates in corn trading, but this has been greatly reduced in the past decade. Intermittently, the NFA has also been directed to support sugar prices by buying excess stock and manage rolling stores that bring low-priced consumer goods including rice, sugar and fish to depressed areas. 15. The NFA, as a corporation, hardly receives budgetary support from the government ­ typically less than P1 billion a year. What it has is government credit guarantee. As of 2004, NFA's credit level was reportedly at about P24 billion, most of it from commercial sources. It also reportedly sustained about P13 billion in operational losses that year. 16. The NFA's rice release operation is viewed as a program to help the poor. Practically all rice releases by the NFA are priced at the set release prices except for some stocks, which have deteriorated in storage and are thus sold at market 8 Rural Growth and Development Revisited Policy Issues prices through auction. Anyone can buy NFA rice but NFA maintains that its partner retail outlets are mostly situated in areas where there are many poor households. A survey supported by the WB indicates that although some non- poor households also buy NFA rice, a greater proportion of poor households do. The survey also showed that NFA rice buyers feel that its quality is poor. This could support reports that rice retailers substitute good quality NFA stocks with poor quality stocks and pass off the better stocks to consumers at higher prices. While these reports are unverified, certainly there is incentive in the pricing system to resort to this. 17. The impact of the above policies on rice have been: - High rice prices for consumers and upward pressures on wages (Roumasset, AGILE, Tolentino, David) - High subsidies on consumers, with the non-poor getting a bigger share than the poor. While more poor households buy NFA rice, the non-poor buy more rice and thus get a bigger share of the benefits (WB). If retailers indeed substitute good NFA rice with poor quality rice, a big part of the subsidy also goes to rice retailers. - Low farmgate prices for farmers because traders use the NFA rice release price as the trigger instead of the NFA palay support prices (Roumasset). - Financial problems for the NFA due to huge subsidy and operation costs compounded by the absence of corresponding budgetary support (AGILE) 18. Consequently, the following had been previously recommended. - Better targeting of NFA's rice release operations to the poor - Separation of the NFA's developmental and proprietary functions - Opening of rice importation to the private sector - Cap on support prices - Tariffication of the rice QR 19. In particular, the separation of NFA's developmental and trading functions, the tariffication of the QR and the cap on support price increases were part of policy commitments made by the Philippines in exchange for a loan to develop the grains sector (GSDP). The availment of this loan was discontinued as the Government found it difficult to implement the policy reforms. Apparently, the government deemed the current policy instruments useful for its rice self- sufficiency and pro-poor agenda. 20. Sugar. Sugar currently holds the highest rate of 65% in the country's tariff structure. This was a recent adjustment made on arguments by the industry that world sugar prices are highly distorted by subsidies and support given by 9 Rural Growth and Development Revisited Policy Issues developed countries. It as also argued that other developing countries committed higher bound tariffs for the sector. The 50% committed to the WTO as bound rate for sugar by 2004 was thus renegotiated, it appears, successfully. 21. Moreover, while sugar was included among the commodities whose QRs were lifted and replaced with tariff, the quedan and market allocation systems which the Sugar Regulatory Administration (SRA) implements give it effective control on the quantity of imports. Under these systems, all sugar is classified according to its market destination and all movement from warehouses is regulated through the quedans. The sugar classifications are: A for the US quota market, B for the domestic market, B1 for use of exporting firms using sugar as input, C for reserve, and D for export to the rest of the world. Imported sugar, unless pre- determined by the SRA to be required for domestic use is classified as C sugar and therefore held in storage, until such time that these are re-classified. Consequently domestic sugar prices are about double world prices as shown in the following table. Sugar Prices P/50kg raw sugar Sugar Crop Year 03-04 02-03 01-02 Domestic Wholesale 839.87 929.13 950.09 World* 468.58 477.55 426.87 Imports (FOB) 419.66 425.89 Dom/World 1.79 1.95 2.23 Dom/Imports 2.21 2.23 *US Contract # 11 Source of basic data:SRA 22. The sugar market allocation system is additionally tolerant of inefficiency because it is implemented in a manner that gives all farms and mills an equitable share of each of the markets (Borrel). The SRA mandates the percentages of production that have to go to each of the market categories and all farms and mills follow these percentages. Thus, the most inefficient farms and mills allocate the same percentage of production to the higher-priced B and A market categories as the most efficient farms and mills do. 23. Because of the increase in trade protection as well as investments of the industry in varietal development, the decline in sugar production apparent in the 1990's has been reversed. At present, the industry is saddled with huge carry-over stocks from the last two crop years (SRA). The desire to maintain high domestic prices prompted the industry to ask the NFA to support millgate prices during the peak season (January ­ February) in the current and past crop year. The NFA support price was and will be slightly lower than prevailing prices of B sugar but substantially above world prices, as shown in the following table. It is however noteworthy that the expected NFA support price this cropyear is lower than that 10 Rural Growth and Development Revisited Policy Issues of last cropyear, indicative of the increasing productivity (or declining unit production costs) in the industry. World, Millsite and Support Sugar Prices World price Dec 2003 (P/50 kg) 424 Millsite price B Dec 2003 (P/50kg) 835 NFA Price 03-04 (P/50kg) 720 % to world 1.70 % to millsite 0.86 World price Sept 2004 (P/50kg) 562 Millsite price B Nov 2004 (P/50kg) 714 Expected NFA Price 04-05 (P/50kg) 680 % to world 1.21 % to millsite 0.95 Sources of Basic Data: SRA and NFA 24. It is clear that reforms towards improving competition in the industry have been thwarted by the producers and millers who are well organized, have the wherewithal1 to support advocacy, and practically control the SRA. The SRA administrator is appointed from the industry while the SRA Board, which issues the sugar regulations, is composed of the DA Secretary and a representative each of the sugar planters and millers2. The absence of representation from oversight agencies and users/consumers predisposes Board decisions to have limited consideration of broad economic and governance issues as well as consumer concerns. Moreover, the industry is represented in most government policy- recommending bodies such as the Sugar Tripartite Council, the DA's Task Force on WTO Agreement on Agriculture Renegotiations, etc. 25. Tariffs and Sensitive Commodities. The accomplishments in tariff reform have been substantial, even for sensitive commodities. The following table shows the movement of tariffs in agriculture on average and on sensitive commodities. It is worth noting that sugar tariffs was programmed to drop to 50%, which it did in 2003, but it was brought back to 65% in 2004. Rice tariffs have not changed since it has remained under a QR regime. 1from various liens collected by the organizations and made mandatory with SRA orders 2The Administrator and Assistant Administrator of the SRA also attend board meetings, as main resource persons and policy implementers, but do not vote on policy issues. 11 Rural Growth and Development Revisited Policy Issues Tariff Rates for Agriculture, Selected Years Sector Year 1995 2000 2004 Average Agriculture 28 14.4 11.88 Rice 50 50 50 Sugar* 100 65 65 Other Sensitive Commodities* 50 - 100 40 - 65 35 - 40 * out-quota rates 26. The following arguments for continuing the liberalization for the sensitive commodities have been forwarded: - Protection keeps rice prices higher than in other countries, which in turn exert upward pressure on wages and reduces the country's competitiveness in labor (Tolentino, WB). The latter part was at least acknowledged in the MTPDP when it adopted the agribusiness goal of reducing the price of wage goods. - High sugar and corn prices curtail the development of sugar-using industries such as processed fruits, carbonated drinks and juices, and sugar confectioneries; and the hog and livestock industries, respectively (WB, David, Tolentino) - Protection keeps investments in the less-profitable protected commodities and away from more profitable commodities (ADB) and exports (WB). - The costs of protection are shouldered by consumers (Clarete) and fall disproportionately on the poor (WB). Protection is anti-poor (Roumasset). Regulations 27. Minimum Access Volumes. MAV commitments were included in the WTO agreement in anticipation of the increases in tariffs that will accompany the process of tariffication. The MAVs are tariff quotas or volumes committed to be imported at much lower in-quota rates. The country committed MAVs for some 15 products including rice, sugar, coffee, poultry, pork, beef, and potatoes. The NFA administers the MAVs for rice while the MAV Secretariat in the DA administers the MAV for other commodities. The MAV volumes were initially allocated to (a) existing importers for products where there had been previous significant imports or (b) producers for other products. These initial MAV holders are required to import the volumes in order to retain their allocation in the following year. New entrants in the MAV system are accommodated using volumes lost by the initial allocation holders provided the entrants show proof of out-quota importation in the previous year (AO9s1996, AO8s1997, AO1s1998). 12 Rural Growth and Development Revisited Policy Issues This system has been criticized for its bias for existing traders and processors over new entrants (WB). 28. The MAV system is also being blamed for technical smuggling. There is widespread suspicion that the MAV import permits are being re-used several times thus multiplying the volume of imports subject to the lower in-quota rates. 29. Sanitary and Phytosanitary Regulations (SPS). These regulations, which seek to protect the country against the entry and spread of pests and microorganisms harmful to plants, animals and humans, assumed greater importance with import liberalization. To ensure compliance with SPS regulations, importers and exporters have to go to the appropriate agency to get the appropriate commodity clearance. The involved agencies are: the Bureaus of Plant Industry (BPI), Animal Industry (BAI), and Fisheries and Aquatic Resources (BFAR), the National Meat Inspection Commission (NMIC), the Fiber Industry Development Administration (FIDA), the SRA, and the Philippine Coconut Authority (PCA). The recent effort of the DA to inform traders of these SPS regulations through the DA website and the web-based SPSIS (SPS Information System) is a good start toward reducing private sector confusion about what these regulations are and which agency enforces them. But a perusal of these websites shows that in contrast to animal and meat products where regulations are fairly clear, regulations with respect to plant products, including seeds are not at all transparent. 30. Each of the regulating agencies has its own distinct mandate to regulate and impose SPS measures. Many regulations are based on outdated legal mandates that were crafted when overall economic policy was based on promoting import substitution and industrialization. Given changes in the general economic policies, the regulations have evolved into a patchwork of administrative measures meant to adapt to current economic thinking while staying within the parameters of existing outdated laws3. For example, the BPI insists that the law requires it to issue import permits and not mere quarantine clearances. 31. The BPI also needs support in developing the plant pest and disease databases it needs to perform its SPS functions effectively and confidently (BPI)4. An Australian institution has expressed interest in supporting the development of plant pest databases, an offer the DA has declined in view of the country's current conflict with Australia on the issue of the latter's SPS regulations on Philippine fruits. The NMIC and BAI are able to immediately institute protective barriers against animal disease outbreaks because the World Organization for Animal Health (OIE) provides extensive information on animal diseases but there is no ready source of incidence of pest and disease information for plants. 3Based on meeting with DA's inter-agency group on regulations 4Based on interviews with BPI quarantine officials 13 Rural Growth and Development Revisited Policy Issues 32. Public Lands Under Stewardship Agreements. Public lands have great potential for contributing to economic growth. In fact, the DENR has various instruments to allow the private sector and rural communities to use public lands for economic activities By virtue of the Constitution, the lease period is 25 years renewable by another 25 years. Some studies have noted that the lease period is short relative to the logging cycle. Also, the severe limitations in the use of the subject land (e.g. limitations in species to be planted in lands subject of IFMA) prevent more productive investments in these lands. Lands under pasture lease agreements could be made more productive if crop production were allowed or if stricter performance standards were imposed5. 33. Land Transfer Limitations under Comprehensive Agrarian Reform Program . The CARP understandably restricts the transfer of lands yea to be transferred under the program. In addition, the Law prohibits the transfer, for period of 10 years, of lands awarded under the CARP; except by hereditary succession or to government, Land Bank of the Philippine (LBP) or other qualified CARP beneficiaries. These saw the disappearance of the agricultural land market and the erosion of the collateral value of agricultural land thus restricting credit for and discouraging investments in agriculture.(Llanto)6. These negative impacts are compounded by the fact that the completion of the land transfer component of CARP is delayed. 34. Entrepreneurs have found ways to get around the transfer restrictions for land already awarded under CARP (Llanto). Most arrangements are within the legal framework of the CARP, like contract growing and leasing, and are meant to enable expansions of hectarage cultivated or operated as a unit, to take advantage of scale economies, without actual transfer of ownership. 35. But, there is wide-spread recognition that the negative impacts of land transfer restrictions on collateral value of agricultural land and on the flow of credit and investment for agriculture need to be addressed. Thus there are proposals to lift the transfer restrictions and retention limits on lands already covered by CARP, the argument being that social justice had been served when the land was awarded to beneficiaries under CARP. 36. However, it should be noted that the CARP and the Constitution envisioned agrarian reform as a program to address not only (a) the need for social justice and equity but also (b) the importance of resource-use efficiency and broad-based participation in the economy as the foundations for sustainable economic growth. It was obvious that the country's highly skewed distribution of agricultural land did not support social stability, equity, and efficiency; and that land transfer had to be complemented with aggressive support for beneficiaries to access other productivity requirements (inputs, technology, credit, markets) and enable the 5These issues are discussed in greater detail in the papers on Private Investments and on Natural Resources Management. 6These issues are discussed in greater detail in the papers on Private Investment and Agrarian Reform. 14 Rural Growth and Development Revisited Policy Issues income and efficiency benefits (PIDS, David). Thus the CARP included both land transfer and social services. 37. Based on the above, one can not argue against the clamor for expanding the coverage of support services for CARP beneficiaries. Also, there is merit to the calls to (a) hasten the completion of land transfer under CARP and (b) ease restrictions in the transfer of land ­ both of these to lessen the disincentives on credit and investments. However, there is no need to lift the limits on land ownership. It has been shown that access to land and economies of scale are not hindered by ownership limits; i.e. efficiency-enhancing arrangements like leasing, contract growing, and cooperative farming could be forged. On the other hand, the skewed distribution of land had clearly been a source of inequity, inefficiency, and social unrest in the rural areas. Thus inhibiting the skewed distribution of land should remain a policy objective -- if not by out-right land ownership limits, then by other measures like a progressive land ownership tax and idle land tax. Support Services 38. The DA's focus has been on achieving food security mainly through increasing domestic production and productivity. The production support programs for rice, corn, livestock and fisheries -- DA's banner programs -- all focus on production to meet domestic requirements. The High Value Commercial Crops (HVCC) Program is the only banner DA program that includes increasing exports among its objectives. The 2003 budget appropriations for the DA mostly support National Irrigation Authority (NIA) irrigation and these banner programs as shown in the following table7. 39. Other DA functions, including those that are specifically mandated in the Agriculture and Fisheries Modernization Act (AFMA) and other laws, receive very little or no appropriations. Funding for these are augmented or provided by funds under the banner programs. Of course, such provision or augmentation is never certain and much will depend on the convincing efforts of those responsible 7The 2004 budget is a reenactment of the 2003 budget while the 2005 budget had not been approved as of writing of this paper. 15 Rural Growth and Development Revisited Policy Issues Highlights of DA Budget 2003 P million % to total Total 14,873.6 100.0 PS 2,445.3 16.4 MOE 5,680.6 38.2 CO 6,747.7 45.4 MOE for Selected Items P Million % of total MOE GMA 3166.9 55.7 Rice 2066.8 36.4 HVCC 313.8 5.5 Livestock 328.3 5.8 Fisheries 458.0 8.1 Other Services* IT Program 46.5 0.8 Agribus and Mktng Support 1.9 nil International Liaison 8.5 0.2 Seed Quality Control Services 10.7 0.2 Plant pest/disease mgmt 2.1 0.0 Enforcement of plant quarantine 10.4 0.2 Pesticide residue analysis 4.6 0.1 CO for selected Items P Million % of total CO GMA 248.0 3.7 Rice 83.4 1.2 HVCC 68.5 1.0 Livestock 19.3 0.3 Fisheries 76.8 1.1 NIA Projects 4591.6 68.0 locally funded 1779.2 26.4 FAPS 2812.4 41.7 * no specific budget items for standards Source of basic data: GAA development, plant variety protection, animal/fish quarantine and disease control for the functions as well as the sympathies of the banner program directors. The lack of certainty as to resources hampers the planning for these functions. DA's report on the target and actual budgetary resources for the AFMA mandated functions as shown in the next table indicates the low priority given to supporting marketing assistance and information dissemination both in target allocations and in actual releases. 16 Rural Growth and Development Revisited Policy Issues AFMA Fund Allocation, 2001-2003 Annual Total Allotment (% of target) Target 2001 2002 2003 (% of total*) Irrigation 30.08 83.95 97.75 68.19 Postharvest Facilities 10.03 33.60 16.68 13.04 Other Infrastructure 10.03 41.77 14.18 14.26 Credit 10.03 7.79 0.25 3.16 Marketing Assistance 8.02 8.22 4.04 3.77 Research and Development 10.03 46.50 28.37 21.01 Capability Building 5.01 89.78 74.83 40.00 National Information Network 4.01 8.11 6.57 9.65 * total fund target is P19.95 billion Source:DA 40. Consequently, DA has been remiss in strengthening important commodity neutral and market-oriented functions. A consultative workshop with the private sector in relation to the drafting of the Medium-Term National Action Agenda for Productivity (MNAAP) for the Agriculture Sector identifies the following gaps as the main factors causing low productivity (David and Innocencio): - "lack of adequate and competitively-priced certification and testing laboratories; - inadequate market information and support structure; - insufficient resources to promote Philippine products and services; - weak linkages between and among government agencies, private agencies (production sector) and the academe; - presence of international and domestic barriers to market entry affecting competitiveness of products; - poor access of farmers' associations, cooperatives (and small and medium enterprises) to credit; and - difficulties of producers (and small and medium enterprises) to access materials and technological inputs to serve the product requirements of new and existing markets or slow delivery of new technology/information." 41. Inputs Provision. The DA's production support programs have focused on providing subsidies for various inputs. In the case of rice, certified seeds, purchased by the DA from contracted seed producers, are distributed to program participants. This arrangement effectively discourages greater investments in seed production and distribution. Other areas where government competes with and crowds out the private sector are in the production and distribution of coconut 17 Rural Growth and Development Revisited Policy Issues seedlings, other planting material, fingerlings, and other farm inputs. The DA has recognized that these input provision programs have to be phased out because it drains the DA budget and its productivity impacts are non-sustainable. Phase-out plans with respect to these various subsidies had in fact been included in the DA's road map to transform their production support programs in support of AFMA. 42. Standards Development and Enforcement. These functions are currently held by several agencies in and outside the DA, including the same agencies involved in SPS regulations as well as the DA Bureau of Agricultural and Fisheries Product Standards (BAFPS), the DTI Bureau of Product Standards (BPS), and the DOH Bureau of Food and Drug (BFAD). The creation of the BAFPS as coordinating agency for agriculture and fisheries standards development and enforcement was mandated in the Agriculture and Fisheries Modernization Act (AFMA) to enhance the competitiveness of Philippine products. The DA has organized said Bureau using staff detailed from its various agencies pending DBM approval of plantilla positions. Its operating budget is sourced from the various commodity programs, specifically the GMA HVCC. 43. The organization, currently the size of a DA service division, has developed voluntary product standards for a number of key exportable and locally consumed goods8, and has accomplished the same through extensive cooperation with the private sector. But it needs to hasten its pace of standards setting if the quality competitiveness of emerging and potential exports is to be ensured. A look at Philippine exports to the US shows substantial rates of rejection due to quality reasons (de Leon). 44. The Bureau has also taken on the important function of participating in international and regional standards setting under the CAC and ASEAN. A pro- active stance in this function is important because no international standards have yet been adopted for a few of the country's exportable products (de Leon). Participation in the standard setting process could ensure enhancement, or at least maintenance, of the country's current export market access. 45. Quality Certification. The agencies involved in standards development are also involved in quality certification. In addition, the Food Development Center (FDC), an agency attached to the NFA, provides this important service, as well as standards compliance advice, to food exporters. The BAFPS has also developed guidelines for, and began, accrediting certifying institutions with respect to some of the standards the Bureau has developed. But a huge gap remains and the lack of adequate laboratories has hampered the provision of this service, especially for the non-traditional exports (de Leon). Given its importance and government's financial constraints, it seems appropriate that the various institutions involved in standards enforcement develop the capacity to accredit and monitor private laboratories so that these may certify on government's behalf. Of course the 8Fresh mango, pineapple, durian, pomelo, saba, cabbage, broccoli, lettuce, cutflower, green coffee beans, shelled corn, corn grits, organic agriculture, and virgin coconut oil 18 Rural Growth and Development Revisited Policy Issues government will also need to maintain its own laboratories even if only to monitor, validate or review the performance of accredited private laboratories. The service fees for government laboratories also have to be reviewed and updated if warranted so that these laboratories can be self-sustaining. 46. Market Information. The AFMA mandated the institutionalization of the National Information Network -- a network from the national to the municipal level that will provide market information including "supply, demand and price information, product standards, directory of agricultural players and institutions, research and technology information, market forecasts and resource accounting data" (AFMA). The DA website currently provides information on production and prices from the BAS and some technology information on a few commodities. Also in the DA website and hidden under the heading "opportunities", the Agriculture Marketing Assistance Service (AMAS) provides basic commodity-specific information on the international market situation of selected commodities. The DA should continue to work at improving the content as well as the presentation of the market information. For example, information on current prices, demand, and quality standards in international markets; on superior plant varieties and their production requirements; on sources of quality planting material; on availability and sources of small machinery and equipment; on availability and prices of fertilizer and pesticides; product standards and quality certifying agencies are examples of information that would prove useful to farmers and agriculture entrepreneurs. Some of these may even be easily available from some DA unit. 47. Under the WB-supported Diversified Farm Income and Market Development Project (DFIMDP), a market information cluster consisting of the AMAS, BAS, ITCAF, Agriculture Training Institute (ATI), Agriculture and Fisheries Information Service (AFIS), and National Agriculture and Fisheries Council (NAFC) has been organized to better tackle the market information service under a new vehicle ­ the Agriculture and Fisheries Market Information System (AFMIS). The AFMIS will have systems for (i) collecting data based on clients' needs, (ii) processing and analysis of data into useful market information and knowledge, and (iii) dissemination of information on a timely and regular basis to clients. There are even plans to have local or provincial AFMIS which shall be linked to the national AFMIS. The DA needs to devote resources to increasing capabilities in this cluster and implementing the AFMIS. 48. The AFMIS should be able to take full advantage of ICT so that information storage, processing, transmittal and dissemination is efficient. In addition to lack of hardware and spotty web access, the IT system of the DA suffers from the lack of standard as to database platform. Oracle was used in the past, but when the DA's license for this software expired and was not renewed, systems developed using the Oracle platform could not be used. Last year, DA planned to buy a license for D-Base following competitive bidding, which, if accomplished, would 19 Rural Growth and Development Revisited Policy Issues render previously developed systems unusable. This issue of standard platform and continuity of licenses should be resolved. 49. Varietal and Technology Improvement. Two pieces of legislation have potentially big impacts on the development and uptake of new varieties and use of quality seeds. These are the Seed Industry Development Act of 1992 and the Plant Variety Protection (PVP) Law of 2002. In addition, regulations pertaining to the testing and commercialization of biotechnology, embodied in AO8s2002 are critical. The Seed Act seeks to promote the development of the seed industry by "encouraging the private sector to engage in seed research and in mass production and distribution of quality seeds" (MO3, s1994). The PVP Law promotes the same by providing protection to owners or breeders of new varieties that meet distinctness, uniformity and stability (DUS) criteria. AO8s2002 seeks to allow the entry of biotechnology in agriculture subject to regulations that address bio-safety concerns. The BPI plays a big role in the implementation of all three. 50. To implement the Seed Act, the BPI, through the National Seed Industry Council and Technical Secretariat, has been conducting field testing and evaluation of promising crop varieties and hybrids, registering those which are deemed superior in terms of production and disease resistance performance, and formulating guidelines on seed certification and standards. Indeed, the BPI has a list of so- called superior varieties for various crops but it has not taken the next step of cooperating with other institutions in the DA for the promotion of these varieties. For example, information on the registered varieties and the sources of quality seeds has not been included in DA market information database. 51. With respect to the PVP Law, the BPI, as interim PVP Office, has began accepting applications for protection, drafting the DUS guidelines for the various commodities and putting together the various variety databases. To date, it has not acted on any of the 12 applications received because of the inherent technical difficulties in developing the DUS guidelines and putting together the variety databases. DUS guidelines on only one crop has so far been completed while the guidelines for 7 more crops await the identification of check varieties for the various characteristic descriptors. Also variety database systems for 5 crops are awaiting variety data. The law was passed in mid 2002. Its IRR was issued in January 2003 but because of the budgeting calendar, the implementation of the PVP Law did not receive a specific budget allocation that year. Neither was specific budget support given in 2004, as that year's budget was a re-enactment of the 2003 budget. With the initial enthusiasm demonstrated by the private sector in terms of application, this function needs to be supported with the appointment of a regular Registrar9 and permanent staff and the allocation of an adequate budget for the PVP Office. The applicants for PVP are expected to shoulder the full cost of application processing but the development of the basic systems to enable processing should be provided up-front. 9The BPI Director acts as interim Registrar in accordance with the PVP Law. 20 Rural Growth and Development Revisited Policy Issues 52. The DA has made substantial progress on allowing the selective entry and release of products of biotechnology in the last two years. AO 8 issued in 2002 defined the rules and regulations for the (a) field testing, (b) commercial planting, and (c) importation for direct use as food or feed or for processing of GM plants and plant products particularly risk assessment principles to be used to assure human, animal and environmental safety. This has been complemented by a series of issuances and actions that saw the approval for field testing and commercialization of Bt corn MON810; and the approval for direct use of products subject of 19 biotech transformation events made on corn, canola, sugar, potato, cotton and soybean. The preparations for issuing regulations on livestock, and fish products are in progress. 53. The low level of investment on research and development (R&D) was identified as a major reason for the country's poor agriculture growth (David). The creation of the Bureau of Agriculture Research (BAR) and the subsequent increases in the budget allocations for R&D sought to correct this but there continues to be major issues in the allocation of research resources (David), in the coordination of the research activities (see paper on R&D), and on its responsiveness to market requirements10. Additionally, developments in IPR highlight the need for protocols on IPR with respect to publicly funded research results. 54. Market Promotion. The AFMA mandated the provision of market assistance services. For this, the DA created the AMAS, which had also been charged with developing the NIN. The market promotion of AMAS has focused on the organization of domestic trade fairs, and facilitating private sector participation in international fairs and selling missions. In the past year, the Service facilitated the country's participation in about a dozen international trade fairs and selling missions. Complementary negotiations to improve access in trading partner markets is handled by the Policy Group and its International Relations Service while technical work to respond to SPS concerns of the trading partners are handled by the appropriate Bureau or Agency. Clearly, there is much room for improving the quality of preparatory work or technical studies to support the country's negotiating stance, as shown by the experience in its bid to export mangoes and bananas to Australia. 55. Credit Facilitation11. Inadequate rural financing is nested within the larger problem of weak rural economies. Thus strategic support for rural economies like appropriate economic policies, basic infrastructure and an environment conducive to private investments will correct most rural financing inadequacies. But there are some issues that require specific response measures, among these the 10More of this discussion in the paper on R&D. 11This section are actually sections from a working paper on rural financial markets prepared by Dr. Gilbert Llanto. 21 Rural Growth and Development Revisited Policy Issues financing of long-gestating projects, financing support for diversification, AFMA provisions on financing12, and the financing of small and medium-size enterprises. 56. Philippine microfinance institutions (MFIs) have successfully designed effective ways of providing sustainable finance services to poor households and micro- enterprises. Many of these micro-enterprises are urban-based but it is noted that MFIs have also successfully provided loans to rural households with off-farm activities, e.g., raising backyard livestock and poultry. Their successful clients eventually demand bigger loans in view of business expansion and other purposes. Thus, while their credit demands increase, the MFIs are hard pressed to meet those demands. 57. Limitations imposed by the MFIs' small equity and the lack of capacity and technical know how in dealing with bigger loans discourage attempts to provide much bigger loans and other types of financial services, e.g., demand deposits. Thus, microfinance clients who "graduate" from loans provided by the microfinance institution, face a credit gap. The graduates' financing requirements are now too large to be met by the microfinance institutions but too small to be attractive to the bigger banks. 58. Commercial and thrift banks service mostly the large farmers, plantation agriculture, large scale agri-businesses, commercial fishing, marketing and distribution controlled by high income economic agents. They fail to address the demand for loans and other services by growing micro-enterprises and middle- sized enterprises. See the following table for an illustration of this situation. 59. The situation creates a financing gap which constrains the micro-enterprises' growth. In terms of loan size, MFIs can provide maximum loans up to Pesos 150,000 and rural banks around Pesos 1.5 million in non-microenterprise loans. On the other hand, the average loans released per account by thrift banks (mid- size banks much smaller than commercial banks) would be around Pesos 10 million, although one thrift bank indicated that the smallest loan it can give is around Pesos 1 million. 60. Credit cooperatives have also provided loans to rural and agricultural areas. Although many of the large cooperatives are usually urban-based, a few have managed to lend to farmers and other rural-based economic agents. The experience of some credit cooperatives in Mindanao that have participated in a USAID project on the strengthening of credit cooperatives indicates their huge potential to be viable financial intermediaries in the countryside. Some of the successful credit cooperatives in other parts of the country have also acted as conduits of microfinance loans from the People's Credit and Finance Corporation, a government-owned microfinance company. 12See paper on private investments for discussion on issues related to the financing of long-gestating projects, diversification and AFMA provisions for an Agricultural Modernization Credit Financing Program (AMCFP) 22 Rural Growth and Development Revisited Policy Issues Rural Activities and Corresponding Source of Financing Farm-based activities Æ Large farms Commercial banks Small farms LBP, rural banks, traders, input suppliers, informal lenders Off-farm activities Æ Small and medium LBP, DBP, private development banks, enterprises Micro-enterprises PCFC, MFIs, informal lenders Primary production by small farmers LBP, rural banks, traders, input suppliers, informal lenders Plantation agriculture, e.g. pineapple, Commercial banks bananas Agro-processing Commercial banks, LBP, DBP Agri-business and marketing Commercial banks, LBP, DBP Aqua-culture Commercial banks, LBP, private development banks Commercial fishing Commercial banks Municipal fishing (small-scale fishing) Rural banks "PCFC" ­ People's Credit and Finance Corporation "LBP"- Land Bank of the Philippines "DBP"- Development Bank of the Philippines Source: Table 22 of Llanto (2004b) 61. However, an interview with the largest federation of cooperatives in the country revealed that purely agriculture-based credit cooperatives are seldom sustainable. The seasonality of agriculture-based activities makes it difficult for cooperatives which are solely focused on agriculture-based activities to be viable and sustainable in the long run. Those rural-based credit cooperative will require loan portfolio diversification across different sectors, covering a diversity of economic activities and members engaged in various income generating activities. They also need to raise resources to address the inadequacy of their capital and to mobilize more deposits. However, there is currently a lack of proper regulation and supervision to protect members' share capital and deposits. Effective regulation and supervision will help generate public confidence in the credit cooperatives as viable financial intermediaries in the countryside. 62. Economic Organization Facilitation. Given that most Philippine farms are small, an important service that could promote greater activity in the farm sector is research and information dissemination on successful models for, or best practices in, economic organization through private joint undertaking such as contract farming, adopt a farm, cooperative farming and marketing, industry associations, etc. Economic organization can potentially address not only marketing 23 Rural Growth and Development Revisited Policy Issues difficulties, but also technology and financing access issues for small producers and traders. The AMAS currently does some initial market matching for processors and producers but there is no effort in the DA to research and disseminate information on, or actively support development of, viable economic organization. Program Planning and Implementation Issues 63. Devolution. The devolution of various development functions to the LGUs has resulted in a mismatch in LGU responsibility vs. capability and resources13 (David). The fact that IRA entitlements were made equal across the LGUs of the same level has also resulted in very little being given to the most resource-poor, i.e. the 4th and 5th class municipalities while those that can easily generate resources (1st class cities) continue to get an even bigger IRA. The current allocation system is deemed systematically biased against the relatively poor, agriculture-oriented localities (Cabanilla). 64. To compound the IRA issue, it appears that the devolution of functions failed to consider the importance of scale in planning for service provision. In particular, the municipality extension workers could be better supported if they are within the planning terrain of the provincial government14. 65. Moreover, the agriculture agencies have not actually adopted a devolved mode in the planning and funds management of its various programs and services. The NAs have held on to program planning and funds management, relegating LGUs to being program implementers (David). As such, the LGUs comply with the NAs' various and divergent reporting and documentary requirements, which in turn muddle up the LGUs own planning cycle processes (GTZ). Also, the facilities under which the LGUs can access DA resources for locally initiated projects are quite limited, reflecting DA's own priorities and limiting the options for LGUs (Cabanilla). 66. The DA knows how to enhance its program planning and implementation. In fact the DA's blueprint for food security listed the following principles in the DA's development and implementation of programs: - "Participatory approach. This means participatory planning, implementation and monitoring and evaluation would be done with all stakeholders. SUCs, NGOs and farmer's group would be active participants in the GMA program. Program areas, strategies and interventions would be identified with them. The main input for identifying GMA interventions is the local development plan of the provinces. 13More of this discussion in the paper on infrastructure. 14More discussion on this issue in the paper on R&D. 24 Rural Growth and Development Revisited Policy Issues - LGU-led program implementation. The local government units would be the lead players in the implementation of the GMA program. The DA (Department of Agriculture) and DILG (Department of Interior and Local Government), along with other concerned agencies will provide the necessary technical and financial support. - Area-based approach. The GMA program would identify interventions based on the domain specificity of the program areas. A situation analysis would be required focusing on the water, soil, climate, production, human resources, processing and marketing endowments of the program area. The comparative advantage or competitive edge as well as the scale economies present in the area, among others, will be the central criteria in the selection of program areas/interventions. - Capability-Building. The GMA would promote local capability-building in the areas of participatory planning - implementation, monitoring, evaluation, research and extension, processing, marketing and entrepreneurship, among others. - Focused targeting. Programs would be developed based on the situation of the people. Programs catering to the poor as well as the big farmers would be designed. Programs would be identified for "winners" or impact areas and also for marginal areas. - Counterpart schemes. The DA, DILG, other concerned agencies and LGUs would enter into program financing arrangements which would entail counterpart funds from each partner, to be stipulated in a memorandum of agreement. The counterpart amount would be based on the partner's capacity. Contributions in kind, such as personnel, facilities and services are included." Summary 67. In summary, the following are the main issues in current government interventions that have impeded the full participation of the private sector and the LGUs in increasing growth in agriculture: - The important policy reforms have been articulated, most have been adopted but a number of the most critical have not been undertaken. This has resulted in wide disparities in policy and program environments across sub-sectors. A few favored sectors ­ rice, corn, sugar, livestock, poultry -- are widely supported by trade protection, incentives, and subsidies, making the other sectors less preferred investment areas. - The regulatory framework was left incoherent because it is based on outdated legal mandates juxtaposed with more recent changes in economic policy 25 Rural Growth and Development Revisited Policy Issues paradigms. Despite the pronouncements for liberalization and openness, a number of regulations tend to protect the interests of the existing players, discourage competition and restrict entry. Some regulations, seeking to address current concerns within the parameters of outdated laws, are unnecessarily onerous or intentionally vague. Finally, a lack of transparency and standard protocols in the implementation of most regulations leave windows of discretion that are opportunities for corruption. - The Department of Agriculture (DA) and its attached agencies focused the bulk of its efforts and resources on national programs that increase production by directly providing some strategic inputs ­ irrigation, planting material, fertilizer, credit, dryer, warehouse, market, etc. In many of these programs, government undertakes functions that compete with or crowd out the private business sector. At the same time, mandated market facilitation functions, such as standards development, quality certification, market information services, market promotion, and plant variety protection remain grossly inadequate - The devolution of the responsibility for agricultural development to the LGUs has not been matched with the appropriate resources and support programs. The IRA is systematically biased against the poor municipalities (Cabanilla). The DA continues to undertake and control most development program design, planning, and funds management, and have very limited support facilities for LGUs, discouraging the LGUs' efforts to initiate and develop their own programs. Recommended Agenda and Action Plan Adopting sector-neutral incentive and protection systems 68. Continue liberalization on sensitive commodities ­ rice, sugar, corn, meat, vegetables, and coffee. The important task is to avert reversals so that the program steadily proceeds. If the producers need temporary additional protection due to irregularities in the world market, safeguards and special safeguards under RA 8800 may be availed. It is important that confidence is developed on these safeguards mechanisms, possibly by constant information dissemination. Monitoring the industries affected, producing regular and meaningful sector situation and outlook papers, highlighting potential problems and opportunities, and encouraging or supporting sector-initiated responses, outside of increasing tariff protection, will also be helpful. This is a task that can be done by the DA Policy Service in conjunction with the NAFC. 69. Prepare to tariffy the rice QR. While there is effort to negotiate the extension of the exemption of rice from tariffication under the WTO, the DA should be prepared to eventually (before or at end of the extension period) eliminate the QR. 26 Rural Growth and Development Revisited Policy Issues The plan to prepare the sector should be drafted and implemented as soon as possible. Said plan should include not only (a) adequately funded safety nets, diversification and productivity enhancement support for affected farmers but also (b) a communications program aimed at the general public that has so long been conditioned to think that rice self-sufficiency is ideal and (c) a program to gradually free up the market -- allow more and more private sector importation, maybe expand the QR and adjust tariffs ­ so that the market changes or shocks with QR elimination is minimized. The objective of administrative action should be to make the QR redundant or ineffective even before official QR elimination is undertaken. 70. The attempt to tariffy the rice QR in 2001 did not prosper because the timing was wrong: the renegotiation on the WTO Agriculture Agreement was around the corner and it was thought that tariffication would reduce the country's bargaining leverage. No program to prime the sector had been implemented so it just was not prepared. This time, the preparation program will be implemented before the actual tariffication. Done correctly, tariffication, which requires the passage of law, should be easier to enact. Reducing competition-dampening government participation in or regulation of the market 71. Separate the NFA's regulatory and trading function. This should accompany the rice tariffication preparations. It will require the passage of a law. The DA, following the cue of the Medium Term Philippine Development Plan (MTPDP), should take the lead in supporting Congress in drafting the appropriate bill that will be true to the policy intent and consider the concerns of NFA employees, farmers and poor consumers. In particular, the bill should create a trading corporation that will implement the support prices for farmers, maintain the requisite reserves, and unload in markets as required for emergency relief or to correct market irregularities, on rules established by a separate regulatory agency. The trading corporation may also participate in the rice market as a regular player on commercial terms under the same rules as other private traders. The regulatory agency should administer the import rice QRs and MAVs (in the meantime that these remain). 72. The effort to reform the NFA should address the main sources of resistance to the reform, which are (a) the NFA employees who fear a loss of employment and income; (b) the farmers who anticipate the scrapping of the price supports at the farmgate; (c) the consumers who benefit from the NFA's consumer support prices; and (d) the politicians who rely on NFA's palay and rice subsidies for their community assistance programs. In the past, the strongest opposition was met from the NFA employees. This time, the NFA should be involved in the advocacy, particularly with its own employees some of whom may need help to prepare for new functions. It will help if the DOF tightens the NFA's access to increased credit guarantees as this will force the NFA bureaucracy to feel the fiscal crunch and advocate for reforms that will serve to clean its books. Also, as 27 Rural Growth and Development Revisited Policy Issues the loss of support for poor consumers and farmers are used as the main argument against reform, the government should make it clear that such support will not be eliminated. 73. Tighten targeting of NFA's rice subsidies to the poor. Prior to NFA reform, it should be asked to get out of distributing subsidized rice and other products. This task should be transferred to the DSWD and LGUs which should, following the Kalahi model, work with community organizations, within a comprehensive poverty eradication framework. In this way, the direct impact of the NFA reform on the poor consumers, and opposition to reform on this basis, will be lessened. 74. Modify SRA's market allocation system. This can only be accomplished with SRA direction. Thus, the first task is to expand the SRA Board to enable more balanced and less parochial policy decisions. While tariffs are high, the reserve category should be permanently abolished to allow greater latitude for individual decisions on where and when to move stocks and to remove the constraint on importers. Changes in the allocation of the high priced US quota or any other future export quotas should also be considered to encourage the least efficient and low quality producers to shape up. 75. Phase out input-subsidies under the DA production support programs. The DA should prepare its phase-out plans, which should include: a review and streamlining of regulations imposed on input traders such as licensing, standards, handling, storage, packaging, and labeling; and a program to monitor and regularly disseminate timely and comprehensive information on input availabilities, dealers, traders, and prices. These will limit disruptions in the farmers' access to these inputs. Institutionalizing firm-neutral, transparent, and streamlined regulatory systems 76. Modify the MAV allocation and documentation system. Should the WTO renegotiation results require expansions in the MAVs instead of their abolition, changes both in the allocation system and documentation system should be explored. In particular, the allocation by auction should be studied to promote fair access among competing importers. Also the electronic tracking of transactions, by both Customs and DA, should be implemented to prevent technical smuggling using the MAVs. 77. Streamline SPS regulations. All agencies should be encouraged to provide greater transparency in its regulations within the framework of the SPSIS. They should also be encouraged to adopt, and make transparent, protocols -- standard requirements, guidelines, procedures, process time frames -- in the implementation of the various regulations. Where appropriate, the development of systems for on-line applications and processing should be considered and supported. Resistance to streamlining is expected, especially if there are rents in the current vague and cumbersome set-up. The DA Secretary should make it clear 28 Rural Growth and Development Revisited Policy Issues that the streamlining of the SPS regulations is a priority. Those who will benefit, and these are the traders that play fair, should be asked to rally behind the effort. 78. The various regulations should also be reviewed with respect to intent and legal basis in order to identify areas where laws need to be reformed or issued. Also, a proposal to build up a plant pest and disease database, not necessarily at the BPI, should be included in the project pipeline. 79. The streamlining of the SPS regulations, specifically the adoption of transparent protocols, should be able to make more apparent cases of regulatory capture in various sub-sectors and thus alert stakeholders and policy makers to advocate for more definitive studies and begin the process for necessary changes. Enhancing access to international markets 80. Support standards development and quality certification. The BAFPS needs to be supported with permanent management and staff positions and an adequate operating budget. The keys are the approval of the DBM of the BAFPS's proposed plantilla positions and the provision for BAFPS in the DA budget. The DA and DBM should get together to finally resolve the issues. DBM should understand that the existing agencies, already poorly equipped and staffed, had been and remain oriented towards protectionist or import regulations. Thus their SPS measures focus on quarantine and product standards that protect the country against the entry of pests and diseases stemming from imports. The BAFPS is focused on product standards that will enhance the country's access to international markets. The objectives and the nature of standards are thus entirely different. 81. The BAFPS should be encouraged to continue working with the private sector to accelerate the development of voluntary standards and give priority to initiating in CAC work on products of export interest to the country. It should also focus on developing guidelines for and accrediting certifying organizations. Both standards and certifying organizations should be publicized. While resources should be devoted towards equipping government laboratories, this should be within a rationalization framework that will allow sharing of facilities across agencies. 82. Strengthen market promotion efforts. The DA should establish specific market promotion priorities, on which basis, the analytical and negotiating work should be strengthened. The priorities may include: SPS issues in Australia and other markets for Philippine fruits and preferential trade agreements with Japan and China. Other types of market promotion, such as participation in trade fairs and selling missions, should be left largely to the private sector, supported only as required with assistance in information, registration, and program arrangements. 83. Develop capacity for market research. The AMAS should be equipped with adequately trained staff, access to consultants, and research resources. Trade 29 Rural Growth and Development Revisited Policy Issues attaches should be similarly equipped and should be assigned, on products and markets identified by the AMAS, to generate specific outputs in market intelligence gathering. Market research should be included in the R&D budget while industry groups and the academe should be encouraged to contribute research effort and information. The AMAS should take efforts to network with industry groups and academic programs. Generating and disseminating critical knowledge and information 84. Develop the AFMIS. The AFMIS cluster should get to work on drafting a framework and development plans, developing DA­wide database standards, developing the component systems ­ information gathering, processing, storage, transmittal, packaging, and dissemination -- including identifying roles, and operationalizing the systems. At the same time, resources should be provided for building up the hardware requirements, accessing efficient internet service and ensuring the continuity of requisite software licenses. The DA should consider using the increasing commercially available DSL broadband access and abandon its satellite dish build-up program. Also, the use of the SMS technology in information dissemination should be considered as cellular phones are much more accessible than computers in many areas. The DA agencies and bureaus outside the cluster should be also encouraged to contribute available and useful information. The cluster should establish means to get user feedback, including regular surveys, and consider these in planning system improvements. 85. Implement the PVP Law. The DA should take steps to organize and equip the PVP Office, including working for the President's appointment of a Registrar. It should institutionalize office procedures and protocols by issuing a manual of standard operating procedures. The technical support groups that will help in the development of DUS guidelines and technical examination of varieties subject of PVP applications should be organized and supported. Resources should be provided for populating and further developing the database systems and continuing the work on DUS guidelines development. 86. Continue development of regulations for biotechnology. The drafting of regulations for the entry and commercialization of livestock and fisheries biotechnology products should commence. In the meantime the DA should continue to dialogue with the public regarding its biotechnology policies and show that it is prepared to address any emerging safety concerns. It should support continued staff training on the testing of biotechnology products and provide resources to equip the testing laboratories. 87. Address issues in R&D15. The government, led by the DA, Department of Science and Technology ( DOST) and DENR or a high level R&D Committee, should take steps to improve the coordination structures in R&D, possibly (a) 15The recommendations are expounded in more detail in the chapter on R&D. 30 Rural Growth and Development Revisited Policy Issues initially through MOUs, (b) the adoption of a common system for developing the research priorities program, and (c) the sharing of research networks. Studies, including the review of international best practices, should be undertaken with a view to improving the research resources allocation system and making it more demand- and need­responsive. Protocols on IPR for publicly funded research should be adopted as allowing researchers to share in the benefits of IPR will encourage greater market orientation in research projects. Lastly, the research coordinating agencies should network with industry, as the latter should be encouraged to maximize their contributions to R&D by way of broadening participation. Improving access to land and credit 88. Address issues in land markets. Legislation is required to ease restrictions in the transfer of land covered by CARP and exempt banks from the 5-hectare limit in land ownership. This is a politically sensitive reform -- many farmers groups and other socially-oriented groups believe that it is the government's responsibility to ensure that small farmers maintain control and ownership of farmlands and that easing land transfer restrictions and exempting banks from the limit will encourage transfers and credit that is likely to lead to foreclosures. The Office of the President (OP), aided by analysis from the NEDA, will have to muster the political will to support this reform. In addition, the reform could be (1) minimized to the most important -- for example, exclude the lifting of the 5 hectare limit so that land will remain legally transferable only to those holding none or less than 5 hectares, and/or (2) complemented in the same legislation by sweeteners such as the allocation of specific resources for completing land transfer under CARP as soon as possible and the institution of an idle land tax. 89. Address issues in public land access. The DENR, assisted by an appropriate TA, should work to tighten performance standards and adopt proper pricing for public lands under lease agreements. These will encourage the more efficient use of the land. Such move will meet opposition from holders of various lease instruments, many of whom would be politically connected. DENR and NEDA should work together to provide analysis to the OP that will allow the latter to muster the political will necessary for the changes to be adopted. 90. Extending the lease period for public lands will further encourage greater investments and productivity. This however will require an amendment in the Constitution. In anticipation that an opportunity to do so may happen, the DENR and NEDA should begin to commission studies that would review the performance of holders of these various lease instruments and look at the expected impact of such Constitutional amendment. 31 Rural Growth and Development Revisited Policy Issues 91. Address the gap of financing for small and medium sized enterprises16. The WB and other donors could be asked to provide technical advice on how to address this financing gap and possibly, develop a financing program where private banks can learn new credit delivery technologies and innovative financial instruments. Also, the Cooperative Development Authority should develop its capacity for effective regulation and supervision of credit cooperatives to build up confidence in these institutions and enable expansions in their loanable funds. Improving LGUs' capacity to undertake development programs 92. Institute DA wide information assistance services for LGUs. The target clientele of the AFMIS should include LGUs. In addition, a specific unit in DA operations should be tasked to accept LGU inquiries and point them to relevant DA office. Also all DA units should be asked to prepare relevant information sheets and/or identify information/ liaison officers to address LGU needs 93. Address issues in devolution17. The review of the LGC should be commenced with a view to correcting the provisions that serve to hinder LGUs from efficiently and effectively performing their responsibilities. For example, growth could be better pursued if the locus of agricultural planning and support services is lodged in the province instead of the municipality, as presently mandated. Also, development could be better encourage if the IRA entitlements accounted for differences in LGU needs and performance instead of equally among the same level of LGU. Facilitating private joint undertaking, contracting and economic organization 94. Develop capacity to research, disseminate information, and facilitate economic organization. This task should be assigned to a specific DA unit, possibly the AMAS, whose job will be to solicit the assistance of involved players in the documentation of positive experiences in economic organization and organize fora to share lessons among current and potential players in such arrangements. Action Plan Matrix 95. The action plan, showing output indicators, responsibility centers, implementation time frames and expected levels of impact on rural growth is shown in matrix form in the following pages. 16This is taken form a working paper on credit prepared by Dr. Gilbert Llanto. 17These recommendations are discussed in greater detail in the papers on Infrastructure and R&D. 32 Rural Growth and Development Revisited Policy Issues REFERENCES ADB. 1998. Philippine Grains Sector Development Program Project. ADB TA 2217.PHI AGILE. 2000. Financial Options for Restructuring the National Food Authority. Balisacan, Aresenio and H. Hill (2003), The Philippine Economy: Development, Policies, and Challenges. Oxford University Press: New York. BAS. Various Reports. Borrel B. etal. 1994. Philippine Sugar: An Industry Finding its Feet, Center for International Economics Cabanilla L. 2002. Achieving Food Security:The Role of and Constraints Faced by LGUs. PASCN Discussion Paper No. 2002-07 Castillo, M. 2004. 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Report No. 27662-PH 35 Rural Growth and Development Revisited: Policy Issues Overall Strategic Creating a hospitable environment for the private sector and rural communities to pursue market- Thrust: driven increases in productivity and diversification Key Lever or Agenda Responsible Implementing and Output Indicator Time Frame Impact Agency(ies) Complementary Action Strategic Thrust 1: Adoption of sector neutral incentive and protection system Continue liberalization DA Policy Group Monitor and analyze situation continued tariff reduction commence med (avert reversals on tariff and outlook of subject products for sensitive commodities immediately and program) on sensitive Work with producers to address enabled in EO implement over 5 commodities ­ rice, sugar, potential problems and years corn, meat, vegetables, opportunities coffee Develop confidence in safeguards system Prepare to tariffy rice QR OP, Agri Sec. Adopt policy Policy statement possibly in in 1 year med the SONA DA Policy Group, Draft change preparation plan: Change Preparation Plan draft in 1 year and NFA, DA Safety nets, productivity drafted, consulted, and implement over 5 Operations Group support, diversification support implemented years Communications and advocacy Make QR redundant: Gradually expand QR and adjust tariffs Phase out NFA import monopoly: privatize bigger portions of the QR Key Lever or Agenda Responsible Implementing and Output Indicator Time Frame Impact Agency(ies) Complementary Action 36 Rural Growth and Development Revisited Policy Issues Strategic Thrust 2: Reduction of competition-dampening government participation in or regulation of the market Separate NFA's regulatory OP, NEDA, Agri. Support passage of law law advocated and enacted in 2 years med and developmental Secretary, NFA, amending NFA structure functions from its trading DA Policy Group function NFA Prepare change management Plans drafted and complete in 1 year plan consultations conducted NFA, CSC Provide support for displaced complete in two staff years NFA Involve NFA: prepare Immediately and organization until completed Tighten targeting of NFA's OP, DSWD, NFA Consider/study coupon system, study and consultations study and med rice release and subsidies to ID system completed; IRR on implement in 1 the poor program issued possibly year through DSWD AO Work with DSWD, community, and NGOs Modify SRA's market SRA with Consider auction or SRA Sugar Order issued study and high allocation system industry performance-based allocations implement reforms of US quota in 2 years SRA Permanently eliminate reserve SRA Sugar Order Issued in 2 years category while tariff is high OP, DA Sec., Expand SRA Board EO amending composition in 1 year NEDA of Board SRA Safety nets Plan drafted, consulted and complete plan in 1 implemented year and implement over 4 years Key Lever or Agenda Responsible Implementing and Output Indicator Time Frame Impact Agency(ies) Complementary Action Phase out input-subsidies NAFC, Agri Sec. Inform stakeholders press releases and AO over two years low under the DA production issued 37 Rural Growth and Development Revisited Policy Issues support programs DA Policy Group, Review/streamline standards, input regulations reviewed complete in two FPA, BPI, BFAR, handling, licensing, certification and sreamlined years BAI and other pertinent regulations on inputs DA ITCAF, FPA, Publish (web, etc.) systems developed and commence in 1 BAI, BPI, BFAR comprehensive list of input installed year suppliers and prices Strategic Thrust 3: Institutionalization of firm-neutral, transparent and streamlined regulatory systems Modify the MAV allocation MAV Sec. Consider auction study and consultations in one year med and documentation system competed; DA AO to amend IRR on MAV issued DA ITCAF, BOC Develop on-line transactions systems developed and in two years recording and monitoring system installed to be shared by DA and BOC Streamline and make DA Policy, Legal Review legal basis of regulations review completed, required review completed high transparent SPS and other and amend /supplement as AOs issued, required and AOs issued in regulations necessary. legislation drafted, 1 year; legislation advocated, and enacted issued in 2 years DA Policy, Improve the SPS Information SPSIS updated and in 1 year ITCAF System completed DA Policy, Develop transparent protocols protocols key regulations in Regulatory drafted/streamlined and 1 year; all Agencies publucized regulations in 2 years Regulatory Consider on-line transactions systems developed and in 1 year Agencies, ITCAF installed Regulatory Consult with and inform consultations conducted through reform Agencies stakeholders process Key Lever or Agenda Responsible Implementing and Output Indicator Time Frame Impact Agency(ies) Complementary Action Strategic Thrust 4: Enhancement of market access in international markets 38 Rural Growth and Development Revisited Policy Issues Support standards Agri Sec., DBM, Provide the BAFPS permanent plantilla approved and in 1 year high development and quality BAFPS positions, budget and other filled; budget specified certification resources BAFPS through Work with private sector in working groups organized commence organized task standards development and immediately and forces certification continue BAFPS with Initiate standards adoption under proposed standards commence support of other CODEX for niche exports submitted immediately and reg agencies continue BAFPS-led task Equip but rationalize rationalizationstudy rationalization plan force+consultants government laboratories completed; lab funding in 1 year and equip to study sources/modes developed; thereafter labs upgraded BAFPS, ITCAF Publicize standards and information included in commence certifying bodies BAFPS, DA websites immediately and continue BAFPS, AMAS? Provide technical assistance to technical assistance study viable SMEs mechanism estalished mechanism over 6 months and commence thereafter Strengthen market DA Policy, Support analytical and priorities established; task commence high promotion efforts ­ see AMAS to set negotiating work based on forces created immediately and paper on private priorities; specific priorities such as: continue investments agencies to do SPS issues in studies Australian/other markets China/Japan markets under trade agreements EU/US markets under GSP Work with private sector Key Lever or Agenda Responsible Implementing and Output Indicator Time Frame Impact Agency(ies) Complementary Action 39 Rural Growth and Development Revisited Policy Issues Develop capacity for market AMAS Work with industry groups/ linkages/networks forged in 6 months and high research academe continue Agric Sec Equip AMAS ­ staff, in 1 year consultants, other resources Policy, AMAS Equip and use trade attaches in 1 year BAR, Policy Include market research in R&D market research projects in 2 years budget / market research receiving allocation in capacity building TA pipeline R&D budget; capacity building TA on pipeline Strategic Thrust 5: Generation of, and enhancement of access to, critical knowledge and information Build up the AFMIS (NIN) AFIS Update NIN / Prepare AFMIS Framework and in 1 year high framework and development Development Plan drafted plan and consulted AFIS Standardize database platform database standards issued in 1 year and structure ITCAF Build up hardware requirements; Software licenses and in 1 year Ensure efficient web service and internet service secured; continuity of requisite software adequate IT hardware licenses provided AFMIS Cluster Develop and operationalize AFMIS operational initial system in 1 AFMIS systems (collection, year; expansions updating, processing, storage, continuing transmittal, dissemination) AFIS Regularly survey users to survey results addresed continuing increase AFMIS usefulness Key Lever or Agenda Responsible Implementing and Output Indicator Time Frame Impact Agency(ies) Complementary Action Implement the PVP Law DA Organize, staff and equip PVP plantilla proposed, in 1 year high Office approved and filled; budget specified President Appoint permanent Registrar Registrar appointed in 1 year PVP Board Approve office procedures and Office procedures and in 6 months protocols protocols institutionalized 40 Rural Growth and Development Revisited Policy Issues PVP Office Organize technical support technical support groups in 6 months for 5 groups organized; SO issued priority crops; DA Finance Provide budget for database database systems populated continuing to systems and DUS guidelines and DUS guidelines accommodate development completed other crops Continue development of BAI, BFAR, FPA, Support regulations drafting regulations drafted, continuing high regulations for Biotech Project Dialogue with public consulted and issued biotechnology Office Address emerging concerns Equip testing laboratories laboratories equipped Continue staff training staff trained Address issues in research DA, DOST, Improve coordination structures Commitees created; MOAs Commitees and high and extension ­see paper on DENR forged; legislation enacted MOAs in 1 year; R&D legislation in 2 years DA, DOST, Improve allocation systems New allocation systems study options in 1 DENR institutionalized year; implement reforms in 2 years DA, DOST, Develop IP protocols for IP Protocols consulted and in 1 year DENR publicly-funded research approved, Joint MO issued DA, DOST, Work with industry linkages forged continuing DENR Strategic Thrust 6: Improving Access to Land and Credit Address issues in land NEDA, Congress Ease restrictions in the transfer Legislation advocated and in 2 years medium markets - see papers on of land covered by CARP enacted Agrarian Reform and and NEDA, Congress Exempt banks from 5-hectare Legislation advocated and in 1 year Private Investments limit in land ownership enacted Key Lever or Agenda Responsible Implementing and Output Indicator Time Frame Impact Agency(ies) Complementary Action Address issues on access to Congress Extend lease period for public Constitution amended high public lands ­ see papers on lands 41 Rural Growth and Development Revisited Policy Issues Private Investment and DENR Tighten performance standards DENR AO issued in 1 year Natural Resources and adopt proper pricing for Management public lands under lease agreements Adress the gap in financing NEDA Ask WB/other donors to assist in TA provided, innovative TA in one year, high for small and medium developing programs and programs implemented programs in 3 enterprises strategies to correct the years financing gap. CDA, NCC, BSP Stengthen regulation and Study completed, Study in 1 year, low supervision over credit regulatory measures regulatory coopertaives advoacted, consulted and measures in 3 enabled years Strategic Thrust 7: Improving LGUs' Capacity to Perform Development Function Institutionalize DA-wide DA OSEC Task a specific unit in DA DA SO Issued in 6 months medium technical information operations to accept LGU assistance services for inquiries and point them to LGUs relevant DA office DA Osec Task all DA units to prepare relevant information sheets and/or identify information/ liaison officers to address LGU needs Address issues on NEDA, DILG, Review LGC to consider: Study completed; reform in one year medium devolution - see paper on Congress 1) Scale economies in the advocated; law R&D and on Infrastructure distribution of responsibilities amendments enacted (i.e. province vs. municipality) 2) Need and performance in the setting of IRA entitlements (e.g. 1st class vs. 5th class) Key Lever or Agenda Responsible Implementing and Output Indicator Time Frame Impact Agency(ies) Complementary Action 42 Rural Growth and Development Revisited Policy Issues Strategic Thrust 8: Facilitation of private joint undertaking, contracting, and economic organization Develop capacity to DA Sec. Assign to specific DA unit such DA SO issued in 6 months high research, document, as agribusiness group disseminate information, Assigned DA Solicit assistance of involved Fora organized and papers in 1 year and and facilitate economic Unit players in documentation of presented regularly thereafter organization experiences ­see successful models in papers on private investments and rural finance Assigned DA Regularly organize fora to share Fora organized and papers in 1 year and Unit lessons among current and presented regularly therafter potential players WB275380 C:\Documents and Settings\WB275380\Desktop\Rural Growth and Development Revisited - Policy Issues Working Paper.doc 07/04/2006 11:41:00 AM 43 Rural Growth and Development Revisited Policy Issues 44