Document of

The World Bank

FOR OFFICIAL USE ONLY

-*A/ 24_iF- Pb4Report No. 7102-PH

STAFF APPRAISAL REPORT

THE PHILIPPINES

IRRIGATION OPERATIONS SUPPORT PROJECT

April 27, 1988

Country Department IIAsia Regiona'. Office

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CURRENCY EQUIVALENTS(November 1987)

Currency Unit - Philippine Peso (P)P 1.00 = US$0.048US$1.00 = P 20.7

GOVERNMENT OF THE PHILIPPINESFISCAL YEAR

January 1 - December 31

WEIGHTS AND MEASURES

1 hectare (ha) = 2.47 acres1 kilometer (km) 5 0.62 miles1 square kilometer (km2) = 0.3886 square miles1 meter (mi3)= 10.76 square feetI cubic meter (m3 ) - 35.31 cubic feet1 million cubic meters (mcm) 810.7 acre-feet1 millimeter (mm) - 0.039 inches1 kilogram (kg) - 2.2 pounds1 cavan - 50 kilogram20 cavans - 1 metric ton

FM OFCAL VW ONLY

ABBREVIATIONS AND ACRONYMS

AAO - Assistant Administrator for OperationsCIS - Comuonal Irrigation SystemDA - Department of AgricultureDPWH - Department of Public Works and HighwaysDT - DitchtenderFIG - Farmer Irrigator CroupsFIO - Farmer Irrigators' OrganizersFSDC - Farm Systems Development CorporationHYV - High Yielding VarietyIA - Irrigators' AssociationICB - International Competitive BiddingIDD - Institutional Development DivisionIDS - Institutional Development WorkerIMIS - Irrigation Management Information SystemIOdP - Input-Output Monitoring ProgramIOSP - Irrigation Operations Support ProjectIRRI - International Rice Research InstituteiS - Irrigation SuperintendentISF - Irrigation Service FeeISO - Irrigation System OfficersLCB - Local Competitive Bidding"&E - Monitoring and EvaluationNEDA - National Economic and Develbpment AuthorityNFA - National Food AuthorityNIA - itional Irrigation AdministrationNIS - National Irrigation SystemOD - Operating Division0M4 - Operations and MaintenancePCARRD - Philippine Council for Agriculture

Resources Research and DevelopmentPCR - Project Completion ReportPIE - Provincial Irrigation EngineerPIO - Provincial Irrigation OfficesPIS - Pump Irrigation SystemRIARS - Regional Integrated Agricultural Research SystemRID - Regional Irrigation DirectorRIO - Regional Irrigation OfficesSCF - Standard Conversion FactorSEC - Securities and Exchange CommissionSMD - Systems Management DepartmentSOE - Statement of ExpenditureVIG - Viability Incentive GrantWm - Watermaster

This document ha a restriced distbution and may be ue by gcIents only In te pefa,meof theiir oaficid dutem Its contents may not otherwise be diclosed without Wotd Bank autdhcuen.

PHILIPPINES

IRRIGATION OPERATIONS SUPPORT PROJECT

STAFF APPRAISAL REPORT

Loan and Project Summary

Borrower: Republic of the Philippines

Beneficiary: National Irrigation Administration (NIA)

Loan Amount: US$45.0 million

Terms: Repayable in 20 years, including 5 years of grace, atthe standard variable interest rate.

Project Ob,ectives: The objectives of the project are: (a) to strengthensubstantially the institutional capability of ilIA andcooperating private irrigators' associations (MAs) toimprove and maintain the efficiency of existingnational irrigation system (NIS) infrastructure; and(b) to improve the operating performance of the 127existing NISs through minor rehabilitation works andthrough increases in the annual funding for and levelsof operations and maintenance (O&M) services.

Description: The project would be the first phase of NIA's proposednine-year Irrigation O&M Improvement Program,commencing in July 1988. It would cover the entire NISservice area of about 600,000 ha, benefitting some430,000 rural families. The project, of 3 years'duration, would initiate higher levels of O&M expendi-ture and work, and would provide related support forall NISs. During the project, average annual expendi-tures on O&M would be increased to an average of aboutUS$24.80/ha (end-1987 prico.), a level about 90Z thatestimated to be necessary to maintain the NISs atmaximum productivity. The project would also providefor minor rehabilitation of existing infrastructure;assist in the further development of IAs and expandedbeneficiary participation in O&M of all NISs;substantially increase O&M cost recovery throughimproved irrigation service fee (ISF) billing andcollection efficiency; and support institutional andoperational policy reforms necessary to ensure thelong-term capability of NIA to keep the NISs operatingefficiently.

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Risks: The main risks would be possible adverse farmerreaction to increased ISF collection efforts, and thefact that in some areas targets may not be reachedbecause of prevailing peace and order problems. Thesepotential difficulties would be eased by improvedirrigation services and increased farmer participationthrough lAs, and are not considered serious risks.

Estimated Cost: Local Foreign Total…---- (USs million)…

Rehabilitation Works 10.5 7.0 17.5044 Program 18.8 1.7 20.5Equipment and Spares 1.8 5.4 7.2IA Development Program 0.6 0.1 0.7

Technical Assistance 1.1 0.2 1.3MIA Staff Training 0.3 0.1 0.4Engineering and Administration 3.3 0.0 3.3

Total Base Cost 36.4 14.5 50.9

Physical Contingencies 5.5 2.2 7.7Price Contingencies 1.2 0.4 1.6

Total Project Cost 43.1 17.1 60.2 /a

Financing Plan:IBRD 27.9 17.1 45.0/bCovernment/NIA 15.2 - 15.2

Total 43.1 17.1 60.2

Estimated Disbursements:

Bank FY 1989 1990 1991 1992- _US$ milli.on)-

Annual 16.4 18.0 10.3 0.3Cumulative 16.4 34.4 44.7 45.0

Rate of Return: 34%

MEp: IBRD 20485

/a Including taxes and duties of about US$2.0 million.

/b Including up to US$1.5 million of retroactive financing.

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PHILIPPINES

IRRIGATION OPERATIONS SUPPORT PROJECT

Table of Contents

Page No.

LOAN AND PROJECT SIOIARY.................................. 1

I. ARICULTURE IN THE ECONOMYs.............................. .o 1

Sectoral Per no r m a n c e 1Rural Pev e r t y 1Development Objectives and Strategyr a t e gy..............e..... 2

II, THE IRRIGATION SUB S E C T OR............ 2

Irrigation Development 2Institutional Responsibilities and Supporting Services.... 3National Irrigation Administration...............e..o..o..o 3Irrigators' Associations..........e....... ... ...... *s.... 4Support Services for Irrigated Agricultureiultureo........ 5

Operational Performance....................... .. e..o........ 6Irrigation Financing and Cost Recovery................o...... 7

Irrigation Financing.. a n c i ng...................... ....... 7Irrigation Service Fees 8ISF Collectionsl.......e..................... ....... .... 8Recurrent Funding Requirement.quireme*nt* , . *.oo, ..... 9Beneficiaries' Capacity to Payay.........o....o........... 10

Government Irrigation Subsector Stratery at....e gy............ 10The Bank's Role in Irrigation Development*o..............o... 11

III. THE PROJECT.O... * ..o.............. ......... 11

Project Formulation and Objectives............e...........e.. 11Project Description. s cOs.........................onSOOOO*.. 12Detailed F ea tu r es..0***ooee*O000*000000 13

Institutional Strengthening of NIA.... IA.................. 13Improvements in ISF Collection Procedures*e*.......o... 13Irrigation Management Information System..stem......... 14Staff Training ......... 15Studies and Preparation of O&M Manualnsw*...........s.. 15Equipment......e...o......e.......... .e. .oo. o...... , 16

This report is based on the findings of an appraisal mission to thePhilippines in October/November 1987, comprising Messrs. T. Daves,C. Gunasekara and I. Naor and Ms. S. Kulsrethsiri (Bank), and Mr. T. Rico-Mora(Consultant).

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Page No.

Irrigators' Association Development....................... 16Minor Rehabilitation ..............e.................................. 17

Structural ................................ ........ .... 18Initial Desilting of Canalso..........................o 18

Expanded Operations and Maintenance Programo.............. 18Operationso..............eeo..................o...o........o..... 18Maintenance ******...........oo....o.......................o...e.. 18

Project Costs and Financing.......................................... 19Cost Estimateso...........................................ooo o 19Financing.. . .............................................. 19

Procurement o o *o t * .* o o e * o o *o ......o.................................. 21Disbursements o..&* .* *.* &.oe .o *a t * a o...........oo................o.... 23

IV. PROJECT IMPLEMENTATION...o................................... 25

Organization and Management...*.....**.......................e 25Project Implementation Schedule ................................ 26Monitoring and Evaluation.................................... 27Accounts and Audits ..o..................0.............0..0........00..0..00 27Environmental Effects........................................ 27

V. AGRICULTURAL PRODUCTION AND MARKETING .......................o o 28

Present and Future Cropping Patterns......................... 28Yields and Productiono.....o.o...........o.. o.o.o.... ............ 29Market Prospects ................o ............. ..........0..0. 30

VI. BENEFITS, JUSTIFICATION AND RISKS.o.....................**o***& 31

Benefits and Beneficiarieso.........................o..........oo 31Farmers' Incomes and Payment Capacity........................ 31Economic Analysisoo ....... 33Project Risks.o..O.*........................................0............ 34

VII. AGREEMENTS TO BE REACHED AND RECOMMENDATION...oo...ooo..... 34

TABLES IN TEXT

2.1 Current ISF Rates............................................ 83.1 Project Cost Summary..o........e............ ................... 203.2 O&M Financing Plan, 1988/89-1990/91.......................... 213.3 Procuremento.. ooo o o ........o.. .............o.o.o............ 235.1 Cropping Intensity and Area, with Irrigation................. 295.2 Average Yields and Production under Irrigation............... 30

ANNEXES

Annex 1Table 1: Project Cost SummaryTable 2: Restoration Work CostsTable 3: O&M Equipment CostsTable 4: Training Equipment CostsTable 5: Equipment Reconditioning CostsTable 6: Parcellary Mapping and Irrigation Fee Register CostsTable 7: NIA Staff Training CostsTable 8: Irrigators' Associati3n Development CostsTable 9: Recurrent O&M CostsTable 10: O&M Unit Costs by Funding Source

Annex 2Table 1: Financing Plan and Proposed IBRD Loan AllocationTable 2: Estimated Schedule of Project ExpendituresTable 3: Estimated Scheduled Loan Disbursements

Annex 3Table 1: Current ISF Rates, by Type of NISTable 2: Adequacy of ISF RatesTable 3: Service and Irrigated Area of the NISs, 1982-86Table 4: Benefited as Compared to Irrigation Area of MISs, 1982-86Table 5: Status of IA Development, June 1987Table 6: IA Development Schedule, 1988-90Table 7: Work Responsibilities for Implementation of the IMIS

Annex 4Table 1: Rice Price Structure, 1987-95Table 2: Summary of Fertilizer Prices, 1987-95Table 3: Paddy Crop Financial BudgetsTable 4: Farm Financial Budgets

Annex 5Table 1: Economic Benefits and CostsTable 2: Project Cash Flow

Annex 6 - Selected Documents and Data Available in Project File

FIGURES

Figure 1: NIA Organization ChartFigure 2: Organization Chart for Project ImplementationFigure 3: Project Implementation Schedule

MAPIBRD 20485

Is AGRICULTURE IN THE ECONOMY V

Sectoral Performance

1.1 The agricultural sector's past performance in the Philippines hasben surprisingly good, considering that for many years the overall incentivestructure was sharplv biased in favor of industry. From 1970 to the economiccrisis of 1982, agriculture grew by over 4X p.a. in real terms (5% p.a. if thedeclining forestry subsector is excluded), or somewhat faster than GDP as awhole. Since then, agricultural growth has slowed to an average 3% p.a..although still showing much more resilience than the rest of the economy. Atthe present time agriculture retains a dominant economic position, directlygenerating about one-fourth of GDP and exports, employing nearly half thetotal labor force, and providing many of the natural resources and much of thedomestic demand on which the industrial and service sectors depend.

1.2 Many factors have contributed to this performance. For much .; the1970s, world food prices were at historically high levels, which compensatedin part for the policy d*istortions that discriminated against agriculture.This encouraged Philippine farmers to increase considerably the total areaunder cultivation, as well as to expand the use of modern technology, mostnotably in the sta;le food, rice, but also in other commodities as diverse asbananas, poultry and aquaculture products. A large irrigation investmentprogram doubled the irrigated area. This, together with the adoption of high-yielding varieties and increased fertilizer application, helped to achieve agrowth rate of 5.3% p.a. in rice production during 1972-80 and a near doublingof rice yields to about 3.0 tons/ha. Corn production also grew, although morebecause of expansion in the planted area than yield improvements. As aresult, by the start of the present decade the Philippines had achievedvirtual self-sufficiency in basic foods and had diversified its structure ofproduction by developing a number of new crops for domestic consumption orexport.

1.3 The main underlying causes of the decline in output growth since1983 have been an increasing shortage of foreign exchange and associatedpolicy measures restricting import of agricultural inputs, the gradualcontraction of credit to the sector, adverse weather and low internationalcommodity prices. Nonetheless, agriculture has been the only major sector tomaintain some momentum of development and to record an overall positive growthrate during the period of economic recession.

Rural Poverty

1.4 Although the record of agricultural growth and diversification overthe past decade and a half has been generally good, it is marred by thecontinuing presence of massive rural poverty. At least 50% of Philippinefamilies still have incomes below the poverty level, and some three-fourths of

1/ For further information see: Philippines Agricultural Sector StrategyReview, World Bank Report No. 6819, of October 21, 1987.

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these live in rural areas where the absolute number of poor have increased,real wages have fallen and the number of landless families has grownsteadily. Overall, it is estimated that about 16 million rural inhabitai.tslive in absoluLe poverty. Small family operated farms predominate and landdistribution is highly skewed. Although the average farm size is about 3.6ha, some 5% of farmers have more than 10 ha each in productiou and togetheraccount for one-third of all farmland. In contrast, about 85% of totalfarmholdings (2.35 million) are less than 5 ha, and the average size of ricefarms is only 2.7 ha. Some 40% of all farms are cultivated by tenant farmers,mostly on a share cropping basis, and population pressure has caused even themost marginal lands to be brought under cultivation. Persistent widespreadrural poverty is the most disappointing aspect of past economic performanceand reflects a combination of factors: a continuing high population growthrate, an increasing scarcity of land, inadequate growth of the agriculturesector itself, and a failure of the economy as a whole to provide sufficientemployment opportunities outside agriculture.

Development Objectives and Strategy

1.5 The Government is keenly aware of the critical role that agriculturemust play in economic recovery and in spearheading the attack on ruralpoverty, and it has substantial activities underway or planned to promote andsupport agricultural development. These involve a series of institutionalreforms to strengthen sector management, policy reforms aimed primarily atreducing government intervention in pricing and marketing, and eliminatingdiscrimination against agriculture, improved utilization of existingproductive capacity, measures to achieve a better distribution of cultivablelands, and the allocation of more resources to agricultural development. TheBank has consistently supported the Government's objectives for agricultureand, in view of its potential contribution to increasing national output andexports and to poverty alleviation, an important element in the Bank's futurecountry assistance strategy for the Philippines will be the continued supportof priority agriculture and rural development activities.

II. THE IRRIGATION SUBSECTOR

Irrigation Development

2.1 Although there is a long tradition of irrigation in the Philippinesdating back to the Spanish era when individuals or groups of farmers built,operated and maintained small-scale systems, the first Government-financedirrigation project was completed only in 1923. By 1940, ten such irrigationsystems covering 80,000 ha had been completed. After World War II, theGovernment stepped up its construction activities, so that by 1968 the totalirrigated area had increased to about 700,000 ha. Since then the totalirrigated area has again doubled to 1.45 million ha, out of about 3.5 millionha judged suitable for irrigation. This expansion, and the related dramaticincrease in paddy production since 1968, have enabled the Philippines toachieve marginal self-sufficiency in rice.

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2.2 Irrigation in the Philippines is generally categorized into threetypes of systems: national irrigation systems (NISs), communal irrigationsystems (CISs) and pump irrigation systems (PISs).

(a) National Irrigation Systems. At present there are 127 NISs, servingabout 600,000 ha. They are built, operated and maintained by theNational Irrigation Administration (NIA), a government-ownedcorporation respeisible for irrigation development and operations.Three of the NISs are reservoir systems: Magat and Upper Pamapangatogether irrigate about 200,000 ha, with power generation as anadditional benefit; and Angat-Maasim, which is primarily for urbanwater supplyp also irrigates about 31,500 ha. The rest of the NISsare run-of-river diversion systems, primarily for irrigation.Twenty new NISs will bring an additional 80,000 ha under irrigationby 1990 and a further 70,000 ha by 1993.

(b) Communal Irrigation Systems. CISs are small gravity, mostly run-of-river type systems, owned and operated by farmer irrigators'associations (MAs). The roughly 6,300 CISs, generally under 1,003ha each, currently account for an aggregate area of about 700,000ha. Unlike the national systems, they are built with or withoutCovernment (NIA) assistance. When NIA is involved, its rolerelative to the CISs is limited to financial and technicalassistance in the planning and construction of the physical works,and development and training of the IAs which own the systems andare responsible for their maintenance after construction iscompleted.

(c) Pump Irrigation Systems. Privately owned PISs service about 200,000ha. Pump units that cover a service area of from 20 to 100 ha areinitially operated and maintained by either NIA or the Farm SystemsDevelopment Corporation (FSDC), and are then turned over tocooperatives. Smaller pump units with command areas of less than 20ha each are privately owned. The high cost of energy has reducedthe overall financial attractiveness of the PISs and is likely toconstrain their further expansion.

Institutional Responsibilities and Supporting Services

2.3 The National Irrigation Administration. The National IrrigationAdministration (NIA), created in 1963 as the successor to the irrigationdivision of the Bureau of Public Works, has a very broad mandate within theirrigation subsector. Republic Act No. 3601 established NIA as a Governmentcorporation responsible for planning, constructing, operating and maintainingall NISs in the Philippines. NIA was also empowered to investigate and studyall national water resources for irrigation purposes; plan, construct,temporarily administer and periodically repair CISs and PISs; and collectirrigation service fees (ISF). In 1974, Presidential Decree No. 552 widenedNIA's scope of action, by giving it broader powers and authority to undertakerelated projects (e.g., flood control, drainage, land reclamation, hydro-powerdevelopment, domestic water supply, road or highway construction,reforestation and other activities to maintain the ecological balance), incoordination with other concerned agencies.

2.4 As a semi-autonomous agency, NIA has considerable operationalfreedom, but is attached to the Department of Public Works and Highways (DPWH)for program and policy coordination purposes (Figure 1). NIA is governed by aBoard of Directors appointed by the President and consisting of the Secretaryof Public Works and Highways (chairman), the Administrator of VIA (vice-chairman), the Director General of che National Economic and DevelopmentAuthority, the Secretary of Agricuiture, the General Manager of the NationalPower Corporation, and a representative of the private sector. All of NIA'sAssistant Administrators are also Presidential appointees.

2.5 NIA has developed into a well-structured agency with its operationscarried out through an effective network of national, regional, provincial andsystem-level offices covering the entire country. It is adequately staffedand, with the exception of a few minor items, has sufficient construction andmaintenance equipment. At its Manila headquarters, NIA's organizationalstructure includes four units, each under an Assistant Administrator:(a) Project Development and Implementation; (b) System Operations andEquipment Management; (c) Finance and Management; and (d) Personnel andAdministrative Services. The first two units are technical and cover allphases of the irrigation project cycle, from identification through planning,preparation, design and construction, to operation and maintenance. Thelatter two units include all support functions. At regional level NIA has 11offices (RIOs), one for each of 10 of the 12 administrative regions of thecountry and one responsible for regions nos. 7 and 8. Each RIO is headed by aRegional Irrigation Director (RID), who reports to NIA's Administrator. Some95 irrigation system offices (ISOs) are each responsible for one NIS or acluster of NISs, as appropriate, and are headed by an IrrigationSuperintendent (IS). Another 67 provincial irrigation offices tPIOs), eachheaded by a Provincial Irrigation Engineer (PIE), are responsible for communalirrigation works. All ISs and PIEs of a given region report directly to theRID of that region.

2.6 Irrigators' Associations. Over the years, NIA has acquiredvaluable experience and has developed a successful participatory strategy forestablishing and maintaining irrigators' associations (IAs). In this respect,NIA is well ahead of many irrigation authorities elsewhere, which are stillattempting to identify effective techniques for organizing farmers into waterusers' groups.

2.7 After observing weaknesses in the conventional centralized, top-downdevelopment of irrigation schemes, in 1976 NIA launched a special experimentalprogram with the Ford Foundation to test new participatory approaches to thesefunctions in the communal irrigation systems, from the earliest stage ofdesign through to operations. Encouraging results prompted NIA to extend theconcept throughout the CIS network, with continuous refinements and improve-ments. Although some smaller CISs still depend more on informal leadership byvillage heads or larger landowners who call on irrigators to perform neededmaintenance and observe tacit water distribution rules, O&M of the larger CISs(above 100 ha) is now usually handled by IAs. Active collaboration among irri-gation officials and farmers, from initial planning through construction,operations and maintenance, is the essential feature of the strategy, with theneed for a new or improved irrigation system serving as the unifying element.In the identification phase, farmers formulate by-laws, register their IA,

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obtain a water permit, establish IA committees as needed, conduct a manpowersurvey of IA members in preparation for construction, work with technicalstaff on land surveys and negotiate the technical design, secure rights ofway, and sign a pre-construction memo of agreement with NIA on the estimatedcost of the proposed CIS. In the construction phase, they contribute labor,monitor construction materials, equipment and costs, reconcile constructioncosts with NIA records, attend training seminars, accept the completed system,and sign the loan with NIA. In the O&M phase, they take over control of theirsystem, while continuing to receive training from NIA in water management.

2.8 More recently, NIA has been trying to transfer some of the lessonslearned in working with IAs in the CISs to the national systems. NIA'sobjective is to obtain beneficiary participation in O&M below the mainconveyance canals in the NISs. The task is more difficult than in the CISs,because the national systems are larger and more complex. Also they havetraditionally been owned and maintained by the Government, and althoughfarmers pay irrigation service fees, they have not been accustomed toparticipating directly in O&M of the NISs. Ultimately, extension of the IAapproach to the NISs will benefit both NIA and the irrigators. It will enableNIA to lower its O&M costs and improve its collection of irrigation servicefees through the IAs. Farmers should achieve better responsiveness in theirdealings with NIA officials, gain a better understanding of irrigatedagriculture, develop their capability for collective bargaining for procure-ment of agricultural inputs, get better operated and maintained systems, andeventually obtain higher and more stable incomes.

2.9 To date NIA has commenced IA organization activities over about336,000 ha within the NISs, comprising some 1,230 IAs, with a membership ofabout 207,000 farm families (Annex 3, Table 5). On the average, one IA coversan area of about 250 ha and is organized on the basis of a lateral or commonwater source. Management structures become more formal as system sizeincreases, but a typical IA is registered with the Securities and ExchangeCommission (SEC) and has an elected board of directors and a roster ofofficers. Of the 1,230 IAs in different stages of formation, 570 are alreadyregistered with the SEC and have entered into formal contracts with NIA forsome O0M responsibilities.

2.10 Support Services for Irrigated Agriculture. Both the public anaprivate sectors provide support services for irrigated agriculture. Thepublic sector is primarily concerned with: policy formulation and planning;the generation and testing of technology for promotion through the Governmentextension service; channelling of a substantial share of rural credit require-ments through the Central Bank to a network of rural and other banking insti-tutions; and, to a lesser extent, produce marketing. The private sectorimports, produces and distributes fertilizers, pesticides, feedstuffs andveterinary supplies, which are available to farmers through retail outlets inevery municipality; and it plays the major role in purchasing, processing anddistributing farm products.

2.11 National agricultural research is coordinated by the PhilippineCouncil for Agriculture, Forestry and Natural Resources Research andDevelopment (PCARRD), which assists the Department of Agriculture (DA) in theformulation of relevant research programs and in the packaging of technology

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for promotion by the extension service. Responsibility for research in rice,the principal irrigated crop, has recently been assigned to DA's newlyestablished Philippine Rice Research Institute at Central Luzon AgriculturalUniversity. Rice research is also carried out at other universities, theInternational Rice Research Institute (IRRI), six DA rice experiment stationsand a number of research substations throughout the country. The DA stationsfocus on varietal screening, foundation seed production and certification,fertilizer trials and intensified land utilization through multiplecropping. High yielding rice varieties and better farm management techniquesare developed and tested at these facilities, and on farms through theRegional Integrated Agricultural Research System (RIARS) and the ProvincialTechnology Verification Trials. Although the quality of agricultural researchis generally good, it is under-funded, with spending well below the levels ofmany comparator countries.

2.12 Extension services are provided to farmers through the 12 DAregional offices, with an average of one extension agent for about every 124farmers. Various credit institutions, rural banks and other governmentagencies also provide some technical assistance to farmers. NIA itself trainswater management technicians to help farmers use their irrigation systemsefficiently, while local municipal action committees and IAs coordinateactivities at the level of individual irrigation systems. The extension andother support services provided by the various agencies need much bettercoordination and their technicians require greater mobility and more intensivetraining. Extensionists are often ill-prepared to advise farmers on irrigatedrice production techniques, and water management technicians seldom receivemuch training in agronomy, with the result that the two sometimes provideconflicting or inadequate advice to irrigating farmers.

Operational Performance

2.13 The performance of mnty of the irrigation systems in the Philippinesfalls below expectations. Despite considerable double cropping, in 1986 totalirrigated area in the NISs reached only 0.8 million ha, of which 95% was inpaddy. The CISs and PISs combined accounted for a total irrigated area of 1.1million ha. In terms of cropping intensity, NIS reservoir systems exhibitedthe highest values, at over 150Z, compared to about 131% for NIS diversionsystems and 127% for the communal and pump systems. An earlier assessment byNIA (1984) concluded that efficiencies (production per unit of irrigationwater) were low and that most NISs were irrigating less than the designservice areas: 69% of the aggregate NIS area was being irrigated during thewet season, when water is plentiful, and only 47% in the dry season.

2.14 The relatively low cropping intensities reflect, inter alia,inadequate and highly variable water supply, particularly in the dry season;poor system maintenance; and some incompatibility of system design andlocation-specific conditions. On the latter point, a random check of NIA-managed NISs, which had met irrigation diversion requirements at the time ofconstruction completion, indicated that about 5% of them suffered 8-10% watershortfalls at the diversion during dry season. Also, flood control anddrainage were not given sufficient emphasis during design of some of the olderNISs. In the case of the CISs, the low cropping intensity is partly attri-butable to the over-design of many systems relative to available water

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supply. For the most part, however, poor operational performance reflectsinadequate O&M funding and capability, on the part of NIA and the IAs. Themost common problems are deteriorating canals and structures, silted anddefective diversion works, inadequate drainage and on farm facilities, andpoorly maintained service roads. Thirty of the 127 NISs have been completelyrehabilitated since 1978; 54 are now under rehabilitation; and 43 have had norehabilitation work in recent years. The rehabilitation work that has beencarried out so far has helped to bring the NIS cropping intensity up to itscurrent average of 1322.

Irrigation Financing and Cost Recovery

2.15 NIA's ability to both implement its ongoing investmenc program andprovide adequate O&M is severely curtailed by its financial situation, whichstems largely from recent Government measures to deal with the country'sfiscal problems, including a sharp reduction in Government contributions toNIA investment projects and a requirement that NIA provide funds to cover thepost-1982 foreign debt-service obligations for NIS development from its ownresources. Irrigation service fee (ISF) rates charged by NIA are not low perse, especially when measured ag2inst beneficiaries' capacity to pay. However,ISF proceeds lag behind amounts due because of low collection levels and thecosts associated with accepting in-kind payments. From 1988 onward NIA willrequire fundamental improvements in cost recovery, in order to raise O&Mexpenditures to satisfactory levels, and an increase in Government contribu-tions to sustain il:s planned investment program and cover aforementioned debtservice.

2.16 Irrigation Financing. In the past, combined interest on construc-tion funds held on deposit, management fees charged to the Government forconstruction supervision, consulting fees, equipment rental and ISFcollections had enabled NIA to finance its operating budget. The investmentprogram was financed by the Government, using mainly foreign loan funds.However, the economic crisis in 1983 and subsequent measures instituted by theGovernment have had a significant adverse impact on NIA's financialsituation. Over the last three years, there has been a sharp decline inirrigation project investment support by the Government: by 1986 Governmentsupport had dropped to about US$6.75 million, less than 1OZ of the 1982level. As Government investment contributions fell, so did the volume ofmanagement fees and interest earnings on construction funds. In 1986, inorder to implement its work program, NIA had to supplement its own income ofUS$15 million by utilizing its cash reserves, which are now exhausted.Implementation of ongoing projects has slowed down or been curtailed; NIA'sstaff has been cut back; and NIA's general capacity to undertake new projectshas been reduced.

2.17 More serious perhaps than the Government's declining support forNIA's investment program has been its decision to transfer to NIA theresponsibility for servicing the debt on all official foreign loans forirrigation contracted since 1982 (equivalent to US$250 million). Debt serviceon these obligations will increase sharply beginning in 1988, reaching a peakof about US$29 million p.a. in 1990. Most of NIA's projects are large-scaleand take a long time to implement and to attain full agricultural development,but the funds borrowed to finance such investments involve relatively short

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maturities (usually 15 years). To a certain extent the financial difficultiesNIA now faces stem from this imbalance. Without some policy changes, VIAcould be forced to cut its operating expenditures drastically, and the alreadyinadequate level of O&M would be reduced even further. This implies that:(a) cost recovery in irrigation must improve; (b) future irrigation investmentprojects must be carefully reviewed, paying particular attention to theirfinancial and economic viability, and to NIA's implementation capacity; and(c) the Government must bridge the financing gap created by the imbalancebetween shorter maturities and longer-term economic returns.

2.18 Irrigation Service Fees. According to the National IrrigationPolicy adopted in 1978, NIA is authorized to charge ISF on irrigated landswithin the NISs at levels sufficient to finance O&M and insurance, and torecover initial investment costs (without interest) in no more than 50 years,provided that such charges are within the beneficiaries' capacity to pay.Since 1975, irrigation fees have been denominated in terms of paddy, andfarmers may pay either in kind or the equivalent cash amount, based on theGovernment paddy support price. This has provided a degree of indexationagainst inflation, although it is also costly for NIA, which must collect,store and sell the paddy. ISF rates vary according to type of system, and bywet and dry season, as follows:

Table 2.1: CURRENT ISF RATES

Kind of system Wet season Dry season(Cavans of 50 kg of paddy weight rice/ha)

Diversion systems 2.0 3.0Reservoir systems 2.5 3.5Pump systems 3.0 5.0

2.19 Despite official policy, these ISF rates could not recover both OEMand all initial investment costs, even if cropping intensities were at designlevel and there were 10OZ billing and collection efficiency. However, ifcollections were at full potential, current ISF rates (valued at the prevail-ing P 3.50/kg Government paddy support price) would cover both the 1983-87average level of O&M expenditures (about US$16.40 per ha of service area), aswell as a small fraction of construction costs. This does not happen atpresent because of under-billing, low average ISF collection efficiency andhigh collection expenditures associated with the in-kind payment system.Nevertheless, ISF revenues do finance about 80% of current O&M expendituresand 47Z of what would be considered desirable O&M levels. This places thePhilippines ahead of most Asian countries in terms of O&M cost recovery.

2.20 ISF Collections. ISF collections have consistently lagged behindamounts due, although they are improving. Collection efficiency, whichaveraged only 43X during 1980-84, rose to 54Z in 1986 and is estimated at 59%in 1987, as a result of increased efforts by NIA and the lAs. Low collection

levels stemming from weaknesses in the collection process are aggravated byinadequate billing. About 202 of the NIS area lacks detailed parcellarymaps. Records of service area, individual irrigated holdings and irrigationfee registers are often incomplete and outdated; and changes in land ownershipare not fully recorded. Consequently, it is estimated that in some areasabout 30Z of irrigated lots go unbilled. Many times, although bills areprepared they are not served on time. In a recent study, one-third ofdelinquent farmers also cited dissatisfaction with NIA's services as theprincipal reason for non-payment.

2.21 The situation is complicated by the lack of effective legalinstruments for enforcing ISF collections. In practical terms, it is verydifficult to implement a "no pay, no water" policy. NIA has to resort tocumbersome and costly civil suits to collect ISF from delinquent farmers. Atpresent, there are some US$34 million in outstanding arrears, dating back tothe 19609. As an inducement to increase payments of overdue accounts, NIAmanagement has proposed and Government has approved, in principle, to:(a) eliminate accrued interest on debts prior to July 1975; and (b) recal-culate ISF debt using the official support price of rice at the time of eachbilling, instead of applying the current support price to the whole debt.These measures, together with increased IA effectiveness, are expected toreduce ISF arrears substantially and to contribute to improved collection ofcurrent ISF assessments.

2.22 In analyzing collection performance, it is important to note thatfees are denominated and usually paid in paddy. Therefore, deductions must bemade for NIA's handling expenses, which average from 14-20% of total in-kindreceipts, as well as losses in sales of paddy of about 162 (1986). Since theaverage market price of paddy has been below the Government support price forthe past seven years, NIA has consistently incurred losses. An existingagreement which obligates the National Food Authority (NFA) to buy paddy fromVIA at the official support price has never been implemented. Although NIAbeArs the downside risk, it does not necessarily benefit from the potential ofthe market price running above the support price, since in that event farmerswould probably revert to making payments in cash rather than in paddy.Finally, deductions must be made for discounts which NIA gives to farmers whopay on time, and for bonuses to IAs and NIA staff for collections above pre-determined levels. Overall, in 1986 NIA's gross receipts from ISF collections(US$8.8 million) yielded net revenues of only about US$6.1 million.

2.23 Recurrent Funding Requirement. VIA estimates its average O&Mexpenses (1983-87) at approximately US$13.10/ha. However, NIA's definitionincludes only those expenditures sourced from its own O&M budget, whichfinances mainly salary and wage compensation of NIA's O&M staff. In additionto this, Government allocates some supplemental funds to NIA, which are usedto finance mechanical and contractual work for canal desilting, minorrestoration activities, road works and repairs, etc., as well as, occasionalemergency funds for areas affected by natural calamities, such as typhoondamage, and for irrigation system renovation and rehabilitation. Unlike NIA'sbasic O&M budget, which has been relatively steady and has increased overtime, special Government O&E allocations have fluctuated widely from year toyear, ranging from 132 to 312 of NIA's basic O&M budget during 1981-86. Thesespecial O&M allocations make up a part (averaging about US$3.30 equivalent in

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recent years) of total O&M funding, which should also be recovered from directbeneficiaries through ISF collections.

2.24 As indicated in parao 2.19 above, present ISF collections financeabout 80% of total actual O&M expenditures (US$16.40 equivalent/ha, includingUS$13.10 from NIA's regular O&M budget and US$3.30 from special Government O&Mallocations). The 20% shortfall in ISF collections represented NIA'srecurrent funding requirement of about US$2 million in 1987. Looking to thefuture, that shortfall could be met with no increase in ISF rates, if collec-tion efficiency were raised to about 75% (Annex 3, Table 2). However, it hasbeen estimated that higher average annual O&M expenditures of about US$28would be needed by 1997, in order to sustain irrigation performance. Thisamount could not be fully covered from ISF without some increase in rates.For example, the increase would be 25%, if cropping intensity were 150%, andif there were full ISF billing and 85% collection efficiency. Alternatively,a lower increase would be needed if NIA could reduce collection costs andlosses, and/or obtain the official support price for its paddy sales.

2.25 Beneficiaries' Capacity to Pas. Data from various farm surveysduring 1982-85 indicate that net income per hectare of irrigated land wassignificantly higher than in rainfed areas. Nevertheless, family incomes inirrigated areas often remained around the poverty threshold due to small farmsizes and widespread tenancy (para. 1.4). In terms of paddy, incrementalproduction of irrigated land ranged from some 1,600-2,700 kg/ha in differentyears and surveys. ISF payments at current rates absorb only about 10-15 ofthese increments and are within the capacity of most beneficiaries to pay.However, full cost recovery of the targeted higher levels of O&M through ISFrate increases from all beneficiaries (para. 2.24) would likely push asignificant number of families below the poverty threshold, unless preceded bysustained productivity improvements.

Government Irrigation Subsector Strategy

2.26 The Philippines has made impressive investments in irrigated agri-culture during the past two decades, with reasonable success as indicated bythe achievement of rice self-sufficiency and the relatively strong rate ofagricultural growth--to which irrigation development has made an importantcontribution. Looking to the future, while a few new large-scale irrigationand multipurpose projects may be justified, Government investments arerequired mainly in rehabilitation, communal and small-scale irrigationschemes. It is estimated that part of the irrigated service area will needrehabilitation (para. 2.14), which would require less investment and yieldgreater and faster returns than entirely new projects. For example, studiesindicate that rehabilitation costs per incremental ton of paddy average onlyabout 25-50X of the costs of converting from rainfed to irrigated riceproduction, but can result in yield increases of as much as 70%. The rehabi-litation needed at this time to correct system deterioration and increase theefficiency of existing infrastructure reflects inadequate O&M in the past.The Government recognizes the problem; large-scale investment programs havealready been scaled back and increased emphasis is being placed on proper O&Mby NIA and the IAs. Limited area expansion through the completion of ongoingschemes, and moderate increases in yields and cropping intensity due to moresatisfactory O&M of established irrigation works, should ensure thatPhilippines is able to maintain self-sufficiency in rice through the 1990s.

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The Bank's Role in Irrigation Development

2.27 To date the Bank has lent US$738 million to the Philippines for 12irrigation projects, one land settlement and three rural development projectswith irrigation components, and one watershed management project. Eleven ofthese projects have been completed. The most recent loan was for the CommunalIrrigation Development Project (Loan 2173-PH, 1982). Together, by 1990 theBank-supported projects will irrigate about 490,000 ha (including 200,000 haof new development, with the remainder large-scale rehabilitation andupgrading), benefit some 290,000 families, and will help to produce more than2 million tons of paddy, or about 222 of total projected rice production and30X of irrigated production.

2.28 Implementation of completed and ongoing Bank-financed projects hasbeen generally satisfactory, although some operations have experienced delaysbecause of local funding constraints, design changes, contractor problems, orpeace and order difficulties. Project Performance Audit Reports that havebeen prepared for four completed projects (Upper Pampanga River IrrigationLn. 637-PH; Aurora-Penaranda Irrigation, Ln. 984/Cr. 472-PH; Tarlac IrrigationSystems Improvement, Ln. 1080-PH; and Jalaur Irrigation, Ln. 1367-PH) allindicate such implementation delays. They also indicate general watershortages, relative to design because of watershed degradation and delivery inefficiency stemming from inadequate O&M. Poor O&M levels are attributed tolow ISF collections. Responsibility for O&M in all NISs is assigned to NIA,but funding has thus far been below the levels needed to sustain the overallperformance of the established irrigation systems. Also, because of thepreoccupation with construction, NIA has not yet developed a strong enoughinternal capability to carry out O&M efficiently and effectively. To helpoffset these problems, the Sank has been asked to support the proposedIrrigation Operations Support Project (IOSP), which is designed to improve O&Mthroughout the entire NIS service area.

III. THE PROJECT

Project Formulation and Objectives

3.1 As with any other infrastructure, proper operation and regular main-tenance of irrigation works are needed to prevent system deterioration, whichin turn leads to decreases in cropping area, yields and output. Although ISFrates and collection efficiency are better and the organization of waterusers' groups is more advanced in the Philippines than in many comparatorcountries, the level of irrigation O&M expenditures and the effectiveness ofthe O&M services provided are still inadequate. In 1979, the Governmentrequested Bank assistance to evaluate O&M of existing irrigation infra-structure and to develop an action plan for improvement. A consultant studyfinanced under the Medium-Scale Irrigation Project (Loan 1809-PH), completed

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in 1985, identified areas for upgrading and institutional strengthening. 1!Drawing on these recommendations, NIA prepared a medium-term nine-yearIrrigation O&M Improvement Program, and has requested that the Bank financethe first three-year time slice of the Program under the proposed IrrigationOperations Support Project (IOSP). The IOSP would be the first Bank-financedproject in the Philippines primarily to address irrigation system O&M.

3.2 The main objectives of the IOSP are: (a) to strengthen substan-tially the institutional and technical capability of NIA and cooperating IAsto improve and maintain the efficiency of existing NIS infrastructure; and(b) to improve the operating performance of the NISs through minor rehabilita-tion works and through increases in the annual funding for and volume of O&Mservices. The IOSP would comprise a three-year Phase I of the longer-termIrrigation O&M Improvement Program. Activities planned for subsequent PhasesII and III include some major rehabilitation (on 18 NISs) and system moderni-zation, as well as continued work to improve O&M levels and develop the IAnetwork. The main targets for the overall Program are the reduction of NISsystem performance deterioration, improvement of water delivery and water useefficiency to permit increased cropping intensity; and achievement of fullcost recovery of increased O&M expenditures, through ISF payments bybeneficiaries. The IOSP is expected to achieve about 75% of the Program'sfinal O0M and cost recovery targets. During preparation/preappraisal missionsin 1986 and March/April 1987, and an appraisal mission in October/November1987, agreements were reached with the Government on the overall IOSP concept,scope and financing.

Project Description

3.3 The project would cover all of the existing 127 NISs, excluding afew selected areas where major rehabilitation works would be needed beforeimproved OEM would have the desired impact. The project would provide for thefollowing:

(a) Institutional Strengthening of NIA to Provide Improved O&MServices. More effective and efficient O0M performance would beobtained through: (i) improvements in the ISF collection processand in the actual level of collections; (ii) full implementation ofNIA's Irrigation Management Information System (IMIS); (iii) train-ing for NIA staff in O&M and farmer organization; (iv) performanceof system rehabilitation studies and preparation of O&M manuals; and(v) rehabilitation of existing, and procurement of some additional,O&M equipment for NIA.

1/ Other Bank documents on the Philippines have also demonstrated the neeifor improved OM of existing irrigation infrastructure: The IrrigationProgram Review (Report No. 3545-PH of December 15, 1982), the PublicInvestment Program (Report No. 5677-PH of August 15, 1985), and thePhilippines Agricultural Sector Survey (Report No. 6819-PH of October 21,1987).

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(b) Acceleration of NIA's Irrigators' Association (IA) DevelopmentProgram. Some 390 new lAs, comprising about 96,000 farmers in anarea of 114,000 irrigated ha, would be fully organized and trainedto enable them to assume responsibilities for O&M of the lateralsand sublaterals in their NIS service areas.

(c) Execution of Minor Rehabilitation. Essential minor rehabilitationwould be carried out to restore and sustain the operationalcapability of the 127 NISs and enable them to respond effectively toincreased levels of OM.

(d) Execution of an Expanded Operations and Maintenance Program. O&Mefforts would be stepped up nationwide, including: (i) systemoperations, such as timely operation of gates and spillway controls,proper operation of canal control structures, adequate supervisionof system performance, timely remedial measures, and regularrecording of canal and river discharges; and (ii) systemmaintenance, such as canal desilting and weed control, minor repairsto canal banks and structures, drainage clearing, and repair andmaintenance of service roads, buildings, equipment and vehicles.

Detailed Features

A. Institutional Strengthening of NIA

3.4 Improvements in ISF Collection Procedures. Although ISF collectionshave consistently lagged, they have improved substantially in the last fewyears (para. 2.20), as a result of improved O&M services to farmers, develop-ment of IAs to participate in OM work and ISP collections, financial induce-ments to farmers for prompt ISF payment, financial and service evaluationincentives to NIA staff for collection performance above designated minima,and quasi-judicial measures to deal with defaulting farmers. The projectwould support and reinforce all of these measures in order to improve ISFcollections further.

3.5 The present ISF billing process is far from satisfactory. Anestimated 201 of irrigated farm lots are not billed in a typical croppingseason, and billing is often delayed. To address these problems, the NISslacking in detailed parcellary maps would be surveyed under the project, allexisting maps would be corrected and a procedure established to ensure futureupdating as may be required. Accurate records of service areas, individualirrigated holdings and irrigation fee registers (IFR) would be prepared forall MISs, to replace current incomplete and outdated records. Thesedocuments, together with data from implementation of the NIA's new managementinformation system (para. 3.8) would allow effective monitoring andverification of seasonal ISF billings, and would enhance NIA's ability todetect and remedy any discrepancies. They would also permit NIA to prepareISF bills well ahead of the close of the planting season, based on fieldprogress reports of land preparation and planting. The billing process wouldbe further improved through computerization: 90 micro-computers procuredunder the project would be allocated to NIS offices and centers serving over1,500 ha. In parallel with these procedural improvements, strong managementaction and sanctions would be adopted against NIA staff responsible for not

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billing irrigated farm lots. The billing efficiency is expected to improve to100Z of the benefitted area by the end of the second year of the project.Benefitted area is the total irrigated area minus exempted holdings (thosewith an annual yield under 40 cavans/ha, not due to farmer negligence).

3.6 With respect to staff incentives, NIA's current Viability IncentiveGrants (VIGs) now provides bonuses to regional and local NIA staff, totaling10% of ISF collections above viability, i.e., amounts sufficient to recoververy narrowly defined O&M costs. This would be replaced by an incentivesystem which is not based on viability, as the latter encourages minimizing ofO&M expenses. Additional and separate incentives would be given for goodperformance in OWM, improved water use efficiency, and for systems with a highproportion of operable machinery and equipment. Incentive levels would bemodest and were agreed at negotiations. Equipment rental receipts would beremoved from incentive computations, as they are irrelevant to NIA's regularoperations and, in fact, may encourage diversion of equipment from its use inO&M. All collection costs, including IA collection shares, now recorded ashead office expenses, and equipment and vehicle depreciation expenses, wouldbe charged to the respective NIS and regional offices. NIA's Office ofRevenue Generation would carefully monitor income and expenses reports forincentive purposes, to ensure that they do not deviate from financialrecords. The Operations Management Office would ensure that the guidelines inthe shared-management (turnover) of VISs to IAs are followed, particularlywith respect to break-even computations and guidelines on the NIA/IA sharingratio. An assurance was obtained at negotiations that NIA's ViabilityIncentive Grants system would be revised prior to June 30, 1988.

3.7 NIA's options for dealing with defaulting farmers are limited.Given the socio-cultural context and the physical design of NIS irrigationfacilities, it is almost impossible to impleme"t a "no pay, no water" policy,which might also adversely affect food production. The legal recourse forNIA, of going to court as an ordinary civil litigant, is time consuming andoften ineffective, although NIA would secure the services of provincialofficials from the Department of Justice to assist in collection of ISFarrears as necessary. If irrigation services to farmers and NIA's collectionmechanisms are improved and sustained as planned, the problem of delinquencyshould be minimized. ISF collection efficiency would increase from thecurrent estimate of 59% (para. 2.20) to 75%, which is the target to beachieved by project completion in mid-1991. This in turn would generaterevenue sufficient to fully recover present OEM expenditures (US$16.40/ha), orabout 62% of the higher level of annual O& expenditures (US$24.80/ha), to beachieved by the end of the project.

3.8 Irrigation Management Information System (IMIS). Over the years,dith assistance from several Bank-financed projects, NIA had developed anInput Output Monitoring Program (IOMP) that comprehensively monitored andevaluated production inputs, benefits and bottlenecks at the irrigation systemlevel. However, it did not cover the physical aspects of NIS operationalperformance or ISF collections. Also, information from the IOMP almost alwaysbecame available only long after current season management decisions had beenmade, and therefore fell short of providing management information necessaryto address several key problems in a timely fashion. A new system (IMIS) hasbeen designed to replace IOMP. IMIS focuses mainly on the status of system

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performance, O&M, land and crop development and ISF billings and collections,and it is organized so that information can reach management quickly. OnceIMIS is fully implemented, it will be an effective instrument for theIrrigation Superintendents (ISs) to monitor and manage the NISs for which theyare responsible. Categories and details of information which will beregularly collected and evaluated under IMIS will include the following:(a) operations. availability of water at source, status of land and cropdevelopment, and water requirements, adequacy and timing of releases tofarmers; (b) maintenance: system inspections conducted, problems identifiedand action taken, condition of canals and structures, vegetation and siltcleaning in canals, routine repairs and structure maintenance in accordancewith defined standards; (c) ISF: area planted and area exempted from ISF withjustification, current ISF collectibles, collections and status of backaccounts; (d) expenditures: system operation, maintenance, and emergencyrepairs; and (e) production: crop types, area and yields, and details of anyproblems encountered. During 1987, NIA implemented IMIS on a pilot basis inthree NISs covering about 32,000 ha. Performance was encouraging, but furtherexpansion is constrained by shortage of funds. The project would supportimplementation of IMIS nationwide, through training and the provision ofmicra-computers at NIS responsibility center level. The computers would alsobe used for staff training, and ISF billing and recording activities.

3.9 Staff Training. NIA personnel would receive appropriate training intechniques of improved irrigation system O&M and IA development. The trainingwould comprise several short courses in various aspects of O&M, financialplanning and management, records management, personnel administration, systemperformance monitoring and data compilation, as well as IA development. NIAwould use local management and training expertise to develop these courses andprovide initial training to NIA headquarters and key regional office staff whowould, in turn, train regional staff to conduct training at NIS level. NIA'sInstitutional Development Division (IDD) is adequately staffed and experiencedto conduct this work. In all, about 6,800 VIA staff would be trained in 24courses ranging from 3 to 12 days'duration each. A detailed 1 st of courses,indicating duration, number of participants, necessary equipment and costs isprovided in Annex 1, Tables 4 and 7. A USAID-assisted Accelerated AgricultureProgram (AAP) provides training for 18 NISs in Regions 5, 6 and 10, whichwould be excluded under IOSP to avoid duplication of activities.

3.10 Studies and Preparation of OM Manuals. The project would financethe cost of 47 months of local consultancy services to assist NIA in thefollowing three tasks:

(a) In several NISs, substantial improvements in operational performanceand water management could be achieved through appropriate designmodifications and improvements of specific irrigation structures orportions of these irrigation systems. In order to identify suchimprovements and develop a comprehensive implementation plan, NIAwould carry out systematic studies of all NISs under the project.

(b) NIA would prepare individual O& manuals for all NISs, for theguidance of system-level O&M staff. These manuals would incorporatestanding orders to deal with emergency situations, such as floodsand typhoons, and instructions for regular system operation and

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maintenance, with special emphasis on upgrading the quality ofirrigation service and ensuring system safety and sustainability.The manuals would identify specific tasks and the timing and mannerof their performance, and would assign staff responsibility forappropriate groups of tasks.

(c) Finally, NIA would carry out studies to identify measures to furtherimprove the ISF collection system, handling of in-kind payments, anda scheme for improved irrigation water pricing.

3.11 Equipment. The project would provide for reconditioning of thelarge number of run-down trucks and construction equipment units an hand. Tosupport completion of some system repair works and to establish an adequatemachinery park for increased long-term O&M activity, the project would alsoinclude procurement of a limited number of backhoe wheel-loaders, motorgraders, compressors and welding machines, none of which are avai-lable insufficient quantities in the regions. It would also provide for procurementof hydrologic and meteorological equipment, handtools, and construction ofequipment sheds. Micro-computers and miscellaneous audio-visual and otherclassroom equipment would be procured for training and implementation of theIMIS. Equipment to be purchased or reconditioned is listed in Annex 1,Tables 3 to 5.

B. Irrigators' Association Development

3.12 NIA's longstanding policy for O&M of the national irrigation systemshas been based on its financial autonomy and the direct linkage between O&Mexpenditures and NIA's internal resource generation. In recent years, NIA hasadded a new dimension to this policy: increased beneficiary participation anddelegation to organized IAs of O&M responsibilities for portions of the MISsbelow the main conveyance canals. The experience which NIA has gained to datein IA development is substantial, and the results are reasonably encouraging(paras. 2.6-2.9). However, expansion of the IA program, follow-up work toconsolidate and sustain achievements already made, and supervision ofestablished IAs have been hampered due to lack of funds. Therefore, theproject would include a component to strengthen and extend NIA's ongoing IAdevelopment program. The most vital aspect of this program is to further aconstructive relationship between NIA's O&M staff and cooperating farmers, toimprove NIS performance and maximize potential benefits from irrigation.Training is essential to enable IAs to acquire the knowledge, skills and theappropriate attitude to undertake O&M responsibilities.

3.13 Once an IA is developed, it is encouraged to take over maintenanceresponsibilities for the laterals and turnouts within the area of its juris-diction, and to assist in system operation within its area. NIA continues tocollect ISF, operate the or-erall system, and maintain the headworks, maincanals and portions of the system not turned over to IAs. This arrangement isformalized through a Stage I Contract, between VIA and the IA, under which theIA is paid agreed remuneration by NIA. The current practice is to pay the IAa remuneration of P 610 for each clearing of a ditchtender section, of up to3.5 km for earth canals or 7 km for lined canals. On average, this amounts toa cost of about P 6,000 p.a. as against P 14,000 to P 17,000 if a ditchtenderwere employed. For assisting in ISF collections, the IA is paid an incentive

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allowance of 2.5X of collections, if collection efficiency is in the range of70-100Z; and in addition, 10, of the collection over 1OOZ.

3.14 The next level of delegating responsibility, referred to as StageII, is implemented after the IA has functioned satisfactorily at Stage I fortwo years. The IA then assumes responsibility for system operations and ISFcollection within its area. Currently this step is formalized under a singlecontract between NIA and the IA wherein, for collections up to the break-evenpoint (where ISP coliections equal NIA's budgeted normal O&M expenditure forthe IA section), the IA is paid 20Z of the amount collected. Collectionsabove the break-even point are shared equally between NIA and the IA. A thirdstage in NIA's IA development program provides for the complete turnover ofthe system to the lAs. However, with the exception of one NIS, which isfunctioning reasonably satisfactorily, deterioration following completeturnover has been considerable, requiring substantial NIA interventions. Forthis reason, in the future NIA will limit this third stage of turnover tosystems of under about 1,000 ha, in which the beneficiaries are clearlycapable of shouldering such responsibility. Once handed over, the systemswill be classified as CISs. This stage is not envisaged under IOSP. Atnegotiations an assurance was obtained that the Stage II agreements would bemodified to be implemented through two separate contracts between NIA and thelAs-one for ISF collections and the other for O&M. Details would befinalized during the first year of the project.

3.15 Under IOSP, 390 more IAs comprising 96,500 farmers and covering anarea of about 114,000 ha would be fully organized, registered and trained toenable them to commence O&M responsibilities (Annex 3, Table 6). Of these,IAs covering about two-thirds of the area would be contracted at Stage I andthe balance at Stage II. As part of NIA's ongoing program, some 407 IAs thatare already registered and contracted at Stage I would also be advanced toStage II by 1990. The related cost, which is insignificant, is not includedin the project. IA development would continue during subsequent phases ofVIA's nine-year Irrigation OM6 Improvement Program.

C. Minor Rehabilitation

3.16 Studies prepared by NIA consultants on OLM needs of the MISs weresupplemented by an analysis of a sample of 14 representative national systemsselected to cover a large variety of climatological conditons, service areas,average farm holding sizes, characteristics of water supply, OM costs, andlevels of ISF collection. Initial repair needs were derived from a 1984inventory of 64 national systems, and equipment needs from informationobtained in the O&M study referred to above. The costs of initial repairswere then extrapolated to all 127 NISs. The approach employed is similar tothat used in preparing the Bank-financed NIS improvement projects-NISIP I(Ln 1414-PH) and NISIP II (Ln 1526-PH)--and is justified viewing the scope andnature of works. It does, however, require an agreement on the criteria andscope for specific capital investments in system restoration under theproject. Consequently an assurance was obtained at negotiations thatinvestments in system restoration would be limited to a regional average ofP 3,000/ha in end-1987 prices, and that these investments would be limited torepairs essential for the supply of required irrigation deliveries.

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3.17 Structural Repairs. The project would provide for minor repair ofdiversion works for all 127 systems, as needed. Structural repairs or changes(repair of overflow sections, stilling basins, aprons, abutments, gates andtheir supports) are required for 27 diversion structures, and minor repairsare needed for diversion structures or headworks for most of the other NISs.Also, almost all NISs require repair of canal structures including riprapprotection against erosion, replacement of broken gates, lifting devices,provision of stabilized control sections for flow measurement and replacementor provision of staff gauges. Finally, several hundred km of main farmditches would be completed.

3.18 Initial Desilting of Canals. To bring irrigation systems torequired delivery capacity, the project would provid¶ for mechanical removalof silt accumulation aggregating about 1.4 million m (MCM,I from an estimated2,900 km of main canals in the 127 NISs, and about 0.4 MCM from 2,200 km oflateral canals. Silt aggregating about 0.5 MCM would be removed manually froma total length of about 6,500 km of sublateraL and minor canals.

D. Expanded Operations and Maintenance Program

3.19 Operations. The project would increase the levels and improve thequality of all system operations. Main intake gates, scour gates and spill-way controls would be operated so as to provide adequate water, while ensuringsystem safety and minimizing canal siltation. To ensure the desired waterdistribution, watermasters, assistant watermasters and gatekeepers would betrained and would devote more direct work time and supervision to properoperation of canal control structures. They would regularly measure, recordand assess canal and river discharges, enabling appropriate adjustments ofgate and control structure settings. This would require recalibration of flowmeasure sections to ensure adequate response to cropping stage and weatherconditions. Upstream water savings would permit improved service to tail-endirrigators.

3.20 Maintenance. The project would substantially increase the intensityof regular canal desilting and weed control in each of the NISs, and wouldalso provide for increased preventive maintenance. For main canals the pro-ject would provide for yearly mechanical removal of about 975,000 m3 of silt,i.e., removing an average of 17 cm of accumulated silt from 1,520 km. Forlateral canals there would be yearly mechanical removal of about 235,000 m3 ofaccumulated silt, i.e., removing an average of 5.5 cm of silt from the entirelgngth of 2,150 km of larger laterals, and manual desilting of about 413,000m , i.e. removing an average of 8 cm from the entire length of 6,450 km ofsmaller sublaterals. Desilting and clearing of farm ditches would beundertaken by water users as needed to keep them operational, and withoutcharge to the project. The project would provide for monthly manual removalof surface and aquatic vegetation for the entire network of main canals byreassigning ditchtenders to this task and for manual weeding of the entirenetwork of lateral and sublateral canals ten times a year by IAs or contractlabor. Canal embankments and structures would be maintained and rep.ired in atimely fashion (para. 4.3). Preventive maintenance of mechanical works andequipment would include cleaning, greasing, painting, and periodic inspectionand replacement of defective parts of gates and of O& equipment.

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3.21 Achievement of this expanded O&M program would require an increasein O&M expenditures from the current level of US$16.40/ha p.a. (1983-87average) to about US$24.80/ha in 1991. Improvements in billings andcollection efficiency under the project are expected to generate revenuesufficient to recover 62% of these higher O&M expenditures by projectcompletion (paras. 2.18-2.19, 3.7). The project would provide for this O&Mspending level. Ultimately, the final target for the nine-year Irrigation O&MImprovement Program would be about US$28/ha, to be achieved by 1997.

Project Costs and Financing

3.22 Cost Estimates. Total project cost, including physical contingen-cies and expected price increases, is estimated at about US$60.2 million, witha foreign exchange component of US$17.1 million (281). The cost estimate isbased on end-1987 prices and includes taxes and duties of about U$2.0 mil-lion. Civil works estimates were based on unli costs derived from cost esti-mates prepared for 64 NISs for which feasibility-g-ade field inventories andinvestigations have been completed. Incremenatal O'.M costs were estimatedbased on detailed projections for 14 represen aLdie systems. Unit (per ha)costs of proposed staffing, vehicle and equipment overhead and use, and otherexpenses estimated for these systems were then applied to all 127 NISs to besupported under the O&M improvement component--assuming linear increases inO&M to the projected 1991 level. The current level of O&H expenditurescovered by NIA's own budget (para. 2.23) were then subtracted to leaveincremental costs. Equipment and vehicle cost estimates for new units werebased on the price of comparable units recently or currently being procured.Estimates for rehabilitation were based on current NIA experience. Costs of IAdevelopment, training, studies and institutional support, including localconsultants at P 55,000 per month, were derived from current NIA unit costs.Physical contingencies were assessed at 15% of the total base costs. Pricecontingency estimates assume foreign inflation of 1% in 1988 and 1989 and 2.2%

I in 1990-91 and domestic inflation of 8.2% in 1988, 9.0% in 1989, and 8.5% in1990-91. Expected price increases are 3% of total project cost. Project costestimates are summarized in Table 3.1 below and detailed in Annex 1, Tables 1to 10 and Annex 2, Table 2.

3.23 Financing. The proposed Bank loan of US$45.0 million would financeabout 75% of total project costs. The loan would cover 100% of the foreignexchange requirement (US$17.1 million) and about 65% (US$27.9 million) oflocal costs. Financing of local costs is justified by the current acuteshortage of counterpart funds in the Philippines. The remaining project costof about US$15.2 million would be provided by NIA and the Government. NIA'scurrent annual income of about US$6.1 million from ISF and US$2.6 million fromequipment rental and management fees would be supplemented by the additionalUS$2.5 million in average annual ISF collections to be achieved under theproject, aggregating US$11.2 million p.a. It is estimated that after coverageof current levels of O&M (US$7.8 million p.a.) NIA would have income of atleast US$3.4 million p.a. for project purposes. The remaining US$1.6 millionp.a. would be provided by NIA to the extent possible, or by the Government inthe event of shortfall in NIA revenues. The projected project cash flow isgiven in Annex 5, Table 2.

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3.24 The loan would be channelled through the Government directly toNIA. Prior to 1982, transfers of such financial resources were treated as

Table 3.1: PROJECT COST SUMMARY

.Local Foreign Total Local Foreign Total (Foreign)--- (million pesos) ---- --- (million US$) --

Rehabilitation Works 217.2 144.8 362.0 10.5 7.0 17.5 (40)O&M Program 388.2 35.4 423.5 18.8 1.7 20.5 (8)Equipment and Spares 38.4 111.5 149.9 1.8 5.4 7.2 (75)IA Development Program 12.1 2.1 14.2 0.6 0.1 0.7 (14)Technical Assistance 23.9 4.0 27.9 1.1 0.2 1.3 (15)NIA Staff Training 5.4 2.3 7.7 0.3 0.1 0.4 (25)Engineering and Administration 69.0 0.0 69.0 3.3 0.0 3.3 (0)

Total Base Costs 754.1 300.1 1,054.2 36.4 14.5 50.9 (28)

Physical contingencies 113.1 45.0 158.1 5.5 2.2 7.7 (28)Price contingencies 171.8 57.0 228.8 1.2 0.4 1.6 (25)

Total Project Cost /a 1,039.0 402.1 1,441.1 43.1 17.1 60.2 (28)

/a Including duties and taxes of about US$2.0 million.

direct public works appropriations or as equity contributions to NIA, with noonlending arrangemenit. Although the Government subsequently required NIA tofund servicing of the foreign loans for irrigation contracted from 1982onwards, it has agreed, in principle, that if NIA's ISF and other revenues areinadequate, Government would provide budgetary support to NIA as needed toensure O&M funding at the levels agreed to under the project. The Govern-ment's formal assurance of these arrangements was obtained at loan negotia-tions.

3.25 NIA has already been channelling all of its ISF revenues and most ofits income derived from investment activity into O&M. To encourage thispractice, all of NIA's counterpart contribution would be used to finance theO&M component of the project. With Government assistance as needed, NIS wouldfinance about 52% of project O&M expenditures, and the Bank loan funds wouldbe used to cover the full cost (minus taxes and duties) of all othercomponents, plus 48X of tne OM component. To ensure that NIA continues toallocate increasing amounts to O&M0, Bank reimbursement against project (i.e.,incremental) OM expenditures would be on a declining basis, at 85X, 55Z, and301 of these expenditures in the first, second and third years of the project,respectively. The aggregate 1988/89-1990/91 O&M financing plan, includingboth maintenance of ongoing OM and incremental expenditures is summarized inTable 3.2 below.

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Table 3.2: O&M FINANCING PLAN, 1988/89-1990/91 /a(USs million)

Z of X ofSource Amount total O&M incremental O&M

Maintenance of ongoing O&Mexpenditures NIA 23.5 47 -

Incremental O&M expenditures NIA 10.3 21 40NIA/Covern-ment 3.1 6 12Bank 12.6 25 48

Subtotal incremental 26.0 53 100

Total 49.5 100 -

/a Only incremental O&M expenditures have been included in the projectcosts.

3.26 To facilitate project start-up in mid-1988, equipment purchases,surveys for civil works, parcellary mapping, and some training and otherinstitutional development activities would have to be undertaken in advance.To provide for these pre-construction activities, expenditures of up to US$1.5million, made after October 15, 1987, would be considered for retroactivefinanCing.

Procurement

3.27 Procurement (Table 3.3) would follow Bank guidelines. Prior totendering and award, the Bank would review all bidding packages for goods overUS$200,000 equivalent, thus covering about 65X of the total value of goods.All bidding packages for civil works estimated to cost over US$3C0,000equivalent would be subject to the Bank's prior review of procurement documen-tation, thus covering about 402 of the total value of works contracts. Othercontracts for goods and works would be reviewed by the Bank on a sample basis,subsequent to their award. All consultant selection arrangements andcontracts would be subject to the Bank's prior review. Bank staff havereviewed local procurement procedures and confirm that they are acceptable.Also NIA has a good record of performance in the preparation of procurementdocuments. Specific procurement rules for the various project activitieswould be as follows:

(a) Goods. O&M equipment, estimated at US$3.3 million, and replacementparts for equipment and vehicle rehabilitation in NIA's workshops,estimated at US$1.6 million, would be procured through internationalcompetitive bidding (ICB), except that in situations when parts are

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required in small batches at different times and locations, localcompetitive bidding (LCB) or local prudent shopping procedures maybe used. Hand tools, implements and training equipment, estimatedat US$0.7 million, would be procured through LCB or local shoppingprocedures. None of the individual LCB contracts would exceedUS$50,000, and the total of goods procured under LCB would notexceed US$2.6 million. Individual items procured through localshopping would not exceed US$2,500 in value and local shoppingpurchases would not exceed US$300,000 in total.

(b) Works. (i) Since minor rehabilitation works, estimated atUS$20.6 million in total, are small, widely scattered over thecountry and in several instances remotely located in difficult peaceand order situations, foreign contractors would not be interestedand in some cases even local bidders may not be attracted. Forthese reasons about 50Z of the work will be procured under LCB, andthe remaining 50Z would be accomplished through force account, forwhich NIA has the experience and capability. (ii) Individual systemmaintenance activities, within the total estimated at US$24.3 mil-lion, are small, seasonal and dispersed and often have to beexecuted without interruption of water supply. As such maintenanceworks are unsuitable for ICB or even sizeable LCB contracts. Theirimplementation would be: US$14.5 million through force account,US$4.9 million through local minor contracts under LCB (none of theindividual LCB contracts would exceed US$100,000), and US$4.9 mil-lion through piece-work by farmers' groups. The last method is inpursuance of the project objective of developing IAs that can assumeresponsibility for maintenance of laterals and turnouts within theirareas. (iii) Parcellary mapping, comprising field surveys andpreparation of maps estimated at US$1.4 million, would be executedas follows: US$0.8 million through LCB contracts and US$0.6 millionusing NIA's survey staff who will also provide guidance regardingthe contract portion of this work. (iv) Work estimated at US$0.7million for equipment and vehicle rehabilitation, for which spareparts (US$1.6 million) are provided as described in para. 3.26(a)above, would be done through force account. In addition, furthersuch work estimated at US$2.2 million, including supply of spareparts would be accomplished through LCB contracts.

(c) Consultant Services. Consultant contracts, estimated at US$0.2million, would be awarded in accordance with Bank Guidelines.

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Table 3.3: PROCUREMENT /a(US$ million)

NotForce appli- Total

Expenditure category ICB LCB account cable cost

Civil works - Minor restorative - 10.3 10.3 - 20.6work and equipment sheds (9.2) (10.3) (19.5)

Irrigation system maintenance - 4.9 14.5 4.9 24.3(2.2) (6.5) (2.2) (10.9)

O&M equipment, workshop tools 3.3 - - - 3.3and hydrometric equipment (3.0) (3.0)

Reconditioning of O&M equipment 1.6 2.2 0.7 - 4.5(1.5) (2.0) (0.7) (4.2)

Hand tools and implements, and - 0.7 - - 0.7training equipment (0.6) (0.6)

Parcellary mapping and updating of - 0.8 0.6 - 1.41SF registers (0.8) (0.6) (1.4)

IA development, training, studies - - -1.5 1.5and O&M manuals, including 62 (1.5) (1.5)man-months local consultancysupport

Engineering and administration /b - - - 3.9 3.9(3.9) (3.9)

Total 4.9 18.9 26.0 10.4 60.2MM (-f) (r ") M) (4")

/a Includes physical and price contingencies. Figures in parentheses are amounts to befinanced by the Bank.

/b Includes system operations, which are minimal in cost relative to maintenance.

Disbursements

3.28 Disbursements would be made at the rate of 100% against foreignexchange expenditures for imported equipment and vehicles, 100% of the ex-factory cost of such items manufactured locally and 85% of expenditures foritems procured locally. Disbursement for civil works would be on the basis of95% of total expenditures. Disbursement for institutional development,technical support, training, and engineering and administration would be 100%of total costs. Disbursements for the O&M component would be made against 85%of project O&M expenditures for the first US$5 million, 55% for the next US$8million and 30% for the final US$13 million (equivalent to 33% of the first

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US$13.2 million of total, ongoing and incremental, O&M expenditures, 28X ofthe next US$16.0 million, and 21X of the final US$18.3 million). An estimatedschedule of disbursements is given in Annex 2, Table 3, which also includes acomparison with regional and country disbursement profiles for the irrigationsubsector. The proposed allocation of the loan proceeds is given in Annex 2,Table 1.

3.29 Disbursements for LCB civil works contracts would be through reim-bursements to NIA on the basis of contractor payments and certification ofwork completed. SOEs would be used for disbursements against expenditures oncivil works contracts less than US$100,000, civil works under force account,OEM, institutional development, technical support, training, and engineeringand administration. In addition, SOEs would be used for minor local expen-ditures on equipment and materials costing up to US$2,500 equivalent perpurchase, the direct purchase of which are justified by their small andfrequent nature. Since there is no provision for a Special Account, thethreshold for disbursement applications would be US$20,000 equivalent. NIAhas the institutional capability to maintain related records in a satisfactorymanner, and supporting documentation would be made available for review byvisiting Bank missions.

3.30 Disbursements are expected to be completed by December 31, 1991, sixmonths after loan closing, to allow adequate lag time for releasingcontractors' retentions and processing withdrawal applications. Although thecountry and regional irrigation project disbursement profiles indicate about a10-year period for full disbursements, it is expected that the proposed loanwould be disbursed in 3-1/2 years from project commencement for the followingreasons:

(a) the proposed project is different from others on which thedisbursement profiles have been based, in that it would cover atime-slice of ongoing activities in the irrigation subsector;

(b) the project would cover a number of operating irrigation schemes,the work involved is simple and does not entail any complicateddesign or require any land acquisition or right-of-way proceedingsand would be executed under the authority of 11 NIA regional officesand 4 special project offices (for the larger systems), which arealready in operation;

(c) work in the different NISs would be implemented simultaneously; and

(d) the status of preparation for initial work is sufficiently advancedto permit an early start on project implementation. VIA wouldsubmit for Bank review a detailed work program for the first year,with summary preliminary engineering, cost estimates, consultantwork plans and contract bid documents before negotiations. Anassurance from the Government was obtained at negotiations thatsimilar work programs and funding proposals for each subsequent yearwould be submitted for Bank review by June 1 of such year.

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IV. PROJECT IMPLEMENTATION

Organization and Management

4.1 NIA would be responsible for management of the project through itsSystems Management Department (SMD), under the Assistant Administrator forSystem Operations and Equipment Management (para. 2.5). NIA's 12 RegionalOffices would be responsible for project planning and the preparation ofdesigns and cost estimates. SMD would then finalize and consolidate thiswork with support from: the Project Development Department, for overallpreparation of work programs in accordance with the approved project proposal;the Design and Specification Department, for engineering design; the EquipmentManagement Department, for equipment specifications, supply and supervision ofequipment operation and maintenance; the Procurement and Physical ResourceDepartment, for procurement; the Institutional Development Department, forissues concerning the IAs and the IMIS; and the Training and DevelopmentDivision of the Personnel and Records Management Department, for the trainingcomponent. SMD would introduce the IMIS with the help of the RegionalIrrigation Directors (RIDs), since the IMIS is intended to supply the RIDswith information on the O&M of each NIS for evaluation and follow-up action.The Regional Offices would also supervise the execution of civil works anddevelopment of IAs, as well as conduct training of NIA personnel andfarmers. Adequate staff is available for these activities. The organizationof SMD and its relationships with the other departments involved in projectimplementation are shown in Figures 1 and 2.

4.2 The SMD Director would be the Project Coordinator. He would(a) plan and supervise day-to-day implementation of the project by theRegional Offices, (b) coordinate the project-related functions of otherdepartments, and (c) be responsible for compiling and submitting t